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
May 2, 1998
[ ] 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 has been subject to such
filing requirements for the past 90
days. Yes [X] No [ ]
- -------------------------------------------------------
Common Shares Outstanding June 5, 1998 - 25,990,988
2
INDEX
- ----------------------------------------------------------------------------------------------------------------
PAGE
- ----------------------------------------------------------------------------------------------------------------
Part 1 - Financial Information 3
- ----------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet - May 2, 1998, January 31, 1998 and
May 3, 1997 3
- ----------------------------------------------------------------------------------------------------------------
Consolidated Earnings - Three Months Ended
May 2, 1998 and May 3, 1997 4
- ----------------------------------------------------------------------------------------------------------------
Consolidated Cash Flows - Three Months Ended
May 2, 1998 and May 3, 1997 5
- ----------------------------------------------------------------------------------------------------------------
Consolidated Shareholders' Equity - Year Ended
January 31, 1998 and Three Months Ended May 2, 1998 6
- ----------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 7
- ----------------------------------------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
- ----------------------------------------------------------------------------------------------------------------
Part II - Other Information 29
- ----------------------------------------------------------------------------------------------------------------
Signature 30
- ----------------------------------------------------------------------------------------------------------------
2
3
PART I - FINANCIAL INFORMATION
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Balance Sheet
In Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
MAY 2, JANUARY 31, MAY 3,
1998 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and short-term investments $ 127,702 $ 49,276 $ 26,421
Accounts receivable 22,281 20,339 34,811
Inventories 111,089 102,042 108,191
Other current assets 5,472 5,802 4,326
Current assets of operations to be divested 12,877 17,105 -0-
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 279,421 194,564 173,749
- ------------------------------------------------------------------------------------------------------------------------------------
Plant, equipment and capital leases, net 49,942 44,810 37,870
Other noncurrent assets 11,538 6,623 8,912
Noncurrent assets of operations to be divested 638 820 -0-
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 341,539 $ 246,817 $ 220,531
====================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Debt to be retired $ 75,000 $ -0- $ -0-
Accounts payable and accrued liabilities 62,811 71,994 59,842
Provision for discontinued operations 2,967 3,017 3,210
Current payments on capital leases 94 240 558
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 140,872 75,251 63,610
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term debt 103,500 75,000 75,000
Capital leases 38 39 167
Other long-term liabilities 11,850 14,219 11,885
Provision for discontinued operations 9,832 10,344 11,161
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 266,092 174,853 161,823
- ------------------------------------------------------------------------------------------------------------------------------------
Contingent liabilities (see Note 11)
SHAREHOLDERS' EQUITY
Non-redeemable preferred stock 7,945 7,945 7,945
Common shareholders' equity:
Par value of issued shares 26,477 26,264 25,503
Additional paid-in capital 133,052 132,218 125,042
Accumulated deficit (73,020) (75,456) (81,925)
Accumulated other comprehensive income (1,150) (1,150) -0-
Treasury shares, at cost (17,857) (17,857) (17,857)
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 75,447 71,964 58,708
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 341,539 $ 246,817 $ 220,531
====================================================================================================================================
The accompanying Notes are an integral part of these Financial Statements.
3
4
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Earnings
Three Months Ended
In Thousands
- ----------------------------------------------------------------------
MAY 2, MAY 3,
1998 1997
- ----------------------------------------------------------------------
Net sales $ 133,808 $ 114,185
Cost of sales 75,987 66,313
Selling and administrative expenses 51,984 43,431
- ----------------------------------------------------------------------
Earnings from operations before
other income and expenses 5,837 4,441
- ----------------------------------------------------------------------
Other expenses (income):
Interest expense 2,889 2,545
Interest income (805) (416)
Other expense 246 113
- ----------------------------------------------------------------------
Total other (income) expenses, net 2,330 2,242
- ----------------------------------------------------------------------
Pretax earnings 3,507 2,199
Income taxes (benefit) (281) 17
- ----------------------------------------------------------------------
NET EARNINGS $ 3,788 $ 2,182
======================================================================
Basic earnings per common share $ .14 $ .08
Diluted earnings per common share $ .14 $ .08
======================================================================
The accompanying Notes are an integral part of these Financial Statements.
4
5
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Three Months Ended
Consolidated Cash Flows
In Thousands
- -----------------------------------------------------------------------------------------------------------------
MAY 2, MAY 3,
1998 1997
- -----------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net earnings $ 3,788 $ 2,182
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 2,385 2,151
Provision for losses on accounts receivable 554 1,005
Other 263 222
Effect on cash of changes in working capital and other assets and liabilities:
Accounts receivable (765) (1,427)
Inventories (6,549) (12,307)
Other current assets 330 183
Accounts payable and accrued liabilities (11,024) (5,542)
Other assets and liabilities (2,842) 231
- -----------------------------------------------------------------------------------------------------------------
Net cash used in operations (13,860) (13,302)
- -----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (7,484) (5,684)
Proceeds from asset sales -0- 78
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (7,484) (5,606)
- -----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Payments on capital leases (147) (760)
Long-term borrowings 103,500 -0-
Exercise of options and related income tax benefits 1,020 2,714
Deferred note expense (3,474) -0-
Other (1,129) -0-
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 99,770 1,954
- -----------------------------------------------------------------------------------------------------------------
NET CASH FLOW 78,426 (16,954)
Cash and short-term investments at beginning of period 49,276 43,375
- -----------------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 127,702 $ 26,421
=================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Net cash paid (received) for:
Interest $ 4,534 $ 4,437
Income taxes (177) 8
=================================================================================================================
The accompanying Notes are an integral part of these Financial Statements.
