1 GENESCO [LOGO] -------------------------------------------------------------------------------- (Mark One) Form 10-Q [x] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended July 31, 1995 [ ] Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 Securities and Exchange Commission Washington, D.C. 20549 Commission File No. 1-3083 -------------------------------------- GENESCO INC. A Tennessee Corporation I.R.S. No. 62-0211340 Genesco Park 1415 Murfreesboro Road Nashville, Tennessee 37217-2895 Telephone 615/367-7000 -------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports with the Commission) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- -------------------------------------------------------- Common Shares Outstanding September 8, 1995 - 24,343,663
2 <TABLE> <CAPTION> INDEX -------------------------------------------------------------------------------------------------------------------- PAGE -------------------------------------------------------------------------------------------------------------------- <S> <C> Part 1 - Financial Information 3 -------------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheet - July 31, 1995, January 31, 1995 and July 31, 1994 3 -------------------------------------------------------------------------------------------------------------------- Consolidated Earnings - Three Months Ended and Six Months Ended July 31, 1995 and 1994 4 -------------------------------------------------------------------------------------------------------------------- Consolidated Cash Flows - Three Months Ended and Six Months Ended July 31, 1995 and 1994 5 -------------------------------------------------------------------------------------------------------------------- Consolidated Shareholders' Equity - Year Ended January 31, 1995 and Six Months Ended July 31, 1995 6 -------------------------------------------------------------------------------------------------------------------- Notes to Consolidated Financial Statements 7 -------------------------------------------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations 18 -------------------------------------------------------------------------------------------------------------------- Part II - Other Information 28 -------------------------------------------------------------------------------------------------------------------- Signature 30 -------------------------------------------------------------------------------------------------------------------- </TABLE> 2
3 PART I - FINANCIAL INFORMATION GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheet In Thousands <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------- JULY 31, JANUARY 31, JULY 31, 1995 1995 1994 ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> ASSETS CURRENT ASSETS Cash and short-term investments $ 5,388 $ 10,235 $ 5,015 Accounts receivable 33,916 32,080 84,796 Inventories 89,427 82,905 153,513 Other current assets 4,133 4,277 7,228 Current assets of operations to be divested 35,482 53,891 -0- ------------------------------------------------------------------------------------------------------------------- Total current assets 168,346 183,388 250,552 ------------------------------------------------------------------------------------------------------------------- Plant, equipment and capital leases, net 28,126 28,073 41,177 Goodwill and other intangibles -0- -0- 18,517 Other noncurrent assets 13,533 13,773 16,802 Noncurrent assets of operations to be divested 1,629 18,644 -0- ------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 211,634 $ 243,878 $ 327,048 =================================================================================================================== ------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Notes payable $ 3,034 $ -0- $ 3,095 Current payments on capital leases 1,614 2,343 2,375 Accounts payable and accrued liabilities 57,957 61,124 60,714 Provision for discontinued operations 4,806 19,190 5,666 ------------------------------------------------------------------------------------------------------------------- Total current liabilities 67,411 82,657 71,850 ------------------------------------------------------------------------------------------------------------------- Long-term debt 75,000 75,000 114,000 Capital leases 2,065 10,057 11,367 Other long-term liabilities 23,310 25,746 33,168 Provision for discontinued operations 14,604 21,025 1,046 Contingent liabilities - - - SHAREHOLDERS' EQUITY Non-redeemable preferred stock 7,944 7,943 7,954 Common shareholders' equity: Par value of issued shares 24,832 24,832 24,822 Additional paid-in capital 121,684 121,670 121,634 Accumulated deficit (104,746) (104,582) (26,579) Minimum pension liability adjustment (2,613) (2,613) (9,964) Treasury shares, at cost (17,857) (17,857) (17,857) Foreign currency translation adjustments -0- -0- (4,393) ------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 29,244 29,393 95,617 ------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 211,634 $ 243,878 $ 327,048 =================================================================================================================== </TABLE> The accompanying Notes are an integral part of these Financial Statements. 3
4 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Earnings In Thousands <TABLE> <CAPTION> -------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED JULY 31, JULY 31, ---------------------- ----------------------- 1995 1994 1995 1994 -------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales $109,600 $114,166 $202,825 $214,387 Cost of sales 67,101 71,279 124,789 133,324 Selling and administrative expenses 37,823 42,034 74,189 80,312 Restructuring charge 2,216 -0- 16,329 -0- -------------------------------------------------------------------------------------------------------------- Earnings (loss) from operations before other income and expenses 2,460 853 (12,482) 751 -------------------------------------------------------------------------------------------------------------- Other expenses (income): Interest expense 2,549 3,093 4,777 5,899 Gain on divestiture -0- (4,900) -0- (4,900) Other expense (income) 1,090 3 (2,758) (512) -------------------------------------------------------------------------------------------------------------- Total other (income) expenses, net 3,639 (1,804) 2,019 487 -------------------------------------------------------------------------------------------------------------- Earnings (loss) before income taxes and discontinued operations (1,179) 2,657 (14,501) 264 Income taxes 6 372 15 513 -------------------------------------------------------------------------------------------------------------- Earnings (loss) before discontinued operations (1,185) 2,285 (14,516) (249) Discontinued operations: Operating loss -0- (2,801) -0- (2,940) Excess provision for future losses 1,699 -0- 14,352 -0- -------------------------------------------------------------------------------------------------------------- NET EARNINGS (LOSS) $ 514 $ (516) $ (164) $ (3,189) ============================================================================================================== Earnings (loss) per common share: Before discontinued operations $ (.05) $ .09 $ (.60) $ (.02) Discontinued operations $ .07 $ (.11) $ .59 $ (.12) Net earnings (loss) $ .02 $ (.02) $ (.01) $ (.14) ============================================================================================================== </TABLE> The accompanying Notes are an integral part of these Financial Statements. 4
