<PAGE> 1
[GENESCO LOGO]
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FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant To
Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended
May 1, 1999
[ ] Transition Report Pursuant To
Section 13 or 15(d) of the
Securities Exchange Act of 1934
Securities and Exchange Commission
Washington, D.C. 20549
Commission File No. 1-3083
---------------------------------------
GENESCO INC.
A Tennessee Corporation
I.R.S. No. 62-0211340
Genesco Park
1415 Murfreesboro Road
Nashville, Tennessee 37217-2895
Telephone 615/367-7000
---------------------------------------
Indicate by check mark whether the
registrant (1) has filed all reports
required to be filed by Section 13 or
15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months
(or such shorter period that the
registrant was required to file such
reports with the commission) and (2)
has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
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Common Shares Outstanding June 4, 1999 - 22,622,920
<PAGE> 2
<TABLE>
<CAPTION>
INDEX
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PAGE
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<S> <C>
Part 1 - Financial Information 3
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Consolidated Balance Sheet - May 1, 1999, January 30, 1999 and
May 2, 1998 3
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Consolidated Earnings - Three Months Ended
May 1, 1999 and May 2, 1998 4
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Consolidated Cash Flows - Three Months Ended
May 1, 1999 and May 2, 1998 5
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Consolidated Shareholders' Equity - Year Ended
January 30, 1999 and Three Months Ended May 1, 1999 6
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Notes to Consolidated Financial Statements 7
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Management's Discussion and Analysis of Financial Condition and
Results of Operations 20
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Part II - Other Information 30
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Signature 31
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</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Balance Sheet
In Thousands
<TABLE>
<CAPTION>
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MAY 1, JANUARY 30, MAY 2,
1999 1999 1998
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<S> <C> <C> <C>
ASSETS
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CURRENT ASSETS
Cash and short-term investments $ 55,711 $ 58,743 $ 127,702
Accounts receivable 24,332 26,258 22,281
Inventories 104,613 117,213 111,089
Deferred income taxes 16,987 19,327 935
Other current assets 5,491 6,719 4,537
Current assets of operations to be divested -0- -0- 12,877
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Total current assets 207,134 228,260 279,421
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Plant, equipment and capital leases, net 59,823 58,387 49,942
Deferred income taxes 10,370 10,370 -0-
Other noncurrent assets 9,411 10,181 11,538
Noncurrent assets of operations to be divested -0- -0- 638
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TOTAL ASSETS $ 286,738 $ 307,198 $ 341,539
==============================================================================================
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LIABILITIES AND SHAREHOLDERS' EQUITY
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CURRENT LIABILITIES
Current debt $ -0- $ -0- $ 75,000
Accounts payable and accrued liabilities 56,597 70,606 62,905
Provision for discontinued operations 2,291 1,876 2,967
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Total current liabilities 58,888 72,482 140,872
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Long-term debt 103,500 103,500 103,500
Other long-term liabilities 6,399 6,446 11,888
Provision for discontinued operations 7,675 8,191 9,832
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Total liabilities 176,462 190,619 266,092
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Contingent liabilities (see Note 8)
SHAREHOLDERS' EQUITY
Non-redeemable preferred stock 7,917 7,918 7,945
Common shareholders' equity:
Common stock, $1 par value:
Authorized: 80,000,000 shares
Issued: May 1, 1999 - 23,282,221;
January 30, 1999 - 24,327,109;
May 2, 1998 - 26,476,602 23,282 24,327 26,477
Additional paid-in capital 116,846 126,095 133,052
Accumulated deficit (19,912) (23,904) (73,020)
Accumulated other comprehensive income -0- -0- (1,150)
Treasury shares, at cost (17,857) (17,857) (17,857)
- ----------------------------------------------------------------------------------------------
Total shareholders' equity 110,276 116,579 75,447
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 286,738 $ 307,198 $ 341,539
==============================================================================================
</TABLE>
The accompanying Notes are an integral part of these Financial Statements.
3
<PAGE> 4
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Earnings
Three Months Ended
In Thousands, except per share amounts
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
MAY 1, MAY 2,
1999 1998
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<S> <C> <C>
Net sales $ 128,656 $ 133,808
Cost of sales 71,141 75,987
Selling and administrative expenses 49,213 51,984
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Earnings from operations before
other income and expenses 8,302 5,837
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Other expenses (income):
Interest expense 1,996 2,889
Interest income (661) (805)
Other expenses 156 246
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Total other (income) expenses, net 1,491 2,330
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Pretax earnings 6,811 3,507
Income tax expense (benefit) 2,744 (281)
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NET EARNINGS $ 4,067 $ 3,788
===============================================================================
Basic earnings per common share $ 0.17 $ 0.14
Diluted earnings per common share $ 0.16 $ 0.13
===============================================================================
</TABLE>
The accompanying Notes are an integral part of these Financial Statements.
