1
GENESCO
[LOGO]
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(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
October 31, 1994
[ ] Transition Report Pursuant To
Section 13 or 15(d) of the
Securities Exchange Act of 1934
Securities and Exchange Commission
Washington, D.C. 20549
Commission File No. 1-3083
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GENESCO INC.
A Tennessee Corporation
I.R.S. No. 62-0211340
Genesco Park
1415 Murfreesboro Road
Nashville, Tennessee 37217-2895
Telephone 615/367-7000
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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 December 9, 1994 - 24,343,663
2
INDEX
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PAGE
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Part 1 - Financial Information
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Consolidated Balance Sheet - October 31, 1994, January 31, 1994 and
October 31, 1993 3
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Consolidated Earnings - Three Months and Nine Months Ended
October 31, 1994 and 1993 4
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Consolidated Cash Flows - Three Months and Nine Months Ended
October 31, 1994 and 1993 5
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Consolidated Shareholders' Equity - Year Ended
January 31, 1994 and Nine Months Ended October 31, 1994 6
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Notes to Consolidated Financial Statements 7
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Management's Discussion and Analysis of Financial Condition and
Results of Operations 22
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Part II - Other Information 33
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Signature 35
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3
PART I - FINANCIAL INFORMATION
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Balance Sheet
In Thousands
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OCTOBER 31, JANUARY 31, OCTOBER 31,
1994 1994 1993
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ASSETS
CURRENT ASSETS
Cash and short-term investments $ 5,619 $ 3,625 $ 2,097
Accounts receivable 41,797 66,006 89,470
Inventories 98,721 155,120 176,218
Other current assets 4,848 5,839 9,897
Current assets of operations to be divested 72,911 -0- -0-
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Total current assets 223,896 230,590 277,682
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Plant, equipment and capital leases 28,502 42,909 49,330
Goodwill and other intangibles -0- 18,590 26,280
Other noncurrent assets 16,037 17,297 19,240
Noncurrent assets of operations to be
divested 19,298 -0- -0-
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TOTAL ASSETS $287,733 $309,386 $372,532
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LIABILITIES AND SHAREHOLDERS' EQUITY
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CURRENT LIABILITIES
Current payments on capital leases $ 2,413 $ 2,365 $ 2,179
Accounts payable and accrued liabilities 74,354 62,723 61,186
Provision for discontinued operations 24,898 5,408 -0-
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Total current liabilities 101,665 70,496 63,365
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Long-term debt 110,000 90,000 114,000
Capital leases 10,750 12,888 12,855
Other long-term liabilities 35,740 36,168 25,492
Provision for discontinued operations 22,700 1,111 -0-
Contingent liabilities - - -
SHAREHOLDERS' EQUITY:
Non-redeemable preferred stock 7,942 8,064 8,131
Common shareholders' equity:
Par value of issued shares 24,832 24,793 24,795
Additional paid-in capital 121,664 121,634 121,612
Retained earnings (deficit) (119,739) (23,241) 25,168
Minimum pension liability (9,964) (9,964) -0-
Treasury shares, at cost (17,857) (17,857) (17,857)
Foreign currency translation adjustments -0- (4,706) (5,029)
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Total shareholders' equity 6,878 98,723 156,820
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $287,733 $309,386 $372,532
===================================================================================================================
The accompanying Notes are an integral part of these Financial Statements.
4
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Earnings
In Thousands
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THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
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1994 1993 1994 1993
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Net sales $123,199 $123,689 $337,586 $347,968
Cost of sales 76,842 76,401 210,166 213,812
Selling and administrative expenses 43,524 46,033 123,836 130,763
Restructuring charge 22,114 -0- 22,114 -0-
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Earnings (loss) from operations before
other income and expenses (19,281) 1,255 (18,530) 3,393
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Other expenses (income):
Interest expense 3,207 3,019 9,106 8,100
Other expense (income), net 262 500 (250) 378
Gain on divestiture -0- -0- (4,900) (677)
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Total other expenses (income), net 3,469 3,519 3,956 7,801
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Loss before income taxes, discontinued
operations, extraordinary loss and
cumulative effect of change in
accounting principle (22,750) (2,264) (22,486) (4,408)
Income taxes 223 105 736 470
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Loss before discontinued operations,
extraordinary loss and cumulative
effect of change in accounting
principle (22,973) (2,369) (23,222) (4,878)
Discontinued operations:
Operating income (loss) (1,600) (715) (4,540) 1,508
Provision for future losses (68,587) -0- (68,587) -0-
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Loss before extraordinary loss and
cumulative effect of change in
accounting principle (93,160) (3,084) (96,349) (3,370)
Extraordinary loss from
early retirement of debt -0- -0- -0- (240)
Postretirement benefits* -0- -0- -0- (2,273)
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NET LOSS $(93,160) $ (3,084) $(96,349) $ (5,883)
================================================================================================================
Earnings (loss) per common share:
Before discontinued operations,
extraordinary loss and cumulative
effect of change in accounting
principle $ (.95) $ (.10) $ (.96) $ (.21)
Discontinued operations $ (2.88) $ (.03) $ (3.01) $ .06
Extraordinary loss $ .00 $ .00 $ .00 $ (.01)
Postretirement benefits* $ .00 $ .00 $ .00 $ (.09)
Net loss $ (3.83) $ (.13) $ (3.97) $ (.25)
==============================================================================================================
*Reflects the cumulative effect of changes in the method of accounting for
postretirement benefits due to the implementation of Statement of Financial
Accounting Standards No. 106 (see Note 1).
The accompanying Notes are an integral part of these Financial Statements.
5
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Cash Flows
In Thousands
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THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
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1994 1993 1994 1993
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OPERATIONS:
Net loss $(93,160) $ (3,084) $(96,349) $ (5,883)
Noncash charges to earnings:
Provision for discontinued operations 68,587 -0- 68,587 -0-
Restructuring charge 22,114 -0- 22,114 -0-
Depreciation and amortization 2,500 2,777 7,447 7,841
Provision for deferred income taxes 1,404 -0- 1,404 -0-
Gain on divestiture -0- -0- (4,900) (677)
Postretirement benefits -0- -0- -0- 2,273
Provision for losses on accounts receivable 7 397 1,262 924
Loss on retirement of debt -0- -0- -0- 240
Other (198) 956 400 1,299
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Net cash provided by (used in) operations before
working capital and other changes 1,254 1,046 (35) 6,017
Effect on cash of changes in working
capital and other assets and liabilities
net of effect of business acquisitions:
Accounts receivable (2,844) (2,340) (22,889) (18,652)
Inventories 2,447 1,053 4,054 (22,878)
Other current assets 819 (1,789) (570) (3,093)
Accounts payable and accrued liabilities 6,220 4,808 3,837 (5,771)
Other assets and liabilities 1,432 639 2,473 (490)
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Net cash provided by (used in) operations 9,328 3,417 (13,130) (44,867)
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INVESTING ACTIVITIES:
Capital expenditures (1,347) (2,446) (4,542) (5,846)
Business acquisition -0- (11,432) -0- (11,432)
Proceeds from disposal of plant and equipment 275 64 2,045 163
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Net cash used in investing activities (1,072) (13,814) (2,497) (17,115)
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FINANCING ACTIVITIES:
Long-term borrowings -0- -0- -0- 76,299
Net borrowings (repayments) under
revolving credit agreement (4,000) 12,000 20,000 17,000
Net change in short-term borrowings (3,095) (1,371) (69) -0-
Payments of long-term debt -0- -0- -0- (32,000)
Payments on capital leases (578) (616) (2,089) (1,544)
Exercise of options and warrants 23 679 29 7,873
Redemption of Mitre U.K. B shares -0- -0- -0- (5,000)
Deferred note expense -0- (550) -0- (3,109)
Dividends paid -0- (77) -0- (232)
Other (2) 3 (250) (25)
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Net cash provided by (used in) financing activities (7,652) 10,068 17,621 59,262
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NET CASH FLOW 604 (329) 1,994 (2,720)
Cash and short-term investments at
beginning of period 5,015 2,426 3,625 4,817
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CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 5,619 $ 2,097 $ 5,619 $ 2,097
========================================================================================================================
The accompanying Notes are an integral part of these Financial Statements.
