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
July 31, 1996
[ ] Transition Report Pursuant To
Section 13 or 15(d) of the
Securities and Exchange Act of 1934
Securities and Exchanges 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) 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
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Common Shares Outstanding September 6, 1996 - 24,511,284
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INDEX
PAGE
Part 1 - Financial Information 3
Consolidated Balance Sheet - July 31, 1996, January 31, 1996 and
July 31, 1995 3
Consolidated Earnings - Three Months Ended and Six Months Ended
July 31, 1996 and 1995 4
Consolidated Cash Flows - Three Months Ended and Six Months Ended
July 31, 1996 and 1995 5
Consolidated Shareholders' Equity - Year Ended
January 31, 1996 and Six Months Ended July 31, 1996 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Part II - Other Information 25
Signature 27
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3
PART I - FINANCIAL INFORMATION
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Balance Sheet
In Thousands
JULY 31, JANUARY 31, JULY 31,
1996 1996 1995
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ASSETS
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CURRENT ASSETS
Cash and short-term investments $ 30,560 $ 35,550 $ 5,388
Accounts receivable 35,389 32,135 33,916
Inventories 94,456 84,930 89,427
Other current assets 3,697 4,317 4,133
Current assets of operations to be divested -0- -0- 35,482
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Total current assets 164,102 156,932 168,346
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Plant, equipment and capital leases, net 30,285 28,552 28,126
Other noncurrent assets 12,102 12,322 13,533
Noncurrent assets of operations to be
divested -0- -0- 1,629
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TOTAL ASSETS $206,489 $197,806 $211,634
============================================================================
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LIABILITIES AND SHAREHOLDERS' EQUITY
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CURRENT LIABILITIES
Notes payable $ -0- $ -0- $ 3,034
Current payments on capital leases 968 1,212 1,614
Accounts payable and accrued liabilities 48,679 43,686 57,957
Provision for discontinued operations 3,894 3,899 4,806
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Total current liabilities 53,541 48,797 67,411
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Long-term debt 75,000 75,000 75,000
Capital leases 1,063 1,485 2,065
Other long-term liabilities 26,887 25,265 23,310
Provision for discontinued operations 12,470 13,354 14,604
Contingent liabilities - - -
SHAREHOLDERS' EQUITY
Non-redeemable preferred stock 7,962 7,958 7,944
Common shareholders' equity:
Par value of issued shares 25,000 24,844 24,832
Additional paid-in capital 122,139 121,715 121,684
Accumulated deficit (91,472) (94,511) (104,746)
Minimum pension liability adjustment (8,244) (8,244) (2,613)
Treasury shares, at cost (17,857) (17,857) (17,857)
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Total shareholders' equity 37,528 33,905 29,244
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $206,489 $197,806 $211,634
============================================================================
The accompanying Notes are an integral part of these Financial Statements.
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4
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Earnings
In Thousands
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THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
--------------------- ------------------
1996 1995 1996 1995
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Net sales $102,955 $109,600 $203,174 $202,825
Cost of sales 62,142 67,101 121,773 124,789
Selling and administrative expenses 36,389 37,823 74,195 74,189
Restructuring and other charges -0- 2,216 -0- 16,329
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Earnings (loss) from operations before
other income and expenses 4,424 2,460 7,206 (12,482)
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Other expenses (income):
Interest expense 2,541 2,617 5,173 4,930
Interest income (432) (68) (862) (153)
Other expense (income) 214 1,090 293 (2,758)
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Total other (income) expenses, net 2,323 3,639 4,604 2,019
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Earnings (loss) before income taxes
and discontinued operations 2,101 (1,179) 2,602 (14,501)
Income taxes (benefit) 28 6 (437) 15
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Earnings (loss) before discontinued operations 2,073 (1,185) 3,039 (14,516)
Discontinued operations:
Excess provision for future losses -0- 1,699 -0- 14,352
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NET EARNINGS (LOSS) $ 2,073 $ 514 $ 3,039 $ (164)
=============================================================================================================
Earnings (loss) per common share:
Before discontinued operations $ .08 $ (.05) $ .11 $ (.60)
Discontinued operations $ .00 $ .07 $ .00 $ .59
Net earnings (loss) $ .08 $ .02 $ .11 $ (.01)
=============================================================================================================
The accompanying Notes are an integral part of these Financial Statements.
