1
GENESCO
(LOGO)
(Mark One) FORM 10-Q
/x/ Quarterly Report Pursuant To
Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended
July 31, 1994
/ / Transition Report Pursuant To
Section 13 or 15(d) of the
Securities Exchange Act of 1934
Securities and Exchange Commission
Washington, D.C. 20549
Commission File No. 1-3083
--------------------------------
GENESCO INC.
A Tennessee Corporation
I.R.S. No. 62-0211340
Genesco Park
1415 Murfreesboro Road
Nashville, Tennessee 37217-2895
Telephone 615/367-7000
--------------------------------
Indicate by check mark whether
the registrant (1) has filed all
reports required to be filed by
Section 13 or 15(d) of the
Securities Exchange Act of 1934
during the preceding 12 months
(or such shorter period that the
registrant was required to file
such reports with the
Commission) and (2) has been
subject to such filing
requirements for the past 90
days. Yes X No
------ ------
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Common Shares Outstanding September 2, 1994 - 24,822,200
2
INDEX
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PAGE
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Part 1 - Financial Information 3
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Consolidated Balance Sheet - July 31, 1994, January 31, 1994 and
July 31, 1993 3
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Consolidated Earnings - Three Months and Six Months Ended
July 31, 1994 and 1993 4
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Consolidated Cash Flows - Three Months and Six Months Ended
July 31, 1994 and 1993 5
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Consolidated Shareholders' Equity - Year Ended
January 31, 1994 and Six Months Ended July 31, 1994 6
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Notes to Consolidated Financial Statements 7
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Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
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Part II - Other Information 30
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Signature 32
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3
PART I - FINANCIAL INFORMATION
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Balance Sheet
In Thousands
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JULY 31, JANUARY 31, JULY 31,
1994 1994 1993
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ASSETS
CURRENT ASSETS
Cash and short-term investments $ 5,015 $ 3,625 $ 2,426
Accounts receivable 84,796 66,006 87,528
Inventories 153,513 155,120 175,472
Other current assets 7,228 5,839 8,107
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Total current assets 250,552 230,590 273,533
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Plant, equipment and capital leases 41,177 42,909 45,823
Goodwill and other intangibles 18,517 18,590 19,434
Other non-current assets 16,802 17,297 18,608
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TOTAL ASSETS $327,048 $309,386 $357,398
===================================================================================================================
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LIABILITIES AND SHAREHOLDERS' EQUITY
- - -------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Notes payable $ 3,095 $ 69 $ 1,371
Current payments on capital leases 2,375 2,365 2,132
Accounts payable and accrued liabilities 66,380 68,062 55,210
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Total current liabilities 71,850 70,496 58,713
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Long-term debt 114,000 90,000 102,000
Capital leases 11,367 12,888 13,344
Other long-term liabilities 34,214 37,279 24,162
Contingent liabilities - - -
SHAREHOLDERS' EQUITY:
Non-redeemable preferred stock 7,954 8,064 8,188
Common shareholders' equity:
Par value of issued shares 24,822 24,793 24,668
Additional paid-in capital 121,634 121,634 120,995
Retained earnings (deficit) (26,579) (23,241) 28,329
Minimum pension liability (9,964) (9,964) -0-
Treasury shares, at cost (17,857) (17,857) (17,857)
Foreign currency translation adjustments (4,393) (4,706) (5,144)
- - -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 95,617 98,723 159,179
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $327,048 $309,386 $357,398
===================================================================================================================
The accompanying Notes are an integral part of these Financial Statements.
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4
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Earnings
In Thousands
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THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
------------------ -------------------
1994 1993 1994 1993
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Net sales $140,953 $146,059 $271,585 $274,443
Cost of sales 96,932 94,059 184,223 175,740
Selling and administrative expenses 45,901 49,296 89,322 94,326
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Earnings (loss) from operations before
other income and expenses (1,880) 2,704 (1,960) 4,377
- - ----------------------------------------------------------------------------------------------------------------
Other expenses (income):
Interest expense 3,093 2,690 5,899 5,081
Other expense (income), net 71 (79) (283) (106)
Gain on divestiture (4,900) (677) (4,900) (677)
- - ----------------------------------------------------------------------------------------------------------------
Total other expenses (income), net (1,736) 1,934 716 4,298
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Earnings (loss) before income taxes,
extraordinary loss and cumulative
effect of change in accounting principle (144) 770 (2,676) 79
Income taxes 372 314 513 365
- - ----------------------------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary loss
and cumulative effect of change in
accounting principle (516) 456 (3,189) (286)
Extraordinary loss from
early retirement of debt -0- (240) -0- (240)
Postretirement benefits* -0- -0- -0- (2,273)
- - ----------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) $ (516) $ 216 $ (3,189) $ (2,799)
================================================================================================================
Earnings (loss) per common share:
Before extraordinary loss and
cumulative effect of change in
accounting principle $ (.02) $ .02 $ (.14) $ (.02)
Extraordinary loss $ .00 $ (.01) $ .00 $ (.01)
Postretirement benefits* $ .00 $ .00 $ .00 $ (.09)
Net earnings (loss) $ (.02) $ .01 $ (.14) $ (.12)
================================================================================================================
*Reflects the cumulative effect of changes in the method of accounting for
postretirement benefits due to the implementation of Statement of Financial
Accounting Standards No. 106 (see Note 1).
The accompanying Notes are an integral part of these Financial Statements.
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5
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Cash Flows
In Thousands
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THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
------------------ -------------------
1994 1993 1994 1993
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OPERATIONS:
Net earnings (loss) $ (516) $ 216 $ (3,189) $ (2,799)
Noncash charges to earnings:
Depreciation and amortization 2,454 2,545 4,947 5,064
Gain on divestiture (4,900) (677) (4,900) (677)
Postretirement benefits -0- -0- -0- 2,273
Provision for losses on accounts receivable 838 (45) 1,255 527
Other 535 415 598 583
- - ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operations before
working capital and other changes (1,589) 2,454 (1,289) 4,971
Effect on cash of changes in working
capital and other assets and liabilities:
Accounts receivable (9,964) (8,931) (20,045) (16,312)
Inventories 5,031 (8,995) 1,607 (23,931)
Other current assets (475) (1,430) (1,389) (1,304)
Accounts payable and accrued liabilities (206) (1,294) (2,383) (10,579)
Other assets and liabilities (269) (2,306) 1,041 (1,129)
- - ------------------------------------------------------------------------------------------------------------------------
Net cash used in operations (7,472) (20,502) (22,458) (48,284)
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INVESTING ACTIVITIES:
Capital expenditures (1,631) (1,754) (3,195) (3,400)
Proceeds from disposal of plant and equipment 1,614 84 1,770 99
- - ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (17) (1,670) (1,425) (3,301)
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FINANCING ACTIVITIES:
Long-term borrowings -0- 1,299 -0- 76,299
Net borrowings (repayments) under
revolving credit agreement 8,000 25,000 24,000 5,000
Net change in short-term borrowings 1,263 (299) 3,026 1,371
Payments of long-term debt -0- -0- -0- (32,000)
Payments on capital leases (894) (472) (1,511) (928)
Exercise of options and warrants -0- 1,275 6 7,194
Redemption of Mitre U.K. B shares -0- (5,000) -0- (5,000)
Deferred note expense -0- (9) -0- (2,559)
Dividends paid -0- (78) -0- (155)
Other -0- (18) (248) (28)
- - ------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 8,369 21,698 25,273 49,194
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NET CASH FLOW 880 (474) 1,390 (2,391)
Cash and short-term investments at
beginning of period 4,135 2,900 3,625 4,817
- - ------------------------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 5,015 $ 2,426 $ 5,015 $ 2,426
========================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Net cash paid (received) for:
Interest $ 814 $ 375 $ 5,343 $ 1,243
Income taxes 135 316 (134) 364
========================================================================================================================
The accompanying Notes are an integral part of these Financial Statements.
