<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 1998
REGISTRATION NO. 33-57009
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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IRON AGE HOLDINGS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6749 04-3349775
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
OF INCORPORATION OR
ORGANIZATION)
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ROBINSON PLAZA THREE
SUITE 400
PITTSBURGH, PENNSYLVANIA 15205
(412) 787-4100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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KEITH A. MCDONOUGH
IRON AGE HOLDINGS CORPORATION
ROBINSON PLAZA THREE
SUITE 400
PITTSBURGH, PENNSYLVANIA 15205
(412) 787-4100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPY TO:
LAUREN I. NORTON, ESQ.
ROPES & GRAY
ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02110
(617) 951-7000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ THIS PROSPECTUS AND THE INFORMATION CONTAINED HEREIN ARE SUBJECT TO +
+ COMPLETION OR AMENDMENT. UNDER NO CIRCUMSTANCES SHALL THIS PROSPECTUS +
+ CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 14, 1998
PROSPECTUS
IRON AGE HOLDINGS CORPORATION
[LOGO APPEARS HERE] [LOGO APPEARS HERE]
OFFER TO EXCHANGE ITS 12 1/8%
SENIOR DISCOUNT NOTES DUE MAY 1,
2009, WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, FOR AN EQUAL PRINCIPAL
AMOUNT AT MATURITY OF ITS 12 1/8%
SENIOR DISCOUNT NOTES DUE MAY 1,
2009, WHICH HAVE NOT BEEN SO
REGISTERED
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ALTHOUGH THE DISCOUNT NOTES (AS
DEFINED) ARE TITLED "SENIOR," (A)
HOLDINGS (AS DEFINED) HAS NOT
ISSUED, AND DOES NOT HAVE ANY
CURRENT FIRM ARRANGEMENTS TO ISSUE,
ANY SIGNIFICANT ADDITIONAL
INDEBTEDNESS TO WHICH THE DISCOUNT
NOTES WOULD BE SENIOR, AND (B) THE
DISCOUNT NOTES ALSO WILL BE
SUBORDINATE TO ALL OF THE SENIOR
INDEBTEDNESS OF HOLDINGS AND TO ALL
OF THE INDEBTEDNESS OF HOLDINGS'
SUBSIDIARIES.
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THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS THEREUNDER WILL EXPIRE AT 5:00 P.M.
NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED
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Iron Age Holdings Corporation, a Delaware corporation ("Holdings"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together
constitute the "Exchange 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 of 1933, as amended (the "Securities Act"), for a like principal
amount at maturity of its outstanding 12 1/8% Senior Discount Notes due 2009
(the "Original Discount Notes" and, together with the Exchange Discount Notes,
the "Discount Notes"), which have not been so registered, from the holders
thereof. The terms of the Exchange Discount Notes are identical in all material
respects to those of the Original Discount Notes, except for certain transfer
restrictions and registration rights relating to the Original Discount Notes.
Holdings will accept for exchange any and all Original Discount Notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on ,
1998, unless extended (as so extended, the "Expiration Date"). Tenders of
Original Discount Notes may be withdrawn at any time prior to the Expiration
Date. The Exchange Offer is not conditioned upon any minimum principal amount
of Original Discount Notes being tendered for exchange pursuant to the Exchange
Offer. Pursuant to the Registration Agreement (as defined), the Exchange Offer
will remain open for a maximum of 30 days (or longer if required by applicable
law) after the date hereof. The Exchange Offer is subject to certain other
customary conditions. See "The Exchange Offer."
The Discount Notes will accrete in value until May 1, 2003 at a rate per
annum of 12 1/8%, compounded semi-annually, to an aggregate principal amount of
$45.140 million, the principal amount at maturity. Cash interest will not
accrue on the Exchange Discount Notes prior to May 1, 2003. Thereafter, cash
interest on the Exchange Discount Notes will accrue at a rate per annum of 12
1/8% and will be payable semi-annually in cash on May 1 and November 1 of each
year, commencing November 1, 2003. See "Description of Exchange Discount
Notes."
The Exchange Discount Notes will be redeemable at the option of Holdings, in
whole or in part, at any time on or after May 1, 2003 at the redemption prices
set forth herein, plus accrued and unpaid interest and liquidated damages, if
any, to the redemption date. Holdings may also redeem up to 35% of the
aggregate principal amount at maturity of the Discount Notes originally issued
at its option, at any time on or prior to May 1, 2001, at a redemption price
equal to 112.125% of the Accreted Value (as defined) thereof, plus accrued and
unpaid interest and liquidated damages, if any, to the redemption date, with
the proceeds of a Public Equity Offering (as defined) received by Holdings,
following which there is a Public Market (as defined); provided, however, that
at least 65% of the aggregate principal amount at maturity of the Discount
Notes originally issued remains outstanding after such redemption. Upon the
occurrence of a Change of Control (as defined), each holder of Exchange
Discount Notes may require
Continued on next page
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SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE EXCHANGE
DISCOUNT NOTES.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1998.
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Continued from previous page
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Holdings to repurchase all of such holder's Exchange Discount Notes at a price
equal to 101% of the Accreted Value thereof, plus accrued and unpaid interest
and liquidated damages, if any, on or prior to the date of repurchase. Under
the New Credit Facility (as defined), Holdings may not repurchase any Exchange
Discount Notes unless and until such time as all amounts outstanding under the
New Credit Facility are repaid in full. There can be no assurance that, in the
event of a Change of Control, Holdings will have available sufficient funds to
repurchase the Exchange Discount Notes. The Exchange Discount Notes will not
be subject to any sinking fund requirement. See "Description of Exchange
Discount Notes" and "Certain Federal Income Tax Considerations."
The Exchange Discount Notes will be unsecured, senior obligations of
Holdings, pari passu in right of payment to all existing and future unsecured,
unsubordinated indebtedness of Holdings. All of the operations of Holdings are
conducted through its subsidiaries, and therefore Holdings is dependent upon
the cash flow of its subsidiaries to meet its obligations, including its
obligations on the Discount Notes. The Discount Notes will be effectively
subordinated to all existing and future indebtedness and liabilities of
Holdings' subsidiaries, including trade credit, the Senior Subordinated Notes
(as defined) and indebtedness with respect to the New Credit Facility. As of
May 2, 1998, (i) the outstanding indebtedness of Holdings was approximately
$25.0 million, and (ii) the outstanding indebtedness of Holdings' subsidiaries
was approximately $125.1 million (exclusive of unused commitments). See
"Description of Exchange Discount Notes." Except as provided under the New
Credit Facility, Holdings has no current or pending financing arrangements
which provide for additional Senior Indebtedness or indebtedness which would
be pari passu in right of payment to the Discount Notes.
The Exchange Discount Notes are being offered hereunder in order to satisfy
certain obligations of Holdings contained in the Registration Agreement dated
April 24, 1998 (the "Registration Agreement"), among Holdings and the other
signatories thereto. Holdings believes that based on interpretations by the
staff of the Securities and Exchange Commission (the "SEC") set forth in no-
action letters issued to third parties, Exchange Discount Notes issued
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by each holder thereof (other than any holder which is an
"affiliate" of Holdings within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such Exchange Discount Notes
are acquired in the ordinary course of such holder's business, such holder has
no arrangement or understanding with any person to participate in the
distribution of such Exchange Discount Notes and such holder is not engaging
and does not intend to engage in a distribution of such Exchange Discount
Notes.
Each broker-dealer that receives Exchange Discount Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Discount Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of Exchange Discount Notes received in
exchange for Original Discount Notes where such Original Discount Notes were
acquired by such broker-dealer as a result of market-making activities or
other trading activities. Holdings has agreed that, starting on the Expiration
Date and ending on the close of business on the 90th day after the Expiration
Date, it will make this Prospectus available to any broker-dealer for use in
connection with any such resale. See "Plan of Distribution."
Holdings will not receive any proceeds from the Exchange Offer and will pay
all expenses incident to the Exchange Offer.
<PAGE>
The Exchange Offer is not being made to, nor will Holdings accept surrenders
for exchange from, holders of Original Discount Notes in any jurisdiction in
which such Exchange Offer or the acceptance thereof would not be in compliance
with the securities or blue sky laws of such jurisdiction.
The Exchange Discount Notes will be available initially only in book-entry
form. Holdings expects that the Exchange Discount Notes issued pursuant to
this Exchange Offer will be issued in the form of a Global Exchange Discount
Note (as defined), which will be deposited with, or on behalf of, The
Depository Trust Company (the "Depositary") and registered in its name or in
the name of Cede & Co., its nominee. Beneficial interests in the Global
Exchange Discount Note representing the Exchange Discount Notes will be shown
on, and transfers thereof will be effected through, records maintained by the
Depositary and its participants. After the initial issuance of the Global
Exchange Discount Note, Exchange Discount Notes in certificated form will be
issued in exchange for interests in the Global Exchange Discount Note only on
the terms set forth in the Indenture dated as of April 24, 1998 (the
"Indenture") between Holdings and The Chase Manhattan Bank, as trustee (the
"Trustee"). See "Description of Exchange Discount Notes--Book-Entry Transfer."
Prior to this Exchange Offer, there has been no public market for the
Original Discount Notes. To the extent that Original Discount Notes are
tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Original Discount Notes could be adversely affected. If a market
for the Exchange Discount Notes should develop, the Exchange Discount Notes
could trade at a discount from their Accreted Value. Holdings does not
currently intend to list the Exchange Discount Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system.
Neither Holdings nor any of its subsidiaries will receive any cash proceeds
from the issuance of the Exchange Discount Notes offered hereby. No dealer-
manager is being used in connection with this Exchange Offer. See "The
Transactions and Use of Proceeds" and "Plan of Distribution."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF ORIGINAL DISCOUNT NOTES ARE URGED TO READ THIS
PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING
WHETHER TO TENDER THEIR ORIGINAL DISCOUNT NOTES PURSUANT TO THE EXCHANGE
OFFER.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
WHEN USED IN THIS PROSPECTUS, THE WORDS "BELIEVES," "ANTICIPATES" AND
SIMILAR EXPRESSIONS ARE USED TO IDENTIFY FORWARD LOOKING STATEMENTS. SUCH
STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. HOLDINGS WISHES TO CAUTION
READERS THAT ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED
IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, CERTAIN STATEMENTS UNDER
"SUMMARY," "THE TRANSACTIONS AND USE OF PROCEEDS," "UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF INCOME AND OTHER FINANCIAL DATA," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
"BUSINESS" AND LOCATED ELSEWHERE HEREIN REGARDING HOLDINGS' FINANCIAL POSITION
AND BUSINESS STRATEGY, MAY CONSTITUTE FORWARD LOOKING STATEMENTS. ALL OF THESE
FORWARD LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY
MANAGEMENT OF HOLDINGS, WHICH ALTHOUGH BELIEVED TO BE REASONABLE, ARE
INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED ON SUCH
ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH ESTIMATES
OR STATEMENTS WILL BE REALIZED, AND IT IS LIKELY THAT ACTUAL RESULTS WILL
DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD
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LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE: (1)
INCREASED COMPETITION; (2) INCREASED COSTS; (3) INABILITY TO CONSUMMATE
ACQUISITIONS ON ATTRACTIVE TERMS; (4) LOSS OR RETIREMENT OF KEY MEMBERS OF
MANAGEMENT; (5) INCREASES IN HOLDINGS' COST OF BORROWINGS OR UNAVAILABILITY OF
ADDITIONAL DEBT OR EQUITY CAPITAL ON TERMS CONSIDERED REASONABLE BY
MANAGEMENT; (6) ADVERSE STATE, FEDERAL OR FOREIGN LEGISLATION OR REGULATION OR
ADVERSE DETERMINATIONS BY REGULATORS; (7) CHANGES IN GENERAL ECONOMIC
CONDITIONS IN THE MARKETS IN WHICH HOLDINGS MAY COMPETE AND FLUCTUATIONS IN
DEMAND IN THE SAFETY SHOE INDUSTRY; AND (8) ABILITY TO SUSTAIN HISTORICAL
MARGINS AS THE INDUSTRY DEVELOPS. MANY OF SUCH FACTORS WILL BE BEYOND THE
CONTROL OF HOLDINGS AND ITS MANAGEMENT. FOR FURTHER INFORMATION OR OTHER
FACTORS WHICH COULD AFFECT THE FINANCIAL RESULTS OF HOLDINGS AND SUCH FORWARD
LOOKING STATEMENTS, SEE "RISK FACTORS."
INDUSTRY DATA AND FINANCIAL INFORMATION
Holdings relies on and refers to information it has received from various
industry analysts regarding the markets for its principal products, safety
shoes, which Holdings believes to be reliable, but the accuracy and
completeness of such information is not guaranteed and Holdings has not
independently verified this market data.
AVAILABLE INFORMATION
Holdings has filed a registration statement on Form S-4 (herein referred to,
together with all exhibits and schedules thereto and any amendments thereto,
as the "Exchange Offer Registration Statement") under the Securities Act with
respect to the Exchange Discount Notes offered hereby. This Prospectus, which
forms a part of the Exchange Offer Registration Statement, does not contain
all of the information set forth in the Exchange Offer Registration Statement,
certain parts of which are omitted in accordance with the rules and
regulations of the SEC. For further information with respect to Holdings and
the Exchange Discount Notes offered hereby, reference is made to the Exchange
Offer Registration Statement. Statements made in this Prospectus as to the
contents of certain documents are not necessarily complete and, in each
instance, reference is made to the copy of the document filed as an exhibit to
the Exchange Offer Registration Statement.
Holdings is not currently subject to the periodic reporting and other
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Pursuant to the Indenture, Holdings has agreed that,
until such time as Holdings shall become subject to the reporting requirements
of Section 13 or 15(d) of the Exchange Act, (a) Holdings shall provide to the
Trustee, the Initial Purchasers (as defined) and holders of Discount Notes
such annual reports and such information, documents and other reports as are
specified in Sections 13 and 15(d) of the Exchange Act and applicable to a
United States of America corporation subject to such Sections, such
information, documents and other reports to be so provided at the times
specified for the filing of such information, documents and reports under such
Sections, and (b) not later than 45 days after the end of each fiscal quarter
of Holdings, Holdings shall issue a press release setting forth a summary of
the results of operations of Holdings for such fiscal quarter and shall
publish such press release on one of the following national business and
financial wire services: Dow Jones News Service, Reuters Financial Service,
Bloomberg News, PR Newswire or Business Wire. Thereafter, notwithstanding that
Holdings may not be subject to the reporting requirements of Section 13 or
15(d) of the Exchange Act, to the extent permitted by the Exchange Act,
Holdings shall file with the SEC and provide the Trustee and holders of
Discount Notes and prospective holders of Discount Notes (upon request) with
such annual reports and such information, documents and other reports as are
specified in such Sections and applicable to a United States of America
corporation subject to such Sections, such information, documents and other
reports to be so filed and provided at the times specified for the filing of
such information, documents and reports under such Sections; provided,
however, that Holdings shall not be
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required to file any report, document or other information with the SEC if the
SEC does not permit such filing. In addition, for so long as any of the
Original Discount Notes remain outstanding, Holdings has agreed to make
available to any prospective purchaser of the Original Discount Notes or
beneficial owner of the Original Discount Notes in connection with any sale
thereof the information required by Rule 144A(d)(4) under the Securities Act.
Any reports or documents filed by Holdings with the SEC (including the
Exchange Offer Registration Statement) may be inspected and copied at the
Public Reference Section of the SEC's office at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the SEC's regional offices in New York (7
World Trade Center, 13th Floor, New York, New York 10048) and Chicago
(Citicorp Center, 14th Floor, 500 West Madison Street, Chicago, Illinois
60661). Copies of such reports or other documents may be obtained at
prescribed rates from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549. In addition, the SEC maintains a web
site that contains reports and other information that is filed through the
SEC's Electronic Data Gathering Analysis and Retrieval System. The web site
can be accessed at http://www.sec.gov.
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SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data, including
the financial statements and notes thereto, appearing elsewhere in this
Prospectus. Unless otherwise stated in this Prospectus or unless the context
otherwise requires, (i) references to "Holdings" or the "Company" mean Iron Age
Holdings Corporation, a Delaware corporation, and its subsidiaries, and (ii)
references to "Iron Age" mean Iron Age Corporation, a Delaware corporation and
a wholly-owned subsidiary of Holdings, and its subsidiaries. All references to
a fiscal year refer to the 12 months ended on the last Saturday in January of
such year. Holdings utilizes a fiscal year of 52 or 53 weeks, ending on the
last Saturday in January. Each of Holdings' fiscal years ended January 27, 1996
("fiscal 1996") and January 25, 1997 ("fiscal 1997") contained 52 weeks and its
fiscal year ended January 31, 1998 ("fiscal 1998") contained 53 weeks. The
period ended April 25, 1997 ("the three monthes ended April 25, 1997") is
comprised of the period January 26, 1997 through April 25, 1997. The period
ended May 2, 1998 ("the three months ended May 2, 1998") is comprised of the
period February 1, 1998 through May 2, 1998.
THE COMPANY
The Company is a leading distributor of safety shoes in the United States.
The Company's core business is the specialty distribution of safety shoes under
the Iron Age(R) brand name, which comprised 79.9% of fiscal 1998 sales. The
Company also distributes work footwear to the service sector through its Knapp
division and manufactures specialized premium quality safety shoes through its
subsidiary Falcon Shoe Mfg. Co. ("Falcon"). The Company distributes directly to
its customers over 450 styles under the Iron Age, Knapp(TM) and Dunham(R) brand
names. The Company's captive, multi-channel distribution network includes 130
shoemobiles, 103 retail stores and 34 in-plant stores, as well as catalog
sales, branded wholesale merchandising, independent sales representatives and
third-party vendors. The Iron Age products and services are marketed
principally to industrial and government employers, most of which require
safety shoes to be worn at the workplace and provide purchase subsidies under
employer safety programs to the end-user employee. The employers provide these
subsidies to increase workplace safety and ensure compliance with OSHA
regulations, thereby decreasing workers' compensation and insurance costs.
Through superior customer service provided by the Company's factory-to-end-user
distribution and advanced information systems, the Company has established a
diverse and loyal customer base of approximately 48,000 accounts. Management
estimates that the Company has industrial customer retention rates in excess of
90%. The Company believes that its focus on direct supply, responsive customer
service and broad, readily available product offerings distinguishes the
Company from other safety footwear suppliers.
The Company was founded in 1817 and has specialized in safety footwear since
the popularization of steel toe shoes during the 1940s. Under the Company's
current management, which was formed in 1986, the Company has reduced its
reliance on independent distributors, and sales of Iron Age products through
Company-owned shoemobiles and retail stores have increased from approximately
60% in fiscal 1987 to 100% in fiscal 1998. Over the same period, net sales and
EBITDA have increased in each consecutive year, growing at compound annual
growth rates ("CAGR") of 15.2% and 23.2%, respectively. For fiscal 1998 pro
forma results of operations, the Company generated net sales of $118.7 million
and EBITDA of $20.5 million, representing increases of 19.5% and 20.0%,
respectively, from the prior fiscal year. Following the Transactions (as
defined), Holdings is highly leveraged. As of May 2, 1998, (i) the outstanding
indebtedness of Holdings was approximately $25.0 million, (ii) the outstanding
indebtedness of Holdings' subsidiaries was approximately $125.1 million
(exclusive of unused commitments), and (iii) there was approximately $41.1
million available to Iron Age under the New Credit Facility for future
borrowings.
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INDUSTRY OVERVIEW
The work shoe market consists of men's and women's work, safety and duty
shoes and boots. End-user safety shoe customers include workers in the primary
metals, chemical and petroleum, automotive, paper, mining, utilities,
electronics, aerospace, food service, 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 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.
As the North American market has shifted from an industrial-based economy
towards a service-based economy, demand for protective footwear products has
shifted from heavy industries towards service industries and light
manufacturing ("non-traditional" customers). The heavy industrial customer is
no longer the sole influencing factor in determining the breadth of safety shoe
product line or the nature of its distribution. These new influences on the
protective footwear marketplace have expanded the market within non-traditional
customers for both safety shoe products and related services, leading to
stronger demand.
COMPETITIVE STRENGTHS
The Company believes that its competitive strengths include:
MARKET LEADERSHIP WITH STRONG BRAND RECOGNITION. The Company is a leading
distributor of safety shoes in the United States and in fiscal 1998 had an
approximately 7% share of the overall work shoe market. The Company believes
that it has doubled its share of the safety shoe segment of the work shoe
market over the past decade to approximately 17%. The Company has established
national brand-name recognition in the industrial safety and service sector
markets with its Iron Age and Knapp brands. The Company believes that its
extensive product selection of over 450 styles coupled with its ability to
provide its customers with flexible, superior service through the use of its
captive factory-to-end-user distribution network differentiates it from its
competition. The Company's product line is well recognized in the industry for
superior quality, comfort and safety features.
CONTROL OF COMPREHENSIVE DISTRIBUTION NETWORK. The Company's multi-pronged
distribution network, comprised of 130 shoemobiles, 103 retail stores and 34
in-plant stores, as well as catalog sales and consumer brands, allows the
Company to tailor its marketing approach to customer size, location and product
demand. This integrated network enables the Company to promote the Iron Age
brand name exclusively and standardize information systems, product offerings
and customer service levels. The Company's network covers all of the United
States and key industrial areas in Mexico and Canada. In fiscal 1998, sales
through the Company's shoemobiles and affiliated retail stores ("mobile and
store centers") represented approximately 63% of the Company's aggregate sales.
DIVERSE AND STABLE CUSTOMER BASE. The Company has a geographically diverse
industrial customer base of over 48,000 accounts in a wide variety of
industries, including the pharmaceutical, aerospace, chemical, food, lumber,
transportation and home products industries. The Company's customers include
approximately 60% of
2
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all companies included in the Fortune 500. As of January 31, 1998, the
Company's top ten customers, which included Merck & Co., Inc., E.I. duPont de
Nemours and Company and AlliedSignal Inc., represented less than 12% of the
Company's total revenues in fiscal 1998. The Company's commitment to superior
customer service has enabled it to establish a loyal customer base
characterized by industrial customer retention rates in excess of 90%.
Virtually all sales to industrial and government customers are accomplished
through safety department-mandated programs, and management estimates that 68%
of such sales were employer-subsidized in fiscal 1998. The Company believes
that heightened sensitivity to workplace safety, supported by federal
regulations, will continue to stimulate demand for its products.
ADVANCED SYSTEMS AND PROCEDURES. The Company's highly automated systems
utilize leading technology, providing management with powerful tools to
strengthen merchandising, purchasing and accounting. All of the Company's
mobile and store centers have been outfitted with point-of-sale ("POS")
computer terminals. The POS system benefits the Company's customers by (i)
reducing transaction time, which minimizes employee downtime, (ii) providing
valuable purchasing data, which allows the employer to monitor safety costs,
and (iii) providing the employer with an efficient and reliable billing system.
The POS system results in lower costs to the Company due to reduced transaction
processing errors and helps it to actively manage inventories and customer
preferences.
BALANCED PRODUCT SOURCING. Through its market leadership position and
extensive operating history, the Company has developed longstanding
relationships with the majority of its 22 suppliers of protective footwear
located in the United States, China, Korea, Canada, Taiwan and the Netherlands.
All products are manufactured to the Company's specifications. In addition,
Falcon, the Company's manufacturing subsidiary, provides access to readily
available production, an inventory of specialty, high-end products and in-depth
knowledge of material and labor costs applicable to third party suppliers.
HISTORY OF SUCCESSFUL ACQUISITIONS. The Company's management team has
demonstrated an ability to identify, acquire and successfully assimilate
complementary acquisition targets. Since 1986, the Company has completed 23
acquisitions of independent distributors, enabling the Company to expand its
market coverage and to extend its primary distribution channel. In addition,
the Company acquired state-of-the-art manufacturing capability through its
purchase of Falcon. Most recently, the Company acquired and successfully
integrated Knapp Shoes, Inc. ("Knapp"), an underperforming competitor with a
strong franchise in the service sector market (the "Knapp Acquisition"). Within
90 days of the Knapp Acquisition, the Company returned Knapp to profitability
by infusing inventory, consolidating manufacturing, distribution and
administrative facilities, reducing personnel and integrating purchasing and
MIS departments. However, there can be no assurance that the Company will
continue to make successful acquisitions in the future.
EXPERIENCED MANAGEMENT TEAM. The Company's Chairman and CEO, Donald Jensen,
has a total of 28 years of experience in the shoe industry. Mr. Jensen,
together with other members of his senior management team--William Mills, Keith
McDonough, William Taaffe and Theodore Johanson--have over 100 years of
industry experience and approximately 79 years with the Company. This
continuity and experience has resulted in strong relationships with suppliers
and customers and significant stability in revenues and earnings. Under the
Company's current management, net sales and EBITDA have increased in each
consecutive year since fiscal 1987, growing at CAGRs of 15.2% and 23.2%,
respectively. There is no assurance that the Company will be similarly
successful in the future. Management currently has a 16% fully diluted equity
interest in the Company.
3
<PAGE>
GENERAL BUSINESS STRATEGY
The Company seeks (i) to strengthen its position as a leading distributor of
safety shoes, (ii) to broaden its target market within the service sector and
(iii) to add additional non-slip protective footwear and other complementary
product lines. In order to accomplish these goals, the Company has adopted the
following strategy:
PENETRATE EXISTING ACCOUNTS. The Company intends to increase sales to
existing industrial and government customers by building upon its position as a
leading distributor of safety footwear with strong brand name product
recognition, comprehensive distribution capabilities and advanced information
systems.
TARGET NEW MARKETS. The Company, led by its National Account department,
plans to generate new business opportunities through aggressive targeted
marketing to large potential users of protective safety footwear. The Company
also plans to increase marketing efforts to non-traditional users of protective
footwear (e.g., service industries and light manufacturing/warehouse
facilities) and to pursue selected acquisitions of independent distributors.
The Company also intends to add new retail locations and shoemobiles as
capacity utilization increases in each market.
DEVELOP CONSUMER BRANDS. The Company is revitalizing the widely recognized
Knapp brand name in the service sector of the work shoe market by augmenting
its existing network of independent sales representatives, retail stores,
direct consumer and industrial mail order and branded wholesale merchandising.
In addition, the Company is building a fleet of Knapp mini-vans and plans to
increase the number of Knapp retail locations. The Company has also developed
new, non-slip footwear products that will be marketed under the Knapp brand
name and sold via direct mail to the food service and hospitality industries.
PURSUE SELECTIVE ACQUISITIONS. The Company plans to capitalize on its
position as a leading distributor of safety shoes through selective
acquisitions of independent safety shoe distributors. The Company evaluates
potential acquisition candidates on a regular basis and is currently exploring
potential acquisition opportunities. The Company believes that acquiring
additional distributors will broaden its geographic distribution and promote
additional operating efficiencies.
FENWAY PARTNERS
Fenway Partners, Inc. ("Fenway") is a private equity investment firm
associated with Fenway Partners Capital Fund, L.P. (the "Fenway Fund"), with
approximately $527 million under management. Fenway was formed in 1994 by Peter
Lamm, Richard Dresdale and Andrea Geisser. Together, the firm's principals have
over 60 years of experience building and managing direct investment portfolios
and have made over 80 investments in a wide variety of industries. Fenway
focuses its investment activities on acquiring domestic middle market companies
with revenues between $100 million and $750 million which offer leading market
shares, strong franchises, multiple profit centers and underlying growth.
Fenway's investments include Iron Age, VDK Foods (Van de Kamps, Mrs. Paul's,
Aunt Jemima frozen breakfast and Celeste), Aurora Foods (Mrs. Butterworth's,
Log Cabin and Duncan Hines), Delimex, National School Supply, CT Farm & Country
and Decorative Concepts. On February 26, 1997, the Fenway Fund, together with
certain other investors, in partnership with certain members of management,
acquired all of the outstanding stock of the predecessor to Holdings for an
aggregate purchase price of approximately $143.6 million (the "Fenway
Acquisition").
4
<PAGE>
THE TRANSACTIONS
On April 24, 1998 (the "Issue Date"), Holdings consummated the sale of the
Original Discount Notes in a transaction exempt from the registration
requirements of the Securities Act (the "Original Offering"). Concurrently with
the Original Offering, Holdings and Iron Age entered into a new credit facility
(the "New Credit Facility") that provides for a senior secured credit facility
of approximately $65.0 million. Concurrently with the Original Offering, Iron
Age conducted the offering (the "Note Offering") of its 9 7/8% Senior
Subordinated Notes due 2008 (the "Senior Subordinated Notes") in an aggregate
principal amount of $100 million.
As set forth in the table below, Holdings and Iron Age used excess cash and
the net proceeds (after deduction of related fees and expenses) from the
Original Offering, the Note Offering and the New Credit Facility as follows:
(i) to repay Iron Age's indebtedness under a syndicated senior bank loan
facility (the "Existing Credit Facility") in the amount of $86.8 million;
(ii) to repay Iron Age's 12.5% Senior Subordinated Notes due 2006 (the
"Existing Subordinated Notes") in the amount of $17.3 million; (iii) to pay a
dividend to Holdings' stockholders and to make compensation payments to certain
members of management of Iron Age in the aggregate amount of $20.0 million;
(iv) to redeem Holdings' Series A Preferred Stock (the "Holdings Series A
Preferred Stock") in the amount of approximately $17.8 million; and (v) to pay
certain fees and expenses in connection with such transactions in the amount of
$5.9 million. The transactions described in this paragraph are collectively
referred to herein as the "Transactions."
See "Use of Proceeds," "Description of Other Indebtedness," "Capitalization"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
<TABLE>
<CAPTION>
DOLLARS IN
MILLIONS
----------
<S> <C>
SOURCES OF FUNDS:
Cash........................................................... $ 1.2
New Credit Facility(1)......................................... 21.6
Senior Subordinated Notes...................................... 100.0
Proceeds of the Original Offering.............................. 25.0
------
Total........................................................ $147.8
======
USES OF FUNDS:
Repayment of Existing Credit Facility.......................... $ 86.8
Redemption of Existing Subordinated Notes(2)................... 17.3
Redemption of Holdings Series A Preferred Stock................ 17.8
Dividend to Holdings' Stockholders and Certain Compensation
Payments
to Management of Iron Age..................................... 20.0
Fees and Expenses(3)........................................... 5.9
------
Total........................................................ $147.8
======
</TABLE>
- --------
(1) Under the New Credit Facility, Iron Age had, as of May 2, 1998, additional
borrowing availability of $41.1 million. See "Description of Other
Indebtedness."
(2) Includes $1.6 million of prepayment premiums.
(3) Represents selling discounts and legal, accounting and other professional
fees.
5
<PAGE>
THE EXCHANGE OFFER
The Exchange Offer........ Up to $45,140,000 aggregate principal amount at
maturity of Exchange Discount Notes are being
offered in exchange for a like aggregate principal
amount at maturity of Original Discount Notes.
Holdings is making the Exchange Offer in order to
satisfy its obligations under the Registration
Agreement relating to the Original Discount Notes.
For a description of the procedures for tendering
Original Discount Notes, see "The Exchange Offer--
Procedures for Tendering."
Expiration Date...........
5:00 p.m., New York City time, on , 1998,
unless the Exchange Offer is extended (in which
case the Expiration Date will be the latest date
and time to which the Exchange Offer is extended).
The Exchange Offer will remain open for a maximum
of 30 days (or longer if required by applicable
law) after the date hereof. See "The Exchange
Offer--Terms of the Exchange Offer."
Conditions of the The Exchange Offer is subject to the condition that
Exchange Offer............ the Exchange Offer does not violate applicable law
or SEC staff interpretation. If Holdings determines
that the Exchange Offer is not permitted by
applicable federal law, it may terminate the
Exchange Offer. The Exchange Offer is not
conditioned upon any minimum principal amount of
Original Discount Notes being tendered. See "The
Exchange Offer--Conditions of the Exchange Offer."
Resale of the Exchange
Discount Notes............
Based on an interpretation by the staff of the SEC
set forth in no-action letters issued to third
parties, Holdings believes that Exchange Discount
Notes issued pursuant to the Exchange Offer in
exchange for Original Discount Notes may be offered
for resale, resold and otherwise transferred by any
holder thereof (other than (i) a broker-dealer who
purchased such Original Discount Notes directly
from Holdings for resale pursuant to Rule 144A
("Rule 144A") or any other available exemption
under the Securities Act or (ii) a person that is
an "affiliate" of Holdings within the meaning of
Rule 405 under the Securities Act) without
compliance with the registration and prospectus
delivery provisions of the Securities Act provided
that the holder is acquiring the Exchange Discount
Notes in its ordinary course of business and is not
participating, does not intend to participate, and
has no arrangement or understanding with any person
to participate, in the distribution of the Exchange
Discount Notes. Each holder of Original Discount
Notes wishing to accept the Exchange Offer must
represent to Holdings that such conditions have
been met and that such holder is not an "affiliate"
of Holdings within the meaning of Rule 405 under
the Securities Act. In the event that Holdings'
belief is inaccurate, holders of Exchange Discount
Notes who transfer Exchange Discount Notes in
violation of the prospectus delivery provisions of
the Securities Act and without an exemption from
registration thereunder may incur liability under
the Securities Act. Holdings does not assume or
indemnify holders of Exchange Discount Notes
against such liability, although Holdings does not
believe that any such liability should exist.
6
<PAGE>
Each broker-dealer that receives Exchange Discount
Notes for its own account in exchange for Original
Discount Notes, where such Original Discount Notes
were acquired by such broker-dealer as a result of
market-making activities or other trading
activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such
Exchange Discount Notes. Although such broker-
dealer may be an "underwriter" within the meaning
of the Securities Act, the Letter of Transmittal
states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act. See "Plan of
Distribution."
All resales must be made in compliance with
applicable state securities or "blue sky" laws.
Such compliance may require that the Exchange Notes
be registered or qualified in a particular state or
that the resales be made by or through a licensed
broker-dealer, unless exemptions from these
requirements are available. Holdings assumes no
responsibility with regard to compliance with such
requirements.
The Exchange Offer is not being made to, nor will
Holdings accept surrenders for exchange from,
holders of Original Discount Notes in any
jurisdiction in which the Exchange Offer or the
acceptance thereof would not be in compliance with
the securities or blue sky laws of such
jurisdiction.
Procedures for Tendering
Discount Notes............ Each holder of Original Discount Notes wishing to
accept the Exchange Offer must complete, sign and
date the accompanying Letter of Transmittal or a
facsimile thereof, as the case may be, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with the Original Discount Notes and any other
required documentation to the Exchange Agent (as
defined) at the address set forth herein. By
executing a Letter of Transmittal, each holder will
represent to Holdings that, among other things, (i)
the Exchange Discount Notes acquired pursuant to
such Exchange Offer are being obtained in the
ordinary course of business of the person receiving
such Exchange Discount Notes, whether or not such
person is the holder, (ii) neither the holder nor
any such other person has any arrangement or
understanding with any person to participate in the
distribution of such Exchange Discount Notes and
that such holder is not engaged in, and does not
intend to engage in, a distribution of Exchange
Discount Notes, and (iii) that neither the holder
nor any such other person is an "affiliate," as
defined in Rule 405 under the Securities Act, of
Holdings. See "The Exchange Offer--Procedures for
Tendering."
Special Procedures for
Beneficial Owners.........
Any beneficial owner whose Original Discount Notes
are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender should contact such registered
7
<PAGE>
holder promptly and instruct such registered holder
to tender on such beneficial owner's behalf. See
"The Exchange Offer--Procedures for Tendering."
Guaranteed Delivery Holders of Original Discount Notes who wish to
Procedures................ tender their Original Discount Notes and whose
Original Discount Notes are not immediately
available or who cannot deliver their Original
Discount Notes, the Letter of Transmittal or any
other documents required by the Letter of
Transmittal, as the case may be, to the Exchange
Agent (or comply with the procedures for book-entry
transfer) prior to the Expiration Date must tender
their Original Discount Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures."
Untendered Discount Following the consummation of the Exchange Offer,
Notes..................... holders of Original Discount Notes eligible to
participate but who do not tender their Original
Discount Notes will not have any further exchange
rights and such Original Discount Notes will
continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market
for such Original Discount Notes could be adversely
affected by the Exchange Offer.
Consequences of Failure
to Exchange...............
The Original Discount Notes that are not exchanged
pursuant to the Exchange Offer will remain
restricted securities. Accordingly, such Original
Discount Notes may be resold only (i) to Holdings,
(ii) to a qualified institutional buyer pursuant to
Rule 144A or pursuant to Rule 144 under the
Securities Act, (iii) in an offshore transaction
pursuant to the requirements of Rule 903 or Rule
904 of Regulation S under the Securities Act, (iv)
to an institutional accredited investor pursuant to
an exemption under the Securities Act, or (v)
pursuant to an effective registration statement
under the Securities Act. See "The Exchange Offer--
Consequences of Failure to Exchange."
Shelf Registration If (i) because of any change in law or applicable
Statement................. interpretations thereof by the staff of the SEC,
Holdings is not permitted to effect the Exchange
Offer as contemplated hereby, (ii) for any other
reason the Exchange Offer Registration Statement is
not declared effective on or prior to 150 days
after the Issue Date or the Exchange Offer is not
consummated on or prior to 180 days after the Issue
Date, (iii) Salomon Brothers Inc, SBC Warburg
Dillon Read Inc. and Banque Nationale de Paris (the
"Initial Purchasers") so request with respect to
Original Discount Notes not eligible to be
exchanged for Exchange Discount Notes in the
Exchange Offer or the Initial Purchasers do not
receive freely tradeable Exchange Discount Notes in
the Exchange Offer, (iv) any applicable law or
interpretations do not permit any holder of
Original Discount Notes to participate in the
Exchange Offer, (v) any holder (other than an
Initial Purchaser) of Original Discount Notes is
not eligible to participate in the Exchange Offer
or such holder does not receive freely tradeable
Exchange Discount Notes in the Exchange
8
<PAGE>
Offer other than by reason of such holder being an
affiliate of Holdings, or (vi) Holdings so elects,
Holdings has agreed pursuant to the Registration
Agreement to register the Original Discount Notes
issued by it on a shelf registration statement (the
"Shelf Registration Statement") and use its
reasonable best efforts to cause it to be declared
effective by the SEC as promptly as practicable
after the filing thereof, and if applicable,
Holdings has agreed to use its reasonable best
efforts to keep the Shelf Registration Statement
effective for a period of two years after the Issue
Date.
Withdrawal Rights......... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
Acceptance of Original
Discount Notes and
Delivery of Exchange
Discount Notes............
Holdings will accept for exchange any and all
Original Discount Notes which are properly tendered
in the Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date. The Exchange
Discount Notes issued pursuant to the Exchange
Offer will be delivered promptly following the
Expiration Date. See "The Exchange Offer--Terms of
the Exchange Offer."
Federal Income Tax
Consequences.............. The exchange pursuant to the Exchange Offer will
not be a taxable event for federal income tax
purposes. See "Material Federal Income Tax
Consequences."
Use of Proceeds........... There will be no cash proceeds to Holdings from the
exchange pursuant to the Exchange Offer.
Exchange Agent............ The Chase Manhattan Bank.
9
<PAGE>
THE EXCHANGE DISCOUNT NOTES
<TABLE>
<S> <C>
Issuer........................... Iron Age Holdings Corporation.
Securities Offered............... $45.140 million in aggregate principal amount at matu-
rity of 12 1/8% Senior Discount Notes due 2009 regis-
tered under the Securities Act. Although the Discount
Notes are titled "Senior," (a) Holdings has not issued,
and does not have any current firm arrangements to is-
sue, any significant additional indebtedness to which
the Discount Notes would be senior, and (b) the Dis-
count Notes also will be effectively subordinate to es-
sentially all of the outstanding indebtedness of Hold-
ings and to all of the indebtedness of Holdings'
subsidiaries.
Maturity Date.................... May 1, 2009.
Interest Rate and Payment Dates.. The Discount Notes will accrete in value until May 1,
2003 at a rate per annum of 12 1/8%, compounded semi-
annually, to an aggregate principal amount of $45.140
million, the principal amount at maturity. Cash
interest will not accrue on the Exchange Discount Notes
prior to May 1, 2003. Thereafter, interest on the
Exchange Discount Notes will accrue at a rate per annum
of 12 1/8% and will be payable in cash on May 1 and
November 1 of each year, commencing November 1, 2003.
See "Description of Exchange Discount Notes."
Original Issue Discount.......... The Exchange Discount Notes are being offered at an
original issue discount for United States federal
income tax purposes. Thus, although cash interest will
not be payable on the Exchange Discount Notes prior to
November 1, 2003, original issue discount will accrue
from the Issue Date and will be included as interest
income periodically (including for periods ending prior
to November 1, 2003) in a holder's gross income for
United States federal income tax purposes in advance of
receipt of the cash payments to which the income is
attributable. See "Certain Federal Income Tax
Considerations."
Optional Redemption.............. Except as described below, the Exchange Discount Notes
will not be redeemable at the option of Holdings prior
to May 1, 2003. On and after such date, the Exchange
Discount Notes will be redeemable, at the option of
Holdings, in whole or in part, at the redemption prices
set forth herein, plus accrued and unpaid interest and
liquidated damages, if any, to the redemption date. In
addition, at any time and from time to time prior to
May 1, 2001, Holdings may, at its option, redeem in the
aggregate up to 35% of the aggregate principal amount
at maturity of the Discount Notes originally issued
with the proceeds of one or more Public Equity
Offerings received by Holdings, following which there
is a Public Market, at a redemption price of 112.125%
of the Accreted Value thereof, plus accrued and unpaid
interest and liquidated damages, if any, to the
redemption date; provided, however, that at least 65%
of
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
the aggregate principal amount at maturity of the
Discount Notes originally issued remains outstanding
immediately after each such redemption. See
"Description of Exchange Discount Notes--Optional
Redemption."
Change of Upon the occurrence of a Change of Control, each holder
Control... of Exchange Discount Notes will have the right to
require Holdings to repurchase all of such holder's
Exchange Discount Notes at a purchase price equal to
101% of the Accreted Value thereof, plus accrued and
unpaid interest and liquidated damages, if any, to the
date of repurchase. Under the New Credit Facility,
Holdings may not repurchase any Exchange Discount Notes
unless and until such time as all amounts outstanding
under the New Credit Facility are repaid in full. There
can be no assurance that, in the event of a Change of
Control, Holdings will have available sufficient funds
to repurchase the Exchange Discount Notes. See
"Description of Exchange Discount Notes--Change of
Control."
Sinking None.
Fund......
Ranking.... The Exchange Discount Notes will be unsecured, senior
obligations of Holdings, pari passu in right of payment
to all existing and future unsecured, unsubordinated
indebtedness of Holdings. All of the operations of
Holdings are conducted through Iron Age and Holdings'
other subsidiaries, and therefore Holdings is dependent
upon the cash flow of its subsidiaries to meet its
obligations, including its obligations on the Discount
Notes. The Discount Notes will be effectively
subordinated to all existing and future indebtedness
and liabilities of Holdings' subsidiaries, including
trade credit, the Senior Subordinated Notes and
indebtedness with respect to the New Credit Facility.
