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
August 1, 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 September 4, 1998 - 26,011,950
2
INDEX
PAGE
----
Part 1 - Financial Information 1
Consolidated Balance Sheet - August 1, 1998, January 31, 1998 and
August 2, 1997 1
Consolidated Earnings - Three Months Ended and Six Months Ended
August 1, 1998 and August 2, 1997 2
Consolidated Cash Flows - Three Months Ended and Six Months Ended
August 1, 1998 and August 2, 1997 3
Consolidated Shareholders' Equity - Year Ended
January 31, 1998 and Six Months Ended August 1, 1998 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
Part II - Other Information 30
Signature 31
3
PART I - FINANCIAL INFORMATION
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Balance Sheet
In Thousands
AUGUST 1, JANUARY 31, AUGUST 2,
1998 1998 1997
--------- ----------- ---------
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 53,249 $ 49,276 $ 17,624
Accounts receivable 27,112 20,339 31,738
Inventories 126,421 102,042 123,466
Other current assets 5,393 5,802 3,817
Current assets of operations to be divested -0- 17,105 -0-
--------- --------- ---------
Total current assets 212,175 194,564 176,645
--------- --------- ---------
Plant, equipment and capital leases, net 53,754 44,810 41,378
Other noncurrent assets 9,874 6,623 9,483
Noncurrent assets of operations to be divested -0- 820 -0-
--------- --------- ---------
TOTAL ASSETS $ 275,803 $ 246,817 $ 227,506
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 68,943 $ 71,994 $ 54,767
Provision for discontinued operations 2,969 3,017 3,580
Current payments on capital leases 27 240 479
--------- --------- ---------
Total current liabilities 71,939 75,251 58,826
--------- --------- ---------
Long-term debt 103,500 75,000 75,000
Capital leases 35 39 82
Other long-term liabilities 12,024 14,219 12,239
Provision for discontinued operations 9,323 10,344 10,784
--------- --------- ---------
Total liabilities 196,821 174,853 156,931
--------- --------- ---------
Contingent liabilities (see Note 11)
SHAREHOLDERS' EQUITY
Non-redeemable preferred stock 7,951 7,945 7,938
Common shareholders' equity:
Par value of issued shares 26,545 26,264 26,141
Additional paid-in capital 133,613 132,218 132,145
Accumulated deficit (70,120) (75,456) (77,792)
Accumulated other comprehensive income (1,150) (1,150) -0-
Treasury shares, at cost (17,857) (17,857) (17,857)
--------- --------- ---------
Total shareholders' equity 78,982 71,964 70,575
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 275,803 $ 246,817 $ 227,506
========= ========= =========
The accompanying Notes are an integral part of Statements.
1
4
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Earnings
In Thousands
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
AUGUST 1, AUGUST 2, AUGUST 1, AUGUST 2,
1998 1997 1998 1997
--------- --------- --------- ---------
Net sales $ 132,049 $ 120,024 $ 265,857 $ 234,209
Cost of sales 74,298 70,896 150,285 137,209
Selling and administrative expenses 51,615 43,108 103,599 86,539
Restructuring income and other charges, net (2,403) (275) (2,403) (275)
--------- --------- --------- ---------
Earnings from operations before
other income and expenses 8,539 6,295 14,376 10,736
--------- --------- --------- ---------
Other expenses (income):
Interest expense 2,180 2,528 5,069 5,073
Interest income (636) (361) (1,441) (777)
Other expense (income) 336 (49) 582 64
--------- --------- --------- ---------
Total other (income) expenses, net 1,880 2,118 4,210 4,360
--------- --------- --------- ---------
Earnings before income taxes
and extraordinary loss 6,659 4,177 10,166 6,376
Income taxes (benefit) 34 44 (247) 61
--------- --------- --------- ---------
Earnings before extraordinary loss 6,625 4,133 10,413 6,315
Extraordinary loss from
early retirement of debt (3,651) -0- (3,651) -0-
--------- --------- --------- ---------
NET EARNINGS $ 2,974 $ 4,133 $ 6,762 $ 6,315
========= ========= ========= =========
Basic earnings per common share:
Before extraordinary loss $ .25 $ .16 $ .40 $ .24
Extraordinary loss $ (.14) $ .00 $ (.15) $ .00
Net earnings $ .11 $ .16 $ .25 $ .24
Diluted earnings per common share:
Before extraordinary loss $ .25 $ .15 $ .40 $ .23