5 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Cash Flows In Thousands <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JULY 31, JULY 31, ---------------------- ---------------------- 1995 1994 1995 1994 ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> OPERATIONS: Net earnings (loss) $ 514 $ (516) $ (164) $ (3,189) Noncash charges to earnings: Depreciation and amortization 1,751 2,454 3,587 4,947 Restructuring charge 2,216 -0- 16,329 -0- Excess provision for future losses (1,699) -0- (14,352) -0- Gain on divestiture -0- (4,900) -0- (4,900) Provision for losses on accounts receivable 192 838 723 1,255 Other 83 535 261 598 ------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) operations before working capital and other changes 3,057 (1,589) 6,384 (1,289) Effect on cash of changes in working capital and other assets and liabilities: Accounts receivable 1,897 (9,964) 3,534 (20,045) Inventories (134) 5,031 3,366 1,607 Other current assets 84 (475) 404 (1,389) Accounts payable and accrued liabilities (2,413) (206) (8,482) (2,383) Other assets and liabilities 402 (269) (2,327) 1,041 ------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) operations 2,893 (7,472) 2,879 (22,458) ------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES: Capital expenditures (2,443) (1,631) (3,528) (3,195) Proceeds from businesses divested and asset sales 387 1,614 1,490 1,770 ------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (2,056) (17) (2,038) (1,425) ------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES: Net borrowings (repayments) under revolving credit agreement -0- 8,000 -0- 24,000 Net change in short-term borrowings 1,291 1,263 3,034 3,026 Payments on capital leases (7,964) (894) (8,722) (1,511) Other -0- -0- -0- (242) ------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities (6,673) 8,369 (5,688) 25,273 ------------------------------------------------------------------------------------------------------------------------ NET CASH FLOW (5,836) 880 (4,847) 1,390 Cash and short-term investments at beginning of period 11,224 4,135 10,235 3,625 ------------------------------------------------------------------------------------------------------------------------ CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 5,388 $ 5,015 $ 5,388 $ 5,015 ======================================================================================================================== SUPPLEMENTAL CASH FLOW INFORMATION: Net cash paid (received) for: Interest $ 225 $ 814 $ 4,520 $ 5,343 Income taxes (745) 135 (767) (134) ======================================================================================================================== </TABLE> The accompanying Notes are an integral part of these Financial Statements. 5
6 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Shareholders' Equity In Thousands <TABLE> <CAPTION> ------------------------------------------------------------------------------------ TOTAL NON-REDEEMABLE PREFERRED COMMON PAID-IN ACCUMULATED STOCK STOCK CAPITAL DEFICIT ------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Balance January 31, 1994 $ 8,064 $24,793 $ 121,634 $ (23,241) ------------------------------------------------------------------------------------ Exercise of options -0- 2 4 -0- Translation adjustments: Year-to-date adjustments -0- -0- -0- -0- Realized in FY 1995 restructuring -0- -0- -0- -0- Net loss -0- -0- -0- (81,192) Minimum pension liability adjustment -0- -0- -0- -0- Other (121) 37 32 (149) ------------------------------------------------------------------------------------ Balance January 31, 1995 $ 7,943 $24,832 $ 121,670 $(104,582) ------------------------------------------------------------------------------------ Net loss -0- -0- -0- (164) Other 1 -0- 14 -0- ------------------------------------------------------------------------------------ BALANCE JULY 31, 1995 $ 7,944 $24,832 $ 121,684 $(104,746) ==================================================================================== <CAPTION> ------------------------------------------------------------------------------------------ FOREIGN MINIMUM TOTAL CURRENCY PENSION SHARE- TREASURY TRANSLATION LIABILITY HOLDERS' STOCK ADJUSTMENTS ADJUSTMENT EQUITY ------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Balance January 31, 1994 $ (17,857) $ (4,706) $ (9,964) $ 98,723 ----------------------------------------------------------------------------------------- Exercise of options -0- -0- -0- 6 Translation adjustments: Year-to-date adjustments -0- 2,136 -0- 2,136 Realized in FY 1995 restructuring -0- 2,570 -0- 2,570 Net loss -0- -0- -0- (81,192) Minimum pension liability adjustment -0- -0- 7,351 7,351 Other -0- -0- -0- (201) ----------------------------------------------------------------------------------------- Balance January 31, 1995 $ (17,857) $ -0- $ (2,613) $ 29,393 ----------------------------------------------------------------------------------------- Net loss -0- -0- -0- (164) Other -0- -0- -0- 15 ----------------------------------------------------------------------------------------- BALANCE JULY 31, 1995 $ (17,857) $ -0- $ (2,613) $ 29,244 ========================================================================================= </TABLE> The accompanying Notes are an integral part of these Financial Statements. 6
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, 1996 ("Fiscal 1996") and of the fiscal year ended January 31, 1995 ("Fiscal 1995"). 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. (See Note 2). BASIS OF CONSOLIDATION All subsidiaries are included in the consolidated financial statements. All significant intercompany transactions and accounts have been eliminated. 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. GOODWILL AND OTHER INTANGIBLES Goodwill and other intangibles relate solely to operations to be divested and consist primarily of the excess of purchase price over fair value of net assets acquired in acquisitions. 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. 7
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 (principally Dollars and Lira). At January 31, 1995 and July 31, 1995, the Company had approximately $9.7 million and $7.1 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 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". 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. 8