As of May 2, 1998, (i) the outstanding indebtedness of
Holdings was approximately $25.0 million, and (ii) the
outstanding indebtedness of Holdings' subsidiaries was
$125.1 million (exclusive of unused commitments). See
"Description of Exchange Discount Notes."
Restrictive The Indenture contains certain covenants that, among
Covenants.. other things, limit: (i) the incurrence of additional
indebtedness by Holdings or any Restricted Subsidiary,
(ii) the making of Restricted Payments (as defined) by
Holdings or any Restricted Subsidiary (including
certain investments and payments of dividends on, and
redemptions of, capital stock of Holdings or any
Restricted Subsidiary), (iii) the creation of
consensual encumbrances and restrictions with respect
to Restricted Subsidiaries, (iv) sales of assets and
subsidiary stock, (v) certain transactions with
affiliates, (vi) the issuance or sale of capital stock
of Restricted Subsidiaries, (vii) the creation of liens
and (viii) consolidations, mergers and transfers of all
or substantially all of Holdings' assets. However, all
of these covenants are subject to a number of
significant exceptions and qualifications. See
"Description of Exchange Discount Notes--Certain
Covenants."
</TABLE>
11
<PAGE>
RISK FACTORS
Prospective purchasers of the Exchange Discount Notes should carefully
consider, in addition to other information contained in this Prospectus, the
information contained herein under the heading "Risk Factors," under the
captions "--Limitation on Access to Cash Flow of Subsidiaries; Holding Company
Structure"; "--Substantial Leverage and Inability to Service Indebtedness"; "--
Restrictions Imposed by Terms of Indebtedness;" "--Original Issue Discount;
Limitations on Holders Claims"; "--Reliance on Suppliers; Economic Developments
in Asia"; "--Limitations on Ability to Implement Holdings' Acquisition
Strategy"; "--Competition"; "--Requirements of and Dependence on Government
Contracts"; "--Product Liability Exposure"; "--Costs of Compliance with
Environmental Laws and Regulations"; "--Dependence on Key Management"; "--
Controlling Stockholder"; "--Inability to Fund a Change of Control Offer"; and
"--Lack of Public Market."
12
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth (i) summary historical consolidated financial
data of Holdings for the five-year period ended January 31, 1998 and the three-
month periods ended April 25, 1997 and May 2, 1998, (ii) the pro forma
consolidated statement of income and other financial data of Holdings for the
twelve-month period ended January 31, 1998 and the three-month period ended May
2, 1998, which give effect to the Fenway Acquisition and the Transactions as if
such events had occurred on January 26, 1997 and (iii) summary historical
balance sheet data of Holdings as of May 2, 1998. The summary historical
consolidated financial data for the five-year period ended January 31, 1998
were derived from audited consolidated financial statements of Holdings. The
summary historical consolidated financial data for the period February 27, 1997
through April 25, 1997 and for the three-month period ended May 2, 1998 were
derived from unaudited financial statements of Holdings, which, in the opinion
of management, include all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the information set forth
therein. The results of operations for the three months ended May 2, 1998 are
not necessarily indicative of the results that may be expected for the full
year. The pro forma financial data and the adjusted balance sheet data are
provided for informational purposes only, are unaudited and are not necessarily
indicative of future results or what the operating results or financial
condition of Holdings would have been had the Fenway Acquisition and the
Transactions actually occurred on the dates assumed. The following table should
be read in conjunction with "Capitalization," "Selected Historical and Pro
Forma Consolidated Financial Data," "Unaudited Pro Forma Consolidated Statement
of Income and Other Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical financial
statements of Holdings, and the accompanying notes thereto, included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR
------------------------------------------------------------
FISCAL YEARS ENDING(1) JANUARY 26,
----------------------------------------------- 1997 THROUGH
JANUARY 29, JANUARY 28, JANUARY 27, JANUARY 25, FEBRUARY 26,
1994 1995 1996 1997 1997
----------- ----------- ----------- ----------- ------------
(IN THOUSANDS EXCEPT FOR FINANCIAL RATIOS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net sales............... $72,158 $85,543 $95,263 $99,360 $10,937
Cost of sales........... 39,043 46,984 50,706 52,437 5,610
------- ------- ------- ------- -------
Gross profit........... 33,115 38,559 44,557 46,923 5,327
Selling, general and
administrative......... 21,961 24,676 28,399 31,267 5,120 (4)
Depreciation............ 1,039 962 1,127 1,322 121
Amortization of
intangible assets...... 1,178 1,239 1,402 1,429 117
------- ------- ------- ------- -------
Operating income
(loss)................ 8,937 11,682 13,629 12,905 (31)(4)
Interest expense........ 3,817 6,163 6,702 6,515 1,116
------- ------- ------- ------- -------
Income (loss) before
income taxes........... 5,120 5,519 6,927 6,390 (1,147)
Provision (benefit) for
income taxes........... 2,145 2,771 3,091 2,800 (452)
------- ------- ------- ------- -------
Net income (loss)...... $ 2,975 $ 2,748 $ 3,836 $ 3,590 $ (695)
======= ======= ======= ======= =======
CASH FLOW DATA:
Net cash (used in)
provided by operating
activities............. $ (360) $ 3,535 $ 1,160 $ 8,817 $ 1,436
Net cash used in
investing activities
(excluding
acquisitions).......... 1,243 3,625 4,679 2,222 117
Net cash (used in)
provided by financing
activities (excluding
acquisitions).......... (664) 2,193 1,516 (7,040) (2,299)
OTHER DATA:
EBITDA (10)............. $11,154 $14,000 $16,511 $17,079 $ 2,269
EBITDA Margin (10)...... 15.5% 16.4% 17.3% 17.2% 20.7%
Depreciation and
amortization........... $ 2,217 $ 2,318 $ 2,882 $ 3,109 $ 246
Capital expenditures
(11)................... 1,275 1,339 2,898 2,562 117
Cash interest expense
(12)................... 5,207 5,688 6,249 5,385 552
Ratio of earnings to
fixed charges (14)..... 2.3x 1.8x 2.0x 1.9x --
Shoemobiles............. 83 88 91 106 106
Retail stores........... 55 60 69 73 73
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
SUCCESSOR
-----------------------------------------------------------------------
UNAUDITED UNAUDITED PRO FORMA
------------------------- ------------------------------
FEBRUARY 27, FEBRUARY 27,
1997 THROUGH 1997 THROUGH THREE MONTHS YEAR ENDED THREE MONTHS
JANUARY 31, APRIL 25, ENDED MAY 2, JANUARY 31, ENDED MAY 2,
1998(2) 1997(2) 1998 1998(1)(3) 1998
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net sales............... $107,769 $17,306 $ 32,167 $118,706 $32,167
Cost of sales........... 53,304 8,795 16,043 58,914 16,043
-------- ------- -------- -------- -------
Gross profit........... 54,465 8,511 16,124 59,792 16,124
Selling, general and
administrative......... 36,541 5,685 12,967 (5) 39,607 (6) 10,722 (6)
Depreciation............ 1,443 245 424 1,570 424
Amortization of
intangible assets...... 2,983 599 846 3,148 846
-------- ------- -------- -------- -------
Operating income
(loss)................ 13,498 1,982 1,887 15,467 4,132
Interest expense........ 9,855 1,449 2,742 15,238 3,887
-------- ------- -------- -------- -------
Income (loss) before
income taxes and
extraordinary item..... 3,643 533 (855) 229 245
Provision (benefit) for
income taxes........... 1,686 205 (128)(5) 984 (6)(7) 346 (6)(7)
-------- ------- -------- -------- -------
Net income (loss)
before extraordinary
item.................. 1,957 328 (727) (755) (101)
Extraordinary item, net
of tax................ -- -- (4,015)(9) -- --
-------- ------- -------- -------- -------
Net income (loss)...... $ 1,957 $ 328 $ (4,742) $ (755)(8) $ (101)(8)
======== ======= ======== ======== =======
CASH FLOW DATA:
Net cash (used in)
provided by operating
activities............. $ (1,912) $ (69) $ (4,442) -- --
Net cash used in
investing activities
(excluding
acquisitions).......... 2,365 132 374 -- --
Net cash (used in)
provided by financing
activities (excluding
acquisitions).......... 5,956 548 8,505 -- --
OTHER DATA:
EBITDA (10)............. $ 18,225 $ 2,879 $ 3,265 $ 20,486 $ 5,510
EBITDA Margin (10)...... 16.9% 16.6% 10.2% 17.3% 17.1%
Depreciation and
amortization........... $ 4,727 $ 897 $ 1,378 $ 5,019 $ 1,378
Capital expenditures
(11)................... 2,571 163 516 2,688 516
Cash interest expense
(12)................... 7,837 205 2,263 11,539 2,971
EBITDA/cash interest
expense................ 1.78x 1.85x
EBITDA/total interest
expense................ 1.34x 1.42x
Net debt/EBITDA (13).... 7.03x 6.81x
Ratio of earnings to
fixed charges (14)..... 1.3x 1.3x -- 1.0x 1.1x
Shoemobiles............. 122 100 130 122 130
Retail stores........... 95 92 103 95 103
</TABLE>
<TABLE>
<S> <C>
BALANCE SHEET DATA (END OF PERIOD):
Total assets........................................................... $182,569
Total debt............................................................. 150,122
Holdings Series A Perferred Stock...................................... --
Total stockholders' equity............................................. 14,738
</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) The unaudited pro forma statement of income data and the other financial
data of Holdings give effect to the Fenway Acquisition and the Transactions
as if such events had occurred on January 26, 1997, as more fully disclosed
in the Unaudited Pro Forma Consolidated Statement of Income and Other
Financial Data and the notes thereto.
(4) Includes $1,054 of non-cash stock-based compensation and $1,000 of non-
recurring management bonuses paid in connection with the Fenway
Acquisition.
(5) Includes approximately $2,245 of compensation payments to certain members
of management of Iron Age in connection with the Transactions and related
tax effect of $960.
14
<PAGE>
(6) Excludes approximately $2,245 of compensation payments to certain members
of management of Iron Age in connection with the Transactions and related
tax effect of $960.
(7) The provision for income taxes for the unaudited pro forma statements of
income for the year ended January 31, 1998 and the three months ended May
2, 1998 is computed by applying the statutory rate of 43%, excluding the
impact of non-deductible goodwill amortization.
(8) Excludes 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 Transactions.
(9) Holdings recorded an extraordinary loss of $4,015, net of tax benefit, for
the three months ended May 2, 1998, due to the early extinguishment of
indebtedness resulting from the repayment of the Existing Subordinated
Notes and the termination of the Existing Credit Facility in connection
with the Transactions.
(10) EBITDA is defined as net income plus (i) provision for income taxes, (ii)
interest expense, (iii) depreciation and amortization, (iv) certain other
non-cash charges described below and (v) certain other non-recurring cash
charges described below. EBITDA presented by Holdings may not be
comparable to EBITDA defined and presented by other companies. EBITDA
margin is defined as EBITDA divided by net sales. Non-cash charges for the
year ended January 25, 1997 and the period January 26, 1997 through
February 26, 1997 include stock-based compensation of $1,065 and $1,054,
respectively. Non-recurring cash charges for the period January 26, 1997
through February 26, 1997 include $1,000 of management bonuses paid in
connection with the Fenway Acquisition. Holdings believes that EBITDA
provides useful information regarding Holdings' ability to service its
debt; however, offerees of the Exchange Discount Notes should consider the
following factors in evaluating such measures: EBITDA and related measures
(i) should not be considered in isolation, (ii) are not measures of
performance calculated in accordance with generally accepted accounting
principles ("GAAP"), (iii) should not be construed as alternatives or
substitutes for income from operations, net income or cash flows from
operating activities in analyzing Holdings' operating performance,
financial position or cash flows (in each case, as determined in
accordance with GAAP) and (iv) should not be used as indicators of
Holdings' operating performance or measures of its liquidity.
<TABLE>
<CAPTION>
TWELVE MONTHS THREE MONTHS
ENDED ENDED
JANUARY 31,1998 MAY 2, 1998
--------------- ------------
<S> <C> <C>
Pro forma operating income....................... $15,467 $4,132
Depreciation and amortization................... 4,718 1,270
Falcon depreciation in cost of sales............ 301 108
------- ------
EBITDA........................................... $20,486 $5,510
======= ======
</TABLE>
(11) Includes capital expenditures financed through capital leases of $312 in
1994, $347 in 1995, $340 in 1996, $340 in 1997, $0 in the period January
26, 1997 to February 27, 1997, $206 in the period February 27, 1997 to
January 31, 1998, $31 in the period February 27, 1997 to April 25, 1997
and $142 in the three months ended May 2, 1998.
(12) Cash interest expense equals total interest expense less amortization of
deferred financing fees and discount.
(13) Net debt is defined as long term debt including current maturities less
cash and cash equivalents.
(14) In calculating the ratio of earnings to fixed charges, earnings consist of
income before taxes plus fixed charges. Fixed charges consist of interest
expense, amortization of deferred financing costs and discount and the
portion of operating lease expense attributable to interest. For the
period January 26, 1997 through February 26, 1997, Holdings' earnings were
inadequate to cover fixed charges by $263. Adjusted to eliminate non-cash
charges of depreciation and amortization of $246, non-cash charges of
stock based compensation of $1,054 and non-recurring management bonuses of
$1,000, such earnings would have exceeded fixed charges by $2,037. For the
three months ended May 2, 1998, Holdings' earnings were inadequate to
cover fixed charges by $855. Adjusted to eliminate non-cash charges of
depreciation and amortization of $1,378 and $2,245 of compensation to
certain members of management in connection with the Transactions for the
three months ended May 2, 1998, such earnings would have exceeded fixed
charges by $2,768.
15
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors in
addition to the other information set forth in this Prospectus before making
an investment in the Exchange Discount Notes offered hereby. Actual results
could differ materially from those projected in the forward looking statements
as a result of certain factors and uncertainties set forth below and elsewhere
in this Prospectus.
LIMITATION ON ACCESS TO CASH FLOW OF SUBSIDIARIES; HOLDING COMPANY STRUCTURE
Holdings is a holding company and does not have, and may not in the future
have, any material assets other than the common stock of Iron Age. All of the
operations of Holdings are conducted through Iron Age and its subsidiaries,
and therefore Holdings is dependent upon the cash flow of its subsidiaries to
meet its obligations, including its obligations under the Discount Notes. 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 Senior Subordinated Indenture, 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 Senior Subordinated Indenture may be affected by
events that are beyond the control of Holdings. If the loans under the New
Credit Facility or the maturity of the Senior Subordinated Notes were to be
accelerated as a result of an event of default thereunder, or if Iron Age were
required to redeem or repurchase any Senior Subordinated Notes prior to the
stated maturity thereof, all or a portion of such outstanding debt would be
required to be paid in full before Iron Age would be permitted to pay
dividends or make other payments to 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. Although cash interest
will not be payable on the Discount Notes until November 1, 2003, there can be
no assurance that Holdings will have sufficient resources to pay cash interest
on the Discount Notes, to meet its other obligations under the Discount Notes
or to satisfy its other present and future debt obligations (including,
without limitation, its guarantee of Iron Age's obligations under the New
Credit Facility).
As a result of the holding company structure of Holdings, the holders of the
Original Discount Notes are, and the holders of the Exchange Discount Notes
will be, structurally subordinate to all creditors of Holdings' subsidiaries.
In the event of insolvency, liquidation, reorganization, dissolution or other
winding-up of Holdings' subsidiaries, Holdings will not receive any funds
available to pay to creditors of the subsidiaries. As of May 2, 1998, the
aggregate amount of outstanding Indebtedness of Holdings and its subsidiaries
was approximately $150.1 million (exclusive of unused commitments).
SUBSTANTIAL LEVERAGE AND INABILITY TO SERVICE INDEBTEDNESS
Following the Transactions, Holdings is highly leveraged. As of May 2, 1998,
(i) the outstanding indebtedness of Holdings was approximately $25.0 million
and (ii) the outstanding indebtedness of Holdings' subsidiaries was
approximately $125.1 million (exclusive of unused commitments). As of May 2,
1998, there was approximately $41.1 million available to Iron Age under the
New Credit Facility for future borrowings. For the three months ended May 2,
1998, Holdings' earnings were inadequate to cover fixed charges by $855,000.
In addition, subject to the restrictions in the New Credit Facility, the
Indenture and the Senior Subordinated Indenture, Holdings and its subsidiaries
may incur additional indebtedness from time to time to finance acquisitions or
capital expenditures or for other purposes. See "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
16
<PAGE>
Holdings' high degree of leverage could have important consequences to
holders of the Discount Notes, including (i) a substantial portion of
Holdings' cash flow from operations must be dedicated to debt service and will
not be available for other purposes, (ii) Holdings' ability to obtain
additional debt financing in the future for working capital, capital
expenditures or acquisitions may be limited, (iii) Holdings' leveraged
position and the covenants that are contained in the Indenture, the Senior
Subordinated Indenture and the New Credit Facility could limit Holdings'
ability to expand (including through acquisitions) and to make capital
improvements, (iv) Holdings may be more leveraged than certain of its
competitors, which may place Holdings at a competitive disadvantage, and (v)
Holdings' ability to refinance the Discount Notes in order to pay the
principal of the Discount Notes at maturity or upon a Change of Control may be
adversely affected. See "Description of Other Indebtedness" and "Description
of Exchange Discount Notes."
Holdings' ability to pay principal and interest on the Discount Notes and to
satisfy its other debt obligations will depend upon its future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond its
control, as well as the availability of revolving credit borrowings under the
New Credit Facility or successor facilities. If Holdings is unable to service
its indebtedness, it will be forced to take actions such as reducing or
delaying capital expenditures, selling assets, restructuring or refinancing
its indebtedness (which could include the Discount Notes), or seeking
additional equity capital. There is no assurance that any of these remedies
can be effected on satisfactory terms, if at all. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Description of Other Indebtedness."
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Indenture and the Senior Subordinated Indenture restrict, among other
things, the ability of Holdings and Iron Age to incur additional indebtedness,
incur liens, pay dividends or make certain other restricted payments,
consummate certain asset sales, enter into certain transactions with
affiliates, merge or consolidate with any other person or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of
the assets of Holdings or Iron Age. In addition, the New Credit Facility
contains other and more restrictive covenants and prohibits Holdings and Iron
Age from prepaying their other indebtedness (including the Discount Notes and
the Senior Subordinated Notes). See "Description of Exchange Discount Notes--
Certain Covenants" and "Description of Other Indebtedness." The New Credit
Facility requires Holdings and Iron Age to maintain specified financial ratios
and satisfy certain financial condition tests. A breach of any of these
covenants could result in a default under the New Credit Facility, the
Indenture and/or the Senior Subordinated Indenture. Upon the occurrence of an
event of default under the New Credit Facility or the Senior Subordinated
Notes, the lenders could elect to declare all amounts outstanding under the
New Credit Facility, together with accrued interest, and the holders of Senior
Subordinated Notes could elect to declare all amounts outstanding under the
Senior Subordinated Notes, together with accrued interest, to be immediately
due and payable. If Holdings and Iron Age were unable to repay the New Credit
Facility, the lenders could proceed against the collateral granted to them to
secure that indebtedness. If the lenders under the New Credit Facility
accelerate the payment of the indebtedness under the New Credit Facility,
there can be no assurance that the assets of Iron Age would be sufficient to
repay in full such indebtedness and the other indebtedness of Holdings and
Iron Age, including the Discount Notes and the Senior Subordinated Notes.
Substantially all of Holdings', Iron Age's, each of their respective present
and future domestic subsidiaries', and, to the extent that no adverse tax
consequence would result therefrom, each of their respective present and
future foreign subsidiaries' assets are pledged as security under the New
Credit Facility. Except for the restrictions described above, the provisions
of the Indenture do not afford the holders of the Discount Notes protection in
the event of a highly leveraged or other transaction involving Holdings that
may adversely affect the holders of the Discount Notes. See "Description of
Other Indebtedness" and "Description of Exchange Discount Notes--Certain
Covenants."
ORIGINAL ISSUE DISCOUNT; LIMITATIONS ON HOLDERS' CLAIMS
The Exchange Discount Notes are being offered at a discount from their
principal amount at maturity. Consequently, holders of the Exchange Discount
Notes will be required to include amounts in gross income for
17
<PAGE>
federal income tax purposes in advance of receipt of the cash payments to
which the income is attributable. See "Material Federal Income Tax
Considerations" for a more detailed discussion of the federal income tax
consequences to the holders of the Exchange Discount Notes resulting from the
purchase, ownership or disposition thereof.
Under the Indenture, in the event of an acceleration of the maturity of the
Discount Notes upon the occurrence of an Event of Default, the holders of the
Discount Notes may be entitled to recover only the amount which may be
declared due and payable pursuant to the Indenture, which will be less than
the principal amount at maturity of such Discount Notes. See "Description of
Exchange Discount Notes--Events of Default." If a bankruptcy case is commenced
by or against Holdings under the United States federal bankruptcy code, the
claim of a holder of Discount Notes with respect to the principal amount
thereof may be limited to an amount equal to the sum of (i) the issue price of
the Discount Notes as set forth on the cover page hereof and (ii) that portion
of the original issue discount (as determined on the basis of such issue
price) which is not deemed to constitute "unmature interest" for purposes of
the United States federal bankruptcy code. Any original issue discount that
was not amortized as of any such bankruptcy filing would constitute "unmatured
interest."
RELIANCE ON SUPPLIERS; ECONOMIC DEVELOPMENTS IN ASIA
Holdings relies on broad-based sourcing for its footwear products. Holdings
sources footwear products from 22 manufacturers in six countries, including
the United States, China, Korea, Canada, Taiwan and the Netherlands. In fiscal
1998, 47% of total pairs sold by Holdings were produced by suppliers outside
of the United States and Canada. Holdings believes that its relationship with
third-party manufacturing facilities provide it with a competitive advantage;
thus, Holdings' future results will partly depend on maintaining its close
working relationships with its principal manufacturers. If Holdings'
relationship with any of its principal manufacturers materially deteriorates,
there can be no assurance that such deterioration will not have a material
adverse effect on Holdings' business, financial condition or results of
operations.
Holdings relies heavily on independent manufacturing facilities located in
China. In fiscal 1998, Holdings sold approximately 576,000 pairs of shoes
manufactured in China, which represented approximately 36% of total pairs sold
by Holdings. In fiscal 1998 one supplier in China manufactured approximately
20% of total pairs of shoes sold by Holdings and there can be no assurance
that the loss of such supplier would not have a material adverse effect on
Holdings' business, financial condition or results of operations.
Historically, the trade relationship between the United States and China has
not had a material adverse effect on Holdings' business, financial condition
or results of operations. However, there have been, and may be in the future,
threats to deny Most Favored Nation trade status to China. There can be no
assurance that the trade relationship between the United States and China will
not worsen, and if it does worsen, there can be no assurance that Holdings'
business, financial condition or results of operations will not be materially
adversely affected thereby. Holdings 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 Holdings' suppliers located
in Asia. 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 Holdings could have a material adverse effect on Holdings'
business, financial condition or results of operations during the transition
to alternative manufacturing facilities.
As is common in the industry, Holdings does not have any long-term contracts
with its independent manufacturers. There can be no assurance that Holdings
will not experience difficulties with such manufacturers, including reduction
in the availability of production capacity, failure to meet production
deadlines or increases in manufacturing costs. Foreign manufacturing is
subject to a number of risks, including work stoppages, transportation delays
and interruptions, political instability, expropriation, nationalization,
foreign currency fluctuations, changing economic conditions, the imposition of
tariffs, import and export controls and other non-tariff barriers and changes
in governmental policies. Any of these events could have a material adverse
effect on Holdings' business, financial condition or results of operations.
Holdings cannot predict whether additional
18
<PAGE>
United States or foreign customs quotas, duties, taxes or other charges or
restrictions will be imposed in the future upon the importation of products
produced outside the United States or what effect such charges or restrictions
could have on its business, financial condition or results of operations.
LIMITATIONS ON ABILITY TO IMPLEMENT HOLDINGS' ACQUISITION STRATEGY
Holdings has pursued and intends to continue to pursue acquisitions as an
important component of its strategy. No assurance can be given that in the
future other suitable acquisition candidates can be acquired on acceptable
terms or that future acquisitions, if completed, will be successful. Future
acquisitions by Holdings could result in the incurrence of additional debt and
contingent liabilities, which could materially adversely affect Holdings'
business, operating results and financial condition. The success of any
completed acquisition will depend on Holdings' ability to integrate
effectively the acquired business into Holdings and its subsidiaries,
including Iron Age. The process of integrating acquired businesses may involve
numerous risks, including difficulties in the assimilation of operations and
products, the diversion of management's attention from other business
concerns, risks of entering markets in which Holdings and its subsidiaries,
including Iron Age, have limited or no direct prior experience and the
potential loss of key employees of the acquired businesses. See "Business--
Business Strategy."
COMPETITION
The work shoe market is highly competitive. Holdings believes that
participants in the work shoe market compete on the basis of distribution
capabilities, retail presence, brand name recognition, corporate
relationships, systems, service, product characteristics, product quality and
price. Some of Holdings' competitors have greater financial and other
resources than Holdings. In addition, the work shoe market is a mature
industry that could experience limited growth. The level of competition in the
markets in which Holdings operates can adversely impact Holdings' revenues and
profitability. As a result of these and other factors, there can be no
assurance that Holdings will successfully maintain its market position. See
"Business--Competition."
REQUIREMENTS OF AND DEPENDENCE ON GOVERNMENT CONTRACTS
Approximately 6% of Holdings' sales in fiscal 1998 were made to the General
Service Administration ("GSA"), a purchasing organization of the federal
government. Holdings must continue to meet certain qualification criteria in
order to continue to sell its products to the GSA. There can be no assurance
that Holdings will continue to be in material compliance with all such
criteria. The failure of Holdings to continue to meet GSA requirements, or a
material reduction in the amount of GSA purchases, could have a material
adverse effect on Holdings' business, financial condition or results of
operations.
PRODUCT LIABILITY EXPOSURE
Holdings faces an inherent business risk of exposure to product liability
claims. There can be no assurance that Holdings will not experience any
material unindemnified or uninsured losses due to product liability and other
claims in the future. A successful claim brought against Holdings for which
Holdings does not receive indemnification or which is in excess of available
insurance coverage, or any claim or product recall that results in significant
expense or adverse publicity against Holdings, may have a material adverse
effect on Holdings' business, financial condition or results of operations.
COSTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS AND REGULATIONS
Holdings' operations, including its manufacturing operations, are subject to
federal, state, local and foreign laws and regulations relating to the
storage, handling, generation, treatment, emission, release, discharge and
disposal of certain substances and waste materials. There can be no assurance
that Holdings will not incur significant costs to remediate violations of
those laws and regulations or to comply with changes in existing laws and
regulations (or the enforcement thereof). Such costs could have a material
adverse effect on Holdings' business, financial condition or results of
operations. See "Business--Environmental Matters."
19
<PAGE>
DEPENDENCE ON KEY MANAGEMENT
The success of Holdings will continue to depend to a significant extent on
its executive and other key management personnel. There can be no assurance
that Holdings or Iron Age will be able to retain their executive officers and
key personnel or attract additional qualified management in the future. In
addition, the success of certain acquisitions contemplated by Holdings and
Iron Age may depend, in part, on the ability of Holdings and Iron Age to
retain management personnel of the acquired companies. See "Management."
CONTROLLING STOCKHOLDER
The Fenway Fund owns more than 88% of the outstanding voting stock of
Holdings. By virtue of such ownership, the Fenway Fund has the power to
control all matters submitted to the stockholders of Holdings and to elect all
directors of Holdings and its subsidiaries. See "Principal Stockholders."
INABILITY TO FUND A CHANGE OF CONTROL OFFER
Upon the occurrence of a Change of Control, each holder of the Discount
Notes may require Holdings to repurchase all of such holder's Discount Notes
at a price equal to 101% of the Accreted Value thereof, plus accrued and
unpaid interest and liquidated damages, if any, to the date of repurchase. A
Change of Control under the Indenture would also constitute a change of
control under the Senior Subordinated Indenture and would permit each holder
of the Senior Subordinated Notes to require Iron Age to repurchase all of such
holder's Senior Subordinated Notes at a price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest and liquidated damages, if
any, to the date of repurchase. The New Credit Facility provides that in the
event of a Change of Control, Holdings may not repurchase any Discount Notes
and Iron Age may not repurchase any Senior Subordinated Notes unless and until
such time as all amounts outstanding under the New Credit Facility are repaid
in full. There can be no assurance that, in the event of a Change of Control,
Holdings will have available sufficient funds to repurchase the Discount
Notes. See "Description of Other Indebtedness" and "Description of Exchange
Discount Notes--Change of Control."
LACK OF PUBLIC MARKET
The Exchange Discount Notes are new securities for which there currently is
no market. Although the Initial Purchasers have informed Holdings that they
intend to make a market in the Exchange Discount Notes, they are not obligated
to do so and any such market making may be discontinued at any time without
notice. Accordingly, there can be no assurance as to the development or
liquidity of any market for the Exchange Discount Notes. Holdings does not
intend to apply for listing of the Discount Notes on any securities exchange
or for quotation through the Nasdaq National Market.
The liquidity of, and trading market for, the Discount Notes also may be
adversely affected by general declines in the market for similar securities.
Such a decline may adversely affect such liquidity and trading markets
independent of the financial performance of, and prospects for, Holdings.
20
<PAGE>
USE OF PROCEEDS
Holdings will receive no proceeds from the issuance of the Exchange Discount
Notes.
21
<PAGE>
CAPITALIZATION
The following table sets forth the historical consolidated capitalization of
Holdings as of May 2, 1998. This table should be read in conjunction with "The
Transactions," "Selected Historical and Pro Forma Consolidated Financial
Data," "Unaudited Pro Forma Consolidated Statement of Income and Other
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and Holdings' Consolidated Financial Statements
and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MAY 2 1998
----------------
(DOLLARS
IN
THOUSANDS)
<S> <C> <C>
Cash........................................................... $ 38
Long-term debt including current maturities(1):
New Credit Facility(2)........................................ 23,900
Other debt.................................................... 1,163
Senior Subordinated Notes..................................... 100,000
Original Discount Notes....................................... 25,059
--------
Total long-term debt......................................... 150,122
Total stockholders' equity..................................... 14,738(3)
--------
Total capitalization........................................... $164,898
========
</TABLE>
- --------
(1) For a description of Holdings' long-term debt, see Note 7 to Holdings'
Consolidated Financial Statements included elsewhere in this Prospectus.
(2) In connection with the consummation of the Original Offering, Holdings and
Iron Age entered into the New Credit Facility, which provides for
borrowings in an outstanding principal amount of up to $65,000, $30,000 of
which is a revolving credit facility and $35,000 of which is an
acquisition facility. On May 2, 1998, after giving effect to the
Transactions, Iron Age had approximately $41,100 of additional borrowing
availability under the New Credit Facility.
(3) Stockholders' equity reflects (i) a dividend of $17,745 to Holdings'
stockholders, (ii) compensation expense for payments to certain members of
management of Iron Age of $2,245, net of tax benefit, and (iii) an
extraordinary loss on early extinguishment of debt, net of tax benefit, of
$4,015.
22
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
AND OTHER FINANCIAL DATA
FOR THE TWELVE MONTHS ENDED JANUARY 31, 1998 AND THE THREE MONTHS ENDED MAY 2,
1998
The following pro forma financial data have been derived by the application
of pro forma adjustments to the historical consolidated financial statements
of Holdings for the twelve-month period ended January 31, 1998 and the three-
month period ended May 2, 1998. On February 26, 1997, the Fenway Fund,
together with certain other investors including management, acquired all of
the outstanding stock of the predecessor to Holdings for an aggregate purchase
price of approximately $143.6 million. In connection therewith, Iron Age
entered into the Existing Credit Facility and issued the Existing Subordinated
Notes. The Fenway Acquisition was accounted for by the purchase method. On
April 24, 1998, Holdings issued the Original Discount Notes and Iron Age
issued the Senior Subordinated Notes and entered into the New Credit Facility.
In connection therewith, Holdings and Iron Age used the proceeds of the
Original Offering and the Note Offering, borrowings under the New Credit
Facility and available cash to repay the Existing Credit Facility and the
Existing Subordinated Notes, redeem the Holdings Series A Preferred Stock and
pay a dividend to Holdings' stockholders. The pro forma financial data
presented below give effect to the Fenway Acquisition and the Transactions as
if such events had occurred on January 26, 1997. The adjustments relating to
the Fenway Acquisition and the Transactions are described in the accompanying
notes. The results of Knapp are included in Successor Historical Statement of
Income Data from the date of the Knapp Acquisition, March 14, 1997. The pro
forma financial data presented below should not be considered indicative of
actual results that would have been achieved had the Fenway Acquisition and
the Transactions occurred on the date assumed and do not purport to indicate
results of operations as of any future date of for any future period. The pro
forma financial data presented below should be read in conjunction with
Holdings' consolidated financial statements and the accompanying notes
thereto, "Summary Historical and Pro Forma Consolidated Financial Data," "The
Transactions," "Capitalization," "Selected Historical and Pro Forma
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which information is included
elsewhere in this Prospectus.
FOR THE TWELVE MONTHS ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
HISTORICAL HISTORICAL FENWAY PRO FORMA FOR
1/26/97- 2/27/97- ACQUISITION THE FENWAY TRANSACTIONS HOLDINGS
2/26/97 1/31/98 ADJUSTMENTS ACQUISITION ADJUSTMENTS PRO FORMA
----------- ---------- ----------- ------------- ------------ ---------
(IN THOUSANDS EXCEPT FOR FINANCIAL RATIOS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DA-
TA:
Net sales............... $10,937 $107,769 $ -- $118,706 $ -- $118,706
Cost of sales........... 5,610 53,304 -- 58,914 -- 58,914
------- -------- ----- -------- ------- --------
Gross profit (loss).... 5,327 54,465 -- 59,792 -- 59,792
Selling, general and
administrative......... 3,066 (1) 36,541 -- 39,607 -- 39,607 (7)
Depreciation............ 121 1,443 6 (2) 1,570 -- 1,570
Amortization of
intangible assets...... 117 2,983 48 (3) 3,148 -- 3,148
------- -------- ----- -------- ------- --------
Operating income
(loss)................ 2,023 13,498 (54) 15,467 -- 15,467
Interest expense........ 1,116 9,855 (220)(4) 10,751 4,487 (6) 15,238
------- -------- ----- -------- ------- --------
Income (loss) before
income taxes........... 907 3,643 166 4,716 (4,487) 229
Provision (benefit) for
income taxes .......... 431 (1) 1,686 796 (5) 2,913 (1,929)(5) 984 (7)
------- -------- ----- -------- ------- --------
Net income (loss)....... $ 476 $ 1,957 $(630) $ 1,803 $(2,558) $ (755)(8)
======= ======== ===== ======== ======= ========
OTHER DATA(9):
Depreciation and
amortization........... 5,019
Cash interest expense... 11,539
Net debt/EBITDA......... 7.03x
Ratio of earnings to
fixed charges (10)..... 1.0x
</TABLE>
23
<PAGE>
FOR THE THREE MONTHS ENDED MAY 2, 1998
<TABLE>
<CAPTION>
SUCCESSOR
HISTORICAL
2/1/98- TRANSACTIONS COMPANY
5/2/98 ADJUSTMENTS PRO FORMA
---------- ------------ ---------
<S> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Net sales............................ $32,167 $32,167
Cost of sales........................ 16,043 16,043
------- ------ -------
Gross profit (loss)................. 16,124 -- 16,124
Selling, general and administrative.. 10,722 (7) 10,722 (7)
Depreciation......................... 424 424
Amortization of intangible assets.... 846 846
------- ------ -------
Operating income (loss)............. 4,132 -- 4,132
Interest expense..................... 2,742 1,145 (6) 3,887
------- ------ -------
Income (loss) before income taxes.... 1,390 (1,145) 245
Provision (benefit) for income
taxes............................... 832 (7) (486)(5) 346 (7)
------- ------ -------
Net income (loss).................... 558 (8) (659) (101)(8)
======= ====== =======
OTHER FINANCIAL DATA(9):
Depreciation and Amortization........ 1,378
Cash interest expense................ 2,971
Net debt/EBITDA...................... 6.81x
Ratio of earnings to fixed charges
(10)................................ 1.1x
</TABLE>
NOTES TO THE PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
($ IN THOUSANDS)
(1) Excludes non-recurring charges of $1,000 and $1,054 representing
management bonuses and stock-based compensation, and related tax effect of
$883, paid in connection with the Fenway Acquisition.
(2) In connection with the Fenway Acquisition, Holdings increased its basis in
its assets by approximately $240. The increase in basis was attributed to
the building which is being depreciated over a useful life of 40 years.
The pro forma adjustment represents the incremental depreciation in
connection with the Fenway Acquisition resulting from the evaluation of
asset values and useful lives.
(3) In connection with the Fenway Acquisition, Holdings allocated
approximately $84,073 and $15,690 of its purchase price to goodwill and
customer lists, respectively. The pro forma adjustment reflects the
incremental amortization of goodwill and customer lists over a useful life
of 40 years and 15 years, respectively, resulting from the Fenway
Acquisition.
(4) In connection with the Fenway Acquisition, Holdings incurred approximately
$79,000 of variable rate indebtedness and $15,000 of 12 1/2% subordinated
notes. The effective interest rate on the debt incurred in connection with
the Fenway Acquisition was approximately 11.4%. The Company repaid
approximately $60,774 of variable rate indebtedness with effective
interest rates ranging from 8.75% to 10.72%. The pro forma adjustment
reflects the elimination of historical interest expense and the addition
of pro forma interest expense based on indebtedness incurred in connection
with the financing of the Fenway Acquisition as follows:
<TABLE>
<S> <C>
Pro forma interest for the Fenway Acquisition.................... $ 10,751
Historical interest.............................................. (10,971)
--------
Acquisition adjustment........................................... $ (220)
========
</TABLE>
(5) The provision for income taxes is computed by applying Holdings' statutory
rate of 43%, excluding the impact of non-deductible goodwill.
(6) In connection with the Transactions, Holdings incurred approximately
$21,513 of borrowings under a revolving credit agreement, $100,000 of
senior subordinated notes bearing interest at 9 7/8%, and approximately
$25,000 of senior discount notes. The effective interest rate on the
borrowings incurred in connection with the Transactions was 10.0%. The
Company repaid approximately $86,800 of variable rate indebtedness and
$15,000 of 12 1/2% subordinated notes. The Company incurred approximately
$4,237 of deferred
24
<PAGE>
financing fees in connection with the Transactions which are being amortized
on the interest method over the life of the related debt outstanding. The
pro forma adjustment reflects the elimination of pro forma interest expense
based on the indebtedness incurred in connection with the Fenway Acquisition
for the twelve months ended January 31, 1998, the elimination of historical
interest expense for the three months ended May 2, 1998 and the addition of
pro forma interest expense after giving effect to the Transactions as
follows:
<TABLE>
<CAPTION>
TWELVE MONTHS THREE MONTHS
ENDED ENDED
JANUARY 31, 1998 MAY 2, 1998
---------------- ------------
<S> <C> <C>
Interest on Senior Subordinated Notes....... $ 9,875 $2,469
Interest on New Credit Facility............. 1,497 456
Interest on Discount Notes.................. 3,123 758
Interest on capital leases and other notes.. 167 46
Deferred financing fee amortization for the
Original Offering.......................... 576 158
Pro forma interest expense in connection
with the Fenway Acquisition................ (10,751) --
Historical interest......................... -- (2,742)
-------- ------
Pro forma adjustment for the Transactions... $ 4,487 $1,145
======== ======
</TABLE>
(7) Excludes approximately $2,245 of compensation payments to certain members
of management of Iron Age in connection with the Transactions and related
tax effect of $960.
(8) Excludes 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 and related tax effect of $1,285 incurred in
connection with the Transactions.
(9) In addition to other data presented, Holdings' pro forma EBITDA, EBITDA
Margin, and Ratio of EBITDA to cash interest expense and total interest
expense for the twelve months ended January 31, 1998 and the three months
ended May 2, 1998 are as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS THREE MONTHS
ENDED ENDED
JANUARY 31, 1998 MAY 2, 1998
---------------- ------------
<S> <C> <C>
Pro forma EBITDA............................. $20,486 $5,510
Pro forma EBITDA margin...................... 17.3% 17.1%
Pro forma EBITDA/cash interest expense....... 1.78x 1.85x
Pro forma EBITDA/total interest expense...... 1.34x 1.42x
</TABLE>
EBITDA is defined as net income plus (i) provision for income taxes, (ii)
interest expense, (iii) depreciation and amortization, (iv) certain other
non-cash charges (described below) and (v) certain other non-recurring cash
charges (described below). EBITDA presented by Holdings may not be
comparable to EBITDA defined and presented by other companies. EBITDA margin
is defined as EBITDA divided by net sales. Non-cash charges for the year
ended January 25, 1997 and the period January 26, 1997 through February 26,
1997 include stock-based compensation of $1,065 and $1,054, respectively.
Non-recurring cash charges for the period January 26, 1997 through February
26, 1997 include $1,000 of management bonuses paid in connection with the
Fenway Acquisition. Holdings believes that EBITDA provides useful
information regarding Holdings' ability to service its debt; however,
offerees of the Exchange Discount Notes should consider the following
factors in evaluating such measures: EBITDA and related measures (i) should
not be considered in isolation, (ii) are not measures of performance
calculated in accordance with GAAP, (iii) should not be construed as
alternatives or substitutes for income from operations, net income or cash
flows from operating activities in analyzing Holdings' operating
performance, financial position or cash flows (in each case, as determined
in accordance with GAAP) and (iv) should not be used as indicators of
Holdings' operating performance or measures of its liquidity.
<TABLE>
<CAPTION>
TWELVE MONTHS THREE MONTHS
ENDED ENDED
JANUARY 31, 1998 MAY 2, 1998
---------------- ------------
<S> <C> <C>
Pro forma operating income.................... $15,467 $4,132
Depreciation and amortization................ 4,718 1,270
Falcon depreciation in cost of sales......... 301 108
------- ------
EBITDA........................................ $20,486 $5,510
======= ======
</TABLE>
(10) In calculating the ratio of earnings to fixed charges, earnings consist
of income before taxes plus fixed charges. Fixed charges consist of
interest expense, amortization of deferred financing costs and discount
and the portion of operating lease expense attributable to interest.