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5
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Cash Flows
In Thousands
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THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
-------------------- ------------------
1996 1995 1996 1995
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OPERATIONS:
Net earnings (loss) $ 2,073 $ 514 $ 3,039 $ (164)
Noncash charges to earnings:
Excess provision for future losses -0- (1,699) -0- (14,352)
Restructuring charge -0- 2,216 -0- 16,329
Depreciation and amortization 1,909 1,751 3,757 3,587
Provision for losses on accounts receivable 607 192 1,601 723
Other 316 83 585 261
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Net cash provided by operations before
working capital and other changes 4,905 3,057 8,982 6,384
Effect on cash of changes in working capital and other assets
and liabilities:
Accounts receivable (3,276) 1,897 (4,855) 3,534
Inventories (7,838) (134) (9,527) 3,366
Other current assets 91 84 620 404
Accounts payable and accrued liabilities 5,877 (2,413) 4,839 (8,482)
Other assets and liabilities 284 402 759 (2,327)
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Net cash provided by operations 43 2,893 818 2,879
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INVESTING ACTIVITIES:
Capital expenditures (3,554) (2,443) (5,738) (3,528)
Proceeds from businesses divested and asset sales 8 387 40 1,490
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Net cash used in investing activities (3,546) (2,056) (5,698) (2,038)
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FINANCING ACTIVITIES:
Net change in short-term borrowings -0- 1,291 -0- 3,034
Payments on capital leases (320) (7,964) (675) (8,722)
Exercise of options and warrants 380 -0- 569 -0-
Other -0- -0- (4) -0-
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Net cash provided by (used in) financing activities 60 (6,673) (110) (5,688)
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NET CASH FLOW (3,443) (5,836) (4,990) (4,847)
Cash and short-term investments at
beginning of year 34,003 11,224 35,550 10,235
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CASH AND SHORT-TERM INVESTMENTS AT END OF YEAR $ 30,560 $ 5,388 $ 30,560 $ 5,388
=======================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Net cash paid (received) for:
Interest $ 4,646 $ 225 $ 8,852 $ 4,520
Income taxes 8 (745) (471) (767)
=======================================================================================================
The accompanying Notes are an integral part of these Financial Statements.
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6
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Shareholders' Equity
In Thousands
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TOTAL MINIMUM TOTAL
NON-REDEEMABLE PENSION SHARE-
PREFERRED COMMON PAID-IN ACCUMULATED TREASURY LIABILITY HOLDERS'
STOCK STOCK CAPITAL DEFLICT STOCK ADJUSTMENT EQUITY
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BALANCE JANUARY 31, 1995 $ 7,943 $ 24,832 $ 121,670 $(104,582) $ (17,857) $ (2,613) $ 29,393
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Excercise of options -0- 8 15 -0- -0- -0- 23
Net earnings -0- -0- -0- 10,071 -0- -0- 10,071
Minimum pension liability adjustment -0- -0- -0- -0- -0- (5,631) (5,631)
Other 15 4 30 -0- -0- -0- 49
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BALANCE JANUARY 31, 1996 $ 7,958 $ 24,844 $ 121,715 $ (94,511) $ (17,857) $ (8,244) $ 33,905
==================================================================================================================================
Net earnings -0- -0- -0- 3,039 -0- -0- 3,039
Exercise of options -0- 156 414 -0- -0- -0- 570
Other 4 -0- 10 -0- -0- -0- 14
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BALANCE JULY 31, 1996 $ 7,962 $ 25,000 $ 122,139 $ (91,472) $ (17,857) $ (8,244) $ 37,528
==================================================================================================================================
The accompanying Notes are an integral part of these Financial Statements
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7
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM STATEMENTS
The consolidated financial statements contained in this report are unaudited
but reflect all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the results for the interim periods of the
fiscal year ending February 1, 1997 ("Fiscal 1997") and of the fiscal year
ended January 31, 1996 ("Fiscal 1996"). 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.
BASIS OF CONSOLIDATION
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.
NATURE OF OPERATIONS
The Company's businesses include the manufacture or sourcing, marketing and
distribution of footwear under the Johnston & Murphy, Laredo, Code West, Larry
Mahan, Dockers and Nautica brands, the tanning and distribution of leather by
the Volunteer Leather division and the operation of Jarman, Journeys, Johnston
& Murphy, Boot Factory and Factory To You retail footwear stores.
CASH AND SHORT-TERM INVESTMENTS
Included in cash and short-term investments at January 31, 1996 and July 31,
1996, are short-term investments of $32.0 million and $27.6 million,
respectively. Short-term investments are highly-liquid debt instruments having
an original maturity of three months or less.
INVENTORIES
Inventories of wholesaling and manufacturing companies are stated at the lower
of cost or market, with cost determined principally by the first-in, first-out
method. Retail inventories are determined by the retail method.
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.
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8
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
The Company implemented Statement of Financial Accounting Standards (SFAS) 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" in the third quarter of Fiscal 1996. This statement
establishes accounting standards for determining impairment of long-lived
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. During the third quarter of Fiscal 1996, the Company identified certain
retail stores that were impaired because of a history of and current period
cash flow losses in these specific stores. An impairment loss of $978,000 was
recognized for these retail stores.
HEDGING CONTRACTS
In order to reduce exposure to foreign currency exchange rate fluctuations in
connection with inventory purchase commitments, the Company enters into foreign
currency forward exchange contracts for Italian Lira. At January 31, 1996 and
July 31,1996, the Company had approximately $4.9 million and $8.5 million,
respectively, of such contracts outstanding. Forward exchange contracts have
an average term of approximately five months. Gains and losses arising from
these contracts offset gains and losses from the underlying hedged
transactions. The Company monitors the credit quality of the major national
and regional financial institutions with whom it enters into such contracts.