4
<PAGE> 5
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Three Months Ended
Consolidated Cash Flows
In Thousands
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
MAY 1, MAY 2,
1999 1998
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<S> <C> <C>
OPERATIONS:
Net earnings $ 4,067 $ 3,788
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 2,440 2,385
Deferred income taxes 2,340 -0-
Provision for losses on accounts receivable 72 554
Other 189 263
Effect on cash of changes in working capital and other assets and liabilities:
Accounts receivable 317 (765)
Inventories 4,921 (6,549)
Other current assets 1,227 330
Accounts payable and accrued liabilities (13,594) (11,024)
Other assets and liabilities 167 (2,842)
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Net cash provided by (used in) operating activities 2,146 (13,860)
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INVESTING ACTIVITIES:
Capital expenditures (4,745) (7,484)
Proceeds from businesses divested and asset sales 9,964 -0-
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Net cash provided by (used in) investing activities 5,219 (7,484)
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FINANCING ACTIVITIES:
Payments on capital leases -0- (147)
Stock repurchases (12,739) -0-
Long-term borrowings -0- 103,500
Dividends paid (75) -0-
Exercise of options and related income tax benefits 2,417 1,020
Deferred note expense -0- (3,474)
Other -0- (1,129)
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Net cash provided by (used in) financing activities (10,397) 99,770
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NET CASH FLOW (3,032) 78,426
Cash and short-term investments at
beginning of period 58,743 49,276
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CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 55,711 $ 127,702
======================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Net cash paid (received) for:
Interest $ 3,160 $ 4,534
Income taxes 75 (177)
</TABLE>
The accompanying Notes are an integral part of these Financial Statements.
5
<PAGE> 6
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Shareholders' Equity
In Thousands
<TABLE>
<CAPTION>
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TOTAL ACCUMULATED
NON-REDEEMABLE ADDITIONAL OTHER
PREFERRED COMMON PAID-IN TREASURY ACCUMULATED COMPREHENSIVE
STOCK STOCK CAPITAL STOCK (DEFICIT) INCOME
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<S> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 31, 1998 $ 7,945 $ 26,264 $ 132,218 $ (17,857) $ (75,456) $ (1,150)
=========================================================================================================================
Net earnings -0- -0- -0- -0- 53,128 -0-
Dividends paid -0- -0- -0- -0- (1,576) -0-
Exercise of options -0- 230 845 -0- -0- -0-
Issue shares - restricted stock options -0- 67 533 -0- -0- -0-
Issue shares - Employee Stock Purchase Plan -0- 107 387 -0- -0- -0-
Tax effect of exercise of stock options -0- -0- 1,887 -0- -0- -0-
Stock repurchases -0- (2,343) (9,889) -0- -0- -0-
Minimum pension liability adjustment -0- -0- -0- -0- -0- 1,150
Other (27) 2 114 -0- -0- -0-
Comprehensive Income
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BALANCE JANUARY 30, 1999 $ 7,918 $ 24,327 $ 126,095 $ (17,857) $ (23,904) $ -0-
=========================================================================================================================
Net earnings -0- -0- -0- -0- 4,067 -0-
Dividends paid -0- -0- -0- -0- (75) -0-
Exercise of options -0- 246 1,915 -0- -0- -0-
Tax effect of exercise of stock options -0- -0- 256 -0- -0- -0-
Stock repurchases -0- (1,300) (11,439) -0- -0- -0-
Other (1) 9 19 -0- -0- -0-
Comprehensive Income
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BALANCE MAY 1, 1999 $ 7,917 $ 23,282 $ 116,846 $ (17,857) $ (19,912) $ -0-
=========================================================================================================================
<CAPTION>
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Total
Share-
Comprehensive holders'
Income Equity
- ----------------------------------------------------------------------------
<S> <C> <C>
BALANCE JANUARY 31, 1998 $ 71,964
============================================================================
Net earnings 53,128 53,128
Dividends paid -0- (1,576)
Exercise of options -0- 1,075
Issue shares - restricted stock options -0- 600
Issue shares - Employee Stock Purchase Plan -0- 494
Tax effect of exercise of stock options -0- 1,887
Stock repurchases -0- (12,232)
Minimum pension liability adjustment 1,150 1,150
Other -0- 89
---------
Comprehensive Income $ 54,278
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BALANCE JANUARY 30, 1999 $ 116,579
============================================================================
Net earnings 4,067 4,067
Dividends paid -0- (75)
Exercise of options -0- 2,161
Tax effect of exercise of stock options -0- 256
Stock repurchases -0- (12,739)
Other -0- 27
---------
Comprehensive Income $ 4,067
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BALANCE MAY 1, 1999 $ 110,276
============================================================================
</TABLE>
The accompanying Notes are an integral part of these Financial Statements.
6
<PAGE> 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 29, 2000 ("Fiscal 2000") and of the fiscal year
ended January 30, 1999 ("Fiscal 1999"). 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 at May 1, 1999 of 622 Jarman, Journeys,
Johnston & Murphy, General Shoe Warehouse, Underground Station and Nautica
retail footwear stores and leased departments. Because of the acquisition of
Mercantile by Dillards Inc., the Company ended its operation of the Jarman
leased departments. The Company transferred the remaining Jarman lease
departments to either Dillards Inc. or Saks Inc. during the first quarter ended
May 1, 1999. The Jarman leased departments' business contributed sales of
approximately $1.2 million and $11.4 million and operating earnings (loss) of
$(0.3) million and $0.3 million for the first quarter of Fiscal 2000 and 1999,
respectively.