25
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth (i) selected historical consolidated
financial data of Holdings for the five-year period ended January 31, 1998 and
the three-month periods ended April 25, 1997 and May 2, 1998, (ii) the pro
forma consolidated statement of income and other financial data of Holdings
for the twelve-month period ended January 31, 1998 which give effect to the
Fenway Acquisition and the Transactions as if such events had occurred on
January 26, 1997 and (iii) selected historical balance sheet data of Holdings
as of May 2, 1998. The selected historical consolidated financial data for the
five-year period ended January 31, 1998 were derived from audited consolidated
financial statements of Holdings. The audited consolidated financial
statements of Holdings for each of the periods in the three-year period ended
January 31, 1998 are included elsewhere in the Prospectus together with the
report of Ernst & Young LLP, independent accountants. The selected historical
consolidated financial data for each of the years in the two-year period ended
January 28, 1995 were derived from audited consolidated financial statements
of Holdings that are not included herein. The selected historical consolidated
financial data for the period February 27, 1997 through April 25, 1997 and for
the three-month period ended May 2, 1998 were derived from unaudited financial
statements of Holdings, which, in the opinion of management, include all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the information set forth therein. The results of
operations for the three months ended May 2, 1998 are not necessarily
indicative of the results that may be expected for the full year. The
following table should be read in conjunction with "Capitalization," "Summary
Historical and Pro Forma Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
historical financial statements of Holdings, and the accompanying notes
thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR
------------------------------------------------------------
FISCAL YEARS ENDING(1) JANUARY 26,
----------------------------------------------- 1997 THROUGH
JANUARY 29, JANUARY 28, JANUARY 27, JANUARY 25, FEBRUARY 26,
1994 1995 1996 1997 1997
----------- ----------- ----------- ----------- ------------
(IN THOUSANDS EXCEPT FOR FINANCIAL RATIOS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA:
Net sales............... $72,158 $85,543 $95,263 $99,360 $10,937
Cost of sales........... 39,043 46,984 50,706 52,437 5,610
------- ------- ------- ------- -------
Gross profit........... 33,115 38,559 44,557 46,923 5,327
Selling, general and
administrative......... 21,961 24,676 28,399 31,267 5,120 (4)
Depreciation............ 1,039 962 1,127 1,322 121
Amortization of
intangible assets...... 1,178 1,239 1,402 1,429 117
------- ------- ------- ------- -------
Operating income
(loss)................ 8,937 11,682 13,629 12,905 (31)(4)
Interest expense........ 3,817 6,163 6,702 6,515 1,116
------- ------- ------- ------- -------
Income (loss) before
income taxes........... 5,120 5,519 6,927 6,390 (1,147)
Provision (benefit) for
income taxes........... 2,145 2,771 3,091 2,800 (452)
------- ------- ------- ------- -------
Net income (loss)...... $ 2,975 $ 2,748 $ 3,836 $ 3,590 $ (695)
======= ======= ======= ======= =======
CASH FLOW DATA:
Net cash (used in)
provided by operating
activities............. $ (360) $ 3,535 $ 1,160 $ 8,817 $ 1,436
Net cash used in
investing activities
(excluding
acquisitions).......... 1,243 3,625 4,679 2,222 117
Net cash (used in)
provided by financing
activities (excluding
acquisitions).......... (664) 2,193 1,516 (7,040) (2,299)
OTHER DATA:
EBITDA (10)............. $11,154 $14,000 $16,511 $17,079 $ 2,269
EBITDA Margin (10)...... 15.5% 16.4% 17.3% 17.2% 20.7%
Depreciation and
amortization........... $ 2,217 $ 2,318 $ 2,882 $ 3,109 $ 246
Capital expenditures
(11)................... 1,275 1,339 2,898 2,562 117
Cash interest expense
(12)................... 5,207 5,688 6,249 5,385 552
Ratio of earnings to
fixed charges (14)..... 2.3x 1.8x 2.0x 1.9x --
Shoemobiles............. 83 88 91 106 106
Retail stores........... 55 60 69 73 73
<CAPTION>
BALANCE SHEET DATA (END
OF PERIOD):
<S> <C> <C> <C> <C> <C>
Total assets............ $75,514 $86,173 $91,151 $90,043 $ --
Total debt.............. 31,040 35,294 38,295 19,212 --
Holdings Series A
Preferred Stock........ -- -- -- -- --
Total stockholders'
equity................. 34,837 37,268 41,738 48,212 --
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
SUCCESSOR
-----------------------------------------------------------------------
UNAUDITED UNAUDITED PRO FORMA
------------------------- ------------------------------
FEBRUARY 27, FEBRUARY 27,
1997 THROUGH 1997 THROUGH THREE MONTHS YEAR ENDED THREE MONTHS
JANUARY 31, APRIL 25, ENDED MAY 2, JANUARY 31, ENDED MAY 2,
1998(2) 1997(2) 1998 1998(1)(3) 1998
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA:
Net sales................ $107,769 $ 17,306 $ 32,167 $118,706 $32,167
Cost of sales............ 53,304 8,795 16,043 58,914 16,043
-------- -------- -------- -------- -------
Gross profit............ 54,465 8,511 16,124 59,792 16,124
Selling, general and
administrative.......... 36,541 5,685 12,967 (5) 39,607 (6) 10,722 (6)
Depreciation............. 1,443 245 424 1,570 424
Amortization of
intangible assets....... 2,983 599 846 3,148 846
-------- -------- -------- -------- -------
Operating income
(loss)................. 13,498 1,982 1,887 15,467 4,132
Interest expense......... 9,855 1,449 2,742 15,238 3,887
-------- -------- -------- -------- -------
Income (loss) before
income taxes and
extraordinary item...... 3,643 533 (855) 229 245
Provision (benefit) for
income taxes............ 1,686 205 (128)(5) 984 (6)(7) 346 (6)(7)
-------- -------- -------- -------- -------
Net income (loss) before
extraordinary item..... 1,957 328 (727) (755) (101)
Extraordinary item, net
of tax................. -- -- (4,015)(9) -- --
-------- -------- -------- -------- -------
Net income (loss)....... $ 1,957 $ 328 $ (4,742) $ (755)(8) $ (101)(8)
======== ======== ======== ======== =======
CASH FLOW DATA:
Net cash (used in)
provided by operating
activities.............. $ (1,912) $ (69) $ (4,442) $ -- $ --
Net cash used in
investing activities
(excluding
acquisitions)........... 2,365 132 374 -- --
Net cash (used in)
provided by financing
activities (excluding
acquisitions)........... 5,956 548 8,505 -- --
OTHER DATA:
EBITDA (10).............. $ 18,225 $ 2,879 $ 3,265 $ 20,486 $ 5,510
EBITDA Margin (10)....... 16.9% 16.6% 10.2% 17.3% 17.1%
Depreciation and
amortization............ $ 4,727 $ 897 $ 1,378 $ 5,019 $ 1,378
Capital expenditures
(11).................... 2,571 163 516 2,688 516
Cash interest expense
(12).................... 7,837 205 2,263 11,539 2,971
EBITDA/cash interest
expense................. 1.78x 1.85x
EBITDA/total interest
expense................. 1.34x 1.42x
Net debt/EBITDA (13)..... 7.03x 6.81x
Ratio of earnings to
fixed charges (14)...... 1.3x 1.3x -- 1.0x 1.1x
Shoemobiles.............. 122 100 130 122 130
Retail stores............ 95 92 103 95 103
BALANCE SHEET DATA (END
OF PERIOD):
Total assets............. $174,801 $170,035 $182,569 $ -- $ --
Total debt............... 101,675 96,096 150,122 -- --
Holdings Series A
Preferred Stock.......... -- -- -- -- --
Total stockholders'
equity................... 37,848 38,013 14,738 -- --
</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) The unaudited pro forma statement of income data and the other financial
data of Holdings give effect to the Fenway Acquisition and the
Transactions as if such events had occurred on January 26, 1997 and
February 1, 1998, as more fully disclosed in the Unaudited Pro Forma
Consolidated Statement of Income and Other Financial Data and the notes
thereto.
(4) Includes $1,054 of non-cash stock-based compensation and $1,000 of non-
recurring management bonuses paid in connection with the Fenway
Acquisition.
(5) Includes approximately $2,245 of compensation payments to certain members
of management of Iron Age in connection with the Transactions, and related
tax effect of $960.
(6) Excludes approximately $2,245 of compensation payments to certain members
of management of Iron Age in connection with the Transactions, and related
tax effect of $960.
27
<PAGE>
(7) The provision for income taxes for the unaudited pro forma statements of
income for the year ended January 31, 1998 and the three months ended May
2, 1998 is computed by applying the statutory rate of 43%, excluding the
impact of non-deductible goodwill amortization.
(8) Excludes 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 Transactions.
(9) Holdings recorded an extraordinary loss of $4,015, net of tax benefit, for
the three months ended May 2, 1998, due to the early extinguishment of
indebtedness resulting from the repayment of the Existing Subordinated
Notes and the termination of the Existing Credit Facility in connection
with the Transactions.
(10) EBITDA is defined as net income plus (i) provision for income taxes, (ii)
interest expense, (iii) depreciation and amortization, (iv) certain other
non-cash charges described below and (v) certain other non-recurring cash
charges described below. EBITDA presented by Holdings may not be
comparable to EBITDA defined and presented by other companies. EBITDA
margin is defined as EBITDA divided by net sales. Non-cash charges for
the year ended January 25, 1997 and the period January 26, 1997 through
February 26, 1997 include stock-based compensation of $1,065 and $1,054,
respectively. Non-recurring cash charges for the period January 26, 1997
through February 26, 1997 include $1,000 of management bonuses paid in
connection with the Fenway Acquisition. Holdings believes that EBITDA
provides useful information regarding Holdings' ability to service its
debt; however, offerees of the Exchange Discount Notes should consider
the following factors in evaluating such measures: EBITDA and related
measures (i) should not be considered in isolation, (ii) are not measures
of performance calculated in accordance with GAAP, (iii) should not be
construed as alternatives or substitutes for income from operations, net
income or cash flows from operating activities in analyzing Holdings'
operating performance, financial position or cash flows (in each case, as
determined in accordance with GAAP) and (iv) should not be used as
indicators of Holdings' operating performance or measures of its
liquidity.
<TABLE>
<CAPTION>
TWELVE MONTHS THREE MONTHS
ENDED ENDED
JANUARY 31, 1998 MAY 2, 1998
---------------- ------------
<S> <C> <C>
Pro forma operating income...................... $15,467 $4,132
Depreciation and amortization.................. 4,718 1,270
Falcon depreciation in cost of sales........... 301 108
------- ------
EBITDA.......................................... $20,486 $5,510
======= ======
</TABLE>
(11) Includes capital expenditures financed through capital leases of $312 in
1994, $347 in 1995, $340 in 1996, $340 in 1997, $0 in the period January
26, 1997 to February 27, 1997, $206 in the period February 27, 1997 to
January 31, 1998, $31 in the period February 27, 1997 to April 25, 1997
and $142 in the three months ended May 2, 1998.
(12) Cash interest expense equals total interest expense less amortization of
deferred financing fees and discount.
(13) Net debt is defined as long term debt including current maturities less
cash and cash equivalents.
(14) In calculating the ratio of earnings to fixed charges, earnings consist
of income before taxes plus fixed charges. Fixed charges consist of
interest expense, amortization of deferred financing costs and discount
and the portion of operating lease expense attributable to interest. For
the period January 26, 1997 through February 26, 1997, Holdings' earnings
were inadequate to cover fixed charges by $263. Adjusted to eliminate
non-cash charges of depreciation and amortization of $246, non-cash
charges of stock based compensation of $1,054 and non-recurring
management bonuses of $1,000, such earnings would have exceeded fixed
charges by $2,037. For the three months ended May 2, 1998, Holdings'
earnings were inadequate to cover fixed charges by $855. Adjusted to
eliminate non-cash charges of depreciation and amortization of $1,378 and
$2,245 of compensation to certain members of management in connection
with the Transactions for the three months ended May 2, 1998, such
earnings would have exceeded fixed charges by $2,768.
28
<PAGE>
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 three months ended
April 25, 1997 and May 2, 1998 and the fiscal years ended January 27, 1996,
January 25, 1997 and January 31, 1998. For purposes of this discussion and
analysis, the financial condition and results of operations of Holdings for
the three months ended April 25, 1997 and for fiscal 1998 represent the
combined results of Holdings and its predecessor. This discussion and analysis
should be read in conjunction with, and is qualified in its entirety by, the
sections entitled (i) "Summary Historical and Pro Forma Consolidated Financial
Data" and (ii) the Consolidated Financial Statements of Holdings and the notes
thereto, each of which is included elsewhere in this Prospectus.
OVERVIEW
Holdings' core business is the specialty distribution of safety shoes under
the Iron Age brand name through shoemobiles, retail stores, in-plant stores
and catalog sales in North America. The core business accounted for 79.9% of
fiscal 1998 sales. Holdings' net sales growth in the U.S. core business was
9.3% in fiscal 1998, or 7.2% excluding the impact of the additional week in
fiscal 1998. Holdings' net sales growth in the U.S. core business has averaged
6.9% over the last three fiscal years, excluding the impact of the additional
week in fiscal 1998. In addition to the core business, Holdings operates in
the consumer direct mail, branded wholesale and retail markets through Iron
Age's Consumer Brands Division (the "Consumer Brands Division"). Holdings
manufactures approximately 20% of total pairs of shoes sold internally through
Falcon, its manufacturing subsidiary.
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. Holdings' same store sales
growth rate has averaged 6.2% over the last four fiscal years and was 7.5% for
fiscal 1998, in each case excluding the impact of the additional week in
fiscal 1998. From fiscal 1987 to fiscal 1998, Holdings' net sales and EBITDA
have increased at CAGRs of 15.2% and 23.2%, respectively.
ACQUISITIONS
The Fenway Acquisition occurred on February 26, 1997. Concurrently with the
Fenway Acquisition, (i) Holdings and Iron Age entered into the Existing Credit
Facility, (ii) Iron Age issued the Existing Subordinated Notes in the amount
of $14,550,000 (net of a $450,000 discount), (iii) Holdings issued 1,500
shares of the Holdings Series A Preferred Stock for an aggregate consideration
of $14,900,000, (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
$100,000, 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. Iron Age used excess cash and net
proceeds from the Original Offering and the New Credit Facility to repay the
Existing Credit Facility and the Existing Subordinated Notes, to make
compensation payments to certain members of management and to pay a dividend
to Holdings to allow Holdings to redeem the Holdings Series A Preferred Stock.
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.
29
<PAGE>
The Knapp Acquisition occurred on March 14, 1997. As part of the Knapp
Acquisition, Holdings contributed an additional $4.0 million of common equity.
At the time of the Knapp Acquisition, Knapp was losing approximately $0.4
million per month. Within 90 days of the Knapp Acquisition, the post-
acquisition operations of Knapp were generating operating income and the
manufacturing, distribution, and administration functions were integrated into
Iron Age. 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.
During the last five weeks of the three months ended May 2, 1998, Holdings
acquired the stock of Safety Supplies and Service Company, Inc. and acquired
certain assets and assumed certain liabilities of Safety Depot Ltd., ACT
Safety, Inc. and J. Mars Knapp Shoes (the "First Quarter Acquisitions"). The
combined purchase price for the First Quarter Acquisitions was approximately
$4.64 million, including transactions costs of approximately $150,000. The
First Quarter Acquisitions have been accounted for using the purchase method
of accounting for business combinations, and, accordingly, (i) the results of
operations for each of the acquired companies are included in Holdings'
financial statements only from the date of the respective acquisitions and
(ii) the purchase price has been allocated to Holdings' assets and liabilities
based upon fair market value. The First Quarter Acquisitions resulted in
goodwill of approximately $2.18 million, which is being amortized over 40
years.
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 and for the three months ended April 25, 1997 in two periods,
respectively: (i) for fiscal 1998, a one-month period prior to the Fenway
Acquisition and an 11-month period following the date of the Fenway
Acquisition, and (ii) for the three months ended April 25, 1997, a one-month
period prior to the Fenway Acquisition and a two month-period following the
date of the Fenway Acquisition. For comparability with prior periods, the
following table also includes the results of operations for the two periods in
fiscal 1998 and for the three months ended April 25, 1997 as a combined
twelve-month period or three-month period, respectively. Management's
discussion and analysis addresses the results of operations as combined for
such periods unless otherwise noted.
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------------------- -------------
JAN. 26, 1997 FEB. 27, 1997
THROUGH THROUGH
FISCAL 1996 FISCAL 1997 FEB. 26, 1997 JAN. 31, 1998
----------- ----------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................. $95,263 $99,360 $10,937 $107,769
Gross profit.............. 44,557 46,923 5,327 54,465
Selling, general and
administrative........... 28,399 31,267 5,120 36,541
Depreciation and
amortization............. 2,529 2,751 238 4,426
Operating income (loss)... 13,629 12,905 (31) 13,498
Interest expense.......... 6,702 6,515 1,116 9,855
Provision (benefit) for
income taxes............. 3,091 2,800 (452) 1,686
OTHER DATA:
Gross profit margin....... 46.8% 47.2% 48.7% 50.5%
Operating income margin... 14.3% 13.0% (0.3)% 12.5%
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------- ---------------------------
FEB. 27, 1997 FEB. 1, 1998
JAN. 26, 1997 THROUGH THROUGH
THROUGH APRIL 25, 1997 MAY 2, 1998
FEB. 26, 1997 (UNAUDITED) (UNAUDITED)
------------- -------------- ------------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
<S> <C> <C> <C>
Net sales........................... $10,937 $17,306 $32,167
Gross profit........................ 5,327 8,511 16,124
Selling, general and
administrative..................... 5,120 5,685 12,967
Depreciation and amortization....... 238 844 1,270
Operating income (loss)............. (31) 1,982 1,887
Interest expense.................... 1,116 1,449 2,742
(Benefit) provision for income
taxes.............................. (452) 205 (128)
Extraordinary item, net of tax
effect............................. -- -- (4,015)
<CAPTION>
OTHER DATA:
<S> <C> <C> <C>
Gross profit margin................. 48.7 % 49.2% 50.1%
Operating income margin............. (0.3)% 11.5% 5.9%
</TABLE>
THREE MONTHS ENDED APRIL 25, 1997 COMPARED TO THREE MONTHS ENDED MAY 2, 1998
NET SALES. For comparability with prior periods, net sales for the
predecessor and successor periods in the three months ended April 25, 1997
have been discussed on a combined basis. Management believes that a combined
discussion of predecessor and successor periods is reasonable and appropriate
because there were no adjustments to net sales for a change in basis resulting
from the Fenway Acquisition. Holdings' net sales for the three months ended
May 2, 1998 increased to $32.2 million, an increase of $3.9 million, or 13.9%,
compared to the three months ended April 25, 1997. The increase was
attributable to increased sales in the core business of $1.6 million, or 6.3%,
and increased sales of $2.3 million, or 79.4%, from the Knapp division.
GROSS PROFIT. For comparability with prior periods, gross profit for the
predecessor and successor periods in the three months ended April 25, 1997
have been discussed on a combined basis. Management believes that a combined
discussion of predecessor and successor periods is reasonable and appropriate
because there were no adjustments to gross profit for a change in basis
resulting from the Fenway Acquisition. Gross profit increased $2.3 million, or
16.5%, to $16.1 million for the three months ended May 2, 1998 from $13.8
million for the three months ended April 25, 1997. As a percentage of net
sales, gross profit increased 1.1% to 50.1% in the three months ended May 2,
1998. The increase in gross profit margin was the result of an increase in
gross profit margin in both the core business and the Knapp division. Gross
profit margin in the core business increased 0.3%. The increase in gross
profit margin was attributable to increased sales of higher margin products,
increased sales through the higher margin shoemobile and retail store channels
and stable product costs in the core business. The remainder of the increase
was attributable to Knapp sales, for which the gross profit margin was 16.5%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For comparability with prior
periods, selling, general and administrative expenses for the predecessor and
successor periods in the three months ended April 25, 1997 have been discussed
on a combined basis. Management believes that a combined discussion of
predecessor and successor periods is reasonable and appropriate because there
were no adjustments to selling, general and administrative expenses for a
change in basis resulting from the Fenway Acquisition. Selling, general and
administrative expenses increased $2.2 million to $13.0 million for the three
months ended May 2, 1998 compared to $10.8 million for the three months ended
April 25, 1997. The increase was primarily attributable to an increase of $1.4
million in selling, general and administrative expenses in the Knapp division.
The remainder of the increase was attributable to an increase of $0.6 million,
or 8.0%, in the core business and a $0.2 million increase in nonrecurring or
non-cash charges, as discussed below. In each of the three months ended May 2,
1998 and April 24, 1997, respectively, Holdings had nonrecurring or non-cash
charges related to certain members of management and stock compensation
expenses in connection with the Fenway Acquisition and the Transactions,
respectively. Removing the impact of these charges from selling, general and
administrative expenses reduces such expenses by $2.2 million and $2.0 million
for the three months ended May 2, 1998 and April 25, 1997, respectively.
31
<PAGE>
OPERATING INCOME. Operating income was $1.9 million and $2.0 million in the
three months ended May 2, 1998 and the period February 27, 1997 through April
25, 1997, respectively. In addition, operating income as a percentage of net
sales was 5.9% in the three months ended May 2, 1998 and 11.5% in the period
February 27, 1997 through April 25, 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 three months ended May 2, 1998 included
non-recurring payments made to certain members of management as discussed
above and additional depreciation and amortization of $0.2 million due to the
increase in the basis of goodwill, customer lists and other intangible assets
capitalized as a result of the Fenway Acquisition and the Knapp Acquisition.
INTEREST EXPENSE. Interest expense was $2.7 million in the three months
ended May 2, 1998 and $1.4 million in the period February 27, 1997 through
April 25, 1997. Interest expense for the predecessor period January 26, 1997
through February 26, 1997 was $1.1 million. Interest expense for the successor
periods reflects the increase in indebtedness of Holdings incurred in
connection with the Fenway Acquisition in February 1997 and the Knapp
Acquisition in March 1997.
INCOME TAX BENEFIT. Income tax benefit was $0.1 million in the three months
ended May 2, 1998 and income tax expense was $0.2 million in the period
February 27, 1997 through April 25, 1997. Income tax benefit for the
predecessor period January 26, 1997 through February 26, 1997 was $0.5
million. Income taxes for the successor periods reflect the effect of
additional non-deductible goodwill amortization.
EXTRAORDINARY ITEM. In connection with the Transactions, Holdings recorded
an extraordinary loss of $4.0 million due to early extinguishment of
indebtedness resulting from the repayment of the Existing Subordinated Notes
and the Existing Credit Facility.
FISCAL 1998 COMPARED TO FISCAL 1997
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 core business of $6.2 million, or
7.1%, sales of $12.8 million from the operations of Knapp 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 Branded
Wholesale Division (the "Branded 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 margin increased 3.2% in fiscal 1998
compared to fiscal 1997. In addition, 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. The gross profit margin in the core business increased 1.6%.
This increase was attributable to increased sales of higher margin products,
increased sales through the higher margin shoemobile and retail store channels
and stable product costs. The remainder of the increase was attributable to
Knapp sales, for which the gross margin was 55.7%.
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
32
<PAGE>
Knapp distribution channels contributed $5.8 million of this increase and the
core business contributed $2.5 million of this increase, which was 8.8%
compared to fiscal 1997. Approximately $0.5 million of the increase was
attributable to the Knapp manufacturing operation within Falcon and a $1.0
million payment 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 in February 1997 and the Knapp
Acquisition in March 1997.
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.
FISCAL 1997 COMPARED TO FISCAL 1996
NET SALES. Holdings' net sales were $99.4 million in fiscal 1997, an
increase of $4.1 million, or 4.3%, compared to fiscal 1996. The increase in
net sales was attributable to continued growth in the core business of $6.1
million, or 7.4%. Sales through the Branded Wholesale Division and Dunham
distribution channels increased 6.8% and 8.7%, respectively, for a combined
increase of $0.6 million. These sales gains offset a $2.6 million decrease in
private label from Holdings' Falcon subsidiary.
GROSS PROFIT. Holdings' gross profit margin increased 0.4% in fiscal 1997
compared to fiscal 1996. In addition, Holdings' gross profit increased to
$46.9 million in fiscal 1997, an increase of $2.4 million, or 5.3%, compared
to fiscal 1996. The increase is primarily related to the increase in sales in
Holdings' core business. Gross profit as a percentage of sales increased to
47.2% in fiscal 1997 compared to 46.8% in fiscal 1996. The increase in gross
profit margin was attributable to increased sales of higher margin products,
increased sales through the higher margin shoemobile and retail store channels
and stable product costs in the core business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Holdings' selling, general and
administration expenses were $31.3 million in fiscal 1997, an increase of $2.9
million, or 10.1%, compared to fiscal 1996. The increase of $2.9 million is
primarily attributable to $1.1 million of stock-based compensation for
employee stock options granted in fiscal 1997. Selling, general and
administrative expenses without giving effect to this charge would have been
$30.2 million for fiscal 1997, compared to $28.4 million for fiscal 1996, an
increase of 6.3%. Approximately $1.1 million of the increase was due to
increased costs in connection with the opening of ten mobile distribution
centers during fiscal 1997 and the last half of fiscal 1996.
AMORTIZATION. Holdings' amortization of intangible assets in fiscal 1997 and
fiscal 1996 was approximately $1.4 million.
OPERATING INCOME. Operating income was $12.9 million in fiscal 1997 compared
to $13.6 million in fiscal 1996, a decrease of 5.3%. After giving effect to
the stock-based compensation discussed above, operating income
33
<PAGE>
increased in fiscal 1997 by $0.3 million, or 2.5%. Other non-recurring charges
in fiscal 1997 include $0.1 million in costs associated with the Fenway
Acquisition.
INTEREST EXPENSE. Interest expense decreased to $6.5 million in fiscal 1997
compared to $6.7 million in fiscal 1996. The $0.2 million decrease in fiscal
1997 was primarily due to decreases in average balances outstanding under the
Company's revolving working capital facility.
INCOME TAX EXPENSE. Holdings' provision for income taxes decreased from $3.1
million in fiscal 1996 to $2.8 million in fiscal 1997, corresponding
approximately with pretax income. Holdings' effective tax rate differed from
the applicable statutory rate primarily due to non-deductible goodwill and
other intangibles amortization.
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 used for operating activities was $4.4 million in the three months
ended May 2, 1998, as compared to net cash provided by operating activities of
$1.4 million in the three months ended April 25, 1997. The decrease in cash
from operating activities is primarily a result of the $2.9 million tax
receivable accrued in connection with the extraordinary loss, as discussed
above, and a $1.0 million decrease in accrued interest. Net cash used for
operating activities was $0.5 million in fiscal 1998, as compared to net cash
provided by operating activities of $8.8 million and $1.2 million in fiscal
1997 and fiscal 1996, respectively. The reduction in cash provided by
operating activities in 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 generated by operating activities in
fiscal 1997 and fiscal 1996 was income before non-cash charges of $5.6 million
and $5.7 million, respectively, primarily due to increased income from
operations as described above.
Holdings used cash for investing activities of $4.9 million in the three
months ended May 2, 1998 compared to $142.0 million used for investing
activities in the three months ended April 25, 1997. Holdings used cash for
investing activities of $2.5 million in fiscal 1998 compared to $2.2 million
in fiscal 1997 and $4.7 million in fiscal 1996. Holdings' capital expenditures
were $0.4 million and $0.2 million in the three months ended May 2, 1998 and
April 25, 1997, respectively. Holdings' capital expenditures for the three
months ended May 2, 1998 were related to improvements to retail stores and
shoemobiles in the core business and installing the POS system in newly-
acquired Canadian stores and shoemobiles. Holdings' capital expenditures were
$2.5 million, $2.2 million and $2.6 million in fiscal years 1998, 1997 and
1996, respectively. Holdings anticipates that these expenditures will be
approximately $2.5 million in fiscal 1999.
Holdings' total working capital as of May 2, 1998 was $51.5 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 Transactions. Management believes
Holdings' liquidity, working capital and borrowing capacity are sufficient to
meet future capital expenditures, acquisitions and working capital needs in
the future.
Excluding cash paid for acquisitions, Holdings generated approximately $2.8
million from financing activities in the three months ended May 2, 1998 due
primarily to borrowings under the New Credit Facility. In the three months
ended April 25, 1997, Holdings used cash of $1.8 million due primarily to
principal payments on debt. Holdings generated approximately $3.7 million in
financing activities in fiscal 1998 due primarily to borrowings by Iron Age
under the Existing 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. In fiscal 1996, Holdings generated $1.5 million due
primarily to borrowings under its revolving credit agreement.
34
<PAGE>
Holdings is a holding company, and its ability to pay interest on the
Discount Notes 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 party to
the New Credit Facility and the Senior Subordinated Indenture, each of which
imposes substantial restrictions on Iron Age's ability to pay dividends to
Holdings. See "Risk Factors--Limitation on Access to Cash Flow of
Subsidiaries; Holding Company Structure."
Cash flow from operations for the three months ended May 2, 1998 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 Existing 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 May 2, 1998 Holdings' debt consisted of the Original Discount Notes,
the Senior Subordinated Notes, the New Credit Facility and certain other debt.
The New Credit Facility consists of a $35.0 million multiple draw acquisition
term loan facility (the "New Acquisition Credit Facility") and 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 consists of capital leases and other notes. As of May 2, 1998,
approximately $12.3 million of the New Acquisition Credit Facility and
approximately $11.6 million of the New Revolving Credit Facility were
outstanding, and Holdings had additional borrowing availability under the New
Acquisition Credit Facility of $22.7 million and under the New Revolving
Credit Facility of approximately $18.4 million. The New Acquisition Credit
Facility matures in quarterly installments from July 2001 until final payment
in April 2004. The New Revolving Credit Facility will mature in April 2004 and
has no scheduled interim amortization.
IMPACT OF THE YEAR 2000 ISSUE
Holdings is in the process of conducting a comprehensive review of its
internal computer systems to identify the systems that could be affected by
the year 2000 issue and is developing an implementation plan to resolve the
issue that is expected to be completed in the latter part of fiscal 1999.
Holdings presently believes that the year 2000 issue will not pose significant
operational problems for Holdings' computer systems as so modified and
converted. Based on a preliminary assessment, Holdings expects to spend under
$50,000 to modify its existing computer systems to ensure proper transaction
processing in the year 2000 and beyond. Through May 2, 1998, Holdings has
incurred approximately $5,000 related to the assessment of, and preliminary
efforts in connection with, its Year 2000 project and the development of a
remediation plan. Holdings plans to complete the critical elements of the Year
2000 project by November 15, 1998. Holdings presently believes that the cost
of preparing its systems for the year 2000 will not have a material effect on
Holdings' current financial position, liquidity or results of operations. If
modifications and conversions are not completed in a timely manner, the year
2000 issue may have a material impact on Holdings' operations.
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.
35
<PAGE>
FORWARD LOOKING STATEMENTS
When used in this Prospectus, the words "believes," "anticipates," and
similar expressions are used to identify forward looking statements. Such
statements are subject to risks and uncertainties which could cause actual
results to differ materially from those projected. Holdings wishes to caution
readers that the following important factors, among the factors discussed in
"Risk Factors" above 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 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.
36
<PAGE>
BUSINESS
The Company is a leading distributor of safety shoes in the United States.
The Company's core business is the specialty distribution of safety shoes
under the Iron Age brand name, which comprised 79.9% of fiscal 1998 sales. The
Company also distributes work footwear to the service sector through its Knapp
division and manufactures specialized premium quality safety shoes through its
subsidiary Falcon. The Company distributes directly to its customers over 450
styles under the Iron Age, Knapp and Dunham brand names. The Company's
captive, multi-channel distribution network includes 130 shoemobiles, 103
retail stores and 34 in-plant stores, as well as catalog sales, branded
wholesale merchandising, independent sales representatives and third-party
vendors. The Iron Age products and services are marketed principally to
industrial and government employers, most of which require safety shoes to be
worn at the workplace and provide purchase subsidies under employer safety
programs to the end-user employee. The employers provide these subsidies to
increase workplace safety and ensure compliance with OSHA regulations, thereby
decreasing workers' compensation and insurance costs. Through superior
customer service provided by the Company's factory-to-end-user distribution
and advanced information systems, the Company has established a diverse and
loyal customer base of approximately 48,000 accounts. Management estimates
that the Company has industrial customer retention rates in excess of 90%. The
Company believes that its focus on direct supply, responsive customer service
and broad, readily available product offerings distinguishes the Company from
other safety footwear suppliers.
The Company was founded in 1817 and has specialized in safety footwear since
the popularization of steel toe shoes during the 1940s. Under the Company's
current management, which was formed in 1986, the Company has reduced its
reliance on independent distributors, and sales of Iron Age products through
Company-owned shoemobiles and retail stores have increased from approximately
60% in fiscal 1987 to 100% in fiscal 1998. Over the same period, net sales and
EBITDA have increased in each consecutive year, growing at CAGRs of 15.2% and
23.2%, respectively. For fiscal 1998 pro forma results of operations, the
Company generated net sales of $118.7 million and EBITDA of $20.5 million,
representing increases of 19.5% and 20.0%, respectively, from the prior fiscal
year. Following the Transactions, Holdings is highly leveraged. As of May 2,
1998, (i) the outstanding indebtedness of Holdings was approximately $25.0
million, (ii) the outstanding indebtedness of Holdings' subsidiaries was
approximately $125.1 million (exclusive of unused commitments), and (iii)
there was approximately $41.1 million available to Iron Age under the New
Credit Facility for future borrowings.
The Company's principal executive offices are located at Robinson Plaza
Three, Suite 400, Pittsburgh, Pennsylvania 15205, (412) 787-4100.
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 segment of the work
shoe market is comprised of three types of customers--industrial, government
and mass merchandising retail. The Company estimates that sales to industrial
and government customers represent over 60% of the safety shoe market segment.
End-user safety shoe customers include workers in the primary metals, chemical
and petroleum, automotive, paper, mining, utilities, electronics, aerospace,
food service, 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 OSHA regulations establishing heightened workplace safety
standards, including regulations governing footwear. OSHA regulations
established standards requiring employers to provide their 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
37
<PAGE>
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.
As the North American market has shifted from an industrial-based economy
towards a service-based economy, demand for protective footwear products has
shifted from heavy industries towards non-traditional customers in service
industries and light manufacturing. The heavy industrial customer is no longer
the sole influencing factor in determining the breadth of safety shoe product
line or the nature of its distribution. These new influences on the protective
footwear marketplace have expanded the market within non-traditional customers
for both safety shoe products and related services, leading to stronger
demand.
Industry sales consist of sales to companies operating in a wide range of
industries. Sales are made primarily between the distributor and the employer,
which generally has safety departments that monitor compliance with overall
safety requirements and provide safety shoe purchase subsidies. Distributors
of safety shoes to industry customers typically provide a full 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 the 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 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 bid directly by the manufacturers. Style selection is
minimal and geared towards a specific purpose.
The retail/mass merchandiser segment includes large retail chain stores,
specialty retailers and other retail outlets. This segment 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.
COMPETITIVE STRENGTHS
The Company believes that its competitive strengths include:
MARKET LEADERSHIP WITH STRONG BRAND RECOGNITION. The Company is a leading
distributor of safety shoes in the United States and in fiscal 1998 had an
approximately 7% share of the overall work shoe market. The Company believes
that it has doubled its share of the safety shoe segment of the work shoe
market over the past decade to approximately 17%. The Company has established
national brand-name recognition in the industrial safety and service sector
markets with its Iron Age and Knapp brands. The Company believes that its
extensive product selection of over 450 styles coupled with its ability to
provide its customers with flexible, superior service through the use of its
captive factory-to-end-user distribution network differentiates it from its
competition. The Company's product line is well recognized in the industry for
superior quality, comfort and safety features.
CONTROL OF COMPREHENSIVE DISTRIBUTION NETWORK. The Company's multi-pronged
distribution network, comprised of 130 shoemobiles, 103 retail stores and 34
in-plant stores, as well as catalog sales and consumer brands, allows the
Company to tailor its marketing approach to customer size, location and
product demand. This integrated network enables the Company to promote the
Iron Age brand name exclusively and standardize information systems, product
offerings and customer service levels. The Company's network covers all of the
38
<PAGE>
United States and key industrial areas in Mexico and Canada. In fiscal 1998,
sales through the Company's mobile and store centers represented approximately
63% of the Company's aggregate sales.
DIVERSE AND STABLE CUSTOMER BASE. The Company has a geographically diverse
industrial customer base of over 48,000 accounts in a wide variety of
industries, including the pharmaceutical, aerospace, chemical, food, lumber,
transportation and home products industries. The Company's customers include
approximately 60% of all companies included in the Fortune 500. As of January
31, 1998, the Company's top ten customers, which include Merck & Co., Inc.,
E.I. duPont de Nemours and Company and AlliedSignal Inc., represented less
than 12% of the Company's total revenues in fiscal 1998. The Company's
commitment to superior customer service has enabled it to establish a loyal
customer base characterized by industrial customer retention rates in excess
of 90%. Virtually all sales to industrial and government customers are
accomplished through safety department-mandated programs, and management
estimates that 68% of such sales were employer-subsidized in fiscal 1998. The
Company believes that heightened sensitivity to workplace safety, supported by
federal regulations, will continue to stimulate demand for its products.
ADVANCED SYSTEMS AND PROCEDURES. The Company's highly automated systems
utilize leading technology, providing management with powerful tools to
strengthen merchandising, purchasing and accounting. All of the Company's
mobile and store centers have been outfitted with POS computer terminals. The
POS system benefits the Company's customers by (i) reducing transaction time,
which minimizes employee downtime, (ii) providing valuable purchasing data,
which allows the employer to monitor safety costs, and (iii) providing the
employer with an efficient and reliable billing system. The POS system results
in lower costs to the Company due to reduced transaction processing errors and
helps it to actively manage inventories and customer preferences.
BALANCED PRODUCT SOURCING. Through its market leadership position and
extensive operating history, the Company has developed longstanding
relationships with the majority of its 22 suppliers of protective footwear
located in the United States, China, Korea, Canada, Taiwan and the
Netherlands. All products are manufactured to the Company's specifications. In
addition, Falcon, the Company's manufacturing subsidiary, provides access to
readily available production, an inventory of specialty, high-end products and
in-depth knowledge of material and labor costs applicable to third party
suppliers.
HISTORY OF SUCCESSFUL ACQUISITIONS. The Company's management team has
demonstrated an ability to identify, acquire and successfully assimilate
complementary acquisition targets. Since 1986, the Company has completed 23
acquisitions of independent distributors, enabling the Company to expand its
market coverage and to extend its primary distribution channel. In addition,
the Company acquired state-of-the-art manufacturing capability through its
purchase of Falcon. Most recently, the Company acquired and successfully
integrated Knapp, an underperforming competitor with a strong franchise in the
service sector market. Within 90 days of the Knapp Acquisition, the Company
returned Knapp to profitability by infusing inventory, consolidating
manufacturing, distribution and administrative facilities, reducing personnel
and integrating purchasing and MIS departments. However, there can be no
assurance that the Company will continue to make successful acquisitions in
the future.
EXPERIENCED MANAGEMENT TEAM. The Company's Chairman and CEO, Donald Jensen,
has a total of 28 years of experience in the shoe industry. Mr. Jensen,
together with other members of his senior management team--William Mills,
Keith McDonough, William Taaffe and Theodore Johanson--have over 100 years of
industry experience and approximately 79 years with the Company. This
continuity and experience has resulted in strong relationships with suppliers
and customers and significant stability in revenues and earnings. Under the
Company's current management, net sales and EBITDA have increased in each
consecutive year since fiscal 1987, growing at CAGRs of 15.2% and 23.2%,
respectively. There is no assurance that the Company will be similarly
successful in the future. Management currently has a 16% fully diluted equity
interest in the Company.
39
<PAGE>
BUSINESS STRATEGY
The Company seeks (i) to strengthen its position as a leading distributor of
safety shoes, (ii) to broaden its target market within the service sector and
(iii) to add additional non-slip protective footwear and other complementary
product lines. In order to accomplish these goals, the Company has adopted the
following strategy:
PENETRATE EXISTING ACCOUNTS. The Company intends to increase sales to
existing industrial and government customers by building upon its position as
a leading distributor of safety footwear with strong brand name product
recognition, comprehensive distribution capabilities and advanced information
systems.
TARGET NEW MARKETS. The Company, led by its National Account department,
plans to generate new business opportunities through aggressive targeted
marketing to large potential users of protective safety footwear. The Company
also plans to increase marketing efforts to non-traditional users of
protective footwear (i.e., service industries and light
manufacturing/warehouse facilities) and to pursue selected acquisitions of
independent distributors. The Company also intends to add new retail locations
and shoemobiles as capacity utilization increases in each market.
DEVELOP CONSUMER BRANDS. The Company is revitalizing the widely recognized
Knapp brand name in the service sector of the work shoe market by augmenting
its existing network of independent sales representatives, retail stores,
direct consumer and industrial mail order and branded wholesale merchandising.
In addition, the Company is building a fleet of Knapp mini-vans and plans to
increase the number of Knapp retail locations. The Company has also developed
new, non-slip footwear products that will be marketed under the Knapp brand
name and sold via direct mail to the food service and hospitality industries.
PURSUE SELECTIVE ACQUISITIONS. The Company plans to capitalize on its
position as a leading distributor of safety shoes through selective
acquisitions of independent safety shoe distributors. The Company evaluates
potential acquisition candidates on a regular basis and is currently exploring
potential acquisition opportunities. The Company believes that acquiring
additional distributors will broaden its geographic distribution and promote
additional operating efficiencies.
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 that includes 130 shoemobiles, 103 retail store
centers and 34 in-plant stores. The Company also distributes its products
through catalog operations and channels associated with consumer brands, which
include branded 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 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 segment 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 six 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. Typically, each
retail store consists of between 600 and 900 square feet of office and
showroom space and 1,000 to 2,500 square feet of warehouse and receiving
space. 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 130 Company 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. In fiscal 1998, the typical shoemobile averaged one and
one-half pre-scheduled account visits per day and 21 pairs sold per business
day.
40
<PAGE>
The Company has outfitted each of its shoemobiles and retail stores with its
POS system which permits each sale to be processed immediately via computer.
The development of the POS system has (i) reduced the "per-sale" transaction
time by eliminating the completion of paper sales slips, (ii) eliminated
"incorrect transactions" through the computer generation of all sales
calculations, (iii) streamlined invoicing by relaying all information by modem
to the central home office and (iv) improved customer service by allowing
customers, upon request, to obtain detailed feedback showing footwear usage by
employee, budget center and selling price.
CATALOG DIRECT. The Company reaches both large and small customers with its
safety shoe catalogues. The mail-order segment 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 catalogues, 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. Sales at each in-plant store range from 1,200 to 3,100 pairs
annually. The Company currently operates 34 in-plant stores at major corporate
customers throughout the United States. At the in-plant stores, the Company
can provide comprehensive sales data through its POS system.
CONSUMER BRAND CHANNELS. The Company's Consumer Brand Division includes the
Knapp distribution channels, Dunham and the Branded Wholesale Division. Since
its March 1997 acquisition of Knapp, the Company has distributed products to
retail markets through a consumer direct mail catalog and independent sales
representatives and to industrial customers through an industrial direct mail
catalog and a wholesale sales program. The Company's Branded Wholesale
Division provides footwear expertise and seasonal product supply to select
third-party retail stores, including CT Farm and Country.
In addition, through its Falcon manufacturing subsidiary, the Company
manufactures private label footwear for such well known customers as Browning
Arms Company, L.L. Bean, Inc., Cabela's Inc. and H.S. Trask & Co.
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 450 individual styles ranging in price from $10.00 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 1996, 1997
and 1998 representing less than 12% 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 and Dunham brand names.