POSTRETIREMENT BENEFITS
Substantially all full-time employees are covered by a defined benefit pension
plan. The Company funds at least the minimum amount required by the Employee
Retirement Income Security Act.
In accordance with SFAS 106, postretirement benefits such as life insurance and
health care are accrued over the period the employee provides services to the
Company.
ENVIRONMENTAL COSTS
Environmental expenditures relating to current operations are expensed or
capitalized as appropriate. Expenditures relating to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable and the costs can be
reasonably estimated and are evaluated independently of any future claims for
recovery. Generally, the timing of these accruals coincides with completion of
a feasibility study or the Company's commitment to a formal plan of action.
INCOME TAXES
Deferred income taxes are provided for all temporary differences and operating
loss and tax credit carryforwards limited, in the case of deferred tax assets,
to the amount of taxes recoverable from taxes paid in the current or prior
years.
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GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 2
ACCOUNTS RECEIVABLE
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JULY 31, JANUARY 31,
IN THOUSANDS 1996 1996
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Trade accounts receivable $38,202 $33,068
Miscellaneous receivables 3,454 3,263
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Total receivables 41,656 36,331
Allowance for bad debts (3,708) (2,065)
Other allowances (2,559) (2,131)
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NET ACCOUNTS RECEIVABLE $35,389 $32,135
=============================================================================
NOTE 3
INVENTORIES
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JULY 31, JANUARY 31,
IN THOUSANDS 1996 1996
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Raw materials $ 8,076 $ 9,229
Work in process 3,667 3,792
Finished goods 27,722 22,935
Retail merchandise 54,991 48,974
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TOTAL INVENTORIES $94,456 $84,930
=============================================================================
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10
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 4
PLANT, EQUIPMENT AND CAPITAL LEASES, NET
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JULY 31, JANUARY 31,
IN THOUSANDS 1996 1996
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Plant and equipment:
Land $ 214 $ 75
Buildings and building equipment 2,570 2,799
Machinery, furniture and fixtures 33,986 32,927
Construction in progress 2,709 1,114
Improvements to leased property 38,854 39,195
Capital leases:
Land 60 60
Buildings 2,195 2,195
Machinery, furniture and fixtures 7,381 7,392
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Plant, equipment and capital leases, at cost 87,969 85,757
Accumulated depreciation and amortization:
Plant and equipment (50,350) (50,355)
Capital leases (7,334) (6,850)
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NET PLANT, EQUIPMENT AND CAPITAL LEASES $ 30,285 $ 28,552
============================================================================
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11
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 5
PROVISION FOR DISCONTINUED OPERATIONS AND RESTRUCTURING RESERVES
PROVISION FOR DISCONTINUED OPERATIONS
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EMPLOYEE FACILITY OTHER
RELATED SHUTDOWN CONTRACT
IN THOUSANDS COSTS COSTS LIABILITIES OTHER TOTAL
- -------------------------------------------------------------------------------------------
Balance January 31, 1996 $15,222 $ 10 $ 45 $1,976 $17,253
Charges and adjustments, net (1,011) (10) 15 117 (889)
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Balance July 31, 1996 14,211 -0- 60 2,093 16,364
Current portion 1,764 -0- 60 2,070 3,894
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TOTAL NONCURRENT PROVISION FOR
DISCONTINUED OPERATIONS $12,447 $ -0- $ -0- $ 23 $12,470
===========================================================================================
RESTRUCTURING RESERVES
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EMPLOYEE FACILITY OTHER
RELATED SHUTDOWN CONTRACT
IN THOUSANDS COSTS COSTS LIABILITIES OTHER TOTAL
- -------------------------------------------------------------------------------------------
Balance January 31, 1996 $ 956 $1,666 $ 59 $ 323 $ 3,004
Charges and adjustments, net (427) (220) (9) (9) (665)
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Balance July 31, 1996 529 1,446 50 314 2,339
Current portion (included in accounts
payable and accrued liabilities) 529 1,304 50 314 2,197
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TOTAL NONCURRENT RESTRUCTURING RESERVES
(INCLUDED IN OTHER LONG-TERM
LIABILITIES) $ -0- $ 142 $ -0- $ -0- $ 142
===========================================================================================
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12
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 6
LEGAL PROCEEDINGS
New York State Environmental Proceedings
The Company is 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 $8.8 million and $12.2 million, respectively.
The Company has filed answers to the complaints in both the Johnstown and
Gloversville cases denying liability and asserting numerous defenses. Because
of uncertainties related to the ability or willingness of the other defendants,
including the municipalities involved, to pay a portion of future remediation
costs, the availability of State funding to pay a portion of future remediation
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 liability the Company may incur with
respect to either of the Johnstown or Gloversville actions.
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 the Company or a former subsidiary from 1965 to 1969, and that
it considers the Company a potentially responsible party. The Department has
also proposed a form of consent order whereby the Company would assume
responsibility for an interim remediation measure with regard to the site. The
owner of the site has advised the Company that it intends to hold the Company
responsible for any required remediation or other damages incident to the
contamination. 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, has not entered into the consent order with
the Department, and is unable to predict whether its own liability, if any,
will have a material effect on its financial condition or results of
operations.
