GENESCO INC.
Table of Contents

(GENESCO LOGO)

Form 10-Q

     
(Mark One)
þ
  Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
  For Quarter Ended October 30, 2004
     
o
  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 for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No o

Common Shares Outstanding November 26, 2004 – 22,299,364


INDEX

         
    Page
       
       
    3  
    5  
    6  
    7  
    8  
    37  
    52  
    52  
       
    54  
    54  
    55  
 EX-10.1 TRADEMARK LICENSE AGREEMENT
 EX-10.2 AMENDMENT NO. 1 TO TRADEMARK LICENSE AGREEMENT
 EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
 EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
 EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
 EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

2


Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements
Genesco Inc. and Subsidiaries
Consolidated Balance Sheets
In Thousands, except share amounts
                         
    October 30,   January 31,   November 1,
    2004
  2004
  2003
Assets
                       
Current Assets
                       
Cash and cash equivalents
  $ 15,012     $ 81,549     $ 44,306  
Accounts receivable, net of allowances of $2,409 at October 30, 2004, $3,334 at January 31, 2004 and $2,743 at November 1, 2003
    18,823       12,515       18,731  
Inventories
    265,733       167,234       205,918  
Deferred income taxes
    10,510       7,633       8,523  
Prepaids and other current assets
    17,706       14,835       14,004  
 
   
 
     
 
     
 
 
Total current assets
    327,784       283,766       291,482  
 
   
 
     
 
     
 
 
Property and equipment:
                       
Land
    4,972       4,856       4,856  
Buildings and building equipment
    14,336       13,917       13,743  
Machinery
    52,790       45,174       46,339  
Furniture and fixtures
    56,097       45,305       45,203  
Construction in progress
    7,231       3,469       6,010  
Improvements to leased property
    126,902       104,941       103,916  
 
   
 
     
 
     
 
 
Property and equipment, at cost
    262,328       217,662       220,067  
Accumulated depreciation
    (110,203 )     (95,995 )     (93,225 )
 
   
 
     
 
     
 
 
Property and equipment, net
    152,125       121,667       126,842  
 
   
 
     
 
     
 
 
Deferred income taxes
    -0-       18,137       20,624  
Goodwill
    97,430       -0-       -0-  
Trademarks
    47,621       -0-       -0-  
Other intangibles, net of accumulated amortization of $1,350 at October 30, 2004, $-0- at January 31, 2004 and $-0- at November 1, 2003
    7,236       -0-       -0-  
Other noncurrent assets
    9,243       6,617       6,678  
 
   
 
     
 
     
 
 
Total Assets
  $ 641,439     $ 430,187     $ 445,626  
 
   
 
     
 
     
 
 

3


Table of Contents

Genesco Inc. and Subsidiaries
Consolidated Balance Sheets
In Thousands, except share amounts

                         
    October 30,   January 31,   November 1,
    2004
  2004
  2003
Liabilities and Shareholders’ Equity
                       
Current Liabilities
                       
Accounts payable
  $ 93,541     $ 47,921     $ 78,318  
Accrued employee compensation
    17,411       6,284       5,916  
Accrued rent
    13,423       11,636       11,837  
Accrued other taxes
    7,471       5,055       4,577  
Accrued income taxes
    6,134       8,689       4,097  
Other accrued liabilities
    20,049       11,100       13,529  
Current portion – long-term debt
    17,000       -0-       -0-  
Provision for discontinued operations
    4,121       1,757       691  
 
   
 
     
 
     
 
 
Total current liabilities
    179,150       92,442       118,965  
 
   
 
     
 
     
 
 
Long-term debt
    175,250       86,250       86,250  
Pension liability
    29,180       25,617       34,907  
Deferred income taxes
    4,210       -0-       -0-  
Other long-term liabilities
    9,076       9,014       10,087  
Provision for discontinued operations
    1,854       1,266       833  
 
   
 
     
 
     
 
 
Total liabilities
    398,720       214,589       251,042  
 
   
 
     
 
     
 
 
Commitments and contingent liabilities
                       
Shareholders’ Equity
                       
Non-redeemable preferred stock
    7,493       7,580       7,579  
Common shareholders’ equity:
                       
Common stock, $1 par value:
                       
Authorized: 80,000,000 shares
                       
Issued/Outstanding:
                       
October 30, 2004 – 22,586,946/22,098,482
                       
January 31, 2004 – 22,211,661/21,723,197
                       
November 1, 2003 – 22,215,640/21,727,176
    22,587       22,212       22,216  
Additional paid-in capital
    101,767       96,612       96,826  
Retained earnings
    154,663       132,215       115,416  
Accumulated other comprehensive loss
    (25,934 )     (25,164 )     (29,596 )
Treasury shares, at cost
    (17,857 )     (17,857 )     (17,857 )
 
   
 
     
 
     
 
 
Total shareholders’ equity
    242,719       215,598       194,584  
 
   
 
     
 
     
 
 
Total Liabilities and Shareholders’ Equity
  $ 641,439     $ 430,187     $ 445,626  
 
   
 
     
 
     
 
 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

4


Table of Contents

Genesco Inc. and Subsidiaries

Consolidated Statements of Earnings
In Thousands, except per share amounts
                                 
    Three Months Ended
  Nine Months Ended
    October 30,   November 1,   October 30,   November 1,
    2004
  2003
  2004
  2003
Net sales
  $ 288,398     $ 212,483     $ 759,863     $ 584,707  
Cost of sales
    145,030       113,355       383,928       313,998  
Selling and administrative expenses
    119,251       82,426       330,596       243,350  
Restructuring and other, net
    667       -0-       627       (139 )
 
   
 
     
 
     
 
     
 