41
<PAGE>
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. The Company's product offerings
include the following:
<TABLE>
<CAPTION>
IRON AGE KNAPP DUNHAM
<S> <C> <C>
Men's Bostonian(R) Service Oxfords Premier
Men's Work Casuals Work/Farm Boots Waterproof
Women's Casuals, Work and Steel Toe Safety Boots Wide-Trak(R) Waterproof
Metatarsal Waterproof Classic
Men's Work Westerns & Wellingtons Outdoor/Hikers Waterproof
Men's & Women's Non-Metallic Cap Intro Special Dozer Women's
Footwear Toe Waterproof
Men's Heavy-Duty Work Boots & Men's Slip Resistant All Season
Shoes Rubber Boots GoreTex(R)
Men's & Women's Heavy Duty Western Waterproof
Puncture Resistant Dress
Men's Heavy-Duty Metatarsals Men's Casuals
Men's & Women's Conductive Golf
Footwear Women's Casual
Men's Safety Toe Rubber Waterproof Women's Slip Resistant
Men's Non-Safety Rubber Waterproof Women's Work & Sports
Men's & Women's Non-Safety ESD Boots
</TABLE>
MANUFACTURING
GENERAL. As a result of its strategic acquisitions of Falcon and Knapp, the
Company currently operates 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 Browning Arms Company, L.L. Bean, Inc., Cabela's Inc. and
H.S. Trask & Co. The Company currently manufactures the Knapp product line at
its other Lewiston facility. The Company is in the process of consolidating
the Knapp manufacturing operations into the Falcon facility, a process
expected to be completed during fiscal 1999. In 1997, the Company completed a
three-year capital expenditure program at the Falcon facility that included
investment in equipment, production line enhancements and the addition of five
new sole molds. In fiscal 1998, approximately 20% of total pairs of shoes sold
were manufactured at the two Lewiston facilities.
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 six countries: the United States, China, Korea,
Canada, Taiwan and the Netherlands. Although in fiscal 1998 one supplier in
China manufactured approximately 20% 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 1998, 47% of its total pairs
were produced by foreign suppliers and 36% 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.
Although 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, 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 fleet of five trucks as
well as common carriers to deliver product orders to its mobile and store
centers. The Company's Distribution and Operations Center in Penn
42
<PAGE>
Yan, New York handles all fleet administration and traffic management
responsibilities for the Company's 130 shoemobiles, 76 cars and utility vans
and four intercompany delivery trucks, including the monitoring of Department
of Transportation compliance, vehicle maintenance, truck replacement and
refurbishment and vehicle procurement.
FACILITIES/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 31, 1998, the principal
properties utilized by the Company.
<TABLE>
<CAPTION>
SQUARE
FACILITY OWN/LEASE LOCATION FOOTAGE(1)
- -------- --------- -------- ----------
<S> <C> <C> <C>
Corporate Headquarters......... Lease Pittsburgh, Pennsylvania 20,500
Distribution Facility.......... Own Penn Yan, New York 175,000(2)
Knapp Administration Facility.. Lease Penn Yan, New York 5,500
Falcon Manufacturing Facili-
ty(3)......................... Lease Lewiston, Maine 112,000
Knapp Manufacturing Facili-
ty(3)......................... Lease Lewiston, Maine 122,000
</TABLE>
- --------
(1) Square footage has been rounded up to the nearest 500 square feet.
(2) Includes 31,000 square feet that is under construction and anticipated to
be completed in April 1998.
(3) The Company plans to consolidate the Knapp manufacturing facility into the
Falcon manufacturing facility during fiscal 1999.
EMPLOYEES
As of January 31, 1998, the Company employed approximately 977 people of
which 567 were involved in sales and distribution, 272 in manufacturing and
138 in administrative. Of such employees, 294 were salaried and 683 were
hourly. None of the Company's employees is presently covered by collective
bargaining agreements. Management considers its employee relations to be good.
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 segment 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. See
"Risk Factors--Competition."
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 stricter in recent years. Accordingly, the Company is
unable to predict the ultimate cost of compliance with environmental laws and
enforcement policies.
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 conditions.
43
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding Holdings'
directors and executive officers, including their respective ages as of
January 31, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Donald R. Jensen....................... 59 Chairman, Chief Executive Officer,
President and Director
William J. Mills....................... 38 Executive Vice President and
Director
Keith A. McDonough..................... 39 Vice President-Finance and Chief
Financial Officer
William J. Taaffe...................... 43 Corporate Vice President, Operations
and Distribution
Theodore C. Johanson................... 59 President and Chief Executive
Officer, Falcon Shoe Mfg. Co.
Peter Lamm............................. 46 Director
Andrea Geisser......................... 55 Director
Russell Steenberg...................... 45 Director
</TABLE>
Donald R. Jensen is Chairman, Chief Executive Officer and President of
Holdings. Mr. Jensen has also been Chairman and Chief Executive Officer of
Iron Age since 1994. 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 before being named Executive Vice President of the Company in 1985.
William J. Mills is Executive Vice President of Holdings. Mr. Mills has also
been President and Chief Operating Officer of Iron Age since May 1997. He is
primarily responsible for the day-to-day management of all field operations
and the Iron Age sales organization. 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 of Holdings. Mr. McDonough
joined Iron Age in 1981. He was appointed to Executive Vice President 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.
William J. Taaffe is Corporate Vice President, Operations and Distribution
of Holdings. Mr. Taaffe has also been President and Chief Operating Officer of
Knapp Division since May 1997. He joined Iron Age as Corporate Vice President,
Operations and Distribution in 1994. Mr. Taaffe is responsible for all sales
and operations of the Knapp Division. Prior to that time, he owned a
management consulting firm from 1990 to 1994. Mr. Taaffe also held various
positions with Triad Systems Corporation, beginning as a territory salesman.
At Triad Systems Corporation, he served as Territory Manager and Regional
Manager before being named Area Manager for Triad's Dental Division in 1988.
44
<PAGE>
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 Team. 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.
Peter Lamm became a director of Holdings and Iron Age in 1997. Mr. Lamm is
President 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 VDK Foods, Aurora Foods, Delimex, CT Farm & Country, National
School Supply and Blue Capital.
Andrea Geisser became a director of Holdings and 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 VDK Foods, Delimex,
Valley Recreation Products and Decorative Concepts.
Russell Steenberg became a director of Holdings and Iron Age in 1997. Mr.
Steenberg has been a Managing Director of Fenway since 1995. From 1983 to
1995, Mr. Steenberg was Vice President and Head of the Corporate Finance Group
of AT&T Investment Management Company, where he had overall responsibility for
the finding, structuring, executing and monitoring of the investments of AT&T
Master Pension Trust. Mr. Steenberg currently serves as a director of Valley
Recreation Products.
DIRECTOR COMPENSATION
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. There are no family relations among any of the directors
or executive officers.
45
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all cash compensation earned in fiscal 1998
by Holdings' Chief Executive Officer and each of the other four most highly
compensated executive officers whose remuneration exceeded $100,000 ("Named
Executives"). The current compensation arrangements for each of these officers
are described in "Employment Agreements."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
NUMBER OF
SECURITIES
UNDERLYING ALL OTHER
NAME AND POSITION SALARY BONUS OPTIONS(4) COMPENSATION
- ----------------- ------------------- ------------ ------------
<S> <C> <C> <C> <C>
Donald R. Jensen............. $ 404,740 $ 554,900(1) 9,351.60 $9,956(5)
Chief Executive Officer,
President
William J. Mills............. 167,857 237,200(2) 3,189.75 9,956(5)
Executive Vice President
Keith A. McDonough........... 118,269 224,760(2) 3,129.75 7,464(6)
Vice President-Finance and
Chief Financial Officer
William J. Taaffe............ 99,176 206,100(2) 1,617.89 6,301(7)
Corporate Vice President,
Operations
and Distribution
Theodore C. Johanson......... 193,123 20,000(3) 200.00 9,005(8)
President and Chief Executive
Officer,
Falcon
</TABLE>
- --------
(1) Includes $275,000 bonus paid by Iron Age in connection with the Fenway
Acquisition.
(2)Includes $175,000 bonus paid by Iron Age in connection with the Fenway
Acquisition.
(3) Includes $20,000 bonus paid by Iron Age in connection with the Fenway
Acquisition.
(4) Options to acquire common stock of Holdings.
(5) 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.
(6) 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.
(7) 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.
(8) Represents Iron Age allocations under defined contribution plan for the
plan year ended December 31, 1997.
46
<PAGE>
OPTION GRANTS
The table below shows grants of options to purchase common stock of Holdings
made to the Chief Executive Officer and Named Executives during fiscal 1998.
OPTION GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(2)
------------------------------------------------------ -----------------------
FAIR
NUMBER OF % OF TOTAL MARKET
SECURITIES OPTIONS VALUE AT
UNDERLYING GRANTED TO EXERCISE TIME OF
OPTIONS EMPLOYEES IN PRICE GRANT EXPIRATION
NAME GRANTED(1) FISCAL YEAR PER SHARE PER SHARE DATE 5% 10%
- ---- ---------- ------------ --------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Donald R. Jensen
Series A(3)............ 6,404.83 55.56 $ 36.36 $363.60 02/28/07 $ 3,560,495 $ 5,807,318
Series B--Basic B(4)... 1,698.00 30.83 363.60 -- 02/28/07 388,278 983,939
Series B--Extra B(5)... 1,248.77 40.83 363.60 -- 02/28/07 285,551 723,643
William J. Mills
Series A(3)............ 1,929.75 16.74 36.36 363.60 02/28/07 1,072,764 1,749,722
Series B--Basic B(4)... 660.00 11.98 363.60 -- 02/28/07 150,920 382,460
Series B--Extra B(5)... 600.00 19.62 363.60 -- 02/28/07 137,200 347,691
Keith A. McDonough
Series A(3)............ 1,929.75 16.74 36.36 363.60 02/28/07 1,072,764 1,749,722
Series B--Basic B(4)... 600.00 10.89 363.60 -- 02/28/07 137,200 347,691
Series B--Extra B(5)... 600.00 19.62 363.60 -- 02/28/07 137,200 347,691
William J. Taaffe
Series A(3)............ 617.89 5.36 36.36 363.60 02/28/07 343,491 560,248
Series B--Basic B(4)... 500.00 9.08 363.60 -- 02/28/07 114,330 289,742
Series B--Extra B(5)... 500.00 16.35 363.60 -- 02/28/97 114,330 289,742
Theodore C. Johanson
Series B--Basic B(4)... 200.00 3.63 363.60 -- 02/28/07 45,733 115,897
</TABLE>
- --------
(1) Options to acquire common stock of Holdings.
(2) The 5% and 10% assumed annual rates of return do not reflect actual
changes in the value of the common stock of Holdings. The assumed rates
are not intended to be a forecast of future performance, but reflect
projections required by SEC regulations.
(3) Series A Options (as defined) are fully exercisable at all times prior to
expiration date and represent options issued in exchange for existing
options for shares of the parent of the predecessor in connection with the
Fenway Acquisition.
(4) 20% of Series B-Basic B Options (as defined) are exercisable on the last
of each fiscal year in which certain target earnings are met. The Series
B-Basic B Options are also exercisable upon a sale transaction by the
Fenway Fund of all stock or assets of Holdings ("Sale Transaction") if the
net sales proceeds equal or exceed the initial purchase price plus certain
internal rates of return.
(5) Series B-Extra B Options (as defined) are exercisable on a Sale
Transaction if the net sales proceeds equal or exceed the initial purchase
price plus certain internal rates of return.
47
<PAGE>
AGGREGATED OPTION EXERCISES
The table below sets forth information concerning the exercise of stock
options during fiscal 1998 and the value of unexercised stock options at the
end of fiscal 1998 for the Chief Executive Officer and Named Executives.
AGGREGATED OPTION EXERCISES IN
FISCAL 1998 AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SHARES OF FISCAL YEAR END AT FISCAL YEAR END(3)
HOLDINGS ---------------------- ---------------------
ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE
- ---- ----------- -------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
Donald R. Jensen
Predecessor
Options(1)........... 3,429 $1,953,941
Series A(2)........... 6,404.83/0 $2,095,917/0
Series B--Basic B(2).. 339.60/1358.40 0/0
Series B--Extra B(2).. 0/1248.77 0/0
William J. Mills
Predecessor
Options(1)........... 53 31,806
Series A(2)........... 1,929.75/0 631,491/0
Series B--Basic B(2).. 132/528 0/0
Series B--Extra B(2).. 0/600 0/0
Keith A. McDonough
Predecessor
Options(1)........... 53 31,806
Series A(2)........... 1,929.75/0 631,491/0
Series B--Basic B(2).. 120/480 0/0
Series B--Extra B(2).. 0/600 0/0
William J. Taaffe
Series A(1)........... 617.89/0 202,198/0
Series B--Basic B(2).. 100/400 0/0
Series B--Extra B(2).. 0/500 0/0
Theodore C. Johanson
Series B--Basic B(2).. 40/160 0/0
</TABLE>
- --------
(1) Options to acquire shares of the predecessor in connection with the Fenway
Acquisition.
(2) Options to acquire common stock of Holdings.
(3) Value based on assumed value at January 31, 1998 of $363.60 per share.
EMPLOYMENT AGREEMENTS
Mr. Jensen is currently employed as Chief Executive Officer and Chairman of
the Board of Directors of Holdings and Iron Age and President of Holdings
pursuant to an agreement dated February 26, 1997. Under this agreement, Mr.
Jensen is entitled to receive an annual salary of $400,000. In addition, Mr.
Jensen is eligible for an annual bonus of up to 100% of base salary 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 him 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.
48
<PAGE>
Jensen is entitled to receive continued salary less amounts received by him
under group disability plans and social security disability benefits until the
earliest 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.
Mr. Mills is currently employed with Iron Age pursuant to an agreement dated
November 20, 1995. Under this agreement, Mr. Mills receives an annual salary
of $142,500, subject to annual increases, and is eligible for a bonus of up to
100% of base salary determined by Iron Age's achievement of operating income
targets. If Mr. Mills is terminated other than for cause or resigns
voluntarily for good reason, he is entitled to receive continued salary for
eighteen 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 30, 1999. 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
30, 1999.
Mr. McDonough is currently employed with Iron Age pursuant to an agreement
dated November 20, 1995. Under this agreement, Mr. McDonough receives an
annual salary of $100,000, subject to annual increases, and is eligible for a
bonus of up to 100% of base salary determined by Iron Age's achievement of
operating income targets. If Mr. McDonough is terminated other than for cause
or resigns voluntarily for good reason, he is entitled to receive continued
salary for eighteen 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 30, 1999.
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 30, 1999.
Mr. Johanson is currently employed as President and Chief Executive Officer
of Falcon pursuant to an agreement dated August 1, 1994. Under this agreement,
Mr. Johanson receives an annual salary of $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.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
As of January 31, 1998, the outstanding equity securities of Holdings
consisted of 99,624.89 shares of common stock, par value $0.01 per share
("Common Stock"), and 1,500 shares of Holdings Series A Preferred Stock, par
value $0.01 per share. Pursuant to the Transactions, Holdings redeemed the
1,500 shares of Holdings Series A Preferred Stock on April 24, 1998.
The following table sets forth certain information as of May 2, 1998
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
securities of Holdings and (ii) the equity securities of Holding by each
director of Holdings, each of the executive officers of Holdings listed under
"Management" and the directors and executive officers of Holdings as a group.
<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)......................... -- --
Russell Steenberg(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 or 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.
(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.
50
<PAGE>
(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."
(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."
(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."
(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."
(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."
(10) Messrs. Lamm, Geisser and Steenberg are Managing Directors of Fenway and
limited partners of Fenway Partners, L.P., the sole general partner of
the Fenway Fund. Accordingly, Messrs. Lamm, Geisser and Steenberg may be
deemed to beneficially own shares owned by the Fenway Fund. Messrs. Lamm,
Geisser and Steenberg 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 and Steenberg disclaim beneficial ownership
of any such shares in which they do not have pecuniary interests.
51
<PAGE>
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. 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. See also "Management--Option Grants."
In connection with the Transactions, members of management of Iron Age
received aggregate payments of $2,245,000 as compensation for the value
created for the stockholders of Holdings in the Transactions.
STOCKHOLDERS AGREEMENT
Holdings, the Fenway Fund, New York Life Insurance Company and American Home
Assurance Company (the "Mezzanine Investors"), Iron Age management 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 including the Mezzanine Investors and Iron Age
management. 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 1998 and fiscal 1999,
$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 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.
52
<PAGE>
DESCRIPTION OF OTHER INDEBTEDNESS
NEW CREDIT FACILITY
On April 24, 1998, Holdings and Iron Age entered into an agreement with
various banks and other financial institutions, including Banque Nationale de
Paris, as a lender and as agent for the lenders from time to time party
thereto, providing for the New Credit Facility, which consists of (i) the New
Revolving Credit Facility for Iron Age of up to $30.0 million in revolving
credit loans, letters of credit and swing line loans and (ii) a multiple draw
New Acquisition Credit Facility for Iron Age of up to $35.0 million, which may
be borrowed for a period of up to three years after the closing date of the
New Credit Facility for permitted acquisitions by Iron Age.
The New Credit Facility is (i) jointly and severally guaranteed by Holdings,
each of its present and future domestic subsidiaries and, to the extent that
no adverse tax consequence would result therefrom, each of its present and
future foreign subsidiaries and (ii) secured by all of the assets (including
capital stock) owned by Holdings, Iron Age, each of their respective present
and future domestic subsidiaries and, to the extent that no adverse tax
consequence would result therefrom, each of their respective present and
future foreign subsidiaries.
The New Credit Facility requires Holdings and Iron Age to meet certain
financial tests, including, without limitation, maximum leverage ratio,
minimum interest coverage and fixed charges coverage. In addition, the New
Credit Facility contains certain negative covenants limiting, among other
things, additional debt, additional liens, transactions with affiliates,
mergers and consolidations, liquidations and dissolutions, sales of assets,
dividends, capital expenditures, investments, loans and advances, prepayments
and modifications of debt instruments and other matters customarily restricted
in such agreements. The New Credit Facility contains customary events of
default, including, without limitation, payment defaults, breaches of
representations and warranties, covenant defaults, certain events of
bankruptcy and insolvency, failure of any guaranty or security document
supporting the New Credit Facility to be in full force and effect, change of
control of Holdings and change of ownership of the stock of the Company.
Availability under the New Revolving Credit Facility is subject to a
borrowing base of (i) 80% of eligible United States and Canadian accounts
receivable and (ii) 50% of eligible United States and Canadian inventory.
Availability under the New Acquisition Credit Facility is subject to maximum
pro forma Leverage Ratios and Senior Leverage Ratios (each as defined in the
New Credit Facility).
The New Revolving Credit Facility matures in April 2004. The New Acquisition
Credit Facility matures in quarterly installments from July 2001 until final
payment in April 2004.
Iron Age's borrowings under the New Credit Facility bear interest at a
floating rate and may be maintained as Base Rate Loans (as defined in the New
Credit Facility) or, beginning 90 days after the closing date of the New
Credit Facility (or earlier upon syndication) at Iron Age's option, as
Eurodollar Loans (as defined in the New Credit Facility). Base Rate Loans bear
interest at the Base Rate (defined as the higher of (x) the applicable prime
lending rate of Banque Nationale de Paris and (y) the Federal Reserve reported
overnight funds rate plus 0.5%) plus the Applicable Margin (as defined in the
New Credit Facility). Eurodollar Loans bear interest at the Eurodollar Rate
(as defined in the New Credit Facility) plus the Applicable Margin (as defined
in the New Credit Facility).
The Applicable Margin is initially Base Rate plus 0.75% and Eurodollar Rate
plus 2.25% and is subject to reduction according to a pricing grid based upon
the Leverage Ratio.
Iron Age is required to pay to the lenders under the New Credit Facility a
commitment fee equal to 0.4375% per annum, payable in arrears on a quarterly
basis, on the average unused portion of the New Credit Facility during such
quarter. Iron Age is also required to pay to the lenders a quarterly letter of
credit fee with respect to each letter of credit outstanding equal to a
floating rate of interest equal to the Applicable Margin on Eurodollar Loans
times the average daily stated amount of such letter of credit, as well as
customary administrative fees.
53
<PAGE>
The New Credit Facility prescribes that certain amounts must be used to
prepay, and/or to reduce commitments under, the New Credit Facility, including
(a) 100% of the net proceeds of any sale or issuance of equity or any
incurrence of indebtedness after the closing date by Iron Age or any of its
subsidiaries, except for proceeds of the Discount Notes and the Senior
Subordinated Notes and subject to certain other exceptions, (b) 100% of the
net proceeds of any sale or other disposition by Iron Age or any of its
subsidiaries of any assets (including casualties or condemnations), except for
the sale of inventory or obsolete or worn-out property in the ordinary course
of business and subject to certain other exceptions and (c) 50% of Excess Cash
Flow (as defined in the New Credit Facility) for each fiscal year of Iron Age
commencing with the year ending in January 2002.
In general, the mandatory prepayments described above will be applied first,
to prepay the New Acquisition Credit Facility and to reduce the commitments
thereunder and second, to prepay and/or permanently reduce commitments under
the New Revolving Credit Facility. Optional or mandatory prepayments of the
New Acquisition Credit Facility will be applied ratably to the respective
installments thereof. Any prepayments of the New Acquisition Credit Facility
may not be reborrowed.
SENIOR SUBORDINATED NOTES
Concurrently with the Exchange Offer, Iron Age is conducting an exchange
offer for the Senior Subordinated Notes. The exchanged Senior Subordinated
Notes will have the same terms as the original Senior Subordinated Notes
described herein. The Senior Subordinated Notes were issued by Iron Age on
April 24, 1998 in an aggregate principal amount of $100,000,000 and will
mature on May 1, 2008. The Senior Subordinated Notes were issued under the
Senior Subordinated Indenture between Iron Age and The Chase Manhattan Bank,
as trustee, and are unsecured, senior subordinated obligations of Iron Age.
Cash interest on the Senior Subordinated Notes will accrue at the rate of 9
7/8% per annum and will be payable semi-annually on May 1 and November 1 of
each year, commencing November 1, 1998, to the holders of record on the
immediately preceding April 15 and October 15, respectively.
On or after May 1, 2003, the Senior Subordinated Notes may be redeemed at
the option of Iron Age, in whole or in part, at any time or from time to time,
at the following redemption prices (expressed in percentages of principal
amount), plus accrued and unpaid interest and liquidated damages, if any, to
the redemption date, if redeemed during the 12-month period commencing on May
1 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2003.............................................................. 104.938%
2004.............................................................. 103.292%
2005.............................................................. 101.646%
2006 and thereafter............................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or prior to May 1, 2001, Iron
Age may, at its option, redeem in the aggregate up to 35% of the original
principal amount of the Senior Subordinated Notes with the proceeds of one or
more Public Equity Offerings (as defined in the Senior Subordinated Indenture)
received by, or invested in, Iron Age, following which there is a Public
Market (as defined in the Senior Subordinated Indenture), at a redemption
price (expressed as a percentage of principal amount) of 109.875% plus accrued
and unpaid interest and liquidated damages, if any, to the redemption date;
provided, however, that at least 65% of the original principal amount of the
Senior Subordinated Notes must remain outstanding after each such redemption.
In the event of a Change of Control (as defined in the Senior Subordinated
Indenture), each holder of Senior Subordinated Notes has the right to require
that Iron Age repurchase such holder's Senior Subordinated Notes at a purchase
price in cash equal to 101% of the principal amount thereof plus accrued and
unpaid interest and liquidated damages, if any, to the date of repurchase.
54
<PAGE>
The Senior Subordinated Indenture contains covenants that, among other
things: limit the ability of Iron Age to incur additional indebtedness
(including a restriction that, subject to certain exceptions, prohibits the
incurrence of indebtedness unless the Consolidated Coverage Ratio (as defined
in the Senior Subordinated Indenture) of Iron Age exceeds 2.00 to 1.00); incur
liens, pay dividends or make certain other restricted payments; consummate
certain asset sales; enter into certain transactions with affiliates; incur
indebtedness that is subordinate in right of payment to any Senior
Indebtedness (as defined in the Senior Subordinated Indenture) and senior in
right of payment to the Senior Subordinated Notes; merge or consolidate with
any other person; or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of the assets of Iron Age. Under certain
circumstances, Iron Age will be required to make an offer to purchase Senior
Subordinated Notes at a price equal to 100% of the principal amount thereof,
plus accrued interest to the date of purchase with the proceeds of certain
Asset Dispositions (as defined in the Senior Subordinated Indenture). The
Senior Subordinated Indenture contains certain customary events of default
which include the failure to pay interest and principal, the failure to comply
with certain covenants in the Senior Subordinated Indenture, a default under
certain indebtedness, the imposition of certain final judgments or warrants of
attachment and certain events occurring under bankruptcy laws. See "Risk
Factors--Limitation on Access to Cash Flow of Subsidiaries; Holding Company
Structure."
55
<PAGE>
DESCRIPTION OF EXCHANGE DISCOUNT NOTES
GENERAL
The Exchange Discount Notes are to be issued under the Indenture. The form
and terms of the Exchange Discount Notes are the same as the form and terms of
the Original Discount Notes, except that (i) the Exchange Discount Notes have
been registered under the Securities Act and therefore will not bear legends
restricting their transfer pursuant to the Securities Act, and (ii) the
holders of Exchange Discount Notes will not be entitled to rights under the
Registration Agreement (except under certain limited circumstances). The
Exchange Discount Notes will evidence the same debt as the Original Discount
Notes (which they replace), and will be issued under, and be entitled to the
benefits of, the Indenture.
The following is a summary of certain provisions of the Indenture and the
Exchange Discount Notes, copies of which will be available upon request to
Holdings at the address set forth under "Business." The Indenture is filed as
an exhibit to the Exchange Offer Registration Statement of which this
Prospectus forms a part. The following summary of certain provisions of the
Indenture and the Exchange Discount Notes does not purport to be complete and
is subject to, and is qualified in its entirety by reference to, all the
provisions of the Indenture and the Exchange Discount Notes, including the
definitions of certain terms therein and those terms made a part thereof by
the Trust Indenture Act of 1939, as amended. Capitalized terms used herein and
not otherwise defined have the meanings set forth in the section "--Certain
Definitions." For purposes of this description of the Exchange Discount Notes,
the term "Holdings" refers only to Iron Age Holdings Corporation and not to
any of its direct or indirect subsidiaries, and the term "Iron Age" refers
only to Iron Age Corporation and not to any of its direct or indirect
subsidiaries.
Principal of, and premium and liquidated damages, if any, and interest on,
the Exchange Discount Notes will be payable, and the Exchange Discount Notes
may be exchanged or transferred, at the office or agency of Holdings in the
Borough of Manhattan, The City of New York (which initially shall be the
corporate trust office of the Trustee in New York, New York), except that, at
the option of Holdings, payment of interest may be made by check mailed to the
address of each Holder as such address appears in the Exchange Discount Note
register.
The Exchange Discount Notes will not be entitled to the benefit of any
mandatory sinking fund.
The Exchange Discount Notes will not be guaranteed by any of the
Subsidiaries.
The Exchange Discount Notes will be issued only in fully registered form,
without coupons, in denominations of $1,000 in principal amount at maturity
and any integral multiple of $1,000 in principal amount at maturity. No
service charge will be made for any registration of transfer or exchange of
Exchange Discount Notes, but Holdings may require payment of a sum sufficient
to cover any transfer tax or other similar governmental charge payable in
connection therewith.
TERMS OF THE EXCHANGE DISCOUNT NOTES
The Original Discount Notes were issued at a discount to their aggregate
principal amount at maturity to generate gross proceeds to Holdings on the
Issue Date of approximately $25.0 million. The terms of the Exchange Discount
Notes are identical in all material respects to those of the Original Discount
Notes, except for certain transfer restrictions and registration rights
relating to the Original Discount Notes. The Discount Notes will accrete in
value from the Issue Date until May 1, 2003 at the rate per annum shown on the
cover of this Prospectus, compounded semi-annually, to an aggregate principal
amount of $45.140 million, the principal amount at maturity. All references to
the principal amount of the Discount Notes herein are references to the
principal amount at final maturity. Cash interest will not accrue on the
Exchange Discount Notes prior to May 1, 2003. Thereafter, interest will accrue
at the rate per annum shown on the cover of this Prospectus and will be
56
<PAGE>
payable semi-annually in cash and in arrears to the Holders of record on each
April 15 or October 15 immediately preceding the interest payment date on May
1 and November 1 of each year, commencing November 1, 2003. Cash interest on
the Exchange Discount Notes will accrue from the most recent interest payment
date to which interest on the Discount Notes has been paid or, if no interest
has been paid, from May 1, 2003. The Exchange Discount Notes will mature and
be payable in full on May 1, 2009.
The Exchange Discount Notes will be unsecured, senior obligations of
Holdings and will rank pari passu in right of payment to all existing and
future unsecured, unsubordinated indebtedness of Holdings. Simultaneously with
the Original Offering, Holdings Guaranteed the Bank Indebtedness, which
Guarantee is secured by a pledge of the Capital Stock of Iron Age. All of the
operations of Holdings are conducted through its Subsidiaries, and therefore
Holdings is dependent upon the cash flow of the Subsidiaries to meet its
obligations, including its obligations on the Discount Notes. See "Risk
Factors--Limitation on Access to Cash Flow of Subsidiaries; Holding Company
Structure." The New Credit Facility and the Senior Subordinated Indenture
restrict the ability of Iron Age and the other Subsidiaries of Holdings to pay
dividends or make other distributions to Holdings. The Original Discount Notes
are, and the Exchange Discount Notes will be, effectively subordinated to all
existing and future Indebtedness and liabilities of Holdings' Subsidiaries
(including trade credit, the Senior Subordinated Notes and Indebtedness of
Iron Age and its Subsidiaries in respect of the New Credit Facility). Any
right of Holdings to receive assets of any of its Subsidiaries upon such
Subsidiary's liquidation or reorganization (and the consequent right of
Holders of the Discount Notes to participate in those assets) will be
effectively subordinated to the claims of that Subsidiary's creditors.
OPTIONAL REDEMPTION
Except as set forth below, the Exchange Discount Notes will not be
redeemable at the option of Holdings prior to May 1, 2003. On and after such
date, the Exchange Discount Notes will be redeemable, at Holdings' option, in
whole or in part, at any time or from time to time, upon not less than 30 nor
more than 60 days' prior notice mailed by first-class mail to each Holder's
registered address, at the following redemption prices (expressed in
percentages of principal amount), plus accrued and unpaid interest and
liquidated damages, if any, to the redemption date (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date), if redeemed during the 12-month period
commencing on May 1 of the years set forth below:
<TABLE>
<CAPTION>
PERIOD REDEMPTION PRICE
------ ----------------
<S> <C>
2003..................................................... 106.063%
2004..................................................... 104.042%
2005..................................................... 102.021%
2006 and thereafter...................................... 100.000%
</TABLE>
In addition, at any time and from time to time prior to May 1, 2001,
Holdings may, at its option, redeem in the aggregate up to 35% of the
aggregate principal amount at maturity of the Discount Notes originally issued
with the proceeds of one or more Public Equity Offerings received by Holdings,
following which there is a Public Market, at a redemption price (expressed as
a percentage of Accreted Value) of 112.125% plus accrued and unpaid interest
and liquidated damages, if any, to the redemption date (subject to the right
of Holders of record on the relevant record date to receive interest due on
the relevant interest payment date); provided, however, that at least 65% of
the aggregate principal amount at maturity of the Discount Notes originally
issued must remain outstanding after each such redemption.
SELECTION
In the case of any partial redemption, selection of the Discount Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Discount Note of $1,000 in original principal amount
at maturity or less will be redeemed in part. If any Exchange Discount Note is
to be redeemed in part only, the notice of redemption relating to such
Exchange Discount Note shall state the portion of the principal amount at
maturity thereof to be redeemed. A new Exchange Discount Note in principal
amount at maturity equal to the unredeemed portion of
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the original Exchange Discount Note will be issued in the name of the Holder
of the original Exchange Discount Note upon cancellation of the original
Exchange Discount Note.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder shall have the right
to require that Holdings repurchase such Holder's Exchange Discount Notes at a
purchase price in cash equal to 101% of the Accreted Value thereof plus
accrued and unpaid interest and liquidated damages, if any, to the date of
repurchase (subject to the right of Holders of record on the relevant record
date to receive interest due on the relevant interest payment date), in
accordance with the provisions of the next paragraph.
Within 30 days following any Change of Control, Holdings shall mail a notice
to each Holder with a copy to the Trustee stating: (i) that a Change of
Control has occurred and that such Holder has the right to require Holdings to
purchase such Holder's Exchange Discount Notes at a purchase price in cash
equal to 101% of the Accreted Value thereof plus accrued and unpaid interest
and liquidated damages, if any, to the date of repurchase (subject to the
right of Holders of record on the relevant record date to receive interest on
the relevant interest payment date), (ii) the circumstances and relevant facts
and relevant financial information regarding such Change of Control, (iii) the
repurchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed) and (iv) the procedures determined by
Holdings, consistent with the Indenture, that a Holder must follow in order to
have its Exchange Discount Notes repurchased.
Holdings shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Exchange Discount Notes pursuant to the
Indenture. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the Indenture, Holdings shall
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under the Indenture by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
Holdings and the Initial Purchasers. Management of Holdings has no present
intention to engage in a transaction involving a Change of Control, although
it is possible that Holdings would decide to do so in the future.
Except for the restrictive covenants discussed below (including the
covenants which limit Holdings' ability to incur indebtedness, merge,
consolidate and sell assets), the provisions of the Indenture do not afford
Holders of the Discount Notes protection in the event of a highly leveraged or
other transaction involving Holdings that may adversely affect the Holders of
the Discount Notes; hence, Holdings could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or
otherwise adversely affect Holdings' capital structure or credit ratings.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Discount Notes to require
that Holdings repurchase or redeem the Discount Notes in the event of a
takeover, recapitalization or similar transaction (including a transaction
with Holdings' management or affiliates).
The occurrence of a Change of Control would constitute a default under the
New Credit Facility. A Change of Control under the Indenture would also
constitute a change of control under the Senior Subordinated Indenture and
would permit each holder of the Senior Subordinated Notes to require Iron Age
to repurchase all of such holder's Senior Subordinated Notes at a price equal
to 101% of the principal amount thereof, plus accrued and unpaid interest and
liquidated damages, if any, to the date of repurchase. Future Senior
Indebtedness of Holdings and its Subsidiaries may contain prohibitions of
certain events which would constitute a Change of Control or require such
Senior Indebtedness to be repurchased upon a Change of Control. Moreover, the
exercise by the Holders of their right to require Holdings to repurchase the
Discount Notes could cause a default under such
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Senior Indebtedness, even if the Change of Control itself does not, due to the
financial effect of such repurchase on Holdings. Finally, Holdings' ability to
pay cash to the Holders upon a repurchase may be limited by Holdings' then
existing financial resources. The New Credit Facility and the Senior
Subordinated Indenture will restrict the ability of Iron Age and the other
Subsidiaries of Holdings to pay dividends or make any other distributions to
Holdings. If Holdings is unable to obtain dividends from Iron Age or the other
Subsidiaries of Holdings sufficient to permit the repurchase of the Discount
Notes or does not refinance such Indebtedness, Holdings will likely not have
the financial resources to repurchase Discount Notes. In any event, there can
be no assurance that Holdings' Subsidiaries will have the resources available
to pay any such dividend or make any such distribution, and there can be no
assurance that sufficient funds will be available when necessary to make any
repurchases required in connection with a Change of Control. Even if
sufficient funds were otherwise available, the terms of the New Credit
Facility will (and other Senior Indebtedness may) prohibit Holdings'
prepayment of the Discount Notes prior to their scheduled maturity.
Consequently, if Iron Age is not able (i) to prepay the New Credit Facility
and other Senior Indebtedness containing similar restrictions or obtain
requisite consents, as described above, or (ii) to make a dividend payment to
Holdings to repurchase the Exchange Discount Notes, Holdings will be unable to
fulfill its repurchase obligations if Holders of Exchange Discount Notes
exercise their repurchase rights following a Change of Control, thereby
resulting in a default under the Indenture.
Except for the Senior Subordinated Notes and the Discount Notes, neither
Holdings nor Iron Age currently has any unsecured, unsubordinated indebtedness
that is subject to Change of Control repayment provisions.
The Change of Control provisions described above may deter certain mergers,
tender offers and other takeover attempts involving Holdings by increasing the
capital required to effectuate such transactions. The definition of "Change of
Control" includes a disposition of all or substantially all of the property
and assets of Holdings and its Restricted Subsidiaries. With respect to the
disposition of property or assets, the phrase "all or substantially all" as
used in the Indenture varies according to the facts and circumstances of the
subject transaction, has no clearly established meaning under New York law
(which is the choice of law under the Indenture) and is subject to judicial
interpretation. Accordingly, in certain circumstances there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the property or assets of a
Person, and therefore it may be unclear as to whether a Change of Control has
occurred and whether Holdings is required to make an offer to repurchase the
Exchange Discount Notes as described above.
With the consent of the Holders of a majority of the aggregate principal
amount of the Discount Notes then outstanding, Holdings and the Trustee may
waive or amend Holdings' obligations to make an offer to repurchase the
Discount Notes as a result of a Change of Control.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the Exchange Discount Notes to be
resold as set forth herein will initially be issued in the form of one or more
Global Exchange Discount Notes (the "Global Exchange Discount Notes"). The
Global Exchange Discount Notes will be deposited on the date of the closing of
the sale of the Discount Notes offered hereby with, or on behalf of, the
Depositary and registered in the name of Cede and Co., as nominee of the
Depositary (such nominee being referred to herein as the "Global Exchange
Discount Note Holder").
Exchange Discount Notes that are issued as described below under "--
Certified Securities" will be issued in the form of registered definitive
certificates (the "Certificated Securities"). Upon the transfer of
Certificated Securities, such Certificated Securities may, unless all Global
Exchange Discount Notes have previously been exchanged for Certificated
Securities, be exchanged for an interest in the Global Exchange Discount Note
representing the principal amount of Exchange Discount Notes being
transferred, subject to the transfer restrictions set forth in the Indenture.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance
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and settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The
Depositary's Participants include securities brokers and dealers (including
the Initial Purchasers), banks and trust companies, clearing corporations and
certain other organizations. Access to the Depositary's system is also
available to other entities such as banks, brokers, dealers and trust
companies (collectively, the "Indirect Participants" or the "Depositary's
Indirect Participants") that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly. Persons who
are not Participants may beneficially own securities held by or on behalf of
the Depositary only through the Depositary's Participants or the Depositary's
Indirect Participants.
Holdings expects that pursuant to procedures established by the Depositary
(i) upon deposit of the Global Exchange Discount Notes, the Depositary will
credit the accounts of Participants designated by the Initial Purchasers with
portions of the principal amount of the Global Exchange Discount Notes and
(ii) ownership of the Exchange Discount Notes evidenced by the Global Exchange
Discount Notes will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by the Depositary (with respect to
the interests of the Depositary's Participants), the Depositary's Participants
and the Depositary's Indirect Participants. Prospective purchasers are advised
that the laws of some states require that certain persons take physical
delivery in definitive form of securities that they own. Consequently, the
ability to transfer Exchange Discount Notes evidenced by the Global Exchange
Discount Note will be limited to such extent. For certain other restrictions
on the transferability of the Exchange Discount Notes, see "Notice to
Investors."
So long as the Global Exchange Discount Note Holder is the registered owner
of any Exchange Discount Notes, the Global Exchange Discount Note Holder will
be considered the sole Holder under the Indenture of any Discount Notes
evidenced by the Global Exchange Discount Notes. Beneficial owners of Exchange
Discount Notes evidenced by the Global Exchange Discount Notes will not be
considered the owners or Holders thereof under the Indenture for any purpose,
including with respect to the giving of any directions, instructions or
approvals to the Trustee thereunder. Neither Holdings nor the Trustee will
have any responsibility or liability for any aspect of the records of the
Depositary or for maintaining, supervising or reviewing any records of the
Depositary relating to the Exchange Discount Notes.
Payments in respect of the principal of, premium, if any, interest and
liquidated damages, if any, on any Exchange Discount Notes registered in the
name of the Global Exchange Discount Note Holder on the applicable record date
will be payable by the Trustee to or at the direction of the Global Exchange
Discount Note Holder in its capacity as the registered Holder under the
Indenture. Under the terms of the Indenture, Holdings and the Trustee may
treat the persons in whose names Exchange Discount Notes, including the Global
Exchange Discount Notes, are registered as the owners thereof for the purpose
of receiving such payments. Consequently, neither Holdings nor the Trustee has
or will have any responsibility or liability for the payment of such amounts
to beneficial owners of Exchange Discount Notes. Holdings believes, however,
that it is currently the policy of the Depositary to immediately credit the
accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holdings of beneficial interests in the
relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of Exchange Discount Notes will be governed by standing
instructions and customary practice and will be the responsibility of the
Depositary's Participants or the Depositary's Indirect Participants.
CERTIFIED SECURITIES
Subject to certain conditions, any person having a beneficial interest in a
Global Exchange Discount Note may, upon request to the Trustee, exchange such
beneficial interest for Exchange Discount Notes in the form of Certified
Securities. Upon any such issuance, the Trustee is required to register such
Certificated Securities in the name of, and cause the same to be delivered to,
such person or persons (or the nominee of any thereof). All such certificated
Exchange Discount Notes would be subject to the legend requirements described
herein under "Notice to Investors." In addition, if (i) Holdings notifies the
Trustee in writing that the Depositary is no longer willing or able to act as
a depositary and Holdings is unable to locate a qualified successor within 90
days or (ii) Holdings, at its option, notifies the Trustee in writing that it
elects to cause the issuance of Exchange Discount
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Notes in the form of Certificated Securities under the Indenture, then, upon
surrender by the Global Exchange Discount Note Holder of its Global Exchange
Discount Note, Exchange Discount Notes in such form will be issued to each
person that the Global Exchange Discount Note Holder and the Depositary
identify as being the beneficial owner of the related Exchange Discount Notes.
Neither Holdings nor the Trustee will be liable for any delay by the Global
Exchange Discount Note Holder or the Depositary in identifying the beneficial
owners of Exchange Discount Notes and Holdings and the Trustee may
conclusively rely on, and will be protected in relying on, instructions from
the Global Exchange Discount Note Holder or the Depositary for all purposes.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
LIMITATION ON INDEBTEDNESS. (a) Holdings shall not, and shall not permit any
Restricted Subsidiary to, Incur any Indebtedness unless, on the date of such
Incurrence, the Consolidated Coverage Ratio exceeds 1.75 to 1.00.
