<PAGE> 1
GENESCO
[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
April 29, 2000
[ ] Transition Report Pursuant To
Section 13 or 15(d) of the
Securities Exchange Act of 1934
Securities and Exchange Commission
Washington, D.C. 20549
Commission File No. 1-3083
-------------------------------
GENESCO INC.
A Tennessee Corporation
I.R.S. No. 62-0211340
Genesco Park
1415 Murfreesboro Road
Nashville, Tennessee 37217-2895
Telephone 615/367-7000
-------------------------------
Indicate by check mark whether
the registrant (1) has filed all
reports required to be filed by
Section 13 or 15(d) of the
Securities Exchange Act of 1934
during the preceding 12 months
(or such shorter period that the
registrant was required to file
such reports with the
commission) and (2) has has been
subject to such filing
requirements for the past 90
days.
Yes [X] No
---------------------------------------------------
Common Shares Outstanding June 2, 2000 - 21,516,848
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
AGE
-----------------------------------------------------------------------------
<S> <C>
Part 1 - Financial Information 3
-----------------------------------------------------------------------------
Consolidated Balance Sheet - April 29, 2000, January 29, 2000 and
May 1, 1999 3
-----------------------------------------------------------------------------
Consolidated Earnings - Three Months Ended
April 29, 2000 and May 1, 1999 4
-----------------------------------------------------------------------------
Consolidated Cash Flows - Three Months Ended
April 29, 2000 and May 1, 1999 5
-----------------------------------------------------------------------------
Consolidated Shareholders' Equity - Year Ended
January 29, 2000 and Three Months Ended April 29, 2000 6
-----------------------------------------------------------------------------
Notes to Consolidated Financial Statements 7
-----------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
-----------------------------------------------------------------------------
Part II - Other Information 29
-----------------------------------------------------------------------------
Signature 30
-----------------------------------------------------------------------------
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Balance Sheet
In Thousands
<TABLE>
<CAPTION>
APRIL 29, JANUARY 29, MAY 1,
2000 2000 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
-------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and short-term investments $ 45,218 $ 57,860 $ 55,711
Accounts receivable 28,645 23,617 24,332
Inventories 113,153 109,815 104,613
Deferred income taxes 14,826 14,826 16,987
Other current assets 8,978 8,881 5,491
-------------------------------------------------------------------------------------------------
Total current assets 210,820 214,999 207,134
-------------------------------------------------------------------------------------------------
Plant, equipment and capital leases, net 74,396 68,661 59,823
Deferred income taxes 4,184 4,184 10,370
Other noncurrent assets 12,992 13,321 9,411
-------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 302,392 $ 301,165 $ 286,738
=================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 70,638 $ 74,874 $ 56,597
Provision for discontinued operations 2,139 2,118 2,291
-------------------------------------------------------------------------------------------------
Total current liabilities 72,777 76,992 58,888
-------------------------------------------------------------------------------------------------
Long-term debt 103,500 103,500 103,500
Other long-term liabilities 6,260 6,368 6,399
Provision for discontinued operations 5,523 6,063 7,675
-------------------------------------------------------------------------------------------------
Total liabilities 188,060 192,923 176,462
-------------------------------------------------------------------------------------------------
Contingent liabilities (see Note 7)
SHAREHOLDERS' EQUITY
Non-redeemable preferred stock 7,875 7,882 7,917
Common shareholders' equity:
Common stock, $1 par value:
Authorized: 80,000,000 shares
Issued: April 29, 2000 - 21,955,674;
January 29, 2000 - 21,714,678;
May 1, 1999 - 23,282,221 21,956 21,715 23,282
Additional paid-in capital 94,754 94,784 116,846
Retained earnings (accumulated deficit) 7,604 1,718 (19,912)
Accumulated other comprehensive income -0- -0- -0-
Treasury shares, at cost (17,857) (17,857) (17,857)
-------------------------------------------------------------------------------------------------
Total shareholders' equity 114,332 108,242 110,276
-------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 302,392 $ 301,165 $ 286,738
=================================================================================================
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
3
<PAGE> 4
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Earnings
Three Months Ended
In Thousands, except per share amounts
<TABLE>
<CAPTION>
APRIL 29, MAY 1,
2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 150,999 $ 128,656
Cost of sales 83,385 71,096
Selling and administrative expenses 56,121 49,414
-------------------------------------------------------------------------
Earnings from operations before interest 11,493 8,146
-------------------------------------------------------------------------
Interest expense 2,101 1,996
Interest income (419) (661)
-------------------------------------------------------------------------
Total interest expense, net 1,682 1,335
-------------------------------------------------------------------------
Pretax earnings 9,811 6,811
Income taxes 3,850 2,744
-------------------------------------------------------------------------
NET EARNINGS $ 5,961 $ 4,067
=========================================================================
Basic earnings per common share $ 0.27 $ 0.17
Diluted earnings per common share $ 0.25 $ 0.16
=========================================================================
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
4
<PAGE> 5
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Three Months Ended
Consolidated Cash Flows
In Thousands
<TABLE>
<CAPTION>
APRIL 29, MAY 1,
2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net earnings $ 5,961 $ 4,067