6
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Shareholders' Equity
In Thousands
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FOREIGN MINIMUM TOTAL
TOTAL RETAINED CURRENCY PENSION SHARE-
PREFERRED COMMON PAID-IN EARNINGS TREASURY TRANSLATION LIABILITY HOLDERS'
STOCK STOCK CAPITAL (DEFICIT) STOCK ADJUSTMENTS ADJUSTMENT EQUITY
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Balance January 31, 1993 $ 8,305 $ 23,658 $114,706 $ 31,283 $(17,857) $ (5,044) $ -0- $155,051
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Exercise of options and warrants -0- 1,132 6,743 -0- -0- -0- -0- 7,875
Translation adjustments -0- -0- -0- -0- -0- 338 -0- 338
Net loss -0- -0- -0- (54,292) -0- -0- -0- (54,292)
Preferred dividends -0- -0- -0- (232) -0- -0- -0- (232)
Minimum pension liability adjustment -0- -0- -0- -0- -0- -0- (9,964) (9,964)
Other (241) 3 185 -0- -0- -0- -0- (53)
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Balance January 31, 1994 $ 8,064 $ 24,793 $121,634 $ (23,241) $(17,857) $ (4,706) $ (9,964) $ 98,723
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Exercise of options -0- 2 4 -0- -0- -0- -0- 6
Translation adjustments:
Year-to-date adjustments -0- -0- -0- -0- -0- 2,136 -0- 2,136
Realized in FY 1995 restructuring -0- -0- -0- -0- -0- 2,570 -0- 2,570
Net loss -0- -0- -0- (96,349) -0- -0- -0- (96,349)
Other (122) 37 26 (149) -0- -0- -0- (208)
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BALANCE OCTOBER 31, 1994 $ 7,942 $ 24,832 $121,664 $(119,739) $(17,857) $ -0- $ (9,964) $ 6,878
===========================================================================================================================
The accompanying Notes are an integral part of these Financial Statements.
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 31, 1995 ("Fiscal 1995") and of the fiscal year
ended January 31, 1994 ("Fiscal 1994"). The results of operations for any
interim period are not necessarily indicative of results for the full year.
The financial statements should be read in conjunction with the financial
statements and notes thereto included in the annual report on Form 10-K.
Certain reclassifications have been made to conform prior years' data to the
current presentation.
BASIS OF CONSOLIDATION
All subsidiaries are included in the consolidated financial statements. All
significant intercompany transactions and accounts have been eliminated.
CASH AND SHORT-TERM INVESTMENTS
There were no short-term investments at October 31, 1994 or January 31, 1994.
Short-term investments are highly-liquid debt instruments having an original
maturity of three months or less.
INVENTORIES
Inventories of wholesaling and manufacturing companies are stated at the lower
of cost or market, determined principally by the first-in, first-out method.
Retail inventories are determined by the retail method.
PLANT, EQUIPMENT AND CAPITAL LEASES
Plant, equipment and capital leases are recorded at cost and depreciated or
amortized over the estimated useful life of related assets. Depreciation and
amortization expense is computed principally by the straight-line method.
GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consist primarily of the excess of purchase
price over fair value of net assets acquired in acquisitions. Goodwill is
being amortized on a straight-line basis over 40 years. The Company
periodically assesses the realizability of intangible assets taking into
consideration such factors as expected cash flows and operating strategies.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign operations are translated at the exchange
rate on the balance sheet date. Income and expenses are translated at the
average exchange rates prevailing during the period. Unrealized translation
adjustments are reported as a separate component of shareholders' equity.
8
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
HEDGING CONTRACTS
In order to reduce exposure to foreign currency exchange rate fluctuations in
connection with inventory purchase commitments, the Company enters into foreign
currency forward exchange contracts. At October 31, 1994 and January 31, 1994,
the Company had approximately $8.4 million and $7.1 million, respectively, of
such contracts outstanding. Gains and losses arising from these contracts
offset gains and losses from the underlying hedged transactions. The Company
monitors the credit quality of the major national and regional financial
institutions with whom it enters into such contracts.
POSTRETIREMENT BENEFITS
Substantially all full-time employees are covered by pension plans. For its
defined benefit plan, the Company funds at least the minimum amount required by
the Employee Retirement Income Security Act. The Company expenses the
multiemployer plan contributions required to be funded under collective
bargaining agreements.
The Company implemented Statement of Financial Accounting Standards (SFAS) 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" in the
first quarter of Fiscal 1994. This statement requires accrual of
postretirement benefits such as life insurance and health care over the period
the employee provides services to the Company.
ENVIRONMENTAL COSTS
Environmental expenditures relating to current operations are expensed or
capitalized as appropriate. Expenditures relating to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable and the costs can be
reasonably estimated and are evaluated independently of any future claims for
recovery. Generally, the timing of these accruals coincides with completion of
a feasibility study or the Company's commitment to a formal plan of action.
INCOME TAXES
Income taxes are accounted for in accordance with SFAS 109, "Accounting for
Income Taxes". SFAS 109, which superseded SFAS 96, was adopted in the first
quarter of Fiscal 1994. SFAS 109 adoption had no effect on earnings and only
resulted in reclassifications of the deferred tax assets in the balance sheet.
Deferred income taxes are provided for the timing differences between reported
earnings and taxable income.
9
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 2
FISCAL 1995 RESTRUCTURING
In response to worsening trends in the Company's men's apparel business and in
response to a strategic review of its footwear operations, the Company's board
of directors, on November 3, 1994, approved a plan (the "1995 Restructuring")
designed to focus the Company on its core footwear businesses by selling or
liquidating four businesses, two of which constitute its entire men's apparel
segment.
The 1995 Restructuring provides for the following:
o Liquidation of the University Brands children shoes business,
o Sale of the Mitre Sports soccer business,
o Liquidation of The Greif Companies men's tailored clothing
business, and
o Sale of the GCO Apparel Corporation tailored clothing
manufacturing business.
The 1995 Restructuring also includes estimated costs of consolidating certain
facilities and effecting permanent work force reductions. Implementation of
the 1995 Restructuring is expected to be complete within 12 months. It is
anticipated that the cash proceeds to be received from implementation of the
1995 Restructuring will slightly exceed the cash costs thereof. Any excess
cash will be reinvested in the Company's ongoing businesses.
The total costs to implement the 1995 Restructuring (both cash and non-cash)
are expected to be $90.7 million, of which $22.1 million (the "1995
Restructuring Charge") relates to University Brands and Mitre and other costs
described below and $68.6 million (the "1995 Restructuring Provision") relates
to Greif and GCO Apparel, which constitute the entire men's apparel segment of
the Company's business, and is therefore treated for financial reporting
purposes as a provision for discontinued operations. No tax benefit is
currently available with respect to either the 1995 Restructuring Charge or the
1995 Restructuring Provision.
The 1995 Restructuring Charge includes $10.7 million in asset write-downs, $2.6
million of foreign currency translation adjustments realization and $8.8
million of other costs, of which $7.2 million are expected to be incurred in
the next 12 months. Other costs expected to be incurred beyond 12 months
include primarily facility shutdown costs and other contract liabilities and
are classified as long-term liabilities in the consolidated balance sheet.