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GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 6
LEGAL PROCEEDINGS, CONTINUED
Whitehall Environmental Sampling
The Michigan Department of Environmental Quality ("MDEQ") has performed
sampling and analysis of soil, sediments, surface water, groundwater, and
waste management areas at the Company's Volunteer Leather Company facility
in Whitehall, Michigan. MDEQ advised the Company that it would review the
results of the analysis for possible referral to the EPA for action under
the Comprehensive Environmental Response Compensation and Liability Act.
However, the Company is cooperating with MDEQ and has been advised by MDEQ
that no EPA referral is presently contemplated. Neither MDEQ nor the EPA
has threatened or commenced any enforcement action. In response to the
testing data, the Company submitted and MDEQ approved a work plan, pursuant
to which a hydro geological study was completed and submitted to MDEQ in
March 1996. Additional studies regarding wastes on-site and groundwater
have been performed and an additional study of adjoining lake sediments is
planned to serve as a basis for the Company's remedial action plan for the
site. The Company is presently unable to determine whether the
implementation of the plan will have a material effect on its financial
condition or results of operations.
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 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. On September
6, 1996, the court granted the defendants' motion for summary judgment
regarding certain alleged misrepresentations by one of the Company's
officers and the plaintiffs motion regarding the existence and breach of
fiduciary duties owed by the Company to the plaintiffs. It denied the
defendants' and plaintiffs' motions for summary judgment in other respects.
The Company and the individual defendants intend to defend the action
vigorously. The Company is unable to predict if the action will have a
material adverse effect on the Company's results of operations or financial
condition.
13
14
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 6
LEGAL PROCEEDINGS, CONTINUED
Texas Interference Action
On October 6, 1995, a prior holder of a license to manufacture and market
western boots and other products under a trademark now licensed to the
Company filed an action in the District Court of Dallas County, Texas
against the Company and a contract manufacturer alleging tortious
interference with a business relationship, breach of contract, tortious
interference with a contract, breach of a confidential relationship and
civil conspiracy based on the Company's entry into the license. The Company
filed an answer denying all the material allegations of the plaintiff's
complaint. The Company is unable to predict whether the outcome of the
litigation will have a material effect on its financial condition or results
of operations.
14
15
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion includes certain forward-looking statements. Actual
results could differ materially from those reflected by the forward-looking
statements in the discussion and a number of factors may adversely affect
future results, liquidity and capital resources. These factors include
softness in the general retail environment, the timing and acceptance of
products being introduced to the market, international trade developments
affecting Chinese and other foreign sourcing of products, as discussed in
greater detail below, the outcome of various litigation and environmental
contingencies, including those discussed in Item 1, Legal Proceedings, in Part
II - Other Information and in Note 6 to the Consolidated Financial Statements,
the solvency of the retail customers of the Company, the level of margins
achievable in the marketplace and the ability to minimize operating expenses.
They also include possible continued weakening of the western boot market,
which has experienced a somewhat prolonged down cycle. Many western boot
retailers are thinly capitalized. Continued weakness in demand for western
boots could result in the failure of those retailers and, consequently, the
erosion of the Company's customer base. Although the Company believes it has
the business strategy and resources needed for improved operations, future
revenue and margin trends cannot be reliably predicted and the Company may
alter its business strategies during Fiscal 1997.
SIGNIFICANT DEVELOPMENTS
Revolving Credit Agreement
On January 5, 1996, the Company entered into a revolving credit agreement with
two banks providing for loans or letters of credit of up to $35 million. The
agreement expires January 5, 1999. This agreement replaced a $50 million
revolving credit agreement providing for loans or letters of credit. See
"Liquidity and Capital Resources."
International Trade Developments
Manufacturers in China have become major suppliers to Genesco and other
footwear companies in the United States. In Fiscal 1997 the Company expects to
import approximately 18% of purchases from China. In addition to the products
the Company imports, many of the Company's suppliers import a significant
amount of their products from China. China's most favored nation trading
status was renewed for an additional year in June 1996, and a congressional
effort to reverse the renewal failed in July. Additionally, the U.S. did not
impose threatened trade sanctions against China in connection with a dispute
over inadequate protection of intellectual property in China. Thus, while
disruptions of supply from China related to trade disputes does not appear to
constitute a substantial threat to the Company's business and prospects in the
immediate future, there can be no assurance that a subsequent failure by the
U.S. to grant the annual extension of most favored nation status to China or
other disruptions in the Company's ability to import shoes from China will not
occur, or that any such disruption would not have a material adverse effect on
the Company's operations.
Fiscal 1995 Restructuring Substantially Completed
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,
15
16
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
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 constituted its entire men's apparel segment.
The 1995 Restructuring provided for the following:
1995 Restructuring Charge
- Liquidation of the University Brands children's shoe business,
- Sale of the Mitre Sports soccer business, and
- Facility consolidation costs and permanent work force reductions.
1995 Restructuring Provision
- Liquidation of The Greif Companies men's tailored clothing business, and
- Sale of the GCO Apparel Corporation tailored clothing manufacturing
business.