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 3,039 2,440
Deferred income taxes -0- 2,340
Provision for losses on accounts receivable 122 72
Other 341 189
Effect on cash of changes in working capital and other assets and liabilities:
Accounts receivable (5,149) 317
Inventories (3,338) 4,921
Other current assets (97) 1,227
Accounts payable and accrued liabilities (4,316) (13,594)
Other assets and liabilities (446) 167
------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (3,883) 2,146
------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (8,950) (4,745)
Proceeds from businesses divested and asset sales 95 9,964
------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (8,855) 5,219
------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Stock repurchase (3,728) (12,739)
Payments of capital leases (1) -0-
Dividends paid (75) (75)
Exercise of options and related income tax benefits 3,900 2,417
------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 96 (10,397)
------------------------------------------------------------------------------------------------------------
NET CASH FLOW (12,642) (3,032)
Cash and short-term investments at
beginning of period 57,860 58,743
------------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 45,218 $ 55,711
============================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Net cash paid for:
Interest $ 3,382 $ 3,160
Income taxes 685 75
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
5
<PAGE> 6
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Shareholders' Equity
In Thousands
<TABLE>
<CAPTION>
TOTAL RETAINED ACCUMULATED TOTAL
NON-REDEEMABLE ADDITIONAL EARNINGS OTHER COMPRE- SHARE-
PREFERRED COMMON PAID-IN TREASURY (ACCUMULATED COMPREHENSIVE HENSIVE HOLDERS'
STOCK STOCK CAPITAL STOCK DEFICIT) INCOME INCOME EQUITY
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January 30, 1999 $ 7,918 $24,327 $ 126,095 $(17,857) $ (23,904) $ -0- $ 116,579
===================================================================================================================================
Net earnings -0- -0- -0- -0- 25,922 -0- 25,922 25,922
Dividends paid -0- -0- -0- -0- (300) -0- -0- (300)
Exercise of options -0- 693 2,796 -0- -0- -0- -0- 3,489
Issue shares - Employee Stock
Purchase Plan -0- 122 417 -0- -0- -0- -0- 539
Tax effect of exercise of stock
options -0- -0- 1,427 -0- -0- -0- -0- 1,427
Stock repurchases -0- (3,439) (36,080) -0- -0- -0- -0- (39,519)
Other (36) 12 129 -0- -0- -0- -0- 105
---------
Comprehensive Income $ 25,922
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE JANUARY 29, 2000 $ 7,882 $21,715 $ 94,784 $(17,857) $ 1,718 $ -0- $ 108,242
===================================================================================================================================
Net earnings -0- -0- -0- -0- 5,961 -0- 5,961 5,961
Dividends paid -0- -0- -0- -0- (75) -0- -0- (75)
Exercise of options -0- 563 2,486 -0- -0- -0- -0- 3,049
Tax effect of exercise of stock
options -0- -0- 851 -0- -0- -0- -0- 851
Stock repurchases -0- (331) (3,397) -0- -0- -0- -0- (3,728)
Other (7) 9 30 -0- -0- -0- -0- 32
---------
Comprehensive Income $ 5,961
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE APRIL 29, 2000 $ 7,875 $21,956 $ 94,754 $(17,857) $ 7,604 $ -0- $ 114,332
===================================================================================================================================
</TABLE>
The accompanying Notes are an integral part of these Consolidated 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 February 3, 2001 ("Fiscal 2001") and of the fiscal year ended
January 29, 2000 ("Fiscal 2000"). 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 April 29, 2000 of 724 Jarman, Journeys, Johnston &
Murphy, Underground Station, Stone & Co. and Nautica retail footwear stores and
leased departments. The Company has agreed to sell its Volunteer Leather
business. The transaction is expected to be concluded in the second quarter of
Fiscal 2001. Because of the acquisition of Mercantile by Dillards Inc., the
Company ended its operation of the Jarman Leased departments in Fiscal 2000. The
Company had 78 Jarman Leased departments at January 30, 1999. The Company
transferred the remaining Jarman Leased departments to Dillards Inc. and Saks
Inc. during the first quarter ended May 1, 1999. The Jarman Leased departments
business contributed sales of approximately $1.2 million and an operating loss
of $(0.3) million for the first quarter in Fiscal 2000.
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 29, 2000 and April 29,
2000, are short-term investments of $47.1 million and $37.4 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:
Buildings and building equipment 20-45 years
Machinery, furniture and fixtures 3-15 years
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 29,
2000 and April 29, 2000, the Company had approximately $30.1 million and $29.2
million, respectively, of such contracts outstanding. Forward exchange contracts
have an average term of approximately four months. The loss from spot rates at
January 29, 2000 and April 29, 2000 under these contracts was $2.5 million and
$3.8 million, respectively. 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.
REVENUE RECOGNITION
Retail sales are recorded net of actual returns, and exclude all taxes, while
wholesale revenue is recorded net of estimated returns when the related goods
have been shipped and legal title has passed to the customer.
8
<PAGE> 9
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
--------------------------------------------------------------------------------
PREOPENING COSTS
Costs associated with the opening of new stores are expensed as incurred.
ADVERTISING COSTS
Advertising costs are predominantly expensed as incurred. Advertising costs were
$5.3 million and $5.1 million for the first quarter of Fiscal 2001 and 2000,
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 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.
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 6).
COMPREHENSIVE INCOME
The Statement of Financial Accounting Standards (SFAS) 130, "Reporting
Comprehensive Income" requires, among other things, the Company's minimum
pension liability adjustment to be included in other comprehensive income.