5
6
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Shareholders' Equity
In Thousands
TOTAL
NON-REDEEMABLE ADDITIONAL
PREFERRED COMMON PAID-IN ACCUMULATED TREASURY
STOCK STOCK CAPITAL (DEFICIT) STOCK
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE FEBRUARY 1, 1997 $7,944 $25,195 $122,615 $(84,107) $(17,857)
=================================================================================================================================
Exercise of options -0- 458 2,809 -0- -0-
Issue shares - Employee Stock Purchase Plan -0- 70 496 -0- -0-
Net earnings -0- -0- -0- 8,651 -0-
Issue shares - litigation settlement -0- 525 6,175 -0- -0-
Tax effect of exercise of stock options -0- -0- 42 -0- -0-
Minimum pension liability adjustment -0- -0- -0- -0- -0-
Other 1 16 81 -0- -0-
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE JANUARY 31, 1998 $7,945 $26,264 $132,218 $(75,456) $(17,857)
=================================================================================================================================
Net earnings -0- -0- -0- 3,788 -0-
Dividends paid -0- -0- -0- (1,352) -0-
Exercise of options -0- 208 812 -0- -0-
Other -0- 5 22 -0- -0-
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE MAY 2, 1998 $7,945 $26,477 $133,052 $(73,020) $(17,857)
=================================================================================================================================
ACCUMULATED TOTAL
OTHER SHARE-
COMPREHENSIVE HOLDERS'
INCOME EQUITY
- -------------------------------------------------------------------------------------
BALANCE FEBRUARY 1, 1997 $ -0- $ 53,790
=====================================================================================
Exercise of options -0- 3,267
Issue shares - Employee Stock Purchase Plan -0- 566
Net earnings -0- 8,651
Issue shares - litigation settlement -0- 6,700
Tax effect of exercise of stock options -0- 42
Minimum pension liability adjustment (1,150) (1,150)
Other -0- 98
- -------------------------------------------------------------------------------------
BALANCE JANUARY 31, 1998 $ (1,150) $ 71,964
=====================================================================================
Net earnings -0- 3,788
Dividends paid -0- (1,352)
Exercise of options -0- 1,020
Other -0- 27
- -------------------------------------------------------------------------------------
BALANCE MAY 2, 1998 $ (1,150) $ 75,447
=====================================================================================
The accompanying Notes are an integral part of these Financial Statements.
6
7
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 30, 1999 ("Fiscal 1999") and of the fiscal year ended
January 31, 1998 ("Fiscal 1998"). 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.
NATURE OF OPERATIONS
The Company's businesses include the manufacture or sourcing, marketing and
distribution of footwear principally under the Johnston & Murphy, Dockers,
Nautica, Laredo, Code West and Larry Mahan brands, the tanning and distribution
of leather by the Volunteer Leather division and the operation of Jarman,
Journeys, Johnston & Murphy, Boot Factory, General Shoe Warehouse, Nautica and
Underground Station retail footwear stores and leased departments.
BASIS OF PRESENTATION
All subsidiaries are included in the consolidated financial statements. All
significant intercompany transactions and accounts have been eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FINANCIAL STATEMENT RECLASSIFICATIONS
Certain reclassifications have been made to conform prior years' data to the
current presentation.
CASH AND SHORT-TERM INVESTMENTS
Included in cash and short-term investments at January 31, 1998 and May 2, 1998,
are short-term investments of $45.6 million and $124.0 million, respectively.
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, with cost determined principally by the first-in, first-out
method. Retail inventories are determined by the retail method.
7
8
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
- ------------------------------------------------------------------------------
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 are computed principally by the straight-line method.
IMPAIRMENT OF LONG-TERM ASSETS
The Company periodically assesses the realizability of its long-lived assets and
evaluates such assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Asset
impairment is determined to exist if estimated future cash flows, undiscounted
and without interest charges, are less than carrying amount.
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 for Italian Lira. At January 31, 1998 and
May 2, 1998, the Company had approximately $15.0 million and $20.3 million,
respectively, of such contracts outstanding. Forward exchange contracts have an
average term of approximately seven months. Gains and losses arising from these
contracts offset gains and losses from the underlying hedged transactions. The
Company 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 a defined benefit pension
plan. The Company also provides certain former employees with limited medical
and life insurance benefits. The Company funds at least the minimum amount
required by the Employee Retirement Income Security Act.
In accordance with SFAS 106, postretirement benefits such as life insurance and
health care are accrued 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. Costs
of future expenditures for environmental remediation obligations are not
discounted to their present value.
8
9
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
- ------------------------------------------------------------------------------
INCOME TAXES
Deferred income taxes are provided for all temporary differences and operating
loss and tax credit carryforwards limited, in the case of deferred tax assets,
to the amount the Company believes is more likely than not to be realized in the
foreseeable future.
NOTE 2
RESTRUCTURINGS
- ------------------------------------------------------------------------------
Fiscal 1998 Restructuring
As a result of the continued weakness in the western boot market, the Company
approved a plan in the fourth quarter of Fiscal 1998 to exit the western boot
business. In connection with the Boot Divestiture, the Company recorded a charge
to earnings of $17.3 million, including $11.3 million in asset writedowns. The
carrying value of the assets held for sale was reduced to fair value based on
estimated selling values less estimated costs to sell. In addition to the asset
writedown, the Company recorded $3.2 million in employee-related costs and $2.8
million of facility shutdown and other costs in the fourth quarter of Fiscal
1998. Net sales of the Company's western boot business for Fiscal 1998, 1997 and
1996 were $45.4 million, $56.1 million and $57.3 million, respectively. The
operating losses for the Company's western boot business for Fiscal 1998 and
1997 were $3.7 million and $2.2 million, respectively. The Company's western
boot business had operating income of $1.6 million for Fiscal 1996.
On June 12, 1998, the Company and Texas Boot Inc. entered into an agreement
providing for the purchase by Texas Boot Inc. of most of the assets related to
the western boot business, including the Company's 26 store Boot Factory retail
chain, which the Company had not planned to include in the Boot Divestiture.
Based on the agreement, the Company anticipates that the charges to earnings and
asset writedowns taken in connection with the Boot Divestiture should be
sufficient to complete the exit from the western boot business. The transaction
is expected to close during the quarter ending August 1, 1998, but is subject to
expiration of Hart-Scott-Rodino waiting periods and other customary closing
conditions.
In addition to the charge related to the Boot Divestiture, the Company took a
charge of $0.6 million during the fourth quarter of Fiscal 1998 to consolidate
staff in one operating division as well as to account for the costs of
eliminating a production process at its remaining footwear plant.
The Company's actions relating to the Boot Divestiture and other charges are
expected to be completed in Fiscal 1999 and are expected to result in the
elimination of approximately 640 jobs, including all positions related to the
western boot business and the Boot Factory retail chain. During the first
quarter ended May 2, 1998, the Company closed its Iuka, Mississippi
manufacturing plant. Primarily due to the closing of the plant, 171 jobs of the
approximately 640 jobs were eliminated in the first quarter of Fiscal 1999.