The 1995 Restructuring Provision includes $27.5 million in asset write-downs
and $41.1 million of other costs, of which approximately $19.5 million are
expected to be incurred in the next 12 months. Other costs include primarily
union pension liability, employee severance arrangements, facility shutdown
costs and other contract liabilities. Other costs expected to be incurred
beyond 12 months, of which the most significant are union pension liabilities
and Greif lease costs, are classified as long-term liabilities in the
consolidated balance sheet.
The 1995 Restructuring provides for the elimination of the remaining 1,300 jobs
in the Company's men's apparel operations and approximately 535 jobs in
footwear operations to be divested or consolidated and in staff positions to be
eliminated.
10
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 2
FISCAL 1995 RESTRUCTURING, CONTINUED
The operating results of the men's apparel segment are shown below:
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THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
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IN THOUSANDS 1994 1993 1994 1993
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Net sales $24,579 $30,407 $81,777 $80,571
Cost of sales and expenses 26,179 31,122 86,317 79,063
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Pretax earnings (loss) (1,600) (715) (4,540) 1,508
Income tax benefit -0- -0- -0- -0-
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Net Earnings (Loss) $(1,600) $ (715) $(4,540) $ 1,508
===========================================================================================================
11
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 3
BUSINESS ACQUISITION
LAMAR MANUFACTURING COMPANY
On August 12, 1993, GCO Apparel Corporation, a newly formed subsidiary of the
Company, acquired all of the men's clothing manufacturing assets and assumed
certain liabilities of LaMar Manufacturing Company, a manufacturer of
moderately priced tailored clothing. The purchase price was approximately
$11.8 million. The purchase price included $10.9 million of cash and $900,000
of deferred payments that will be completed by August 1995. In addition, the
Company paid acquisition expenses of approximately $500,000. The acquisition
was financed through revolving credit borrowings.
In January 1994, the Company reassessed the recoverability of the $6.9 million
of goodwill associated with this acquisition and wrote-off the unamortized
portion of the goodwill. On November 3, 1994, the board of directors of the
Company, as part of a decision to exit the tailored clothing business, adopted
a plan to sell GCO Apparel Corporation (see Note 2).
NOTE 4
ACCOUNTS RECEIVABLE
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OCTOBER 31, JANUARY 31,
IN THOUSANDS 1994 1994
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Trade accounts receivable $ 40,937 $ 67,174
Miscellaneous receivables 2,940 3,406
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Total receivables 43,877 70,580
Allowance for bad debts (1,214) (2,065)
Other allowances (866) (2,509)
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NET ACCOUNTS RECEIVABLE $ 41,797 $ 66,006
==============================================================================================================
NOTE 5
INVENTORIES
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OCTOBER 31, JANUARY 31,
IN THOUSANDS 1994 1994
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Raw materials $ 7,725 $ 21,305
Work in process 4,605 15,786
Finished goods 28,335 71,981
Retail merchandise 58,056 46,048
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TOTAL INVENTORIES $ 98,721 $155,120
==============================================================================================================
12
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 6
ASSETS OF OPERATIONS TO BE DIVESTED (AT OCTOBER 31, 1994)
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DISCONTINUED OTHER
IN THOUSANDS OPERATIONS OPERATIONS TOTALS
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CURRENT ASSETS:
Accounts receivable $19,133 $18,587 $37,720
Inventory 16,158 18,256 34,414
Other -0- 777 777
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TOTAL CURRENT ASSETS $35,291 $37,620 $72,911
===============================================================================================================
NONCURRENT ASSETS:
Fixed Assets:
Plant and equipment $ 1,878 $ 1,819 $ 3,697
Capitalized lease rights -0- 65 65
Goodwill and other intangibles -0- 15,536 15,536
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TOTAL NONCURRENT ASSETS $ 1,878 $17,420 $19,298
===============================================================================================================
13
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 7
PLANT, EQUIPMENT AND CAPITAL LEASES, NET
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OCTOBER 31, JANUARY 31,
IN THOUSANDS 1994 1994
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Plant and equipment:
Land $ 75 $ 485
Buildings and building equipment 2,514 5,830
Machinery, furniture and fixtures 30,617 45,105
Construction in progress 1,853 1,550
Improvements to leased property 37,602 43,474
Capital leases:
Land 60 592
Buildings 2,126 11,203
Machinery, furniture and fixtures 7,759 10,324
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Plant, equipment and capital leases, at cost 82,606 118,563
Accumulated depreciation and amortization:
Plant and equipment (48,734) (64,642)
Capital leases (5,370) (11,012)
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NET PLANT, EQUIPMENT AND CAPITAL LEASES $ 28,502 $ 42,909
===========================================================================================================
NOTE 8
PROVISION FOR DISCONTINUED OPERATIONS (AT OCTOBER 31, 1994)
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IN THOUSANDS CURRENT NON-CURRENT TOTALS
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Employee related costs $ 9,839 $16,347 $26,186
Facility shutdown costs 2,965 5,983 8,948
Other contract liabilities 8,439 -0- 8,439
Other 3,655 370 4,025
- -----------------------------------------------------------------------------------------------------------
TOTALS $24,898 $22,700 $47,598
===========================================================================================================
14
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 9
CREDIT FACILITIES
At October 31, 1994, the Company's English subsidiary, Mitre U.K., had a credit
facility with a credit limit equal to the lesser of (i) 5,000,000 pounds
sterling (approximately U.S. $8,183,000 at October 31, 1994) or (ii) the
aggregate of 75 percent of the value of current receivables and 50 percent of
the value of inventory of Mitre U.K. The facility, which was guaranteed up to
4,300,000 pounds sterling by the Company, permitted borrowings for working
capital of up to 2,000,000 pounds sterling, the issuance of letters of credit
of up to 3,500,000 pounds sterling and the issuance of guarantee bonds and
indemnities of up to 500,000 pounds sterling. The facility expired on December
2, 1994.
15
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 10
LONG-TERM DEBT
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OCTOBER 31, JANUARY 31,
IN THOUSANDS 1994 1994
- --------------------------------------------------------------------------------------------------------------
Borrowings under revolving credit agreement
(weighted average interest rate at:
October 31, 1994-7.34%; January 31, 1994-5.56%) $ 35,000 $ 15,000
10 3/8% senior notes due February 2003 75,000 75,000
- --------------------------------------------------------------------------------------------------------------
Total long-term debt 110,000 90,000
Current portion -0- -0-
- --------------------------------------------------------------------------------------------------------------
TOTAL NONCURRENT PORTION OF LONG-TERM DEBT $110,000 $ 90,000
==============================================================================================================
REVOLVING CREDIT AGREEMENTS:
On August 2, 1993 the Company entered into a revolving credit agreement with a
group of seven banks providing for loans or letters of credit of up to $100
million (subsequently amended to $65 million and subject to further reductions-
see below). The agreement expires August 2, 1996. This agreement replaced the
$45 million revolving credit agreement and Genesco's $25 million letter of
credit agreement in effect at July 31, 1993. The repayment of the revolving
credit borrowings under the $45 million credit agreement resulted in an
extraordinary loss recognized in the second quarter of Fiscal 1994 of $240,000.
Loan borrowings for the quarter ended October 31, 1994 under the revolving
credit agreements averaged $36,901,000 at a rate of 7.06% with a maximum month
end borrowing of $38,000,000. Outstanding letters of credit at October 31, 1994
were $8,791,000.
As of October 31, 1994, the revolving credit agreement was amended in regard to
certain financial covenants to reflect operating results, including the
restructuring charge and the provision for the discontinuation of the men's
apparel segment, and the maximum commitment was reduced to $65 million. The
maximum commitment will be further reduced by $15 million on the earlier of
April 30, 1995 or 7 days after the first Designated Asset Sale Date, defined in
the credit agreement as a date when the Company or any of its subsidiaries
sells an operating division, excluding any discontinued operations, for a
purchase price in excess of $15 million. Further commitment reductions occur
in the event Net Cash Proceeds generated on account of any Designated Asset
Sale exceed $40 million.