BUSINESS SEGMENTS
The Statement of Financial Accounting Standards (SFAS) 131, "Disclosures about
Segments of an Enterprise and Related Information" requires that companies
disclose "operating segments" based on the way management disaggregates the
company for making internal operating decisions. (see Note 8).
9
<PAGE> 10
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 2
<TABLE>
<CAPTION>
ACCOUNTS RECEIVABLE
----------------------------------------------------
APRIL 29, JANUARY 29,
IN THOUSANDS 2000 2000
----------------------------------------------------
<S> <C> <C>
Trade accounts receivable $ 30,755 $ 25,125
Miscellaneous receivables 1,466 1,679
----------------------------------------------------
Total receivables 32,221 26,804
Allowance for bad debts (1,018) (926)
Other allowances (2,558) (2,261)
----------------------------------------------------
NET ACCOUNTS RECEIVABLE $ 28,645 $ 23,617
====================================================
</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 more than 13% of the Company's trade receivables
balance as of April 29, 2000 and no other customer accounted for more than 9% of
the Company's trade receivables balance as of April 29, 2000.
NOTE 3
<TABLE>
<CAPTION>
INVENTORIES
--------------------------------------------
APRIL 29, JANUARY 29,
IN THOUSANDS 2000 2000
--------------------------------------------
<S> <C> <C>
Raw materials $ 3,426 $ 3,098
Work in process 2,433 2,146
Finished goods 21,083 31,513
Retail merchandise 86,211 73,058
--------------------------------------------
TOTAL INVENTORIES $113,153 $109,815
============================================
</TABLE>
10
<PAGE> 11
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 4
<TABLE>
<CAPTION>
PLANT, EQUIPMENT AND CAPITAL LEASES, NET
-------------------------------------------------------------------------
APRIL 29, JANUARY 29,
IN THOUSANDS 2000 2000
-------------------------------------------------------------------------
<S> <C> <C>
Plant and equipment:
Land $ 302 $ 302
Buildings and building equipment 2,726 2,726
Machinery, furniture and fixtures 49,280 50,345
Construction in progress 9,087 7,116
Improvements to leased property 61,700 58,962
Capital leases:
Buildings 305 305
-------------------------------------------------------------------------
Plant, equipment and capital leases, at cost 123,400 119,756
Accumulated depreciation and amortization:
Plant and equipment (48,701) (50,794)
Capital leases (303) (301)
-------------------------------------------------------------------------
NET PLANT, EQUIPMENT AND CAPITAL LEASES $ 74,396 $ 68,661
=========================================================================
</TABLE>
11
<PAGE> 12
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 5
PROVISION FOR DISCONTINUED OPERATIONS AND RESTRUCTURING RESERVES
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROVISION FOR DISCONTINUED OPERATIONS
-------------------------------------------------------------
EMPLOYEE
RELATED
IN THOUSANDS COSTS* TOTAL
-------------------------------------------------------------
<S> <C> <C>
Balance January 29, 2000 $ 8,181 $ 8,181
Charges and adjustments, net (519) (519)
-------------------------------------------------------------
Balance April 29, 2000 7,662 7,662
Current portion 2,139 2,139
-------------------------------------------------------------
TOTAL NONCURRENT PROVISION FOR
DISCONTINUED OPERATIONS $ 5,523 $ 5,523
=============================================================
</TABLE>
* Union pension withdrawal liability
<TABLE>
<CAPTION>
RESTRUCTURING RESERVES
----------------------------------------------------------------------------------------
EMPLOYEE FACILITY
RELATED SHUTDOWN
IN THOUSANDS COSTS COSTS OTHER TOTAL
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance January 29, 2000 $ 64 $ 436 $ 527 $ 1,027
Charges and adjustments, net -0- (67) (8) (75)
----------------------------------------------------------------------------------------
Balance April 29, 2000 64 369 519 952
Current portion (included in accounts
payable and accrued liabilities) 64 291 519 874
----------------------------------------------------------------------------------------
TOTAL NONCURRENT RESTRUCTURING RESERVES
(INCLUDED IN OTHER LONG-TERM LIABILITIES) $ -0- $ 78 $ -0- $ 78
========================================================================================
</TABLE>
12
<PAGE> 13
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 6
<TABLE>
<CAPTION>
EARNINGS PER SHARE
------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
APRIL 29, 2000 MAY 1, 1999
-------------------------------------- --------------------------------------
(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 $5,961 $4,067
Less: Preferred stock dividends (75) (75)
------------------------------------------------------------------------------------------------------------------------
BASIC EPS
Income available to
common shareholders 5,886 21,587 $.27 3,992 23,594 $.17
==== ====
EFFECT OF DILUTIVE SECURITIES
Options 416 -0- 962
5 1/2% convertible subordinated notes 947 4,918 -0-
Employees' preferred stock(1) 72 73
------------------------------------------------------------------------------------------------------------------------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $6,833 26,993 $.25 $3,992 24,629 $.16
========================================================================================================================
</TABLE>
(1) 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 weighted shares outstanding reflects the effect of the stock buy back
program of up to 6.8 million shares announced by the Company in Fiscal 1999,
2000 and 2001. The Company has repurchased 6.1 million shares as of April 29,
2000.
13
<PAGE> 14
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 7
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
remediation 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
$2.2 million to $2.6 million, including certain enhancements to the program
recommended by the Company's environmental consultants in the fourth quarter of
Fiscal 2000. 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.