 
Earnings from operations
    23,450       16,702       44,712       27,498  
 
   
 
     
 
     
 
     
 
 
Loss on early retirement of debt
    -0-       -0-       -0-       2,581  
Interest expense, net
                               
Interest expense
    3,204       1,590       8,138       6,162  
Interest income
    (66 )     (80 )     (222 )     (471 )
 
   
 
     
 
     
 
     
 
 
Total interest expense, net
    3,138       1,510       7,916       5,691  
 
   
 
     
 
     
 
     
 
 
Earnings before income taxes from continuing operations
    20,312       15,192       36,796       19,226  
Income tax expense
    7,783       5,780       13,668       7,368  
 
   
 
     
 
     
 
     
 
 
Earnings from continuing operations
    12,529       9,412       23,128       11,858  
Provision for discontinued operations, net
    (440 )     -0-       (461 )     -0-  
 
   
 
     
 
     
 
     
 
 
Net Earnings
  $ 12,089     $ 9,412     $ 22,667     $ 11,858  
 
   
 
     
 
     
 
     
 
 
Basic earnings per common share:
                               
Continuing operations
  $ .57     $ .43     $ 1.05     $ .54  
Discontinued operations
  $ (.02 )   $ .00     $ (.03 )   $ .00  
Net earnings
  $ .55     $ .43     $ 1.02     $ .54  
Diluted earnings per common share:
                               
Continuing operations
  $ .55     $ .42     $ 1.02     $ .53  
Discontinued operations
  $ (.01 )   $ .00     $ (.02 )   $ .00  
Net earnings
  $ .54     $ .42     $ 1.00     $ .53  
 
   
 
     
 
     
 
     
 
 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

5


Table of Contents

Genesco Inc. and Subsidiaries

Consolidated Statements of Cash Flows
In Thousands
                                 
    Three Months Ended
  Nine Months Ended
    October 30,   November 1,   October 30,   November 1,
    2004
  2003
  2004
  2003
CASH FLOWS FROM OPERATING ACTIVITIES:
                               
Net earnings
  $ 12,089     $ 9,412     $ 22,667     $ 11,858  
Tax benefit of stock options exercised
    97       29       1,192       45  
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
                               
Depreciation
    7,273       5,550       20,538       16,189  
Deferred income taxes
    266       -0-       (43 )     -0-  
Provision for losses on accounts receivable
    (12 )     37       76       329  
Impairment of long-lived assets
    260       -0-       535       -0-  
Restructuring gain
    -0-       -0-       -0-       (139 )
Loss on retirement of debt
    -0-       -0-       -0-       959  
Provision for discontinued operations
    705       -0-       739       -0-  
Other
    812       387       1,747       1,059  
Effect on cash of changes in working capital and other assets and liabilities net of acquisitions:
                               
Accounts receivable
    (2,441 )     (4,189 )     (5,890 )     291  
Inventories
    (2,356 )     7,521       (63,729 )     (37,297 )
Other current assets
    (4,305 )     (184 )     (2,400 )     (2 )
Accounts payable
    (2,572 )     (4,283 )     21,330       36,162  
Other accrued liabilities
    15,289       3,898       14,802       (2,858 )
Other assets and liabilities
    2,523       (1,570 )     5,956       (69 )
 
   
 
     
 
     
 
     
 
 
Net cash provided by operating activities
    27,628       16,608       17,520       26,527  
 
   
 
     
 
     
 
     
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
                               
Capital expenditures
    (11,559 )     (6,773 )     (27,814 )     (15,972 )
Acquisitions, net of cash acquired
    1,120       -0-       (167,663 )     -0-  
Proceeds from sale of property and equipment
    9       12       11       638  
 
   
 
     
 
     
 
     
 
 
Net cash used in investing activities
    (10,430 )     (6,761 )     (195,466 )     (15,334 )
 
   
 
     
 
     
 
     
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
                               
Payments of capital leases
    (135 )     -0-       (321 )     -0-  
Stock repurchases
    -0-       (1,367 )     -0-       (1,398 )
Change in overdraft balances
    (8,355 )     2,528       5,253       (1,504 )
Revolver borrowings, net
    (10,000 )     -0-       6,000       -0-  
Dividends paid
    (73 )     (74 )     (219 )     (221 )
Payments of long-term debt
    -0-       -0-       -0-       (103,245 )
Long-term borrowings
    -0-       -0-       100,000       86,250  
Deferred financing costs
    -0-       -0-       (3,360 )     (3,238 )
Options exercised and shares issued in Employee Stock Purchase Plan
    1,100       404       4,065       540  
Other
    (9 )     -0-       (9 )     -0-  
 
   
 
     
 
     
 
     
 
 
Net cash provided by (used in) financing activities
    (17,472 )     1,491       111,409       (22,816 )
 
   
 
     
 
     
 
     
 
 
Net Cash Flow
    (274 )     11,338       (66,537 )     (11,623 )
Cash and cash equivalents at beginning of period
    15,286       32,968       81,549       55,929  
 
   
 
     
 
     
 
     
 
 
Cash and cash equivalents at end of period
  $ 15,012     $ 44,306     $ 15,012     $ 44,306  
 
   
 
     
 
     
 
     
 
 
Supplemental Cash Flow Information:
                               
Net cash paid for:
                               
Interest
  $ 1,831     $ 586     $ 5,939     $ 6,109  
Income taxes
    1,236       131       15,890       7,705  

The accompanying Notes are an integral part of these Consolidated Financial Statements.