(b) Notwithstanding the foregoing paragraph (a), Holdings and its Restricted
Subsidiaries may Incur the following Indebtedness:
(1) Indebtedness Incurred pursuant to the New Acquisition Credit
Facility; provided, however, that, after giving effect to any such
Incurrence, the aggregate principal amount of such Indebtedness then
outstanding thereunder does not exceed the difference between (i) $35
million and (ii) the aggregate amount of all scheduled or otherwise
mandatory permanent repayments (but not optional repayments) of principal
actually made thereunder since the Issue Date;
(2) Indebtedness Incurred pursuant to the New Revolving Credit Facility;
provided, however, that, after giving effect to any such Incurrence, the
aggregate principal amount of such Indebtedness then outstanding thereunder
does not exceed the greater of (i) the difference between (a) $30 million
less any Indebtedness Incurred under clause (15) and (b) the aggregate
amount of all repayments (whether scheduled, otherwise mandatory or
optional) of principal actually made thereunder since the Issue Date to the
extent that the corresponding commitments have been permanently reduced and
(ii) the sum of (x) 50% of the value of the eligible inventory of Holdings
and its Restricted Subsidiaries under the New Revolving Credit Facility and
(y) 80% of the value of the eligible accounts receivable of Holdings and
its Restricted Subsidiaries under the New Revolving Credit Facility, in
each case determined in accordance with GAAP;
(3) Indebtedness of (A) Holdings owing to and held by any Restricted
Subsidiary or (B) a Wholly Owned Subsidiary owing to and held by Holdings
or a Restricted Subsidiary; provided, however, that (x) in the case of
clause (A), any such Indebtedness is subordinated to the Discount Notes,
(y) in the case of clause (B), any subsequent issuance or transfer of any
Capital Stock which results in any such Wholly Owned Subsidiary ceasing to
be a Wholly Owned Subsidiary shall be deemed to constitute the Incurrence
of such Indebtedness by the issuer thereof and (z) in the case of clause
(B), any subsequent transfer of such Indebtedness (other than to Holdings
or a Wholly Owned Subsidiary) shall be deemed to constitute the Incurrence
of such Indebtedness by the issuer thereof;
(4) Indebtedness represented by the Discount Notes;
(5) Indebtedness represented by the Senior Subordinated Notes and the
Subsidiary Guaranties;
(6) Indebtedness outstanding on the Issue Date (other than Indebtedness
described in clause (1), (2) or (3));
(7) Refinancing Indebtedness Incurred in respect of any Indebtedness
described in clause (4), (5), (6) or (8) or this clause (7) or Incurred
pursuant to paragraph (a);
(8) Indebtedness of a Restricted Subsidiary Incurred and outstanding on
the date on which such Restricted Subsidiary became a Restricted Subsidiary
or was acquired by Holdings (other than Indebtedness
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Incurred to provide all or any portion of the funds used to consummate the
transaction or series of related transactions pursuant to which such
Restricted Subsidiary became a Subsidiary or was otherwise acquired by
Holdings);
(9) Indebtedness of foreign Restricted Subsidiaries, and any Refinancing
Indebtedness thereof; provided, however, that the aggregate principal
amount of such Indebtedness at any time outstanding does not exceed $10
million;
(10) Indebtedness in respect of performance bonds, completion guarantees,
bankers' acceptances, letters of credit and surety or appeal bonds provided
by Holdings or any Restricted Subsidiary in the ordinary course of
business, including, without limitation, letters of credit in respect of
workers' compensation claims or self-insurance, or other Indebtedness with
respect to reimbursement-type obligations regarding workers' compensation
claims;
(11) Hedging Obligations consisting of Interest Rate Agreements and
Currency Agreements entered into in the ordinary course of business and not
for the purpose of speculation; provided, however, that, in the case of
Currency Agreements and Interest Rate Agreements, such Currency Agreements
and Interest Rate Agreements do not increase the Indebtedness of Holdings
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities
and compensation payable thereunder;
(12) Purchase Money Indebtedness, and any Refinancing Indebtedness
thereof, and Capital Lease Obligations Incurred to finance the acquisition
by Holdings or a Restricted Subsidiary of any assets in the ordinary course
of business; provided, however, that the aggregate principal amount of such
Indebtedness at any time outstanding shall not exceed $10 million;
(13) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft of similar instrument inadvertently (except
in the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; provided, however, that such Indebtedness is
extinguished within five Business Days of Incurrence;
(14) Indebtedness of Holdings or any Restricted Subsidiary arising from
agreements providing for indemnification, adjustment of purchase price,
earn out or similar obligations, in any case Incurred in connection with
the disposition of any assets of Holdings or any Restricted Subsidiary
(other than Guarantees of Indebtedness Incurred by any Person acquiring all
or any portion of such assets for the purpose of financing such
acquisition) in a principal amount not to exceed the gross proceeds
actually received by Holdings or any Restricted Subsidiary in connection
with such disposition;
(15) Indebtedness Incurred pursuant to any Permitted Receivables
Financing;
(16) Guarantees by Holdings or any Wholly Owned Subsidiary of
Indebtedness of Holdings or any Wholly Owned Subsidiary that was permitted
to be Incurred under another provision of this covenant;
(17) Indebtedness, and any Refinancing Indebtedness thereof, which is not
Senior Indebtedness; provided, however, that the aggregate principal amount
of such Indebtedness at any time outstanding shall not exceed $5 million;
and
(18) Indebtedness, and any Refinancing Indebtedness thereof, in an
aggregate principal amount which, together with all other Indebtedness
(other than Indebtedness permitted by clauses (1) through (17) or paragraph
(a)) of Holdings and the Restricted Subsidiaries outstanding on the date of
Incurrence of such Indebtedness, does not exceed $10 million.
(c) For purposes of determining compliance with the foregoing covenant, (i)
in the event that an item of Indebtedness meets the criteria of more than one
of the types of Indebtedness described above, Holdings, in its sole
discretion, will classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of the above clauses
and (ii) an item of Indebtedness may be divided and classified in more than
one of the types of Indebtedness described above.
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LIMITATION ON RESTRICTED PAYMENTS. (a) Holdings shall not, and shall not
permit any Restricted Subsidiary, directly or indirectly, to make a Restricted
Payment if at the time Holdings or such Restricted Subsidiary makes such
Restricted Payment:
(1) a Default shall have occurred and be continuing or would result
therefrom;
(2) Holdings is not able to Incur an additional $1.00 of Indebtedness
pursuant to paragraph (a) of the covenant described under "--Limitation on
Indebtedness"; or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments (the amount of any payments made in property other than
in cash to be valued at the fair market value of such property, as
determined in good faith by the Board of Directors) declared or made since
the Issue Date (including any amount included in the calculation of the
amount of Restricted Payments pursuant to paragraph (c) of "--Limitation on
Indebtedness") would exceed the sum of:
(A) 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from the beginning of the fiscal
quarter immediately following the fiscal quarter during which the
Original Discount Notes are originally issued to the end of the most
recent fiscal quarter ending at least 45 days (or, if less, the number
of days after the end of such fiscal quarter as the consolidated
financial statements of Holdings shall be provided to the Noteholders
pursuant to the Indenture) prior to the date of such Restricted Payment
(or, in case such Consolidated Net Income accrued during such period
(treated as one accounting period) shall be a deficit, minus 100% of
such deficit);
(B) the aggregate Net Cash Proceeds received by Holdings from the
issuance or sale of its Capital Stock (other than Disqualified Stock)
and other capital contributions subsequent to the Issue Date (other
than net proceeds received from an issuance or sale of such Capital
Stock to a Subsidiary of Holdings and other than an issuance or sale to
an employee stock ownership plan or to a trust established by Holdings
or any of its Subsidiaries for the benefit of their employees to the
extent that the purchase by such plan or trust is financed by
Indebtedness of such plan or trust to Holdings or any Subsidiary or for
which Holdings or any Subsidiary is liable, directly or indirectly
(including being liable to make cash contributions to such plan or
trust which are used to pay interest or principal on such
Indebtedness), unless such Indebtedness has been repaid with cash on or
prior to the date of determination);
(C) the amount by which Indebtedness of Holdings or its Restricted
Subsidiaries is reduced on Holdings' balance sheet upon the conversion
or exchange (other than by a Subsidiary of Holdings) subsequent to the
Issue Date of any Indebtedness of Holdings or its Restricted
Subsidiaries convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of Holdings (less the amount of any cash, or the
fair market value of any other property, distributed by Holdings or any
Restricted Subsidiary upon such conversion or exchange);
(D) an amount equal to the sum of (i) the net reduction in
Investments in Unrestricted Subsidiaries resulting from dividends,
repayments of loans or advances or other transfers of assets by any
Unrestricted Subsidiary to Holdings or any Restricted Subsidiary, or
the receipt of proceeds by Holdings or any Restricted Subsidiary from
the sale or other disposition of any portion of the Capital Stock of
any Unrestricted Subsidiary, in each case occurring subsequent to the
Issue Date, and (ii) the portion (proportionate to Holdings' equity
interest in such Subsidiary) of the fair market value of the net assets
of an Unrestricted Subsidiary at the time such Unrestricted Subsidiary
is designated a Restricted Subsidiary; provided, however, that the
foregoing sum shall not exceed, in the case of any Unrestricted
Subsidiary, the amount of Investments previously made (and treated as a
Restricted Payment) by Holdings or any Restricted Subsidiary in such
Unrestricted Subsidiary; and
(E) $5 million.
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(i) any purchase or redemption of Capital Stock or Subordinated
Obligations of Holdings or any Restricted Subsidiary made by exchange for,
or out of the proceeds of the substantially concurrent sale of,
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Capital Stock of Holdings (other than Disqualified Stock and other than
Capital Stock issued or sold to a Subsidiary or an employee stock ownership
plan or to a trust established by Holdings or any of its Subsidiaries for
the benefit of their employees to the extent that the purchase by such plan
or trust is financed by Indebtedness of such plan or trust to Holdings or
any Subsidiary or for which Holdings or any Subsidiary is liable, directly
or indirectly (including being liable to make cash contributions to such
plan or trust which are used to pay interest or principal on such
Indebtedness), unless such Indebtedness has been repaid with cash on or
prior to the date of determination); provided, however, that (A) such
purchase or redemption shall be excluded from the calculation of the amount
of Restricted Payments and (B) the Net Cash Proceeds from such sale shall
be excluded from the calculation of amounts under clause (3)(B) of
paragraph (a) above;
(ii) any purchase or redemption of (A) Subordinated Obligations of
Holdings made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Indebtedness of Holdings which is permitted to be
Incurred pursuant to paragraph (b) of the covenant described under "--
Limitation on Indebtedness" or (B) Subordinated Obligations of a Restricted
Subsidiary made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Indebtedness of such Restricted
Subsidiary or Holdings which is permitted to be Incurred pursuant to
paragraph (b) of the covenant described under "--Limitation on
Indebtedness"; provided, however, that, except as otherwise required by
paragraph (c) of the covenant described under "--Limitation on
Indebtedness," such purchase or redemption shall be excluded from the
calculation of the amount of Restricted Payments;
(iii) any purchase or redemption of (A) Disqualified Stock of Holdings
made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Disqualified Stock of Holdings or (B) Disqualified
Stock of a Restricted Subsidiary made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Disqualified Stock of
such Restricted Subsidiary or Holdings; provided, however, that such
purchase or redemption will be excluded from the calculation of the amount
of Restricted Payments;
(iv) payments on the Issue Date of $17.6 million to redeem the
outstanding Holdings Series A Preferred Stock; provided, however, that such
payments will be excluded from the calculation of the amount of Restricted
Payments;
(v) upon the occurrence of a Change of Control and within 60 days after
the completion of the offer to repurchase the Discount Notes pursuant to
the covenant described under "--Change of Control" above (including the
purchase of all Discount Notes tendered), any purchase or redemption of
Subordinated Obligations of Holdings pursuant to the terms thereof as a
result of such Change of Control at a purchase or redemption price not to
exceed 101% of the outstanding principal amount thereof, plus accrued and
unpaid interest thereon, if any; provided, however, that (A) at the time of
such purchase or redemption, no Default or Event of Default shall have
occurred and be continuing or would result therefrom, (B) Holdings would be
able to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a)
of the covenant described under "--Limitation on Indebtedness" after giving
pro forma effect to such Restricted Payment, (C) such purchase or
redemption is not made, directly or indirectly, from the proceeds of (or
made in anticipation of) any Issuance of Indebtedness by Holdings or any
Subsidiary and (D) such purchase or redemption will be included in the
calculation of the amount of Restricted Payments;
(vi) dividends paid within 60 days after the date of declaration thereof
if at such date of declaration such dividend would have complied with this
covenant; provided, however, that such dividend shall be included in the
calculation of the amount of Restricted Payments;
(vii) payments to redeem or repurchase Capital Stock of Holdings from
existing or former employees or management of Holdings or any Subsidiary or
their assigns, estates or heirs, in each case in connection with the
repurchase provisions under employee stock option or stock purchase
agreements or other agreements to compensate management employees and in
each case approved by the Board of Directors; provided, however, that at
the time of such payment, no Default or Event of Default shall have
occurred and be continuing or would result therefrom; and provided further,
however, that such redemptions or repurchases shall not exceed an aggregate
amount equal to the sum of (A) $2.0 million and (B) the amount
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of any proceeds to Holdings from (1) sales of Capital Stock of Holdings to
management employees subsequent to the Issue Date and (2) any "key-man"
life insurance policies which are used to make such redemptions or
repurchases; and provided further, however, that (x) such payments (other
than payments from the proceeds of any "key-man" life insurance policies)
will be included in the calculation of the amount of Restricted Payments,
(y) such payments from the proceeds of any "key-man" life insurance
policies will be excluded in the calculation of the amount of Restricted
Payments and (z) the cancellation of Indebtedness owing to Holdings from
members of management of Holdings or any of its Restricted Subsidiaries in
connection with a repurchase of Capital Stock of Holdings by Holdings will
be excluded in the calculation of Restricted Payments;
(viii) loans and advances made after the Issue Date to employees or
directors of Holdings or any Subsidiary the proceeds of which are used to
purchase Capital Stock of Holdings; provided, however, that the aggregate
principal amount of such loans and advances shall not exceed $2 million at
any time outstanding; and provided further, however, that such loans and
advances will be included in the calculation of the amount of Restricted
Payments to the extent not repaid; and
(ix) repurchases of Capital Stock of Holdings by Holdings or a Restricted
Subsidiary deemed to occur upon the exercise of stock options if such
Capital Stock represents a portion of the exercise price thereof; provided,
however, that such payments will be excluded in the calculation of the
amount of Restricted Payments.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED
SUBSIDIARIES. Holdings shall not, and shall not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or consensual restriction (other than
pursuant to the New Credit Facility) on the ability of any Restricted
Subsidiary (a) to pay dividends or make any other distributions on its Capital
Stock to Holdings or a Restricted Subsidiary or pay any Indebtedness owed to
Holdings, (b) to make any loans or advances to Holdings or (c) to transfer any
of its property or assets to Holdings, except: (i) any encumbrance or
restriction pursuant to an agreement in effect at or entered into on the Issue
Date (including, without limitation, the New Credit Facility, the Senior
Subordinated Indenture and the Indenture), (ii) any encumbrance or restriction
with respect to a Restricted Subsidiary pursuant to an agreement relating to
any Indebtedness Incurred by such Restricted Subsidiary which was entered into
on or prior to the date on which such Restricted Subsidiary was acquired by
Holdings (other than Indebtedness Incurred to provide all or any portion of
the funds used to consummate the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or
was acquired by Holdings) and outstanding on such date, (iii) any encumbrance
or restriction with respect to a Restricted Subsidiary pursuant to an
agreement effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (i) or (ii) of this covenant or this clause
(iii) or contained in any amendment to an agreement referred to in clause (i)
or (ii) of this covenant or this clause (iii); provided, however, that the
encumbrances and restrictions with respect to such Restricted Subsidiary
contained in any such agreement or amendment are no less favorable to the
Holder in any material respect than the encumbrances and restrictions with
respect to such Restricted Subsidiary contained in such agreements, (iv) in
the case of clause (c) above, any encumbrance or restriction (A) that
restricts in a customary manner the subletting, assignment or transfer of any
property or asset that is subject to a lease, license or similar contract, or
the assignment or transfer of any such lease, license or other contract,
including restrictions on assignment, (B) by virtue of any transfer of,
agreement to transfer, option or right with respect to, or Lien on, any
property or assets of Holdings or any Restricted Subsidiary not otherwise
prohibited by the Indenture, (C) contained in mortgages, pledges or other
security agreements securing Indebtedness of a Restricted Subsidiary to the
extent such encumbrance or restriction restricts the transfer of the property
subject to such mortgages, pledges or other security agreements or (D)
pursuant to customary provisions restricting dispositions of real property
interests set forth in any reciprocal easement agreements of Holdings or any
Restricted Subsidiary, (v) any restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or assets of such
Restricted Subsidiary pending the closing of such sale or disposition, (vi)
any encumbrance or restriction with respect to any Receivables Subsidiary
pursuant to an agreement related to Indebtedness of the Receivables Subsidiary
which is permitted under the covenant described
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under "--Limitation on Indebtedness" or pursuant to any agreement relating to
a Financing Disposition to or by the Receivables Subsidiary, (vii) any
encumbrance or restriction contained in any agreement or instrument governing
Indebtedness (whether or not outstanding) of foreign Restricted Subsidiaries
if such Indebtedness is permitted under the covenant described under clause
(9) of paragraph (b) of "--Limitation on Indebtedness"; provided, however,
that any such restrictions are ordinary and customary with respect to the type
of Indebtedness being Incurred (under the relevant circumstances), (viii) any
customary encumbrance or restriction imposed by any agreement to sell assets
or Capital Stock permitted under the Indenture to any Person pending the
closing of such sale and (ix) any customary encumbrances or restrictions
created in connection with Indebtedness Incurred under the covenant described
in "--Limitation on Indebtedness" which are no more restrictive than those
contained in the Senior Subordinated Indenture as in effect on the Issue Date.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK. Holdings shall not, and
shall not permit any Restricted Subsidiary to, consummate any Asset
Disposition unless Holdings or such Restricted Subsidiary receives
consideration at the time of such Asset Disposition at least equal to the fair
market value (including as to the value of all non-cash consideration), as
determined in good faith by the Board of Directors, of the shares and assets
subject to such Asset Disposition and at least 80% of the consideration
thereof received by Holdings or such Restricted Subsidiary is in the form of
cash or cash equivalents. In the event and to the extent that the Net
Available Cash received by Holdings or any Restricted Subsidiary from one or
more Asset Dispositions occurring on or after the Issue Date and not applied
pursuant to clause (i) or (ii) below exceeds $5 million, then Holdings or such
Restricted Subsidiary shall (i) within 360 days after the date such Net
Available Cash so received exceeds $5 million and to the extent Holdings or
such Restricted Subsidiary elects (or is required by the terms of any Senior
Indebtedness), (A) apply an amount equal to such excess Net Available Cash
received by Holdings to prepay, repay or purchase Senior Indebtedness of
Holdings or apply an amount equal to such excess Net Available Cash received
by any Restricted Subsidiary to prepay, repay or purchase Indebtedness of such
Restricted Subsidiary, in each case owing to a Person other than Holdings or
any Affiliate of Holdings, or (B) invest (or enter into a binding commitment
to invest; provided, however, that such commitment shall be subject only to
customary conditions (other than financing) and such investment shall be
consummated within 180 days after the end of such 360-day period) an amount
equal to such Net Available Cash not applied pursuant to clause (A), in
Additional Assets (including by means of an Investment in Additional Assets by
a Restricted Subsidiary with Net Available Cash received by Holdings or
another Restricted Subsidiary) and (ii) apply such excess Net Available Cash
(to the extent not applied pursuant to clause (i)) as provided in the
following paragraphs of the covenant described hereunder; provided, however,
that in connection with any prepayment, repayment or purchase of Indebtedness
pursuant to clause (A) above, Holdings or such Restricted Subsidiary shall
retire such Indebtedness and shall cause the related loan commitment, if any,
to be permanently reduced in an amount equal to the principal amount so
prepaid, repaid or purchased. The amount of such excess Net Available Cash
required to be applied pursuant to clause (ii) above and not theretofore so
applied shall constitute "Excess Proceeds." Pending application of Net
Available Cash pursuant to this provision, such Net Available Cash shall be
invested in Temporary Cash Investments.
If at any time the aggregate amount of Excess Proceeds not theretofore
subject to an Excess Proceeds Offer (as defined below) totals at least $5
million, Holdings shall, not later than 30 days after the end of the period
during which Holdings is required to apply such Excess Proceeds pursuant to
clause (i) of the immediately preceding paragraph (or, if Holdings so elects,
at any time within such period), make an offer (an "Excess Proceeds Offer") to
purchase from the holders thereof on a pro rata basis an aggregate principal
amount of Discount Notes and other pari passu debt obligations subject to a
similar covenant (collectively, the "Pari Passu Notes") equal to the Excess
Proceeds (rounded down to the nearest multiple of $1,000) on such date, at a
purchase price equal to 100% of the Accreted Value of such Discount Notes and
Pari Passu Notes, plus, in each case, accrued interest and liquidated damages,
if any, to the date of purchase (the "Excess Proceeds Payment"). Upon
completion of an Excess Proceeds Offer, the amount of Excess Proceeds
remaining after application pursuant to such Excess Proceeds Offer (including
payment of the purchase price for Discount Notes and Pari Passu Notes duly
tendered) may be used by Holdings for any corporate purpose (to the extent not
otherwise prohibited by the Indenture).
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If the Accreted Value (or the aggregate principal amount, as applicable) of
Discount Notes and Pari Passu Notes validly tendered and not withdrawn in
connection with an Excess Proceeds Offer exceeds the Excess Proceeds available
therefor, such Excess Proceeds will be apportioned between the Discount Notes
and such Pari Passu Notes, with the portion of such Excess Proceeds payable in
respect of the Discount Notes equal to the amount of such Excess Proceeds
multiplied by a fraction, the numerator of which is the Accreted Value of the
Discount Notes and the denominator of which is the sum of the Accreted Value
of the Discount Notes and the outstanding principal amount (or accreted value,
as applicable) of the relevant Pari Passu Notes.
For the purposes of this covenant, the following are deemed to be cash: (i)
the assumption of Senior Indebtedness of Holdings or any Restricted Subsidiary
and the release of Holdings or such Restricted Subsidiary from all liability
on such Indebtedness in connection with such Asset Disposition and (ii)
securities received by Holdings or any Restricted Subsidiary from the
transferee that are promptly converted by Holdings or such Restricted
Subsidiary into cash; provided, however, that any Designated Noncash
Consideration received by Holdings or any Restricted Subsidiary in such Asset
Sale having an aggregate fair market value, taken together with all other
Designated Noncash Consideration received pursuant to this proviso that is at
that time outstanding, not to exceed $5 million (with the fair market value of
each item of Designated Noncash Consideration being measured at the time
received and without giving effect to subsequent changes in value), shall be
deemed to be cash for the purposes of this provision.
Holdings shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in the event that Excess Proceeds are received by Holdings and Holdings is
required to repurchase Discount Notes as described above. To the extent that
the provisions of any securities laws or regulations conflict with the
provisions of this covenant, Holdings shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the Indenture by virtue thereof.
The New Credit Facility and the Senior Subordinated Indenture will restrict
the ability of Iron Age and the other Subsidiaries of Holdings to pay
dividends or make any other distributions to Holdings. If Holdings is unable
to obtain dividends from Iron Age or the other Subsidiaries of Holdings
sufficient to permit the repurchase of the Discount Notes or does not
refinance such Indebtedness, Holdings will likely not have the financial
resources to repurchase Discount Notes. In any event, there can be no
assurance that Holdings' Subsidiaries will have the resources available to pay
any such dividend or make any such distribution. Holdings' failure to make an
Asset Sale Offer when required or to purchase tendered Discount Notes when
tendered would constitute an Event of Default under the Indenture.
LIMITATION ON AFFILIATE TRANSACTIONS. (a) Holdings shall not, and shall not
permit any Restricted Subsidiary to, enter into or conduct any transaction
(including the purchase, sale, lease or exchange of any property, employee
compensation arrangements or the rendering of any service) with any Affiliate
of Holdings (an "Affiliate Transaction") unless (1) the terms of such
Affiliate Transaction are no less favorable to Holdings or such Restricted
Subsidiary than those that could be obtained at the time of such transaction
in arms-length dealings with a Person who is not such an Affiliate, (2) if
such Affiliate Transaction involves an amount in excess of $1 million, the
terms of such Affiliate Transaction (i) are set forth in writing, (ii) comply
with clause (1) and (iii) have been approved by a majority of the
disinterested members of the Board of Directors and (3) if such Affiliate
Transaction involves an amount in excess of $10 million, the terms of such
Affiliate Transaction (i) comply with clause (2) and (ii) have been determined
by a nationally recognized investment banking firm to be fair, from a
financial standpoint, to Holdings and its Restricted Subsidiaries.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any
Restricted Payment permitted to be made pursuant to the covenant described
under "--Limitation on Restricted Payments," (ii) any issuance of securities,
or other payments, awards or grants in cash, securities or otherwise pursuant
to, or the funding of, employment arrangements, stock options and stock
ownership plans in the ordinary course of business and approved by the Board
of Directors, (iii) the grant of stock options or similar rights to employees
and directors of Holdings in the ordinary course of business and pursuant to
plans approved by the Board of Directors,
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(iv) loans or advances to employees in the ordinary course of business of
Holdings or its Restricted Subsidiaries, but in any event not to exceed $2
million in the aggregate outstanding at any time, (v) fees, compensation or
employee benefit arrangements paid to and indemnity provided for the benefit
of directors, officers or employees of Holdings or any Subsidiary in the
ordinary course of business, (vi) any Affiliate Transaction between Holdings
and a Restricted Subsidiary or between Restricted Subsidiaries in the ordinary
course of business (so long as the other stockholders of any participating
Restricted Subsidiaries which are not Wholly Owned Subsidiaries are not
themselves Affiliates of Holdings), (vii) transactions with a Receivables
Subsidiary pursuant to any Permitted Receivables Financing, (viii) any payment
under Section 1.b or 1.d of the Management Agreement not to exceed $300,000 in
any fiscal year; provided, however, that (1) at the time of such payment no
Default or Event of Default shall have occurred and be continuing or would
result therefrom, and the Consolidated Coverage Ratio shall exceed 1.50 to
1.00 and (2) any such payment shall accrue if not paid pursuant to the
foregoing clause (1), or (ix) any payment under the Management Agreement other
than under Section 1.b or 1.d thereof.
LIMITATION ON THE ISSUANCE OR SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. Holdings (i) shall not, and shall not permit any Restricted
Subsidiary to, sell, pledge, hypothecate or otherwise dispose of any shares of
Capital Stock of a Restricted Subsidiary, other than pledges of Capital Stock
of a Restricted Subsidiary securing the Bank Indebtedness or other than to
Holdings or a Wholly Owned Subsidiary and (ii) shall not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of
any shares of its Capital Stock other than to Holdings or a Wholly Owned
Subsidiary; in each case unless (x) immediately after giving effect to such
sale, pledge, hypothecation or other disposition or issuance, such Restricted
Subsidiary continues to be a Restricted Subsidiary and (y) the proceeds of any
such sale of Capital Stock are treated as Net Available Cash from an Asset
Disposition and are applied in accordance with the terms of the covenant
described under "--Limitation on Sales of Assets and Subsidiary Stock";
provided, however, that this provision shall not prohibit (A) the sale of all
of the Capital Stock of any Restricted Subsidiary (other than Iron Age), (B)
the sale, pledge, hypothecation or other disposition of Preferred Stock of a
Subsidiary in compliance with the terms of the covenant described under "--
Limitation on Indebtedness" or (C) the issuance or sale of any Preferred Stock
of a Restricted Subsidiary if such issuance or sale would be in compliance
with the terms of the covenant described under "--Limitation on Indebtedness";
provided further, however, that Holdings shall not sell, pledge, hypothecate
or otherwise dispose of any shares of Capital Stock of Iron Age, other than
pledges of Capital Stock of Iron Age securing the Bank Indebtedness.
LIMITATION ON LIENS. Holdings shall not, directly or indirectly, Incur or
permit to exist any Lien of any nature whatsoever on any property of Holdings
(including Capital Stock of a Restricted Subsidiary), whether owned at the
Issue Date or thereafter acquired, other than Permitted Liens, unless the
Discount Notes are secured on an equal and ratable basis with the obligations
so secured until such time as such obligation is no longer secured by a Lien.
MERGER AND CONSOLIDATION. Holdings shall not consolidate with or merge with
or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor Company")
shall be a Person organized and existing under the laws of the United States
of America, any State thereof or the District of Columbia and the Successor
Company (if not Holdings) shall expressly assume, by a supplemental indenture,
executed and delivered to the Trustee, in form satisfactory to the Trustee,
all the obligations of Holdings under the Discount Notes and the Indenture,
(ii) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Subsidiary of the Successor Company as a result of such transaction as having
been Incurred by such Successor Company or such Subsidiary of the Successor
Company at the time of such transaction), no Default or Event of Default shall
have occurred and be continuing, (iii) except in the case of a merger the sole
purpose of which is to change Holdings' jurisdiction of incorporation,
immediately after giving effect to such transaction, the Successor Company
would be able to Incur an additional $1.00 of Indebtedness pursuant to
paragraph (a) of the covenant described under "--Limitation on Indebtedness",
(iv) immediately after giving effect to such transaction, the Successor
Company shall have Consolidated Net Worth in an amount that is not less than
the Consolidated Net Worth of Holdings immediately prior to such transaction
and (v) Holdings shall have delivered to the Trustee an Officers' Certificate
and an
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Opinion of Counsel, each stating that such consolidation, merger or transfer
and such supplemental indenture, if any, comply with the Indenture.
Notwithstanding the foregoing clauses (ii), (iii) and (iv), any Restricted
Subsidiary may consolidate with, merge into or transfer all or part of its
properties and assets to, Holdings.
The Successor Company shall succeed to, and be substituted for, and may
exercise every right and power of, Holdings under the Indenture, but in the
case of a conveyance, transfer or lease of all or substantially all of the
assets of Holdings, Holdings shall not be released from the obligation to pay
the Accreted Value of and interest and liquidated damages, if any, on the
Discount Notes.
SEC REPORTS. Until such time as Holdings shall become subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, (a)
Holdings shall provide the Trustee, the Initial Purchasers, the Noteholders
and prospective Noteholders (upon request) with such annual reports and such
information, documents and other reports as are specified in Sections 13 and
15(d) of the Exchange Act and applicable to a United States corporation
subject to such Sections, such information, documents and other reports to be
so provided at the times specified for the filing of such information,
documents and reports under such Sections and (b) not later than 45 days after
the end of each fiscal quarter of Holdings, Holdings shall issue a press
release setting forth a summary of the results of operations of Holdings for
such fiscal quarter and shall publish such press release on one of the
following national business and financial wire services: Dow Jones News
Service, Reuters Financial Service, Bloomberg News, PR Newswire or Business
Wire. Thereafter, notwithstanding that Holdings may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, to the
extent permitted by the Exchange Act, Holdings shall file with the SEC and
provide the Trustee and Noteholders and prospective Noteholders (upon request)
with such annual reports and such information, documents and other reports as
are specified in such Sections and applicable to a United States corporation
subject to such Sections, such information, documents and other reports to be
so filed and provided at the times specified for the filing of such
information, documents and reports under such Sections; provided, however,
that Holdings shall not be required to file any report, document or other
information with the SEC if the SEC does not permit such filing.
EVENTS OF DEFAULT
An Event of Default is defined in the Indenture as: (i) a default in the
payment of interest on any Discount Note when due, continued for 30 days, (ii)
a default in the payment of Accreted Value of any Discount Note when due at
its Stated Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise, (iii) the failure by Holdings to comply with its
obligations under "--Certain Covenants--Merger and Consolidation," "--Change
of Control" or "--Limitation on Restricted Payments" above, (iv) the failure
by Holdings to comply for 30 days after notice with any of its obligations
under the covenants (other than the covenants described in clause (iii))
described above under "--Certain Covenants" (in each case other than a failure
to purchase Discount Notes), (v) the failure by Holdings to comply for 60 days
after notice with its other agreements contained in the Indenture, (vi) the
failure by Holdings or any Material Subsidiary to pay any Indebtedness within
any applicable grace period after final maturity or the acceleration of any
such Indebtedness by the holders thereof because of a default, if the total
amount of such Indebtedness unpaid or accelerated exceeds $10 million and such
failure continues for 10 Business Days after notice (the "cross acceleration
provision"), (vii) certain events of bankruptcy, insolvency or reorganization
of Holdings or a Material Subsidiary (the "bankruptcy provisions"), (viii) the
rendering of any judgment or decree for the payment of money in excess of $10
million against Holdings or a Material Subsidiary, if such judgment or decree
remains outstanding for a period of 60 days and is not discharged, waived or
stayed within 10 Business Days after notice (the "judgment default
provision"), (ix) a Subsidiary Guaranty ceases to be in full force and effect
(other than in accordance with the terms of such Subsidiary Guaranty) or a
Subsidiary Guarantor denies or disaffirms its obligations under its Subsidiary
Guaranty and such Default continues for 30 days or (x) the failure by any
Subsidiary Guarantor to comply with its obligations under any Subsidiary
Guaranty to which such Subsidiary Guarantor is a party, after any applicable
grace period. However, a default under clause (iv) or (v) will not constitute
an Event of Default until the Trustee or the Holders of 25% in aggregate
principal amount of the outstanding Discount Notes notify Holdings of the
default and Holdings does not cure such default within the time specified in
clauses (iv) and (v) hereof after receipt of such notice.
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If an Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in aggregate principal amount of the outstanding Discount
Notes may, after giving 10 Business Days' notice to the Representative
(provided, however, that no such notice need be given if, at such time (i)
prior to the date on which the Bank Indebtedness has been repaid in full in
cash, payment of any Bank Indebtedness shall have been accelerated or (ii) on
or after the date on which the Bank Indebtedness has been repaid in full in
cash, payment of any Senior Indebtedness shall have been accelerated), declare
the Accreted Value of and accrued but unpaid interest and liquidated damages,
if any, on all the Discount Notes to be due and payable. Upon such a
declaration, such Accreted Value, interest and liquidated damages, if any,
shall be due and payable immediately. If an Event of Default relating to
certain events of bankruptcy, insolvency or reorganization of Holdings occurs
and is continuing, the Accreted Value of and interest and liquidated damages,
if any, on all the Discount Notes will ipso facto become and be immediately
due and payable without any declaration or other act on the part of the
Trustee or any Holders of the Discount Notes. Under certain circumstances, the
Holders of a majority in aggregate principal amount of the outstanding
Discount Notes may on behalf of all Holders rescind any such acceleration with
respect to the Discount Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee
will be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders of the Discount
Notes unless such Holders have offered to the Trustee reasonable indemnity or
security against any loss, liability or expense. Except to enforce the right
to receive payment of Accreted Value, premium or liquidated damages, if any,
or interest when due, no Holder of a Discount Note may pursue any remedy with
respect to the Indenture or the Discount Notes unless (i) such Holder has
previously given the Trustee notice that an Event of Default is continuing,
(ii) Holders of at least 25% in aggregate principal amount of the outstanding
Discount Notes have requested the Trustee to pursue the remedy, (iii) such
Holders have offered the Trustee reasonable security or indemnity against any
loss, liability or expense, (iv) the Trustee has not complied with such
request within 60 days after the receipt thereof and the offer of security or
indemnity and (v) the Holders of a majority in aggregate principal amount of
the outstanding Discount Notes have not given the Trustee a direction that, in
the opinion of the Trustee, is inconsistent with such request within such 60-
day period. Subject to certain restrictions, the Holders of a majority in
aggregate principal amount of the outstanding Discount Notes are given the
right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or of exercising any trust or power
conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the Indenture or that the Trustee
determines is unduly prejudicial to the rights of any other Holder of a
Discount Note or that would involve the Trustee in personal liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder of the Discount
Notes and the Representative notice of the Default within 90 days after it
occurs. Except in the case of a Default in the payment of Accreted Value of or
interest or liquidated damages, if any, on any Discount Note, the Trustee may
withhold notice if and so long as a committee of its trust officers determines
that withholding notice is not opposed to the interest of the Holders of the
Discount Notes. In addition, Holdings is required to deliver to the Trustee,
within 120 days after the end of each fiscal year, a certificate indicating
whether the signers thereof know of any Default that occurred during the
previous year. Holdings also is required to deliver to the Trustee and the
Representative, within 30 days after the occurrence thereof, written notice of
any event which would constitute any of certain Defaults, their status and
what action Holdings is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the Holders of a majority in aggregate principal amount of the Discount
Notes then outstanding (including consents obtained in connection with a
tender offer or exchange for the Discount Notes) and any past default or
compliance with any provisions may also be waived with the consent of the
Holders of a majority in aggregate principal amount at maturity of the
Discount Notes then outstanding. However, without the consent of each Holder
of an outstanding Discount
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Note affected thereby, no amendment may, among other things, (i) reduce the
amount of Discount Notes whose Holders must consent to an amendment, (ii)
reduce the rate of or extend the time for payment of interest on, or
calculation of Accreted Value for, any Discount Note, (iii) reduce the
principal at maturity or Accreted Value of, or extend the Stated Maturity of,
any Discount Note, (iv) reduce the premium payable upon the redemption or
repurchase of any Note or change the time at which any Note may be redeemed as
described under "--Optional Redemption," (v) reduce the liquidated damages, or
change the time for the payment thereof, as described under "Exchange Offer;
Registration Rights," (vi) make any Discount Note payable in money other than
that stated in the Discount Note, (vii) impair the right of any Holder of the
Discount Notes to receive payment of Accreted Value of and interest and
liquidated damages, if any, on such Holder's Discount Notes on or after the
due date therefor or to institute suit for the enforcement of any payment on
or with respect to such Holder's Discount Notes or (viii) make any change in
the amendment provisions which require each Holder's consent or in the waiver
provisions.
Without the consent of any Holder of the Discount Notes, Holdings and
Trustee may amend the Indenture to cure any ambiguity, omission, defect or
inconsistency, to provide for the assumption by a successor corporation or
limited liability company of the obligations of Holdings under the Indenture,
to provide for uncertificated Discount Notes in addition to or in place of
certificated Discount Notes (provided, however, that the uncertificated
Discount Notes are issued in registered form for purposes of Section 163(f) of
the Code, or in a manner such that the uncertificated Discount Notes are
described in Section 163(f)(2)(B) of the Code), to add guarantees with respect
to the Discount Notes, to secure the Discount Notes, to add to the covenants
of Holdings for the benefit of the Holders of the Discount Notes or to
surrender any right or power conferred upon Holdings, to make any change that
does not adversely affect the rights of any Holder of the Discount Notes or to
comply with any requirement of the SEC in connection with the qualification of
the Indenture under the Trust Indenture Act.
The consent of the Holders of the Discount Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, Holdings is
required to mail to Holders of the Discount Notes a notice briefly describing
such amendment. However, the failure to give such notice to all Holders of the
Discount Notes, or any defect therein, will not impair or affect the validity
of the amendment.
TRANSFER
The Exchange Discount Notes will be issued in registered form and will be
transferable only upon the surrender of the Exchange Discount Notes being
transferred for registration of transfer. Holdings may require payment of a
sum sufficient to cover any tax, assessment or other governmental charge
payable in connection with certain transfers and exchanges.
DEFEASANCE
Holdings at any time may terminate all its obligations under the Discount
Notes and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register
the transfer or exchange of the Discount Notes, to replace mutilated,
destroyed, lost or stolen Discount Notes and to maintain a registrar and
paying agent in respect of the Discount Notes. Holdings at any time may
terminate its obligations under the covenants described under "--Certain
Covenants" (other than the covenant described under "--Merger and
Consolidation"), the operation of the cross acceleration provision, the
bankruptcy provisions with respect to Material Subsidiaries and the judgment
default provision described under "--Events of Default" above and the
limitations contained in clauses (iii) and (iv) under "--Merger and
Consolidation" above ("covenant defeasance").
Holdings may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option. If Holdings exercises its legal
defeasance option, payment of the Discount Notes may not be
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accelerated because of an Event of Default with respect thereto. If Holdings
exercises its covenant defeasance option, payment of the Discount Notes may
not be accelerated because of an Event of Default specified in clause (iv),
(vi), (vii) (with respect only to Material Subsidiaries) or (viii) under "--
Events of Default" above or because of the failure of Holdings to comply with
clause (iii) or (iv) under "--Merger and Consolidation" above.
In order to exercise either defeasance option, Holdings must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of Accreted Value and interest on the
Discount Notes to redemption or maturity, as the case may be, and must comply
with certain other conditions, including delivery to the Trustee of an Opinion
of Counsel to the effect that Holders of the Discount Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
deposit and defeasance and will be subject to federal income tax on the same
amount and in the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred (and, in the case of
legal defeasance only, such Opinion of Counsel must be based on a ruling of
the Internal Revenue Service or other change in applicable federal income tax
law).
CONCERNING THE TRUSTEE
The Chase Manhattan Bank is the Trustee under the Indenture and has been
appointed by Holdings as Registrar and Paying Agent with regard to the
Exchange Discount Notes.
The Holders of a majority in aggregate principal amount of the outstanding
Discount Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that if an Event of
Default occurs (and is not cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of Discount Notes, unless such Holder
shall have offered to the Trustee security and indemnity satisfactory to it
against any loss, liability or expense and then only to the extent required by
the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it and the Exchange Discount Notes will be
governed by, and construed in accordance with, the laws of the State of New
York without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be
required thereby.
CERTAIN DEFINITIONS
"Accreted Value" means, with respect to any Discount Note, as of a date of
determination: (i) prior to May 1, 2003, the sum of (a) the initial offering
price of such Discount Note and (b) the portion of the excess of the principal
amount of such Discount Note over such initial offering price which shall have
been accreted thereon through such date, such amount to be so accreted on a
daily basis at the rate per annum shown on the cover of this Offering
Memorandum of the initial offering price of such Discount Note, computed on
the basis of a 360-day year of twelve 30-day months from the Issue Date
through the date of determination, compounded semi-annually on each May 1 and
November 1 commencing November 1, 1998; (ii) on or after May 1, 2003, 100% of
the principal amount thereof.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business, (ii) the Capital Stock
of a Person that becomes a Restricted Subsidiary as a result of the
acquisition of such Capital Stock by Holdings or another Restricted Subsidiary
or (iii) Capital Stock constituting a minority interest in any Person that at
such time is a Restricted Subsidiary; provided, however, that any such
Restricted Subsidiary described in clauses (ii) or (iii) above is primarily
engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such
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Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing. For purposes of the
provisions described under "--Certain Covenants--Limitation on Affiliate
Transactions" and "--Certain Covenants--Limitations on Sales of Assets and
Subsidiary Stock" and the definition of the term "Restricted Payment" only,
"Affiliate" shall also mean any beneficial owner of Capital Stock representing
10% or more of the total voting power of the Voting Stock (on a fully diluted
basis) of Holdings or of rights or warrants to purchase such Capital Stock
(whether or not currently exercisable) and any Person who would be an
Affiliate of any such beneficial owner pursuant to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) by Holdings or any
Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of
this definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares and, to the
extent required by local ownership laws in foreign countries, shares owned by
foreign shareholders), (ii) all or substantially all the assets of any
division, business segment or comparable line of business of Holdings or any
Restricted Subsidiary or (iii) any other assets of Holdings or any Restricted
Subsidiary outside of the ordinary course of business of Holdings or such
Restricted Subsidiary (other than, in the case of (i), (ii) and (iii) above,
(A) transactions permitted under "--Certain Covenants--Merger and
Consolidation," (B) a disposition by a Restricted Subsidiary to Holdings or by
Holdings or a Restricted Subsidiary to a Wholly Owned Subsidiary and (C) for
purposes of the covenant described under "--Certain Covenants--Limitation on
Sales of Assets and Subsidiary Stock" only, a disposition that constitutes a
Permitted Investment or a Restricted Payment permitted by the covenant
described under "--Certain Covenants-- Limitation on Restricted Payments").