Extraordinary loss $ (.11) $ .00 $ (.12) $ .00
Net earnings $ .14 $ .15 $ .28 $ .23
========= ========= ========= =========
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
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- --------------------
AUGUST 1, AUGUST 2, AUGUST 1, AUGUST 2,
1998 1997 1998 1997
--------- --------- --------- ---------
OPERATIONS:
Net earnings $ 2,974 $ 4,133 $ 6,762 $ 6,315
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,722 2,279 5,107 4,430
Provision for deferred income taxes -0- (687) -0- (687)
Provision for losses on accounts receivable (407) 46 147 1,051
Impairment of long-lived assets and other charges -0- 831 -0- 831
Restructuring charge (credit) (2,403) (1,106) (2,403) (1,106)
Loss on retirement of debt 3,651 -0- 3,651 -0-
Other 178 416 441 638
Effect on cash of changes in working capital and other assets
and liabilities:
Accounts receivable (2,602) 3,027 (3,367) 1,600)
Inventories (14,943) (15,275) (21,492) (27,582)
Other current assets 83 509 413 692
Accounts payable and accrued liabilities 7,613 3,057 (3,411) (2,485)
Other assets and liabilities (258) (134) (3,100) 97
-------- -------- --------- ---------
Net cash used in operations (3,392) (2,904) (17,252) (16,206)
-------- -------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures (6,519) (6,853) (14,003) (12,537)
Proceeds from businesses divested and
asset sales 13,926 114 13,926 192
-------- -------- --------- ---------
Net cash provided by (used in) investing activities 7,407 (6,739) (77) (12,345)
-------- -------- --------- ---------
FINANCING ACTIVITIES:
Payments of long-term debt (77,220) -0- (77,220) -0-
Payments on capital leases (70) (164) (217) (924)
Dividens paid (1,426) -0- (1,426) -0-
Long-term borrowings -0- -0- 103,500 -0-
Exercise of stock options and related income tax benefits 614 1,010 1,634 3,724
Deferred note expense (440) -0- (3,914) -0-
Other 74 -0- (1,055) -0-
-------- -------- --------- --------
Net cash provided by (used in) financing activities (78,468) 846 21,302 2,800)
-------- -------- -------- --------
NET CASH FLOW (74,453) (8,797) 3,973 (25,751)
Cash and short-term investments at
beginning of period 127,702 26,421 49,276 43,375
-------- -------- --------- --------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 53,249 $ 17,624 $ 53,249 $ 17,624
======== ======== ========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Net cash paid (received) for:
Interest $ 2,528 $ 4,123 $ 7,062 $ 8,560
Income taxes 76 75 (101) 83
======== ======== ========= ========
The accompanying Notes are an integral part of these Financial Statements.
3
6
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Shareholders' Equity
In Thousands
TOTAL ACCUMULATED TOTAL
NON-REDEEMABLE ADDITIONAL OTHER SHARE-
PREFERRED COMMON PAID-IN ACCUMULATED TREASURY COMPREHENSIVE HOLDERS'
STOCK STOCK CAPITAL (DEFICIT) STOCK INCOME EQUITY
-------------- -------- ---------- ----------- -------- ------------- --------
BALANCE FEBRUARY 1, 1997 $ 7,944 $ 25,195 $122,615 $(84,107) $(17,857) $ -0- $ 53,790
======== ======== ======== ======== ======== ======== ========
Exercise of options -0- 458 2,809 -0- -0- -0- 3,267
Issue shares - Employee Stock Purchase Plan -0- 70 496 -0- -0- -0- 566
Net earnings -0- -0- -0- 8,651 -0- -0- 8,651
Issue shares - litigation settlement -0- 525 6,175 -0- -0- -0- 6,700
Tax effect of exercise of stock options -0- -0- 42 -0- -0- -0- 42
Minimum pension liability adjustment -0- -0- -0- -0- -0- (1,150) (1,150)
Other 1 16 81 -0- -0- -0- 98
-------- -------- -------- -------- -- ------ -------- --------
BALANCE JANUARY 31, 1998 $ 7,945 $ 26,264 $132,218 $(75,456) $(17,857) $ (1,150) $ 71,964
======== ======== ======== ======== ======== ======== ========
Net earnings -0- -0- -0- 6,762 -0- -0- 6,762
Dividends paid -0- -0- -0- (1,426) -0- -0- (1,426)
Exercise of options -0- 212 822 -0- -0- -0- 1,034
Issue shares - restricted stock options -0- 67 533 -0- -0- -0- 600
Other 6 2 40 -0- -0- -0- 48
-------- -------- -------- -------- -------- -------- --------
BALANCE AUGUST 1, 1998 $ 7,951 $ 26,545 $133,613 $(70,120) $(17,857) $ (1,150) $ 78,982
======== ======== ======== ======== ======== ======== ========
The accompanying Notes are an integral part of these Financial Statements.