9 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 2 RESTRUCTURINGS -------------------------------------------------------------------------------- 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: 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. In connection with the 1995 Restructuring, the Company took a combined charge of $90.7 million in the third quarter of Fiscal 1995, of which $22.1 million (the "1995 Restructuring Charge") related to University Brands and Mitre and facility consolidation costs and permanent work force reductions and $68.6 million (the "1995 Restructuring Provision") related 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. In the fourth quarter of Fiscal 1995 the 1995 Restructuring Provision was positively adjusted by $10.5 million reducing the $68.6 million provision for future losses of discontinued operations to $58.1 million. The adjustment reflected the favorable consequences of a transfer, not anticipated at the time the provision was recorded, of a licensing agreement for men's apparel to another manufacturer. The transfer resulted in realization of inventory and accounts receivable balances on more favorable terms than anticipated, assumption of piece goods commitments by other manufacturers and cancellation of minimum royalty requirements under the transferred license. In the first quarter of Fiscal 1996 the Company took an additional restructuring charge of $14.1 million relating to the 1995 Restructuring. The additional restructuring charge reflected the lowering of anticipated proceeds from the sale of Mitre Sports soccer business. In addition, the 1995 Restructuring Provision was adjusted by an additional reversal of $12.7 million. The reversal reflected primarily (1) an agreement during the quarter providing for the resolution of a long-term lease liability on terms more favorable than were anticipated when the 1995 Restructuring Provision was established, (2) better than anticipated realization of inventories and accounts receivable as the remaining Greif inventory was liquidated in the first quarter of Fiscal 1996 and (3) lower than anticipated union pension liability, which the pension fund determined and announced to the Company during the quarter. 9
10 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 2 RESTRUCTURINGS, CONTINUED -------------------------------------------------------------------------------- In the second quarter of Fiscal 1996 the Company took an additional restructuring charge of $2.2 million relating to the 1995 Restructuring. This addition to the 1995 Restructuring Charge reflects the actual proceeds received from the sale on August 14, 1995 of the Mitre Sports soccer business. In addition, the Company made an additional positive adjustment of $1.7 million to the 1995 Restructuring Provision. The adjustment reflects primarily the reversal of reserves in connection with the final settlement of a long-term lease liability, based on the resolution of certain contingencies at the closing of the transaction in the second quarter more favorably than the Company had anticipated and lower than anticipated severance payments. The transactions provided for in the 1995 Restructuring are substantially complete. The 1995 Restructuring Charge, as adjusted, provided for the elimination of 464 jobs in footwear operations to be divested or consolidated and in staff positions to be eliminated, of which 302 jobs had been eliminated as of July 31, 1995. 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 effective June 9, 1995. The Company's Mitre Sports soccer business was sold effective August 14, 1995 with cash proceeds to the Company of approximately $19.1 million, including repayment of intercompany balances, subject to the outcome of certain contingencies, principally a post-closing audit. The outcome of these contingencies may require further adjustments to the 1995 Restructuring Charge and Provision. There can be no assurance that variations in the timing of any further adjustments will not affect the results of operations and cash flows of the Company in the third fiscal quarter or that some variations will not be material. While the Company is unable to predict with certainty the extent, if any, to which the aggregate cash proceeds from the 1995 Restructuring will exceed the cash requirements thereof, it currently anticipates that cash proceeds will exceed requirements by approximately $10 million. Any excess cash will be reinvested in the Company's ongoing businesses. Excess cash requirements, if any, from quarter to quarter during the implementation of the 1995 Restructuring are expected to be funded from cash flow from operations and, if necessary, from revolving credit borrowings. The operating results of the men's apparel segment prior to the decision to discontinue, classified as discontinued operations in the consolidated earnings statement, are shown below: <TABLE> <CAPTION> ----------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED JULY 31, -------------------------- IN THOUSANDS 1994 ----------------------------------------------------------------------------------------------------------- <S> <C> Net sales $57,198 Cost of sales and expenses 60,138 ----------------------------------------------------------------------------------------------------------- Pretax loss (2,940) Income tax expense (benefit) -0- ----------------------------------------------------------------------------------------------------------- Net Loss $(2,940) =========================================================================================================== </TABLE> 10
11 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 2 RESTRUCTURINGS, CONTINUED -------------------------------------------------------------------------------- Discontinued operations' sales subsequent to the decision to discontinue were $20.0 million for the six months ended July 31, 1995. Operating results of stores identified for closure and businesses to be divested pursuant to the 1995 Restructuring and the 1994 Restructuring referred to below are included in the Company's sales, gross margin and selling and administrative expenses. 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. FISCAL 1994 RESTRUCTURING Because of developments in the fourth quarter of Fiscal 1994, the Company changed operating strategies and made a decision to restructure certain of its operations and reassessed the recoverability of certain assets (the "1994 Restructuring"). As a result, the Company recorded a charge of $29.4 million, of which $17.1 million related to the men's apparel segment. This charge reflects estimated costs of closing certain manufacturing facilities, effecting permanent work force reductions and closing 58 retail stores. The provision included $15.8 million in asset write-downs and $13.6 million of future consolidation costs. The restructuring involved the elimination of approximately 1,200 jobs (20% of the Company's total work force in Fiscal 1994). Included in the $15.8 million of asset write-downs was $7.7 million relating to goodwill, of which $6.9 million related to the LaMar acquisition and $800,000 related to the Toddler U Inc. acquisition. 11