14
<PAGE> 15
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 7
LEGAL PROCEEDINGS, CONTINUED
--------------------------------------------------------------------------------
Whitehall Environmental Sampling
Pursuant to a work plan approved by the Michigan Department of Environmental
Quality ("MDEQ") the Company 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. On June 29,
1999, the Company submitted a final remedial action plan (the "Plan") for the
site to MDEQ. The Plan proposes no direct remedial action with respect to soils
at the site, which are in compliance with applicable regulatory standards, or
lake sediments, which the Company believes do not pose a threat to human health
or the environment and do not violate any applicable regulatory standard. The
Plan includes the filing of certain restrictive covenants encumbering the
tannery property to prevent activities disturbing the lake sediments and uses of
the property inconsistent with the applicable regulatory standards. The Company,
with the approval of MDEQ, previously installed horizontal wells to capture
groundwater from a portion of the site and treat it by air sparging. The Plan
proposes continued operation of this system for an indefinite period and
monitoring of groundwater samples to ensure that the system is functioning as
intended. The Plan is subject to MDEQ approval. In December 1999, MDEQ responded
to the Plan with a request for further information.
On June 30, 1999, the City of Whitehall filed an action against the Company in
the circuit court for the City of Muskegon alleging that the Company's and its
predecessors' past wastewater management practices have adversely affected the
environment, and seeking injunctive relief under Parts 17 and 201 of the
Michigan Natural Resources Environmental Protection Act ("MNREPA") to require
the Company to correct the alleged pollution. Further, the City alleges
violations of City ordinances prohibiting blight and litter, and that the
Whitehall Volunteer Leather plant constitutes a public nuisance. The Company
filed an answer denying the material allegations of the complaint and asserting
affirmative defenses and counterclaims against the City. The Company also moved
to join the State of Michigan as a party to the action, since it has primary
responsibility for administration of the environmental statutes underlying most
of the City's claims. The State moved to dismiss the Company's action against it
and to intervene in the case on a limited basis, seeking declaratory and
injunctive relief regarding the restrictive covenants on the property, the
State's jurisdiction under MNREPA Part 201 and its right of access to the
property. On May 5, 2000, the court dismissed the Company's action against the
State; the cross actions between the City and the Company remain.
15
<PAGE> 16
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 7
LEGAL PROCEEDINGS, CONTINUED
--------------------------------------------------------------------------------
If the proposed Plan is approved and the litigation's outcome does not require
additional remediation of the site, the Company does not expect remediation to
have a material impact on its financial condition or results of operations.
However, there can be no assurance that the Plan will be approved as submitted,
and the Company is unable to predict whether any further remediation that may
ultimately be required will have a material effect on its financial condition or
results of operations.
Whitehall Accident
On June 4, 1999, a truck driver working under contact with 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 Michigan agency has issued six citations alleging regulatory infractions
identified in the course of a general compliance review following the accident.
Proposed monetary penalties associated with the citations total $15,100. The
Company is contesting the citations. On March 14, 2000, the estate of the
deceased truck driver brought an action against the Company in Michigan state
court alleging that the Company's negligent acts and omissions caused his death
and seeking unspecified damages. The Company is currently unable to predict the
extent of its liability, if any, in connection with the accident and how
liability, if found, would be allocated among other potential defendants,
including the chemical vendor and the common carrier, and whether such
liability, if any, would have a material effect on its financial condition or
results of operations. The Company's insurance carrier is defending the Company
in the action, subject to a standard reservation of rights to deny coverage.
Threatened Contribution Claim
The Company has been advised by the current owner of an adhesives manufacturing
business formerly owned by the Company that the owner has been named a
third-party defendant in a suit brought under CERCLA relating to an Alabama
solvent recycling facility allegedly used by the business. According to the
owner, it would in turn seek contribution from the Company against any portion
of its liability arising out of the Company's operation of the business prior to
its 1986 divestiture. The current owner has advised the Company that available
information on volumes of contaminants at the site indicates that the entire
share of liability related to the adhesives business should be minimus. Based
solely on this information, and without having undertaken any verification of
it, the Company does not currently expect this threatened claim to have a
material adverse effect on its financial condition or results of operations.
16
<PAGE> 17
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8
BUSINESS SEGMENT INFORMATION
--------------------------------------------------------------------------------
The Company currently operates five reportable business segments (not including
corporate): Journeys; Jarman, comprised of the Jarman, Underground Station and
Stone & Co. retail footwear chains; Johnston & Murphy, comprised of Johnston &
Murphy retail stores and wholesale distribution; Licensed Brands, comprised of
Dockers and Nautica Footwear; and Leather. The Company operated in Fiscal 2000
the Other Retail segment, comprised of General Shoe Warehouse and the Jarman
Leased departments, both of which were closed in Fiscal 2000. 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 Company has agreed to sell its Volunteer Leather business.