Under the amended revolving credit agreement, the Company may borrow at the
prime rate plus .5% or LIBOR plus 2.75%. Commitment fees are 0.5% per annum on
the daily unused portion. In addition, the interest and commitment fee rates
will increase by .15% per month commencing on the earlier of May 1, 1995 or a
Designated Asset Sale Date.
16
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 10
LONG-TERM DEBT, CONTINUED
The amended credit agreement requires the Company to maintain:
(i) a ratio of Consolidated Current Assets to the sum of Consolidated Current
Liabilities and Consolidated Senior Funded Indebtedness of not less than 1.0 to
1.0 at the end of any quarter beginning with the quarter ending January 31,
1995;
(ii) a Consolidated Interest Coverage Ratio of a certain amount for
respective periods as follows:
Quarter ending January 31, 1995 1.82 to 1.00
Two quarters ending April 30, 1995 .99 to 1.00
Three quarters ending July 31, 1995 .92 to 1.00
Four quarters ending October 31, 1995 1.24 to 1.00
Four quarters ending January 31, 1996 1.26 to 1.00
Four quarters ending April 31, 1996 and thereafter 1.34 to 1.00
(iii) Consolidated Net Worth, as defined in the credit agreement, at the end of
each quarter as follows:
October 31, 1994 $15,000,000
January 31, 1995 18,260,000
April 30, 1995 15,760,000
July 31, 1995 15,452,000
October 31, 1995 19,071,000
January 31, 1996 22,264,000
April 30, 1996 20,634,000
July 31, 1996 20,357,000
(iv) the ratio of Consolidated Senior Funded Indebtedness to Total Capital of
not more than 0.80 to 1.0 at the end of any quarter beginning with the quarter
ending January 31, 1995.
The Company is required by the amended credit agreement to reduce the
outstanding principal balance to $20,000,000 or less for 20 consecutive days
during the fourth fiscal quarter of each fiscal year. The Company must also
maintain a balance of zero for 20 consecutive days both during the 45 days
immediately following a Designated Asset Sale Date and, unless such a reduction
has been accomplished during the 45 day period following any Designated Asset
Sale Date in either that quarter or the previous one, during the first fiscal
quarter of each year.
The revolving credit agreement contains other covenants which restrict the
payment of dividends and other payments with respect to capital stock and
annual capital expenditures are limited to $20,000,000, subject to certain
exceptions. The Company was in compliance with the financial covenants
contained in the amended revolving credit agreement at October 31, 1994.
17
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 10
LONG-TERM DEBT, CONTINUED
10 3/8% SENIOR NOTES DUE 2003:
On February 1, 1993, the Company issued $75,000,000 of 10 3/8% senior notes due
February 1, 2003. The Company used $54 million of the proceeds to repay all of
its outstanding long-term debt resulting in an extraordinary loss recognized in
the fourth quarter of Fiscal 1993 of $583,000 (net of income tax benefit of
$37,000). The balance of the proceeds was used to purchase shares of Mitre
U.K. and for general corporate purposes.
The fair value of the Company's 10 3/8% senior notes, based on the quoted
market price on October 31, 1994, is $57,750,000.
The indenture under which the notes were issued limits the incurrence of
indebtedness, the making of restricted payments, the restricting of subsidiary
dividends, transactions with affiliates, liens, sales of assets and
transactions involving mergers, sales or consolidations.
NOTE 11
SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
OCTOBER 31,
--------------------------
IN THOUSANDS 1994 1993
- --------------------------------------------------------------------------------------------------------------
Cash paid (received) for:
Interest $10,338 $ 6,145
Income taxes (98) 375
Noncash investing and financing activities:
Fixed assets acquired under capital leases $ -0- $ 379
Business acquisition:
Fair value of assets acquired -0- 13,102
Liabilities assumed -0- (1,670)
- --------------------------------------------------------------------------------------------------------------
NET CASH PAID FOR ACQUISITION $ -0- $11,432
==============================================================================================================
18
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 12
LEGAL PROCEEDINGS
Tennessee Environmental Proceedings
The Company is subject to several administrative orders issued by the Tennessee
Department of Environment and Conservation directing the Company to implement
plans designed to remedy possible ground water contamination and to manage
source area material which was generated by a divested operating division and
which was deposited on a site in a rural area near Nashville, Tennessee.
Substantially all source material and ground water remedial actions have been
implemented. The Company believes that it has fully provided for the costs to
be incurred with respect to these remedial actions.
In addition to the administrative proceedings described above, the Company was
named as a defendant in nine civil actions originally filed on behalf of 29
individuals who reside or own property in the vicinity of the site described
above. The plaintiffs alleged that the Company is liable for creating a
nuisance and a hazardous condition and for negligence based upon the alleged
violation of several state and federal environmental statutes. The plaintiffs
sought recovery for personal injuries and property damages totalling $17.6
million, punitive damages totalling $19.5 million and certain costs and
expenses, including attorneys' fees. On November 2, 1994, the Company
concluded a settlement agreement disposing of all claims in the litigation
which had not been previously settled, resulting in a charge to earnings of
approximately $659,000 in the third quarter. The Company had previously
concluded settlement agreements with the other plaintiffs providing for
payments by the Company aggregating approximately $675,000 and for the purchase
of a residence at an appraised value of approximately $170,000.
New York State Environmental Proceedings
The Company is also a defendant in two separate civil actions filed by the
State of New York; one against the City of Gloversville, New York, and 33 other
private defendants; and the other against the City of Johnstown, New York, and
14 other private defendants. In addition, third party complaints and cross
claims have been filed against numerous other entities, including the Company,
in both actions. These actions arise out of the alleged disposal of certain
hazardous material directly or indirectly in municipal landfills. The
complaints in both cases allege the defendants, together with other
contributors to the municipal landfills, are liable under a federal
environmental statute and certain common law theories for the costs of
investigating and performing remedial actions required to be taken with respect
to the landfills and damages to the natural resources.
The environmental authorities have issued decisions selecting plans of
remediation with respect to the Johnstown and Gloversville sites which have
total estimated costs of $16.5 million and $28.3 million, respectively.
19
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 12
LEGAL PROCEEDINGS, CONTINUED
The Company has filed answers to the complaints in both the Johnstown and
Gloversville cases denying liability and asserting numerous defenses. The
Company has established a provision in the amount of $1,000,000 to cover its
estimated share of future remediation costs, including a $500,000 charge in the
third quarter ended October 31, 1993. Because of uncertainties related to the
ability or willingness of the other defendants, including the municipalities
involved, to pay a portion of such costs, the availability of State funding to
pay a portion of such costs, the insurance coverage available to the various
defendants, the applicability of joint and several liability and the basis for
contribution claims among the defendants, management is presently unable to
predict the outcome or to estimate the extent of any additional liability the
Company may incur with respect to either of the Johnstown or Gloversville
actions.