12 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 3 ACCOUNTS RECEIVABLE* -------------------------------------------------------------------------------- <TABLE> <CAPTION> JULY 31, JANUARY 31, IN THOUSANDS 1995 1995 ---------------------------------------------------------------------------------------------------------- <S> <C> <C> Trade accounts receivable $33,657 $32,401 Miscellaneous receivables 2,835 2,258 ---------------------------------------------------------------------------------------------------------- Total receivables 36,492 34,659 Allowance for bad debts (1,294) (1,127) Other allowances (1,282) (1,452) ---------------------------------------------------------------------------------------------------------- NET ACCOUNTS RECEIVABLE $33,916 $32,080 ========================================================================================================== </TABLE> * Excludes accounts receivable of operations to be divested (see Note 5). NOTE 4 INVENTORIES* -------------------------------------------------------------------------------- <TABLE> <CAPTION> JULY 31, JANUARY 31, IN THOUSANDS 1995 1995 ---------------------------------------------------------------------------------------------------------- <S> <C> <C> Raw materials $ 9,534 $ 8,856 Work in process 3,612 2,877 Finished goods 23,651 21,992 Retail merchandise 52,630 49,180 ---------------------------------------------------------------------------------------------------------- TOTAL INVENTORIES $89,427 $82,905 ========================================================================================================== </TABLE> * Excludes inventories of operations to be divested (see Note 5). 12
13 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements <TABLE> <CAPTION> NOTE 5 ASSETS OF OPERATIONS TO BE DIVESTED -------------------------------------------------------------------------------------------------------------- JANUARY 31, JULY 31, 1995 1995 -------------------------------------------- ---------- DISCONTINUED* OTHER** IN THOUSANDS OPERATIONS OPERATIONS TOTALS -------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Current assets: Accounts receivable $ 3,628 $ 16,975 $ 20,603 $ 27,079 Inventory -0- 14,484 14,484 26,158 Other -0- 395 395 654 -------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS $ 3,628 $ 31,854 $ 35,482 $ 53,891 ============================================================================================================== Noncurrent assets: Plant and equipment $ -0- $ 1,611 $ 1,611 $ 2,647 Capitalized lease rights -0- 18 18 299 Goodwill and other intangibles -0- -0- -0- 15,698 -------------------------------------------------------------------------------------------------------------- TOTAL NONCURRENT ASSETS $ -0- $ 1,629 $ 1,629 $ 18,644 ============================================================================================================== </TABLE> * Includes the assets of The Greif Companies and GCO Apparel Corporation comprising the men's apparel segment (see Note 2). ** Includes the assets of University Brands and Mitre Sports (see Note 2). <TABLE> <CAPTION> NOTE 6 PLANT, EQUIPMENT AND CAPITAL LEASES, NET* -------------------------------------------------------------------------------------------------------------- JULY 31, JANUARY 31, IN THOUSANDS 1995 1995 -------------------------------------------------------------------------------------------------------------- <S> <C> <C> Plant and equipment: Land $ 75 $ 75 Buildings and building equipment 2,517 2,797 Machinery, furniture and fixtures 32,135 30,682 Construction in progress 1,756 672 Improvements to leased property 37,316 37,776 Capital leases: Land 60 60 Buildings 2,126 2,195 Machinery, furniture and fixtures 7,650 7,627 -------------------------------------------------------------------------------------------------------------- Plant, equipment and capital leases, at cost 83,635 81,884 Accumulated depreciation and amortization: Plant and equipment (49,214) (48,131) Capital leases (6,295) (5,680) -------------------------------------------------------------------------------------------------------------- NET PLANT, EQUIPMENT AND CAPITAL LEASES $ 28,126 $ 28,073 ============================================================================================================== </TABLE> * Excludes plant, equipment and capital leases of operations to be divested (see Note 5). 13
14 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 7 PROVISION FOR DISCONTINUED OPERATIONS AND RESTRUCTURING RESERVES -------------------------------------------------------------------------------- <TABLE> <CAPTION> PROVISION FOR DISCONTINUED OPERATIONS ------------------------------------------------------------------------------------------------------------------- EMPLOYEE FACILITY OTHER RELATED SHUTDOWN CONTRACT IN THOUSANDS COSTS COSTS LIABILITIES OTHER TOTAL ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance January 31, 1995 $ 25,134 $ 9,405 $ 1,415 $ 4,261 $ 40,215 Charges and adjustments, net (8,311) (9,229) 74 (3,339) (20,805) ------------------------------------------------------------------------------------------------------------------- Balance July 31, 1995 16,823 176 1,489 922 19,410 Current portion 2,219 176 1,489 922 4,806 ------------------------------------------------------------------------------------------------------------------- TOTAL NONCURRENT PROVISION FOR DISCONTINUED OPERATIONS $ 14,604 $ -0- $ -0- $ -0- $ 14,604 =================================================================================================================== <CAPTION> RESTRUCTURING RESERVES ------------------------------------------------------------------------------------------------------------------- EMPLOYEE FACILITY OTHER RELATED SHUTDOWN CONTRACT IN THOUSANDS COSTS COSTS LIABILITIES OTHER TOTAL ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance January 31, 1995 $ 3,965 $ 3,123 $ 555 $ 3,112 $ 10,755 Charges and adjustments, net (1,788) (1,235) 694 (1,777) (4,106) ------------------------------------------------------------------------------------------------------------------- Balance July 31, 1995 2,177 1,888 1,249 1,335 6,649 Current portion (included in accounts payable and accrued liabilities) 2,177 1,614 1,249 1,332 6,372 ------------------------------------------------------------------------------------------------------------------- TOTAL NONCURRENT RESTRUCTURING RESERVES (INCLUDED IN OTHER LONG-TERM LIABILITIES) $ -0- $ 274 $ -0- $ 3 $ 277 =================================================================================================================== </TABLE> 14
15 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 8 CREDIT FACILITIES -------------------------------------------------------------------------------- At July 31, 1995, the Company's English subsidiary, Mitre U.K., has a credit facility with a credit limit equal to the lesser of (i) 5,000,000 pounds sterling (approximately $7,985,000 at July 31, 1995) 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 is guaranteed up to 4,300,000 pounds sterling by Genesco Inc., permits 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 in December 1994 and has been extended by an oral agreement through July 31, 1995. The facility was cancelled in connection with the sale of Mitre U.K. as of August 14, 1995. NOTE 9 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. 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. 15