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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 and
Nautica brands, the tanning and distribution of leather by the Volunteer Leather
division and the operation of Jarman, Journeys, Johnston & Murphy, General Shoe
Warehouse, Nautica and Underground Station retail footwear stores and leased
departments. Because of the merger of Dillards Inc. and Mercantile Stores
Company, the Company expects to end its operations of the Jarman leased
departments. Except for 17 stores which Dillards Inc. closed or sold in
September, the Company expects to operate the remaining leased departments at
least through the remainder of the current fiscal year. The Jarman leased
departments' business contributed approximately $4.1 million in operating
earnings to the Company's results in the fiscal year ended January 31, 1998.
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 August 1,
1998, are short-term investments of $45.6 million and $47.7 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.
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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
August 1, 1998, the Company had approximately $15.0 million and $30.3 million,
respectively, of such contracts outstanding. Forward exchange contracts have an
average term of approximately five 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.
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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. The
Company completed the sale of its western boot business to Texas Boot, Inc. on
July 14, 1998. Net earnings for the second quarter ended August 1, 1998 reflects
a restructuring gain of $2.4 million primarily from the sale of the western boot
operations. The $2.4 million gain represents savings of employee-related costs
and facility shutdown costs due to facilities assumed and employees retained by
the buyer.
The Company's actions relating to the Boot Divestiture is 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. Primarily due to
the sale of the western boot business and the closing of the Iuka, Mississippi
manufacturing plant, 622 jobs of the approximately 640 jobs were eliminated in
the first six months of Fiscal 1999.
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 functions in one operating division as well as to account for the costs of
eliminating a production process at its remaining footwear plant.
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10
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 3
ACCOUNTS RECEIVABLE
AUGUST 1, JANUARY 31,
IN THOUSANDS 1998 1998
-------- -----------
Trade accounts receivable $ 25,692 $ 19,947
Miscellaneous receivables 4,275 3,142
-------- --------
Total receivables 29,967 23,089
Allowance for bad debts (911) (988)
Other allowances (1,944) (1,762)
-------- --------
NET ACCOUNTS RECEIVABLE $ 27,112 $ 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 12% of the Company's trade
receivables balance as of August 1, 1998.
NOTE 4
INVENTORIES
AUGUST 1, JANUARY 31,
IN THOUSANDS 1998 1998
--------- -----------
Raw materials $ 3,952 $ 4,452
Work in process 2,390 2,261
Finished goods 30,255 28,458
Retail merchandise 89,824 66,871
-------- --------
TOTAL INVENTORIES $126,421 $102,042
======== ========
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11
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 5
PLANT, EQUIPMENT AND CAPITAL LEASES, NET
AUGUST 1, JANUARY 31,
IN THOUSANDS 1998 1998
--------- -----------
Plant and equipment:
Land $ 263 $ 263
Buildings and building equipment 2,444 2,515
Machinery, furniture and fixtures 37,162 34,338
Construction in progress 7,462 6,767
Improvements to leased property 52,702 51,136
Capital leases:
Buildings 456 200
Machinery, furniture and fixtures 4,136 4,777
------- --------
Plant, equipment and capital leases, at cost 104,625 99,996
Accumulated depreciation and amortization:
Plant and equipment (46,662) (50,519)
Capital leases (4,209) (4,667)
------- --------
NET PLANT, EQUIPMENT AND CAPITAL LEASES $53,754 $ 44,810
======= ========
9
12
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 6
ASSETS OF OPERATIONS TO BE DIVESTED
JANUARY 31,
IN THOUSANDS 1998
-----------
Current assets:
Accounts receivable, net of allowance of $3,325 $ 7,684
Inventory 9,418
Other current assets 3
-------
TOTAL CURRENT ASSETS $17,105
=======
Noncurrent assets:
Plant and equipment 783
Capitalized lease rights 37
-------
TOTAL NONCURRENT ASSETS $ 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 (918) (151) (1,069)
------- ------- -------
Balance August 1, 1998 11,118 1,174 12,292
Current portion 1,911 1,058 2,969
------- ------- -------
TOTAL NONCURRENT PROVISION FOR
DISCONTINUED OPERATIONS $ 9,207 $ 116 $ 9,323
======= ======= =======
*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 (2,326) (321) (427) (3,074)
-------- --------- --------- ---------
Balance August 1, 1998 1,267 1,662 1,105 4,034
Current portion (included in accounts
payable and accrued liabilities) 1,267 1,235 985 3,487
-------- --------- --------- ---------
TOTAL NONCURRENT RESTRUCTURING RESERVES
(INCLUDED IN OTHER LONG-TERM LIABILITIES) $ -0- $ 427 $ 120 $ 547
======== ========= ========= =========
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GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8
LONG-TERM DEBT
AUGUST 1, JANUARY 31,
IN THOUSANDS 1998 1998
--------- -----------
10 3/8% senior notes due February 2003 $ -0- $ 75,000
5 1/2% convertible subordinated notes due April 2005 103,500 -0-
-------- --------
Total long-term debt 103,500 75,000
Current portion -0- -0-
-------- --------
Total Noncurrent 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 August 1, 1998 were
$9.8 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 August 1, 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 in the second quarter
ended August 1, 1998.