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GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Shareholders' Equity
In Thousands
- - ---------------------------------------------------------------------------------------------------------------------
FOREIGN MINIMUM TOTAL
TOTAL RETAINED CURRENCY PENSION SHARE-
PREFERRED COMMON PAID-IN EARNINGS TREASURY TRANSLATION LIABILITY HOLDERS'
STOCK STOCK CAPITAL (DEFICIT) STOCK ADJUSTMENTS ADJUSTMENT EQUITY
- - ---------------------------------------------------------------------------------------------------------------------
Balance January 31, 1993 $ 8,305 $ 23,658 $114,706 $ 31,283 $(17,857) $ (5,044) $ -0- $155,051
- - ---------------------------------------------------------------------------------------------------------------------
Exercise of options and
warrants -0- 1,132 6,743 -0- -0- -0- -0- 7,875
Translation adjustment -0- -0- -0- -0- -0- 338 -0- 338
Net loss -0- -0- -0- (54,292) -0- -0- -0- (54,292)
Preferred dividends -0- -0- -0- (232) -0- -0- -0- (232)
Minimum pension liability
adjustment -0- -0- -0- -0- -0- -0- (9,964) (9,964)
Other (241) 3 185 -0- -0- -0- -0- (53)
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Balance January 31, 1994 $ 8,064 $ 24,793 $121,634 $(23,241) $(17,857) $ (4,706) $ (9,964) $ 98,723
- - ---------------------------------------------------------------------------------------------------------------------
Exercise of options -0- 2 4 -0- -0- -0- -0- 6
Translation adjustment -0- -0- -0- -0- -0- 313 -0- 313
Net loss -0- -0- -0- (3,189) -0- -0- -0- (3,189)
Other (110) 27 (4) (149) -0- -0- -0- (236)
- - ---------------------------------------------------------------------------------------------------------------------
BALANCE JULY 31, 1994 $ 7,954 $ 24,822 $121,634 $(26,579) $(17,857) $ (4,393) $ (9,964) $ 95,617
=====================================================================================================================
The accompanying Notes are an integral part of these Financial Statements.
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GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM STATEMENTS
The consolidated financial statements contained in this report are unaudited
but reflect all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the results for the interim periods of the
fiscal year ending January 31, 1995 ("Fiscal 1995") and of the fiscal year
ended January 31, 1994 ("Fiscal 1994"). The results of operations for any
interim period are not necessarily indicative of results for the full year.
The financial statements should be read in conjunction with the financial
statements and notes thereto included in the annual report on Form 10-K.
BASIS OF CONSOLIDATION
All subsidiaries are included in the consolidated financial statements. All
significant intercompany transactions and accounts have been eliminated.
CASH AND SHORT-TERM INVESTMENTS
There were no short-term investments at January 31, 1994 or July 31, 1994.
Short-term investments are highly-liquid debt instruments having an original
maturity of three months or less.
INVENTORIES
Inventories of wholesaling and manufacturing companies are stated at the lower
of cost or market, determined principally by the first-in, first-out method.
Retail inventories are determined by the retail method.
PLANT, EQUIPMENT AND CAPITAL LEASES
Plant, equipment and capital leases are recorded at cost and depreciated or
amortized over the estimated useful life of related assets. Depreciation and
amortization expense is computed principally by the straight-line method.
GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consist primarily of the excess of purchase
price over fair value of net assets acquired in acquisitions. Goodwill is
being amortized on a straight-line basis over 40 years. The Company
periodically assesses the realizability of intangible assets taking into
consideration such factors as expected cash flows and operating strategies.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign operations are translated at the exchange
rate on the balance sheet date. Income and expenses are translated at the
average exchange rates prevailing during the period. Unrealized translation
adjustments are reported as a separate component of shareholders' equity.
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8
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
HEDGING CONTRACTS
In order to reduce exposure to foreign currency exchange rate fluctuations in
connection with inventory purchase commitments, the Company enters into foreign
currency forward exchange contracts. At July 31, 1994 and January 31, 1994,
the Company had approximately $11.8 million and $7.1 million, respectively, of
such contracts outstanding. Gains and losses arising from these contracts
offset gains and losses from the underlying hedged transactions. The Company
continually monitors the credit quality of the major national and regional
financial institutions with whom it enters into such contracts.
POSTRETIREMENT BENEFITS
Substantially all full-time employees are covered by pension plans. For its
defined benefit plan, the Company funds at least the minimum amount required by
the Employee Retirement Income Security Act. The Company expenses the
multiemployer plan contributions required to be funded under collective
bargaining agreements.
The Company implemented Statement of Financial Accounting Standards (SFAS) 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" in the
first quarter of Fiscal 1994. This statement requires accrual of
postretirement benefits such as life insurance and health care over the period
the employee provides services to the Company.
ENVIRONMENTAL COSTS
Environmental expenditures relating to current operations are expensed or
capitalized as appropriate. Expenditures relating to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable and the costs can be
reasonably estimated and are evaluated independently of any future claims for
recovery. Generally, the timing of these accruals coincides with completion of
a feasibility study or the Company's commitment to a formal plan of action.
INCOME TAXES
Income taxes are accounted for in accordance with SFAS 109, "Accounting for
Income Taxes". SFAS 109, which superseded SFAS 96, was adopted in the first
quarter of Fiscal 1994. SFAS 109 adoption had no effect on earnings and only
resulted in reclassifications of the deferred tax assets in the balance sheet.
Deferred income taxes are provided for the timing differences between reported
earnings and taxable income.
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GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 2
BUSINESS ACQUISITION
LAMAR MANUFACTURING COMPANY
On August 12, 1993, GCO Apparel Corporation, a newly formed subsidiary of the
Company, acquired all of the men's clothing manufacturing assets and assumed
certain liabilities of LaMar Manufacturing Company, a manufacturer of
moderately priced tailored clothing. The purchase price was approximately
$11.8 million. The purchase price included $10.9 million of cash and $900,000
of deferred payments that will be completed by August 1995. In addition, the
Company paid acquisition expenses of approximately $500,000. The acquisition
was financed through revolving credit borrowings.
NOTE 3
ACCOUNTS RECEIVABLE
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JULY 31, JANUARY 31,
IN THOUSANDS 1994 1994
- - ---------------------------------------------------------------------------------------------------------------
Trade accounts receivable $ 86,907 $ 67,174
Miscellaneous receivables 2,926 3,406
- - --------------------------------------------------------------------------------------------------------------
Total receivables 89,833 70,580
Allowance for bad debts (2,570) (2,065)
Other allowances (2,467) (2,509)
- - --------------------------------------------------------------------------------------------------------------
NET ACCOUNTS RECEIVABLE $ 84,796 $ 66,006
==============================================================================================================
On July 31, 1994, approximately 4% of the Company's trade receivables are from
retailers who have been acquired in leveraged buy-out transactions. The
Company closely monitors these receivables.
NOTE 4
INVENTORIES
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JULY 31, JANUARY 31,
IN THOUSANDS 1994 1994
- - ---------------------------------------------------------------------------------------------------------------
Raw materials $ 18,393 $ 21,305
Work in process 11,874 15,786
Finished goods 73,289 71,981
Retail merchandise 49,957 46,048
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TOTAL INVENTORIES $153,513 $155,120
==============================================================================================================
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10
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 5
PLANT, EQUIPMENT AND CAPITAL LEASES, NET
- - -----------------------------------------------------------------------------------------------------------
JULY 31, JANUARY 31,
IN THOUSANDS 1994 1994
- - -----------------------------------------------------------------------------------------------------------
Plant and equipment:
Land $ 487 $ 485
Buildings and building equipment 5,558 5,830
Machinery, furniture and fixtures 43,856 45,105
Construction in progress 2,523 1,550
Improvements to leased property 41,280 43,474
Capital leases:
Land 592 592
Buildings 10,449 11,203
Machinery, furniture and fixtures 9,624 10,324
- - -----------------------------------------------------------------------------------------------------------
Plant, equipment and capital leases, at cost 114,369 118,563
Accumulated depreciation and amortization:
Plant and equipment (62,328) (64,642)
Capital leases (10,864) (11,012)
- - -----------------------------------------------------------------------------------------------------------
Net Plant, Equipment and Capital Leases $ 41,177 $ 42,909
===========================================================================================================
NOTE 6
CREDIT FACILITIES
The Company's English subsidiary, Mitre U.K., has a credit facility with a
credit limit equal to the lesser of (i) 5,000,000 pounds sterling
(approximately U.S. $7,634,000 at July 31, 1994) or (ii) the aggregate of 75
percent of the value of current receivables and 50 percent of the value of
inventory of Mitre U.K. The facility, which is guaranteed up to 4,300,000
pounds sterling by the Company, permits borrowings for working capital of up to
2,000,000 pounds sterling, the issuance of letters of credit of up to 3,500,000
pounds sterling and the issuance of guarantee bonds and indemnities of up to
500,000 pounds sterling. The bank has extended this credit facility for one
month beyond its September 14, 1994 expiration date pending negotiation of a
new agreement.