The transactions provided for in the 1995 Restructuring were substantially
complete as of January 31, 1996 and the Company does not expect any material
future adjustments arising from the completion of the 1995 Restructuring. The
divestiture of the University Brands business was completed in February 1995.
The operations of The Greif Companies have ceased, its inventories and
equipment have been liquidated and its last major remaining long-term lease
liability was resolved in June 1995. The Company's GCO Apparel Corporation was
sold in June 1995. The Company's Mitre Sports soccer business was sold in
August 1995.
RESULTS OF OPERATIONS - SECOND QUARTER FISCAL 1997 COMPARED TO FISCAL 1996
The Company's net sales from ongoing operations in the second quarter ended
July 31, 1996 increased 13.4% from the previous year. The Company's total net
sales (including both ongoing operations and, for the second quarter ended July
31, 1995, $18,792,000 of sales from the operations divested as part of the 1995
Restructuring) decreased 6.1%. Total gross margin for the quarter decreased
4.0% but increased as a percentage of net sales from 38.8% to 39.6%. Selling
and administrative expenses decreased 3.8% but increased as a percentage of net
sales from 34.5% to 35.3%. Pretax earnings in the second quarter ended July
31, 1996 were $2,101,000, compared to a pretax loss of $1,179,000 for the
quarter ended July 31, 1995. The pretax loss for the second quarter ended July
31, 1995 includes a $2.2 million increase in the 1995 Restructuring Charge.
The Company reported net earnings of $2,073,000 ($0.08 per share) for the
second quarter ended July 31, 1996 compared to net earnings of $514,000 ($0.02
per share) in the second quarter ended July 31, 1995. The second quarter ended
July 31, 1995 net earnings includes, in addition to the 1995 Restructuring
Charge adjustment, a positive adjustment of $1.7 million to the 1995
Restructuring Provision.
16
17
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Footwear Retail
Three Months
Ended July 31,
-------------------- %
1996 1995 Change
-------- -------- ------
(In Thousands)
Net Sales ......................... $ 61,847 $ 54,581 13.3%
Operating Income .................. $ 4,244 $ 2,979 42.5%
Operating Margin .................. 6.9% 5.5%
Primarily due to an increase in comparable store sales of approximately 11%,
net sales from footwear retail operations increased 13.3% in the quarter ended
July 31, 1996 compared to the previous year despite the operation of 2% fewer
stores in the second quarter ended July 31, 1996. The average price per pair
increased 5% and unit sales increased 10% for the second quarter.
The Company's second quarter comparable store sales were as follows:
Jarman Retail +11%
Jarman Lease +10%
Journeys +24%
Johnston & Murphy (including factory stores) + 9%
Other Outlet Stores -13%
Total Retail +11%
The Jarman Lease comparable store increase was aided by a 7% increase in
the average square footage due to remodeling while the other outlet store
decline was due to the continued weakness in demand for western boot products.
Gross margin as a percentage of net sales decreased from 49.0% to 48.2%,
primarily from changes in product mix to more branded products as well as
increased markdowns to stimulate sales in the Company's boot outlets.
Operating expenses increased 7.3%, primarily due to increased selling salaries,
advertising, rent expense and increased divisional management expenses to
support the new store growth, but decreased as a percentage of net sales from
43.5% to 41.2%.
Operating income in the second quarter ended July 31, 1996 was up 42.5%
compared to the same period last year due to increased sales and the lower
expenses as a percent of sales.
17
18
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Footwear Wholesale & Manufacturing
Three Months
Ended July 31,
------------------ %
1996 1995 Change
------- -------- -------
(In Thousands)
Net Sales .......................... $41,108 $55,019 (25.3)%
Net Sales - Ongoing ................ $41,108 $36,227 13.5%
Operating Income before
Restructuring and Other Charges .. $ 2,299 $ 2,710 (15.2)%
Restructuring and Other Charges .... $ -0- $(2,216) 100.0%
Operating Income ................... $ 2,299 $ 494 365.4%
Operating Margin ................... 5.6% 0.9%
Net sales from footwear wholesale and manufacturing operations were $13.9
million (25.3%) lower in the second quarter ended July 31, 1996 than in the
same period last year, reflecting primarily the absence of sales in the second
quarter ended July 31, 1996 from the operations divested as part of the 1995
Restructuring. Sales from ongoing operations were up 13.5%, reflecting
primarily increased men's branded footwear sales, which more than offset the
continuing trend of decreased sales of western boots, primarily attributable to
lower unit sales. The increase in branded sales was aided by an increase in
product assortment by key retailers.
Gross margin in the second quarter ended July 31, 1996 decreased 30.2% compared
to the same period last year and gross margin as a percentage of net sales also
decreased from 28.6% to 26.8%, primarily from the absence of higher gross
margins of the divested operations. Gross margin for ongoing operations
increased 11.5% but decreased as a percentage of sales from 27.2% to 26.8%
primarily from changes in sales mix and start-up problems associated with the
introduction of the Larry Mahan boot brand.