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 30, 1999 and May 1,
1999, are short-term investments of $53.5 million and $47.6 million,
respectively. Short-term investments are highly-liquid debt instruments having
an original maturity of three months or less.
7
<PAGE> 8
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
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 over
estimated useful lives:
<TABLE>
<S> <C>
Buildings and building equipment 20-45 years
Machinery, furniture and fixtures 3-15 years
</TABLE>
Leasehold improvements and properties under capital leases are amortized on the
straight-line method over the shorter of their useful lives or their related
lease terms.
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 and Euro. At January 30,
1999 and May 1, 1999, the Company had approximately $21.2 million and $22.6
million, respectively, of such contracts outstanding. Forward exchange
contracts have an average term of approximately four 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.
8
<PAGE> 9
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
REVENUE RECOGNITION
Retail sales are recorded net of actual returns, and exclude all taxes, while
wholesale revenue is recorded net of returns when the related goods have been
shipped and legal title has passed to the customer.
PREOPENING COSTS
Costs associated with the opening of new stores are expensed as incurred.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs were $5.1 million
and $4.3 million for the first quarter of Fiscal 2000 and 1999, respectively.
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.
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.
9
<PAGE> 10
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
EARNINGS PER COMMON SHARE
Basic earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities to issue common stock were
exercised or converted to common stock. (see Note 7).
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.
BUSINESS SEGMENTS
The Company implemented Statement of Financial Accounting Standards (SFAS) 131,
"Disclosures about Segments of an Enterprise and Related Information" in the
fourth quarter of Fiscal 1999. The standard requires that companies disclose
"operating segments" based on the way management disaggregates the company for
making internal operating decisions. (see Note 9).
10
<PAGE> 11
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 2
RESTRUCTURINGS
Workforce Reduction
In connection with the divestiture of the western boot business and the
substantial completion of the exiting of the Jarman leased department business,
the Company reviewed the structure and level of staffing in all of its
operations. Upon completion of the review, the Company recorded a $1.3 million
charge to earnings included in selling and administrative expenses for a
workforce reduction of 66 positions, of which 50 positions were eliminated by
May 1, 1999. Twenty-six of the positions eliminated related to the Jarman Lease
division, with the remainder being primarily employed at corporate
headquarters.
Fiscal 1998 Restructuring
As a result of the continued weakness in the western boot market, the Company
approved a plan (the "Boot Divestiture") 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 in the fourth quarter of
Fiscal 1998, 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. The charges related to the Boot
Divestiture also included $3.2 million in employee-related costs and $2.8
million of facility shutdown and other costs. 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
sales of the Company's western boot business were $10.8 million and the
operating loss was $0.9 million for the first quarter ended May 2, 1998.
The Company's actions relating to the Boot Divestiture resulted in the
elimination of 622 jobs, including all positions related to the western boot
business and the Boot Factory retail chain.
11
<PAGE> 12
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
NOTE 3
ACCOUNTS RECEIVABLE
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MAY 1, JANUARY 30,
IN THOUSANDS 1999 1999
- -----------------------------------------------------------------------------
<S> <C> <C>
Trade accounts receivable $ 24,930 $ 23,106
Miscellaneous receivables 1,970 5,430
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Total receivables 26,900 28,536
Allowance for bad debts (1,018) (1,075)
Other allowances (1,550) (1,203)
- -----------------------------------------------------------------------------
NET ACCOUNTS RECEIVABLE $ 24,332 $ 26,258
=============================================================================
</TABLE>
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.
One customer accounted for 11% of the Company's trade receivables balance as of
May 1, 1999 and no other customer accounted for more than 8% of the Company's
trade receivables balance as of May 1, 1999.
<TABLE>
<CAPTION>
NOTE 4
INVENTORIES
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MAY 1, JANUARY 30,
IN THOUSANDS 1999 1999
- -----------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 2,623 $ 2,969
Work in process 2,166 2,077
Finished goods 24,067 33,949
Retail merchandise 75,757 78,218
- -----------------------------------------------------------------------------
TOTAL INVENTORIES $104,613 $117,213
=============================================================================
</TABLE>
12
<PAGE> 13
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
NOTE 5
PLANT, EQUIPMENT AND CAPITAL LEASES, NET
- -----------------------------------------------------------------------------
MAY 1, JANUARY 30,
IN THOUSANDS 1999 1999
- -----------------------------------------------------------------------------
<S> <C> <C>
Plant and equipment:
Land $ 263 $ 263
Buildings and building equipment 2,726 2,729
Machinery, furniture and fixtures 41,717 39,587
Construction in progress 6,182 8,819
Improvements to leased property 56,906 56,790
Capital leases:
Buildings 200 200
Machinery, furniture and fixtures 3,925 4,026
- -----------------------------------------------------------------------------
Plant, equipment and capital leases, at cost 111,919 112,414
Accumulated depreciation and amortization:
Plant and equipment (48,307) (49,993)
Capital leases (3,789) (4,034)
- -----------------------------------------------------------------------------
NET PLANT, EQUIPMENT AND CAPITAL LEASES $ 59,823 $ 58,387
=============================================================================
</TABLE>
13
<PAGE> 14
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
NOTE 6
PROVISION FOR DISCONTINUED OPERATIONS AND RESTRUCTURING RESERVES
- ------------------------------------------------------------------------------------------------------
PROVISION FOR DISCONTINUED OPERATIONS
- ------------------------------------------------------------------------------------------------------
EMPLOYEE
RELATED
IN THOUSANDS COSTS* OTHER TOTAL
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance January 30, 1999 $ 9,693 $ 374 $ 10,067
Charges and adjustments, net -0- (101) (101)
- ------------------------------------------------------------------------------------------------------
Balance May 1, 1999 9,693 273 9,966
Current portion 2,018 273 2,291
- ------------------------------------------------------------------------------------------------------
TOTAL NONCURRENT PROVISION FOR
DISCONTINUED OPERATIONS $ 7,675 $ -0- $ 7,675
======================================================================================================
*Union pension withdrawal liability.