6


Table of Contents

Genesco Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity
In Thousands
                                                                 
    Total                                   Accumulated           Total
    Non-Redeemable           Additional                   Other           Share-
    Preferred   Common   Paid-In   Treasury   Retained   Comprehensive   Comprehensive   holders’
    Stock
  Stock
  Capital
  Shares
  Earnings
  Loss
  Income
  Equity
Balance February 1, 2003
  $ 7,599     $ 22,222     $ 97,488     $ (17,857 )   $ 103,779     $ (30,452 )           $ 182,779  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Net earnings
    -0-       -0-       -0-       -0-       28,730       -0-     $ 28,730       28,730  
Dividends paid
    -0-       -0-       -0-       -0-       (294 )     -0-       -0-       (294 )
Exercise of options
    -0-       45       624       -0-       -0-       -0-       -0-       669  
Issue shares - Employee Stock Purchase Plan
    -0-       32       327       -0-       -0-       -0-       -0-       359  
Tax benefit of stock options exercised
    -0-       -0-       69       -0-       -0-       -0-       -0-       69  
Stock repurchases
    -0-       (117 )     (1,784 )     -0-       -0-       -0-       -0-       (1,901 )
Gain on foreign currency forward contracts (net of tax of $0.6 million)
    -0-       -0-       -0-       -0-       -0-       985       985       985  
Minimum pension liability adjustment (net of tax of $2.8 million)
    -0-       -0-       -0-       -0-       -0-       4,303       4,303       4,303  
Other
    (19 )     30       (112 )     -0-       -0-       -0-       -0-       (101 )
 
                                                   
 
         
Comprehensive income
                                                    34,018          
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Balance January 31, 2004
    7,580       22,212       96,612       (17,857 )     132,215       (25,164 )             215,598  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Net earnings
    -0-       -0-       -0-       -0-       22,667       -0-       22,667       22,667  
Dividends paid
    -0-       -0-       -0-       -0-       (219 )     -0-       -0-       (219 )
Exercise of options
    -0-       354       3,711       -0-       -0-       -0-       -0-       4,065  
Tax benefit of stock options exercised
    -0-       -0-       1,192       -0-       -0-       -0-       -0-       1,192  
Loss on foreign currency forward contracts (net of tax benefit of $0.4 million)
    -0-       -0-       -0-       -0-       -0-       (673 )     (673 )     (673 )
Loss on interest rate swaps (net of tax benefit of $0.1 million)
    -0-       -0-       -0-       -0-       -0-       (233 )     (233 )     (233 )
Foreign currency translation adjustment
    -0-       -0-       -0-       -0-       -0-       136       136       136  
Other
    (87 )     21       252       -0-       -0-       -0-       -0-       186  
 
                                                   
 
         
Comprehensive income*
                                                  $ 21,897          
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Balance October 30, 2004
  $ 7,493     $ 22,587     $ 101,767     $ (17,857 )   $ 154,663     $ (25,934 )           $ 242,719  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 

*Comprehensive income was $11.8 million and $9.7 million for the third quarter ended October 30, 2004 and November 1, 2003, respectively. Comprehensive income was $12.7 million for the nine month period ended November 1, 2003.

The accompanying Notes are an integral part of these Consolidated Financial Statements.

7


Table of Contents

Genesco Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1
Summary of Significant Accounting Policies

Interim Statements

The consolidated financial statements contained in this report are unaudited but reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for the interim periods of the fiscal year ending January 29, 2005 (“Fiscal 2005”) and of the fiscal year ended January 31, 2004 (“Fiscal 2004”). The results of operations for any interim period are not necessarily indicative of results for the full year. The interim financial statements should be read in conjunction with the financial statements and notes thereto included in the annual report on Form 10-K.

Nature of Operations

The Company’s businesses include the design or sourcing, marketing and distribution of footwear principally under the Johnston & Murphy and Dockers brands and the operation at October 30, 2004 of 1,603 Jarman, Journeys, Journeys Kidz, Johnston & Murphy, Underground Station, Hat World, Lids, Hat Zone, Cap Connection and Headquarters retail footwear and headwear stores and leased departments.

Principles of Consolidation

All subsidiaries are included in the consolidated financial statements. All significant intercompany transactions and accounts have been eliminated.

Financial Statement Reclassifications

Certain reclassifications have been made to conform prior years’ data to the current year presentation.

Use of Estimates

The preparation of financial statements in conformity with U.S. 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.

Significant areas requiring management estimates or judgments include the following key financial areas:

    Inventory Valuation
 
    The Company values its inventories at the lower of cost or market.
 
    In its wholesale operations, cost is determined using the first-in, first-out (FIFO) method. Market is determined using a system of analysis which evaluates inventory at the stock number level based on factors such as inventory turn, average selling price, inventory level, and selling prices reflected in future orders. The Company provides reserves when the inventory has not been marked down to market based on current selling prices or when the inventory is not turning and is not expected to turn at levels satisfactory to the Company.

8


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 1
Summary of Significant Accounting Policies, Continued

    In its retail operations, other than the Hat World/Lids segment, the Company employs the retail inventory method, applying average cost-to-retail ratios to the retail value of inventories. Under the retail inventory method, valuing inventory at the lower of cost or market is achieved as markdowns are taken or accrued as a reduction of the retail value of inventories.
 
    Inherent in the retail inventory method are subjective judgments and estimates including merchandise mark-on, markups, markdowns, and shrinkage. These judgments and estimates, coupled with the fact that the retail inventory method is an averaging process, could produce a range of cost figures. To reduce the risk of inaccuracy and to ensure consistent presentation, the Company employs the retail inventory method in multiple subclasses of inventory with similar gross margin, and analyzes markdown requirements at the stock number level based on factors such as inventory turn, average selling price, and inventory age. In addition, the Company accrues markdowns as necessary. These additional markdown accruals reflect all of the above factors as well as current agreements to return products to vendors and vendor agreements to provide markdown support. In addition to markdown provisions, the Company maintains provisions for shrinkage and damaged goods based on historical rates.
 