Operating expenses decreased 27.1% and decreased as a percentage of net sales
from 21.7% to 21.2%, reflecting primarily the absence of the expenses
attributable to the operations divested in the 1995 Restructuring. Ongoing
operations expenses increased as a percentage of sales from 19.9% to 21.2%,
primarily due to higher advertising expenses including advertising associated
with the introduction of the Larry Mahan boot brand and higher bad debt expense
reflecting continuing credit problems in the western boot market and higher
royalty expenses.
The decrease in operating income before restructuring and other charges is due
primarily to lower earnings in the Company's boot business reflecting higher
bad debt expense related to the
18
19
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
continued weakness of the western boot market and costs associated with the
introduction of the Larry Mahan brand.
Corporate and Interest Expenses
Corporate and other expenses in the second quarter ended July 31, 1996 were
$2.3 million compared to $2.1 million the previous year, an increase of 11%.
Included in this year's corporate and other expenses is a $150,000 provision
for environmental litigation. The increase in corporate expenses, excluding
the provision for environmental litigation, is attributable primarily to
increased bonus accruals based on the Company's increased earnings.
Interest expense decreased $76,000, or 3%, from last year, while interest
income increased $364,000 from last year due to increased short-term
investments related to the cash generated from the 1995 Restructuring. There
were no borrowings under the Company's revolving credit facility during the
three months ended July 31, 1996 while borrowings averaged $44,000 during the
three months ended July 31, 1995.
Other Income
Operating results of businesses to be divested pursuant to the 1995
Restructuring are included in the Company's sales, gross margin and selling and
administrative expenses for the three months ended July 31, 1995. The net
operating losses incurred by these operations subsequent to the decision to
divest are charged against the restructuring reserves established to provide
for such losses. The elimination of these gains from the Company's results of
operations for the three months ended July 31, 1995 is presented as other
expense in the Consolidated Earnings Statement. Such operating gains totalled
$1.0 million for the three months ended July 31, 1995.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JULY 31 FISCAL 1997 COMPARED TO FISCAL
1996
The Company's net sales from ongoing operations for the six months ended July
31, 1996, which included an additional week versus a year ago, increased 17.0%
from the previous year. The Company's total net sales (including both ongoing
operations and, for the six months ended July 31, 1995, $29,239,000 of sales
from the operations divested as part of the 1995 Restructuring) increased 0.2%.
Total gross margin for the six months increased 4.3% and increased as a
percentage of net sales from 38.5% to 40.1%. Selling and administrative
expenses were flat with the previous year but decreased as a percentage of net
sales from 36.6% to 36.5%. Pretax earnings for the six months ended July 31,
1996 were $2,602,000, compared to a pretax loss of $14,501,000 for the six
months ended July 31, 1995. The pretax loss for the six months ended July 31,
1995 includes a $16.3 million increase in the 1995 Restructuring Charge and
recognition of a $1.8 million gain from the favorable resolution of a claim
relating to import duties. The Company reported net earnings of $3,039,000
($0.11 per share) for the six months ended July 31, 1996 compared to a net loss
of $164,000 ($0.01 per share) for the six months ended July 31, 1995. The six
months ended July 31, 1995 net loss includes, in addition to the 1995
Restructuring Charge adjustment, a positive adjustment of $14.4 million to the
1995 Restructuring Provision.
19
20
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Footwear Retail
Six Months
Ended July 31,
-------------------- %
1996 1995 Change
-------- --------- ------
(In Thousands)
Net Sales ......... $120,882 $102,339 18.1%
Operating Income .. $ 7,428 $ 4,200 76.9%
Operating Margin .. 6.1% 4.1%
Primarily due to an increase in comparable store sales of approximately 12% and
seven additional selling days in the six months, net sales from footwear retail
operations increased 18.1% for the six months ended July 31, 1996 compared to
the previous year despite the operation of 2% fewer stores for the six months
ended July 31, 1996. The average price per pair increased 6% and unit sales
increased 12% for the six months ended July 31, 1996.
The Company's six month comparable store sales were as follows:
Jarman Retail +11%
Jarman Lease +14%
Journeys +21%
Johnston & Murphy (including factory stores) +10%
Other Outlet Stores - 8%
Total Retail +12%
The Jarman Lease comparable store increase was aided by a 6% increase in
the average square footage due to remodeling while the other outlet store
decline was due to the continued weakness in demand for western boot products.
Gross margin as a percentage of net sales decreased from 49.5% to 48.9%,
primarily from increased markdowns to stimulate sales in the Company's boot
outlets and changes in product mix to more branded products. Operating
expenses increased 10.5%, primarily due to increased selling salaries,
advertising and rent expense and increased divisional management expenses to
support the new store growth, but decreased as a percentage of net sales from
45.6% to 42.6%.
Operating income for the six months ended July 31, 1996 was up 76.9% compared
to the same period last year due to increased sales (including the additional
week) and the lower expenses as a percent of sales.