16 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 9 LEGAL PROCEEDINGS, CONTINUED -------------------------------------------------------------------------------- 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. 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 $1,500,000 to cover its estimated share of future remediation costs. 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. Whitehall Environmental Sampling The Michigan Department of Natural Resources ("MDNR") 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. MDNR 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 MDNR and has been advised by MDNR that no EPA referral is presently contemplated. Neither MDNR nor the EPA has threatened or commenced any enforcement action. In response to the testing data, the Company has submitted a conceptual work plan for approval by MDNR. The plan provides, among other things, for fencing a waste disposal area to reduce the likelihood of human contact with any hazardous substances which may be in the area, installing an erosion barrier along a portion of the shore of White Lake adjoining the facility, and performing additional testing and analysis to determine what additional remediation may be necessary. The Company does not believe that the installation of an erosion barrier and fencing and the additional testing anticipated by the conceptual work plan will have a material effect on its financial condition or results of operations, but is unable to determine whether additional remediation activities, if any, would have a material effect on its financial condition or results of operations. 16
17 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 9 LEGAL PROCEEDINGS, CONTINUED -------------------------------------------------------------------------------- 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. 17
18 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------------------------------------- SIGNIFICANT DEVELOPMENTS 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, 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: 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. In connection with the 1995 Restructuring, the Company took a combined charge of $90.7 million in the third quarter of Fiscal 1995, of which $22.1 million (the "1995 Restructuring Charge") related to University Brands and Mitre and other costs described below and $68.6 million (the "1995 Restructuring Provision") related 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. In the fourth quarter of Fiscal 1995 the 1995 Restructuring Provision was positively adjusted by $10.5 million, reducing the $68.6 million provision for future losses of discontinued operations to $58.1 million. The adjustment reflected the favorable consequences of a transfer, not anticipated at the time the provision was recorded, of a licensing agreement for men's apparel to another manufacturer. The transfer resulted in realization of inventory and accounts receivable balances on more favorable terms than anticipated, assumption of piece goods commitments by other manufacturers and cancellation of minimum royalty requirements under the transferred license. 18
19 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------------------------------------- In the first quarter of Fiscal 1996 the Company took an additional restructuring charge of $14.1 million relating to the 1995 Restructuring. The additional restructuring charge reflected the lowering of anticipated proceeds from the sale of the Mitre Sports soccer business. In addition, the 1995 Restructuring Provision was adjusted by an additional reversal of $12.7 million. The reversal reflected primarily (1) an agreement during the quarter providing for the resolution of a long-term lease liability on terms more favorable than were anticipated when the 1995 Restructuring Provision was established, (2) better than anticipated realization of inventories and accounts receivable as the remaining Greif inventory was liquidated in the first quarter of Fiscal 1996 and (3) lower than anticipated union pension liability, which the pension fund determined and announced to the Company during the quarter. In the second quarter of Fiscal 1996 the Company took an additional restructuring charge of $2.2 million relating to the 1995 Restructuring. This addition to the 1995 Restructuring Charge reflects the actual proceeds received from the sale on August 14, 1995 of the Mitre Sports soccer business. In addition, the Company made an additional positive adjustment of $1.7 million to the 1995 Restructuring Provision. The adjustment reflects primarily the reversal of reserves in connection with the final settlement of a long-term lease liability, based on the resolution of certain contingencies at the closing of the transaction in the second quarter more favorably than the Company had anticipated and lower than anticipated severance payments. The transactions provided for in the 1995 Restructuring are substantially complete. The 1995 Restructuring Charge, as adjusted, provided for the elimination of 464 jobs in footwear operations to be divested or consolidated and in staff positions to be eliminated, of which 302 jobs had been eliminated as of July 31, 1995. 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 effective June 9, 1995. The Company's Mitre Sports soccer business was sold effective August 14, 1995 with cash proceeds to the Company of approximately $19.1 million, including repayment of intercompany balances, subject to the outcome of certain contingencies, principally a post-closing audit. The outcome of these contingencies may require further adjustments to the 1995 Restructuring Charge and Provision. There can be no assurance that variations in the timing of any further adjustments will not affect the results of operations and cash flows of the Company in the third fiscal quarter or that some variations will not be material. While the Company is unable to predict with certainty the extent, if any, to which the aggregate cash proceeds from the 1995 Restructuring will exceed the cash requirements thereof, it currently anticipates that cash proceeds will exceed requirements by approximately $10 million. Any excess cash will be reinvested in the Company's ongoing businesses. Excess cash requirements, if any, from quarter to quarter during the implementation of the 1995 Restructuring are expected to be funded from cash flow from operations and, if necessary, from revolving credit borrowings. 19
20 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - SECOND QUARTER FISCAL 1996 COMPARED TO FISCAL 1995 The Company's net sales from continuing operations in the second quarter ended July 31, 1995 decreased 4.0% from the previous year reflecting primarily lower sales from the operations divested as part of the 1995 Restructuring. Net sales from ongoing operations increased 3.8% from the previous year. Total gross margin for the quarter decreased .9% but increased as a percentage of net sales from 37.6% to 38.8%. Selling and administrative expenses decreased 10.0% and decreased as a percentage of net sales from 36.8% to 34.5%. The pretax loss in the second quarter ended July 31, 1995 was $1,179,000, compared to pretax earnings of $2,657,000 for the quarter ended July 31, 1994. The pretax loss for the second quarter ended July 31, 1995 includes the $2.2 million increase in the 1995 Restructuring Charge. Last year's pretax earnings includes the recognition of $4.9 million of additional gain on the sale in 1987 of the Company's Canadian operations following the settlement in the second quarter of Fiscal 1995 of certain claims arising out of that transaction. The Company reported net earnings of $514,000 ($0.02 per share) for the second quarter ended July 31, 1995 compared to a net loss of $516,000 ($0.02 per share) in the second quarter ended July 31, 1994. The second quarter ended July 31, 1995 net earnings includes, in addition to the 1995 Restructuring Charge adjustment, the positive adjustment of $1.7 million to the 1995 Restructuring Provision. See Note 2 to the Consolidated Financial Statements and "Significant Developments - Fiscal 1995 Restructuring." Footwear Retail <TABLE> <CAPTION> Three Months Ended July 31, ------------------------- % 1995 1994 Change -------- -------- ------ (In Thousands) <S> <C> <C> <C> Net Sales . . . . . . . . . . . . . . . . . . . . . $54,581 $52,999 3.0% Operating Income . . . . . . . . . . . . . . . . . $ 2,979 $ 2,104 41.6% Operating Margin . . . . . . . . . . . . . . . . . 