    The Hat World/Lids segment employs the moving average cost method for valuing inventories and applies freight using an allocation method. The Company provides a valuation allowance for slow-moving inventory based on negative margins and estimated shrink based on historical experience and specific analysis, where appropriate.
 
    Inherent in the analysis of both wholesale and retail inventory valuation are subjective judgments about current market conditions, fashion trends, and overall economic conditions. Failure to make appropriate conclusions regarding these factors may result in an overstatement or understatement of inventory value.
 
    Impairment of Definite-Lived Long-Lived Assets
 
    The Company periodically assesses the realizability of its definite-lived 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 the carrying amount. Inherent in the analysis of impairment are subjective judgments about future cash flows. Failure to make appropriate conclusions regarding these judgments may result in an overstatement of the value of definite-lived long-lived assets.

9


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 1
Summary of Significant Accounting Policies, Continued

    Environmental and Other Contingencies
 
    The Company is subject to certain loss contingencies related to environmental proceedings and other legal matters, including those disclosed in Note 9 to the Company’s Consolidated Financial Statements. The Company monitors these matters on an ongoing basis and, on a quarterly basis, management reviews the Company’s reserves and accruals in relation to each of them, adjusting provisions as management deems necessary in view of changes in available information. Changes in estimates of liability are reported in the periods when they occur. Consequently, management believes that its reserve in relation to each proceeding is a reasonable estimate of the probable loss connected to the proceeding, or in cases in which no reasonable estimate is possible, the minimum amount in the range of estimated losses, based upon its analysis of the facts and circumstance as of the close of the most recent fiscal quarter. However, because of uncertainties and risks inherent in litigation generally and in environmental proceedings in particular, there can be no assurance that future developments will not require additional reserves to be set aside, that some or all reserves will be adequate or that the amounts of any such additional reserves or any such inadequacy will not have a material adverse effect upon the Company’s financial condition or results of operations.
 
    Revenue Recognition
 
    Retail sales are recorded at the point of sale and are net of estimated returns. Catalog and internet sales are recorded at time of delivery to the customer and are net of estimated returns. Wholesale revenue is recorded net of estimated returns and allowances for markdowns, damages and miscellaneous claims when the related goods have been shipped and legal title has passed to the customer. Shipping and handling costs charged to customers are included in net sales. Actual amounts of markdowns have not differed materially from estimates. Actual returns and claims in any future period may differ from historical experience.
 
    Pension Plan Accounting
 
    The Company accounts for the defined benefit pension plans using Statement of Financial Accounting Standards (SFAS) No. 87, “Employer’s Accounting for Pensions.” Under SFAS No. 87, pension expense is recognized on an accrual basis over employees’ approximate service periods. The calculation of pension expense and the corresponding liability requires the use of a number of critical assumptions, including the expected long-term rate of return on plan assets and the assumed discount rate, as well as the recognition of actuarial gains and losses. Changes in these assumptions can result in different expense and liability amounts, and future actual experience can differ from these assumptions.

10


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 1
Summary of Significant Accounting Policies, Continued

Cash and Cash Equivalents

Included in cash and cash equivalents at October 30, 2004 and January 31, 2004, are cash equivalents of $0.7 million and $71.1 million, respectively. Cash equivalents are highly-liquid debt instruments having an original maturity of three months or less. The majority of payments due from banks for customer credit card transactions process within 24 - 48 hours and are accordingly classified as cash and cash equivalents.

At October 30, 2004 and January 31, 2004, outstanding checks drawn on zero-balance accounts at certain domestic banks exceeded book cash balances at those banks by approximately $17.4 million and $12.0 million, respectively. These amounts are included in trade accounts payable.

Concentration of Credit Risk and Allowances on Accounts Receivable

The Company’s footwear wholesaling business sells primarily to independent retailers and department stores across the United States. Receivables arising from these sales are not collateralized. Credit risk is affected by conditions or occurrences within the economy and the retail industry. Two customers each accounted for 12% and another customer accounted for 11% of the Company’s trade receivables balance as of October 30, 2004 and no other customer accounted for more than 8% of the Company’s trade receivables balance as of October 30, 2004.

The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information as well as company specific factors. The Company also establishes allowances for sales returns, customer deductions and co-op advertising based on specific circumstances, historical trends and projected probable outcomes.

Property and Equipment

Property and equipment are recorded at cost and depreciated or amortized over the estimated useful life of related assets. Depreciation and amortization expense are computed principally by the straight-line method over the following estimated useful lives:

     
Buildings and building equipment
  20-45 years
Machinery
  3-10 years
Furniture and fixtures
  10 years

Leasehold improvements and properties under capital leases are amortized on the straight-line method over the shorter of their useful lives or their related lease terms.

11


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 1
Summary of Significant Accounting Policies, Continued

Goodwill and Other Intangibles

Under the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and intangible assets with indefinite lives are no longer amortized, but tested at least annually for impairment. This Statement also requires that intangible assets with finite lives be amortized over their respective lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

Identifiable intangible assets of the Company are primarily goodwill and indefinite-lived trademarks acquired in connection with the acquisition of Hat World Corporation on April 1, 2004. Identifiable intangible assets with finite lives are amortized and those with indefinite lives are not amortized. The estimated useful life of an identifiable intangible asset to the Company is based upon a number of factors including the effects of demand, competition and the level of maintenance expenditures required to obtain future cash flows.

The Company tests for impairment of identifiable intangible assets with an indefinite life, at a minimum on an annual basis, relying on a number of factors including operating results, business plans and projected future cash flows. The impairment test for identifiable assets not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying amount.