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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, 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 and
six months ended August 1, 1998 or August 2, 1997.
12
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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
AUGUST 1, 1998 AUGUST 2, 1997
--------------------------------------- ---------------------------------------
(IN THOUSANDS, EXCEPT INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
Earnings before extraordinary loss $ 6,625 $ 4,133
Less: Preferred stock dividends (75) (75)
------- ------ ------ ------- ------ ------
BASIC EPS
Income available to
common shareholders 6,550 26,034 $ .25 4,058 25,468 $ .16
====== ======
Plus: Interest on 5 1/2% convertible
subordinated notes 1,579 -0-
EFFECT OF DILUTIVE SECURITIES
Options 1,410 1,482
5 1/2% convertible subordinated notes 4,918 -0-
Contingent Options(1) 67 133
Employees' Preferred Stock(2) 80 80
------- ------ ------ ------- ------ ------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $ 8,129 32,509 $ .25 $ 4,058 27,163 $ .15
======= ====== ====== ======= ====== ======
(1) These options 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.
13
16
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 10
EARNINGS PER SHARE, CONTINUED
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
AUGUST 1, 1998 AUGUST 2, 1997
--------------------------------------- ---------------------------------------
(IN THOUSANDS, EXCEPT INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
Earnings before extraordinary loss $10,413 $ 6,315
Less: Preferred stock dividends (150) (150)
------- ------ ------ -------- ------ ------
BASIC EPS
Income available to
common shareholders 10,263 25,975 $ .40 6,165 25,192 $ .24
====== ======
Plus: Interest on 5 1/2% convertible
subordinated notes 1,995 -0-
EFFECT OF DILUTIVE SECURITIES
Options 1,418 1,400
5 1/2% convertible subordinated notes 3,108 -0-
Contingent Options(1) 67 133
Employees' Preferred Stock(2) 80 80
------- ------ ------ -------- ------ ------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $12,258 30,648 $ .40 $ 6,165 26,805 $ .23
======= ====== ====== ======== ====== ======
(1) These options 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.
14
17
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 11
LEGAL PROCEEDINGS
New York State Environmental Proceedings
The Company is a defendant in a civil action filed by the State of New York
against the City of Gloversville, New York, and 33 other private defendants. The
action arose out of the alleged disposal of certain hazardous material directly
or indirectly in a municipal landfill and seeks 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.
The environmental authorities have selected a plan of remediation for the site
with a total estimated cost of approximately $10.0 million. The Company has
filed an answer to the complaint denying liability and asserting numerous
defenses. The Company, along with other defendants, and the State are
participating in non-binding mediation in an attempt to agree upon an allocation
of the remediation costs. Because of uncertainties related to the ability or
willingness of the other defendants 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 action. However,
management does not presently expect the action to have a material effect on the
Company's financial condition or results of operations.
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.
15
18
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 11
LEGAL PROCEEDINGS, CONTINUED
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 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 these estimates and assuming the plan's 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 does not 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.
Other Legal Proceedings
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.
16
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, 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. 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, 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
The Company's Jarman Lease Division had an arrangement with Mercantile Stores
Company in which Jarman Lease operated Mercantile's men's shoe departments.
Because of the merger of Dillards Inc. and Mercantile Stores Company, the
Company expects to end its operation of the men's leased departments. Except for
17 stores which Dillards Inc. closed or sold in September, the Company expects
to operate the remaining leased departments at least through the remainder of
the current fiscal year. As a result of the termination of the arrangement
between the Company and Mercantile Stores Company, the Company has announced an
accelerated store opening 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.
17
20
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
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 17 stores closed or sold by Dillards Inc. had store operating
income of approximately $0.4 million for the five month period ending January
31, 1998. The Company also implemented expense reductions and anticipates some
additional wholesale volume in its plans to address the Mercantile transition.
The Company established accruals for severance related to the expense reductions
of approximately $0.5 million in the second quarter ended August 1, 1998.
Additional accruals for severance could be recorded depending on final terms of
the Mercantile transition.
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. The
Company completed the sale of its western boot business to Texas Boot, Inc. on
July 14, 1998. Net earnings for the second quarter ended August 1, 1998 reflects
a restructuring gain of $2.4 million primarily from the sale of the western boot
operations. The $2.4 million gain represents savings of employee-related costs
and facility shutdown costs due to facilities assumed and employees retained by
the buyer.