5.5% 4.0% </TABLE> Primarily due to an increase in comparable store sales of approximately 5%, net sales from footwear retail operations increased 3% in the quarter ended July 31, 1995 compared to the previous year, despite the operation of 4% fewer stores in the second quarter ended July 31, 1995. As part of a restructuring plan adopted in the fourth quarter of Fiscal 1994 (the "1994 Restructuring"), the Company completed the closing of 7 retail stores in the second quarter of last fiscal year, which resulted in increased discounting. Consequently, the average price per pair in the quarter ended July 31, 1995 increased 8% as compared to the same period last year, while unit sales were down 4%. Gross margin as a percentage of net sales decreased from 50.7% to 49.0%, primarily from price pressures on branded products as well as increased markdowns to stimulate sales in the Company's boot outlets. Operating 20
21 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------------------------------------- expenses decreased 5.3%, primarily due to the operation of fewer stores as a result of the 1994 Restructuring and other store closings (see Note 2 to the Consolidated Financial Statements) and decreased as a percentage of net sales from 47.4% to 43.5%. In addition to the operation of fewer stores, expenses are down due to job eliminations as part of the 1995 Restructuring and lower selling salaries and advertising expenses. The increase in operating income in the second quarter ended July 31, 1995 compared to the same period last year was due to sales growth and a decrease in operating expenses. Footwear Wholesale & Manufacturing <TABLE> <CAPTION> Three Months Ended July 31, ------------------------- % 1995 1994 Change -------- -------- ------ (In Thousands) <S> <C> <C> <C> Net Sales . . . . . . . . . . . . . . . . . . . . $ 55,019 $61,167 (10.1)% Operating Income before Restructuring Charges . . . . . . . . . . . . . $ 2,710 $ 2,742 (1.2)% Restructuring Charges . . . . . . . . . . . . . . $ 2,216 $ -0- 100.0% Operating Income . . . . . . . . . . . . . . . . $ 494 $ 2,742 (82.0)% Operating Margin . . . . . . . . . . . . . . . . 0.9% 4.5% </TABLE> Net sales from footwear wholesale and manufacturing operations were $6.1 million (10.1%) lower in the second quarter ended July 31, 1995 than in the same period last year, reflecting primarily lower sales from the operations divested as part of the 1995 Restructuring. Sales from ongoing operations were up 4.6%, reflecting primarily increased tanned leather sales and men's branded footwear sales, which more than offset decreased sales of western boots, primarily attributable to lower selling prices. Gross margin as a percentage of net sales increased from 26.2% to 28.6% primarily from improved overhead absorption due to the closing of a footwear plant in February as part of the 1995 Restructuring. Operating expenses decreased 12.3% and decreased as a percentage of net sales from 22.3% to 21.7%, primarily because of the lower sales in operations to be divested, the sale of University Brands in January 1995 and job eliminations as part of the 1995 Restructuring. The increase in operating income from ongoing operations before Restructuring Charge excluding $1,027,000 of divested operating income for the three months ended July 31, 1994 is due primarily to increased sales of tanned leather and improvements in gross margin and expense reductions due to the 1995 Restructuring. 21
22 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------------------------------------- The net sales and operating income before Restructuring Provision for the three months ended July 31, 1994 of the University Brands and Mitre Sports businesses that are being disposed of in the 1995 Restructuring were $26,542,000 and $1,027,000, respectively. The operating results subsequent to October 31, 1994 have been charged against the Restructuring Provision. Discontinued Operations On November 3, 1994, in response to worsening trends in the Company's men's apparel business, the Company's board of directors approved a plan to exit the men's apparel business. See "Significant Developments-Fiscal 1995 Restructuring" and Note 2 to the Consolidated Financial Statements for information regarding the discontinuation of this business segment. Net sales and operating loss of the men's apparel segment for the three months ended July 31, 1994, which was prior to the decision to discontinue, were $26.8 million and $2.8 million, respectively. Corporate and Interest Expenses Corporate and other expenses in the three months ended July 31, 1995 were $2.1 million, compared to $4.0 million last year, a decrease of approximately 47%. Included in last year's corporate and other expenses is a $700,000 provision for environmental litigation. The decrease in corporate expenses, excluding the provision for environmental litigation, is attributable primarily to lower professional fees and to lower compensation expenses due to layoffs related to the Restructurings and to other staff reductions. Interest expense decreased $544,000, or 18%, from last year, because of a decrease in borrowings. Borrowings under the Company's Revolving Credit Facility during the three months ended July 31, 1995 averaged $44,000 compared to average borrowings of $34.5 million last year. Other Income Operating results of stores identified for closure and businesses to be divested pursuant to the 1994 and 1995 Restructurings are included in the Company's sales, cost of sales and selling and administrative expenses. The net operating losses or gains incurred by these operations subsequent to the decision to divest are charged against the restructuring reserves established to provide for such losses or gains. The elimination of these gains from the Company's results of operations for the three months ended July 31, 1995 is presented as an other expense in the Consolidated Earnings Statement. Such operating gains totalled $1.1 million for the three months ended July 31, 1995. RESULTS OF OPERATIONS - SIX MONTHS ENDED JULY 31 FISCAL 1996 COMPARED TO FISCAL 1995 The Company's net sales from continuing operations for the six months ended July 31, 1995 decreased 5.4% from the previous year reflecting primarily lower sales from the operations divested as part of the 1995 Restructuring. Net sales from ongoing operations increased 1.7% from the previous year. Total gross margin for the six months decreased 3.7% but increased as a percentage 22