Identifiable intangible assets of the Company with finite lives are primarily leases and customer lists. They are subject to amortization and are evaluated for impairment using a process similar to that used to evaluate other definite-lived long-lived assets. An impairment loss is recognized for the amount by which the carrying value exceeds the fair value of the asset.

Postretirement Benefits

Substantially all full-time employees, except employees in the Hat World/Lids segment, are covered by a defined benefit pension plan. The Company also provides certain former employees with limited medical and life insurance benefits. The Company funds at least the minimum amount required by the Employee Retirement Income Security Act.

Cost of Sales

For the Company’s retail operations, the cost of sales includes actual product cost, the cost of transportation to the Company’s warehouses from suppliers and the cost of transportation from the Company’s warehouses to the stores. Additionally, the cost of its distribution facilities allocated to its retail operations is included in cost of sales.

For the Company’s wholesale operations, the cost of sales includes the actual product cost and the cost of transportation to the Company’s warehouses from suppliers.

12


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 1
Summary of Significant Accounting Policies, Continued

Selling and Administrative Expenses

Selling and administrative expenses include all operating costs of the Company excluding (i) those related to the transportation of products from the supplier to the warehouse, (ii) for its retail operations, those related to the transportation of products from the warehouse to the store and (iii) costs of its distribution facilities which are allocated to its retail operations. Wholesale and unallocated retail costs of distribution are included in selling and administrative expenses in the amounts of $1.8 million, $1.9 million, $4.2 million and $6.2 million for the third quarter and first nine months of Fiscal 2005 and 2004, respectively.

Buying, Merchandising and Occupancy Costs

The Company records buying and merchandising and occupancy costs in selling and administrative expense. Because the Company does not include these costs in cost of sales, the Company’s gross margin may not be comparable to other retailers that include these costs in the calculation of gross margin.

Shipping and Handling Costs

Shipping and handling costs related to inventory purchased from suppliers is included in the cost of inventory and is charged to cost of sales in the period that the inventory is sold. Shipping and handling costs are charged to cost of sales in the period incurred except for wholesale and unallocated retail costs of distribution, which are included in selling and administrative expenses.

Preopening Costs

Costs associated with the opening of new stores are expensed as incurred, and are included in selling and administrative expenses on the accompanying Statements of Earnings.

Store Closings and Exit Costs

From time to time, the Company makes strategic decisions to close stores or exit locations, or activities. If stores or operating activities to be closed or exited constitute components, as defined by SFAS No. 144 (adopted in Fiscal 2002), and will not result in a migration of customers and cash flows, these closures will be considered discontinued operations when the related assets meet the criteria to be classified as held for sale, or at the cease-use date, whichever occurs first. The results of operations of discontinued operations are presented retroactively, net of tax, as a separate component on the Statement of Earnings, if material individually or cumulatively.

Assets related to planned store closures or other exit activities are reflected as assets held for sale and recorded at the lower of carrying value or fair value less costs to sell when the required criteria, as defined by SFAS No. 144, are satisfied. Depreciation ceases on the date that the held for sale criteria are met.

13


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 1
Summary of Significant Accounting Policies, Continued

Assets related to planned store closures or other exit activities that do not meet the criteria to be classified as held for sale are evaluated for impairment in accordance with the Company’s normal impairment policy, but with consideration given to revised estimates to future cash flows. In any event, the remaining depreciable useful lives are evaluated and adjusted as necessary.

Exit costs related to anticipated lease termination costs, severance benefits and other expected charges are accrued for and recognized in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (adopted in Fiscal 2003).

Advertising Costs

Advertising costs are predominantly expensed as incurred. Advertising costs were $6.1 million, $5.4 million, $18.0 million and $15.1 million for the third quarter and first nine months of Fiscal 2005 and 2004, respectively. Direct response advertising costs for catalogs are capitalized, in accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position No. 93-7, “Reporting on Advertising Costs.” Such costs are amortized over the estimated future revenues realized from such advertising, not to exceed six months. The consolidated balance sheets included prepaid assets for direct response advertising costs of $0.6 million and $0.3 million at October 30, 2004 and November 1, 2003, respectively.

Consideration to Resellers

The Company does not have any written buy-down programs with retailers, but the Company has provided certain retailers with markdown allowances for obsolete and slow moving products that are in the retailer’s inventory. The Company estimates these allowances and provides for them as reductions to revenues at the time revenues are recorded. Markdowns are negotiated with retailers and changes are made to the estimates as agreements are reached. Actual amounts for markdowns have not differed materially from estimates.

Cooperative Advertising

Cooperative advertising funds are made available to all of the Company’s retail customers. In order for retailers to receive reimbursement under such programs, the retailer must meet specified advertising guidelines and provide appropriate documentation of expenses to be reimbursed. The Company’s cooperative advertising agreements require that retail customers present documentation or other evidence of specific advertisements or display materials used for the Company’s products by submitting the actual print advertisements presented in catalogs, newspaper inserts or other advertising circulars, or by permitting physical inspection of displays. Additionally, the Company’s cooperative advertising agreements require that the amount of reimbursement requested for such advertising or materials be supported by invoices or other evidence of the actual costs incurred by the retailer. The Company accounts for these cooperative advertising costs as selling and administrative expenses, in accordance with Emerging Issues Task Force (EITF) Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).”

14


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 1
Summary of Significant Accounting Policies, Continued

Cooperative advertising costs recognized in selling and administrative expenses were $0.7 million, $0.7 million, $1.8 million and $2.1 million for the third quarter and first nine months of Fiscal 2005 and 2004, respectively. During the first nine months of Fiscal 2005 and 2004, the Company’s cooperative advertising reimbursements paid did not exceed the fair value of the benefits received under those agreements.