The Company's actions relating to the Boot Divestiture is 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. Primarily due to
the sale of the western boot business and the closing of the Iuka, Mississippi
manufacturing plant, 622 jobs of the approximately 640 jobs were eliminated in
the first six months of Fiscal 1999.
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 functions in one operating division as well as to account for the costs of
eliminating a production process at its remaining footwear plant.
18
21
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations - Second Quarter Fiscal 1999 Compared to Fiscal 1998
The Company's net sales in the second quarter ended August 1, 1998 increased
10.0% to $132.0 million from $120.0 million in the second quarter ended August
2, 1997. Pro forma for the Boot Divestiture, the Company's net sales increased
18.1% to $126.3 million for the second quarter ended August 1, 1998 from $106.9
million in the same period last year. Gross margin for the quarter increased
17.6% to $57.8 million in the second quarter this year from $49.1 million in the
same period last year and increased as a percentage of net sales from 40.9% to
43.7%. Selling and administrative expenses increased 19.7% from the second
quarter last year and increased as a percentage of net sales from 35.9% to
39.1%. Pretax earnings in the second quarter ended August 1, 1998 were $6.7
million compared to $4.2 million for the second quarter ended August 2, 1997.
Pretax earnings for the second quarter ended August 1, 1998 and August 2, 1997
included a net restructuring gain of $2.4 million and $0.3 million,
respectively. Net earnings for the second quarter ended August 1, 1998 were $2.3
million ($0.14 diluted earnings per share) compared to $4.1 million ($0.15
diluted earnings per share) for the second quarter ended August 2, 1997. Net
earnings for the second quarter this year included an extraordinary loss for the
early retirement of debt of $3.7 million.
Footwear Retail
Three Months Ended
----------------------
August 1, August 2, %
1998 1997 Change
--------- --------- ------
(dollars in thousands)
Net sales............................................... $92,699 $79,918 16.0 %
Net sales - ongoing operations(1)....................... $90,509 $76,639 18.1 %
Operating income........................................ $ 5,138 $ 7,498 (31.5)%
Operating margin........................................ 5.5% 9.4%
(1) Pro forma for the Boot Divestiture as if it occurred at the beginning
of the periods presented.
Primarily due to a 22% increase in average retail stores operated, net sales
from footwear retail operations increased 16.0% for the second quarter ended
August 1, 1998 compared to the same period last year. The average price per pair
decreased 3% and unit sales increased 24% for the second quarter of Fiscal 1999.
19
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 August 1, August 2,
Sales Changes 1998 1997
------------- --------- ---------
Journeys................................................. 1% 232 160
Johnston & Murphy (including factory stores)............. 7% 127 123
Jarman Retail............................................ -7% 166(1) 147
Jarman Lease............................................. -2% 103 85
Boot Factory Outlet Stores............................... -12% 0 27
Other Outlet Stores...................................... 0% 28 14
--- ---
Total Retail............................................. 0% 656 556
=== ===
(1) Includes eleven Underground Station Stores.
Primarily because of expected continuing softness through the third quarter
ending October 31, 1998 in certain of its retail divisions, the Company expects
its third quarter earnings to be essentially flat with last years third quarter.
Retail gross margin increased 14.8% to $44.5 million from $38.8 million, but
decreased as a percentage of net sales to 48.0% in the second quarter of Fiscal
1999 compared to 48.6% in the same period last year, primarily from increased
markdowns. Retail operating expenses increased 25.4% in the second quarter of
Fiscal 1999, primarily due to the 22% increase in average stores operated, which
resulted in increased occupancy related expenses and selling salaries and due to
increased advertising expenses. In addition, divisional management expenses
increased in the second quarter of Fiscal 1999 to support new store growth.
Overall retail operating expenses increased as a percentage of net sales from
39.2% to 42.4%.
Retail operating income for the second quarter ended August 1, 1998 was down
31.5% to $5.1 million compared to $7.5 million in the same period last year, due
to decreased margins as a percentage of net sales and increased expenses as a
percentage of net sales.
On July 14, 1998, the Company sold its Boot Factory retail chain in conjunction
with the Boot Divestiture. For the second quarter ended August 1, 1998, the
chain had net sales and operating loss of $2.2 million and $383,000,
respectively, compared to $3.3 million and $29,000, respectively, in the same
period last year.