23 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------------------------------------- of net sales from 37.8% to 38.5%. Selling and administrative expenses decreased 7.6% and decreased as a percentage of net sales from 37.5% to 36.6%. The pretax loss in the six months ended July 31, 1995 was $14.5 million, compared to pretax earnings of $264,000 for the six months ended July 31, 1994. 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. Included in last year's pretax earnings is the recognition of $4.9 million of additional gain on the sale in 1987 of the Company's Canadian operations following the settlement in the second quarter of certain claims arising out of that transaction. The Company reported a net loss of $164,000 ($0.01 per share) for the six months ended July 31, 1995 compared to a net loss of $3.2 million ($0.14 per share) in the six months ended July 31, 1994. 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. See Note 2 to the Consolidated Financial Statements and "Significant Developments - Fiscal 1995 Restructuring." Footwear Retail <TABLE> <CAPTION> Six Months Ended July 31, ------------------------- % 1995 1994 Change -------- -------- ------ (In Thousands) <S> <C> <C> <C> Net Sales . . . . . . . . . . . . . . . . . . . . . $102,339 $100,771 1.6% Operating Income . . . . . . . . . . . . . . . . . $ 4,200 $ 3,412 23.1% Operating Margin . . . . . . . . . . . . . . . . . 4.1% 3.4% </TABLE> Primarily due to an increase in comparable store sales of approximately 5%, net sales from footwear retail operations increased 1.6% in the six months ended July 31, 1995 compared to the previous year even though the Company operated 5% fewer stores in the six months ended July 31, 1995. As part of the 1994 Restructuring, the Company completed the closing of 34 retail stores in the first six months of last fiscal year, which resulted in increased discounting. Consequently, the average price per pair increased 10% in the first half this year, while unit sales were down 7% as compared to the same period last year. Gross margin as a percentage of net sales decreased from 51.1% to 49.5%, primarily from price pressures on branded products as well as increased markdowns to stimulate sales in the Company's boot outlets. Operating expenses decreased 4.7%, primarily due to the operation of fewer stores as a result of the 1994 Restructuring (see Note 2 to the Consolidated Financial Statements) and decreased as a percentage of net sales from 48.5% to 45.6%. In addition to the operation of fewer stores, expenses are down due to job eliminations as part of the 1995 Restructuring and lower selling salaries and advertising expenses. 23
24 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------------------------------------- The increase in operating income in the six months ended July 31, 1995 compared to the same period last year was due to sales growth and a decrease in operating expenses. Footwear Wholesale & Manufacturing <TABLE> <CAPTION> Six Months Ended July 31, ------------------------- % 1995 1994 Change -------- -------- ------ (In Thousands) <S> <C> <C> <C> Net Sales . . . . . . . . . . . . . . . . . . . . $ 100,486 $113,616 (11.6)% Operating Income before Restructuring Charges . . . . . . . . . . . . . $ 6,507 $ 4,667 39.4% Restructuring Charges . . . . . . . . . . . . . . $ 16,329 $ -0- 100.0% Operating Income . . . . . . . . . . . . . . . . $ (9,822) $ 4,667 Operating Margin . . . . . . . . . . . . . . . . (9.8)% 4.1% </TABLE> Net sales from footwear wholesale and manufacturing operations were $13.1 million (11.6%) lower in the six months ended July 31, 1995 than in the same period last year, reflecting lower sales from the operations divested as part of the 1995 Restructuring. Sales from ongoing operations were up 1.6%, reflecting primarily increased tanned leather and men's branded footwear sales, which more than offset decreased sales of western boots, primarily attributable to lower selling prices. Gross margin as a percentage of net sales increased from 26.0% to 27.3% primarily from improved overhead absorption due to the closing of a footwear plant in February 1995 as part of the 1995 Restructuring. Operating expenses decreased 7.2% but increased as a percentage of net sales from 22.3% to 23.4%, primarily because of the lower sales in operations to be divested, the sale of University Brands in January 1995 and job eliminations as part of the 1995 Restructuring. Included in the operating income from ongoing operations before Restructuring Charge 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 increase in operating income before Restructuring Charge and the import duty claim excluding $1.2 million of divested operating income for the six months ended July 31, 1994 is due primarily to increased sales of tanned leather and men's branded products and improvements in gross margin and expense reductions due to the 1995 Restructuring. The net sales and operating income before Restructuring Provision for the six months ended July 31, 1994 of the University Brands and Mitre Sports businesses that are being disposed of in the 1995 Restructuring were $43.4 million and $1.2 million, respectively. The operating results subsequent to October 31, 1994 have been charged against the Restructuring Provision. 24
25 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------------------------------------- Discontinued Operations On November 3, 1994, in response to worsening trends in the Company's men's apparel business, the Company's board of directors approved a plan to exit the men's apparel business. See "Significant Developments-Fiscal 1995 Restructuring" and Note 2 to the Consolidated Financial Statements for information regarding the discontinuation of this business segment. Net sales and operating loss of the men's apparel segment for the six months ended July 31, 1994, which was prior to the decision to discontinue, were $57.2 million and $2.9 million, respectively. Corporate and Interest Expenses Corporate and other expenses in the first six months ended July 31, 1995 were $4.1 million, compared to $6.8 million last year, a decrease of approximately 40%. Included in last year's corporate and other expenses is a $700,000 provision for environmental litigation. The decrease in corporate expenses, excluding the provision for environmental litigation, is attributable primarily to lower professional fees and to lower compensation expenses due to layoffs related to the Restructurings and to other staff reductions. Interest expense decreased $1,122,000, or 19%, from last year, because of a decrease in borrowings. Borrowings under the Company's Revolving Credit Facility averaged $22,000 during the six months ended July 31, 1995 compared to $29.1 million last year. Other Income Operating results of stores identified for closure and businesses to be divested pursuant to the 1994 and 1995 Restructurings are included in the Company's sales, cost of sales and selling and administrative expenses. 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. <TABLE> <CAPTION> July 31, ------------------ 1995 1994 ------- ------ <S> <C> <C> Cash and short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5.4 $ 5.0 Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100.9 $178.7 Long-term debt (includes current maturities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75.0 $114.0 Current ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5x 3.5x --------------- </TABLE> 25