<CAPTION>
RESTRUCTURING RESERVES
- ------------------------------------------------------------------------------------------------------
EMPLOYEE FACILITY
RELATED SHUTDOWN
IN THOUSANDS COSTS COSTS OTHER TOTAL
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance January 30, 1999 $ 268 $ 955 $ 985 $ 2,208
Charges and adjustments, net (18) (59) (106) (183)
- ------------------------------------------------------------------------------------------------------
Balance May 1, 1999 250 896 879 2,025
Current portion (included in accounts
payable and accrued liabilities) 250 773 879 1,902
- ------------------------------------------------------------------------------------------------------
TOTAL NONCURRENT RESTRUCTURING RESERVES
(INCLUDED IN OTHER LONG-TERM LIABILITIES) $ -0- $ 123 $ -0- $ 123
======================================================================================================
</TABLE>
14
<PAGE> 15
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
NOTE 7
EARNINGS PER SHARE
- ---------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
MAY 1, 1999 MAY 2, 1998
----------------------------------------- ----------------------------------------
(IN THOUSANDS, EXCEPT INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Earnings $4,067 $3,788
Less: Preferred stock dividends (75) (75)
- ---------------------------------------------------------------------------------------------------------------------------------
BASIC EPS
Income available to
common shareholders 3,992 23,594 $.17 3,713 25,915 $.14
==== ====
EFFECT OF DILUTIVE SECURITIES
Options 962 1,490
Contingent Options(1) -0- 200
Employees' Preferred Stock(2) 73 80
- ---------------------------------------------------------------------------------------------------------------------------------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $3,992 24,629 $.16 $3,713 27,685 $.13
=================================================================================================================================
</TABLE>
(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 amount of the dividend on the convertible preferred stock per common share
obtainable on conversion of the convertible preferred stock is higher than
basic earnings per share for the period. Therefore, conversion of the
convertible preferred stock is not reflected in diluted earnings per share,
because it would have been antidilutive. 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.
The amount of the interest on the convertible subordinated notes (net of tax)
for the period per common share obtainable on conversion is higher than basic
earnings per share, therefore the convertible debt is not reflected in diluted
earnings per share because it is antidilutive.
The weighted shares outstanding reflects the effect of the stock buy back
program of up to 4.8 million shares announced by the Company in August 1998 and
January 1999. The Company has repurchased 3.6 million shares as of May 1, 1999.
15
<PAGE> 16
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8
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 into 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 $12.0 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 of New York
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 New York State funding to pay a portion of
remediaton costs and insurance coverage available to the various defendants,
the applicability of joint and several liability and the basis for contribution
claims among the defendants, management is 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 in
the range of $1.6 million to $2.0 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. 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.
16
<PAGE> 17
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8
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, with the approval of
MDEQ, has installed horizontal wells to capture groundwater from a portion of
the site, will treat the groundwater either after its use in the manufacturing
process or through an air sparge system and will install monitoring wells.
Associated operations and maintenance costs are expected to be in the range of
$10,000 to $15,000 per year. Based on these estimates, 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. Certain remedial alternatives could be more costly. The
MDEQ has informally advised the Company that it intends to begin its own
testing of lake sediments and may consider a remediation strategy which would
involve dredging a portion of the lake. The Company is continuing to study the
lake sediment issues, and at present is unable to predict whether and to what
extent it may be required to participate in a remediation of 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 presently expect the action to have a
material effect on its financial condition or results of operations. The
Company and the plaintiff have agreed, subject to bankruptcy court approval, to
settle the action for a payment of $162,500 by the Company.
17
<PAGE> 18
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 9
BUSINESS SEGMENT INFORMATION
The Company has four reportable segments: Specialty Retail Footwear, comprised
of Journeys, Jarman and General Shoe Warehouse; Branded Footwear, comprised of
Johnston & Murphy retail and wholesale, Dockers Footwear and Nautica Footwear;
Leather; and Western Boots, which was divested in Fiscal 1999. All the
Company's segments, except Leather, sell footwear products at either retail or
wholesale. The Leather segment is comprised of Volunteer Leather, a leather
tanning and finishing company which sells primarily to military boot
manufacturers and other customers.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
The Company's reportable segments are based on an organization methodology used
by management in order to make operating decisions and assess performance along
types of products sold. Specialty Retail Footwear primarily sells branded
products from other companies while Branded Footwear primarily sells the
Company's owned and licensed brands.