On April 8, 1993 the Company entered into a letter of credit agreement, which
was amended January 31, 1994 and April 5, 1994, with a foreign bank under which
up to $10,000,000 in letters of credit are available for issuance to the
Company's suppliers in connection with the importation of foreign goods. The
agreement provides for the issuance through October 6, 1994 of letters of
credit payable for periods not exceeding 180 days. At July 31, 1994, there was
$8,687,000 of credit available under the letter of credit agreement. The
financial covenants contained in the letter of credit agreement are
substantially identical to those contained in the Company's revolving credit
agreement. The Company is in negotiation for the renewal of this letter of
credit facility for a period of up to six months on substantially the same
terms and conditions. See Note 7 for the revolving credit agreement covenants.
10
11
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 6
CREDIT FACILITIES, CONTINUED
On July 1, 1994 the Company entered into a credit facility with a United States
bank under which it may borrow up to $2,000,000. This facility expires on June
30, 1995.
NOTE 7
LONG-TERM DEBT
- - ---------------------------------------------------------------------------------------------------------------
JULY 31, JANUARY 31,
IN THOUSANDS 1994 1994
- - ---------------------------------------------------------------------------------------------------------------
Borrowings under revolving credit agreement
(weighted average interest rate at:
July 31, 1994-6.77%; January 31, 1994-5.56%) $ 39,000 $ 15,000
10 3/8% senior notes due February 2003 75,000 75,000
- - --------------------------------------------------------------------------------------------------------------
Total long-term debt 114,000 90,000
Current portion -0- -0-
- - --------------------------------------------------------------------------------------------------------------
TOTAL NON-CURRENT PORTION OF LONG-TERM DEBT $114,000 $ 90,000
===============================================================================================================
REVOLVING CREDIT AGREEMENTS:
On August 2, 1993 the Company entered into a revolving credit agreement with a
group of seven banks providing for loans or letters of credit of up to $100
million. The agreement expires August 2, 1996. This agreement replaced the
$45 million revolving credit agreement and Genesco's $25 million letter of
credit agreement in effect at July 31, 1993. The repayment of the revolving
credit borrowings under the $45 million credit agreement resulted in an
extraordinary loss recognized in the second quarter of Fiscal 1994 of $240,000.
Loan borrowings for the quarter ended on July 31, 1994 under the revolving
credit agreements averaged $34,516,000 at a rate of 6.60% with a maximum month
end borrowing of $39,000,000. Outstanding letters of credit at July 31, 1994
were $11,881,000.
As a result of operating losses and the restructuring charge in the fourth
quarter of Fiscal 1994, the revolving credit agreement was amended January 31,
1994 to adjust certain financial covenants.
Under the amended $100 million revolving credit agreement, the Company may
borrow at the prime rate, certificate of deposit rate plus 2.30%, or LIBOR plus
2.25% or may borrow up to $25 million through a competitive bid process.
Commitment fees are 0.3% per annum on the daily unused portion.
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GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 7
LONG-TERM DEBT, CONTINUED
The amended credit agreement requires the Company to maintain (i) a ratio of
Consolidated Current Assets to Consolidated Current Liabilities of not less
than 2.5 to 1.0 at the end of any quarter; (ii) a Consolidated Tangible Net
Worth at the end of the 2nd, 3rd, and 4th quarter of not less than $73,000,000,
$80,000,000 and $89,000,000, respectively for Fiscal 1995, and not less than
$89,000,000 for each quarter of Fiscal 1996 increasing each fiscal year
thereafter, on a cumulative basis, by an amount equal to 50% of positive
Consolidated Net Income for the preceding fiscal year, without reduction for
cumulative net losses; (iii) a Consolidated Fixed Charge Coverage Ratio of not
less than 1.0 with respect to the fiscal year ending January 31, 1995, or less
than 1.25 with respect to any fiscal year thereafter, unless during the fourth
fiscal quarter the Company reduces the principal amount of loans outstanding
under the agreement to not more than $10,000,000 for at least 30 consecutive
days and (iv) the ratio of Consolidated Senior Funded Indebtedness to Total
Capital of not more than 0.60 to 1.0 during the first three quarters of each
fiscal year and 0.55 to 1.0 at the end of each fiscal year except at July 31,
1994 the ratio of not more than 0.63 to 1.0 is permitted.
The revolving credit agreement contains other covenants which restrict the
payment of dividends and other payments with respect to capital stock and
annual capital expenditures may not exceed $20,000,000, subject to certain
exceptions. The Company was in compliance with the financial covenants
contained in the amended revolving credit agreement at July 31, 1994.
10 3/8% SENIOR NOTES DUE 2003:
On February 1, 1993, the Company issued $75,000,000 of 10 3/8% senior notes due
February 1, 2003. The Company used $54 million of the proceeds to repay all of
its outstanding long-term debt resulting in an extraordinary loss recognized in
the fourth quarter of Fiscal 1993 of $583,000 (net of income tax benefit of
$37,000). The balance of the proceeds was used to purchase shares of Mitre
U.K. and for general corporate purposes.
The fair value of the Company's 10 3/8% senior notes, based on the quoted
market price on July 31, 1994, is $58,875,000.
The indenture under which the notes were issued limits the incurrence of
indebtedness, the making of restricted payments, the restricting of subsidiary
dividends, transactions with affiliates, liens, sales of assets and
transactions involving mergers, sales or consolidations.
12
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GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8
LEGAL PROCEEDINGS
The Company is subject to several administrative orders issued by the Tennessee
Department of Environment and Conservation directing the Company to implement
plans designed to remedy possible ground water contamination and to manage
source area material which was generated by a divested operating division and
which was deposited on a site in a rural area near Nashville, Tennessee.
Substantially all source material and ground water remedial actions have been
implemented. The Company believes that it has fully provided for the costs to
be incurred with respect to these remedial actions.
In addition to the administrative proceedings described above, the Company was
named as a defendant in nine civil actions originally filed on behalf of 29
individuals who reside or own property in the vicinity of the site described
above. The plaintiffs alleged that the Company is liable for creating a
nuisance and a hazardous condition and for negligence based upon the alleged
violation of several state and federal environmental statutes. The plaintiffs
sought recovery for personal injuries and property damages totalling $17.6
million, punitive damages totalling $19.5 million and certain costs and
expenses, including attorneys' fees. Including a settlement concluded with
four individuals in September 1994, the Company has concluded settlement
agreements with a total of 24 individual plaintiffs, providing for payments by
the Company aggregating approximately $675,000 and the purchase of a residence
at an appraised value of approximately $170,000. The claims dismissed pursuant
to the settlement agreements involve approximately $11.6 million in alleged
compensatory damages and $13.5 million in punitive damages. In light of the
settlements already reached, management believes that resolution of the
remaining actions will not have a material adverse effect on either the
Company's results of future operations or on its financial condition.
The Company is also a defendant in two separate civil actions filed by the
State of New York; one against the City of Gloversville, New York, and 33 other
private defendants; and the other against the City of Johnstown, New York, and
14 other private defendants. In addition, third party complaints and cross
claims have been filed against numerous other entities, including the Company,
in both actions. These actions arise out of the alleged disposal of certain
hazardous material directly or indirectly in municipal landfills. The
complaints in both cases allege the defendants, together with other
contributors to the municipal landfills, are liable under a federal
environmental statute and certain common law theories for the costs of
investigating and performing remedial actions required to be taken with respect
to the landfills and damages to the natural resources.
The environmental authorities have issued decisions selecting plans of
remediation with respect to the Johnstown and Gloversville sites which have
estimated costs of $16.5 million and $28.3 million, respectively.
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14
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8
LEGAL PROCEEDINGS, CONTINUED
The Company has filed answers to the complaints in both the Johnstown and
Gloversville cases denying liability and asserting numerous defenses. The
Company has established a provision in the amount of $1,000,000 to cover its
estimated share of future remediation costs, including a $500,000 charge in the
third quarter ended October 31, 1993. Because of uncertainties related to the
ability or willingness of the other defendants, including the municipalities
involved, to pay a portion of such costs, the availability of State funding to
pay a portion of such costs, the insurance coverage available to the various
defendants, the applicability of joint and several liability and the basis for
contribution claims among the defendants, management is presently unable to
predict the outcome or to estimate the extent of any additional liability the
Company may incur with respect to either of the Johnstown or Gloversville
actions.