26 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------------------------------------- Working Capital The Company's business is somewhat seasonal, with the Company's investment in inventory and accounts receivable normally reaching peaks in the spring and fall of each year. Cash flow from operations is ordinarily generated principally in the fourth quarter of each fiscal year. Cash provided by operating activities was $2.9 million in the first six months of Fiscal 1996 compared to $22.5 million used by operating activities for the same period last year. The $25.4 million improvement in cash flow from operating activities between the first six months of Fiscal 1996 and the first six months of Fiscal 1995 reflects primarily cash inflows from the liquidation of assets included in the 1995 Restructuring and lower seasonal requirements from the disposition of businesses included in the 1995 Restructuring. A $3.4 million decrease in inventories from January 31, 1995 levels reflected in the Consolidated Statement of Cash Flows was due primarily to liquidation of inventories in connection with the 1995 Restructuring, which more than offset planned seasonal increases, while the $4.9 million decrease in ongoing inventories compared with July 31, 1994 reflects lower inventory levels in the Company's boot business. As reflected in the Consolidated Statement of Cash Flows, accounts receivable at July 31, 1995 decreased $3.5 million compared to January 31, 1995, primarily from collection of receivables in the operations being divested in the 1995 Restructuring. Ongoing accounts receivable at July 31, 1995 were $1.2 million greater than at July 31, 1994, primarily due to increased sales in men's branded footwear and tanned leather and extended terms to meet competitive pressures. Cash provided (or used) due to changes in accounts payable and accrued liabilities in the Consolidated Statement of Cash Flows at July 31, 1995 and 1994 is as follows: <TABLE> <CAPTION> Six Months Ended July 31, -------------------------- (In Thousands) 1995 1994 -------- -------- <S> <C> <C> Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 1,872 $ 1,066 Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . (10,354) (3,449) -------- -------- $ (8,482) $ (2,383) ======== ======== </TABLE> 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 severance costs and liabilities related to the Restructurings. 26
27 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------------------------------------- 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. Revolving credit agreement borrowings increased by $24 million during the six months ended July 31, 1994 to finance seasonal working capital increases, to finance operations and to fund approximately $4.1 million of costs associated with the Company's 1994 Restructuring. Capital Expenditures Total capital expenditures in Fiscal 1996 are expected to be approximately $8.0 million of which the Company has spent $3.5 million for the six months ended July 31, 1995. These include expected retail expenditures of $4.1 million to open approximately 22 new retail stores and to complete 31 major store renovations. Capital expenditures for wholesale and manufacturing operations and other purposes are expected to be approximately $3.9 million. 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 approximately $11.2 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. However, the financial covenants contained in the revolving credit agreement are restrictive and the Company is considering various alternatives in meeting its credit needs, including the negotiation of a new revolving credit facility to replace the existing one. There were $12.8 million of letters of credit outstanding under the revolving credit agreement at July 31, 1995. The restricted payments covenant contained in the Company's revolving credit agreement and restricted payment covenant 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. 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. 27
28 PART II - OTHER INFORMATION -------------------------------------------------------------------------------- ITEM 3. DEFAULTS UPON SENIOR SECURITIES At July 31, 1995 Genesco was in arrears with respect to dividends payable on the following classes of preferred stock: <TABLE> <CAPTION> ARREARAGE ------------------------------------------- DATE DIVIDENDS BEGINNING THIS END OF CLASS OF STOCK PAID TO OF QUARTER QUARTER QUARTER ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> $2.30 Series 1 October 31, 1993 $128,511 $ 21,409 $149,920 $4.75 Series 3 October 31, 1993 139,878 23,313 163,191 $4.75 Series 4 October 31, 1993 116,935 19,490 136,425 $1.50 Subordinated Cumulative Preferred October 31, 1993 67,464 11,256 78,720 ----------------------------------------------------------------------------------------------------------- TOTALS $452,788 $ 75,468 $528,256 =========================================================================================================== </TABLE> ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's annual meeting of shareholders held on June 28, 1995, shares representing a total of 24,546,902 votes were outstanding and entitled to vote. At the meeting, shareholders of the Company: (1) elected seven directors nominated by the board of directors by the following votes: <TABLE> <CAPTION> Votes Votes "For" "Withheld" ----------- ---------- <S> <C> <C> David M. Chamberlain 20,045,573 729,539 W. Lipscomb Davis, Jr. 20,042,128 732,984 John Diebold 20,019,527 755,585 Harry D. Garber 19,942,241 832,871 Joel C. Gordon 20,055,632 719,480 William A. Williamson, Jr. 20,058,404 716,708 William S. Wire II 19,861,651 913,461 </TABLE> (2) ratified the appointment of Price Waterhouse LLP as independent accountants for the fiscal year ending January 31, 1996 by a vote of 20,145,784 for, 397,729 against, with 231,599 abstentions: and (3) ratified employee stock purchase plan by a vote of 19,389,073 for, 1,062,590 against, with 323,449 abstentions: and (4) defeated a shareholder proposal requesting the board to take steps to provide for cumulative voting in the election of directors by a vote of 4,337,983 for, 8,225,729 against, with 544,623 abstentions and 7,666,777 not voted: and (5) defeated a shareholder proposal regarding the repealing of the Company's Shareholder Rights Plan by a vote of 4,484,037 for, 8,089,880 against, with 534,418 abstentions and 7,666,777 not voted. 28
29 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K EXHIBITS (10) z. Asset Purchase Agreement dated as of August 11, 1995 between the Company and Pentland Sports Group, LTD. aa. Share Purchase Agreement dated as of August 14, 1995 between the Company and Pentland Industries Limited. (11) Computation of earnings per common and common share equivalent. (27) Financial Data Schedule (for SEC use only) -------------------- REPORTS ON FORM 8-K None 29
30 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 14, 1995 30