Corporate assets include cash, deferred income taxes, prepaid pension cost and
deferred note expense. The Company does not allocate certain costs to each
segment in order to make decisions and assess performance. These costs include
corporate overhead, restructuring gains and losses, interest expense, interest
income, and other charges. Other charges include severance and litigation
charges.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SPECIALTY
THREE MONTHS ENDED RETAIL BRANDED
MAY 2, 1999 FOOTWEAR FOOTWEAR LEATHER CORPORATE CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales to external customers $ 61,253 $ 63,550 $5,836 $ -0- $ 130,639
Intercompany sales -0- (1,436) (547) -0- (1,983)
- -------------------------------------------------------------------------------------------------------------------------
Net sales 61,253 62,114 5,289 -0- 128,656
- -------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 3,521 6,825 200 (2,273) 8,273
Interest expense -0- -0- -0- 1,996 1,996
Interest income -0- -0- -0- 661 661
Other charges -0- -0- -0- (127) (127)
- -------------------------------------------------------------------------------------------------------------------------
Pretax earnings 3,521 6,825 200 (3,735) 6,811
- -------------------------------------------------------------------------------------------------------------------------
Total assets 84,778 83,655 8,836 109,469 286,738
Depreciation 1,229 718 115 378 2,440
Capital expenditures 2,847 1,120 9 769 4,745
</TABLE>
18
<PAGE> 19
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
NOTE 9
BUSINESS SEGMENT INFORMATION, CONTINUED
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
SPECIALTY
THREE MONTHS ENDED RETAIL BRANDED WESTERN
MAY 1, 1998 FOOTWEAR FOOTWEAR LEATHER BOOT CORPORATE CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales to external customers $ 61,943 $ 57,103 $ 6,621 $ 10,796 $ -0- $ 136,463
Intercompany sales -0- (1,858) (797) -0- -0- (2,655)
- -------------------------------------------------------------------------------------------------------------------------
Net sales 61,943 55,245 5,824 10,796 -0- 133,808
- -------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 3,805 5,576 262 (883) (3,096) 5,664
Interest expense -0- -0- -0- -0- 2,889 2,889
Interest income -0- -0- -0- -0- 805 805
Other charges -0- -0- -0- -0- (73) (73)
- -------------------------------------------------------------------------------------------------------------------------
Pretax earnings 3,805 5,576 262 (883) (5,253) 3,507
- -------------------------------------------------------------------------------------------------------------------------
Total assets 95,171 72,363 9,971 13,515 150,519 341,539
Depreciation 1,061 643 179 196 306 2,385
Capital expenditures 5,408 775 28 18 1,255 7,484
</TABLE>
19
<PAGE> 20
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 changes in consumer demand or tastes that
affect sales in the Company's retail stores or sales by its Branded Footwear
operations at wholesale, changes in business strategies or directions of the
Company's competitors, the Company's ability to open, staff and support
additional retail stores on schedule and at acceptable expense levels, the cost
and availability of externally sourced products and the acceptance of planned
new product offerings. Failure by the Company to successfully complete its
plans for addressing the Year 2000 issue, discussed elsewhere in this report,
or failures related to the issue by key suppliers of goods or services to the
Company or by the customers of the Company could also result in a failure to
meet expectations reflected in forward-looking statements. Other factors that
could also lead to such a failure to meet expectations reflected in forward
looking statements include international trade developments affecting foreign
sourcing of products, the outcome of various litigation and environmental
contingencies, including those discussed in Note 8 to the Consolidated
Financial Statements, the solvency of the wholesale customers of the Company
and the ability to deal with changes in markets for the Company's products.
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 alter its business strategies to
address changing conditions.
SIGNIFICANT DEVELOPMENTS
Leased Department Transition
Under an agreement with Mercantile Stores Company, Inc. the Company operated
the men's shoe departments in Mercantile department stores through the
Company's Jarman Lease division. Because of the acquisition of Mercantile by
Dillards Inc., the Company has ended its operation of the leased departments.
The Company transferred the remaining Jarman leased departments to Dillards
Inc. or Saks Inc. during the first quarter ended May 1, 1999. The Jarman leased
departments' business contributed sales of approximately $1.2 million and $11.4
million and operating earnings (loss) of $(0.3) million and $0.3 million for
the first quarter of Fiscal 2000 and 1999, respectively.
Share Repurchase Program
During the third quarter ended October 31, 1998, the Company authorized the
purchase, from time to time, of up to 2.6 million shares of the Company's
common stock. During the fourth quarter ended January 30, 1999, the Company
authorized an additional 2.2 million shares to be repurchased. The purchases
may be made on the open market or in privately negotiated transactions. As of
May 1, 1999, the Company had repurchased 3.6 million shares at a cost of $25.0
million.
Workforce Reduction
In connection with the divestiture of the western boot business and the
substantial completion of the exiting of the Jarman leased department business,
the Company reviewed the structure and level of
20
<PAGE> 21
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
staffing in all of its operations. Upon completion of the review, the Company
recorded a $1.3 million charge to earnings during the fourth quarter of Fiscal
1999 included in selling and administrative expenses for a workforce reduction
of 66 positions, of which 50 positions were eliminated by May 1, 1999.
Twenty-six of the positions eliminated related to the Jarman Lease division,
with the remainder being primarily employed at corporate headquarters.