20
23
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Footwear Wholesale & Manufacturing
Three Months Ended
---------------------
August 1, August 2, %
1998 1997 Change
--------- --------- ------
(dollars in thousands)
Net sales........................................... $39,350 $40,106 (1.9)%
Net sales - ongoing operations(1)................... $35,776 $30,304 18.1 %
Operating income.................................... $ 6,087 $ 1,428 326.3 %
Operating margin.................................... 15.5% 3.6%
(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 decreased 1.9% to
$39.4 million for the second quarter ended August 1, 1998, from $40.1 million in
the same period last year, reflecting primarily the continuing trend of
decreased sales of western boots, primarily attributable to lower unit sales,
and lower tanned leather 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. Pro
forma for the Boot Divestiture, wholesale sales attributable to ongoing
operations increased 18.1% to $35.8 million for the second quarter ended August
1, 1998, from $30.3 million in the same period last year, reflecting primarily
increased men's branded footwear wholesale sales. The increase in branded
footwear wholesale sales in the second 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.
Wholesale gross margin for the second quarter ended August 1, 1998 increased
28.0% to $13.2 million from $10.3 million in the same period last year. As a
percentage of net sales, gross margin increased from 25.7% to 33.6%, primarily
from changes in sales mix.
Wholesale operating expenses increased 1.8% for the second quarter ended August
1, 1998, and increased as a percentage of net sales from 22.8% to 23.7%,
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.
Wholesale operating income increased from $1.4 million for the second quarter
ended August 2, 1997, to $6.1 million for the second quarter ended August 1,
1998, due to increased sales from ongoing operations and increased margins.
Wholesale operating income for the second quarter ended August 1, 1998 included
$250,000 of litigation expenses.
21
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. The Company sold its western boot business July 14, 1998.
For the second quarter ended August 1, 1998 the western boot business had net
sales and operating loss of $3.6 million and $0.4 million, respectively,
compared to net sales and operating loss of $9.8 million and $1.9 million,
respectively, in the same period last year.
Corporate and Interest Expenses
Corporate and other expenses for the second quarter ended August 1, 1998 were
$3.0 million compared to $2.6 million for the same period last year, an increase
of 17.0%. 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 decreased 14% from $2.5 million for the second quarter ended
August 2, 1997 to $2.2 million for the second quarter ended August 1, 1998,
primarily due to the decrease in interest rates on the Company's long-term debt
from 10 3/8% to 5 1/2% and interest income increased 76% from $0.4 million to
$0.6 million due to increases in average short-term investments as a result of
the increased cash from the sale of the western boot business and 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 August 1, 1998 or August 2, 1997.
RESULTS OF OPERATIONS - SIX MONTHS FISCAL 1999 COMPARED TO FISCAL 1998
The Company's net sales for the six months ended August 1, 1998 increased 13.5%
to $265.9 million from $234.2 million for the six months ended August 2, 1997.
Pro forma for the Boot Divestiture, the Company's net sales increased 20.5% to
$249.3 million for the six months ended August 1, 1998 from $206.9 million in
the same period last year. Gross margin for the quarter increased 19.1% to
$115.6 million for the six months this year from $97.0 million for the same
period last year and increased as a percentage of net sales from 41.4% to 43.5%.
Selling and administrative expenses increased 19.7% from the first six months
last year and increased as a percentage of net sales from 36.9% to 39.0%. Pretax
earnings for the six months ended August 1, 1998 were $10.2 million compared to
$6.4 million for the six months ended August 2, 1997. Pretax earnings for the
six months ended August 1, 1998 and August 2, 1997 included a net restructuring
gain of $2.4 million and $0.3 million, respectively. Net earnings for the six
months ended August 1, 1998 were $6.8 million ($0.28 diluted earnings per share)
compared to $6.3 million ($0.23 diluted earnings per share) for the six months
ended August 2, 1997. Net earnings for the six months this year included a tax
credit of $247,000 and an extraordinary loss of $3.7 million for the early
retirement of debt.
22
25
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Footwear Retail
Six Months Ended
---------------------
August 1, August 2, %
1998 1997 Change
--------- --------- ------
(dollars in thousands)
Net sales........................................... $178,298 $149,942 18.9 %
Net sales - ongoing operations(1)................... $173,623 $143,794 20.7 %
Operating income.................................... $ 11,178 $ 13,256 (15.7)%
Operating margin.................................... 6.3% 8.8%
(1) Pro forma for the Boot Divestiture as if it occurred at the beginning
of the periods presented.
Primarily due to a 2% increase in comparable store sales and a 21% increase in
average retail stores operated, net sales from footwear retail operations
increased 18.9% for the six months ended August 1, 1998 compared to the same
period last year. The average price per pair decreased 2% while unit sales
increased 21% for the first six months of Fiscal 1999.