20
21
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Footwear Wholesale & Manufacturing
Six Months
Ended July 31,
-------------------- %
1996 1995 Change
-------- -------- -------
(In Thousands)
Net Sales ................ $82,292 $100,486 (18.1)%
Net Sales - Ongoing ...... $82,292 $ 71,343 15.3 %
Operating Income before
Restructuring Charges .. $ 3,791 $ 6,507 (41.7)%
Restructuring Charges .... $ -0- $(16,329) 100.0 %
Operating Income (Loss) .. $ 3,791 $ (9,822) NA
Operating Margin ......... 4.6% (9.8)%
Net sales from footwear wholesale and manufacturing operations were $18.2
million (18.1%) lower for the six months ended July 31, 1996 than in the same
period last year, reflecting primarily the absence of sales in the six months
ended July 31, 1996 from the operations divested as part of the 1995
Restructuring. Sales from ongoing operations were up 15.3%, reflecting
primarily increased men's branded footwear and tanned leather sales, which more
than offset the continuing trend of decreased sales of western boots, primarily
attributable to lower unit sales. The increase in branded sales was aided by
an increase in product assortment by key retailers.
Gross margin for the six months ended July 31, 1996 decreased 18.8% compared to
the same period last year and gross margin as a percentage of net sales also
decreased from 27.3% to 27.1%, primarily from the absence of the higher gross
margins of the divested operations. Gross margin for ongoing operations
increased 17.6% and increased as a percentage of sales from 26.6% to 27.1%
primarily from changes to a higher margin sales mix.
Operating expenses decreased 21.1% and decreased as a percentage of net sales
from 23.4% to 22.5%, reflecting primarily the absence of the expenses
attributable to the operations divested in the 1995 Restructuring. Ongoing
operations expenses increased as a percentage of sales from 20.0% to 22.5%,
primarily due to higher advertising expenses including advertising associated
with the introduction of the Larry Mahan boot brand and higher bad debt expense
reflecting continuing credit problems in the western boot market and higher
royalty expenses.
Included in the operating income before restructuring and other charges for the
six months ended July 31, 1995 is a one-time gain of $1.8 million from the
favorable resolution of a claim relating to import duties. The decrease in
operating income before restructuring and other charges and the import duty
claim is due primarily to lower earnings in the Company's boot business
reflecting higher bad debt expense and higher than normal returns related to
the continued weakness of the western boot market and costs associated with the
introduction of the Larry Mahan brand.
21
22
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 for the six months ended July 31, 1996 were $4.3
million compared to $4.1 million the previous year, an increase of 5%.
Included in this year's corporate and other expenses is a $150,000 provision
for environmental litigation. The increase in corporate expenses, excluding
the provision for environmental litigation, is attributable primarily to
increased bonus accruals based on the Company's increased earnings.
Interest expense increased $243,000, or 5%, from last year due to interest
expense incurred for the union pension liability as a result of the 1995
Restructuring Provision, while interest income increased $709,000 from last
year due to increased short-term investments related to the cash generated from
the 1995 Restructuring. There were no borrowings under the Company's revolving
credit facility during the six months ended July 31, 1996 while borrowings
averaged $22,000 during the six months ended July 31, 1995.
Other Income
Operating results of businesses to be divested pursuant to the 1995
Restructuring are included in the Company's sales, gross margin and selling and
administrative expenses for the six months ended July 31, 1995. The net
operating losses incurred by these operations subsequent to the decision to
divest are charged against the restructuring reserves established to provide
for such losses. The elimination of these losses from the Company's results of
operations for the six months ended July 31, 1995 is presented as other income
in the Consolidated Earnings Statement. Such operating losses totalled $0.9
million for the six months ended July 31, 1995. Also included in other income
for the six months ended July 31, 1995 is a $1.8 million gain from the
favorable resolution of a claim relating to import duties.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain financial data at the dates indicated.
All dollar amounts are in millions.
July 31,
---------------
1996 1995
------ ------
Cash and short-term investments .............. $ 30.6 $ 5.4
Working capital .............................. $110.6 $100.9
Long-term debt (includes current
maturities) ................................. $ 75.0 $ 75.0
Current ratio ................................ 3.1x 2.5x
Working Capital
The Company's business is somewhat seasonal, with the Company's investment in
inventory and accounts receivable normally reaching peaks in the spring and
fall of each year. Cash flow from operations is ordinarily generated
principally in the fourth quarter of each fiscal year.
22
23
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Cash provided by operating activities was $818,000 in the first six months of
Fiscal 1997 compared to $2,879,000 for the same period last year. The $2.1
million reduction in cash flow from operating activities between the first six
months of Fiscal 1997 and the first six months of Fiscal 1996 reflects
primarily changes in accrued liabilities from bonus payments earned in Fiscal
1996.
A $9.5 million increase in inventories from January 31, 1996 levels reflected
in the Consolidated Cash Flows Statement reflects planned seasonal increases as
well as the introduction of the Larry Mahan boot brand. The $5.0 million
increase in inventories compared with July 31, 1995 reflects the buildup of
inventory to support the increased level of sales and the additional inventory
associated with the introduction of the Larry Mahan brand.