9
10
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 3
ACCOUNTS RECEIVABLE
- -------------------------------------------------------------------------------------------------------------------
MAY 2, JANUARY 31,
IN THOUSANDS 1998 1998
- -------------------------------------------------------------------------------------------------------------------
Trade accounts receivable $ 20,789 $ 19,947
Miscellaneous receivables 4,867 3,142
- -------------------------------------------------------------------------------------------------------------------
Total receivables 25,656 23,089
Allowance for bad debts (1,370) (988)
Other allowances (2,005) (1,762)
- -------------------------------------------------------------------------------------------------------------------
NET ACCOUNTS RECEIVABLE $ 22,281 $ 20,339
===================================================================================================================
The Company's footwear wholesaling business sells primarily to independent
retailers and department stores across the United States. Receivables arising
from these sales are not collateralized. Credit risk is affected by conditions
or occurrences within the economy and the retail industry. The Company
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends and other information.
No single customer accounted for more than 7% of the Company's trade receivables
balance as of May 2, 1998.
NOTE 4
INVENTORIES
- -------------------------------------------------------------------------------------------------------------------
MAY 2, JANUARY 31,
IN THOUSANDS 1998 1998
- -------------------------------------------------------------------------------------------------------------------
Raw materials $ 3,833 $ 4,452
Work in process 2,364 2,261
Finished goods 21,237 28,458
Retail merchandise 83,655 66,871
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVENTORIES $ 111,089 $ 102,042
===================================================================================================================
10
11
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 5
PLANT, EQUIPMENT AND CAPITAL LEASES, NET
- --------------------------------------------------------------------------------------------------------------
MAY 2, JANUARY 31,
IN THOUSANDS 1998 1998
- --------------------------------------------------------------------------------------------------------------
Plant and equipment:
Land $ 263 $ 263
Buildings and building equipment 2,444 2,515
Machinery, furniture and fixtures 34,207 34,338
Construction in progress 9,220 6,767
Improvements to leased property 48,675 51,136
Capital leases:
Land -0- -0-
Buildings 200 200
Machinery, furniture and fixtures 4,472 4,777
- --------------------------------------------------------------------------------------------------------------
Plant, equipment and capital leases, at cost 99,481 99,996
Accumulated depreciation and amortization:
Plant and equipment (45,113) (50,519)
Capital leases (4,426) (4,667)
- --------------------------------------------------------------------------------------------------------------
NET PLANT, EQUIPMENT AND CAPITAL LEASES $ 49,942 $ 44,810
==============================================================================================================
11
12
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 6
ASSETS OF OPERATIONS TO BE DIVESTED
MAY 2, JANUARY 31,
IN THOUSANDS 1998 1998
- -------------------------------------------------------------------------------------------------------------------------
Current assets:
Accounts receivable, net of allowance of $3,293 and $3,325
for May 2, 1998 and January 31, 1998, respectively $ 5,953 $ 7,684
Inventory 6,920 9,418
Other current assets 4 3
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS $ 12,877 $ 17,105
=========================================================================================================================
Noncurrent assets:
Plant and equipment 630 783
Capitalized lease rights 8 37
- -------------------------------------------------------------------------------------------------------------------------
TOTAL NONCURRENT ASSETS $ 638 $ 820
=========================================================================================================================
NOTE 7
PROVISION FOR DISCONTINUED OPERATIONS AND RESTRUCTURING RESERVES
PROVISION FOR DISCONTINUED OPERATIONS
EMPLOYEE
RELATED
IN THOUSANDS COSTS* OTHER TOTAL
- -------------------------------------------------------------------------------------------------------------------------
Balance January 31, 1998 $ 12,036 $ 1,325 $ 13,361
Charges and adjustments, net (452) (110) (562)
- -------------------------------------------------------------------------------------------------------------------------
Balance May 2, 1998 $ 11,584 $ 1,215 $ 12,799
Current portion 1,867 1,100 2,967
- -------------------------------------------------------------------------------------------------------------------------
TOTAL NONCURRENT PROVISION FOR
DISCONTINUED OPERATIONS $ 9,717 $ 115 $ 9,832
=========================================================================================================================
*Union pension withdrawal liability.
RESTRUCTURING RESERVES
EMPLOYEE FACILITY
RELATED SHUTDOWN
IN THOUSANDS COSTS COSTS OTHER TOTAL
- -------------------------------------------------------------------------------------------------------------------------
Balance January 31, 1998 $ 3,593 $ 1,983 $ 1,532 $ 7,108
Charges and adjustments, net (1,244) (267) (253) (1,764)
- -------------------------------------------------------------------------------------------------------------------------
Balance May 2, 1998 $ 2,349 $ 1,716 $ 1,279 $ 5,344
Current portion (included in accounts
payable and accrued liabilities) 2,349 1,139 1,099 4,587
- -------------------------------------------------------------------------------------------------------------------------
TOTAL NONCURRENT RESTRUCTURING RESERVES
(INCLUDED IN OTHER LONG-TERM LIABILITIES) $ -0- $ 577 $ 180 $ 757
=========================================================================================================================
12
13
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8
LONG-TERM DEBT
- -------------------------------------------------------------------------------------------------------------------
MAY 2, JANUARY 31,
IN THOUSANDS 1998 1998
- -------------------------------------------------------------------------------------------------------------------
10 3/8% senior notes due February 2003 $ 75,000 $ 75,000
5 1/2% convertible subordinated notes due April 2005 103,500 -0-
- -------------------------------------------------------------------------------------------------------------------
Total long-term debt 178,500 75,000
Current portion - debt to be retired (75,000) -0-
- -------------------------------------------------------------------------------------------------------------------
Total Non-current Portion of Long-term Debt $103,500 $ 75,000
===================================================================================================================
REVOLVING CREDIT AGREEMENT:
On September 24, 1997, the Company entered into a revolving credit agreement
with three banks providing for loans or letters of credit of up to $65 million.
The agreement, as amended March 31, 1998, expires September 24, 2002. This
agreement replaced a $35 million revolving credit agreement providing for loans
or letters of credit. The replacement of the $35 million revolving credit
agreement resulted in an extraordinary loss recognized in the third quarter of
Fiscal 1998 of $169,000. Outstanding letters of credit at May 2, 1998 were $12.9
million.