The Company has entered into a stipulation of settlement with the United States
Department of Justice and the United States Environmental Protection Agency
("EPA") dismissing a civil action against the Company for alleged violations of
the federal Clean Water Act and the pre-treatment standards for leather
tanning and finishing adopted thereunder in connection with wastewater
discharges from a facility of the Company into the Muskegon County Wastewater
Management System sewage treatment system at Whitehall, Michigan. The
stipulation of settlement was approved by the court on December 16, 1993 and
the Company has paid a civil penalty of $550,000 to resolve all claims asserted
in the complaint.
On January 7, 1993, 23 former holders of the Company's series 2, 3 and 4
subordinated serial preferred stock filed a civil action against the Company
and certain officers in the United States District Court for the Southern
District of New York (the "U.S. District Court Action"). The plaintiffs allege
that the defendants misrepresented and failed to disclose material facts to
representatives of the plaintiffs in connection with exchange offers which were
made by the Company to the plaintiffs and other holders of the Company's series
1, 2, 3 and 4 subordinated serial preferred stock from June 23, 1988 to August
1, 1988. The plaintiffs contend that had they been aware of the
misrepresentations and omissions, they would not have agreed to exchange their
shares pursuant to the exchange offers. The plaintiffs allege breach of
fiduciary duty and fraudulent and negligent misrepresentations and seek damages
in excess of $10 million, costs, attorneys' fees, interest and punitive damages
in an unspecified amount. By order dated December 2, 1993, the U.S. District
Court denied a motion for judgement on the pleadings filed on behalf of all
defendants. On July 6, 1994, the court denied a motion for partial summary
judgment filed on behalf of the plaintiffs. The Company and the individual
defendants intend to vigorously defend the U.S. District Court Action. The
Company is unable to predict if the U.S. District Court Action will have a
material adverse effect on the Company's results of operations or financial
condition.
14
15
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8
LEGAL PROCEEDINGS, CONTINUED
The U.S. District Court Action is based, in part, on a judicial determination
on July 29, 1992 of the fair value of the Company's series 2 and 3 subordinated
serial preferred stock in an appraisal action in the Chancery Court for
Davidson County, Tennessee (the "Chancery Court Action"). The Chancery Court
Action was commenced after certain preferred shareholders dissented from
certain charter amendments approved by shareholders on February 4, 1988 and
demanded the fair value of their shares. The Chancery Court determined that
the fair values of a share of series 2 was $131.32 and of a share of the series
3 was $193.11 (which amounts are in excess of the mandatory redemption and
liquidation values of a share of series 2 subordinated serial preferred stock
and of the optional redemption and liquidation values of a share of series 3
subordinated serial preferred stock), compared with $91 a share for the series
2 and $46 a share for the series 3 previously paid by the Company as the fair
value of such shares. The Chancery Court ordered the Company to pay to Jacob
Landis, the only shareholder who prosecuted his dissenter's rights, the
additional sum of $358,062 plus interest at 10% from July 29, 1992, attorneys'
fees and costs to be determined in further proceedings. The Company appealed
the Chancery Court's decision, and on September 1, 1993 the Tennessee Court of
Appeals affirmed the Chancery Court's decision and remanded the case to the
Chancellor for further proceedings. The Company filed a petition to the
Tennessee Supreme Court to review the case, which the court denied on January
31, 1994. The Company paid the amount of the judgement plus accrued interest
on February 4, 1994. The dissenting shareholder has filed an application with
the Chancery Court for legal fees and expenses of approximately $800,000. The
Company believes the amount is excessive and that some of such expenses are
unjustified and is opposing the application. On August 18, 1994, a special
master recommended to the Chancery Court that the dissenting shareholder be
awarded a total of approximately $441,000 for fees and expenses.
On May 13, 1993, the landlord of a building in New York City in which the
Company was the sole tenant filed a civil action in the Supreme Court of the
State of New York claiming that the Company breached the lease for the premises
and negligently allowed the premises to deteriorate. The complaint seeks
compensatory damages of $2.5 million and punitive damages of $5 million. On
June 8, 1993 the Company removed the action to the United States District Court
for the Southern District of New York. On September 9, 1994, the Company
reached a tentative settlement of all claims in consideration of a payment by
the Company of $255,000.
At various times in 1990 and 1991 (i) the Canadian Department of National
Revenue, Taxation (the "Department"), the Alberta Corporate Tax Administration
and the Ontario Ministry of Revenue made tax reassessments relating to the
deductibility of interest expense incurred by one of the Company's Canadian
subsidiaries on funds borrowed from the Company and (ii) the Department made
tax reassessments relating to non-resident withholding tax with respect to the
payment by that subsidiary of its loan from the Company and with respect to
interest on loans by that subsidiary to the Company. These reassessments,
which the Company has calculated to be approximately Canadian $18.7 million
including interest (approximately U.S. $14.1 million) at January 31, 1994, were
made against Agnew Group, Inc., the corporate successor to the purchaser of the
Company's Canadian operations (the "Taxpayer").
15
16
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8
LEGAL PROCEEDINGS, CONTINUED
The Taxpayer made indemnification claims with respect to all such reassessments
pursuant to the indemnification provisions of the stock purchase agreement
dated as of January 23, 1987 relating to the sale of the Company's Canadian
operations, and the Company assumed the defense of the Taxpayer. On behalf of
the Taxpayer, the Company filed notices of objections to all of the
reassessments and appealed the confirmation by the Minister of National Revenue
of the Federal interest deductibility reassessments by filing a statement of
claim in the Federal Court of Canada. The Provincial reassessments will be
held in abeyance pending the outcome of the Federal Court action. The Company
also filed notices of objection to the withholding tax reassessments on behalf
of the Taxpayer.
Any liability finally determined to be owing by the Company as a result of the
indemnification provisions of the share purchase agreement would have been
subject to an offset of up to Canadian $5,000,000 pursuant to a loan agreement
dated February 6, 1987 among the Company, the purchaser and a former
stockholder of the purchaser.
On February 4, 1994, the Taxpayer filed for protection under the Companies
Creditors Arrangement Act and is seeking approval of a plan of compromise or
arrangement with its creditors.
The Company entered into a settlement agreement, dated as of May 4, 1994, with
the Taxpayer and the Department and deposited, in full satisfaction of the
Department's and the Taxpayer's claims against it, $1.8 million (Canadian) with
an escrow agent pending the entry by the Canadian Treasury Board of a remission
order approving the terms of the settlement agreement. On May 10, 1994, the
Ontario Court (General Division) approved the Taxpayer's plan of compromise or
arrangement subject to the settlement agreement. The remission order was
entered on August 10, 1994. The Company had previously made a provision for
its liability to the Taxpayer in an amount greater than its payment under the
settlement agreement, resulting in $4.9 million of additional gain on the
divestiture of the Company's Canadian operations.
16
17
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
SIGNIFICANT DEVELOPMENTS
Restructuring Charge
Certain events and changes in operating strategies in the fourth quarter of the
fiscal year ended January 31, 1994 ("Fiscal 1994") led to a decision to
restructure certain of the Company's operations and a reassessment of the
recoverability of certain assets. As a result, the Company recorded a charge
of $29.4 million, for which no tax benefit is currently available. This charge
reflected estimated costs of closing certain manufacturing facilities,
effecting permanent work force reductions and closing 58 retail stores. The
provision included $15.8 million in asset write-downs and $13.6 million of
future consolidation costs, of which approximately $12 million is expected to
be incurred in the fiscal year ending January 31, 1995 ("Fiscal 1995"). The
restructuring involves the elimination of approximately 1,200 jobs (20% of the
Company's total work force in Fiscal 1994). The Company expects to implement
substantially all of the restructuring plan in Fiscal 1995. During the six
months ended July 31, 1994, the Company closed a footwear plant, completed the
closing of 34 retail stores and paid approximately $4.1 million of the
consolidation costs. On August 22, 1994, the Company announced the closure of
its Verona, Virginia tailored clothing plant in November 1994.
RESULTS OF OPERATIONS - SECOND QUARTER FISCAL 1995 VS 1994
The Company's net sales in the second quarter ended July 31, 1994 decreased
3.5% from the previous year. Total gross margin for the quarter decreased
15.3% and declined from 35.6% to 31.2% as a percentage of sales. Selling and
administrative expenses decreased 6.9% and decreased as a percentage of sales
from 33.8% to 32.6%. The pretax loss in the second quarter ended July 31, 1994
was $144,000, compared to pretax earnings of $770,000 in the quarter ended July
31, 1993. The Company reported a net loss of $516,000 ($.02 per share) in the
second quarter ended July 31, 1994 compared to net earnings of $216,000 ($.01
per share) last year. The loss includes the recognition of $4.9 million of
additional gain on the sale in 1987 of the Company's Canadian operations
following the settlement in the second quarter of certain claims arising out of
that transaction. See Note 8 to the Consolidated Financial Statements. Last
year's net earnings were reduced by a $240,000 ($.01 per share) loss from the
early retirement of debt.