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 the way management organizes the
segments in order to make operating decisions and assess performance along types
of products sold. Journeys and Jarman sells primarily branded products from
other companies while Johnston & Murphy and Licensed Brands sells primarily 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, interest expense, interest income, and other charges. Other
includes severance, litigation and environmental charges.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JOHNSTON LICENSED
APRIL 29, 2000 JOURNEYS JARMAN & MURPHY BRANDS LEATHER CORPORATE CONSOLIDATED
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $58,017 $21,020 $ 44,159 $ 23,859 $ 5,626 $ -0- $ 152,681
Intercompany sales -0- -0- (73) (968) (641) -0- (1,682)
---------------------------------------------------------------------------------------------------------------
NET SALES TO EXTERNAL CUSTOMERS 58,017 21,020 44,086 22,891 4,985 -0- 150,999
---------------------------------------------------------------------------------------------------------------
Operating income (loss) 6,512 743 5,673 1,633 (279) (2,519) 11,763
Interest expense -0- -0- -0- -0- -0- 2,101 2,101
Interest income -0- -0- -0- -0- -0- 419 419
Other -0- -0- -0- -0- -0- (270) (270)
---------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 6,512 743 5,673 1,633 (279) (4,471) 9,811
---------------------------------------------------------------------------------------------------------------
Total assets 75,680 29,880 64,636 26,449 9,393 96,354 302,392
Depreciation 1,095 469 692 31 110 642 3,039
Capital expenditures 4,130 2,493 1,598 17 -0- 712 8,950
</TABLE>
17
<PAGE> 18
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8
<TABLE>
<CAPTION>
BUSINESS SEGMENT INFORMATION, CONTINUED
-----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED OTHER JOHNSTON LICENSED
MAY 1, 1999 JOURNEYS JARMAN RETAIL & MURPHY BRANDS LEATHER CORPORATE CONSOLIDATED
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $39,450 $ 18,574 $ 3,229 $ 40,326 $ 23,221 $ 5,839 $ -0- $ 130,639
Intercompany sales -0- -0- -0- (5) (1,431) (547) -0- (1,983)
-----------------------------------------------------------------------------------------------------------------------------------
NET SALES TO EXTERNAL CUSTOMERS 39,450 18,574 3,229 40,321 21,790 5,292 -0- 128,656
-----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 3,688 27 (194) 5,290 1,535 200 (2,273) 8,273
Interest expense -0- -0- -0- -0- -0- -0- 1,996 1,996
Interest income -0- -0- -0- -0- -0- -0- 661 661
Other -0- -0- -0- -0- -0- -0- (127) (127)
-----------------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 3,688 27 (194) 5,290 1,535 200 (3,735) 6,811
-----------------------------------------------------------------------------------------------------------------------------------
Total assets 56,841 24,653 3,284 57,543 26,112 8,836 109,469 286,738
Depreciation 737 431 61 661 57 115 378 2,440
Capital expenditures 2,818 (66) 95 1,098 22 9 769 4,745
</TABLE>
NOTE 9
SUBSEQUENT EVENT
--------------------------------------------------------------------------------
The Company has agreed to sell its Volunteer Leather business to S. B. Foot
Tanning Company of Red Wing, Minnesota. The transaction, which is expected to be
concluded during the second quarter, will result in an after tax charge to
second quarter net earnings estimated in the range of $2 million to $3 million.
18
<PAGE> 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 this 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 at retail or wholesale, changes in buying patterns by significant
wholesale customers, changes in business strategies by the Company's
competitors, the Company's ability to open, staff and support additional retail
stores on schedule and at acceptable expense levels, the ability to conclude the
Volunteer Leather divestiture as anticipated and the outcome of litigation and
environmental matters, including those discussed in Note 7 to the Consolidated
Financial Statements. 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
Volunteer Leather Divestiture
The Company has agreed to sell its Volunteer Leather business to S. B. Foot
Tanning Company of Red Wing, Minnesota. The transaction, which is expected to be
concluded during the second quarter, will result in an after tax charge to
second quarter net earnings estimated in the range of $2 million to $3 million.
Net cash flow from the transaction is expected to be positive in the range of $5
million to $6 million.
Share Repurchase Program
In total, the Company's board of directors has authorized the repurchase of 6.8
million shares of the Company's common stock since the third quarter of Fiscal
1999. This total includes the authorization in February of 2000 of an additional
1.0 million shares. The purchases may be made on the open market or in privately
negotiated transactions. As of April 29, 2000, the Company had repurchased 6.1
million shares at a cost of $55.5 million.
Jarman Leased Departments 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 Leased departments division. Because of the 1998 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. and Saks Inc. during the first quarter ended May 1, 1999. The
Jarman Leased departments business contributed sales of $1.2 million and an
operating loss of ($0.3) million for the first quarter of Fiscal 2000.
19
<PAGE> 20
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
--------------------------------------------------------------------------------
Business Segments
The Company currently operates five reportable business segments (not including
corporate): Journeys; Jarman, comprised of the Jarman, Underground Station and
Stone & Co. retail footwear chains; Johnston & Murphy, comprised of Johnston &
Murphy retail stores and wholesale distribution; Licensed Brands, comprised of
Dockers and Nautica Footwear; and Leather. The Company operated in Fiscal 2000
the Other Retail segment, comprised of General Shoe Warehouse and the Jarman
Leased departments, both of which were closed in Fiscal 2000. The Company has
agreed to sell its Volunteer Leather business.
RESULTS OF OPERATIONS - FIRST QUARTER FISCAL 2001 COMPARED TO FISCAL 2000
The Company's net sales in the first quarter ended April 29, 2000 increased
17.4% to $151.0 million from $128.7 million in the first quarter ended May 1,
1999. Excluding net sales attributable to the divested Other Retail business
from last year, the Company's net sales increased 20.4% to $151.0 million in the
first quarter ended April 29, 2000 from $125.4 million in the same period last
year. Gross margin increased 17.5% to $67.6 million in the first quarter this
year from $57.6 million in the same period last year and increased as a
percentage of net sales from 44.7% to 44.8%. Selling and administrative expenses
in the first quarter this year increased 13.6% from the first quarter last year
but decreased as a percentage of net sales from 38.4% to 37.2%. Selling and
administrative expenses were reduced $0.5 million in the first quarter this year
for a reduction in pension expense. Explanations of the changes in results of
operations are provided by business segment in discussions following this
introductory paragraph.