The Company's comparable store sales increases and store count at the end of the
periods were as follows:
Store Count
----------------------
Comparable August 1, August 2,
Sales Changes 1998 1997
------------- --------- ---------
Journeys................................................. 4% 232 160
Johnston & Murphy (including factory stores)............. 9% 127 123
Jarman Retail............................................ -3% 166(1) 147
Jarman Lease............................................. -1% 103 85
Boot Factory Outlet Stores............................... -10% 0 27
Other Outlet Stores...................................... 4% 28 14
--- ---
Total Retail............................................. 2% 656 556
=== ===
(1) Includes eleven Underground Station Stores.
Retail gross margin increased 18.1% to $87.5 million from $74.1 million but
decreased as a percentage of net sales to 49.1% in the first six months of
Fiscal 1999 compared to 49.4% in the same period last year, primarily from
increased markdowns. Retail operating expenses increased 25.2% in the first six
months of Fiscal 1999, primarily due to the 21% increase in average stores
23
26
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
operated, which resulted in increased occupancy related expenses and selling
salaries and due to increased advertising expenses. In addition, divisional
management expenses increased in the first six months of Fiscal 1999 to support
new store growth. Overall retail operating expenses increased as a percentage of
net sales from 40.5% to 42.6%.
Retail operating income for the six months ended August 1, 1998 was down 15.7%
to $11.2 million compared to $13.3 million in the same period last year, due to
decreased margins as a percentage of net sales and increased expenses as a
percentage of net sales.
On July 14, 1998, the Company sold its Boot Factory retail chain in conjunction
with the Boot Divestiture. For the six months ended August 1, 1998, the chain
had net sales and operating loss of $4.7 million and $589,000, respectively,
compared to $6.1 million and $209,000, respectively, in the same period last
year.
Footwear Wholesale & Manufacturing
Six Months Ended
---------------------
August 1, August 2, %
1998 1997 Change
--------- --------- ------
(dollars in thousands)
Net sales........................................... $87,559 $84,267 3.9%
Net sales - ongoing operations(1)................... $75,674 $63,074 20.0%
Operating income.................................... $ 8,640 $ 2,581 234.8%
Operating Margin.................................... 9.9% 3.1%
(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 3.9% to
$87.6 million for the six months ended August 1, 1998, from $84.3 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 six months 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 20.0% to $75.7 million for the six months ended August 1, 1998, from
$63.1 million in the same period last year.
24
27
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Wholesale gross margin for the six months ended August 1, 1998 increased 22.6%
to $28.1 million from $22.9 million in the same period last year. As a
percentage of net sales, gross margin increased from 27.2% to 32.1%, primarily
from changes in sales mix.
Wholesale operating expenses increased 4.3% for the six months ended August 1,
1998, and increased slightly as a percentage of net sales from 24.5% to 24.6%,
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.
Wholesale operating income increased from $2.6 million for the six months ended
August 2, 1997, to $8.6 million for the six months ended August 1, 1998, due to
increased sales and margin. Wholesale operating income for the six months ended
August 1, 1998 included $250,000 of litigation expenses.
During the fourth quarter of Fiscal 1998, the Company adopted a plan to exit the
western boot business. The Company sold its western boot business July 14, 1998.
For the six months ended August 1, 1998 the western boot business had net sales
and operating loss of $11.9 million and $1.1 million, respectively, compared to
net sales and operating loss of $21.2 million and $2.3 million, respectively, in
the same period last year.
Corporate and Interest Expenses
Corporate and other expenses for the six months ended August 1, 1998 were $6.0
million compared to $5.2 million for the same period last year, an increase of
16.6%. 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 was flat for the six months ended August 1, 1998 compared to
the six months ended August 2, 1997 and interest income increased 85% from $0.8
million to $1.4 million due to increases in average short-term investments as a
result of the increased cash from the sale of the western boot business and 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 six
months ended August 1, 1998 or August 2, 1997.
25
28
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain financial data at the dates indicated.
August 1, August 2,
1998 1997
--------- ---------
(dollars in millions)
Cash and short-term investments.............................. $ 53.2 $ 17.6
Working capital.............................................. $140.2 $117.8
Long-term debt (includes current maturities)................. $103.5 $ 75.0
Current ratio................................................ 2.9x 3.0x
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.
Cash used in operating activities was $17.2 million in the first six months of
Fiscal 1999 compared to $16.2 million in the first six months of Fiscal 1998.
The $1.0 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 69 stores in the six months ended August 1, 1998
compared to a net of 52 stores for the same period last year.
The $24.4 million increase in inventories from January 31, 1998 levels reflects
planned increases in retail inventory to support the net increase of 69 stores
in the first six months 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 August 1, 1998 increased $6.8 million compared to January
31, 1998, primarily due to increased sales of men's branded footwear.