Footwear Retail
Three Months
Ended July 31,
-------------------------
1994 1993 % Change
-------- -------- --------
(In Thousands)
Sales . . . . . . . . . . . . . . . . . . . . . . . . . $52,999 $53,798 (1.5%)
Operating Income . . . . . . . . . . . . . . . . . . . $ 2,104 $ (412) -
Operating Margin . . . . . . . . . . . . . . . . . . . 4.0% (0.8%)
17
18
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Despite an increase in comparable store sales of approximately 3%, net sales
from footwear retail operations declined 1.5% in the quarter ended July 31,
1994 compared to the previous year due to the operation of 7% fewer stores and
a $500,000 decline in accessory sales. The average price per pair increased
approximately 3%, but unit sales decreased approximately 3%. Gross margin as a
percentage of sales increased from 49.6% to 50.7%. Operating expenses
decreased 7.4%, primarily due to operation of fewer stores and lower
advertising expenses, and decreased as a percentage of sales from 50.4% to
47.4%. Operating income in the fiscal year ending January 31, 1995 does not
include operating losses of the retail stores included in the Company's
restructuring. Operating income in the second quarter ended July 31, 1993,
adjusted to exclude results of the 58 stores included in the restructuring, was
$390,000. Operating income of $2,104,000 in the second quarter this year was
higher than last year's adjusted operating income due to improved margin as a
percentage of sales from lower markdowns and the lower expenses.
The department store chain in which the Company currently operates 82 men's
shoe departments recently reported that it is engaged in discussions with
another Company concerning a possible merger or other business combination.
The Company cannot now predict the extent to which any such acquisition would
affect the operation of this profitable leased department business.
Footwear Wholesale & Manufacturing
Three Months
Ended July 31,
-------------------------
1994 1993 % Change
-------- -------- --------
(In Thousands)
Sales . . . . . . . . . . . . . . . . . . . . . . . . $61,167 $67,238 (9.0%)
Operating Income . . . . . . . . . . . . . . . . . . $ 2,742 $ 5,393 (49.2%)
Operating Margin . . . . . . . . . . . . . . . . . . 4.5% 8.0%
Net sales from footwear wholesale and manufacturing operations were $6.1
million (9.0%) lower in the quarter ended July 31, 1994 than in the previous
year, reflecting lower sales of the Company's boot, athletic and tanned leather
products.
Gross margin as a percentage of sales decreased from 29.3% to 26.2%, primarily
due to price reductions to stimulate sales.
Operating expenses decreased 5.4% but increased as a percentage of sales from
21.4% to 22.3%, primarily because of increased bad debt and royalty expenses.
The decline in operating income is due to lower sales in the Company's boot and
athletic products combined with price reductions taken to stimulate sales,
primarily in boots and in children's shoes.
18
19
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Tailored Clothing
Three Months
Ended July 31,
-------------------------
1994 1993 % Change
-------- -------- --------
(In Thousands)
Sales . . . . . . . . . . . . . . . . . . . . . . . . . $26,787 $25,023 7.0%
Operating Income . . . . . . . . . . . . . . . . . . . $(2,801) $ 1,037 -
Operating Margin . . . . . . . . . . . . . . . . . . . (10.5%) 4.1%
Net sales from tailored clothing operations increased 7.0%. Net sales,
excluding those of GCO Apparel Corporation ("GCO Apparel"), which began
operations in August 1993, declined by 9.6%.
Gross margin decreased 80% and declined as a percentage of sales from 22.3% to
4.2%. This decline was the result of industry-wide conditions and events
described below which occurred in Fiscal 1993 and Fiscal 1994.
The United States market for tailored clothing has been shrinking, reflecting a
long-term shift in consumer preferences toward more casual apparel and the
increasing market share of lower-cost foreign and domestic, non-union
manufacturers at the expense of traditional domestic manufacturers like Greif.
In addition, changes have occurred in the traditional channels of distribution
for tailored clothing as a result of the consolidation (frequently in leveraged
buyouts) of department stores, the declining number of independent men's
specialty stores and the growth of off-price clothing merchants. All of these
factors have led to increased demands by retailers for lower-priced clothing
and promotional pricing.
In Fiscal 1993 and Fiscal 1994, The Greif Companies division ("Greif")
implemented a plan to reduce its manufacturing costs to become more
competitive. Greif reduced its manufacturing capacity through a reduction in
employment and made changes in product specifications to lower labor and
material costs. The products manufactured to the new specifications, which
were shipped for the spring 1993 season, were not well-received by Greif's
customers and led to higher than normal returns, allowances and discounts.
Greif has made improvements in the quality of its products for spring 1994
despite having accepted orders based on lower-cost product specifications.
19
20
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
In the fourth quarter of Fiscal 1994 Greif was notified that its licenses for
two Ralph Lauren brands of traditionally-styled clothing would not be renewed
after the fall 1994 season and that these brands would be manufactured by a
foreign manufacturer and sold at lower price points. This has resulted in
price pressure in connection with the sale of the fall 1994 line from
retailers.
In addition to the factors described above, tailored clothing gross margin was
adversely affected by the inclusion of GCO Apparel's low margin cut, make and
trim operations, which were acquired in August 1993, and by the shipment in the
quarter of lower-margin products that were produced at Greif in anticipation of
a work stoppage in the third quarter of Fiscal 1994.
Operating expenses decreased 15% and decreased as a percentage of sales from
18.1% to 14.4%. The decrease in operating expenses is due to reduced
advertising expenses, primarily from reversal of $625,000 of accrued
advertising, and lower staff expenses attributable to the restructuring. The
reduction in operating income is attributable to lower Greif sales and lower
gross margins.
As a result of continuing price pressures, the loss after the fall 1994 season
of the Ralph Lauren brands and a decline in orders for the spring and fall 1994
seasons for Greif's other branded tailored clothing products, Greif does not
expect to be profitable in Fiscal 1995. The Company believes that Greif must
be able to manufacture and market high-quality branded products to up-scale
retailers of better men's apparel in order to generate sufficient gross margin
to operate profitably. Greif has redesigned and is attempting to market its
Perry Ellis and Perry Ellis Portfolio brands and its other branded products in
this manner for the spring 1995 season. Greif recently launched a newly
designed line of traditionally-styled clothing under the Metropolis brand to
replace the Ralph Lauren brands for the spring 1995 season. The plant closure
actions provided for in the restructuring charge in the fourth quarter of
Fiscal 1994 are expected to be taken in the fourth quarter of Fiscal 1995. On
August 22, 1994, the Company announced the closure of its Verona, Virginia
tailored clothing plant in November 1994.
20
21
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
As a result of continuing losses incurred by Greif, the Company is considering
various alternatives, including a further restructuring or sale or other
disposition of this business. Any reduction in employment of employees covered
by collective bargaining agreements beyond that anticipated in the
restructuring plan provided for in Fiscal 1994 or the sale of all or a
substantial portion of its business and assets could result in the incurrence
of withdrawal liability for Greif's portion of accumulated benefits in excess
of the assets of the multiemployer pension plan applicable to Greif's covered
employees. The maximum liability, and the corresponding maximum charge to
earnings, that would result from a permanent cessation of Greif's obligation to
contribute to the multiemployer plan or a cessation of all operations covered
by collective bargaining agreements is estimated to have a present value of
approximately $15.7 million in Fiscal 1995. A 70% decline in Greif's
contributions to the multiemployer plan or the permanent cessation of the
obligation to contribute to the plan with respect to a facility could
constitute a "partial withdrawal" and result in recognition of a portion of the
withdrawal liability calculated on the basis of the decline in hours worked.
The period over which any such withdrawal liability would have to be paid is
based on the average number of historical hours worked and the contribution
rate per hour but cannot exceed 20 years. Any transaction involving a
disposition of the assets of Greif's business would likely result in a failure
to realize the full value of assets employed in Greif's business and the
incurrence of other significant liabilities not included in the Fiscal 1994
restructuring provision.
Corporate and Interest Expenses
Corporate and other expenses were $4.0 million compared to $3.2 million for the
same period last year, an increase of 23%. Included in this year's corporate
and other expenses is a $700,000 provision for environmental litigation.