Preferred Shareholder Action
On January 7, 1993, 23 former holders of the Company's series 2, 3 and 4
subordinated serial preferred stock filed a civil action against the Company
and certain officers in the United States District Court for the Southern
District of New York (the "U.S. District Court Action"). The plaintiffs
allege that the defendants misrepresented and failed to disclose material facts
to representatives of the plaintiffs in connection with exchange offers which
were made by the Company to the plaintiffs and other holders of the Company's
series 1, 2, 3 and 4 subordinated serial preferred stock from June 23, 1988 to
August 1, 1988. The plaintiffs contend that had they been aware of the
misrepresentations and omissions, they would not have agreed to exchange their
shares pursuant to the exchange offers. The plaintiffs allege breach of
fiduciary duty and fraudulent and negligent misrepresentations and seek damages
in excess of $10 million, costs, attorneys' fees, interest and punitive damages
in an unspecified amount. By order dated December 2, 1993, the U.S. District
Court denied a motion for judgement on the pleadings filed on behalf of all
defendants. On July 6, 1994, the court denied a motion for partial summary
judgement filed on behalf of the plaintiffs. The Company and the individual
defendants intend to vigorously defend the U.S. District Court Action. The
Company is unable to predict if the U.S. District Court Action will have a
material adverse effect on the Company's results of operations or financial
condition.
20
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 12
LEGAL PROCEEDINGS, CONTINUED
The U.S. District Court Action is based, in part, on a judicial determination
on July 29, 1992 of the fair value of the Company's series 2 and 3 subordinated
serial preferred stock in an appraisal action in the Chancery Court for
Davidson County, Tennessee (the "Chancery Court Action"). The Chancery Court
Action was commenced after certain preferred shareholders dissented from
certain charter amendments approved by shareholders on February 4, 1988 and
demanded the fair value of their shares. The Chancery Court determined that
the fair values of a share of series 2 was $131.32 and of a share of the series
3 was $193.11 (which amounts are in excess of the mandatory redemption and
liquidation values of a share of series 2 subordinated serial preferred stock
and of the optional redemption and liquidation values of a share of series 3
subordinated serial preferred stock), compared with $91 a share for the series
2 and $46 a share for the series 3 previously paid by the Company as the fair
value of such shares. The Chancery Court ordered the Company to pay to Jacob
Landis, the only shareholder who prosecuted his dissenter's rights, the
additional sum of $358,062 plus interest at 10% from July 29, 1992, attorneys'
fees and costs to be determined in further proceedings. The Company appealed
the Chancery Court's decision, and on September 1, 1993 the Tennessee Court of
Appeals affirmed the Chancery Court's decision and remanded the case to the
Chancellor for further proceedings. The Company filed a petition to the
Tennessee Supreme Court to review the case, which the court denied on January
31, 1994. The Company paid the amount of the judgement plus accrued interest
on February 4, 1994. In September 1994, the Company paid the dissenter's legal
fees and expenses aggregating approximately $445,000.
New York Real Estate Claim
On May 13, 1993, the landlord of one of the Company's retail stores in New York
City filed a civil action claiming that the Company breached the store lease
and negligently allowed the premises to deteriorate. The complaint sought
compensatory damages of $2.5 million and punitive damages of $5 million. On
September 9, 1994, the Company settled the case for $255,000.
Canadian Tax Litigation
At various times in 1990 and 1991 (i) the Canadian Department of National
Revenue, Taxation (the "Department"), the Alberta Corporate Tax Administration
and the Ontario Ministry of Revenue made tax reassessments relating to the
deductibility of interest expense incurred by one of the Company's Canadian
subsidiaries on funds borrowed from the Company and (ii) the Department made
tax reassessments relating to non-resident withholding tax with respect to the
payment by that subsidiary of its loan from the Company and with respect to
interest on loans by that subsidiary to the Company. These reassessments,
which the Company has calculated to be approximately Canadian $18.7 million
including interest (approximately U.S. $14.1 million) at January 31, 1994, were
made against Agnew Group, Inc., the corporate successor to the purchaser of the
Company's Canadian operations (the "Taxpayer").
21
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 12
LEGAL PROCEEDINGS, CONTINUED
The Company entered into a settlement agreement, dated as of May 4, 1994, with
the Taxpayer and the Department and paid, in full satisfaction of the
Department's and the Taxpayer's claims against it, $1.3 million. The
settlement became effective with Canadian government approval on August 10,
1994. The Company had previously made a provision for its liability to the
Taxpayer in an amount greater than its payment under the settlement agreement,
resulting in $4.9 million of additional gain on the divestiture of the
Company's Canadian operations, recognized in the second quarter ended July 31,
1994.
22
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
SIGNIFICANT DEVELOPMENTS
Fiscal 1994 Restructuring
Certain events and changes in operating strategies in the fourth quarter of the
fiscal year ended January 31, 1994 ("Fiscal 1994") led to a decision to
restructure certain of the Company's operations and a reassessment of the
recoverability of certain assets (the "1994 Restructuring"). As a result, the
Company recorded a charge of $29.4 million (the "1994 Restructuring Charge"),
for which no tax benefit is currently available. This charge reflected
estimated costs of closing certain manufacturing facilities, effecting
permanent work force reductions and closing 58 retail stores. The 1994
Restructuring Charge included $15.8 million in asset write- downs and $13.6
million of other costs, of which, depending upon the timing and outcome of
certain pending negotiations, approximately $12 million are expected to be
incurred in the fiscal year ending January 31, 1995 ("Fiscal 1995"). The
Company expects to complete the 1994 Restructuring by the end of Fiscal 1995.
To date, the Company has closed a footwear plant and 39 retail stores, paid
approximately $4.6 million of the other costs, and closed a men's apparel
plant.
Fiscal 1995 Restructuring
In response to worsening trends in the Company's men's apparel business and in
response to a strategic review of its footwear operations, the Company's board
of directors, on November 3, 1994, approved a plan (the "1995 Restructuring")
designed to focus the Company on its core footwear businesses by selling or
liquidating four businesses, two of which constitute its entire men's apparel
segment. The ongoing businesses, after implementation of the 1995
Restructuring, will include the manufacture or sourcing, marketing and
distribution of footwear under the Johnston & Murphy, J. Murphy, Domani,
Laredo, Code West, Dockers and Nautica brands, the tanning and distribution of
leather by the Volunteer Leather division and the operation of Jarman,
Journeys, Johnston & Murphy, J. Murphy, Boot Factory and Factory To You retail
footwear stores.
The 1995 Restructuring provides for the following:
o Liquidation of the University Brands children shoes business,
o Sale of the Mitre Sports soccer business,
o Liquidation of The Greif Companies men's tailored clothing
business, and
o Sale of the GCO Apparel Corporation tailored clothing
manufacturing business.
The 1995 Restructuring also includes estimated costs of consolidating certain
facilities and effecting permanent work force reductions. Implementation of
the 1995 Restructuring is expected to be complete within 12 months. It is
anticipated that the cash proceeds to be received from implementation of the
1995 Restructuring will slightly exceed the cash costs thereof. Any excess
cash will be reinvested in the Company's ongoing businesses.
23
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The total costs to implement the 1995 Restructuring (both cash and non-cash)
are expected to be $90.7 million, of which $22.1 million (the "1995
Restructuring Charge") relates to University Brands and Mitre and other costs
described below and $68.6 million (the "1995 Restructuring Provision") relates
to Greif and GCO Apparel, which constitute the entire men's apparel segment of
the Company's business, and is therefore treated for financial reporting
purposes as a provision for discontinued operations. No tax benefit is
currently available with respect to either the 1995 Restructuring Charge or the
1995 Restructuring Provision.
The 1995 Restructuring Charge includes $10.7 million in asset write-downs, $2.6
million of foreign currency translation adjustments realization and $8.8
million of other costs, of which $7.2 million are expected to be incurred in
the next 12 months. Other costs expected to be incurred beyond 12 months
include primarily facility shutdown costs and other contract liabilities and
are classified as long-term liabilities in the consolidated balance sheet.
The 1995 Restructuring Provision includes $27.5 million in asset write-downs
and $41.1 million of other costs, of which approximately $19.5 million are
expected to be incurred in the next 12 months. Other costs include primarily
union pension liability, employee severance arrangements, facility shutdown
costs and other contract liabilities. Other costs expected to be incurred
beyond 12 months, of which the most significant are union pension liabilities
and Greif lease costs, are classified as long-term liabilities in the
consolidated balance sheet.