Under the revolving credit agreement, the Company may borrow at the prime rate
or LIBOR plus 1.5% which may be changed if the Company's pricing ratio (as
defined in the credit agreement) changes. Facility fees are 0.425% per annum on
$65.0 million and also varies based on the pricing ratio. The new credit
agreement requires the Company to meet certain financial ratios and covenants,
including minimum tangible net worth, fixed charge coverage and debt to equity
ratios. The Company is required by the credit agreement to reduce the
outstanding principal balance of the revolving loans to zero for 30 consecutive
days during each period beginning on December 15 of any Fiscal Year and ending
on April 15 of the following Fiscal Year. The revolving credit agreement, as
amended, contains other covenants which restrict the payment of dividends and
other payments with respect to capital stock. In addition, annual capital
expenditures are limited to $30.0 million for Fiscal 1998 and thereafter subject
to possible carryforwards from the previous year of up to $3.0 million if less
is spent in the current year. The Company was in compliance with the financial
covenants contained in the revolving credit agreement at May 2, 1998.
10 3/8% SENIOR NOTES DUE 2003:
On February 1, 1993, the Company issued $75 million of 10 3/8% senior notes due
February 1, 2003. These notes were redeemed May 8, 1998 resulting in a $3.7
million extraordinary loss for early retirement of debt to be reflected in the
Company's second quarter results.
13
14
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8
LONG-TERM DEBT, CONTINUED
- ------------------------------------------------------------------------------
5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2005:
On April 9, 1998, the Company issued $103.5 million of 5 1/2% convertible
subordinated notes due April 15, 2005. The notes will be convertible into
47.5172 shares of common stock per $1,000 principal amount of Notes (equivalent
to a conversion price of $21.045 per share of common stock), subject to
adjustment. During the second quarter the Company used: 1) $79.9 million of the
proceeds to repay all of the Company's 10 3/8% senior notes including interest
and expenses incurred in connection therewith resulting in an extraordinary loss
of $3.7 million to be reflected in the Company's second quarter results, 2) $1.3
million of the proceeds to pay dividends in arrears because of certain
convenants in the indenture relating to the senior notes, and 3) the remaining
proceeds for general corporate purposes.
The indenture does not restrict the incurrence of Senior Debt by the Company or
other indebtedness or liabilities by the Company or any of its subsidiaries.
NOTE 9
COMPREHENSIVE INCOME
- ------------------------------------------------------------------------------
The Company implemented Statement of Financial Accounting Standards (SFAS) 130,
"Reporting Comprehensive Income" in the first quarter of Fiscal 1999. This
statement establishes standards for reporting and display of comprehensive
income. SFAS 130 requires the minimum pension liability adjustment to be
included in other comprehensive income. The adoption of this statement had no
impact on the Company's net income or shareholders' equity for the quarter ended
May 2, 1998 or May 3, 1997.
14
15
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 10
EARNINGS PER SHARE
- ---------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
MAY 2, 1998 MAY 3, 1997
------------------------------------------- ---------------------------------------
(IN THOUSANDS, EXCEPT INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
- ---------------------------------------------------------------------------------------------------------------------------------
Net Earnings $3,788 $2,182
Less: Preferred stock dividends (75) (75)
- ---------------------------------------------------------------------------------------------------------------------------------
BASIC EPS
Income available to
common shareholders 3,713 25,915 $.14 2,107 24,915 $.08
==== ====
Plus: Interest on 5 1/2% convertible
subordinated notes 417 -0-
EFFECT OF DILUTIVE SECURITIES
Options 1,355 1,317
5 1/2% convertible subordinated notes 1,297 -0-
Contingent Options(1) 200 67
Employees' Preferred Stock(2) 80 80
- ---------------------------------------------------------------------------------------------------------------------------------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $4,130 28,847 $.14 $2,107 26,379 $.08
=================================================================================================================================
(1) These options refer to Fiscal 1997 and Fiscal 1998 and are contingent
upon service to the Company and the Company's common stock trading at
various prices.
(2) The Company's Employees' Subordinated Convertible Preferred Stock is
convertible one for one to the Company's common stock. Because there
are no dividends paid on this stock, these shares are assumed to be
converted.
The dilutive effect of the convertible preferred stock was not reflected in
diluted earnings per share because it is antidilutive. The amount of the
dividend for the period per common share obtainable on conversion is higher than
basic earnings per share. The shares convertible to common stock for Series 1, 3
and 4 preferred stock would have been 30,816, 40,869 and 24,946, respectively.
15
16
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 11
LEGAL PROCEEDINGS
- ------------------------------------------------------------------------------
New York State Environmental Proceedings
The Company was 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 were
filed against numerous other entities, including the Company, in both actions.
These actions arose out of the alleged disposal of certain hazardous material
directly or indirectly in municipal landfills and seek recovery under a federal
environmental statute and certain common law theories for the costs of
investigating and performing remedial actions and damage to natural resources.
In March 1997, the Company accepted an offer to settle the Johnstown action
pursuant to which the action has been dismissed for a payment of $31,350. The
Company remains a defendant in the Gloversville action. The environmental
authorities have selected a plan of remediation for the Gloversville site with a
total estimated cost of approximately $10.0 million. The Company has filed an
answer to the complaint in the Gloversville case denying liability and asserting
numerous defenses. Because of uncertainties related to the ability or
willingness of the other defendants, including the municipalities involved, to
pay a portion of remediation costs, the availability of State funding and
insurance coverage, the applicability of joint and several liability and the
basis for contribution claims among the defendants, management is unable to
predict the outcome of the Gloversville action. However, management does not
presently expect the Gloversville action to have a material effect on the
Company's financial condition or results of operations.
16
17
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 11
LEGAL PROCEEDINGS, CONTINUED
- ------------------------------------------------------------------------------
The Company has received notice from the New York State Department of
Environmental Conservation (the "Department") that it deems remedial action to
be necessary with respect to certain contaminants in the vicinity of a knitting
mill operated by a former subsidiary of the Company from 1965 to 1969, and that
it considers the Company a potentially responsible party. In August 1997, the
Department and the Company entered into a consent order whereby the Company
assumed responsibility for conducting a remedial investigation and feasibility
study ("RIFS") and implementing an interim remediation measure with regard to
the site, without admitting liability or accepting responsibility for any future
remediation of the site. In conjunction with the consent order, the Company
entered into an agreement with the owner of the site providing for a release
from liability for property damage and for necessary access to the site, for
payments totaling $400,000. The Company estimates that the cost of conducting
the RIFS and implementing the interim remedial measure will be approximately
$1.6 million. The Company believes that it has adequately reserved for the costs
of conducting the RIFS and implementing the interim remedial measure
contemplated by the consent order, but there is no assurance that the consent
order will ultimately resolve the matter. In conjunction with the consent order,
the Company entered into an agreement with the owner of the site providing for
necessary access to the site. The Company has not ascertained what
responsibility, if any, it has for any contamination in connection with the
facility or what other parties may be liable in that connection and is unable to
predict whether its liability, if any, beyond that voluntarily assumed by the
consent order will have a material effect on its financial condition or results
of operations.