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 of Fiscal 1999
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, net of tax, of $2.2
million, 2) $1.3 million of the proceeds to pay preferred dividends in arrears
because of certain convenants in the indenture relating to the senior notes,
and 3) the remaining proceeds for general corporate purposes.
Fiscal 1998 Restructuring
As a result of the continued weakness in the western boot market, the Company
approved a plan (the "Boot Divestiture") 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 in the fourth quarter of
Fiscal 1998, 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. The charges related to the Boot
Divestiture also included $3.2 million in employee-related costs and $2.8
million of facility shutdown and other costs. 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
sales of the Company's western boot business were $10.8 million and the
operating loss was $0.9 million for the first quarter ended May 2, 1998.
The Company's actions relating to the Boot Divestiture resulted in the
elimination of 622 jobs, including all positions related to the western boot
business and the Boot Factory retail chain.
RESULTS OF OPERATIONS - FIRST QUARTER FISCAL 2000 COMPARED TO FISCAL 1999
The Company's net sales in the first quarter ended May 1, 1999 decreased 3.9%
to $128.7 million from $133.8 million in the first quarter ended May 2, 1998.
Pro forma for the Boot Divestiture including the western boot retail stores as
though it had occurred prior to the beginning of the earlier period, the
Company's net sales increased 4.6% to $128.7 million in the first quarter ended
May 1, 1999 from $123.0 million in the same period last year. Gross margin
decreased 0.5% to $57.5 million in the first quarter this year from $57.8
million in the same period last year but increased as a percentage of net sales
from 43.2% to 44.7%. Selling and administrative expenses in the first
21
<PAGE> 22
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
quarter this year decreased 5.3% from the first quarter last year and decreased
as a percentage of net sales from 38.8% to 38.3%.
Pretax earnings in the first quarter ended May 1, 1999 were $6.8 million
compared to $3.5 million for the first quarter ended May 2, 1998.
Net earnings for the first quarter ended May 1, 1999 were $4.1 million ($.16
diluted earnings per share) compared to $3.8 million ($0.13 diluted earnings
per share) for the first quarter ended May 2, 1998. The Company had an
effective tax rate of 40.3% for the first quarter ended May 1, 1999. Net
earnings for the first quarter last year included a tax credit of $281,000.
Specialty Retail Footwear
<TABLE>
<CAPTION>
Three Months Ended
---------------------
May 1, May 2, %
1999 1998 Change
------- ------- ------
(dollars in thousands)
<S> <C> <C> <C>
Net sales .......................... $61,253 $61,943 (1.1)%
Operating income ................... $ 3,521 $ 3,805 (7.5)%
Operating margin ................... 5.7% 6.1%
</TABLE>
Primarily due to the exiting of the Jarman lease business, net sales from
Specialty Retail Footwear operations decreased 1.1% for the first quarter ended
May 1, 1999 compared to the same period last year. Excluding sales attributable
to the Jarman lease business from both periods, Specialty Retail Footwear net
sales increased 19% for the first quarter of this year compared to the first
quarter of last year, primarily due to a 3% increase in comparable store sales
and a 23% increase in average ongoing Specialty Retail Footwear stores
operated. Excluding the Jarman lease business, the average price per pair of
shoes increased 3% and unit sales increased 20% for the first quarter of Fiscal
2000.
22
<PAGE> 23
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The Company's comparable store sales and store count for Specialty Retail
Footwear at the end of the periods were as follows:
<TABLE>
<CAPTION>
Store Count
--------------------
Comparable May 1, May 2,
Sales Changes 1999 1998
------------- ------ ------
<S> <C> <C> <C>
Journeys ......................................................... 6% 270 212
Jarman Retail .................................................... 0% 164(1) 161(2)
Jarman Lease ..................................................... 56%(3) -0- 103
General Shoe Warehouse ........................................... -13% 16 14
--- ---
Total Specialty Retail Footwear .............................. 3% 450 490
=== ===
</TABLE>
- ------------------------
(1) Includes seventeen Underground Station stores.
(2) Includes three Underground Stations stores.
(3) This number is high from the liquidation of the inventory due to the close
out of the Jarman lease business in the first quarter of Fiscal 2000.
Specialty Retail Footwear operating income for the first quarter ended May 1,
1999 was down 7.5% to $3.5 million compared to $3.8 million for the same period
last year. The decline was due primarily to the exiting of the Jarman lease
business. The Jarman lease business lost $0.3 million in the first quarter this
year compared to earnings of $0.3 million for the same period last year.
Branded Footwear
<TABLE>
<CAPTION>
Three Months Ended
---------------------
May 1, May 2, %
1999 1998 Change
------- ------- ------
(dollars in thousands)
<S> <C> <C> <C>
Net sales ........................................................ $62,114 $55,245 12.4%
Operating income ................................................. $ 6,825 $ 5,576 22.4%
Operating margin ................................................. 11.0% 10.1%
</TABLE>
Branded Footwear net sales increased 12.4% to $62.1 million for the first
quarter ended May 1, 1999 from $55.2 million for the first quarter ended May 2,
1998, reflecting primarily a 5% increase in comparable store sales for Johnston
& Murphy Retail, a 21% increase in average Branded Footwear retail stores
operated and a 10% increase in men's Branded Footwear wholesale sales. The
store count for Branded Footwear retail operations at the end of the first
quarter this year included 136 Johnston & Murphy stores and factory stores and
36 Nautica Retail leased departments compared to 129 Johnston & Murphy stores
and factory stores and eight Nautica Retail leased departments at the end of
the first quarter of last year. The average price per pair of shoes for Branded
Footwear retail
23
<PAGE> 24
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
increased 1% for the first quarter of this year and unit sales increased 12%
during the same period. Unit sales for the Branded Footwear wholesale
businesses increased 12% for the first quarter of this year while the average
price per pair of shoes decreased 3% for the same period.