Excluding the provision for environmental litigation, the increase in corporate
expenses is due to higher professional fees that more than offset lower
compensation expenses due to the layoffs related to the restructuring and other
staff reductions that occurred after the first quarter in Fiscal 1994.
Interest expense increased $403,000, or 15%, from the second quarter of last
year because of an increase in average outstanding indebtedness under the
Company's revolving credit agreement and higher average interest rates under
that agreement.
21
22
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
RESULTS OF OPERATIONS - SIX MONTHS ENDED JULY 31 FISCAL 1995 VS 1994
The Company's net sales for the six months ended July 31, 1994 decreased 1.0%
from the previous year. Total gross margin for the six months decreased 11.5%
and declined from 36.0% to 32.2% as a percentage of sales. Selling and
administrative expenses decreased 5.3% and decreased as a percentage of sales
from 34.4% to 32.9%. The pretax loss in the six months ended July 31, 1994 was
$2.7 million, compared to pretax earnings of $79,000 last year. The Company
reported a net loss of $3.2 million ($.14 per share) in the six months ended
July 31, 1994 compared to a net loss of $2.8 million ($.12 per share) last
year. The loss for the six months ended July 31, 1994 includes the recognition
of $4.9 million of additional gain on the sale in 1987 of the Company's
Canadian operations following the settlement in the second quarter of certain
claims arising out of that transaction. See Note 8 to the Consolidated
Financial Statements. Last year's net loss includes a $2.3 million ($.09 per
share) loss from the cumulative effect of changes in the method of accounting
for postretirement benefits due to the implementation of Statement of Financial
Accounting Standards No. 106 and an extraordinary loss of $240,000 ($.01 per
share) from the early retirement of debt.
Footwear Retail
Six Months
Ended July 31,
-------------------------
1994 1993 % Change
-------- -------- --------
(In Thousands)
Sales . . . . . . . . . . . . . . . . . . . . . . . . . $100,771 $102,343 (1.5%)
Operating Income . . . . . . . . . . . . . . . . . . . $ 3,412 $ 436 683%
Operating Margin . . . . . . . . . . . . . . . . . . . 3.4% 0.4%
Despite an increase in comparable store sales of approximately 3%, net sales
from footwear retail operations declined 1.5% in the six months ended July 31,
1994 compared to the previous year due to the operation of 6% fewer stores and
a $1.7 million decline in accessory sales. The average price per pair and unit
sales were flat for the six months. Gross margin as a percentage of sales
increased from 50.6% to 51.1%. Operating expenses decreased 4.8%, primarily
due to operation of fewer stores and lower advertising expenses, and decreased
as a percentage of sales from 50.2% to 48.5%. Operating income in the fiscal
year ending January 31, 1995 does not include operating losses of the retail
stores included in the Company's restructuring. Operating income in the first
six months ended July 31, 1993, adjusted to exclude results of the 58 stores
included in the restructuring, was $1,859,000. Current operating income of
$3,412,000 in the first six months this year was higher than last year's
adjusted operating income due to improved margin as a percentage of sales from
lower markdowns and the lower expenses.
22
23
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Footwear Wholesale & Manufacturing
Six Months
Ended July 31,
-------------------------
1994 1993 % Change
-------- -------- --------
(In Thousands)
Sales . . . . . . . . . . . . . . . . . . . . . . . . $113,616 $121,936 (6.8%)
Operating Income . . . . . . . . . . . . . . . . . . $ 4,667 $ 8,668 (46.2%)
Operating Margin . . . . . . . . . . . . . . . . . . 4.1% 7.1%
Net sales from footwear wholesale and manufacturing operations were $8.3
million (6.8%) lower in the six months ended July 31, 1994 than in the previous
year, reflecting primarily lower sales of the Company's boot products and to a
lesser extent lower sales of athletic products.
Gross margin as a percentage of sales decreased from 28.7% to 26.0%, primarily
due to volume-related manufacturing variances and price reductions to stimulate
sales.
A sharp decline in the sale of boots led to a decision in the latter part of
Fiscal 1994 to curtail the production of boots. See "Significant
Developments-Restructuring Charge" above. Despite the closing of a boot plant
in the first quarter of Fiscal 1995, the lower volume of boots manufactured in
the second quarter of Fiscal 1995 resulted in underabsorption of overhead and
negative manufacturing variances. Record boot sales in the first quarter last
year resulted in positive manufacturing variances in the Company's boot plants.
Operating expenses decreased 4.6% but increased slightly as a percentage of
sales from 21.8% to 22.3%, primarily because of increased royalty and bad debt
expenses.
The decline in operating income is due to lower boot sales combined with price
reductions taken to stimulate sales of boots and children's shoes.
23
24
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Tailored Clothing
Six Months
Ended July 31,
-------------------------
1994 1993 % Change
-------- -------- --------
(In Thousands)
Sales . . . . . . . . . . . . . . . . . . . . . . . . . $57,198 $50,164 14.0%
Operating Income . . . . . . . . . . . . . . . . . . . $(2,940) $ 2,223 -
Operating Margin . . . . . . . . . . . . . . . . . . . (5.1%) 4.4%
For discussion of industry-wide conditions and developments in The Greif
Companies in Fiscal 1993 and 1994 and their effect on Greif's business and
prospects, see "Results of Operations-Second Quarter Fiscal 1995 vs
1994-Tailored Clothing."
Net sales from tailored clothing operations increased 14.0%. Net sales,
excluding those of GCO Apparel Corporation ("GCO Apparel") which began
operations in August 1993, declined by 5.5%. Gross margin decreased 47% and
declined as a percentage of sales from 23.6% to 11.0%.
Tailored clothing gross margin was adversely affected by the inclusion of GCO
Apparel's low margin cut, make and trim operations which were acquired in August
1993 and was adversely affected by the shipment in the first six months of
lower-margin products that were produced at Greif in anticipation of a work
stoppage in the third quarter of Fiscal 1994.
Operating expenses decreased 6% and decreased as a percentage of sales from
19.1% to 15.8%. The decrease in operating expenses is due to reduced
advertising expenses, primarily from reversal of $625,000 of accrued
advertising, and lower staff expenses attributable to the restructuring. The
reduction in operating income is attributable to lower Greif sales and lower
gross margins.
Corporate and Interest Expenses
Corporate and other expenses were $6.8 million compared to $6.8 million for the
same period last year. Included in this year's corporate and other expense is
a $700,000 provision for environmental litigation. Excluding the provision for
environmental litigation, the decrease in corporate expenses is due to lower
compensation expenses due to the layoffs related to the restructuring and other
staff reductions that occurred after the first quarter in Fiscal 1994 and due
to the accrual of $400,000 for bonuses in the first half of last year that were
not accrued this year.
24
25
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Interest expense increased $818,000, or 16%, from the first six months of last
year because of an increase in average outstanding indebtedness under the
Company's revolving credit agreement and higher average interest rates under
that agreement.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain financial data at the dates indicated.
All dollar amounts are in millions.
July 31,
------------------------
1994 1993
------ ------
Cash and short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5.0 $ 2.4
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $178.7 $214.8
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $114.0 $102.0
Current ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5x 4.7x
- - ---------------
Working Capital
The Company's business is somewhat seasonal, with the Company's investment in
inventory and accounts receivable reaching peaks in the spring and fall of each
year. Cash flow from operations is generated principally in the fourth quarter
of each fiscal year.
Cash used by operating activities was $22.5 million in the first six months of
Fiscal 1995 compared to $48.3 million used by operating activities last year.
The $25.8 million improvement in cash flow from operating activities between
the first six months of Fiscal 1995 and the first six months of Fiscal 1994
reflects (i) reduced retail inventory from store closings, (ii) lower tailored
clothing inventory as a result of anticipated lower Greif sales and reduced raw
material purchases for the spring 1995 season (see "Backlog"), (iii) improved
footwear inventory management and (iv) changes in accounts payable resulting
from changes in buying patterns (i.e., changes in the timing of purchases and
receipts).
A $1.6 million decrease in inventories from January 31, 1994 levels was due
primarily to lower tailored clothing inventory that more than offset normal
seasonal increases. The $22.0 million decrease in inventories compared
with July 31, 1993 reflects improved footwear inventory controls, lower
tailored clothing inventory and lower retail inventory from store closings.
Accounts receivable at July 31, 1994 increased $18.8 million compared to
January 31, 1994, primarily from seasonal increases and extended terms given to
meet competitive pressures. Accounts receivable at July 31, 1994 were $2.7
million less than at July 31, 1993, due to lower footwear wholesale sales and a
change in the sales mix.