Whitehall Environmental Sampling
The Michigan Department of Environmental Quality ("MDEQ") has performed sampling
and analysis of soil, sediments, surface water, groundwater and waste management
areas at the Company's Volunteer Leather Company facility in Whitehall,
Michigan. In response to the testing data, the Company submitted and MDEQ
approved a work plan, pursuant to which the Company performed a hydrogeological
study and a series of studies regarding wastes on-site and groundwater. On the
basis of these studies, the Company has proposed a remedial action plan
involving installation of horizontal wells to capture groundwater from a portion
of the site, treatment of the groundwater either after its use in the
manufacturing process or through an air sponge system, and installation of
monitoring wells. The Company's consulting engineers preliminarily estimate
capital cost associated with the plan to be in the range of $100,000 to $180,000
with operations and maintenance cost in the range of $10,000 to $15,000 per
year. Based on its present expectations for the plan and assuming its approval
by the MDEQ, the Company does not believe that soil and groundwater remediation
at the site will have a material impact on its financial condition or results of
operations. The proposed plan is not expected to address lake sediments.
Officials of MDEQ have been quoted in press reports as proposing a $3.5 million
lake sediment cleanup with $2.5 million to be funded by responsible parties,
which would presumably include but not be limited to the Company. The Company is
at present unable to predict whether and to what extent it may in the future be
required to participate in a remediation of lake sediments, or whether its
participation, if any, will have a material effect on its financial condition or
results of operations.
17
18
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 11
LEGAL PROCEEDINGS, CONTINUED
- ------------------------------------------------------------------------------
Other Legal Proceedings
On October 6, 1995, a prior holder of a license to manufacture and market
western boots and other products under a trademark now licensed to the Company
filed an action in the District Court of Dallas County, Texas against the
Company and a contract manufacturer alleging tortious interference with a
business relationship, breach of contract, tortious interference with a
contract, breach of a confidential relationship and civil conspiracy based on
the Company's entry into the license and seeking damages of $20 million. The
Company paid $400,000 to settle the litigation and it was dismissed in April
1998.
On August 8, 1997, the trustee in bankruptcy of a Texas boot retailer filed an
action in Texas state court against the Company and an unrelated boot wholesaler
and retail chain alleging violations of a Texas antitrust statute and breach of
contract by the Company. The trustee's allegations against the Company involve
its decision not to consign additional boot inventories to the bankrupt retailer
for its liquidation sale. The complaint seeks damages in an unspecified amount.
The Company has filed an answer denying all material allegations in the
complaint and does not expect the action to have a material effect on its
financial condition or results of operations.
18
19
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
This discussion and the notes to the Consolidated Financial Statements include
certain forward-looking statements. Actual results could differ materially from
those reflected by the forward-looking statements in the discussion and a number
of factors may adversely affect future results, liquidity and capital resources.
These factors include softness in the general retail environment, particularly
as it may result in changing buying patterns by customers of the Company's
wholesale divisions, the timing and acceptance of products being introduced to
the market, international trade developments affecting foreign sourcing of
products, the outcome of various litigation and environmental contingencies,
including those discussed in Note 11 to the Consolidated Financial Statements,
the solvency of the retail customers of the Company, the level of margins
achievable in the marketplace and the ability to minimize operating expenses and
to deal with changes in markets for the Company's products, including the market
for tanned leather used in military footwear. The continuing weakening of the
western boot market has caused declining sales in the Company's western boot
business and erosion of its retail customer base, leading to the Company's
decision to exit the western boot business ("Boot Divestiture") and the related
charges discussed below. In addition to the risks and uncertainties discussed
above, the Company's ability to execute the plans and realize the estimates of
value reflected for the Boot Divestiture may adversely affect future results,
liquidity and capital resources. Additionally, as discussed below, the Company
has announced an accelerated store opening plan to address the anticipated loss
of its leased men's shoe departments in Mercantile Stores Company's department
stores. The timing and terms of the transition out of the leased department
business and the ability to open and operate the additional stores on schedule
and at expected levels of profitability are also among the factors that could
lead to material differences from the expectations reflected in the forward
looking statements in this report. Although the Company believes it has an
appropriate business strategy and the resources necessary for its operations,
future revenue and margin trends cannot be reliably predicted and the Company
may further alter its business strategies during Fiscal 1999.
SIGNIFICANT DEVELOPMENTS
5 1/2% Convertible Subordinated Notes
On April 9, 1998, the Company issued $103.5 million of 5 1/2% convertible
subordinated notes due April 15, 2005. During the second quarter the Company
used: 1) $79.9 million of the proceeds to repay all of the Company's 10 3/8%
senior notes including interest and expenses incurred in connection therewith
resulting in an extraordinary loss of $3.7 million to be reflected in the
Company's second quarter results, 2) $1.3 million of the proceeds to pay
dividends in arrears because of certain convenants in the indenture relating to
the senior notes, and 3) the remaining proceeds for general corporate purposes.
See Note 8 to the Company's Consolidated Financial Statements included elsewhere
herein.
Accelerated Growth Plan
Dillard's Inc. has announced a planned acquisition of Mercantile Stores Company.
The Company's Jarman Lease Division has an arrangement with Mercantile in which
Jarman Lease operates Mercantile's men's shoe departments. Traditionally,
Dillard's has operated its own shoe departments. As a result of the expected
termination of the arrangement between the Company and Mercantile Stores
Company, the Company has announced an accelerated store opening
19
20
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
schedule to address the loss of the Jarman Lease business. The Company intends
to open 51 Journeys stores in addition to the stores originally planned to be
opened during the next two years and an additional five Johnston & Murphy stores
in fiscal year 2000.
The Mercantile shoe departments' business contributed approximately $4.1 million
in operating earnings to the Company's results in the fiscal year ended January
31, 1998. The Company also intends to implement expense reductions and
anticipates some additional wholesale volume in its plans to address the
Mercantile transition. The Company currently expects to establish accruals for
severance related to the expense reductions in the range of $500,000 to $900,000
in the second quarter ending August 1, 1998, once the timing and terms of the
Mercantile transition have been determined.