"Attributable Debt" with respect to a Sale/Leaseback Transaction means, as
at the time of determination, the present value (discounted at the interest
rate borne by the Discount Notes, compounded annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied
by the amount of such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means any and all amounts (whether outstanding on the
Issue Date or thereafter incurred) payable under or in respect of the New
Credit Facility and the other Loan Documents, including Bank Hedge Agreements
(as such terms are defined in the New Credit Facility), including, without
limitation, principal, premium, if any, interest (including interest accruing
on or after the filing of any petition in bankruptcy or for reorganization
relating to Iron Age whether or not a claim for post-filing interest is
allowed in such proceedings), fees, charges, expenses, reimbursement
obligations, Guarantees and all other amounts payable thereunder or in respect
thereof.
"Board of Directors" means the Board of Directors of Holdings or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is required to be
classified, and accounted for as a capital lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented
by such obligation shall be the capitalized amount of such obligation
determined in accordance with GAAP, and the Stated Maturity thereof shall be
the date of the last payment of rent or any other amount due under such lease
prior to the first date upon which such lease may be terminated by the lessee
without payment of a penalty.
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"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any
Preferred Stock, but excluding any debt securities convertible into such
equity.
"Change of Control" means the occurrence of any of the following events:
(i)(a) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders, is or becomes
the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that for purposes of this clause (i) such person shall
be deemed to have "beneficial ownership" of all shares that any such person
has the right to acquire, whether such right is exercisable immediately or
only after the passage of time), directly or indirectly, of more than 35%
of the total voting power of the Voting Stock of Holdings (or its successor
by merger, consolidation or purchase of all or substantially all of its
assets) and (b) the Permitted Holders beneficially own (as defined in this
clause (i)), directly or indirectly, in the aggregate a lesser percentage
of the total voting power of the Voting Stock of Holdings than such other
person and do not have the right or ability by voting power, contract or
otherwise to elect or designate for election a majority of the Board of
Directors (for the purposes of this clause (i), such other person shall be
deemed to beneficially own any Voting Stock of Holdings held by any other
entity, if such other person is the beneficial owner (as defined in this
clause (i)), directly or indirectly, of more than 35% of the voting power
of the Voting Stock of Holdings and the Permitted Holders beneficially own
(as defined in this clause (i)), directly or indirectly, in the aggregate a
lesser percentage of the voting power of the Voting Stock of Holdings and
do not have the right or ability by voting power, contract or otherwise to
elect or designate for election a majority of the board of directors of
Holdings);
(ii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (together with
any new directors whose election by the Board of Directors or whose
nomination for election by the shareholders of Holdings was approved by a
vote of a majority of the directors of Holdings then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors then in office; or
(iii) the sale, lease, transfer, conveyance or other disposition (other
than by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of Holdings and its
Restricted Subsidiaries taken as a whole to any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act) other than a
Permitted Holder.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days (or, if less, the
number of days after the end of such fiscal quarter as the consolidated
financial statements of Holdings shall be provided to the Noteholders pursuant
to the Indenture) prior to the date of such determination to (ii) Consolidated
Interest Expense for such four fiscal quarters (in each case determined, for
any fiscal quarter preceding the Issue Date, adjusted on a pro forma basis to
give effect to the Transactions, the Iron Age Transactions and the Application
of Proceeds as if they had occurred at the beginning of such period and
adjusted for any pro forma expense and cost reductions and related adjustments
that are directly attributable to the Transactions, the Iron Age Transactions
and the Application of Proceeds, as estimated in good faith by the Board of
Directors); provided, however, that:
(1) if Holdings or any Restricted Subsidiary (x) has Incurred any
Indebtedness since the beginning of such period that remains outstanding on
such date of determination or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness,
or both, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving effect on a pro forma basis to such Indebtedness as
if such Indebtedness had been Incurred on the first day of such period
(except that in making such computation, the amount of Indebtedness under
any revolving credit facility outstanding on the date of such calculation
shall be computed based on (A) the average daily balance of such
Indebtedness
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during such four fiscal quarters or such shorter period for which such
facility was outstanding or (B) if such facility was created after the end
of such four fiscal quarters, the average daily balance of such
Indebtedness during the period from the date of creation of such facility
to the date of such calculation) and the discharge of any other
Indebtedness repaid, repurchased, defeased or otherwise discharged with the
proceeds of such new Indebtedness as if such discharge had occurred on the
first day of such period or (y) has repaid, repurchased, defeased or
otherwise discharged any Indebtedness since the beginning of the period
that is no longer outstanding on such date of determination, or if the
transaction giving rise to the need to calculate the Consolidated Coverage
Ratio involves a discharge of Indebtedness (in each case other than
Indebtedness incurred under any revolving credit facility unless such
Indebtedness has been permanently repaid and corresponding commitments have
been permanently reduced), EBITDA and Consolidated Interest Expense for
such period shall be calculated after giving effect on a pro forma basis to
the discharge of such Indebtedness as if such discharge had occurred on the
first day of such period,
(2) if since the beginning of such period Holdings or any Restricted
Subsidiary shall have made any Asset Disposition, the EBITDA for such
period shall be reduced by an amount equal to the EBITDA (if positive)
directly attributable to the assets which are the subject of such Asset
Disposition for such period, or increased by an amount equal to the EBITDA
(if negative) directly attributable thereto for such period and
Consolidated Interest Expense for such period shall be reduced by an amount
equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of Holdings or any Restricted Subsidiary repaid, repurchased,
defeased, assumed by a third person (to the extent Holdings and its
Restricted Subsidiaries are no longer liable for such Indebtedness) or
otherwise discharged with respect to Holdings and its continuing Restricted
Subsidiaries in connection with such Asset Disposition for such period (or,
if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated
Interest Expense for such period directly attributable to the Indebtedness
of such Restricted Subsidiary to the extent Holdings and its continuing
Restricted Subsidiaries are no longer liable for such Indebtedness after
such sale),
(3) if since the beginning of such period Holdings or any Restricted
Subsidiary (by merger or otherwise) shall have made an Investment in any
Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary)
or an acquisition of assets, which acquisition constitutes all or
substantially all of an operating unit of a business, including any such
Investment or acquisition occurring in connection with a transaction
requiring a calculation to be made hereunder, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto (including the Incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of such period,
(4) if since the beginning of such period any Person that subsequently
became a Restricted Subsidiary or was merged with or into Holdings or any
Restricted Subsidiary since the beginning of such period shall have made
any Asset Disposition, any Investment or acquisition of assets that would
have required an adjustment pursuant to clause (2) or (3) above if made by
Holdings or a Restricted Subsidiary during such period, EBITDA and
Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto as if such Asset Disposition, Investment or
acquisition occurred on the first day of such period,
(5) if since the beginning of such period any Unrestricted Subsidiary
shall have been designated a Restricted Subsidiary, EBITDA and Consolidated
Interest Expense for such period shall be calculated to include all net
income (or loss) and all interest expense of such Subsidiary during the
portion of such period that such Subsidiary was an Unrestricted Subsidiary,
but only to the extent that such net income (or loss) or interest expense
has not been included in EBITDA or Consolidated Interest Expense pursuant
to clauses (1) through (4) above, and
(6) if since the beginning of such period any Restricted Subsidiary shall
have been designated an Unrestricted Subsidiary, EBITDA and Consolidated
Interest Expense for such period shall be calculated to exclude all net
income (or loss) and all interest expense of such Subsidiary during the
portion of such period that such Subsidiary was a Restricted Subsidiary.
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For purposes of this definition, whenever pro forma effect is to be given to
an acquisition of assets, the amount of income or earnings relating thereto
and the amount of Consolidated Interest Expense associated with any
Indebtedness Incurred in connection therewith, the pro forma calculations
shall be determined in good faith by a responsible financial or accounting
officer of Holdings in accordance with Article 11 of Regulation S-X
promulgated by the SEC. If any Indebtedness bears a floating rate of interest
and is being given pro forma effect, the interest expense of such Indebtedness
shall be calculated as if the rate in effect on the date of determination had
been the applicable rate for the entire period (taking into account any
Interest Rate Agreement applicable to such Indebtedness if such Interest Rate
Agreement has a remaining term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of Holdings and its Restricted Subsidiaries on a consolidated basis
determined in accordance with GAAP, plus (a) to the extent not included in
such total interest expense, and to the extent incurred by Holdings or its
Restricted Subsidiaries, (i) interest expense attributable to Capital Lease
Obligations, (ii) amortization of debt discount, (iii) capitalized interest,
(iv) non-cash interest expenses, (v) commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing, (vi) net costs associated with Hedging Obligations (including
amortization of fees), (vii) dividends in respect of all Preferred Stock of
Holdings and its Restricted Subsidiaries and in respect of all Disqualified
Stock of Holdings in each case held by Persons other than Holdings or a Wholly
Owned Subsidiary, (viii) interest actually paid on any Indebtedness of any
other Person that is Guaranteed by Holdings or any Restricted Subsidiary and
(ix) the cash contributions to any employee stock ownership plan or similar
trust to the extent such contributions are used by such plan or trust to pay
interest or fees to any Person (other than Holdings or any Wholly Owned
Subsidiary) in connection with Indebtedness Incurred by such plan or trust,
minus (b) to the extent included in such total interest expense, amortization
of deferred financing costs, fees and expenses. For purposes of the foregoing,
total interest expense shall be determined after giving effect to any net
payments made or received by Holdings and its Subsidiaries with respect to
Interest Rate Agreements and Currency Agreements. Notwithstanding the
foregoing, the Consolidated Interest Expense with respect to any Restricted
Subsidiary of Holdings that was not a Wholly Owned Subsidiary shall be
included only to the extent (and in the same proportion) that the net income
of such Restricted Subsidiary was included in calculating Consolidated Net
Income.
"Consolidated Net Income" means, for any period, the net income of Holdings
and its Restricted Subsidiaries on a consolidated basis determined in
accordance with GAAP; provided, however, that there shall not be included in
such Consolidated Net Income: (i) any net income (or loss) of any Person if
such Person is not a Restricted Subsidiary, except that (A) subject to the
exclusion contained in clause (iv) below, Holdings' equity in the net income
of any such Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such Person
during such period to Holdings or a Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other distribution
paid to a Restricted Subsidiary, to the limitations contained in clause (iii)
below) and (B) Holdings' equity in a net loss of any such Person (other than
an Unrestricted Subsidiary) for such period shall be included in determining
such Consolidated Net Income to the extent of the aggregate investment of
Holdings or any of its Restricted Subsidiaries in such Person, (ii) any net
income (or loss) of any Person acquired by Holdings or a Subsidiary in a
pooling of interests transaction accrued for any period prior to the date of
such acquisition, (iii) any net income of any Restricted Subsidiary if such
Restricted Subsidiary is subject to restrictions, directly or indirectly, on
the payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to Holdings, except that (A) subject to
the exclusion contained in clause (iv) below, Holdings' equity in the net
income of any such Restricted Subsidiary for such period shall be included in
such Consolidated Net Income up to the aggregate amount of cash that would
have been permitted to be distributed by such Restricted Subsidiary consistent
with such restriction during such period to Holdings or another Restricted
Subsidiary as a dividend or other distribution (subject, in the case of a
dividend or other distribution paid to another Restricted Subsidiary, to the
limitation contained in this clause) and (B) Holdings' equity in a net loss of
any such Restricted Subsidiary for such period shall be included in
determining such Consolidated Net Income, (iv) any gain (or loss) realized
upon the sale or other disposition of any assets of Holdings or its
consolidated Subsidiaries (including pursuant to any sale-and-leaseback
arrangement) which is not sold or otherwise disposed of in the ordinary course
of business and any gain (or loss) realized upon the sale or other disposition
of any Capital Stock
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of any Person, (v) extraordinary gains or losses, (vi) any non-cash
compensation charge for employee stock options or other stock awards, (vii)
payments on the Issue Date of up to $2.3 million to certain management
stockholders of Holdings in connection with the Transactions and the Iron Age
Transactions and (viii) the cumulative effect of a change in accounting
principles. Notwithstanding the foregoing, for the purposes of the covenant
described under "Certain Covenants--Limitation on Restricted Payments" only,
there shall be excluded from Consolidated Net Income any dividends, repayments
of loans or advances or other transfers of assets from Unrestricted
Subsidiaries to Holdings or a Restricted Subsidiary to the extent such
dividends, repayments or transfers increase the amount of Restricted Payments
permitted under such covenant pursuant to clause (a)(3)(D) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of Holdings and its Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of Holdings ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as (i) the
par or stated value of all outstanding Capital Stock of Holdings plus (ii)
paid-in capital or capital surplus relating to such Capital Stock plus (iii)
any retained earnings or earned surplus less (A) any accumulated deficit and
(B) any amounts attributable to Disqualified Stock.
"Currency Agreement" means, with respect to any Person, any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Noncash Consideration" means the fair market value of noncash
consideration received by Holdings or any Restricted Subsidiary in connection
with an Asset Sale that is so designated as Designated Noncash Consideration
pursuant to an Officers' Certificate executed by the principal executive
officer and the principal financial officer of Holdings or such Restricted
Subsidiary, less the amount of cash or cash equivalents received in connection
with a sale of such Designated Noncash Consideration. Such Officers'
Certificate shall state the basis of such valuation, which shall be a report
of a nationally recognized investment banking firm with respect to the receipt
in one or a series of related transactions of Designated Noncash Consideration
with a fair market value in excess of $5 million.
"Disqualified Stock" means, with respect to any Person, any Capital Stock of
such Person which by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable, at the option of
the holder thereof, for Indebtedness or Disqualified Stock or (iii) is
redeemable at the option of the holder thereof, in whole or in part, in each
case on or prior to the first anniversary of the Stated Maturity of the
Discount Notes; provided, however, that only the portion of Capital Stock
which so matures or is so mandatorily redeemable, is so convertible or
exchangeable or is so redeemable at the option of the holder thereof prior to
the first anniversary of the Stated Maturity of the Discount Notes shall be
deemed to be Disqualified Stock.
"EBITDA" for any period means the sum of Consolidated Net Income plus,
without duplication, the following to the extent deducted in calculating such
Consolidated Net Income: (a) Consolidated Interest Expense, (b) income tax
expense, (c) depreciation expense, (d) amortization expense, (e) payments made
pursuant to clause (viii) of paragraph (b) of "--Certain Covenants--Limitation
on Affiliate Transactions" and (f) all other non-cash items reducing
Consolidated Net Income (other than non-cash items that will require cash
payments and for which an accrual or reserve is, or is required by GAAP to be,
made), less, to the extent added in calculating such Consolidated Net Income,
all non-cash items increasing Consolidated Net Income (excluding such non-cash
items to the extent they represent an accrual for cash receipts to be received
prior to the Stated Maturity of the Discount Notes), in each case for such
period. Notwithstanding the foregoing, the provision for taxes based on the
income or profits of, and the depreciation and amortization of, a Subsidiary
of any Person shall be added to Consolidated Net Income to compute EBITDA of
such Person only to the extent (and in the same proportion) that the net
income of such Subsidiary was included in calculating Consolidated Net Income
of such Person.
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"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Financing Disposition" means any sale of any accounts receivable, or
interest therein, by Holdings or any Subsidiary to any Receivables Subsidiary,
or by the Receivables Subsidiary, pursuant to a Permitted Receivables
Financing.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in (i)
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board and (iii) such
other statements by such other entity as approved by a significant segment of
the accounting profession. All ratios and computations based on GAAP contained
in the Indenture shall be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and
any obligation, direct or indirect, contingent or otherwise, of such Person
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness of such other Person (whether arising by virtue of
partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay or to maintain financial
statement conditions or otherwise) or (ii) entered into for the purpose of
assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole
or in part); provided, however, that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning. The term
"Guarantor" shall mean any Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Discount Note is
registered on the registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by
such Subsidiary at the time it becomes a Subsidiary; provided further,
however, that in the case of a discount security, neither the accrual of
interest nor the accretion of original issue discount shall be considered an
Incurrence of Indebtedness, but the entire face amount of such security shall
be deemed Incurred upon the issuance of such security. The term "Incurrence"
when used as a noun shall have a correlative meaning.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium, if any,
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which such Person is responsible or liable,
(ii) all Capital Lease Obligations of such Person and all Attributable Debt in
respect of Sale/Leaseback Transactions entered into by such Person, (iii) all
obligations of such Person issued or assumed as the deferred purchase price of
property or services, all conditional sale obligations of such Person and all
obligations of such Person under any title retention agreement (but excluding
trade accounts payables and warranty and service obligations arising in the
ordinary course of business), which purchase price or obligation is due more
than six months after the date of placing such property in service or taking
delivery and title thereto or the completion of such services (provided,
however, that, in the case of obligations of an acquired Person assumed in
connection with an acquisition of such Person, such obligations would
constitute Indebtedness of such Person), (iv) all obligations of such Person
for the reimbursement of any obligor on any letter of credit, banker's
acceptance or similar credit transaction (other than obligations with respect
to letters of credit securing obligations (other than obligations described in
(i) through (iii) above) entered into in the ordinary course of business of
such Person to the extent such letters of credit are not drawn upon or, if and
to the extent drawn
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upon, such drawing is reimbursed no later than the tenth Business Day
following receipt by such Person of a demand for reimbursement following
payment on the letter of credit), (v) the amount of all obligations of such
Person with respect to the redemption, repayment or other repurchase of any
Disqualified Stock or, with respect to any Subsidiary of such Person, any
Preferred Stock (but excluding, in each case, any accrued dividends), (vi) all
obligations of the type referred to in clauses (i) through (v) of other
Persons and all dividends of other Persons for the payment of which, in either
case, such Person is responsible or liable, directly or indirectly, as
obligor, guarantor or otherwise, including by means of any Guarantee, (vii)
all obligations of the type referred to in clauses (i) through (vi) of other
Persons secured by any Lien on any property or asset of such Person (whether
or not such obligation is assumed by such Person), the amount of such
obligation being deemed to be the lesser of the fair market value of such
property or assets at the date of determination or the amount of the
obligation so secured and (viii) to the extent not otherwise included in this
definition, net Hedging Obligations of such Person (the amount of any such
obligations to be equal at any time to the termination value of such agreement
or arrangement giving rise to such obligation that would be payable by such
Person at such time). The amount of Indebtedness of any Person at any date
shall be the outstanding balance at such date of all unconditional obligations
as described above and the maximum liability, upon the occurrence of the
contingency giving rise to the obligation, of any contingent obligations as
described above at such date.
"Interest Rate Agreement" means with respect to any Person any interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement or
other financial agreement or arrangement designed to protect such Person
against fluctuations in interest rates.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business) or other
extensions of credit (including by way of Guarantee or similar arrangement,
but excluding any debt or extensions of credit represented by a bank deposit
other than a time deposit) or capital contribution to (by means of any
transfer of cash or other property to others or any payment for property or
services for the account or use of others), or any purchase or acquisition of
Capital Stock, Indebtedness or other similar instruments issued by, such
Person. For purposes of the definition of "Unrestricted Subsidiary" and the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments", (i) "Investment" shall include the portion (proportionate to
Holdings' equity interest in a Restricted Subsidiary to be designated as an
Unrestricted Subsidiary) of the fair market value of the net assets of any
Restricted Subsidiary at the time that such Restricted Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, Holdings shall be
deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary in an amount equal to (x) Holdings' "Investment" in such Subsidiary
at the time of such redesignation less (y) the portion (proportionate to
Holdings' equity interest in such Subsidiary) of the fair market value of the
net assets of such Subsidiary at the time of such redesignation, but in no
event shall such Investment be reduced below zero; and (ii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer, in each case as determined in good
faith by the Board of Directors. If Holdings or any Restricted Subsidiary
sells or otherwise disposes of any common stock of any direct or indirect
Restricted Subsidiary (other than to Holdings or a Restricted Subsidiary),
Holdings shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the common stock of such
Restricted Subsidiary not sold or disposed of.
"Issue Date" means the date on which the Original Discount Notes were
originally issued.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions are not required to be open in the State of New York.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Management Agreement" means the Management Agreement originally dated as of
February 26, 1997, as amended and in effect on the Issue Date, among Holdings,
Iron Age and Fenway.
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"Management Investors" means each of the officers, employees and directors
of Iron Age or Holdings who own Voting Stock (or options to acquire Voting
Stock) of Holdings on the Issue Date, in each case so long as such person
shall remain an officer, employee or director of Holdings or Iron Age.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only
as and when received, but excluding any other consideration received in the
form of assumption by the acquiring Person of Indebtedness or other
obligations relating to the properties or assets that are the subject of such
Asset Disposition or received in any other noncash form), in each case net of
(i) all legal, accounting, investment banking, title and recording tax
expenses, commissions and other fees and expenses incurred, and all federal,
state, provincial, foreign and local taxes required to be paid or accrued as a
liability under GAAP, as a consequence of such Asset Disposition, (ii) all
payments made on any Indebtedness which is secured by any assets subject to
such Asset Disposition, in accordance with the terms of any Lien upon such
assets, or which must by its terms, or in order to obtain a necessary consent
to such Asset Disposition, or by applicable law, be repaid out of the proceeds
from such Asset Disposition, (iii) all distributions and other payments
required to be made to minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition and (iv) the deduction of
appropriate amounts provided by the seller as a reserve, in accordance with
GAAP, against any liabilities associated with the property or other assets
disposed in such Asset Disposition and retained by Holdings or any Restricted
Subsidiary after such Asset Disposition.
"Net Cash Proceeds" means, with respect to any issuance or sale of Capital
Stock, the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"New Acquisition Credit Facility" means the term credit facility made
available pursuant to the Credit Agreement, dated as of the Issue Date, among
Iron Age, as borrower, Holdings and certain Subsidiaries, as guarantors, and
Banque Nationale de Paris, as agent for the lenders from time to time,
together with all Loan Documents (as defined therein) and all other documents,
instruments and agreements executed in connection therewith, including,
without limitation, any guarantees, security documents and hedge agreements,
in each case, as the same may be amended, supplemented, restated, waived,
modified, Refinanced or replaced from time to time (including any successive
amendments, supplements, restatements, waivers, modifications, Refinancings or
replacements that increase the aggregate amount of borrowings outstanding or
the aggregate commitments of the lenders thereunder, and whether with the
original agent and lenders or another agent or agents or other lenders),
except to the extent that any such amendment, supplement, restatement, waiver,
modification, Refinancing or replacement by Holdings or any Subsidiaries would
violate the covenants described in "--Certain Covenants--Limitation on
Indebtedness."
"New Credit Facility" means the New Acquisition Credit Facility and the New
Revolving Credit Facility.
"New Revolving Credit Facility" means the revolving credit facility made
available pursuant to the Credit Agreement, dated as of the Issue Date, among
Iron Age, as borrower, Holdings and certain Subsidiaries, as guarantors, and
Banque Nationale de Paris, as agent for the lenders from time to time,
together with all Loan Documents (as defined therein) and all other documents,
instruments and agreements executed in connection therewith, including,
without limitation, any guarantees, security documents and hedge agreements,
in each case, as the same may be amended, supplemented, restated, waived,
modified, Refinanced or replaced from time to time (including any successive
amendments, supplements, restatements, waivers, modifications, Refinancings or
replacements that increase the aggregate amount of borrowings outstanding or
the aggregate commitments of the lenders thereunder, and whether with the
original agent and lenders or another agent or agents or other lenders),
except to the extent that any such amendment, supplement, restatement, waiver,
modification, Refinancing or replacement by Holdings or any Subsidiaries would
violate the covenants described in "--Certain Covenants--Limitation on
Indebtedness."
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"Note Obligations" means any principal of, premium and liquidated damages,
if any, and interest on, and any other amounts owing under or with respect to
the Discount Notes payable pursuant to the terms of the Discount Notes or the
Indenture or upon acceleration of the Discount Notes, including, without
limitation, amounts received upon the exercise of rights of rescission or
other rights of action (including claims for damages) or otherwise, to the
extent relating to the purchase price of the Discount Notes or amounts
corresponding to such principal of, premium and liquidated damages, if any,
interest on, or other amounts owing with respect to, the Discount Notes.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to
Holdings or the Trustee.
"Permitted Holders" means Fenway Partners Capital Fund, L.P., New York Life
Insurance Company, American Home Assurance Company, the Management Investors
and their respective Affiliates.
"Permitted Investment" means an Investment by Holdings or any Restricted
Subsidiary in (i) Holdings, (ii) a Restricted Subsidiary or a Person that
will, upon the making of such Investment, become a Restricted Subsidiary;
provided, however, that the primary business of such Restricted Subsidiary is
a Related Business, (iii) another Person if as a result of such Investment
such other Person is merged or consolidated with or into, or transfers or
conveys all or substantially all its assets to, Holdings or a Restricted
Subsidiary; provided, however, that such Person's primary business is a
Related Business, (iv) Temporary Cash Investments, (v) receivables owing to
Holdings or any Restricted Subsidiary if created or acquired in the ordinary
course of business, (vi) payroll, travel and similar advances to cover matters
that are expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary course of
business, (vii) loans or advances to officers and employees made in the
ordinary course of business of Holdings or such Restricted Subsidiary and not
exceeding $2 million in the aggregate outstanding at any time, (viii) stock,
obligations or securities received in settlement of debts created in the
ordinary course of business and owing to Holdings or any Restricted Subsidiary
or in satisfaction of judgments, (ix) any Person to the extent such Investment
represents the non-cash portion of the consideration received for an Asset
Disposition as permitted pursuant to the covenant described under "--Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock", (x) Interest
Rate Agreements and Currency Agreements entered into in the ordinary course of
business and otherwise in compliance with the Indenture, (xi) Investments in
securities of trade creditors or customers received pursuant to any plan of
reorganization or similar arrangement upon the bankruptcy or insolvency of
such trade creditors or customers, (xii) Investments in Unrestricted
Subsidiaries and additional Investments having an aggregate fair market value,
taken together with all other investments made pursuant to this clause (xii)
that are at that time outstanding, not to exceed $5 million (with the fair
market value of each Investment being measured at the time made and without
giving effect to subsequent changes in value), (xiii) any Investment by
Holdings or any Wholly Owned Subsidiary in a Receivables Subsidiary or any
Investment by a Receivables Subsidiary in any other Person in connection with
a Permitted Receivables Financing; provided, however, that any Investment in a
Receivables Subsidiary is in the form of a purchase money note or an equity
interest and (xiv) Investments the payment for which consists exclusively of
Capital Stock (other than Disqualified Stock) of Holdings.
"Permitted Liens" means (i) Liens existing as of the Issue Date to the
extent and in the manner such Liens are in effect on the Issue Date, (ii)
Liens securing the Discount Notes, (iii) Liens securing Holding's obligations
under the New Credit Facility, (iv) Liens for taxes, assessments or
governmental charges or claims either (A) not delinquent or (B) contested in
good faith by appropriate proceedings and as to which Holdings shall have set
aside on its books such reserves as may be required pursuant to GAAP, (v)
judgment Liens not giving rise to an Event of Default so long as such Lien is
adequately bonded and any appropriate legal proceedings which may have been
duly initiated for the review of such judgment shall not have been finally
terminated or the period within which such proceedings may be initiated shall
not have expired, (vi) Liens securing Hedging Obligations which are
Indebtedness otherwise permitted under the Indenture and (vii) restrictions on
transfer of securities under federal and state securities laws.
"Permitted Receivables Financing" means any financing pursuant to which
Holdings or any Restricted Subsidiary may sell, convey or otherwise transfer
to a Receivables Subsidiary or any other Person (in the case of
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a transfer by a Receivables Subsidiary), or grant a security interest in, any
accounts receivable (and related assets) of Holdings or any Restricted
Subsidiary; provided, however, that (i) the covenants, events of default and
other provisions applicable to such financing shall be customary for such
transactions and shall be on market terms (as determined in good faith by the
Board of Directors) at the time such financing is entered into and (ii) such
financing shall be non-recourse to Holdings and its Subsidiaries (other than
the Receivables Subsidiary) except to a limited extent customary for such
transactions.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
"Preferred Stock" means, as applied to the Capital Stock of any corporation,
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Public Equity Offering" means a public offering of common stock of Holdings
pursuant to an effective registration statement under the Securities Act.
"Public Market" means any time after (i) a Public Equity Offering has been
consummated and (ii) at least 10% of the total issued and outstanding common
stock of Holdings has been distributed by means of an effective registration
statement under the Securities Act or sales pursuant to Rule 144 under the
Securities Act.
"Purchase Money Indebtedness" means Indebtedness (i) consisting of the
deferred purchase price of property, conditional sale obligations, obligations
under any title retention agreement, other purchase money obligations and
obligations in respect of industrial revenue bonds or similar Indebtedness, in
each case where the maturity of such Indebtedness does not exceed the
anticipated useful life of the asset being financed and (ii) incurred to
finance the acquisition by Holdings or a Restricted Subsidiary of such asset
(including Additional Assets), including additions and improvements; provided,
however, that any Lien arising in connection with any such Indebtedness shall
be limited to the specified asset being financed or, in the case of real
property or fixtures, including additions and improvements, the real property
on which such asset is attached; and provided further, however, that such
Indebtedness is Incurred within 90 days after such acquisition of such asset
by Holdings or Restricted Subsidiary.
"Receivables Subsidiary" means a bankruptcy-remote, special-purpose Wholly
Owned Subsidiary formed in connection with a Permitted Receivables Financing.
"Refinance" means, with respect to any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease, retire, supplement, substitute,
defer, reissue or restate (including pursuant to any defeasance or discharge
mechanism), or to issue other Indebtedness in exchange or replacement for,
such indebtedness. "Refinanced" and "Refinancing" shall have correlative
meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of Holdings or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture; provided, however, that (i)
such Refinancing Indebtedness has a Weighted Average Life to Maturity of not
less than the Indebtedness being Refinanced and (ii) such Refinancing
Indebtedness has an aggregate principal amount (or if Incurred with original
issue discount, an aggregate issue price) that is equal to or less than the
aggregate principal amount (or if Incurred with original issue discount, the
aggregate accreted value) then outstanding or committed (plus fees and
expenses, including any premium and defeasance costs) under the Indebtedness
being Refinanced; provided further, however, that Refinancing Indebtedness
shall not include (x) Indebtedness of a Subsidiary that Refinances
Indebtedness of Holdings or (y) Indebtedness of Holdings or a Restricted
Subsidiary that Refinances Indebtedness of an Unrestricted Subsidiary.
"Related Business" means the business of Holdings and its Restricted
Subsidiaries on the Issue Date or any business related, ancillary or
complementary (as determined in good faith by the Board of Directors) to the
businesses of Holdings and the Restricted Subsidiaries on the Issue Date.
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"Representative" means, until the date on which the Bank Indebtedness has
been repaid in full in cash, and all commitments and other obligations
thereunder have been terminated, the Agent (or if there is no Agent, the
trustee, agent or representative) under the New Credit Facility and,
thereafter, the trustee, agent or representative for each issue of Senior
Indebtedness.
"Restricted Payment" means, with respect to any Person, (i) the declaration
or payment of any dividends or any other distributions on or in respect of its
Capital Stock (including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the holders of its
Capital Stock, except dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) and except dividends or distributions
payable solely to Holdings or a Restricted Subsidiary (and, in the case of
dividends or distributions by a Restricted Subsidiary which is not a Wholly
Owned Subsidiary, to its other holders of Capital Stock on a pro rata basis or
on a basis that results in the receipt by Holdings or a Restricted Subsidiary
of dividends or distributions of greater value than it would receive on a pro
rata basis), (ii) the purchase, redemption or other acquisition or retirement
for value of any Capital Stock of Holdings held by any Person (other than a
Restricted Subsidiary) or of any Capital Stock of a Restricted Subsidiary held
by any Affiliate of Holdings (other than a Restricted Subsidiary), including
the exercise of any option to exchange any Capital Stock (in each case other
than in exchange for Capital Stock that is not Disqualified Stock), (iii) the
purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment of any Subordinated Obligations (other than the
purchase, repurchase or other acquisition of Subordinated Obligations
purchased in anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case due within one year of the date of
purchase, repurchase or acquisition; and other than the purchase, repurchase,
defeasance or other acquisition of Subordinated Obligations made solely with
Disqualified Stock of Holdings) or (iv) the making of any Investment (other
than a Permitted Investment) in any Person.
"Restricted Subsidiary" means any Subsidiary of Holdings that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby Holdings or a Restricted Subsidiary
transfers such property to a Person and Holdings or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Senior Indebtedness" of Holdings means the following obligations, whether
outstanding on the date of the Indenture or thereafter Incurred, without
duplication, all obligations consisting of Bank Indebtedness and all
obligations consisting of the principal of and premium, if any, and accrued
and unpaid interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to Holdings regardless
of whether post-filing interest is allowed in such proceeding) on, and fees,
charges, expenses, reimbursement obligations, Guarantees and all other amounts
owing in respect of, all other Indebtedness of Holdings, unless, in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding, it is provided that the obligations in respect of such
Indebtedness are subordinated or junior in right of payment to the Discount
Notes; provided, however, that Senior Indebtedness shall not include (1) any
obligation of Holdings to any Subsidiary, except to the extent pledged under
the New Credit Facility, (2) any liability for federal, state, local or other
taxes owed or owing by Holdings, (3) any accounts payable or other liability
to trade creditors arising in the ordinary course of business (including
guarantees thereof or instruments evidencing such liabilities), (4) any
Indebtedness of Holdings (and any accrued and unpaid interest in respect
thereof) which is expressly subordinate or junior in right of payment to any
other Indebtedness or other obligation of Holdings, including any Subordinated
Obligations, (5) any Indebtedness represented by Capital Stock or (6) that
portion of any Indebtedness which at the time of Incurrence is Incurred in
violation of the Indenture.
"Senior Subordinated Indenture" means the Indenture, dated as of the Issue
Date between Iron Age and The Chase Manhattan Bank, as trustee, pursuant to
which the Senior Subordinated Notes are to be issued by Iron Age.
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"Senior Subordinated Notes" means the 9 7/8% Senior Subordinated Notes due
2008 issued by Iron Age pursuant to the Senior Subordinated Indenture in the
aggregate principal amount of $100 million.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory
redemption provision.
"Subordinated Obligation" means any Disqualified Stock and any other
Indebtedness of Holdings (whether outstanding on the Issue Date or thereafter
Incurred) which is subordinate or junior in right of payment to the Discount
Notes pursuant to a written agreement to that effect.
"Subsidiary" means, with respect to any Person, any corporation,
association, partnership or other business entity of which more than 50% of
the total voting power of shares of Capital Stock or other interests
(including partnership interests) entitled (without regard to the occurrence
of any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by (i)
such Person, (ii) such Person and one or more Subsidiaries of such Person or
(iii) one or more Subsidiaries of such Person. Unless otherwise specified
herein, each reference to a Subsidiary shall refer to a Subsidiary of
Holdings.
"Subsidiary Guarantor" means each Subsidiary that has issued a Subsidiary
Guaranty pursuant to the Senior Subordinated Indenture.
"Subsidiary Guaranty" means the Guarantee of Iron Age's obligations with
respect to the Senior Subordinated Notes by a Subsidiary Guarantor pursuant to
the terms of the Senior Subordinated Indenture.
"Taxes" means all taxes, fees, levies, duties, tariffs, imposts, and
governmental impositions or charges of any kind in the nature of (or similar
to) taxes, payable to any federal, state, local or foreign taxing authority,
including without limitation income, franchise, profits, gross receipts, ad
valorem, net worth, value added, sales, use, service, real or personal
property, special assessments, capital stock, license, payroll, withholding,
employment, social security (or similar), workers' compensation, unemployment
compensation, disability, utility, severance, production, excise, stamp,
occupation, premiums, windfall profits, environmental (including taxes under
Section 59A of the Code), customs duties, registration, alternative and add-on
minimum, estimated, transfer and gains taxes or other tax of any kind
whatsoever, in all cases including interest, penalties, additional taxes and
additions to tax imposed with respect thereto.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any State thereof or any foreign country recognized
by the United States of America, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $50 million (or the
foreign currency equivalent thereof) and has outstanding debt which is rated
"A" (or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker
dealer or mutual fund distributor, (iii) repurchase obligations with a term of
not more than 30 days for underlying securities of the types described in
clause (i) above entered into with a bank meeting the qualifications described
in clause (ii) above, (iv) investments in commercial paper, maturing not more
than 180 days after the date of acquisition, issued by a corporation (other
than an Affiliate of Holdings) organized and in existence under the laws of
the United States of America or any foreign country recognized by the United
States of America with a rating at the time as of which any investment therein
is made of "P-1" (or higher) according to Moody's Investors Service, Inc. or
"A-1" (or higher) according to Standard & Poor's Ratings Group, (v)
investments in securities with maturities of six months or less from the date
of acquisition issued or fully guaranteed by any State, Commonwealth or
Territory of the United States of America, or by any political subdivision or
taxing authority thereof, and rated at least "A" by Standard & Poor's Ratings
Group or "A" by
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Moody's Investors Service, Inc. and (vi) investments in mutual funds whose
investment guidelines restrict such funds' investments to those satisfying the
provisions of clauses (i) through (v) above.
"Unrestricted Subsidiary" means (i) any Subsidiary of Holdings that at the
time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
of Holdings (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or holds any Lien on any property of,
Holdings or any other Subsidiary of Holdings that is not a Subsidiary of the
Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total assets of $10,000 or less or (B) if
such Subsidiary has assets greater than $10,000, such designation would be
permitted under the covenant described under "--Certain Covenants--Limitation
on Restricted Payments". The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (x) Holdings could Incur $1.00 of
additional Indebtedness under paragraph (a) of the covenant described under
"--Certain Covenants--Limitation on Indebtedness" and (y) no Default or Event
of Default shall have occurred and be continuing. Any such designation by the
Board of Directors shall be evidenced to the Trustee by promptly filing with
the Trustee a copy of the board resolution giving effect to such designation
and an Officers' Certificate certifying that such designation complied with
the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States
of America (including any agency or instrumentality thereof) for the payment
of which the full faith and credit of the United States of America is pledged
and which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding
and normally entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the then outstanding
aggregate principal amount of such Indebtedness into (ii) the sum of the total
of the products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by Holdings
and/or one or more Wholly Owned Subsidiaries.
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THE EXCHANGE OFFER
At the closing of the Original Offering, Holdings and the Initial Purchasers
entered into a registration agreement (the "Registration Agreement"). Pursuant
to the Registration Agreement, Holdings agreed, at its cost, (i) to file with
the SEC on or prior to 90 days after the Issue Date a registration statement
on the appropriate form (the "Exchange Offer Registration Statement") relating
to a registered exchange offer (the "Exchange Offer") for the Original
Discount Notes under the Securities Act and (ii) to use its reasonable best
efforts to cause the Exchange Offer Registration Statement to be declared
effective under the Securities Act on or prior to 150 days after the Issue
Date. As promptly as practicable after the effectiveness of the Exchange Offer
Registration Statement, Holdings will offer to holders of Transfer Restricted
Securities (as defined below) who are not prohibited by any law or policy of
the SEC from participating in the Exchange Offer the opportunity to exchange
their Transfer Restricted Securities for Exchange Discount Notes that are
identical in all material respects to the Original Discount Notes (except that
the Exchange Discount Notes will not contain terms with respect to transfer
restrictions) and that would be registered under the Securities Act. For each
Original Discount Note surrendered to Holdings pursuant to the Exchange Offer,
the holder of such Original Discount Note will receive an Exchange Discount
Note having a principal amount at maturity equal to that of the surrendered
Original Discount Note. Principal on the Exchange Discount Notes will accrete
in the same manner as for the Original Discount Notes. Cash interest on each
Exchange Discount Note will accrue from the last cash interest payment date on
which cash interest was paid on the Original Discount Note surrendered in
exchange thereof or, if no cash interest has been paid on such Original
Discount Note, from May 1, 2003. Holdings will keep the Exchange Offer open
for not less than 30 days (or longer, if required by applicable law) after the
date hereof.
If (i) because of any change in law or applicable interpretations thereof by
the staff of the SEC, Holdings is not permitted to effect the Exchange Offer
as contemplated hereby, (ii) for any other reason the Exchange Offer
Registration Statement is not declared effective on or prior to 150 days after
the Issue Date or the Exchange Offer is not consummated on or prior to 180
days after the Issue Date, (iii) the Initial Purchasers so request with
respect to Original Discount Notes not eligible to be exchanged for Exchange
Discount Notes in the Exchange Offer or the Initial Purchasers do not receive
freely tradeable Exchange Discount Notes in the Exchange Offer, (iv) any
applicable law or interpretations do not permit any holder of Original
Discount Notes to participate in the Exchange Offer, (v) any holder (other
than an Initial Purchaser) of Original Discount Notes is not eligible to
participate in the Exchange Offer or such holder does not receive freely
tradeable Exchange Discount Notes in the Exchange Offer other than by reason
of such holder being an affiliate of Holdings (it being understood that the
requirement that a participating broker-dealer deliver the prospectus
contained in the Exchange Offer Registration Statement in connection with the
sales of Exchange Discount Notes shall not result in such Exchange Discount
Notes being not "freely tradeable") or (vi) Holdings so elects, then Holdings
will file, at its cost, as promptly as practical with the SEC a shelf
registration statement (the "Shelf Registration Statement") to cover resales
of Transfer Restricted Securities by such holders of Original Discount Notes
who satisfy certain conditions relating to the provision of information in
connection with the Shelf Registration Statement. For purposes of the
foregoing, "Transfer Restricted Securities" means each Original Discount Note
until (i) the date on which such Original Discount Note has been exchanged for
a freely transferable Exchange Discount Note in the Exchange Offer, (ii) the
date on which such Original Discount Note has been effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement or (iii) the date on which such Original Discount Note
is distributed to the public pursuant to Rule 144 under the Securities Act or
is saleable pursuant to Rule 144(k) under the Securities Act.
Holdings will use its reasonable best efforts to have the Exchange Offer
Registration Statement or, if applicable, the Shelf Registration Statement
(each, a "Registration Statement") declared effective by the SEC as promptly
as practicable after the filing thereof. Unless the Exchange Offer would not
be permitted by a policy of the SEC, Holdings will commence the Exchange Offer
and will use its reasonable best efforts to consummate the Exchange Offer as
promptly as practicable, but in any event on or prior to 180 days after the
Issue Date. If applicable, Holdings will use its reasonable best efforts to
keep the Shelf Registration Statement effective for a period of two years
after the Issue Date. Holdings will, in the event a Shelf Registration
Statement is filed, among
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other things, provide to each holder of Original Discount Notes for whom such
Shelf Registration Statement was filed copies of the prospectus which is a
part of such Shelf Registration Statement, notify each such holder when such
Shelf Registration Statement has become effective, and take certain other
actions as are required to permit unrestricted resales of the Original
Discount Notes or the Exchange Discount Notes, as the case may be. A holder of
Original Discount Notes or Exchange Discount Notes selling Original Discount
Notes or Exchange Discount Notes pursuant to a Shelf Registration Statement
will generally be required to be named as a selling securityholder in the
related prospectus and to deliver a prospectus to purchasers, will be subject
to certain of the civil liability provisions under the Securities Act in
connection with such sales, and will be bound by the provisions of the
Registration Agreement that are applicable to such holder (including certain
indemnification obligations).