Pretax earnings for the first quarter ended April 29, 2000 were $9.8 million
compared to $6.8 million for the first quarter ended May 1, 1999.
Net earnings for the first quarter ended April 29, 2000 were $6.0 million ($.25
diluted earnings per share) compared to $4.1 million ($.16 diluted earnings per
share) for the first quarter ended May 1, 1999.
Journeys
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
April 29, May 1, %
2000 1999 Change
--------- ------ -------
(dollars in thousands)
<S> <C> <C> <C>
Net sales ......... $58,017 $39,450 47.1%
Operating income... $ 6,512 $ 3,688 76.6%
Operating margin... 11.2% 9.3%
</TABLE>
20
<PAGE> 21
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
--------------------------------------------------------------------------------
Reflecting both a 28% increase in average Journeys stores operated (i.e., the
sum of the number of stores open on the first day of the fiscal quarter and the
last day of each fiscal month during the quarter divided by four) and an
exceptionally high 21% increase in comparable store sales, net sales from
Journeys increased 47.1% for the first quarter ended April 29, 2000 compared to
the same period last year. The average price per pair of shoes decreased 2% in
the first quarter of Fiscal 2001 while unit sales increased 50% during the same
period. The store count for Journeys was 351 stores at the end of the first
quarter of Fiscal 2001 compared to 270 stores at the end of the first quarter
last year.
Journeys operating income for the first quarter ended April 29, 2000 was up
76.6% to $6.5 million compared to $3.7 million for the first quarter ended May
1, 1999. The increase was due to increased sales both from store openings and a
comparable store sales increase and decreased expenses as a percentage of sales.
Jarman
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
April 29, May 1, %
2000 1999 Change
--------- ------ -------
(dollars in thousands)
<S> <C> <C> <C>
Net sales ......... $21,020 $18,574 13.2%
Operating income... $ 743 $ 27 NA
Operating margin... 3.5% 0.1%
</TABLE>
Primarily due to a 9% increase in comparable store sales, net sales from Jarman
increased 13.2% for the first quarter ended April 29, 2000 compared to the same
period past year. The increase in sales was driven primarily by Underground
Station stores. The average price per pair of shoes increased 8% in the first
quarter of Fiscal 2001 and unit sales increased 1% during the same period.
Jarman operated 177 stores at the end of the first quarter of Fiscal 2001,
including 25 Underground Station stores and seven Stone & Co. stores. It had
operated 164 stores at the end of the first quarter last year, including 17
Underground Station stores.
Jarman operating income for the first quarter ended April 29, 2000 was $0.7
million compared to $27,000 for the first quarter ended May 1, 1999 and
increased as a percent of sales to 3.5% from 0.1% for the same period last year.
The increase was due to increased sales, increased gross margin in dollars and
as a percentage of sales due primarily to lower markdowns and decreased expenses
as a percentage of sales.
21
<PAGE> 22
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
--------------------------------------------------------------------------------
Johnston & Murphy
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
April 29, May 1, %
2000 1999 Change
--------- ------ -------
(dollars in thousands)
<S> <C> <C> <C>
Net sales ......... $44,086 $40,321 9.3%
Operating income... $ 5,673 $ 5,290 7.2%
Operating margin... 12.9% 13.1%
</TABLE>
Johnston & Murphy net sales increased 9.3% to $44.1 million for the first
quarter ended April 29, 2000 from $40.3 million for the first quarter ended May
1, 1999, reflecting primarily a 5% increase in comparable store sales for
Johnston & Murphy retail operations, which accounted for 62% of Johnston &
Murphy segment sales in the first quarter this year and 60% of Johnston & Murphy
segment sales in the first quarter last year and a 7% increase in average
Johnston & Murphy retail stores operated. There was a 4% increase in Johnston &
Murphy wholesale sales. The store count for Johnston & Murphy retail operations
at the end of the first quarter of Fiscal 2001 included 148 Johnston & Murphy
stores and factory stores compared to 136 Johnston & Murphy stores and factory
stores at the end of the first quarter of Fiscal 2000. The average price per
pair of shoes for Johnston & Murphy retail decreased 1% in the first quarter
this year while unit sales increased 12% during the same period. Unit sales for
the Johnston & Murphy wholesale business increased 10% in the first quarter of
Fiscal 2001, while the average price per pair of shoes decreased 5% for the same
period, reflecting increased promotional activities and mix changes.
Johnston & Murphy operating income for the first quarter ended April 29, 2000
increased 7.2% from $5.3 million for the first quarter ended May 1, 1999 to $5.7
million, primarily due to increased sales.