Fiscal 1998 Restructuring
As a result of the continued weakness in the western boot market, the Company
approved a plan in the fourth quarter of Fiscal 1998 to exit the western boot
business. In connection with the Boot Divestiture, the Company recorded a charge
to earnings of $17.3 million, including $11.3 million in asset writedowns. The
carrying value of the assets held for sale was reduced to fair value based on
estimated selling values less estimated costs to sell. In addition to the asset
writedown, the Company recorded $3.2 million in employee-related costs and $2.8
million of facility shutdown and other costs in the fourth quarter of Fiscal
1998. Net sales of the Company's western boot business for Fiscal 1998, 1997 and
1996 were $45.4 million, $56.1 million and $57.3 million, respectively. The
operating losses for the Company's western boot business for Fiscal 1998 and
1997 were $3.7 million and $2.2 million, respectively. The Company's western
boot business had operating income of $1.6 million for Fiscal 1996.
On June 12, 1998, the Company and Texas Boot Inc. entered into an agreement
providing for the purchase by Texas Boot Inc. of most of the assets related to
the western boot business, including the Company's 26 store Boot Factory retail
chain, which the Company had not planned to include in the Boot Divestiture.
Based on the agreement, the Company anticipates that the charges to earnings and
asset writedowns taken in connection with the Boot Divestiture should be
sufficient to complete the exit from the western boot business. The transaction
is expected to close during the quarter ending August 1, 1998, but is subject to
expiration of Hart-Scott-Rodino waiting periods and other customary closing
conditions.
In addition to the charge related to the Boot Divestiture, the Company took a
charge of $0.6 million during the fourth quarter of Fiscal 1998 to consolidate
staff in one operating division as well as to account for the costs of
eliminating a production process at its remaining footwear plant.
The Company's actions relating to the Boot Divestiture and other charges are
expected to be completed in Fiscal 1999 and are expected to result in the
elimination of approximately 640 jobs, including all positions related to the
western boot business and the Boot Factory retail chain. During the first
quarter ended May 2, 1998, the Company closed its Iuka, Mississippi
manufacturing plant. Primarily due to the closing of the plant, 171 jobs of the
approximately 640 jobs were eliminated in the first quarter of Fiscal 1999.
20
21
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS - FIRST QUARTER FISCAL 1999 COMPARED TO FISCAL 1998
The Company's net sales in the first quarter ended May 2, 1998 increased 17.2%
to $133.8 million from $114.2 million in the first quarter ended May 3, 1997.
Pro forma for the Boot Divestiture, the Company's net sales increased 23.1% to
$123.0 million for the first quarter ended May 2, 1998 from $99.9 million in the
same period last year. Gross margin for the quarter increased 20.8% to $57.8
million in the first quarter this year from $47.9 million in the same period
last year and increased as a percentage of net sales from 41.9% to 43.2%.
Selling and administrative expenses increased 19.7% from the first quarter last
year and increased as a percentage of net sales from 38.0% to 38.8%. Pretax
earnings in the first quarter ended May 2, 1998 were $3.5 million compared to
$2.2 million for the first quarter ended May 3, 1997. Net earnings for the first
quarter ended May 2, 1998 were $3.8 million ($0.14 diluted earnings per share)
compared to $2.2 million ($0.08 diluted earnings per share) for the first
quarter ended May 3, 1997. Net earnings for the first quarter this year included
a tax credit of $281,000.
Footwear Retail
Three Months Ended
----------------------
May 2, May 3, %
1998 1997 Change
------- ------ ------
(dollars in thousands)
Net sales...............................................$ 85,599 $ 70,024 22.2%
Net sales-ongoing operations(1).........................$ 83,114 $ 67,155 23.8%
Operating income........................................$ 6,040 $ 5,758 4.9%
Operating margin........................................ 7.1% 8.2%
- ---------------
(1) Pro forma for the Boot Divestiture as if it occurred at the beginning
of the periods presented.
Primarily due to a 5% increase in comparable store sales and a 20% increase in
average retail stores operated, net sales from footwear retail operations
increased 22.2% for the first quarter ended May 2, 1998 compared to the same
period last year. The average price per pair increased 1% and unit sales
increased 18% for the first quarter of Fiscal 1999.
21
22
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
The Company's comparable store sales increases and store count at the end of the
periods were as follows:
Store Count
-------------------
Comparable May 2, May 3,
Sales Changes 1998 1997
------------- ------ ------
Journeys................................................. 9% 212 136
Johnston & Murphy (including factory stores)............. 11% 129 122
Jarman Retail............................................ 1% 161(1) 144
Jarman Lease............................................. -1% 103 85
Boot Factory Outlet Stores............................... -8% 26 29
Other Outlet Stores...................................... 8% 22 14
------ ------
Total Retail ........................................ 5% 653 530
====== ======
- -------------------
(1) Includes three Underground Station Stores.
Retail gross margin as a percentage of net sales increased slightly to 50.5% in
the first quarter of Fiscal 1999 compared to 50.4% in the same period last year.
Retail operating expenses increased 26.1% in the first quarter of Fiscal 1999,
primarily due to the 20% increase in average stores operated, which resulted in
increased occupancy related expenses and selling salaries. In addition,
divisional management expenses increased in the first quarter of Fiscal 1999 to
support new store growth. Overall retail operating expenses increased as a
percentage of net sales from 41.9% to 43.3%.
Retail operating income for the first quarter ended May 2, 1998 was up 4.9% to
$6.0 million compared to $5.8 million in the same period last year, due to
increased sales and gross margin.
On June 12, 1998, the Company announced that it has agreed to sell its Boot
Factory retail chain in conjunction with the Boot Divestiture. For the first
quarter ended May 2, 1998, the chain had net sales and operating loss of $2.5
million and $206,000, respectively, compared to $2.9 million and $180,000,
respectively, in the same period last year.
22
23
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Footwear Wholesale & Manufacturing
Three Months Ended
----------------------
May 2, May 3, %
1998 1997 Change
------- ------- ------
(dollars in thousands)
Net sales...............................................$ 48,209 $ 44,161 9.2%
Net sales - ongoing operations(1).......................$ 39,898 $ 32,770 21.8%
Operating income........................................$ 2,553 $ 1,153 121.4%
Operating margin........................................ 5.3% 2.6%
- ------------------------
(1) Pro forma for the Boot Divestiture as if it occurred at the beginning
of the periods presented.