If (i) a Registration Statement is not filed with the SEC on or prior to 90
days after the Issue Date, (ii) the Exchange Offer Registration Statement or a
Shelf Registration Statement, if applicable, is not declared effective on or
prior to 150 days after the Issue Date, (iii) the Exchange Offer is not
consummated on or prior to 180 days after the Issue Date or (iv) a Shelf
Registration Statement is filed and declared effective on or prior to 150 days
after the Issue Date but shall thereafter cease to be effective or usable (at
any time that Holdings is obligated to maintain the effectiveness thereof) in
connection with resales of Original Discount Notes or Exchange Discount Notes
in accordance with and during the periods specified in the Registration
Agreement (each such event referred to in clauses (i) through (iv), a
"Registration Default"), Holdings will be obligated to pay liquidated damages
to each holder of Transfer Restricted Securities, during the first 90-day
period immediately following the occurrence of such Registration Default, in
an amount equal to 5c per week per $1,000 of the Accreted Value of the
Original Discount Notes constituting Transfer Restricted Securities held by
such holder. The amount of the liquidated damages will increase an additional
5c per week per $1,000 of the Accreted Value of the Original Discount Notes
constituting Transfer Restricted Securities for each subsequent 90-day period
until the applicable Registration Default has been cured, up to a maximum
amount of Liquidated Damages of 20c per week per $1,000 of the Accreted Value
of the Original Discount Notes constituting Transfer Restricted Securities.
All accrued liquidated damages shall be paid to holders in cash in arrears on
May 1 and November 1 of each year during which such liquidated damages are
payable, commencing on the first such date to occur after the obligation to
pay liquidated damages arises. Following the cure of all Registration
Defaults, the accrual of liquidated damages will cease.
The Registration Agreement also provides that Holdings (i) shall, if
required under applicable securities laws, upon prior written request, make
available for a period of 90 days after the consummation of the Exchange Offer
a prospectus meeting the requirements of the Securities Act to any broker-
dealer for use in connection with any resale of any such Exchange Discount
Notes and (ii) shall pay all expenses incident to the Exchange Offer
(including the expense of one counsel to the holders of the Original Discount
Notes) and will indemnify certain holders of the Original Discount Notes
(including any broker-dealer) against certain liabilities, including
liabilities under the Securities Act. A broker-dealer which delivers such a
prospectus to purchasers in connection with such resales will be subject to
certain of the civil liability provisions under the Securities Act and will be
bound by the provisions of the Registration Agreement (including certain
indemnification rights and obligations).
Each holder of Original Discount Notes who wishes to exchange such Original
Discount Notes for Exchange Discount Notes in the Exchange Offer will be
required to make certain representations, including representations that (i)
any Exchange Discount Notes to be received by it will be acquired in the
ordinary course of its business, (ii) it has no arrangement or understanding
with any person to participate in the distribution of the Exchange Discount
Notes, and (iii) it is not an "affiliate" (as defined in Rule 405 under the
Securities Act) of Holdings, or if it is an affiliate, that it will comply
with the registration and prospectus delivery requirements of the Securities
Act to the extent applicable.
If the holder of Original Discount Notes is not a broker-dealer, it will be
required to represent that it is not engaged in, and does not intend to engage
in, the distribution of the Exchange Discount Notes. If the holder of Original
Discount Notes is a broker-dealer that will receive Exchange Discount Notes
for its own account in exchange for Original Discount Notes that were acquired
as a result of market-making activities or other trading
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activities (an "Exchanging Dealer"), it will be required to acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Discount Notes.
Holders of the Original Discount Notes will be required to make certain
representations to Holdings (as described above) in order to participate in
the Exchange Offer and will be required to deliver information to be used in
connection with the Shelf Registration Statement in order to have their
Original Discount Notes included in the Shelf Registration Statement and
benefit from the provisions regarding liquidated damages set forth in the
preceding paragraphs. A holder who sells Original Discount Notes pursuant to
the Shelf Registration Statement generally will be required to be named as a
selling securityholder in the related prospectus and to deliver a prospectus
to purchasers, will be subject to certain of the civil liability provisions
under the Securities Act in connection with such sales and will be bound by
the provisions of the Registration Agreement which are applicable to such a
holder (including certain indemnification obligations).
The summary herein of certain provisions of the Registration Agreement is a
description of the material provisions of the Registration Agreement, a copy
of which is filed as an exhibit to the Exchange Offer Registration Statement.
Except as set forth herein, after consummation of the Exchange Offer,
holders of Original Discount Notes have no registration or exchange rights
under the Registration Agreement. See "--Consequences of Failure of Exchange,"
and "--Resales of Exchange Discount Notes; Plan of Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE
The Original Discount Notes which are not exchanged for Exchange Discount
Notes pursuant to an Exchange Offer and are not included in a resale
prospectus will remain Transfer Restricted Securities. Accordingly, such
Original Discount Notes may not be offered, sold or otherwise transferred
prior to the date which is two years after the later of the date of original
issue and the last date that Holdings or any affiliate of Holdings was the
owner of such securities (or any predecessor thereto) (the "Resale Restriction
Termination Date") only (a) to Holdings (b) pursuant to a registration
statement which has been declared effective under the Securities Act, (c) for
so long as the Original Discount Notes are eligible for resale pursuant to
Rule 144A, to a person the owner reasonably believes is a qualified
institutional buyer that purchases for its own account or for the account of a
qualified institutional buyer to whom notice is given that the transfer is
being made in reliance on Rule 144A, (d) to an "accredited investor" within
the meaning of subparagraph (1), (2), (3) or (7) of paragraph (a) of Rule 501
under the Securities Act that is purchasing for his own account or for the
account of such an "accredited investor" in each case in a minimum of Original
Discount Notes with a purchase price of $500,000 or (c) pursuant to any other
available exemption from the registration requirements of the Securities Act,
subject in each of the foregoing cases to any requirement of law that the
disposition of its property or the property of such investor account or
accounts be at all times within its or their control. The foregoing
restrictions on resale will not apply subsequent to the Resale Restriction
Termination Date. If any resale or other transfer of the Original Discount
Notes is proposed to be made pursuant to clause (d) above prior to the Resale
Restriction Termination Date, the transferor shall deliver a letter from the
transferee to Holdings and the Trustee, which shall provide, among other
things, that the transferee is an "accredited investor" within the meaning of
subparagraph (1), (2), (3) or (7) of paragraph (a) of Rule 501 under the
Securities Act and that it is acquiring such Securities for investment
purposes and not for distribution in violation of the Securities Act. Prior to
any offer, sale or other transfer of Original Discount Notes prior to the
Resale Restriction Termination Date pursuant to clauses (d) or (e) above, the
issuer and the Trustee may require the delivery of an opinion of counsel,
certifications and/or other information satisfactory to each of them.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in the Prospectus and
in the Letter of Transmittal, the form of which is included as Exhibit 99.1 to
the Registration Statement of which this Prospectus is a part, Holdings will
accept any and all Original Discount Notes validly tendered and not withdrawn
prior to the
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applicable Expiration Date. Holdings will issue $1,000 principal amount of
Exchange Discount Notes in exchange for each $1,000 principal amount of
Original Discount Notes accepted in the Exchange Offer. Holders may tender
some or all of their Original Discount Notes pursuant to the Exchange Offer.
However, Original Discount Notes may be tendered only in integral multiples of
$1,000 principal amount.
The form and terms of the Exchange Discount Notes are the same as the form
and terms of the Original Discount Notes, except that (i) the Exchange
Discount Notes have been registered under the Securities Act and therefore
will not bear legends restricting their transfer pursuant to the Securities
Act, and (ii) the holders of Exchange Discount Notes will not be entitled to
rights under the Registration Agreement (except under certain limited
circumstances). The Exchange Discount Notes will evidence the same debt as the
Original Discount Notes (which they replace), and will be issued under, and be
entitled to the benefits of, the Indenture.
Solely for reasons of administration (and for no other purpose) Holdings has
fixed the close of business on , 1998 as the record date for the
Exchange Offer for purposes of determining the persons to whom this Prospectus
and the Letter of Transmittal will be mailed initially. Only a registered
holder of Original Discount Notes (or such holder's legal representative or
attorney-in-fact) as reflected on the records of the Trustee under the
Indenture may participate in the Exchange Offer. There will be no fixed record
date for determining registered holders of the Original Discount Notes
entitled to participate in the Exchange Offer.
Holders of the Original Discount Notes do not have any appraisal or
dissenters' rights under the General Corporation Law of Delaware or under the
Indenture in connection with the Exchange Offer. Holdings intends to conduct
the Exchange Offer in accordance with the applicable requirements of the
Exchange Act and the rules and regulations of the SEC thereunder.
Holdings shall be deemed to have accepted validly tendered Original Discount
Notes when, as and if it has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of the Original Discount Notes for purposes of receiving the Exchange Discount
Notes.
If any tendered Original Discount Notes are not accepted for exchange
because of an invalid tender, the occurrence of certain other events set forth
herein or otherwise, certificates for any such unaccepted Original Discount
Notes will be returned without expense, to the tendering holder thereof as
promptly as practicable after the Expiration Date.
Holders who tender Original Discount Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of
the Original Discount Notes pursuant to the Exchange Offer. Holdings will pay
all charges and expenses, other than certain applicable taxes, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSION; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on
, 1998, unless Holdings extends the Exchange Offer, in which case the
term "Expiration Date" shall mean the latest date and time to which such
Exchange Offer is extended.
In order to extend the Exchange Offer, Holdings will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, prior to 9:00 a.m., New York City time, on the next
Business Day after the previously scheduled Expiration Date.
Holdings reserves the right, in its sole discretion, (i) to delay accepting
any Original Discount Notes, (ii) extend the Exchange Offer, (iii) if the
condition set forth below under "--Conditions of the Exchange Offer" shall not
have been satisfied, to terminate the Exchange Offer, by giving oral or
written notice of such delay, extension or termination to the Exchange Agent,
or (iv) to amend the terms of the Exchange Offer in any manner.
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Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by a public announcement thereof. If the
Exchange Offer is amended in a manner determined by Holdings to constitute a
material change, it will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered holders of
the Original Discount Notes and the Exchange Offer will be extended for a
period of five to ten business days, as required by law, depending upon the
significance of the amendment and the manner of disclosure to the registered
holders, if the Exchange Offer would otherwise expire during such five to ten
business day period.
Without limiting the manner in which Holdings may choose to make public
announcement of any delay, extension, termination or amendment of its Exchange
Offer, Holdings shall not have an obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release thereof to the Dow Jones News Service.
PROCEDURES FOR TENDERING
Only a registered holder of Original Discount Notes may tender such Original
Discount Notes in the Exchange Offer. To tender in the Exchange Offer, a
Holder must complete, sign and date the Letter of Transmittal, have the
signatures thereon guaranteed if required by such Letter of Transmittal, and
mail or otherwise deliver such Letter of Transmittal to the Exchange Agent at
the address set forth below under "--Exchange Agent" for receipt prior to the
applicable Expiration Date. In addition, either (i) certificates for such
Original Discount Notes must be received by the Exchange Agent along with the
Letter of Transmittal, or (ii) a timely confirmation of a book-entry transfer
(a "Book-Entry Confirmation") of such Original Discount Notes into the
Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer
described below, must be received by the Exchange Agent prior to the
applicable Expiration Date, or (iii) the Holder must comply with the
guaranteed delivery procedures described below. To be tendered effectively,
the Letter of Transmittal and all other required documents must be received by
the Exchange Agent at the address set forth below under "--Exchange Agent"
prior to the applicable Expiration Date.
The tender by a Holder will constitute an agreement between such holder and
Holdings in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal applicable to such Exchange Offer.
THE METHOD OF DELIVERY OF THE ORIGINAL DISCOUNT NOTES AND THE APPLICABLE
LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT
IS AT THE ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS
RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE
AGENT BEFORE THE APPLICABLE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR
ORIGINAL DISCOUNT NOTES SHOULD BE SENT TO HOLDINGS. HOLDERS MAY REQUEST THEIR
RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO
EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Original Discount Notes are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender should contact the registered holder promptly and
instruct such registered holder to tender on such beneficial owner's behalf.
If such beneficial owner wishes to tender on such owner's own behalf, such
owner must, prior to completing and executing the Letter of Transmittal and
delivering such owner's Original Discount Notes, either make appropriate
arrangements to register ownership of the Original Discount Notes in such
beneficial owner's name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership may take considerable
time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Original Discount Notes tendered pursuant thereto are
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tendered (i) by a registered holder who has not completed the box entitled
"Special Delivery Instructions" on the Letter of Transmittal designated for
such Original Discount Notes, or (ii) for the account of an Eligible
Institution. In the event that signatures on a Letter of Transmittal or a
notice of withdrawal, as the case may be, are required to be guaranteed, such
guarantee must be by a participant in a recognized signature guarantee
medallion program within the meaning of Rule 17Ad-15 under the Exchange Act
(an "Eligible Institution").
If a Letter of Transmittal is signed by a person other than the registered
holder of any Original Discount Notes listed therein, such Original Discount
Notes must be endorsed or accompanied by a properly completed bond power,
signed by such registered holder as such registered holder's name appears on
such Original Discount Notes, with signature guaranteed by an Eligible
Institution.
If a Letter of Transmittal or any Original Discount Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and evidence
satisfactory to Holdings, as applicable, of their authority to so act must be
submitted with the Letter of Transmittal designated for such Original Discount
Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Original Discount Notes will
be determined by Holdings in its sole discretion, which determination will be
final and binding. Holdings reserves the absolute right to reject any and all
Original Discount Notes not properly tendered or any Original Discount Notes
the issuer's acceptance of which would, in the opinion of counsel for such
issuer, be unlawful. Holdings also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Original Discount
Notes. The interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) by Holdings will be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Original Discount Notes must be cured within
such time as Holdings shall determine. Although Holdings intends to notify
holders of defects or irregularities with respect to tenders of Original
Discount Notes issued by it, neither Holdings, the Exchange Agent nor any
other person shall incur any liability for failure to give such notification.
Tenders of Original Discount Notes will not be deemed to have been made until
such defects or irregularities have been cured or waived. Any Original
Discount Notes received by the Exchange Agent that are not validly tendered
and as to which the defects or irregularities have not been cured or waived,
or if Original Discount Notes are submitted in a principal amount greater than
the principal amount of Original Discount Notes being tendered by such
tendering holder, such unaccepted or non-exchanged Original Discount Notes
will be returned by the Exchange Agent to the tendering holders (or, in the
case of Original Discount Notes tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry transfer procedures described below, such unaccepted or non-
exchanged Original Discount Notes will be credited to an account maintained
with such Book-Entry Transfer Facility), unless otherwise provided in the
Letter of Transmittal designated for such Original Discount Notes, as soon as
practicable following the applicable Expiration Date.
By tendering Original Discount Notes in the Exchange Offer, each registered
holder will represent to the issuer of such Original Discount Notes that,
among other things, (i) the Exchange Discount Notes to be acquired by the
holder and any beneficial owner(s) of such Original Discount Notes
("Beneficial Owner(s)") in connection with the Exchange Offer are being
acquired by the holder and any Beneficial Owner(s) in the ordinary course of
business of the holder and any Beneficial Owner(s), for such holder's own
account, for investment and not with a view to or for sale in connection with
any distribution of the Exchange Discount Notes, (ii) the holder and each
Beneficial Owner are not participating, do not intend to participate, and have
no arrangement or understanding with any person to participate, in a
distribution of the Exchange Discount Notes, (iii) the Holder and each
Beneficial Owner acknowledge and agree that (x) any person participating in an
Exchange Offer for the purpose of distributing the Exchange Discount Notes
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction with respect
to the Exchange Discount Notes acquired by such person and cannot rely on the
position of the staff of the SEC set
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forth in no-action letters that are discussed herein under "--Resales of the
Exchange Discount Notes," and (y) any broker-dealer that receives Exchange
Discount Notes for its own account in exchange for Original Discount Notes
pursuant to an Exchange Offer, where such Original Discount Notes were
acquired by such broker-dealer as a result of market-making activities or
other trading activities, must deliver a prospectus in connection with any
resale of such Exchange Discount Notes, see "Plan of Distribution," but by so
acknowledging, the holder shall not be deemed to admit that, by delivering a
prospectus, it is an "underwriter" within the meaning of the Securities Act,
(iv) neither the holder nor any Beneficial Owner is an "affiliate," as defined
in Rule 405 under the Securities Act, of Holdings except as otherwise
disclosed to Holdings in writing, and (v) the holder and each Beneficial Owner
understands that a secondary resale transaction described in clause (iii)
above should be covered by an effective registration statement containing the
selling securityholder information required by Item 507 of Regulation S-K of
the SEC.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Original Discount Notes at the Book-Entry Transfer Facility, for
purposes of the Exchange Offers, within two business days after the date of
this Prospectus, and any financial institution that is a participant in the
Book-Entry Transfer Facility's system may make book-entry delivery of Original
Discount Notes by causing the Book-Entry Transfer Facility to transfer such
Original Discount Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility in accordance with such Book-Entry Transfer Facility's
procedures for transfer. However, although delivery of Original Discount Notes
may be effected through book-entry transfer at the Book-Entry Transfer
Facility, the applicable Letter of Transmittal, with any required signature
guarantees and any other documents, must be transmitted to and received by the
Exchange Agent at the address set forth below under "--Exchange Agent" on or
prior to the applicable Expiration Date or the guaranteed delivery procedures
described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Original Discount Notes and (i) whose
Original Discount Notes are not immediately available, or (ii) who cannot
deliver their Original Discount Notes, the Letter of Transmittal or any other
required documents to the Exchange Agent prior to the applicable Expiration
Date, may effect a tender if:
(1) The tender is made through an Eligible Institution;
(2) Prior to the applicable Expiration Date, the Exchange Agent receives
from such Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by mail, hand delivery or facsimile
transmission) setting forth the name and address of the holder, the
certificate number(s) of such Original Discount Notes and the principal
amount of the Original Discount Notes being tendered, stating that the
tender is being made thereby and guaranteeing that, within five business
days after the applicable Expiration Date, the applicable Letter of
Transmittal together with the certificate(s) representing the Original
Discount Notes (or a Book-Entry Confirmation) and any other documents
required by the applicable Letter of Transmittal will be delivered by the
Eligible Institution to the Exchange Agent; and
(3) Such properly completed and executed Letter of Transmittal, as well
as the certificate(s) representing all tendered Original Discount Notes in
proper form for transfer (or a Book-Entry Confirmation) and all documents
required by the Letter of Transmittal are received by the Exchange Agent
within five business days after the applicable Expiration Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Original Discount Notes
pursuant to an Exchange Offer may be withdrawn, unless theretofore accepted
for exchange as provided in the applicable Exchange Offer, at any time prior
to the Expiration Date of that Exchange Offer.
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To be effective, a written or facsimile transmission notice of withdrawal
must be received by the Exchange Agent at its address set forth herein prior
to the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Original Discount Notes to be
withdrawn (the "Depositor"), (ii) identify the Original Discount Notes to be
withdrawn (including the certificate number or numbers and aggregate principal
amount of such Original Discount Notes), and (iii) be signed by the holder in
the same manner as the original signature on the applicable Letter of
Transmittal (including any required signature guarantees). All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by Holdings in its sole respective discretion, which
determination shall be final and binding on all parties. Any Original Discount
Notes so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer and no Exchange Discount Notes will be issued
with respect thereto unless the Original Discount Notes so withdrawn are
retendered. Property withdrawn Original Discount Notes may be retendered by
following one of the procedures described above under "--Procedures for
Tendering" at any time prior to the applicable Expiration Date.
Any Original Discount Notes which have been tendered but which are not
accepted for exchange due to the rejection of the tender due to uncured
defects or the prior termination of the applicable Exchange Offer, or which
have been validly withdrawn, will be returned to the holder thereof (unless
otherwise provided in the Letter of Transmittal), as soon as practicable
following the applicable Expiration Date or, if so requested in the notice of
withdrawal, promptly after receipt by the issuer of the Original Discount
Notes of notice of withdrawal without cost to such holder.
CONDITIONS OF THE EXCHANGE OFFER
The Exchange Offer is subject to the condition that the Exchange Offer, or
the making of any exchange by a holder, does not violate applicable law or any
applicable interpretation of the staff of the SEC. If there has been a change
in SEC policy such that there is a substantial question whether the Exchange
Offer is permitted by applicable federal law, Holdings has agreed to seek a
no-action letter or other favorable decision from the SEC allowing Holdings to
consummate the Exchange Offer.
If Holdings determines that the Exchange Offer is not permitted by
applicable Federal law, it may terminate the Exchange Offer. In connection
therewith Holdings may (i) refuse to accept any Original Discount Notes and
return any Original Discount Notes that have been tendered by the holders
thereof, (ii) extend the Exchange Offer and retain all Original Discount Notes
tendered prior to the Expiration of the Exchange Offer, subject to the rights
of such holders of tendered Original Discount Notes to withdraw their tendered
Original Discount Notes, or (iii) waive such termination event with respect to
the Exchange Offer and accept all properly tendered Original Discount Notes
that have not been withdrawn. If such waiver constitutes a material change in
the Exchange Offer, Holdings will disclose such change by means of a
supplement to this Prospectus that will be distributed to each registered
holder of Original Discount Notes, and Holdings will extend the Exchange Offer
for a period of five to ten business days, depending upon the significance of
the waiver and the manner of disclosure to the registered holders of the
Original Discount Notes, if the Exchange Offer would otherwise expire during
such period.
EXCHANGE AGENT
The Chase Manhattan Bank has been appointed as "Exchange Agent" for the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of Transmittal and other documents
should be directed to the Exchange Agent addressed as follows:
By Registered or Certified Mail or Hand or Overnight Delivery:
The Chase Manhattan Bank
450 West 33rd Street, 15th Floor
New York, New York 10001
Attention: Global Trust Services
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Facsimile Transmissions: (212) 946-8158
(ELIGIBLE INSTITUTIONS ONLY)
Delivery to other than the above address or facsimile number will not
constitute a valid delivery.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by Holdings. The principal
solicitation is being made by mail; however, additional solicitation may be
made by telegraph, telephone or in person by officers and regular employees of
Holdings and its affiliates.
No dealer-manager has been retained in connection with the Exchange Offer
and no payments will be made to brokers, dealers or others soliciting
acceptance of the Exchange Offer. However, reasonable and customary fees will
be paid to the Exchange Agent for its service and it will be reimbursed for
its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by Holdings and are estimated in the aggregate to be approximately
$ . Such expenses include fees and expenses of the Exchange Agent and the
Trustee under the Indenture, accounting and legal fees and printing costs,
among others.
Holdings will pay all transfer taxes, if any, applicable to the exchange of
the Original Discount Notes pursuant to the Exchange Offer. If, however, a
transfer tax is imposed for any reason other than the exchange of the Original
Discount Notes pursuant to the Exchange Offer, then the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment
of such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
ACCOUNTING TREATMENT
The carrying values of the Original Discount Notes are not expected to be
materially different from the fair value of the Exchange Discount Notes at the
time of the exchange. Accordingly, no gain or loss for accounting purposes
will be recognized. The expenses of the Exchange Offer will be amortized over
the term of the Exchange Discount Notes.
RESALES OF THE EXCHANGE DISCOUNT NOTES; PLAN OF DISTRIBUTION
Based on no-action letters issued by the staff of the SEC to third parties,
Holdings believes the Exchange Discount Notes issued pursuant to the Exchange
Offer in exchange for the Original Discount Notes may be offered for resale,
resold and otherwise transferred by any holder thereof (other than (i) a
broker-dealer who purchased such Original Discount Notes directly from
Holdings to resell pursuant to Rule 144A or any other available exemption
under the Securities Act or (ii) a person that is an "affiliate" of Holdings
within the meaning of Rule 405 under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities Act
provided that the holder is acquiring the Exchange Discount Notes in its
ordinary course of business and is not participating, does not intend to
participate, and has no arrangement or understanding with any person to
participate, in the distribution of the Exchange Discount Notes. Each holder
of Original Discount Notes wishing to accept the Exchange Offer must represent
to Holdings that such conditions have been met and that such holder is not an
"affiliate" of Holdings within the meaning of Rule 405 under the Securities
Act. In the event that Holdings' belief is inaccurate, holders of Exchange
Discount Notes who transfer Exchange Discount Notes in violation of the
prospectus delivery provisions of the Securities Act and without an exemption
from registration thereunder may incur liability under the Securities Act.
Holdings does not assume or indemnify holders against such liability.
All resales must be made in compliance with applicable state securities or
"blue sky" laws. Such compliance may require that the Exchange Discount Notes
be registered or qualified in a particular state or that
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the resales be made by or through a licensed broker-dealer, unless exemptions
from these requirements are available. Holdings assumes no responsibility with
regard to compliance with such requirements.
Each affiliate of Holdings must acknowledge that such person will comply
with the registration and prospectus delivery requirements of the Securities
Act to the extent applicable. Each broker-dealer that receives Exchange
Discount Notes in exchange for Original Discount Notes held for its own
account, as a result of market-making or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Discount Notes. Although a broker-dealer may be an "underwriter"
within the meaning of the Securities Act, the Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Discount Notes received in exchange for Original Discount Notes.
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MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following is a description of the material federal income tax
consequences associated with the acquisition, ownership, and disposition of
the Exchange Discount Notes by holders who exchange Original Discount Notes
for the Exchange Discount Notes. The description does not describe all of the
aspects of federal income taxation that may be relevant to a prospective
holder of the Exchange Discount Notes in light of his or her particular
circumstances, or to certain types of holders (including dealers in
securities, insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, S corporations, and persons who hold the
Exchange Discount Notes as part of a hedge, straddle, "synthetic security" or
other integrated investment) that are subject to special treatment under the
federal income tax laws. This description also does not address the tax
consequences to nonresident aliens, foreign corporations, foreign partnerships
or foreign trusts that are subject to United States federal income tax on a
net basis on income with respect to an Exchange Discount Note because such
income is effectively connected with the conduct of a U.S. trade or business.
Such holders generally are taxed in a similar manner to U. S. Holders (as
defined below); however, certain special rules apply. In addition, this
description is limited to holders who hold the Exchange Discount Notes as
capital assets within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended (the "Code"). This description also does not describe any
tax consequences under state, local, or foreign tax laws.
The discussion is based upon the Code, Treasury Regulations, Internal
Revenue Service ("IRS") rulings and pronouncements, and judicial decisions all
in effect as of the date hereof, all of which are subject to change at any
time by legislative, judicial or administrative action. Any such changes may
be applied retroactively in a manner that could adversely affect a holder of
the Exchange Discount Notes. Holdings has not sought and will not seek any
rulings or opinions from the IRS or counsel with respect to the matters
discussed below. There can be no assurance that the IRS will not take
positions concerning the tax consequences of the purchase, ownership or
disposition of the Exchange Discount Notes which are different from those
discussed herein.
HOLDERS WHO EXCHANGE ORIGINAL DISCOUNT NOTES FOR EXCHANGE DISCOUNT NOTES
SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE CONSEQUENCES THAT
MAY APPLY TO THEM IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES, AS WELL AS THE
APPLICATION OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
EXCHANGE OF ORIGINAL DISCOUNT NOTES FOR EXCHANGE DISCOUNT NOTES. The
exchange of an Original Discount Note by a holder for an Exchange Discount
Note pursuant to the Exchange Offer will not constitute a taxable exchange of
the Original Discount Note. As a result, a holder will not recognize taxable
gain or loss upon receipt of an Exchange Discount Note, such holder's holding
period for an Exchange Discount Note will include the holding period for the
Original Discount Note so exchanged and such holder's adjusted tax basis in an
Exchange Discount Note will be the same as such holder's adjusted tax basis in
the Original Discount Note so exchanged.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS
A U.S. Holder is any holder who or which is (i) a citizen or resident of the
United States, (ii) a domestic corporation or domestic partnership or (iii) an
estate or trust other than a "foreign estate" or "foreign trust" as defined in
Section 7701(a)(31) of the Code.
CLASSIFICATION OF THE DISCOUNT NOTES. Holdings intends to treat the Exchange
Discount Notes as debt rather than equity for federal income tax purposes. The
IRS could challenge this characterization. If the Exchange Discount Notes were
treated as equity rather than debt, the amount treated as a distribution on
any such instrument would be treated as ordinary dividend income to the extent
of the current or accumulated earnings and profits of Holdings, and any
interest deductions taken by Holdings with respect to the instrument would be
disallowed, which may adversely affect Holdings' financial position.
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Pursuant to Section 385(c) of the Code, the characterization of the Exchange
Discount Notes as debt is binding on a holder of the Exchange Discount Notes
unless such holder discloses any inconsistent treatment on such holder's tax
return. Section 385(c) is not binding on the IRS.
The following discussion assumes that the Exchange Discount Notes will be
treated as debt for federal income tax purposes.
ORIGINAL ISSUE DISCOUNT. The Exchange Discount Notes will be considered to
be issued with original issue discount ("OID') for federal income tax
purposes. As a result, holders of Exchange Discount Notes will be required to
include accrued OID in gross income in advance of the receipt of the cash
payments related to such income, but will not be required to include in income
such cash payments when they are received by such holder on the Exchange
Discount Notes.
The amount of OID with respect to an Exchange Discount Note will be equal to
the excess of the instrument's stated redemption price at maturity over its
issue price. For this purpose, the stated redemption price at maturity of an
Exchange Discount Note will equal the sum of all amounts payable pursuant to
the Exchange Discount Note, regardless of whether denominated as principal or
interest. The issue price of the Exchange Discount Notes will be the first
price at which a substantial amount of the Exchange Discount Notes are sold
(other than to brokers, underwriters and placement agents).
The amount required to be included in a U.S. Holder's income as OID in a
taxable year will be equal to the sum of the daily portions of OID for each
day during such taxable year on which such holder holds the Exchange Discount
Note. The daily portions of OID will be determined by allocating, to each day
during such taxable year, a pro rata portion of the OID on the instrument
attributable to the "accrual period" (which may not exceed one year) in which
such day is included. The amount of OID attributable to an accrual period will
be the product of (i) the "adjusted issue price" at the beginning of such
accrual period (i.e., the issue price plus OID attributable to prior accrual
periods, less any cash payments on the instrument during such prior accrual
periods) multiplied by (ii) the yield to maturity of the instrument
(determined by semiannual compounding). Each payment made under an Exchange
Discount Note will be treated first as a payment of any accrued unpaid OID
that has not been allocated to prior payments and second as a payment of
principal. Special rules will apply for calculating OID for initial short or
final accrual periods.
BECAUSE OF THE COMPLEXITY OF THE RULES RELATING TO OID, U.S. HOLDERS SHOULD
CONSULT THEIR TAX ADVISORS AS TO THE APPLICATION OF THE RULES TO THEIR
PARTICULAR CIRCUMSTANCES.
EFFECT OF PAYMENTS ON REDEMPTION AND REPURCHASE RIGHTS. At any time on or
prior to May 1, 2001, Holdings may under certain circumstances redeem in the
aggregate up to 35% of the aggregate principal amount of the Discount Notes
originally issued with the proceeds of one or more Public Equity Offerings by
Iron Age or Holdings, as described above under "Description of Exchange
Discount Notes--Optional Redemption." Further, upon the occurrence of a Change
in Control, each holder of Exchange Discount Notes will have the right to
require Holdings to repurchase all or part of such holder's Discount Notes, as
described above under "Description of Exchange Discount Notes--Change in
Control."
Based on Holdings' current expectations, the likelihood that a Public Equity
Offering or Change in Control will occur is remote. Accordingly, Holdings
intends to take the position that the contingent payments described above do
not, as of the Issue Date, affect the computation of the amount of OID on the
Exchange Discount Notes or the yield to maturity or maturity date of the
Exchange Discount Notes. Holdings' determination in this regard is binding on
a holder, unless such holder discloses in the proper manner to the Internal
Revenue Service that it is taking a different position.
Prospective investors should consult their tax advisors as to the tax
considerations relating to the contingent payments described above. If,
contrary to Holdings' expectations, a Public Equity Offering or Change in
Control were to occur or if the Internal Revenue Service were to take the
position that the contingent payments were not remote as of the Issue Date,
Holdings could be required to redetermine the amount and timing of interest
income realized by a holder of an Exchange Discount Note.
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SALE, EXCHANGE OR RETIREMENT OF AN EXCHANGE DISCOUNT NOTE. Upon the sale,
exchange, retirement or other taxable disposition of an Exchange Discount
Note, a U.S. Holder will recognize taxable gain or loss in an amount equal to
the difference between the amount of cash and fair market value of property
received in exchange therefor and such holder's adjusted tax basis in the
Exchange Discount Note. A U.S. Holder's adjusted tax basis in an Exchange
Discount Note will generally be increased by the amounts of any OID included
in income by such holder with respect to such Exchange Discount Note and
decreased by the amounts of any payments actually received by such U.S. Holder
with respect to such Exchange Discount Note.
Gain or loss recognized on the sale or other taxable disposition of an
Exchange Discount Note generally will be capital gain or loss and will be
long-term capital gain or loss if the Exchange Discount Note has been held for
more than one year (the maximum rate of tax on any such long-term capital gain
being further reduced if the Exchange Discount Note were held for more than
eighteen months) and otherwise will be short-term capital gain or loss.
CLASSIFICATION OF EXCHANGE DISCOUNT NOTES AS APPLICABLE HIGH YIELD DISCOUNT
OBLIGATIONS. Section 163 of the Code provides that all of the OID with respect
to certain "applicable high yield discount obligations" will be bifurcated
into two elements: (i) an interest element that is deductible by the issuer
only when paid and (ii) a disqualified portion for which the issuer receives
no deduction (the "disqualified portion"). The Exchange Discount Notes will
constitute applicable high yield discount obligations and therefore the
deduction by Holdings of OID on the Exchange Discount Notes will be limited.
The disqualified portion of OID on the Exchange Discount Note will equal the
product of the total OID on the Exchange Discount Notes times the ratio of (a)
the excess of the yield to maturity over the sum of the long-term applicable
federal rate in effect for the month in which the Exchange Discount Notes are
issued plus 6% to (b) the yield to maturity.
A U.S. Holder of an applicable high yield discount obligation must continue
to include OID on the obligation as it accrues. Corporate U.S. Holders
generally will be eligible for the 70% dividends-received deduction with
respect to the disqualified portion of OID accrued on an Exchange Discount
Note to the extent of Holdings' accumulated or current earnings and profits.
Although the matter is not free from doubt, any amount qualifying as a
dividend should not be subject to extraordinary dividend treatment under
Section 1059 of the Code.
BACKUP WITHHOLDING. The backup withholding rules require a payor to deduct
and withhold a tax if (i) the payee fails to furnish a taxpayer identification
number ("TIN") in the prescribed manner, (ii) the IRS notifies the payor that
the TIN furnished by the payee is incorrect, (iii) the payee has failed to
report properly the receipt of "reportable payments" and the IRS has notified
the payor that withholding is required, or (iv) the payee fails to certify
under the penalty of perjury that such payee is not subject to backup
withholding. If any one of the events discussed above occurs with respect to a
holder of Exchange Discount Notes, Holdings, its paying agent or other
withholding agent will be required to withhold a tax equal to 31% of any
"reportable payment" made in connection with the Exchange Discount Notes of
such holder. A "reportable payment" includes, among other things, amounts paid
in respect of interest or OID on an Exchange Discount Note. Any amounts
withheld from a payment to a holder under the backup withholding rules will be
allowed as a refund or credit against such holder's federal income tax,
provided that the required information is furnished to the IRS. Certain
holders (including, among others, corporations and certain tax-exempt
organizations) are not subject to backup withholding.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES FOR NON-U.S. HOLDERS
This section describes special rules applicable to a Non-U.S. Holder of
Exchange Discount Notes. This description does not address the tax
consequences to stockholders, partners or beneficiaries in a Non-U.S. Holder
or the tax consequences to Non-U.S. Holders that are subject to United States
federal income tax on a net basis on income with respect to an Exchange
Discount Note because such income is effectively connected with the conduct of
a U.S. trade or business. For purposes hereof, a "Non-U.S. Holder" is any
person that is not a U.S. Holder.
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INTEREST AND OID. Payments with respect to OID accrued by a Non-U.S. Holder
that do not qualify for the portfolio interest exception discussed below will
be subject to withholding of federal income tax at a rate of 30% unless a U.S.
income tax treaty applies to reduce the rate of withholding. To claim a treaty
reduced rate, the Non-U.S. Holder must provide a properly executed Form 1001
(See discussion below for changes to withholding tax provisions to be
effective for payments of interest made after December 1, 1999).
Payments with respect to OID accrued by a Non-U.S. Holder on an Exchange
Discount Note will not be subject to federal income or withholding tax if it
qualified as "portfolio interest." Generally, payments with respect to accrued
OID on the Exchange Discount Notes will qualify as portfolio interest if (i)
the Non-U.S. Holder does not own, actually or constructively, 10% or more of
the total combined voting power of all classes of stock of Holdings entitled
to vote, (ii) the Non-U.S. Holder is not a controlled foreign corporation that
is related to Holdings actually or constructively through stock ownership for
federal income tax purposes, (iii) the Non-U.S. Holder is not a bank receiving
interest on a loan entered into in the ordinary course of business, and (iv)
either (x) beneficial owner of the Exchange Discount Note provides Holdings or
its paying agent, a properly executed certification on IRS Form W-8 (or a
suitable substitute form) signed under penalties of perjury that the
beneficial owner is not a "U.S. person" for federal income tax purposes and
that provides the beneficial owner's name and address, or (y) a securities
clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its business holds the
Exchange Discount Note and certifies to Holdings or its agent under penalties
of perjury that the IRS Form W-8 (or a suitable substitute) has been received
by it from the beneficial owner of the Exchange Discount Note or a qualifying
intermediary and furnishes the payor a copy thereof.
As described above, Holdings intends to treat the Exchange Discount Notes as
debt for federal income tax purposes. If the Exchange Discount Notes were
treated as equity, the amount treated as a distribution on the Exchange
Discount Notes would be subject to federal income taxation at a rate of 30% on
the gross amount of the dividend (unless reduced by an applicable income tax
treaty), which tax generally is collected by withholding at a source. Under
current Treasury Regulations, a Non-U.S. Holder is required to satisfy certain
certification and other requirements in order to claim the benefit of a
reduced rate of withholding under an applicable income tax treaty.
SALE, EXCHANGE OR RETIREMENT OF EXCHANGE DISCOUNT NOTES. Any gain realized
by a Non-U.S. Holder on the sale, exchange or retirement of the Exchange
Discount Notes, will generally not be subject to federal income tax or
withholding unless (i) the Non-U.S. Holder is an individual who was present in
the U.S. for 183 days or more in the taxable year of the disposition and meets
certain other requirements, or (ii) the Non-U.S. Holder is subject to tax
pursuant to certain provisions of the Code applicable to certain individuals
who renounce their U.S. citizenship or terminate long-term U.S. residency. If
a Non-U.S. Holder falls under (ii) above, the holder will be taxed on the net
gain derived from the sale under the graduated federal income tax rates that
are applicable to U.S. citizens, and may be subject to withholding under
certain circumstances. If a Non-U.S. Holder falls under (i) above, the holder
generally will be subject to federal income tax at a rate of 30% on the gain
derived from the sale (or reduced treaty rate) and may be subject to
withholding in certain circumstances.
U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING TAX. Back-up withholding
and information reporting generally will not apply to an Exchange Discount
Note issued in registered form that is beneficially owned by a Non-U.S. Holder
if the certification of Non-U.S. Holder status is provided to Holdings or its
agent as described above in"--Material Federal Income Tax Consequences to Non-
U.S. Holders--Interest and OID," provided that the payor does not have actual
knowledge that the holder is a U.S. person. Holdings may be required to report
annually on Form 1042-S to the IRS and to each Non-U.S. Holder the amount of
interest paid to, and the tax withheld, if any, with respect to each Non-U.S.
Holder.
If payments of principal and interest are made to the beneficial owner of an
Exchange Discount Note by or through the foreign office of a custodian,
nominee or other agent of such beneficial owner, or if the proceeds of the
sale of Exchange Discount Notes are made to the beneficial owner of an
Exchange Discount Note through a foreign office of a "broker" (as defined in
the pertinent Treasury Regulations), the proceeds will not be subject
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to backup withholding (absent actual knowledge that the payee is a U.S.
person). Information reporting (but not backup withholding) will apply,
however, to a payment by a foreign office of a custodian, nominee, agent or
broker that is (i) a U.S. person, (ii) a controlled foreign corporation for
federal income tax purposes, or (iii) derives 50% or more of its gross income
from the conduct of a U.S. trade or business for a specified three-year
period; unless the broker has in its records documentary evidence that the
holder is not a Non-U.S. Holder and certain conditions are met (including that
the broker has no actual knowledge that the holder is a U.S. Holder) or the
holder otherwise establishes an exemption. Payment through the U.S. office of
a custodian, nominee, agent or broker is subject to both backup withholding at
a rate of 31% and information reporting, unless the holder certifies that it
is a Non-U.S. Holder under penalties of perjury or otherwise establishes an
exemption.
Any amount withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a credit against, or refund of, such
holder's federal income tax liability, provided that certain information is
provided by the holder to the IRS.
EFFECT OF NEW WITHHOLDING REGULATIONS. The IRS published Treasury
Regulations on October 14, 1997 that revise the procedures for claiming the
benefit of the portfolio interest exemption, a reduced treaty rate and the
exemption from backup withholding. In general, these regulations will be
effective for payments made after December 31, 1999. They will modify the
requirements imposed on a Non-U.S. Holder for establishing the Non-U.S.
Holder's status as a non-U.S. "beneficial owner" eligible for the portfolio
interest exemption, a reduced treaty rate, or the exemption from backup
withholding. Specifically, the new regulations will require a certification of
information including non-U.S. status, on a new form, by the non-U.S.
beneficial owner with which or with whom payments are associated. The
regulations also prescribe somewhat different procedures for entities
including foreign intermediaries and foreign flow-through entities (such as
foreign partnerships) to claim the benefit of the portfolio interest
exemption, reduced treaty rate(s) or the exemption from backup withholding on
behalf of those non-U.S. beneficial owners for which or for whom such entities
receive payments. Non-U.S. Holders should consult their tax advisors to
determine how the regulations will affect their particular circumstances.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Discount Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Discount Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Exchange Discount Notes
received in exchange for Original Discount Notes where such Original Discount
Notes were acquired as a result of market-making activities or other trading
activities. Holdings has agreed that, starting on the Expiration Date and
ending on the close of business on the ninetieth day after the Expiration
Date, it will make this Prospectus, as amended or supplemented, available to
any broker-dealer for use in connection with any such resale. In addition,
until , 1998, all dealers effecting transactions in the Exchange
Discount Notes may be required to deliver a prospectus.