Licensed Brands
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
April 29, May 1, %
2000 1999 Change
--------- ------ -------
(dollars in thousands)
<S> <C> <C> <C>
Net sales ...... $22,891 $21,790 5.1%
Operating income $ 1,633 $ 1,535 6.4%
Operating margin 7.1% 7.0%
</TABLE>
22
<PAGE> 23
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
--------------------------------------------------------------------------------
Licensed Brands net sales increased 5.1% to $22.9 million for the first quarter
ended April 29, 2000 from $21.8 million for the first quarter ended May 1, 1999,
reflecting primarily a 4% increase in Licensed Brands wholesale sales. Licensed
Brands' net sales also included the net sales of unmanned leased shoe
departments in Nautica retail outlets operated by an affiliate of the licensor
of the Nautica trademark. There were 48 Nautica leased departments at the end of
the first quarter of Fiscal 2001, compared to 36 Nautica leased departments at
the end of the first quarter of Fiscal 2000. Unit sales for the Licensed Brands
wholesale businesses increased 5% for the first quarter this year, while the
average price per pair of shoes decreased 5% for the same period, reflecting
increased promotional activities.
Licensed Brands operating income for the first quarter ended April 29, 2000
increased 6.4% from $1.5 million for the first quarter ended May 1, 1999 to $1.6
million, primarily due to increased sales and decreased expenses as a percentage
of sales.
Other Retail
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
April 29, May 1, %
2000 1999 Change
--------- ------ -------
(dollars in thousands)
<S> <C> <C> <C>
Net sales ...... $ -0- $ 3,229 (100.0%)
Operating loss . $ -0- $ (194) NA
Operating margin NA (6.0%)
</TABLE>
The Jarman Leased departments business was closed in the first quarter of Fiscal
2000 and the remaining five Other Retail stores, which were General Shoe
Warehouse stores, were transferred to the Jarman and Johnston & Murphy operating
segments during the first quarter of Fiscal 2001. The Company will no longer
report results from the Other Retail segment.
Leather
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
April 29, May 1, %
2000 1999 Change
--------- ------ -------
(dollars in thousands)
<S> <C> <C> <C>
Net sales ................ $ 4,985 $5,292 (5.8%)
Operating income (loss)... $ (279) $ 200 NA
Operating margin ......... (5.6%) 3.8%
</TABLE>
23
<PAGE> 24
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
--------------------------------------------------------------------------------
Leather net sales decreased 5.8% to $5.0 million for the first quarter ended
April 29, 2000 from $5.3 million for the first quarter ended May 1, 1999,
primarily due to decreased orders from civilian footwear suppliers.
Leather operating income for the first quarter ended April 29, 2000 decreased
from $0.2 million for the first quarter ended May 1, 1999 to a loss of $0.3
million, primarily due to decreased sales and decreased gross margin as a
percentage of sales reflecting margin pressures from increased raw material
prices and competitive pressures on pricing. See "Volunteer Leather Divestiture"
under "Significant Developments" for more information on the Leather segment.
Corporate, Interest Expenses and Other Charges
Corporate and other expenses for the first quarter ended April 29, 2000 were
$2.5 million compared to $2.3 million for the first quarter ended May 1, 1999
(exclusive of other charges of $0.3 million, primarily litigation and severance
charges, in the first quarter this year and other charges of $0.1 million,
primarily litigation and severance charges, in the first quarter last year), an
increase of 10.8%. The increase in corporate expenses in the first quarter this
year is attributable primarily to increased incentive compensation accruals,
related to improved performance.
Interest expense increased 5.3% from $2.0 million in the first quarter ended May
1, 1999 to $2.1 million for the first quarter ended April 29, 2000, primarily
due to increased bank activity fees due to the increase in the number of
individual bank accounts because of increased new store openings. Interest
income decreased 37% from $0.7 million in the first quarter last year to $0.4
million in the first quarter this year due to decreases in average short-term
investments. There were no borrowings under the Company's revolving credit
facility during the three months ended April 29, 2000 or May 1, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain financial data at the dates indicated.
<TABLE>
<CAPTION>
Apr. 29, May 1,
2000 1999
-------- ------
(dollars in millions)
<S> <C> <C>
Cash and short-term investments ............ $ 45.2 $ 55.7
Working capital ............................ $ 138.0 $ 148.2
Long-term debt (includes current maturities) $ 103.5 $ 103.5
Current ratio .............................. 2.9x 3.5x
</TABLE>
24
<PAGE> 25
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
--------------------------------------------------------------------------------
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 used in operating activities was $3.9 million in the first three months of
Fiscal 2001 compared to $2.1 million of cash provided by operating activities in
the first three months of Fiscal 2000. The $6.0 million decrease in cash flow
from operating activities reflects primarily increased accounts receivable due
to increased wholesale sales and increased inventory due to increased new store
openings. Contributing to the inventory change was an increase in net stores and
leased departments of 45 this year compared to a net decline of 52 last year.
The $3.3 million increase in inventories at April 29, 2000 from January 29, 2000
levels reflects increases in retail inventory to support the net increase of 45
stores in the first quarter this year.
Accounts receivable at April 29, 2000 increased $5.1 million compared to January
29, 2000 primarily due to increased wholesale sales and lengthening of days
sales outstanding due to changes in promotional activities.
Cash provided (or used) due to changes in accounts payable and accrued
liabilities are as follows:
<TABLE>
<CAPTION>
Three Months Ended
------------------------
Apr. 29, May 1,
2000 1999
-------- ------
(in thousands)
<S> <C> <C>
Accounts payable ..... $ 1,639 $ (6,831)
Accrued liabilities... (5,955) (6,763)
---------- -----------
$ (4,316) $(13,594)
========== ===========
</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
payment of incentive compensation accruals.