Net sales from footwear wholesale and manufacturing operations increased 9.2% to
$48.2 million for the first quarter ended May 2, 1998, from $44.2 million in the
same period last year, reflecting primarily increased men's branded footwear
wholesale sales, which more than offset lower tanned leather sales and the
continuing trend of decreased sales of western boots, primarily attributable to
lower unit sales. Tanned leather sales were down due to lower orders from
military footwear suppliers, which have been impacted by the continuing decrease
in demand for leather military footwear, which makes up the bulk of the
Company's tanned leather business. The Company expects the decline in tanned
leather sales to continue through the remainder of Fiscal 1999. The increase in
branded footwear wholesale sales in the first quarter of Fiscal 1999 included
sales of new products introduced by the Company's Nautica division as well as
new distribution channels for the division's athletic products. Pro forma for
the Boot Divestiture, wholesale sales attributable to ongoing operations
increased 21.8% to $39.9 million for the first quarter ended May 2, 1998, from
$32.8 million in the same period last year.
Wholesale gross margin for the first quarter ended May 2, 1998 increased 15.7%
to $14.6 million from $12.6 million in the same period last year. As a
percentage of net sales, gross margin increased from 28.6% to 30.3%, primarily
from changes in sales mix.
Wholesale operating expenses increased 3.6% for the first quarter ended May 2,
1998, primarily as a result of higher divisional administrative expenses to
support the expected growth in the branded businesses and increased royalty
expenses from increased sales and higher royalty rates and from, increased
advertising expenses, but decreased as a percentage of net sales from 26.0% to
24.6%.
Wholesale operating income increased from $1.2 million for the first quarter
ended May 3, 1997, to $2.6 million for the first quarter ended May 2, 1998, due
to increased sales and gross margin and to the lower expenses as a percentage of
sales.
23
24
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
During the fourth quarter of Fiscal 1998, the Company adopted a plan to exit the
western boot business. For the first quarter ended May 2, 1998 the western boot
business had net sales and operating loss of $8.3 million and $0.7 million,
respectively, compared to net sales and operating loss of $11.4 million and $0.3
million, respectively, in the same period last year.
Corporate and Interest Expenses
Corporate and other expenses for the first quarter ended May 2, 1998 were $3.0
million compared to $2.6 million for the same period last year, an increase of
16.2%. The increase in corporate expenses is attributable primarily to increased
legal fees and expenses related to systems development in order to be Year 2000
compliant.
Interest expense increased 14% from $2.5 million for the first quarter ended May
3, 1997 to $2.9 million for the first quarter ended May 2, 1998, due to the
issuance of $103.5 million of 5 1/2% convertible subordinated notes on April 9
before the retirement of the 10 3/8% senior notes on May 8, 1998 and interest
income increased 94% from $0.4 million to $0.8 million due to increases in
average short-term investments as a result of the increased cash from the
issuance of $103.5 million of 5 1/2% convertible subordinated notes. There were
no borrowings under the Company's revolving credit facility during the three
months ended May 2, 1998 or May 3, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain financial data at the dates indicated.
May 2, May 3,
1998 1997
------ -----
(dollars in millions)
Cash and short-term investments.................................................. $127.7 $ 26.4
Working capital.................................................................. $138.5 $ 110.1
Long-term debt (includes current maturities)..................................... $178.5 $ 75.0
Current ratio.................................................................... 2.0x 2.7x
On April 9, 1998, the Company issued $103.5 million in principal amount of its 5
1/2% Convertible Subordinated Notes due 2005. On May 8, 1998, using a portion of
the proceeds of the sale of the Convertible Subordinated Notes, the Company
redeemed $75 million in principal amount of its 10 3/8% Senior Notes due 2003,
at 102.96% of their face value.
Working Capital
The Company's business is somewhat seasonal, with the Company's investment in
inventory and accounts receivable normally reaching peaks in the spring and fall
of each year. Cash flow from operations is ordinarily generated principally in
the fourth quarter of each Fiscal year.
24
25
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Cash used in operating activities was $13.9 million in the first three months of
Fiscal 1999 compared to $13.3 million in the first three months of Fiscal 1998.
The $0.6 million reduction in cash flow from operating activities reflects
primarily the additional working capital needed to support new store growth. The
Company has added a net of 66 stores in the first quarter ended May 2, 1998
compared to a net of 26 stores for the same period last year.
The $6.5 million increase in inventories from January 31, 1998 levels reflects
planned increases in retail inventory to support the net increase of 66 stores
in the first quarter of Fiscal 1999 and increases in men's branded wholesale
inventory to support growth in certain of the wholesale businesses and lower
than anticipated sales in certain product styles.
Accounts receivable at May 2, 1998 increased $0.8 million compared to January
31, 1998, primarily due to increased sales of men's branded footwear.
Cash provided (or used) due to changes in accounts payable and accrued
liabilities are as follows:
Three Months Ended
------------------------------
May 2, May 3,
1998 1997
------ ------
(in thousands)
Accounts payable.......................................................... $ (3,499) $ 1,209
Accrued liabilities...................................................... (7,525) (6,751)
--------- --------
$ (11,024) $ (5,542)
========= ========
The fluctuations in accounts payable are due to changes in buying patterns,
payment terms negotiated with individual vendors and changes in inventory
levels. The change in accrued liabilities was due primarily to payment of
bonuses, interest payments on the Company's long-term debt and payments of
severance costs and liabilities related to the Restructurings.
There were no revolving credit borrowings during the three months ended May 2,
1998 and May 3, 1997, as cash generated from operations and cash on hand funded
seasonal working capital requirements and capital expenditures. On September 24,
1997, the Company entered into a revolving credit agreement with three banks
providing for loans or letters of credit of up to $65 million. On January 30,
1998 the revolving credit agreement was amended to permit the Boot Divestiture.
On March 31, 1998, the revolving credit agreement was amended to permit the
issuance of the Company's 5 1/2% Convertible Subordinated Notes due 2005. The
agreement, as amended March 31, 1998, expires September 24, 2002.
Capital Expenditures
Total capital expenditures in Fiscal 1999 are expected to be approximately $33.0
million. These include expected retail expenditures of $23.9 million to open
approximately 152 new retail stores and to complete 44 major store renovations.
Capital expenditures for wholesale and
25
26
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
manufacturing operations and other purposes are expected to be approximately
$9.1 million, including approximately $6.3 million for new systems to improve
customer service and support the Company's growth.
Year 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal activities.