Holdings will not receive any proceeds from any sale of Exchange Discount
Notes by broker-dealers. Exchange Discount Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Discount Notes or
a combination of such methods of resale, at market prices prevailing at the
time of resale, at prices related to such prevailing market prices or
negotiated prices. Any such resale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or the purchasers
of any such Exchange Discount Notes. Any broker-dealer that resells Exchange
Discount Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such Exchange Discount Notes may be deemed to be an "underwriter" within the
meaning of the Securities Act and any profit of any such resale of Exchange
Discount Notes and any commissions or concessions received by any such persons
may be deemed to be underwriting compensation under the Securities Act. The
Letter of Transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date, Holdings will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the
Letter of Transmittal. Holdings has agreed to pay all expenses incident to the
Exchange Offer (including the expenses of one counsel for the Holders of the
Discount Notes) other than commissions or concessions of any brokers or
dealers and will indemnify the Holders of the Discount Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
Certain legal matters in connection with the Exchange Discount Notes offered
hereby will be passed upon for Holdings by Ropes & Gray, One International
Place, Boston, Massachusetts 02110.
EXPERTS
The consolidated financial statements of Iron Age Holdings Corporation at
January 31, 1998 and 1997, and for each of the three years in the period
January 31, 1998, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and the information under the
caption "Selected Historical Consolidated Financial Data" for each of the five
years in the period ended January 31, 1998, appearing in this Prospectus and
Registration Statement have been derived from consolidated financial
statements audited by Ernst & Young LLP.
Such consolidated financial statements and selected historical consolidated
financial data are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
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IRON AGE HOLDINGS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 27, 1996, JANUARY 25, 1997 AND JANUARY 31, 1998
PERIOD FEBRUARY 27, 1997 THROUGH APRIL 25, 1997 (UNAUDITED) AND
THREE MONTHS ENDED MAY 2, 1998 (UNAUDITED)
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. F-2
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Income........................................... F-4
Consolidated Statements of Stockholders' Equity............................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
F-1
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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 25, 1997 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 31, 1998. Our audits also included the financial statement
schedule listed in the index at Item 21.1. 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 on 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 25, 1997 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 31, 1998, 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 13, 1998
F-2
<PAGE>
IRON AGE HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- -----------------------
MAY 2,
JANUARY 25, JANUARY 31, 1998
1997 1998 (UNAUDITED)
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ 1,517 $ 2,069 $ 38
Accounts receivable, net................. 14,202 15,996 17,427
Inventories.............................. 26,537 36,841 38,397
Prepaid expenses......................... 2,171 1,640 5,659
Deferred income taxes.................... 941 640 696
------- -------- --------
Total current assets................... 45,368 57,186 62,215
Notes receivable and other assets.......... 2,817 290 331
Property and equipment, net................ 9,321 10,479 10,515
Intangible assets, net..................... 32,725 106,846 109,508
------- -------- --------
Total assets........................... $90,231 $174,801 $182,569
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt..... $ 3,007 $ 3,699 $ 668
Accounts payable......................... 3,270 3,510 4,579
Accrued expenses......................... 5,092 7,272 5,471
------- -------- --------
Total current liabilities.............. 11,369 14,481 10,718
Long-term debt, less current maturities.... 60,727 97,976 149,454
Accrued pension liability.................. 516 516 516
Deferred income taxes...................... 1,203 6,949 7,143
------- -------- --------
Total liabilities...................... 73,815 119,922 167,831
Commitments and contingencies.............. -- -- --
Redeemable preferred stock................. -- 17,031 --
Stockholders' equity:
Common stock, $.01 par value, 125,000
shares authorized, 101,020 issued and
outstanding............................. 1 -- --
Common stock, $.01 par value, 200,000
shares authorized, 99,625 issued and
outstanding............................. -- 1 1
Additional paid-in capital............... 7,328 38,086 38,086
Retained earnings........................ 9,310 (174) (23,294)
Comprehensive income..................... (223) (65) (55)
------- -------- --------
Total stockholders' equity............. 16,416 37,848 14,738
------- -------- --------
Total liabilities and stockholders'
equity................................ $90,231 $174,801 $182,569
======= ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
IRON AGE HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------------------ --------------------------------------
FEBRUARY 27, THREE
YEAR ENDED JANUARY 26, FEBRUARY 27, 1997 THROUGH MONTHS ENDED
----------------------- 1997 THROUGH 1997 THROUGH APRIL 25, MAY 2,
JANUARY 27, JANUARY 25, FEBRUARY 26, JANUARY 31, 1997 1998
1996 1997 1997 1998 (UNAUDITED) (UNAUDITED)
----------- ----------- ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $95,263 $99,360 $10,937 $107,769 $17,306 $32,167
Cost of sales........... 50,706 52,437 5,610 53,304 8,795 16,043
------- ------- ------- -------- ------- -------
Gross profit............ 44,557 46,923 5,327 54,465 8,511 16,124
Selling, general and
administrative......... 28,399 31,267 5,120 36,541 5,685 12,967
Depreciation............ 1,127 1,322 121 1,443 245 424
Amortization of
intangible assets...... 1,402 1,429 117 2,983 599 846
------- ------- ------- -------- ------- -------
Operating income
(loss)................. 13,629 12,905 (31) 13,498 1,982 1,887
Interest expense........ 6,702 6,515 1,116 9,855 1,449 2,742
------- ------- ------- -------- ------- -------
Income (loss) before
income taxes........... 6,927 6,390 (1,147) 3,643 533 (855)
Provision (benefit) for
income taxes........... 3,091 2,800 (452) 1,686 205 (128)
------- ------- ------- -------- ------- -------
Income (loss) before
extraordinary item..... $ 3,836 $ 3,590 $ (695) $ 1,957 328 (727)
Extraordinary item, net
of tax................. -- -- -- -- -- (4,015)
------- ------- ------- -------- ------- -------
Net income (loss)....... $ 3,836 $ 3,590 $ (695) $ 1,957 $ 328 $(4,742)
======= ======= ======= ======== ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
IRON AGE HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNTS CAPITAL EARNINGS INCOME TOTAL
------- ------- ------- -------- ------------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR
Balance at January 28,
1995................... 101,020 $ 1 $ 6,263 $ 1,884 $(248) $ 7,900
Net income............ -- -- -- 3,836 -- 3,836
Foreign currency
translation adjust-
ment, net of tax..... -- -- -- -- 4 4
------- ----- ------- -------- ----- -------
Balance at January 27,
1996................... 101,020 1 6,263 5,720 (244) 11,740
Net income............ -- -- -- 3,590 -- 3,590
Stock-based compensa-
tion................. -- -- 1,065 -- -- 1,065
Foreign currency
translation adjust-
ment, 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 compensa-
tion................. -- -- 1,054 -- -- 1,054
Foreign currency
translation adjust-
ment, 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 adjust-
ment, net of tax..... -- -- -- -- (65) (65)
------- ----- ------- -------- ----- -------
Balance at January 31,
1998................... 99,625 1 38,086 (174) (65) 37,848
Net loss (unaudited).. -- -- -- (4,742) -- (4,742)
Dividends paid on
preferred stock
(unaudited).......... -- -- -- (633) -- (633)
Dividends paid on
common stock
(unaudited).......... -- -- -- (17,745) -- (17,745)
Foreign currency
translation
adjustment, net of
tax (unaudited)...... -- -- -- -- 10 10
------- ----- ------- -------- ----- -------
Balance at May 2, 1998
(unaudited)............ 99,625 $ 1 $38,086 $(23,294) $ (55) $14,738
======= ===== ======= ======== ===== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
IRON AGE HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------------------ --------------------------------------
YEAR ENDED JANUARY 26, FEBRUARY 27, FEBRUARY 27, THREE
----------------------- 1997 THROUGH 1997 THROUGH 1997 THROUGH MONTHS ENDED
JANUARY 27, JANUARY 25, FEBRUARY 26, JANUARY 31, APRIL 25, MAY 2,
1996 1997 1997 1998 1997 1998
----------- ----------- ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....... $ 3,836 $ 3,590 $ (695) $ 1,957 $ 328 $ (4,742)
Adjustments to reconcile
net income (loss) to
net cash provided by
operating activities:
Extraordinary item, net
of tax................ -- -- -- -- -- 4,015
Depreciation and
amortization.......... 2,882 3,109 246 4,727 897 1,378
Amortization of
deferred financing
fees included in
interest.............. 318 384 16 613 102 539
Provision for losses on
accounts receivable... 14 45 10 30 29 47
Deferred income taxes.. 131 369 -- (602) 2 (134)
Stock-based
compensation.......... -- 1,065 1,054 -- -- --
Changes in operating
assets and
liabilities:
Accounts receivable.... (134) (690) (954) 372 1,376 (618)
Inventories............ (3,611) 1,554 797 (6,976) (2,304) 1
Prepaid expenses....... 23 (143) 65 238 (180) (961)
Other assets........... (386) (182) 20 (14) 2 (294)
Accounts payable....... (3,045) (35) (573) (1,375) 277 388
Accrued expenses....... 1,294 (249) 1,450 (882) (598) (4,061)
Payments of pension
benefits.............. (162) -- -- -- -- --
-------- --------- ------ -------- -------- ---------
Net cash provided by
(used in) operating
activities............. 1,160 8,817 1,436 (1,912) (69) (4,442)
INVESTING ACTIVITIES
Net cash used in
business acquisitions.. -- -- -- (141,717) (141,717) (4,493)
Other assets............ (2,119) -- -- -- -- --
Purchases of property
and equipment.......... (2,560) (2,222) (117) (2,365) (132) (374)
-------- --------- ------ -------- -------- ---------
Net cash used in
investing activities... (4,679) (2,222) (117) (144,082) (141,849) (4,867)
FINANCING ACTIVITIES
Borrowing under
revolving credit
agreement.............. 71,238 93,617 (1,909) 44,450 16,350 33,800
Proceeds from senior
term notes............. -- -- -- 65,000 65,000 --
Proceeds from senior
subordinated notes..... -- -- -- 14,550 14,550 100,000
Proceeds from the
Discount Notes......... -- -- -- -- -- 25,000
Contribution by
Holdings............... 1,421 2,441 -- 40,000 40,000 6,380
Issuance of Preferred
Stock.................. -- -- -- 14,900 14,900 --
Issuance of stock
purchase warrants...... -- -- -- 100 100 --
Principal payments on
debt................... (69,413) (100,352) (357) (23,531) (1,074) (111,063)
Payment of financing
costs.................. -- -- -- (7,468) (7,468) (5,112)
Redemption of Holdings
Series A Preferred
Stock.................. -- -- -- -- -- (17,664)
Dividends paid.......... -- -- -- -- -- (17,745)
Principal payments on
capital leases......... (309) (305) (33) (328) (93) 52
-------- --------- ------ -------- -------- ---------
Net cash provided by
(used in) financing
activities............. 1,516 (7,040) (2,299) 147,673 142,265 7,268
Effect of exchange rate
changes on cash and
cash equivalents....... 7 40 (37) (110) (44) 10
-------- --------- ------ -------- -------- ---------
(Decrease) increase in
cash and cash
equivalents............ (1,996) (405) (1,017) 1,569 303 (2,031)
Cash and cash
equivalents at
beginning of year...... 3,918 1,922 1,517 500 500 2,069
-------- --------- ------ -------- -------- ---------
Cash and cash
equivalents at end of
year................... $ 1,922 $ 1,517 $ 500 $ 2,069 $ 803 $ 38
======== ========= ====== ======== ======== =========
Supplemental disclosures
of cash flow
information:
Cash paid during the
period for:
Interest............... $ 6,249 $ 5,385 $ 552 $ 7,837 $ 205 $ 5,869
Income taxes........... $ 2,573 $ 2,568 $ 7 $ 1,138 $ 144 $ 195
Supplemental schedule of
noncash investing and
financing activities:
Capital lease
agreements for
equipment............. $ 340 $ 340 $ -- 206 $ 1 $ 142
======== ========= ====== ======== ======== =========
Assets acquired and
liabilities assumed in
connection with
acquisitions:
Fair value of assets
acquired.............. $ -- $ -- $ -- $171,328 $171,328 $ 5,879
Liabilities assumed.... -- -- -- (21,946) (21,946) (1,236)
-------- --------- ------ -------- -------- ---------
Cash paid.............. -- -- -- 149,382 149,382 4,643
Less fees and
expenses.............. -- -- -- (7,468) (7,468) (150)
Less cash acquired..... -- -- -- (197) (197) --
-------- --------- ------ -------- -------- ---------
Net cash used in
business
acquisitions.......... $ -- $ -- $ -- $141,717 $141,717 $ 4,493
======== ========= ====== ======== ======== =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
IRON AGE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1998 AND MAY 2, 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 ("Investment Co."), Iron Age Mexico S.A. de C.V. ("Iron Age Mexico"),
Iron Age Canada Ltd. ("Iron Age Canada"), 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.
Holdings distributes and manufactures work footwear with operations
concentrated in North America. As a percentage of sales, 94% and 6% of
Holdings' operations are related to distributing and manufacturing,
respectively. Holdings has one reportable segment, distribution of work
footwear in the United States.
FISCAL YEAR
Holdings' fiscal year ends on the last Saturday in January. The 1996 and
1997 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.
INTERIM FINANCIAL STATEMENTS
The financial statements of Holdings for the period February 27, 1997
through April 25, 1997 and the three months ended May 2, 1998 and the related
footnote information are unaudited but, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments and accruals)
which Holdings considers necessary for a fair presentation of the information
set forth therein. Results of operations for interim periods are not
necessarily indicative of the results that may be expected for the entire
year.
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 96% of inventories at January 25, 1997 and January 31, 1998
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.
F-7
<PAGE>
IRON AGE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $665,000, $749,000 and $984,000 of unamortized catalog costs at
January 25, 1997, January 31, 1998 and May 2, 1998. For the years ended
January 27, 1996, January 25, 1997 and the periods January 26, 1997 through
February 26, 1997, February 27, 1997 through January 31, 1998, February 27,
1997 through April 25, 1997 and the three months ended May 2, 1998 advertising
expense recorded by Holdings was $1,231,000, $1,134,000, $110,000, $1,801,000,
$252,000 and $609,000, 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>
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
business' 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 a separate component of
stockholders' equity. Foreign currency transaction gains and losses are
included in determining net income. Such amounts have not been material.
REVENUE RECOGNITION
Revenue from product sales is recognized at the time products are shipped.
F-8
<PAGE>
IRON AGE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FINANCIAL INSTRUMENTS
Holdings periodically enters into interest rate swap agreements to moderate
its exposure to interest rate changes and to lower the overall cost of
borrowing. 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. The fair values of the swap agreements are not recognized in
the financial statements. Approximately 33%, or $50 million, of Holdings'
outstanding long-term debt was subject to interest-rate swap agreements at May
2, 1998.
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.
COMPREHENSIVE INCOME
As of February 1, 1998, Holdings adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income". Statement 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 stockholder's equity, to be
included in other comprehensive income. The adoption of this statement had no
impact on Holdings' net income or stockholders' equity.
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 27, 1996 and the
January 25, 1997 consolidated financial statements to conform to the January
31, 1998 presentation.
2. ACQUISITIONS
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
F-9
<PAGE>
IRON AGE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$34,037,000 (net of carryover basis adjustment of $1,963,000), manditorily
redeemable preferred stock issued for $14,900,000, common stock purchase
warrants issued for $100,000, borrowings under the Existing Credit Facility of
$79,000,000, and subordinated notes issued to certain Mezzanine Investors 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 assets acquired has been proportionately
reduced by approximately $1,963,000 with such amount being charged against the
gross stockholder's 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 forty years. The forty 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.
As Holdings' 1998 financial statements only include the Predecessor's
operations from the date of acquisition, the following selected unaudited pro
forma information is being provided to present a summary of the results of
Holdings as if the acquisition had occurred as of January 28, 1996 and January
26, 1997, giving effect to purchase accounting adjustments. The pro forma data
is for informational purposes only and may not necessarily reflect the results
of operations had the change in ownership been in effect for the years ended
January 25, 1997 and January 31, 1998.
<TABLE>
<CAPTION>
1997 1998
------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Net Sales............................................... $99,360 $118,706
Net loss................................................ (767) 1,803
</TABLE>
KNAPP SHOES, INC. (KNAPP)
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
was funded with a capital contribution 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 Company's credit agreement of
$1,326,000. The results of operations for Knapp are included in the
consolidated statement of income from the date of acquisition. Knapp is 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 $4,519,000 is being amortized on the
straight-line basis over forty years. Holdings has not provided selected
unaudited pro forma information as if the Knapp Acquisition had occurred as of
January 28, 1996 and January 26, 1997 because the Knapp Acquisition was not a
significant business combination.
F-10
<PAGE>
IRON AGE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OTHER ACQUISITIONS
During the three months ended May 2, 1998, Holdings acquired the stock of
Safety Supplies and Service Company, Inc., and acquired certain assets and
assumed certain liabilities of Safety Depot Ltd., ACT Safety, Inc. and J. Mars
Knapp Shoes for approximately $4,643,000, including transaction costs of
approximately $150,000. The results of operations are included from the date
of the acquisitions, respectively. 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 $2,182,000 is being amortized on the straight-line basis,
over forty years. Holdings has not provided selected unaudited pro forma
information as if these acquisitions had occurred as of January 28, 1996 and
January 26, 1997 because these acquisitions, individually and collectively,
were not significant business combinations.
3. ACCOUNTS RECEIVABLE
Accounts receivable are presented net of allowance for doubtful accounts of
approximately $352,000, $382,000 and $429,000 as of January 25, 1997, January
31, 1998 and May 2, 1998, respectively. Holdings does not require collateral
for its trade accounts receivable and maintains an allowance for doubtful
accounts. 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>
PREDECESSOR SUCCESSOR
----------- -----------------------
MAY 2,
JANUARY 25, JANUARY 31, 1998
1997 1998 (UNAUDITED)
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Finished products...................... $26,797 $33,527 $36,200
Raw materials.......................... 2,235 3,470 2,490
------- ------- -------
29,032 36,997 38,690
Less excess of current cost over LIFO
inventory value....................... 2,495 156 293
------- ------- -------
$26,537 $36,841 $38,397
======= ======= =======
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- -----------------------
MAY 2,
JANUARY 25, JANUARY 31, 1998
1997 1998 (UNAUDITED)
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Land and buildings..................... $ 2,417 $ 3,158 $ 3,188
Vehicles............................... 4,360 3,047 3,525
Furniture and fixtures................. 1,664 917 1,080
Machinery and equipment................ 5,290 4,133 4,324
Leasehold improvements................. 993 857 928
------- ------- -------
14,724 12,112 13,045
Less accumulated depreciation and
amortization.......................... 5,403 1,633 2,530
------- ------- -------
Net property and equipment............. $ 9,321 $10,479 $10,515
======= ======= =======
</TABLE>
F-11
<PAGE>
IRON AGE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- -----------------------
MAY 2,
JANUARY 25, JANUARY 31, 1998
1997 1998 (UNAUDITED)
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Goodwill................................. $38,010 $ 88,592 $91,393
Customer lists........................... 1,741 16,150 16,694
Deferred financing costs................. 1,348 5,518 5,124
Other.................................... 268 262 235
------- -------- --------
41,367 110,522 113,446
Less accumulated amortization............ 8,642 3,676 3,938
------- -------- --------
$32,725 $106,846 $109,508
======= ======== ========
</TABLE>
In connection with the Transactions, Holdings expensed approximately
$4,927,000 of unamortized deferred financing costs related to the Existing
Credit Facility and the Existing Subordinated Notes. Such costs are included
in Holdings' extraordinary loss, net of tax, for the three months ended May 2,
1998. Financing costs incurred in connection with obtaining the 9 7/8% Senior
Subordinated Notes, the 12 1/8% Senior Discount Notes and the New Credit
Facility of approximately $4,249,000 have been deferred by Holdings as of May
2, 1998 and will be amortized over the period the Senior Subordinated Notes,
the Discount Notes and the New Credit Facility are outstanding.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- -----------------------
MAY 2,
JANUARY 25, JANUARY 31, 1998
1997 1998 (UNAUDITED)
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
9 7/8% Senior Subordinated Notes due
2008 (a) ............................ $ -- $ -- $100,000
Senior Discount Notes (b)............. -- -- 45,140
New Credit Facility (c)............... -- -- 23,900
Existing Credit Facility (retired) (d)
Working capital advance............. -- 23,000 --
Term A Note......................... -- 18,500 --
Term B Note......................... -- 19,850 --
Term C Note......................... -- 24,813 --
Existing Subordinated Notes (retired)
(e).................................. -- 15,000 --
Other Notes (f)....................... 451 208 317
Capitalized lease obligations (Note
11).................................. 911 754 846
Predecessor obligations (g)........... 62,372 -- --
------- -------- --------
63,374 102,125 170,203
Less:
Current maturities.................. 3,007 3,699 668
Unamortized discount................ -- 450 20,081
------- -------- --------
$60,727 $ 97,976 $149,454
======= ======== ========
</TABLE>
F-12
<PAGE>
IRON AGE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(A) 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) pay a dividend to Holdings of approximately
$13,638,700 to allow Holdings to redeem the Holdings Series A Preferred Stock,
(iii) make compensation payments of approximately $2,245,000 to certain
members of management, and (iv) 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 Existing Credit Facility of
$1,562,000; unamortized deferred financing fees of $4,927,000; and unamortized
discount on the Existing Subordinated Notes of $434,000.
The Senior Subordinated Notes accrue interest at the rate of 9 7/8% per
annum and are payable semi-annually 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 Senior Subordinated Indenture.
The Senior Subordinated Indenture 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.
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)
(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 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 Indenture and the Senior Subordinated Notes, whether for payment
of principal of or interest on the Senior Subordinated Notes, expenses,
indemnification or otherwise. On the effective date of Iron Age's and
Holdings' registration statements on Form S-4, none of Iron Age's Domestic
Restricted Subsidiaries will be a Material Subsidiary, and therefore no
Subsidiary Guaranty will be in force.
Iron Age has 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.
(B) 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 the
F-13
<PAGE>
IRON AGE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Holdings Series A Preferred Stock and (iii) to make a capital contribution to
the Company of approximately $2,245,000 for compensation payments to certain
members of management. 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 semi-annually in arrears on May 1, and November 1, commencing
on November 1, 2003. The Discount Notes mature on May 1, 2009.
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.
The Indenture 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 Holdings'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 Senior Subordinated Indenture, 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 Senior Subordinated Indenture 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.
Holdings has 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.
(C) 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 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 borrowings under the letter of credit and the swing line facility
were $495,000 and $0, respectively at May 2, 1998.
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.
F-14
<PAGE>
IRON AGE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 plus 0.5%. Borrowings on the
New Credit Facility accrue interest at 9.5% at May 2, 1998.
Iron Age has classified its borrowings under the New Credit Facility as
long-term as of May 2, 1998 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.
(D) EXISTING CREDIT FACILITY (RETIRED)
On February 26, 1997, Holdings and Iron Age entered into a $100,000,000
Existing 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 Existing 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.
(E) EXISTING SUBORDINATED NOTES (RETIRED)
On February 26, 1997, Iron Age issued the Existing Subordinated Notes in the
principal amounts of $10,000,000 and $5,000,000 at a discount. The Existing
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 three months ended May 2, 1998. The
unamortized debt discount of approximately $434,000 was also expensed at May
2, 1998 in connection with the extinguishment of the Existing Subordinated
Notes and is included in Iron Age's extraordinary loss, net of tax, for the
three months ended May 2, 1998.
(F) OTHER NOTES
Holdings has other notes of approximately $451,000, $208,000 and $317,000 at
January 25, 1997, January 31, 1998 and May 2, 1998, respectively. The notes
will be paid by January 1999. The notes accrue interest at rates varying from
8.5% to 9.5%.
(G) PREDECESSOR OBLIGATIONS
At January 25, 1997, the Predecessor had $62,372,000 of outstanding
obligations that were comprised of a $10,350,000 revolving credit agreement, a
$7,500,000 bank term loan, $12,382,000 of senior stockholder notes and
$32,140,000 of mezzanine stockholder notes. The obligations, including accrued
interest of $747,000, were extinguished in connection with the Fenway
Acquisition that occurred on February 26, 1997.
F-15
<PAGE>
IRON AGE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future Maturities of Long-Term Debt
Five-year maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1999........................................................... $ 668
2000........................................................... 291
2001........................................................... 184
2002........................................................... 3,164
2003........................................................... 4,125
2004........................................................... 4,100
Thereafter..................................................... 157,671
--------
$170,203
========
</TABLE>
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 short-term revolving credit agreements and its bank
term loan approximate their fair value. The fair values of Holdings' 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 25, 1997 and January 31, 1998 and May 2, 1998 are as follows:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
---------------- -------------------------------------------------
JANUARY 25, 1997 JANUARY 31, 1998 MAY 2, 1998
---------------- ------------------------ -----------------------
CARRYING FAIR
CARRYING FAIR CARRYING FAIR AMOUNT VALUE
AMOUNT VALUE AMOUNT VALUE (UNAUDITED) (UNAUDITED)
-------- ------- ------------ ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 1,517 $ 1,517 $ 2,069 $ 2,069 $ 38 $ 38
Senior Subordinated
Notes.................. -- -- -- -- 100,000 100,000
New Credit Facility..... -- -- -- -- 23,900 23,900
Senior Discount Notes... -- -- -- -- 25,059 25,059
Working capital
advance................ -- -- 23,000 23,000 -- --
Term Notes.............. -- -- 63,163 63,163 -- --
Existing Subordinated
Notes (retired)........ -- -- 15,000 15,000 -- --
Other Notes............. 451 451 208 208 317 317
Predecessor
obligations............ 62,372 62,372 -- -- -- --
Interest rate swap
agreements............. -- -- -- (702) -- (560)
</TABLE>
F-16
<PAGE>
IRON AGE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 will be merged into
Holdings' plan. 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 years ended January 27, 1996 and January 25, 1997, and the periods
January 26, 1997 through February 26, 1997, February 27, 1997 through January
31, 1998 and for the three months ended May 2, 1998, contributions made by
Holdings to the defined contribution plans were approximately $774,000,
$872,000, $0, $589,000 and $363,000, respectively.
10. INCOME TAXES
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------------------ --------------------------------------
FEBRUARY 27, THREE
YEAR ENDED JANUARY 26, FEBRUARY 27, 1997 THROUGH MONTHS ENDED
----------------------- 1997 THROUGH 1997 THROUGH APRIL 25, MAY 2,
JANUARY 27, JANUARY 25, FEBRUARY 26, JANUARY 31, 1997 1998
1996 1997 1997 1998 (UNAUDITED) (UNAUDITED)
----------- ----------- ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Income taxes:
Current:
Federal............... $2,435 $1,782 $(450) $2,306 $281 $(179)
State................. 524 649 (2) (24) (3) (87)
------ ------ ----- ------ ---- -----
2,959 2,431 (452) 2,282 278 (266)
Deferred:
Federal............... 62 321 -- (458) (56) 95
State................. 70 48 -- (138) (17) 43
------ ------ ----- ------ ---- -----
132 369 -- (596) (73) 138
------ ------ ----- ------ ---- -----
$3,091 $2,800 $(452) $1,686 $205 $(128)
====== ====== ===== ====== ==== =====
</TABLE>
A reconciliation of U.S. income tax computed at the statutory rate and
actual expense is as follows:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------------------ --------------------------------------
FEBRUARY 27, THREE
YEAR ENDED JANUARY 26, FEBRUARY 27, 1997 THROUGH MONTHS ENDED
----------------------- 1997 THROUGH 1997 THROUGH APRIL 25, MAY 2,
JANUARY 27, JANUARY 25, FEBRUARY 26, JANUARY 31, 1997 1998
1996 1997 1997 1998 (UNAUDITED) (UNAUDITED)
----------- ----------- ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Amount computed at
statutory rate......... $2,355 $2,173 $ (390) $1,239 $181 $(291)
State and local taxes
less applicable federal
income tax............. 392 460 (1) (107) (13) (29)
Goodwill and other
amortization........... 313 232 26 657 119 190
Other................... 31 (65) (87) (103) (82) 2
------ ------ ----- ------ ---- -----
$3,091 $2,800 $(452) $1,686 $205 $(128)
====== ====== ===== ====== ==== =====
</TABLE>
F-17
<PAGE>
IRON AGE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the net deferred tax asset and liability are as follows:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- ------------------
JANUARY 25, JANUARY 31, MAY 2,
1997 1998 1998
----------- ----------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax liabilities:
Inventory.................................. $1,211 $2,244 $2,244
Property and equipment..................... 988 1,088 1,105
Customer lists............................. -- 5,783 5,680
Other...................................... -- 349 618
------ ------ ------
Total deferred tax liabilities........... 2,199 9,464 9,647
Deferred tax assets:
Interest expense........................... 370 2,016 2,016
Inventory.................................. 361 568 580
Accrued expenses........................... 474 526 566
Stock-based compensation................... 360 -- --
Other...................................... 372 45 38
------ ------ ------
Total deferred tax assets................ 1,937 3,155 3,200
------ ------ ------
Net deferred tax liabilities............. $ 262 $6,309 $6,447
====== ====== ======
</TABLE>
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 18%, 17%, 17% and 20% of its inventory from one vendor for the
fiscal years ended January 27, 1996 and January 25, 1997 and the periods
January 26, 1997 through February 26, 1997 and May 2, 1998 and February 27,
1997 through January 31, 1998, respectively. At January 25, 1997 January 31,
1998 and May 2, 1998, Holdings had outstanding inventory purchase commitments
of approximately $15,445,000 and $15,275,000 and 14,452,000, 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.
F-18
<PAGE>
IRON AGE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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 LEASES OPERATING LEASES
-------------- ----------------
<S> <C> <C>
Nine months ended January 30, 1999......... $ 321 $ 2,604
2000....................................... 368 2,621
2001....................................... 236 1,868
2002....................................... 116 1,079
2003....................................... 36 678
2004....................................... -- 474
Thereafter................................. -- 749
------ -------
Total minimum lease payments............... 1,077 $10,073
=======
Less amounts representing interest......... 231
------
Present value of future minimum lease pay-
ments..................................... 846
Less current maturities of capital lease
obligations............................... 351
------
Capital lease obligations.................. $ 495
======
</TABLE>
Operating lease expense under such arrangements was approximately
$1,767,000, $2,271,000, $203,000, $594,000, $3,785,000 and $1,065,000 for the
fiscal years ended January 27, 1996 and January 25, 1997, and the periods
January 26, 1997 through February 26, 1997, for the period February 27, 1997
through April 25, 1997, February 27, 1997 through January 31, 1998 and the
three months ended May 2, 1998, respectively.
At January 25, 1997, January 31, 1998 and May 2, 1998, property and
equipment include capitalized vehicle leases of approximately $1,904,000, and
$1,223,000 and $1,455,000, respectively, and accumulated amortization of
approximately $848,000 and $315,000 and $404,000, 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 "Mezzanine
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
F-19
<PAGE>
IRON AGE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Mezzanine 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, the
Company 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.
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 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 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, 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 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 applies APB Opinion 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for its stock option plan. At
January 31, 1998, no compensation cost has been recognized in Holdings'
financial statements.
F-20
<PAGE>
IRON AGE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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>
<S> <C>
Net income:
As reported..................................... $1,957
Pro forma....................................... 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 Holdings' stock option plan as of January 31,
1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------ --------------
<S> <C> <C>
Outstanding, beginning of period................... -- $--
Granted............................................ 20,245 177
------ ----
Outstanding, end of year........................... 20,245 $177
====== ====
Options exercisable at end of year................. 12,660 $ 65
====== ====
</TABLE>
Stock options granted during the fiscal year ended January 31, 1998 and
outstanding as of January 31, 1998 were as follows:
<TABLE>
<CAPTION>
OPTIONS EXERCISE PRICE OF
EXERCISE GRANT DATE OPTIONS CONTRACTUAL CURRENTLY CURRENTLY EXERCISEABLE
PRICE FAIR VALUE GRANTED LIFE EXERCISEABLE OPTIONS
-------- ---------- ------- ----------- ------------ ----------------------
<S> <C> <C> <C> <C> <C> <C>
Series A Options........ $ 36 $ 5 11.528 9.1 years 11,528 $ 36
Series B Options........ 364 51 8,717 9.1 years 1,132 364
------ ------
20,245 12,660
====== ======
</TABLE>
F-21
<PAGE>
IRON AGE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 fiscal
years ended January 27, 1996 and January 25, 1997 and the period January 26,
1997 through February 26, 1997 is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------
JANUARY 26, 1997 THROUGH
JANUARY 27, 1996 JANUARY 25, 1997 FEBRUARY 26, 1997
------------------------ ------------------------ ------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- ---------------- ------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year................ 8,899 $62 11,595 $62 12,212 $62
Granted................. 2,696 62 617 62 --
Exercised............... -- -- 12,212 62
------ --- ------ --- ------ ---
Outstanding, end of
year................... 11,595 62 12,212 62 -- --
====== === ====== === ====== ===
Exerciseable, end of
year................... 7,763 $62 9,536 $62 -- --
Weighted average fair
value of options
granted during the
year................... $ 214 $ 611 --
</TABLE>
For the year ended January 25, 1997 and the period January 26, 1997 through
February 26, 1997, Predecessor recognized compensation expense of $1,065,000
and $1,054,000, 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 years ended January 27, 1996 and January 25, 1997, and the period
January 26, 1997 through February 26, 1997 would have been as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------
JANUARY 26, 1997
THROUGH
JANUARY 27, 1996 JANUARY 25, 1997 FEBRUARY 26, 1997
---------------- ---------------- -----------------
<S> <C> <C> <C>
Net income before stock
options and warrants..... $3,836 $ 3,590 $ (695)
Recorded APB No. 25 com-
pensation expense........ -- (1,065) (1,054)
Pro forma compensation ex-
pense from stock options
and warrants:
Fiscal year ended Janu-
ary 27, 1996 grant..... 108 108 108
Fiscal year ended Janu-
ary 25, 1997 grant..... -- 355 --
------ ------- -------
Pro forma net income...... $3,728 $ 4,192 $ 251
====== ======= =======
</TABLE>
F-22
<PAGE>
IRON AGE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
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 ("BCC"). Holdings paid management fees of $134,000, $132,000, $0,
$250,000, $43,000 and $69,000 in the fiscal years ended January 27, 1996 and
January 25, 1997 and the periods January 26, 1997 through February 26, 1997
and February 27, 1997 through January 31, 1998, February 27, 1997 through
April 25, 1997 and the three months ended May 2, 1998, 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 $79,516 for the eleven months ended January 31,
1998 and $2,631 for the three months ended May 2, 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 Mezzanine 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 including the Mezzanine Investors and Iron Age
management. 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.
F-23
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALES PERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY HOLDINGS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A SOLIC-
ITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT THERE
HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF
HOLDINGS SINCE THE DATE AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS.
------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary................................................................... 1
Risk Factors.............................................................. 16
Use of Proceeds........................................................... 21
Capitalization............................................................ 22
Unaudited Pro Forma Consolidated Statement of Income and Other Financial
Data..................................................................... 23
Selected Historical and Pro Forma Consolidated Financial Data............. 26
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 29
Business.................................................................. 37
Management................................................................ 44
Principal Stockholders.................................................... 50
Certain Relationships and Related Transactions............................ 52
Description of Other Indebtedness......................................... 53
Description of Exchange Discount Notes.................................... 56
The Exchange Offer........................................................ 86
Material Federal Income Tax Considerations................................ 96
Plan of Distribution...................................................... 101
Legal Matters............................................................. 101
Experts................................................................... 101
Index to Consolidated Financial Statements................................ F-1
</TABLE>
UNTIL , 1998 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECU-
RITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DE-
LIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN-
SOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
IRON AGE HOLDINGS CORPORATION
EXCHANGE OFFER
$45,140,000 12 1/8% SENIOR DISCOUNT
NOTES DUE 2009
--------
PROSPECTUS
--------
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 102(b) of the Delaware General Corporation Law
("DGCL"), the Registrant's Certificate of Incorporation eliminates the
personal liability of a director to the Registrant or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the DGCL (relating to unlawful payment of dividends and
unlawful stock purchase and redemption) or (iv) for any transaction from which
the director derived an improper personal benefit.
Section 145 of the DGCL authorizes a corporation to indemnify its directors,
officers, employees and other agents in terms sufficiently broad to permit
indemnification (including reimbursement for expenses) under certain
circumstances for liabilities arising under the Securities Act of 1933, as
amended (the "Securities Act"). The Registrant's Certificate of Incorporation
contains a provision covering indemnification to the maximum extent permitted
under the DGCL of directors and officers of the Registrant against certain
liabilities and expenses incurred as a result of proceedings involving such
persons in their capacitities as directors, officers or agents of the
Registrant, including proceedings under the Securities Act or the Securities
Exchange Act of 1934, as amended.
At present, there is no pending litigation or proceeding involving a
director, officer or other agent of the Registrant in which indemnification is
being sought, nor is the Registrant aware of any threatened litigation that
may result in a claim for indemnification by any director, officer or other
agent of the Registrant.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1* Holdings Certificate of Incorporation, as amended.
3.2* Holdings By-laws.
4.1* Indenture dated as of April 24, 1998.
4.2* Registration Agreement dated April 24, 1998.
5.1* Opinion of Ropes & Gray re: legality.
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.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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 Stock Purchase Agreement dated as of February 26,
1997.
10.21* Pittsburgh, Pennsylvania Lease Agreement dated March 1, 1993, as
amended June 2, 1994, as amended June 12, 1996, as amended December
10, 1997.
10.22* Jerusalem, New York Lease Agreement dated December 9, 1992, as
amended January 1, 1994, as amended April 1997.
10.23* Jerusalem, New York Lease Agreement dated June 20, 1997, as amended
January 9, 1998.
10.24* Lewiston, Maine Lease Agreement dated January 14, 1994.
10.25* Lewiston, Maine Lease Agreement dated November 30, 1990, as amended
June 8, 1994.
10.26* Ontario, Canada Lease Agreement dated June 11, 1991, as renewed
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 dated August 1, 1994.
10.31* Johanson Non-Competition Agreement dated August 1, 1994.
12.1* Statement regarding computation of ratio of earnings to fixed
charges.
21.1* Subsidiaries of Holdings.
23.1* Consent of Ropes & Gray (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP.
24.1* Powers of Attorney (included on signature page).
25.1* Statement of Eligibility on Form T-1 of The Chase Manhattan Bank
under the Indenture.
27.1* Financial Data Schedules.
99.1* Form of Letter of Transmittal used in connection with the Exchange
Offer.
99.2* Form of Notice of Guaranteed Delivery used in connection with the
Exchange Offer.
99.3* Form of Exchange Agent Agreement.
</TABLE>
- --------
* Previously filed as part of this Registration Statement.
II-2
<PAGE>
(B)
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
IRON AGE HOLDINGS CORPORATION
MAY 2, 1998
<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
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
- ------------------------ ------------ ---------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Three Months Ended May
2, 1998 (unaudited):
Deducted from assets
accounts:
Allowance for
doubtful accounts.. $382,000 $47,000 $-- $ -- $429,000
Year ended January 31,
1998:
Deducted from assets
accounts:
Allowance for
doubtful accounts.. 352,000 40,000 -- 10,000(1) 382,000
Year ended January 25,
1997:
Deducted from assets
accounts:
Allowance for
doubtful accounts.. 307,000 45,000 -- -- 352,000
Year ended January 27,
1996:
Deducted from assets
accounts:
Allowance for
doubtful accounts.. 321,000 14,000 -- 28,000(1) 307,000
</TABLE>
- --------
(1) Uncollectible accounts written off, net of recoveries.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by any such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether or not such indemnification
is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) That, every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new
II-3
<PAGE>
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
(4) That for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(5) That for purposes of determining any liability under the Securities
Act, each post-effective amendment that contained a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(6) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(7) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(8) That, for purposes of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein and the
offering of such securities at the time shall be deemed to be the initial
bona fide offering thereof.
(9) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(10) To file an application for the purpose of determining the
eligibility of the Trustee to act under subsection (a) of section 310 of
the Trust Indenture Act ("Act") in accordance with the rules and
regulations prescribed by the Commission under section 305(b)(2) of the
Act.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 to the Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Pittsburgh, Commonwealth of Pennsylvania, on the 14th day of August, 1998.
Iron Age Holdings Corporation
/s/ Keith A. McDonough
By: _________________________________
NAME: KEITH A. MCDONOUGH
TITLE: VICE PRESIDENT-- FINANCE, CHIEF
FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities indicated on the 14th day of August, 1998.
<TABLE>
<S> <C>
SIGNATURES TITLE
* Chairman, Chief Executive Officer,
- ------------------------------------- President and Director (principal
DONALD R. JENSEN executive officer)
* Executive Vice President and Director
- -------------------------------------
WILLIAM J. MILLS
/s/ Keith A. McDonough Vice President--Finance and Chief
- ------------------------------------- Financial Officer (principal financial
KEITH A. MCDONOUGH and accounting officer)
* Corporate Vice President, Operations
- ------------------------------------- and Distribution
WILLIAM J. TAAFFE
* President and Chief Executive Officer,
- ------------------------------------- Falcon Shoe Mfg. Co.
THEODORE C. JOHANSON
* Director
- -------------------------------------
PETER LAMM
* Director
- -------------------------------------
ANDREA GEISSER
* Director
- -------------------------------------
RUSSELL STEENBERG
Attorney-in-fact
*By: /s/ Keith A. McDonough
---------------------------------
KEITH A. MCDONOUGH
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
3.1* Holdings Certificate of Incorporation, as amended.
3.2* Holdings By-laws.
4.1* Indenture dated as of April 24, 1998.
4.2* Registration Agreement dated April 24, 1998.
5.1* Opinion of Ropes & Gray re: legality.
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 Stock Purchase Agreement dated as of
February 26, 1997.
10.21* Pittsburgh, Pennsylvania Lease Agreement dated March 1, 1993,
as amended June 2, 1994, as amended June 12, 1996, as amended
December 10, 1997.
10.22* Jerusalem, New York Lease Agreement dated December 9, 1992, as
amended January 1, 1994, as amended April 1997.
10.23* Jerusalem, New York Lease Agreement dated June 20, 1997, as
amended January 9, 1998.
10.24* Lewiston, Maine Lease Agreement dated January 14, 1994.
10.25* Lewiston, Maine Lease Agreement dated November 30, 1990, as
amended June 8, 1994.
10.26* Ontario, Canada Lease Agreement dated June 11, 1991, as
renewed 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 dated August 1, 1994.
10.31* Johanson Non-Competition Agreement dated August 1, 1994.
12.1* Statement regarding computation of ratio of earnings to fixed
charges.
21.1* Subsidiaries of Holdings.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
23.1* Consent of Ropes & Gray (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP.
24.1* Powers of Attorney (included on signature page).
25.1* Statement of Eligibility on Form T-1 of The Chase Manhattan
Bank under the Indenture.
27.1* Financial Data Schedules.
99.1* Form of Letter of Transmittal used in connection with the
Exchange Offer.
99.2* Form of Notice of Guaranteed Delivery used in connection with
the Exchange Offer.
99.3* Form of Exchange Agent Agreement.
</TABLE>
- --------
* Previously filed as part of this Registration Statement.
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated March 13, 1998, in Amendment No. 1 to the
Registration Statement (Form S-4 No. 333-57009) and related Prospectus of Iron
Age Holdings Corporation for the registration of $45,140,000 of its 12- 1/8%
senior discount notes due 2009.
Ernst & Young LLP
Pittsburgh Pennsylvania
August 14, 1998