As reflected in the Consolidated Cash Flows Statement, accounts receivable at
July 31, 1996 increased $4.9 million compared to January 31, 1996 and accounts
receivable at July 31, 1996 were $1.5 million greater than at July 31, 1995,
primarily due to increased sales of men's branded footwear and tanned leather
and the introduction of the Larry Mahan boot brand.
Cash provided (or used) due to changes in accounts payable and accrued
liabilities in the Consolidated Cash Flows Statement at July 31, 1996 and 1995
is as follows:
Six Months Ended July 31,
-------------------------
(In Thousands) 1996 1995
-------- --------
Accounts payable ........................ $ 11,586 $ 1,872
Accrued liabilities ..................... (6,747) (10,354)
-------- --------
$ 4,839 $ (8,482)
======== ========
The fluctuations in accounts payable are due to changes in buying patterns,
payment terms negotiated with individual vendors and changes in inventory
levels.
The change in accrued liabilities was due primarily to payment of bonuses and
to payment of severance costs and liabilities related to the Restructurings.
There were no revolving credit borrowings during the six months ended July 31,
1996, as cash generated from operations and cash on hand funded capital
expenditures. There were only minimal revolving credit borrowings during the
six months ended July 31, 1995 as cash generated from the 1995 Restructuring
more than offset seasonal working capital increases in the remaining
operations.
Capital Expenditures
Total capital expenditures in Fiscal 1997 are expected to be approximately
$13.4 million. These include expected retail expenditures of $10.1 million to
open approximately 55 new retail stores (21 were opened by July 31, 1996) and
to complete 41 major store renovations. Capital expenditures for wholesale and
manufacturing operations and other purposes are expected to be approximately
$3.3 million.
23
24
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 1997. The
approximately $6.1 million of costs associated with the 1994 Restructuring and
the 1995 Restructuring that are expected to be incurred during the next twelve
months are also expected to be funded from cash on hand and from cash generated
from operations.
There were $10.6 million of letters of credit outstanding under the revolving
credit agreement at July 31, 1996.
The restricted payments covenant contained in the indenture under which the
Company's 10 3/8% senior notes were issued prohibits the Company from declaring
dividends on the Company's capital stock, except from a pool of available net
earnings and the proceeds of stock sales. At July 31, 1996, that pool was in a
$106.0 million deficit position. 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 currently has dividend arrearages in the amount
of $830,000 and is unable to predict when dividends may be reinstated.
24
25
PART II - OTHER INFORMATION
- ------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
On May 28, 1996, the Company and certain other industrial users of the
wastewater treatment system in Muskegon County, Michigan, filed a motion to
intervene in litigation pending in the Circuit Court for the County of
Muskegon between the City of Whitehall and Muskegon County. The City
originally brought suit against the County challenging a temporary transfer
to a unit of local government for use by an area landfill of a
contract-based wastewater capacity allocation by the Company's Whitehall
Leather operation. The City alleged that the transfer was improper and
should be voided. The City amended its complaint to address certain broader
issues of wastewater capacity allocation in the treatment system, whereupon
the industrial users, including the Company, sought to intervene. On August
1, 1996, the Court rendered a decision granting summary disposition in favor
of the Company and the other members of the industrial users group regarding
the validity of the allocation contract and of the Company's temporary
transfer of capacity.
See Note 6 to the Consolidated Financial Statements for discussion of other
legal proceedings to which the Company is a party.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At July 31, 1996 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 $214,147 $21,352 $235,499
$4.75 Series 3 October 31, 1993 233,130 23,313 256,443
$4.75 Series 4 October 31, 1993 194,892 19,490 214,382
$1.50 Subordinated Cumulative
Preferred October 31, 1993 112,489 11,331 123,820
- ------------------------------------------------------------------------
TOTALS $754,658 $75,486 $830,144
========================================================================
25
26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of shareholders held on June 26, 1996,
shares representing a total of 24,626,411 votes were outstanding and
entitled to vote. At the meeting, shareholders of the Company:
(1) elected nine directors nominated by the board of directors by the
following votes:
Votes
Votes "For" "Withheld"
----------- ----------
David M. Chamberlain 21,164,425 244,366
W. Lipscomb Davis, Jr. 21,164,512 244,279
John Diebold 21,019,017 389,774
Richard H. Evans 21,160,874 247,917
Harry D. Garber 21,031,188 377,603
Joel C. Gordon 21,157,590 251,201
Kathleen Mason 21,108,698 300,093
William A. Williamson, Jr. 21,163,462 245,329
William S. Wire II 21,124,579 284,212
(2) ratified the appointment of Price Waterhouse LLP as independent
accountants for the fiscal year ending January 31, 1997 by a vote of
21,228,431 for, 131,916 against, with 48,444 abstentions: and
(3) ratified employee stock purchase plan by a vote of 18,433,893 for,
2,712,312 against, with 262,586 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
(11) Computation of earnings per common and common share equivalent.
(27) Financial Data Schedule (for SEC use only)
______________
REPORTS ON FORM 8-K
None
27
SIGNATURE
- -----------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Genesco Inc.
/s/ James S. Gulmi
James S. Gulmi
Chief Financial Officer
September 16, 1996