There were no revolving credit borrowings during the first three months ended
April 29, 2000 and May 1, 1999, as cash generated from operations and cash on
hand funded seasonal working capital requirements and capital expenditures.
25
<PAGE> 26
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
--------------------------------------------------------------------------------
Capital Expenditures
Total capital expenditures in Fiscal 2001 are expected to be approximately $32.9
million. These include expected retail expenditures of $28.6 million to open
approximately 100 Journeys stores, 15 Johnston & Murphy stores and factory
stores, 51 Jarman Retail stores which includes approximately 31 Underground
Station stores and three Stone & Co. stores and to complete 34 major store
renovations. Capital expenditures for wholesale and manufacturing operations and
other purposes are expected to be approximately $4.3 million, including
approximately $2.0 million for new systems to improve customer service and
support the Company's growth.
Year 2000
The Company completed its Year 2000 software program conversions and compliance
programs during the fourth quarter of Fiscal 2000. The total cost of upgrading
most of the Company's major operating systems, including the Year 2000 project
for Fiscal Years 1998 through 2000, was $19.1 million. Of the total project
cost, approximately $11.2 million is attributable to the purchase of new
software and hardware which has been capitalized. The remaining $7.9 million has
been expensed, including costs of $1.8 million for Fiscal 2000. Subsequent to
December 31, 1999, the Company has not experienced any material Year 2000
problems either internally or from outside sources. The Company has no reason to
believe that Year 2000 problems will materially affect it in the future.
However, since it may take several additional months before it is known whether
the Company or third party suppliers, vendors or customers may have had Year
2000 problems, no assurances can be given that the Company will not experience
losses or disruptions due to Year 2000 computer-related problems. The Company
will continue to monitor its operations for any Year 2000 problems.
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 7 to the
Company's Consolidated Financial Statements. The Company has made provisions for
certain of these contingencies, including approximately $100,000 reflected in
Fiscal 2001, $472,000 reflected in Fiscal 2000, $402,000 reflected in Fiscal
1999 and $250,000 reflected in Fiscal 1998. The Company monitors these matters
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
and circumstances 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.
26
<PAGE> 27
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
--------------------------------------------------------------------------------
Future Capital Needs
The Company expects that cash on hand and cash provided by operations will be
sufficient to fund all of its capital expenditures through Fiscal 2001, although
the Company may borrow from time to time to support seasonal working capital
requirements. The approximately $3.0 million of costs associated with the prior
restructurings and discontinued operations that are expected to be incurred
during the next twelve months are also expected to be funded from cash on hand.
In February of 2000, the Company authorized the additional repurchase, from time
to time, of up to 1.0 million shares of the Company's common stock. These
purchases will be funded from available cash. The Company has repurchased a
total of 6.1 million shares at a cost of $55.5 million from all authorizations
for Fiscal 1999, Fiscal 2000 and Fiscal 2001.
There were $10.8 million of letters of credit outstanding under the revolving
credit agreement at April 29, 2000, leaving availability under the revolving
credit agreement of $54.2 million.
The Company's revolving credit agreement restricts the payment of dividends and
other payments with respect to capital stock. At April 29, 2000, $30.8 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.
FINANCIAL MARKET RISK
The following discusses the Company's exposure to financial market risk related
to changes in interest rates and foreign currency exchange rates.
Outstanding Debt of the Company - The Company's outstanding long-term debt of
$103.5 million 5 1/2% convertible subordinated notes due April 2005 bears
interest at a fixed rate. Accordingly, there would be no immediate impact on the
Company's interest expense due to fluctuations in market interest rates.
Cash and Short-Term Investments - The Company's cash and short-term investment
balances are invested in financial instruments with original maturities of three
months or less. The Company does not have significant exposure to changing
interest rates on invested cash at April 29, 2000. As a result, the interest
rate market risk implicit in these investments at April 29, 2000, if any, is
low.
Foreign Currency Exchange Rate Risk - Most purchases by the Company from foreign
sources are denominated in U.S. dollars. To the extent that import transactions
are denominated in other currencies, it is the Company's practice to hedge its
risks through the purchase of forward foreign exchange contracts. The loss from
such transaction was $3.8 million at April 29, 2000. At April 29, 2000, the
Company had $29.2 million of foreign exchange contracts for Italian Lira and
Euro. As of April 29, 2000, a 10% adverse change in foreign currency exchange
rates from market rates would decrease the fair value of the contracts by
approximately $6.3 million.
27
<PAGE> 28
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
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Summary - Based on the Company's overall market interest rate and foreign
currency rate exposure at April 29, 2000, the Company believes that the effect,
if any, of reasonably possible near-term changes in interest rates or
fluctuations in foreign currency exchange rates on the Company's consolidated
financial position, result of operations or cash flows for Fiscal 2001 would not
be material.
The Company does not purchase or hold any derivative financial instruments for
trading purposes.
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 SFAS No. 137 in
July 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, the impact of adopting the provisions of
this statement is not currently estimable and will depend on the financial
position of the Company and the nature and purpose of the derivative instruments
in use at that time.
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PART II - OTHER INFORMATION
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company incorporates by reference the information regarding market risk to
appear under the heading "Financial Market Risk" in Management's Discussion and
Analysis of Financial Condition and Results of Operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
(27) Financial Data Schedule (for SEC use only)
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REPORTS ON FORM 8-K
None
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SIGNATURE
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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 13, 2000
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