The 1995 Restructuring provides for the elimination of the remaining 1,300 jobs
in the Company's men's apparel operations and approximately 535 jobs in
footwear operations to be divested or consolidated and in staff positions to be
eliminated.
Revolving Credit Agreement
On January 31, 1994, the Company's revolving credit agreement was amended to
adjust certain financial covenants to reflect operating results, including the
1994 Restructuring Charge. The agreement was further amended as of October 31,
1994 to reflect operating results, including the charges and provisions
associated with the 1995 Restructuring, and to reduce the facility from $100
million to $65 million (subject to further reductions). See Notes 2 and 10 to
the Consolidated Financial Statements.
24
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
RESULTS OF OPERATIONS - THIRD QUARTER FISCAL 1995 VS 1994
The Company's net sales from continuing operations in the third quarter ended
October 31, 1994 decreased 0.4% from the same period the previous year. Total
gross margin for the quarter decreased 2.0% and declined from 38.2% to 37.6% as
a percentage of net sales. Selling and administrative expenses decreased 5.5%
and decreased as a percentage of net sales from 37.2% to 35.3%. The pretax
loss in the quarter was $22,750,000, compared to a pretax loss of $2,264,000 in
the same quarter last year. The Company reported a net loss of $93,160,000
($3.83 per share) in the third quarter ended October 31, 1994 compared to a net
loss of $3,084,000 ($.13 per share) last year. The pretax loss for the quarter
ended October 31, 1994 includes the $22.1 million 1995 Restructuring Charge.
The quarter's net loss includes, in addition to the 1995 Restructuring Charge,
the $68.6 million 1995 Restructuring Provision. See Note 2 to the Consolidated
Financial Statements.
Footwear Retail
Three Months
Ended October 31,
---------------------------
1994 1993 % Change
-------- -------- --------
(In Thousands)
Net Sales . . . . . . . . . . . . . . . . . . . . . . . $59,698 $58,417 2.2%
Operating Income . . . . . . . . . . . . . . . . . . . $ 5,148 $ 1,292 298%
Operating Margin . . . . . . . . . . . . . . . . . . . 8.6% 2.2%
Led by an increase in comparable store sales of approximately 4%, net sales
from footwear retail operations increased 2.2% in the quarter ended October 31,
1994 compared to the same period last year. The average price per pair
decreased approximately 3%, while unit sales increased approximately 16%,
primarily from the opening of lower-priced children's shoes leased departments
during Fiscal 1995. Gross margin as a percentage of net sales increased from
49.6% to 51.5%. Operating expenses decreased 6.8%, primarily due to the
operation of fewer stores as a result of the 1994 Restructuring, and lower
advertising expenses, and decreased as a percentage of net sales from 46.9% to
42.8%. Operating income in the third quarter ended October 31, 1994 does not
include operating losses of the 58 retail stores to be closed in the 1994
Restructuring. Operating income in the third quarter ended October 31, 1993,
adjusted to exclude results of these 58 stores, was $2,270,000. Operating
income of $5,148,000 in the third quarter this year was higher than last year's
third quarter adjusted operating income due to improved gross margin resulting
from lower markdowns and from the lower operating expenses.
25
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Footwear Wholesale & Manufacturing
Three Months
Ended October 31,
---------------------------
1994 1993 % Change
-------- -------- --------
(In Thousands)
Net Sales . . . . . . . . . . . . . . . . . . . . . . . $ 63,501 $65,272 (2.7%)
Operating Income . . . . . . . . . . . . . . . . . . $(18,211) $ 2,689
Operating Margin . . . . . . . . . . . . . . . . . . . (28.7%) 4.1%
Net sales from footwear wholesale and manufacturing operations were $1.8
million (2.7%) lower in the quarter ended October 31, 1994 than in the
comparable period last year, reflecting primarily lower sales (both in pairs
and prices) of western boots and, to a lesser extent, tanned leather. Gross
margin as a percentage of net sales decreased from 28.0% to 24.6%, primarily
due to price reductions to stimulate sales. Operating expenses decreased 15.7%
and decreased as a percentage of net sales from 24.2% to 21.0%, primarily
because of reduced advertising expenses. Operating income for the quarter
ended October 31, 1994 includes $20.6 million of the 1995 Restructuring Charge.
The decline in operating income, excluding the 1995 Restructuring Charge, is
due primarily to lower sales of western boots.
The net sales and operating income (loss) for the quarter ended October 31,
1994 of the University Brands and Mitre Sports businesses that will be disposed
of in the 1995 Restructuring were $18,980,000 and $(1,340,000), respectively
and for the quarter ended October 31, 1993 were $17,094,000 and $(946,000),
respectively.
Discontinued Operations
Three Months
Ended October 31,
---------------------------
1994 1993 % Change
-------- -------- --------
(In Thousands)
Net Sales . . . . . . . . . . . . . . . . . . . . . . . $24,579 $30,407 (19.2%)
Operating Income . . . . . . . . . . . . . . . . . . . $(1,600) $ (715) (123.8%)
Operating Margin . . . . . . . . . . . . . . . . . . . (6.5%) (2.4%)
Net sales from men's apparel operations decreased 19.2%. Net sales, excluding
those of GCO Apparel Corporation ("GCO Apparel"), which began operations in
August 1993, declined by 21%.
26
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Operating income declined in the quarter ended October 31, 1994 versus the
quarter ended October 31, 1993 because of declining sales and continued
pressure on tailored clothing gross margin. See "Significant
Developments-Fiscal 1995 Restructuring" for information regarding the
discontinuation of this business segment.
Corporate and Interest Expenses
Corporate and other expenses were $6.5 million in the third quarter this year
compared to $3.2 million for the same period last year, an increase of 101%.
Included in the $6.5 million is a $659,000 provision for environmental
litigation recorded in the third quarter this year, while in the third quarter
last year, the Company recorded a $500,000 provision for environmental
litigation. This year's expenses also include $2.3 million of severance costs,
$1.3 million of which relate to the 1995 Restructuring. After adjusting each
quarter for the above items, the current quarter's expenses are $841,000
greater than last year's comparable quarter, due principally to the costs of
amending the revolving credit agreement and to increased professional services.
Interest expense increased $188,000, or 6%, in the third quarter this year
compared to the same quarter of last year. Higher average interest rates this
year compared to last year more than offset lower average borrowings under the
revolving credit agreement .
RESULTS OF OPERATIONS - NINE MONTHS ENDED OCTOBER 31 FISCAL 1995 VS 1994
Net sales from continuing operations for the nine months ended October 31, 1994
decreased 3.0% from the comparable period last year. Total gross margin for
the nine months decreased 5.0% and declined from 38.6% to 37.7% as a percentage
of net sales. Selling and administrative expenses decreased 5.3% and decreased
as a percentage of net sales from 37.6% to 36.7%. The pretax loss in the nine
months ended October 31, 1994 was $22.5 million, compared to a pretax loss of
$4.4 million last year. The Company reported a net loss of $96.3 million
($3.97 per share) in the nine months ended October 31, 1994 compared to a net
loss of $5.9 million ($.25 per share) last year. The pretax loss for the nine
months ended October 31, 1994 includes the $22.1 million 1995 Restructuring
Charge and recognition of $4.9 million of additional gain on the sale in 1987
of the Company's Canadian operations. See Notes 2 and 12 to the Consolidated
Financial Statements. This year's net loss includes, in addition to the above
adjustments, the $68.6 million 1995 Restructuring Provision. Last year's net
loss includes a $2.3 million ($.09 per share) loss from the cumulative effect
of changes in the method of accounting for postretirement benefits due to the
implementation of Statement of Financial Accounting Standards No. 106 and an
extraordinary loss of $240,000 ($.01 per share) from the early retirement of
debt.