25
26
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Cash provided (or used) due to changes in accounts payable and accrued
liabilities at July 31, 1994 and 1993 is as follows:
Six Months Ended July 31,
----------------------------------
(In Thousands) 1994 1993
------- ---------
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . $ 1,066 $ (9,545)
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . (3,449) (1,034)
------- --------
$(2,383) $(10,579)
======= ========
The fluctuations in accounts payable are due to changes in buying patterns
(i.e., changes in the timing of purchases and receipts), payment terms
negotiated with individual vendors and changes in inventory levels.
The change in accrued liabilities in the six months ended July 31, 1994 versus
the six months ended July 31, 1993 is due primarily to accrued liabilities
related to the Company's restructuring.
Revolving credit agreement borrowings during the six months ended July 31, 1994
increased by $24 million to finance seasonal working capital increases, to
finance current operations and to fund approximately $4.1 million of costs
associated with the Company's restructuring. Revolving credit agreement
borrowings during the six months ended July 31, 1993 increased by only $5
million due to the $75 million financing completed February 1, 1993.
Capital Expenditures and Acquisitions
Total capital expenditures in Fiscal 1995 are expected to be approximately $9.1
million. These include expected expenditures of $4.6 million to open
approximately 24 new retail stores and to complete 20 major store renovations.
Capital expenditures for wholesale and manufacturing operations and other
purposes are expected to be approximately $4.5 million.
On August 12, 1993, GCO Apparel acquired all of the men's clothing
manufacturing assets and assumed certain liabilities of LaMar. See Note 2 to
the Consolidated Financial Statements. The purchase price was approximately
$11.8 million, including $10.9 million of cash and $900,000 of deferred
payments to be completed by August 1995. The acquisition was financed through
revolving credit agreement borrowings.
26
27
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Future Capital Needs
The Company expects that cash provided by operations will be sufficient to fund
all of its capital expenditures during Fiscal 1995 and to pay down most of its
revolving credit indebtedness under its $100 million credit facility at January
31, 1995. The substantial improvement in cash flow planned for Fiscal 1995 is
based upon expected improved operating results and lower working capital needs
resulting from better footwear inventory management and substantial liquidation
of working capital invested in the tailored clothing business. See "Results of
Operations - Second Quarter Fiscal 1995 vs 1994 - Tailored Clothing."
Approximately $12 million of consolidation costs that are expected to be
incurred in Fiscal 1995 are expected to be offset by cash inflows from
liquidation of assets employed in restructured operations.
The Company's tangible net worth for purposes of its revolving credit agreement
was $77.2 million at July 31, 1994. The Company is required to maintain a
tangible net worth at July 31, 1994, October 31, 1994 and January 31, 1995 of
$73 million, $80 million and $89 million, respectively. Compliance with the
tangible net worth maintenance covenant in future periods may be affected
through earnings or the sale of shares of the Company's capital stock. An
election to pursue certain alternative strategies under consideration with
respect to Greif (see "Results of Operations --Second Quarter Fiscal 1995 vs
1994 - Tailored Clothing") will require further amendment of the Company's
revolving credit agreement. There were $50.9 million of loans and letters of
credit outstanding at July 31, 1994.
The restricted payments covenant contained in the Company's revolving credit
agreement prohibits the Company from declaring dividends on the Company's
capital stock. The aggregate of annual dividend requirements on the Company's
Subordinated Serial Preferred Stock, $2.30 Series 1, $4.75 Series 3 and $4.75
Series 4, and on its $1.50 Subordinated Cumulative Preferred Stock is $302,000.
The Company is unable to predict when dividends may be reinstated.
On April 8, 1993, the Company entered into a letter of credit agreement, which
was amended on January 31, 1994 and April 5, 1994, with a foreign bank, under
which up to $10,000,000 in letters of credit are available for issuance to the
Company's suppliers in connection with the importation of foreign goods. The
agreement provides for the issuance through October 6, 1994 of letters of
credit payable for periods not exceeding 180 days. At July 31, 1994, there was
$8.7 million of credit available under this letter of credit agreement. The
Company is in negotiation for the renewal of this letter of credit facility for
a period of up to six months on substantially the same terms and conditions.
While no assurance can be given regarding renewal of this facility, the
Company's revolving credit agreement adequately provides for the issuance of
letters of credit to meet the Company's current needs.
27
28
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The Company's English subsidiary, Mitre U.K., has a credit facility with a
credit limit equal to the lesser of (i) 5.0 million pounds sterling
(approximately U.S. $7.6 million at July 31, 1994) or (ii) the aggregate of 75
percent of the value of current receivables and 50 percent of the value of
inventory of Mitre U.K. The facility, which is guaranteed up to 4.3 million
pounds sterling by the Company, permits borrowings for working capital of up to
2.0 million pounds sterling, the issuance of letters of credit of up to 3.5
million pounds sterling and the issuance of guarantee bonds and indemnities of
up to 500,000 pounds sterling. The bank has extended this credit facility for
one month beyond its September 14, 1994 expiration date pending negotiation of
a new agreement. No assurance can be given regarding renewal of this facility,
but the Company's revolving credit agreement provides adequate credit to the
Company to meet the current working capital needs of Mitre U.K.
On July 1, 1994 the Company entered into a credit facility with a United States
bank under which it may borrow up to $2,000,000. This facility expires on June
30, 1995.
On April 27, 1994, Standard & Poor's announced that it had lowered the rating
of the 10 3/8% Notes to B+ from BB- and that, until the Company can demonstrate
improved performance on a consistent basis, the rating will be subject to
further downgrade. On June 6, 1994, Moody's announced that it had lowered its
rating of the Notes to B1 from Ba3. According to Standard & Poor's, a debt
instrument rated B has a greater vulnerability to default than debt rated BB,
but currently has the capacity to meet interest and principal payments.
Standard & Poor's modifier + indicates that the 10 3/8% Notes are at the upper
end of the broad ratings category. According to Moody's, the assurance of
interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small with respect to a debt
instrument rated B. The Moody's modifier indicates that the security ranks in
the higher end of its rating category. Ratings are not a recommendation to
purchase, hold or sell long-term debt of the Company, inasmuch as ratings do
not comment as to market price or suitability for particular investors and may
be subject to revision or withdrawal at any time by the assigning rating
agency.
28
29
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
BACKLOG
On July 31, 1994 the Company's wholesale operations (which accounted for 60% of
sales in Fiscal 1994) had a backlog of orders, including unconfirmed customer
purchase orders, amounting to approximately $67.4 million, compared to
approximately $89.7 million on July 31, 1993. Of these amounts, approximately
$36.0 million and $37.1 million, respectively, were for footwear and
approximately $31.4 million and $52.6 million, respectively, were for men's
apparel. The backlog of orders is somewhat seasonal, reaching a peak for
footwear in the spring and for tailored clothing in the summer. Tailored
clothing and footwear operations maintain in-stock programs for selected
anticipated high volume styles, but customer orders for tailored clothing are
generally received several months in advance of shipping dates.
The order backlog in dollars on July 31, 1994 for footwear wholesale products,
which includes tanned leather, was 3% lower than on July 31, 1993. This
decrease is attributable to decreases in the order backlog for the Company's
boot, athletic and tanned leather products. The majority of orders for
footwear and tanned leather is for delivery within 90 days. Therefore, the
footwear wholesale products backlog at any one time is not necessarily
indicative of a corresponding change in future sales for an extended period of
time.
Tailored clothing backlog in dollars on July 31, 1994, consisting primarily of
fall 1994 and spring 1995 orders, was 40% lower than on July 31, 1993.
Tailored clothing backlog does not include sales anticipated under GCO
Apparel's cut, make and trim agreement. The Company believes that the decrease
in tailored clothing backlog is attributable to (i) general market conditions
throughout the tailored clothing industry, (ii) product quality problems in
Fiscal 1994 arising out of the Company's efforts to redesign and manufacture
certain products to meet retailer demands for lower-cost, branded products,
(iii) the Company's decision to reduce sales to off-price retailers (iv)
retailer concerns regarding the pricing of the Chaps by Ralph Lauren line by
the new licensee and (v) the impact of the loss of the Ralph Lauren licenses
for the spring 1995 season. The Company expects the lower level of demand for
its tailored clothing products to continue through Fiscal 1995.