Vendor Allowances

From time to time the Company negotiates allowances from its vendors for markdowns taken or expected to be taken. These markdowns are typically negotiated on specific merchandise and for specific amounts. These specific allowances are recognized as a reduction in cost of sales in the period in which the markdowns are taken. Markdown allowances not attached to specific inventory on hand or already sold are applied to concurrent or future purchases from each respective vendor.

The Company receives support from some of its vendors in the form of reimbursements for cooperative advertising and catalog costs for the launch and promotion of certain products. The reimbursements are agreed upon with vendors and represent specific, incremental, identifiable costs incurred by the Company in selling the vendor’s products. Such costs and the related reimbursements are accumulated and monitored on an individual vendor basis, pursuant to the respective cooperative advertising agreements with vendors. Such cooperative advertising reimbursements are recorded as a reduction of selling and administrative expenses in the same period in which the associated expense is incurred. If the amount of cash consideration received exceeds the costs being reimbursed, such excess amount would be recorded as a reduction of cost of sales.

Vendor reimbursements of cooperative advertising costs recognized as a reduction of selling and administrative expenses were $0.5 million, $0.7 million, $1.8 million and $1.6 million for the third quarter and first nine months of Fiscal 2005 and 2004, respectively. During the first nine months of Fiscal 2005 and 2004, the Company’s cooperative advertising reimbursements received were not in excess of the costs reimbursed.

Environmental Costs

Environmental expenditures relating to current operations are expensed or capitalized as appropriate. Expenditures relating to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated and are evaluated independently of any future claims for recovery. Generally, the timing of these accruals coincides with completion of a feasibility study or the Company’s commitment to a formal plan of action. Costs of future expenditures for environmental remediation obligations are not discounted to their present value.

15


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 1
Summary of Significant Accounting Policies, Continued

Income Taxes

Deferred income taxes are provided for all temporary differences and operating loss and tax credit carryforwards limited, in the case of deferred tax assets, to the amount the Company believes is more likely than not to be realized in the foreseeable future.

Earnings Per Common Share

Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities to issue common stock were exercised or converted to common stock (see Note 8).

Other Comprehensive Income

SFAS No. 130, “Reporting Comprehensive Income,” requires, among other things, the Company’s minimum pension liability adjustment, unrealized gains or losses on foreign currency forward contracts, unrealized gains and losses on interest rate swaps and foreign currency translation adjustments to be included in other comprehensive income net of tax. Accumulated other comprehensive loss at October 30, 2004 consists of $26.5 million of cumulative minimum pension liability adjustments, net of tax, cumulative net gains of $0.7 million on foreign currency forward contracts, net of tax, cumulative net losses of $0.2 million on interest rate swaps, net of tax and a $0.1 million foreign currency translation adjustment.

Business Segments

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” requires that companies disclose “operating segments” based on the way management disaggregates the Company for making internal operating decisions (see Note 10).

Derivative Instruments and Hedging Activities

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of SFAS No. 133,” SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” (collectively “SFAS 133”) require an entity to recognize all derivatives as either assets or liabilities in the consolidated balance sheet and to measure those instruments at fair value. Under certain conditions, a derivative may be specifically designated as a fair value hedge or a cash flow hedge. The accounting for changes in the fair value of a derivative are recorded each period in current earnings or in other comprehensive income depending on the intended use of the derivative and the resulting designation.

Stock Incentive Plans

The Company implemented SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” in the fourth quarter of Fiscal 2003. This statement amends the disclosure provisions of SFAS No. 123, “Accounting for Stock Based Compensation,” to require prominent disclosure about the effect on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation and amends Accounting Principles Board (APB) Opinion No. 28, “Interim Financial Reporting,” to require disclosure about those effects in interim financial information.

16


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 1
Summary of Significant Accounting Policies, Continued

As of October 30, 2004, the Company had two fixed stock incentive plans and one restricted stock incentive plan. The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Accordingly, no compensation cost has been recognized other than for its restricted stock incentive plan. The compensation cost that has been charged against income for its restricted stock incentive plans was $0.1 million, $0.1 million, $0.3 million and $0.4 million, net of tax, for the third quarter and first nine months of Fiscal 2005 and 2004, respectively. There was no additional stock incentive plan compensation reflected in net earnings, as all options granted under the fixed stock incentive plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Had compensation cost for all of the Company’s stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the methodology prescribed by SFAS No. 123 “Accounting for Stock-Based Compensation” (as amended by SFAS No. 148), the Company’s net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:

                                 
    Three Months Ended
  Nine Months Ended
    October 30,   November 1,   October 30,   November 1,
(In thousands, except per share amounts)
  2004
  2003
  2004
  2003
Net earnings, as reported
  $ 12,089     $ 9,412     $ 22,667     $ 11,858  
Add: stock-based employee compensation expense included in reported net earnings, net of related tax effects
    99       143       318       401  
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
    (760 )     (682 )     (2,012 )     (1,737 )
 
   
 
     
 
     
 
     
 
 
Pro forma net earnings
  $ 11,428     $ 8,873     $ 20,973     $ 10,522  
 
   
 
     
 
     
 
     
 
 
Earnings per share:
                               
Basic - as reported
  $ .55     $ .43     $ 1.02     $ .54  
 
   
 
     
 
     
 
     
 
 
Basic - pro forma
  $ .52     $ .40     $ .95     $ .47  
 
   
 
     
 
     
 
     
 
 
Diluted - as reported
  $ .54     $ .42     $ 1.00     $ .53  
 
   
 
     
 
     
 
     
 
 
Diluted - pro forma
  $ .51     $ .40     $ .93     $ .47  
 
   
 
     
 
     
 
     
 
 

New Accounting Principles

In November 2004, the Emerging Issues Task Force (EITF) issued Consensus No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.” The Consensus addresses when to include contingently convertible debt instruments in diluted earnings per share. The Consensus requires companies to include the convertible debt in diluted earnings per share regardless of whether the market price trigger has been met. The Company’s diluted earnings per share calculation for Fiscal 2005 will include an additional 3.9 million shares and a net after tax interest add back of $2.5 million. The Consensus is effective for periods ending after December 15, 2004 and requires restatement of prior period diluted earnings per share.