26
29
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 are as follows:
Six Months Ended
----------------------
August 1, August 2,
1998 1997
--------- ---------
(in thousands)
Accounts payable.................................. $ 3,711 $ 7,836
Accrued liabilities............................... (3,967) (10,321)
------- --------
$ (256) $ (2,485)
======= ========
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 six months ended August 1,
1998 and August 2, 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 $27.5
million. These include expected retail expenditures of $19.5 million to open
approximately 152 new retail stores and to complete 29 major store renovations.
Capital expenditures for wholesale and manufacturing operations and other
purposes are expected to be approximately $8.0 million, including approximately
$5.0 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
27
30
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
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 began using the first of five parts in its
new financial system during the second quarter. 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 97% of its estimated
resources committed and expects to have the remaining resources committed by the
time the resources are required in the fourth quarter of Fiscal 1999. The
Company plans to complete its Year 2000 project no later than July 31, 1999. The
Company has completed the remediation of approximately 34% of its identified 1.7
million lines of code in its legacy systems. The Company's contingency plan for
its systems replacement has the Company remediating its wholesale and retail
systems if certain hurdles are not met by February 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 and cash on hand. 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 $3.0 million for
Fiscal 1999. Cumulative to date expenditures are $2.8 million with cumulative
capital expenditures of $6.1 million.
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 Company is presently developing contingency plans to determine what actions
the Company will take if its trading partners are not Year 2000 compliant. The
Company expects the contingency plan to be completed by the end of the first
quarter in Fiscal 2000.
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. Management uses outside consultants to review the adequacy of its Year
2000 plans. 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 trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
28
31
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
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 $6.5 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. The Company has also authorized the repurchase, from time to time,
up to 2.6 million shares of the Company's common stock. These purchases will be
funded from available cash.
There were $9.8 million of letters of credit outstanding under the revolving
credit agreement at August 1, 1998, leaving availability under the revolving
credit agreement of $55.2 million.
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.
29
32
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of shareholders held on June 17, 1998, shares
representing a total of 26,193,850 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 23,415,031 120,848
W. Lipscomb Davis, Jr. 23,411,524 124,355
Joel C. Gordon 23,414,242 121,637
Ben T. Harris 23,416,296 119,583
Kathleen Mason 23,412,727 123,152
William A. Williamson, Jr. 23,413,577 122,302
William S. Wire II 23,389,581 146,298
Gary M. Witkin 23,396,111 139,768
(2) ratified the appointment of Price Waterhouse LLP as independent
accountants for the fiscal year ending January 30, 1999 by a vote of
23,472,945 for, 32,099 against, with 30,805 abstentions: and
(3) ratified an amendment to the Company's Restated Charter increasing to
80,000,000 the number of authorized shares of common stock by a vote of
22,739,755 for, 723,088 against, with 73,036 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
(3)b. Amendment to the Restated Charter of Genesco Inc. dated as of June 17,
1998.
(27) Financial Data Schedule (for SEC use only)
- --------------
REPORTS ON FORM 8-K
None.
30
33
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
September 15, 1998
31
1
EXHIBIT (3) b.
The first sentence of Article Sixth of the Charter is deleted and
replaced in its entirety with the following sentence:
The maximum number of shares of stock which the Corporation is
authorized to have outstanding at any time is eighty million
(80,000,000) shares of Common Stock of the par value of one
dollar ($1.00) per share (hereinafter sometimes called "Common
Stock"); three thousand seven hundred five (3,705) shares of
Cumulative Convertible Preferred Stock without nominal or par
value (hereinafter sometimes called "Convertible Preferred
Stock"); four hundred ninety nine thousand six hundred ten
(499,610) shares of Subordinated Cumulative Convertible
Preference Stock without nominal or par value (hereinafter
sometimes called "Subordinated Preference Stock"); three
million (3,000,000) shares of Subordinated Serial Preferred
Stock without nominal or par value (hereinafter sometimes
called "Serial Preferred Stock"); five million (5,000,000)
shares of Subordinated Cumulative Preferred Stock without
nominal or par value (hereinafter sometimes called "Cumulative
Preferred Stock"); and five million (5,000,000) shares of
Employees' Subordinated Convertible Preferred Stock without
nominal or par value (hereinafter sometimes called "Employees'
Preferred Stock").
5
1,000
6-MOS
JAN-30-1999
FEB-01-1998
AUG-01-1998
5,529
47,720
23,748
911
126,421
212,175
104,625
50,871
275,802
71,994
103,500
0
7,951
26,545
44,486
275,802
265,857
265,857
150,285
150,285
0
885
5,069
10,166
(247)
10,413
0
(3,651)
0
6,762
.25
.28