29
30
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company entered into a settlement agreement dated as of May 4, 1994 with
the corporate successor to the purchaser of the Company's Canadian operations
(the Taxpayer") and with the Canadian Department of National Revenue (the
"Department") in connection with tax reassessments by the Department for which
the Taxpayer had made indemnification claims against the Company. On February
4, 1994 the Taxpayer filed for protection under the Companies Creditors
Arrangement Act and sought approval of a plan of compromise or arrangement with
its creditors. On May 10, 1994, the Ontario Court (General Division) approved
the Taxpayer's plan of compromise or arrangement, subject to the settlement
agreement. Pursuant to the settlement agreement, the Company deposited, in
full satisfaction of the Taxpayer's and the Department's claims, $1.8 million
(Canadian) with an escrow agent, pending entry by the Canadian Treasury Board
of a remission order approving the terms of the settlement agreement. The
remission order was entered on August 10, 1994.
On September 8, 1994 the Company entered into a settlement agreement with
members of the Smith family who were among the 29 individual plaintiffs who
brought private civil actions arising out of alleged contamination of a site in
Williamson County, Tennessee.
On September 9, 1994 the Company reached a tenative settlement of a court
action brought by a former landlord involving alleged breach by the Company of
a lease for property in New York City.
For additional information concerning these settlements, see Note 8 to the
Consolidated Financial Statements which is incorporated herein by reference.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At July 31, 1994 Genesco was in arrears with respect to dividends payable on
the following classes of preferred stock:
ARREARAGE
-------------------------------------------
DATE DIVIDENDS BEGINNING THIS END OF
CLASS OF STOCK PAID TO OF QUARTER QUARTER QUARTER
- - -----------------------------------------------------------------------------------------------------------
$2.30 Series 1 October 31, 1993 $ 42,876 $ 21,409 $ 64,285
$4.75 Series 3 October 31, 1993 46,626 23,313 69,939
$4.75 Series 4 October 31, 1993 38,978 19,489 58,467
$1.50 Subordinated Cumulative
Preferred October 31, 1993 22,438 11,256 33,694
- - -----------------------------------------------------------------------------------------------------------
TOTALS $150,918 $ 75,467 $226,385
===========================================================================================================
30
31
PART II - OTHER INFORMATION, CONTINUED
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of shareholders held on June 22, 1994, shares
representing a total of 24,513,669 votes were outstanding and entitled to vote.
At the meeting, shareholders of the Company:
(1) elected eight directors nominated by the board of directors by the
following votes:
Votes
Votes "For" "Withheld"
----------- ----------
David M. Chamberlain 21,454,292 657,068
W. Lipscomb Davis, Jr. 21,465,393 645,967
John Diebold 21,457,989 653,371
Harry D. Garber 21,460,691 650,669
Joel C. Gordon 21,469,149 651,211
E. Douglas Grindstaff 21,377,885 723,475
William A. Williamson, Jr. 21,457,519 656,841
William S. Wire II 21,340,507 770,853
(2) ratified the appointment of Price Waterhouse as independent
accountants for the fiscal year ending January 31, 1995 by a vote of
21,652,994 for, 262,168 against, with 196,198 abstentions: and
(3) defeated a shareholder proposal requesting the board to take steps
to provide for cumulative voting in the election of directors by a
vote of 7,421,999 for, 7,882,844 against, with 255,746 abstentions
and 6,550,771 not voted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
(11) Computation of earnings per common and common share equivalent.
(27) Financial Data Schedule
______________
REPORTS ON FORM 8-K
None
31
32
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Genesco Inc.
/s/ Robert E. Brosky
Robert E. Brosky
Controller and Chief Accounting Officer
September 14, 1994
32
1
EXHIBIT 11
- - ----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JULY 31, SIX MONTHS ENDED JULY 31,
-------------------------------------- -----------------------------------
1994 1993 1994 1993
---------------- ------------------ ------------------ ------------------
IN THOUSANDS EARNINGS SHARES EARNINGS SHARES EARNINGS SHARES EARNINGS SHARES
- - ----------------------------------------------------------------------------------------------------------------------------------
PRIMARY EARNINGS (LOSS) PER SHARE
Earnings (loss) before extraordinary loss
and cumulative effect of change
in accounting principle $ (516) $ 456 $(3,189) $ (286)
Preferred dividend requirements $ 76 $ 77 $ 151 $ 155
- - ----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary loss
and cumulative effect of change
in accounting principle applicable
to common stock and average common
shares outstanding $ (592) 24,317 $ 379 24,175 $(3,340) 24,312 $ (441) 24,039
Employees preferred and stock options deemed
to be a common stock equivalent -0- 389 -0- -0-
- - ----------------------------------------------------------------------------------------------------------------------------------
Totals before extraordinary loss and
cumulative effect of change
in accounting principle $ (592) 24,317 $ 379 24,564 $(3,340) 24,312 $ (441) 24,039
PER SHARE $ (.02) $ .02 $ (.14) $ (.02)
==================================================================================================================================
Earnings (loss) before cumulative effect
of change in accounting principle $ (516) $ 216 $(3,189) $ (526)
Preferred dividend requirements $ 76 $ 77 $ 151 $ 155
- - ----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before cumulative effect
of change in accounting principle applicable
to common stock and average common shares
outstanding $ (592) 24,317 $ 139 24,175 $(3,340) 24.312 $ (681) 24,039
Employees preferred and stock options deemed
to be a common stock equivalent -0- 389 -0- -0-
- - ----------------------------------------------------------------------------------------------------------------------------------
Totals before cumulative effect of change in
accounting principle $ (592) 24,317 $ 139 24,564 $(3,340) 24,312 $ (681) 24,039
PER SHARE $ (.02) $ .01 $ (.14) $ (.03)
==================================================================================================================================
Net earnings (loss) $ (516) $ 216 $(3,189) $(2,799)
Preferred dividend requirements $ 76 $ 77 $ 151 $ 155
- - ----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) applicable to common stock
and average common shares outstanding $ (592) 24,317 $ 139 24,175 $(3,340) 24,312 $(2,954) 24,039
Employees preferred and stock options deemed
to be a common stock equivalent -0- 389 -0- -0-
- - ----------------------------------------------------------------------------------------------------------------------------------
Total net earnings (loss) $ (592) 24,317 $ 139 24,564 $(3,340) 24,312 $(2,954) 24,039
PER SHARE $ (.02) $ .01 $ (.14) $ (.12)
==================================================================================================================================
FULLY DILUTED EARNINGS (LOSS) PER SHARE
Earnings (loss) before extraordinary loss and
cumulative effect of change
in accounting principle applicable
to common stock and average common
shares outstanding $ (592) 24,317 $ 379 24,564 $(3,340) 24,312 $ (441) 24,039
Senior securities the conversion of which
would dilute earnings per share -0- 122 -0- -0-
- - ----------------------------------------------------------------------------------------------------------------------------------
Totals before extraordinary loss and
cumulative effect of change
in accounting principle $ (592) 24,317 $ 379 24,686 $(3,340) 24,312 $ (441) 24,039
PER SHARE $ (.02) $ .02 $ (.14) $ (.02)
==================================================================================================================================
Earnings (loss) before cumulative effect of
change in acounting principle applicable
to common stock and average common shares
outstanding $ (592) 24,317 $ 139 24,564 $(3,340) 24,312 $ (681) 24,039
Senior securities the conversion of which
would dilute earnings per share -0- 122 -0- -0-
- - ----------------------------------------------------------------------------------------------------------------------------------
Totals before cumulative effect of change in
accounting principle $ (592) 24,317 $ 139 24,686 $(3,340) 24,312 $ (681) 24,039
PER SHARE $ (.02) $ .01 $ (.14) $ (.03)
=================================================================================================================================
Net earnings (loss) applicable to common stock
and average common shares outstanding $ (592) 24,317 $ 139 24,564 $(3,340) 24,312 $(2,954) 24,039
Senior securities the conversion of which
would dilute earnings per share -0- 122 -0- -0-
- - ----------------------------------------------------------------------------------------------------------------------------------
TOTAL NET EARNINGS (LOSS) $ (592) 24,317 $ 139 24,686 $(3,340) 24,312 $(2,954) 24,039
PER SHARE $ (.02) $ .01 $ (.14) $ (.12)
==================================================================================================================================
All figures in thousands except amount per share.
5
1,000
6-MOS
JAN-31-1995
JUL-31-1994
5,015
0
84,440
2,570
153,513
250,552
114,369
73,192
327,048
71,850
125,367
24,822
0
7,954
62,841
327,048
271,585
271,585
184,223
184,223
0
1,255
5,899
(2,676)
513
(3,189)
0
0
0
(3,189)
(.14)
(.14)