17


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 2
Restructuring and Other Charges and Discontinued Operations

Fiscal 2005 Other Charges

The Company recorded a pretax charge to earnings of $0.7 million in the third quarter of Fiscal 2005. The charge was primarily for lease terminations of four Jarman stores and retail store asset impairments. These lease terminations were part of a plan announced by the Company in the fourth quarter of Fiscal 2004 to close 48 stores in Fiscal 2005.

The Company recorded a pretax credit to earnings of $0.2 million in the second quarter of Fiscal 2005. The credit was primarily for the recognition of a gain on the curtailment of the Company’s defined benefit pension plan, offset by charges for retail store asset impairments and lease terminations of four Jarman stores.

The Company recorded a pretax charge to earnings of $0.1 million in the first quarter of Fiscal 2005. The charge was primarily for lease terminations of six Jarman stores.

Impairment and Other Charges

The Company recorded a pretax charge to earnings of $1.0 million ($0.6 million net of tax) in the fourth quarter of Fiscal 2004. The charge includes $2.8 million in asset impairments related to 59 underperforming retail stores identified as suitable for closing if acceptable lease terminations can be negotiated, most of which are Jarman stores. The charge is net of recognition of $1.8 million of excess restructuring provisions relating to facility shutdown costs originally accrued in Fiscal 2002. In accordance with SFAS No. 146, the Company revised its estimated liability and reduced the lease obligation during the period that the early lease termination was legally obtained.

In accordance with Company policy, the Company evaluated assets at these identified stores for impairment when a strategic decision was made during the fourth quarter of Fiscal 2004 to pursue the closure of these stores. Assets were determined to be impaired when the revised estimated future cash flows were insufficient to recover the carrying costs. Impairment charges represent the excess of the carrying value over the fair value of those assets.

Asset impairment charges are reflected as a reduction of the net carrying value of property and equipment, and in restructuring and other charges in the accompanying Statements of Earnings.

18


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 2
Restructuring and Other Charges and Discontinued Operations, Continued

Restructuring Reserves

                         
    Employee   Facility    
    Related   Shutdown    
In thousands
  Costs
  Costs
  Total
Balance February 1, 2003
  $ 423     $ 2,928     $ 3,351  
Excess provision August 2, 2003
    (132 )     (7 )     (139 )
Excess provision January 31, 2004
    (22 )     (1,779 )     (1,801 )
Charges and adjustments, net
    (215 )     (689 )     (904 )
 
   
 
     
 
     
 
 
Balance January 31, 2004 (included in other accrued liabilities)
    54       453       507  
Charges and adjustments, net
    (54 )     (453 )     (507 )
 
   
 
     
 
     
 
 
Balance October 30, 2004
  $ -0-     $ -0-     $ -0-  
 
   
 
     
 
     
 
 

Discontinued Operations

Accrued Provision for Discontinued Operations

                                 
    Employee   Facility        
    Related   Shutdown        
In thousands
  Costs
  Costs
  Other
  Total
Balance February 1, 2003
  $ 1,433     $ 1,132     $ 30     $ 2,595  
Additional provision January 31, 2004
    10       1,441       (18 )     1,433  
Charges and adjustments, net
    (1,443 )     448       (10 )     (1,005 )
 
   
 
     
 
     
 
     
 
 
Balance January 31, 2004
    -0-       3,021       2       3,023  
Additional provisions Fiscal 2005
    -0-       739       -0-       739  
Charges and adjustments, net
    -0-       2,212       1       2,213  
 
   
 
     
 
     
 
     
 
 
Balance October 30, 2004*
    -0-       5,972       3       5,975  
Current provision for discontinued operations
    -0-       4,118       3       4,121  
 
   
 
     
 
     
 
     
 
 
Total Noncurrent Provision for Discontinued Operations
  $ -0-     $ 1,854     $ -0-     $ 1,854  
 
   
 
     
 
     
 
     
 
 

*Includes $5.6 million environmental provision including $3.8 million in current provision for discontinued operations.

19


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 3
Inventories

                 
    October 30,   January 31,
In thousands
  2004
  2004
Raw materials
  $ 174     $ 142  
Wholesale finished goods
    30,101       28,900  
Retail merchandise
    235,458       138,192  
 
   
 
     
 
 
Total Inventories
  $ 265,733     $ 167,234  
 
   
 
     
 
 

Note 4
Derivative Instruments and Hedging Activities

In order to reduce exposure to foreign currency exchange rate fluctuations in connection with inventory purchase commitments for its Johnston & Murphy division, the Company enters into foreign currency forward exchange contracts for Euro to make Euro denominated payments with a maximum hedging period of twelve months. Derivative instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged. The settlement terms of the forward contracts correspond with the payment terms for the merchandise inventories. As a result, there is no hedge ineffectiveness to be reflected in earnings. At October 30, 2004 and January 31, 2004, the Company had approximately $8.6 million and $6.6 million, respectively, of such contracts outstanding. Forward exchange contracts have an average remaining term of approximately two and one-half months. The gain based on spot rates under these contracts at October 30, 2004 and January 31, 2004 was $0.5 million and $0.8 million, respectively. For the nine months ended October 30, 2004, the Company recorded an unrealized loss on foreign currency forward contracts of $1.1 million in accumulated other comprehensive loss, before taxes. The Company monitors the credit quality of the major national and regional financial institutions with which it enters into such contracts.