27
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Footwear Retail
Nine Months
Ended October 31,
---------------------------
1994 1993 % Change
-------- -------- --------
(In Thousands)
Net Sales . . . . . . . . . . . . . . . . . . . . . . . $160,469 $160,760 (0.2%)
Operating Income . . . . . . . . . . . . . . . . . . . $ 8,560 $ 1,728 395%
Operating Margin . . . . . . . . . . . . . . . . . . . 5.3% 1.1%
Despite an increase in comparable store sales of approximately 3%, net sales
from footwear retail operations declined 0.2% in the nine months ended October
31, 1994 compared to the corresponding period in the previous year, principally
due to the operation of 6% fewer stores as a result of the 1994 Restructuring
and a $6.3 million decline in accessory sales. The average price per pair
declined 1%, while unit sales were up 5% for the nine months, primarily from
the operation of lower priced children's shoes leased departments this year.
Gross margin as a percentage of net sales increased from 50.3% to 51.2%
primarily from lower markdowns. Operating expenses decreased 5.5%, primarily
due to the operation of fewer stores as a result of the 1994 Restructuring and
lower advertising expenses, and decreased as a percentage of net sales from
49.0% to 46.4%. Operating income in the nine months ending October 31, 1994
does not include operating losses of the retail stores to be closed in the 1994
Restructuring. Operating income in the first nine months ended October 31,
1993, adjusted to exclude results of the 58 stores to be closed in the 1994
Restructuring, was $4,129,000. Current operating income of $8,560,000 in the
first nine months this year was higher than last year's adjusted operating
income due to improved margin as a percentage of net sales from lower markdowns
and the lower operating expenses.
Footwear Wholesale & Manufacturing
Nine Months
Ended October 31,
---------------------------
1994 1993 % Change
-------- -------- --------
(In Thousands)
Net Sales . . . . . . . . . . . . . . . . . . . . . . . $177,117 $187,208 (5.4%)
Operating Income . . . . . . . . . . . . . . . . . . . $(13,544) $ 11,357
Operating Margin . . . . . . . . . . . . . . . . . . . (7.6%) 6.1%
Net sales from footwear wholesale and manufacturing operations were $10.1
million (5.4%) lower in the nine months ended October 31, 1994 than in the
previous year's corresponding nine month period, reflecting primarily lower
unit sales and selling prices of western boots and, to a lesser extent, lower
sales of tanned leather.
28
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Gross margin as a percentage of net sales decreased from 28.5% to 25.5%,
primarily due to volume-related manufacturing variances and price reductions to
stimulate sales.
Operating expenses decreased 8.8% and decreased as a percentage of net sales
from 22.6% to 21.8%, primarily because of reduced advertising expenses.
Included in this year's operating income is $20.6 million of the 1995
Restructuring Charge. The decline in operating income, excluding the 1995
Restructuring Charge, is due to lower western boot sales combined with price
reductions taken to stimulate sales of boots and children's shoes.
Driven by record sales, western boot production in the first quarter of last
year resulted in positive manufacturing variances in the Company's boot plants.
A sharp decline in the sale of western boots led to a decision in the latter
part of Fiscal 1994 to curtail western boot production. See "Significant
Developments-Fiscal 1994 Restructuring" above. Despite the closing of a
western boot plant in the first quarter of Fiscal 1995 pursuant to the 1994
Restructuring, the lower volume of boots manufactured in the first nine months
of Fiscal 1995 resulted in negative manufacturing variances. The 1995
Restructuring Charge includes a provision to close another boot manufacturing
plant, which is anticipated to occur in the first quarter of Fiscal 1996.
The net sales and operating income (loss) for the nine months ended October 31,
1994 of the University Brands and Mitre Sports businesses that will be disposed
of in the 1995 Restructuring were $62,342,000 and $(173,000), respectively and
for the nine months ended October 31, 1993 were $63,117,000 and $1,823,000,
respectively.
Discontinued Operations
Nine Months
Ended October 31,
---------------------------
1994 1993 % Change
-------- -------- --------
(In Thousands)
Net Sales . . . . . . . . . . . . . . . . . . . . . . . $81,777 $80,571 1.5%
Operating Income . . . . . . . . . . . . . . . . . . . $(4,540) $ 1,508 -
Operating Margin . . . . . . . . . . . . . . . . . . . (5.6%) 1.9%
Net sales from tailored clothing operations increased 1.5% in the nine months
ended October 31, 1994 as compared to the same period last year. Net sales,
excluding those of GCO Apparel, which began operations in August 1993, declined
by 10.8%.
The reduction in operating income is attributable to lower Greif sales and
lower gross margins. See "Significant Developments- Fiscal 1995 Restructuring"
for information regarding the discontinuation of this business segment.
29
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Corporate and Interest Expenses
Corporate and other expenses in the nine months ended October 31, 1994 were
$13.3 million compared to $10.1 million for the same period last year, an
increase of approximately 32%. Included in corporate and other expenses this
year are provisions of $1.4 million for environmental litigation compared to
only $500,000 of such provisions last year. This year's expenses also include
$2.3 million of severance costs, $1.3 million of which relates to the 1995
Restructuring. Excluding the provisions for environmental litigation and the
severance costs, corporate expenses were essentially unchanged from last year,
with lower compensation expenses due to layoffs related to the 1994
Restructuring and other staff reductions that occurred after the first quarter
of Fiscal 1994 being offset by higher professional fees and the costs of
amending the revolving credit agreement. It is expected that compensation
expense will be further reduced in Fiscal 1996 as the 1995 Restructuring is
implemented.
Interest expense increased $1,006,000, or 12%, from the same period last year
because of an increase in both average borrowings and average interest rates.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain financial data at the dates indicated.
All dollar amounts are in millions.
October 31,
----------------------
1994 1993
------ ------
Cash and short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5.6 $ 2.1
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $122.2 $214.3
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $110.0 $114.0
Current ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2x 4.4x
_______________
Working Capital
The Company's business is somewhat seasonal, with the Company's investment in
inventory and accounts receivable reaching peaks in the spring and fall of each
year. Cash flow from operations is generated principally in the fourth quarter
of each fiscal year.
Cash used by operating activities was $13.1 million in the first nine months of
Fiscal 1995 compared to $44.9 million in the same period last year. The $31.8
million improvement in cash flow from operating activities as compared to the
first nine months of Fiscal 1994 reflects factors including lower footwear
wholesale inventory (primarily in the Company's boot business), lower tailored
clothing inventory as a result of anticipated lower Greif sales and reduced raw
material purchases for the spring 1995 season and improved footwear inventory
management, as well as differences in the timing and manner of deliveries and
in payment terms from vendors, resulting in a higher level of accounts payable
at October 31, 1994 than at the same date last year.
30
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
A $4.1 million decrease in inventories from January 31, 1994 levels was due
primarily to lower tailored clothing inventory that more than offset normal
seasonal increases. The $14.2 million decrease in continuing inventories
compared with October 31, 1993 reflects lower boot inventory, improved footwear
inventory controls, and lower retail inventory from the store closings included
in the 1994 Restructuring.
Accounts receivable at October 31, 1994 increased $22.9 million compared to
January 31, 1994, primarily from seasonal increases and extended terms given to
meet competitive pressures. Accounts receivable at October 31, 1994, excluding
those of operations to be divested, were $800,000 less than at October 31,
1993, due to lower footwear wholesale sales.