Branded Footwear operating income for the first quarter ended May 1, 1999
increased 22.4% from $5.6 million in the first quarter of last year to $6.8
million in the first quarter of this year, primarily due to increased sales,
increased gross margin as a percentage of sales and decreased expenses as a
percentage of sales.
Leather
<TABLE>
<CAPTION>
Three Months Ended
---------------------
May 1, May 2, %
1999 1998 Change
------- ------- ------
(dollars in thousands)
<S> <C> <C> <C>
Net sales ........................................................ $ 5,289 $ 5,824 (9.2)%
Operating income ................................................. $ 200 $ 262 (23.7)%
Operating margin ................................................. 3.8% 4.5%
</TABLE>
Leather net sales decreased 9.2% to $5.3 million in the first quarter ended May
1, 1999 from $5.8 million in the first quarter ended May 2, 1998, primarily due
to lower orders from military footwear suppliers, which were impacted by a
decrease in demand for leather military footwear, which makes up the bulk of
the Company's tanned leather business.
Leather operating income decreased from $0.3 million in the first quarter last
year to $0.2 million in the first quarter this year, primarily due to lower
sales and lower gross margin as a percentage of sales.
Corporate, Interest Expenses and Other Charges
Corporate and other expenses for the first quarter ended May 1, 1999 were $2.3
million compared to $3.1 million for the first quarter ended May 2, 1998
(exclusive of other charges of $0.1 million, primarily litigation and severance
charges, in the first quarter this year and other charges of $0.1 million,
primarily litigation charges, in the first quarter last year), a decrease of
26.6%. The decrease in corporate expenses in the first quarter this year is
attributable primarily to decreased professional expenses and decreased comp-
ensation expense including bonus accruals.
Interest expense decreased 30.9% from $2.9 million in the first quarter ended
May 2, 1998 to $2.0 million in the first quarter ended May 1, 1999, primarily
due to the decrease in interest rates on the Company's long-term debt from 10
3/8% on $75 million borrowings to 5 1/2% on $103.5 million borrowings. Interest
income decreased 17.9% from $0.8 million in the first quarter of last year to
$0.7 million in the first quarter of this year, due to decreases in interest
rates.
24
<PAGE> 25
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
There were no borrowings under the Company's revolving credit facility during
during the three months ended May 1, 1999 or May 2, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain financial data at the dates indicated.
<TABLE>
<CAPTION>
May 1, May 2,
1999 1998
-------- --------
(dollars in millions)
-------------------
<S> <C> <C>
Cash and short-term investments ................................ $ 55.7 $ 127.7
Working capital ................................................ $ 148.2 $ 138.5
Long-term debt (includes current maturities) ................... $ 103.5 $ 178.5
Current ratio .................................................. 3.5x 2.0x
</TABLE>
- -----------
On April 9, 1998, the Company issued $103.5 million in principal amount of 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 generated principally in the
fourth quarter of each fiscal year.
Cash provided by operating activities was $2.1 million in the first three
months of Fiscal 2000 compared to $13.9 million cash used in operating
activities in the first three months of Fiscal 1999. The $16.0 million increase
in cash flow from operating activities reflects primarily the decrease in
inventories. Contributing to the inventory change was a slowdown in store
openings from 70 stores in last years first quarter to 29 stores in this years
first quarter and the selloff of Jarman lease inventory.
The $4.9 million decrease in inventories at May 1, 1999 from January 30, 1999
levels reflected in the statement of cash flows reflects the exiting of the
Jarman lease business and planned seasonal decreases in men's branded wholesale
inventory.
Accounts receivable at May 1, 1999 decreased $0.3 million compared to January
30, 1999 primarily due to the exiting of the Jarman lease business.
25
<PAGE> 26
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Cash used due to changes in accounts payable and accrued liabilities are as
follows:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
May 1, May 2,
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Accounts payable $ (6,831) $ (3,499)
Accrued liabilities (6,763) (7,525)
-------- --------
$(13,594) $(11,024)
======== ========
</TABLE>
The fluctuations in accounts payable for the first quarter this year from the
first quarter last year are due to changes in buying patterns, payment terms
negotiated with individual vendors and changes in inventory levels.
The change in accrued liabilities for the first quarter this year was due
primarily to payments related to bonus plans and changes in timing of interest
payments.
There were no revolving credit borrowings during the first three months ended
May 1, 1999 and May 2, 1998, as cash generated from operations, the Boot
Divestiture and cash on hand funded seasonal working capital requirements and
capital expenditures.