Based on a recent assessment, the Company determined that it will be required to
modify or replace significant portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999. The Company has
also begun the process of upgrading and modernizing its major information
systems, including its wholesale and retail operating systems and its financial
systems. The replacement systems will be Year 2000 compliant. The Company will
utilize both internal and external resources to reprogram, or replace, and test
the software for Year 2000 modifications. The Company currently has 98% of its
estimated resources committed and expects to have the remaining resources
committed in the second quarter of Fiscal 1999. The Company plans to complete
its Year 2000 project no later than July 31, 1999. The total cost of upgrading
most of the Company's major operating systems, including the Year 2000 project
for Fiscal years 1998 through 2000, is estimated at $22 million and is being
funded through operating cash flows. Of the total project cost, approximately
$14 million is attributable to the purchase of new software and hardware which
will be capitalized. The remaining $8 million will be expensed as incurred over
3 years, including projected costs of $3.5 million for Fiscal 1999.
The Company has developed plans for formal communications with all of its
significant suppliers and large customers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 issues. The communications began in the last quarter of Fiscal 1998
and the Company anticipates initial completion in the second half of Fiscal 1999
with follow-up continuing until the Year 2000 with critical trading partners
based on the initial responses. There can be no assurance the systems of other
companies on which the Company's systems rely will be timely converted, or that
a failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have material adverse effect on the
Company.
The costs of the project and the date on which the Company plans to complete the
Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no assurance that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel
26
27
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
trained in this area, the ability to locate and correct all relevant computer
codes, and similar uncertainties.
Environmental and Other Contingencies
The Company is subject to certain loss contingencies related to environmental
proceedings and other legal matters, including those disclosed in Note 11 to the
Company's Consolidated Financial Statements included elsewhere herein. The
Company has made provisions for certain of these contingencies, including
provisions of $150,000 and $500,000 in discontinued operations in Fiscal 1997
and Fiscal 1996, respectively, and $250,000 and $500,000 reflected in Fiscal
1998 and 1996, respectively. The Company monitors these proceedings on an
ongoing basis and at least quarterly management reviews the Company's reserves
and accruals in relation to each of them, adjusting provisions as management
deems necessary in view of changes in available information. Changes in
estimates of liability are reported in the periods when they occur.
Consequently, management believes that its reserve in relation to each
proceeding is a reasonable estimate of the probable loss connected to the
proceeding, or in cases in which no reasonable estimate is possible, the minimum
amount in the range of estimated losses, based upon its analysis of the facts as
of the close of the most recent Fiscal quarter. Because of uncertainties and
risks inherent in litigation generally and in environmental proceedings in
particular, however, there can be no assurance that future developments will not
require additional reserves to be set aside, that some or all reserves may not
be inadequate or that the amounts of any such additional reserves or any such
inadequacy will not have a material adverse effect upon the Company's financial
condition or results of operations.
Future Capital Needs
The Company expects that cash on hand and cash provided by operations will be
sufficient to fund all of its capital expenditures through Fiscal 1999, although
the Company may borrow from time to time to support seasonal working capital
requirements. The approximately $7.6 million of costs associated with the Boot
Divestiture, the 1994 Restructuring and the 1995 Restructuring that are expected
to be incurred during the next twelve months are also expected to be funded from
cash on hand and cash generated from exiting the western boot business.
There were $12.9 million of letters of credit outstanding under the revolving
credit agreement at May 2, 1998, leaving availability under the revolving credit
agreement of $52.1 million.
The restricted payments covenant contained in the indenture under which the
Company's 10 3/8% senior notes were issued prohibited the Company from declaring
dividends on the Company's capital stock, except from a pool of available net
earnings and the proceeds of stock sales. The Company's 10 3/8% senior notes
were redeemed May 8, 1998 resulting in a $3.7 million extraordinary loss for
early retirement of debt to be reflected in the Company's second quarter
results. 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 $300,000.
The Company had dividend arrearages in the amount of $1.3 million as of May 2,
1998 which were paid on May 28, 1998. The Company's new 5 1/2% convertible
subordinated notes issued April 9, 1998 do not prohibit the Company from
declaring dividends on the Company's capital stock.
27
28
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Changes in Accounting Principles
The Company implemented Statement of Financial Accounting Standards (SFAS) 130,
"Reporting Comprehensive Income" in the first quarter of Fiscal 1999. This
statement establishes standards for reporting and display of comprehensive
income. For additional information, see Note 9 to the Company's Consolidated
Financial Statements included elsewhere herein.
28
29
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
See Note 11 to the Consolidated Financial Statements regarding the settlement
during the quarter of an action brought against the Company by the prior
licensee of a western boot trademark licensed by the Company.
ITEM 2. CHANGES IN SECURITIES
On April 9, 1998, the Company issued $103.5 million of its 5 1/2% Convertible
Subordinated Notes due 2005 (the "5 1/2% Notes"). The 5 1/2% Notes were sold to
qualified institutional investors pursuant to Rule 144A under the Securities Act
of 1933. The initial purchasers were Goldman, Sachs & Co., NationsBanc
Montgomery Securities LLC and SBC Warburg Dillon Read Inc. Discounts to the
initial purchasers totalled $3.4 million. The 5 1/2% Notes are convertible into
the Company's common stock at the rate of 47.5172 shares per $1,000 principal
amount.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At May 2, 1998 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 $ 362,926 $ 21,349 $ 384,275
$4.75 Series 3 October 31, 1993 391,012 23,001 414,013
$4.75 Series 4 October 31, 1993 331,317 19,489 350,806
$1.50 Subordinated Cumulative
Preferred October 31, 1993 191,358 11,256 202,614
- ---------------------------------------------------------------------------------------------------------------
TOTALS $ 1,276,613 $ 75,095 $ 1,351,708
===============================================================================================================
*The dividend arrearage of $1,351,708 was paid on May 28, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
(27) Financial Data Schedule (for SEC use only)
- --------------
REPORTS ON FORM 8-K
Form 8-K filed April 6, 1998 to announce the proposed private placement of
$103.5 million of Convertible Subordinated Notes.
Form 8-K filed April 15, 1998 to announce the completed sale of the $103.5
million of 5 1/2% Convertible Subordinated Notes due April 15, 2005.
29
30
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/ James S. Gulmi
James S. Gulmi
Chief Financial Officer
June 16, 1998
30
5
1,000
3-MOS
JAN-30-1999
FEB-01-1998
MAY-02-1998
3,734
123,968
18,784
1,370
111,089
279,421
99,481
49,539
341,539
140,872
103,500
0
7,945
26,477
41,025
341,539
133,808
133,808
75,987
75,987
0
766
2,889
3,507
(281)
3,788
0
0
0
3,788
.14
.14