Cash provided (or used) due to changes in accounts payable and accrued
liabilities during the nine months ended October 31, 1994 and 1993 is as
follows:
Nine Months Ended October 31,
--------------------------------------
(In Thousands) 1994 1993
------- --------
Accounts payable . . . . . . . . . . . . . . . . . . . . . $ 9,803 $ (6,188)
Accrued liabilities . . . . . . . . . . . . . . . . . . . (5,966) 417
------- --------
$ 3,837 $ (5,771)
======= ========
The increase in accounts payable is due to differences in the timing and manner
of deliveries and in payment terms negotiated with individual vendors and
changes in inventory levels.
The change in accrued liabilities in the nine months ended October 31, 1994
versus the nine months ended October 31, 1993 is due primarily to accrued
liabilities, including severance costs and liabilities under leases, related to
the 1994 Restructuring.
Revolving credit agreement borrowings during the nine months ended October 31,
1994 increased by $20 million to finance seasonal working capital increases, to
finance current operations and to fund approximately $4.6 million of costs
associated with the 1994 Restructuring.
Capital Expenditures and Acquisitions
Total capital expenditures in Fiscal 1995 are expected to be approximately $7.0
million. These include expected expenditures of $3.7 million to open
approximately 28 new retail stores and to complete 12 major store renovations.
Capital expenditures for wholesale and manufacturing operations and other
purposes are expected to total approximately $3.3 million for the year.
31
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
On August 12, 1993, GCO Apparel Corporation acquired all of the men's clothing
manufacturing assets and assumed certain liabilities of LaMar. See Note 3 to
the Consolidated Financial Statements. The purchase price was approximately
$11.8 million, including $10.9 million of cash and $900,000 of deferred
payments to be completed by August 1995. The acquisition was financed through
revolving credit agreement borrowings. The divestiture of GCO Apparel's
operations are included in the 1995 Restructuring Provision.
Future Capital Needs
The Company expects that cash provided by operations and by the sale of assets
employed in operations to be divested pursuant to the 1995 Restructuring will
be sufficient to fund all of its capital expenditures through Fiscal 1996. The
substantial improvement in cash flow achieved to date and expected for the
remainder of Fiscal 1995 is based upon lower working capital needs resulting
from better footwear inventory management and substantial liquidation of
working capital invested in the tailored clothing business. The approximately
$34.1 million of costs associated with the 1994 Restructuring and the 1995
Restructuring that are expected to be incurred during the next 12 months are
expected to be fully offset by cash inflows from sales of assets employed in
operations to be divested pursuant to the 1995 Restructuring.
The Company believes it will be able to comply with the financial covenants
contained in its revolving credit agreement, as amended as of October 31, 1994,
and that the commitments under that agreement will be adequate to meet the
Company's credit needs for Fiscal 1996. See Note 10 to the Consolidated
Financial Statements. However, the financial covenants contained in the
revolving credit agreement are restrictive and the Company is considering
various alternatives in meeting its credit needs.
There were $43.8 million of loans and letters of credit outstanding under the
revolving credit agreement at October 31, 1994.
The restricted payments covenant contained in the Company's revolving credit
agreement prohibits the Company from declaring dividends on the Company's
capital stock. The aggregate of annual dividend requirements on the Company's
Subordinated Serial Preferred Stock, $2.30 Series 1, $4.75 Series 3 and $4.75
Series 4, and on its $1.50 Subordinated Cumulative Preferred Stock is $302,000.
The Company is unable to predict when dividends may be reinstated.
At October 31, 1994, the Company's English subsidiary, Mitre U.K., had a credit
facility with a credit limit equal to the lesser of (i) 5.0 million pounds
sterling (approximately U.S. $8.2 million at October 31, 1994) or (ii) the
aggregate of 75 percent of the value of current receivables and 50 percent of
the value of inventory of Mitre U.K. The facility expired on December 2, 1994.
Management of the Company believes that the financial commitments provided by
its revolving credit agreement will be adequate to replace the commitments
provided by the expired facility.
32
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
On November 7, 1994, Standard & Poor's announced that it had lowered the rating
of the 10 3/8% Notes to B from B+ based on its concern that Genesco's ongoing
business operations will not provide the earnings and cash flow generation
reflective of a B+ senior credit rating. On June 6, 1994, Moody's announced
that it had lowered its rating of the Notes to B2 from B1 and that the rating
remains under review for potential further downgrade. According to Standard &
Poor's, a debt instrument rated B has a greater vulnerability to default than
debt rated BB, but currently has the capacity to meet interest and principal
payments. According to Moody's, the assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small with respect to a debt instrument rated B. Ratings are
not a recommendation to purchase, hold or sell long-term debt of the Company,
inasmuch as ratings do not comment as to market price or suitability for
particular investors and may be subject to revision or withdrawal at any time
by the assigning rating agency.
BACKLOG
On October 31, 1994 the Company's footwear wholesale operations (including
leather tanning operations), which accounted for 51% of continuing operations
sales in Fiscal 1994, had a backlog of orders, including unconfirmed customer
purchase orders, amounting to approximately $37.6 million, compared to
approximately $34.2 million on October 31, 1993. Most orders are for delivery
within 90 days. Therefore, the backlog at any one time is not necessarily
indicative of future sales for an extended period of time. The backlog is
somewhat seasonal, reaching a peak in the spring. Footwear companies maintain
in-stock programs for selected anticipated high volume styles.
33
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 2, 1994 the Company entered into a settlement agreement with
members of the Hackett family, the last of 29 individual plaintiffs who brought
civil actions arising out of alleged contamination of a site in Williamson
County, Tennessee. The settlement resulted in a charge to earnings of
approximately $659,000 in the third quarter ended October 31, 1994.
For additional information concerning these settlements, see Note 12 to the
Consolidated Financial Statements which is incorporated herein by reference.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At October 31, 1994 Genesco was in arrears with respect to dividends payable on
the following classes of preferred stock:
ARREARAGE
-------------------------------------------
DATE DIVIDENDS BEGINNING THIS END OF
CLASS OF STOCK PAID TO OF QUARTER QUARTER QUARTER
- -----------------------------------------------------------------------------------------------------------
$2.30 Series 1 October 31, 1993 $ 64,285 $ 21,409 $ 85,694
$4.75 Series 3 October 31, 1993 69,939 23,313 93,252
$4.75 Series 4 October 31, 1993 58,467 19,490 77,957
$1.50 Subordinated Cumulative
Preferred October 31, 1993 33,694 11,256 44,950
- -----------------------------------------------------------------------------------------------------------
TOTALS $226,385 $ 75,468 $301,853
===========================================================================================================
34
PART II - OTHER INFORMATION, CONTINUED
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
(10) y. Severance Agreement dated as of October 12, 1994, between the
Company and E. Douglas Grindstaff.
z. Severance Agreement dated as of October 12, 1994, between the
Company and Thomas B. Clark.
aa. Form of Employment Continuation Agreement between the Company
and certain executive officers.
ab. Nonqualified Stock Option Agreement dated as of October 12,
1994, between the Company and David M. Chamberlain.
ac. Third Amendment to Loan Agreement dated as of October 28,
1994, among the Company and NationsBank of North Carolina,
N.A., First National Bank of Chicago and others, incorporated
by reference to the Company's Current Report on Form 8-K dated
November 7, 1994.
(11) Computation of earnings per common and common share equivalent.
(27) Financial Data Schedule
______________
REPORTS ON FORM 8-K
On October 13, 1994 the Company filed a Current Report on Form 8-K announcing
the resignation of its President and Chief Executive Officer and its Executive
Vice President-Administration and the election of a new chief executive
officer.
On November 7, 1994 the Company filed a Current Report on Form 8-K announcing
the adoption of a restructuring plan and an amendment to its revolving credit
facility agreement with a group of seven banks.
35
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Genesco Inc.
/s/ Robert E. Brosky
Robert E. Brosky
Controller and Chief Accounting Officer
December 15, 1994