Capital Expenditures
Total capital expenditures in Fiscal 2000 are expected to be approximately
$23.9 million. These include expected retail expenditures of $17.7 million to
open approximately 50 Journeys stores, 21 Johnston & Murphy stores and factory
stores, seven Jarman Retail stores and five Nautica Retail leased departments
and to complete 38 major store renovations. Capital expenditures for wholesale
and manufacturing operations and other purposes are expected to be
approximately $6.2 million, including approximately $3.0 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.
The Company has 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 is in the process of
upgrading and modernizing its major information systems, including
26
<PAGE> 27
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
its wholesale and retail operating systems and its financial systems. The
replacement systems are expected to be Year 2000 compliant.
The Company is utilizing both internal and external resources to reprogram or
replace and test software for Year 2000 compliance. The Company currently has
100% of the estimated human resources it expects to be required in the
remediation and testing process committed.
The Company plans to complete its Year 2000 project no later than October 31,
1999. As of the beginning of the first quarter of Fiscal 2000, the Company is
using all modules of its new financial system. The Company has implemented a
contingency plan that provides for remediation of the existing retail systems,
adding an additional 0.5 million lines of code to be remediated. After
adjusting for the additional lines of code to be remediated, the Company has
completed the remediation, including final testing, of approximately 76% of its
identified 2.5 million lines of code in its legacy systems. The Company's
existing staffing plan would allow the completion of this contingency plan by
the end of October 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 $20.3 million and is being funded through operating cash flows and
cash on hand. Of the total project cost, approximately $12.5 million is
attributable to the purchase of new software and hardware which has been or
will be capitalized. The remaining $8.0 million has been or will be expensed,
including projected costs of $2.1 million for Fiscal 2000. Cumulative to date
expenditures through May 1, 1999 are $5.8 million plus cumulative capital
expenditures of $10.0 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
which the Company initially completed in the fourth quarter of Fiscal 1999 and
the Company anticipates 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 such contingency plans to be
completed by the end of July 1999.
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
27
<PAGE> 28
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
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.
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 8 to the
Company's Consolidated Financial Statements. The Company has made provisions
for certain of these contingencies, including provisions of $150,000 in
discontinued operations in Fiscal 1997, $250,000 reflected in Fiscal 1998 and
$402,000 reflected in Fiscal 1999. 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 adequate 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 2000,
although the Company may borrow from time to time to support seasonal working
capital requirements. The approximately $4.2 million of costs associated with
the prior restructurings 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, of up to 4.8 million shares
of the Company's common stock. These purchases will be funded from available
cash. The Company has repurchased 3.6 million shares at a cost of $25.0 million
as of May 1, 1999.
There were $7.2 million of letters of credit outstanding under the revolving
credit agreement at May 1, 1999, leaving availability under the revolving
credit agreement of $57.8 million.
The Company's revolving credit agreement restricts the payment of dividends and
other payments with respect to capital stock. At May 1, 1999, $45.3 million was
available for such payments. 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.
28
<PAGE> 29
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
CHANGES IN ACCOUNTING PRINCIPLES
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, effective for fiscal years beginning after
June 15, 1999. The Financial Accounting Standards Board issued an exposure draft
in May of 1999 to delay the effective date of SFAS No. 133 for one year, to
fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities.
It requires an entity to recognize all derivatives as either assets or
liabilities in the consolidated balance sheet and to measure those instruments
at fair value. Under certain conditions, a derivative may be specifically
designated as a fair value hedge or a cash flow hedge. The accounting for
changes in the fair value of a derivative will depend on the intended use of
the derivative and the resulting designation. At this time, management has not
fully evaluated the impact of SFAS No. 133.
29
<PAGE> 30
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 4, 1999, a truck driver employed by a carrier for a chemical vendor
died after inhaling a toxic vapor produced when he deposited a chemical
compound that he was delivering to the Company's Whitehall, Michigan, leather
tannery into a tank containing another chemical solution. Regulatory
authorities, including the National Transportation Safety Board and the
Michigan Occupational Safety and Health Administration, are investigating the
incident. The Company is currently unable to predict the effect, if any,
of the incident on its financial condition or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
<TABLE>
<S> <C>
(27) Financial Data Schedule (for SEC use only)
</TABLE>
- --------------
REPORTS ON FORM 8-K
None
30
<PAGE> 31
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 15, 1999
31
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GENESCO
INC.'S 1ST QUARTER FISCAL 2000 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAY-01-1999
<CASH> 8,069
<SECURITIES> 47,642
<RECEIVABLES> 23,380
<ALLOWANCES> 1,018
<INVENTORY> 104,613
<CURRENT-ASSETS> 207,134
<PP&E> 111,919
<DEPRECIATION> 52,096
<TOTAL-ASSETS> 286,738
<CURRENT-LIABILITIES> 58,888
<BONDS> 103,500
0
7,917
<COMMON> 23,282
<OTHER-SE> 79,077
<TOTAL-LIABILITY-AND-EQUITY> 286,738
<SALES> 128,656
<TOTAL-REVENUES> 128,656
<CGS> 71,141
<TOTAL-COSTS> 71,141
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 73
<INTEREST-EXPENSE> 1,996
<INCOME-PRETAX> 6,811
<INCOME-TAX> 2,744
<INCOME-CONTINUING> 4,067
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,067
<EPS-BASIC> 0.17
<EPS-DILUTED> 0.16
</TABLE>