The Company estimates that the majority of net hedging losses related to forward exchange contracts will be reclassified from accumulated other comprehensive loss into earnings through higher cost of sales over the succeeding year.

20


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 4
Derivative Instruments and Hedging Activities, Continued

The Company uses interest rate swaps as a cash flow hedge to manage interest costs and the risk associated with changing interest rates of long-term debt. During the first quarter ended May 1, 2004, the Company entered into three separate forward-starting interest rate swap agreements as a means of managing its interest rate exposure on its new $100.0 million variable rate term loan. All three agreements were effective beginning on October 1, 2004 and are designed to swap a variable rate of three-month LIBOR (2.17% at October 30, 2004) for a fixed rate ranging from 2.52% to 3.32%. The aggregate notional amount of the swaps is $65.0 million. Of the three agreements, the swap agreement with a $15.0 million notional amount expires on October 1, 2005, the swap agreement with a $20.0 million notional amount expires on July 1, 2006 and the swap agreement with a $30.0 million notional amount expires on April 1, 2007. These agreements have the effect of converting certain of the Company’s variable rate obligations to fixed rate obligations.

In order to ensure continued hedge effectiveness, the Company intends to elect the three-month LIBOR option for its variable rate interest payments on its term loan as of each interest payment date. Since the interest payment dates coincide with the swap reset dates, the hedges are expected to be perfectly effective. However, because the swaps do not qualify for the short-cut method, the Company will evaluate quarterly the continued effectiveness of the hedge and will reflect any ineffectiveness in the results of operations. As long as the hedge continues to be perfectly effective, net amounts paid or received will be reflected as an adjustment to interest expense and the changes in the fair value of the derivative will be reflected in other comprehensive income.

At October 30, 2004, the net loss of these interest rate swap agreements was $0.2 million, net of tax, representing the change in fair value of the derivative instruments.

21


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 5
Long-Term Debt

                 
    October 30,   January 31,
In thousands
  2004
  2004
4 1/8% convertible subordinated debentures due June 2023
  $ 86,250     $ 86,250  
Term loan, matures April 1, 2009
    100,000       -0-  
Revolver borrowings
    6,000       -0-  
 
   
 
     
 
 
Total long-term debt
    192,250       86,250  
Current portion, term loan
    17,000       -0-  
 
   
 
     
 
 
Total Noncurrent Portion of Long-Term Debt
  $ 175,250     $ 86,250  
 
   
 
     
 
 

Long-term debt maturing during each of the next five years ending October is as follows: 2005 – $17,000,000, 2006 — $18,000,000; 2007 — $22,000,000; 2008 - $28,000,000; 2009 — $21,000,000; and thereafter — $86,250,000.

Credit Agreement:

On April 1, 2004, the Company entered into new credit facilities totaling $175.0 million with a group of 10 banks, led by Bank of America, N.A. as Administrative Agent. The agreement governing the facilities expires April 1, 2009. The facilities consist of a $100.0 million term loan (used to fund a portion of the purchase price for the Hat World acquisition) and a $75.0 million revolving credit facility (which replaced the previous $75.0 million revolving credit facility). The revolving credit facility is available for working capital and general corporate purposes, and also provides for the issuance of commercial and standby letters of credit. The Company borrowed the $100.0 million term loan on April 1, 2004. The Company had $6.0 million of borrowings outstanding under the revolving credit agreement at October 30, 2004. The Company had outstanding letters of credit of $10.2 million under the agreement at October 30, 2004. These letters of credit support product purchases and lease and insurance indemnifications.

Under both the term loan and revolving credit facilities, interest rates and facility fees are determined according to a pricing grid providing margins over LIBOR or an alternate base rate (the higher of the Federal Funds Rate plus 1/2% or the prime rate). The applicable fees and margins are determined by the Company’s leverage (adjusted debt to earnings before interest, taxes, depreciation, amortization and rent (“EBITDAR”)) ratio.

Deferred financing costs incurred of $3.4 million related to the $175.0 million credit facilities were capitalized and are being amortized over the expected lives of the agreements. These costs are included in other non-current assets on the Balance Sheet.

These credit facilities are guaranteed by each subsidiary of the Company whose assets exceed 5% of the consolidated assets of the Company and its subsidiaries or whose revenue or net income exceeds 10% of the consolidated net income of the Company and its subsidiaries. These credit facilities are secured by substantially all of the material assets of the Company and the guarantors.

22


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 5
Long-Term Debt, Continued

The credit agreement requires the Company to maintain a consolidated tangible net worth in excess of a specified amount that is adjusted in accordance with the Company’s consolidated net income. The credit agreement also requires the Company to meet specified ratio requirements with respect to leverage (debt to EBITDAR) and fixed charge coverage, and restricts the making of capital expenditures. The credit agreement also contains negative covenants restricting, among other things, indebtedness, liens, investments (including acquisitions), fundamental changes and restricted payments (including repurchasing the Company’s common stock or declaring cash dividends in respect thereof). The Company was in compliance with the financial covenants contained in the credit agreement at October 30, 2004.

4 1/8% Convertible Subordinated Debentures due 2023:

On June 24, 2003 and June 26, 2003, the Company issued a total of $86.3 million of 4 1/8% Convertible Subordinated Debentures due June 15, 2023. The Debentures are convertible at the option of the holders into shares of the Company’s common stock, par value $1.00 per share, if: (1) the price of its common stock issuable upon conversion of a Debenture reaches 120% or more of the initial conversion price ($26.54 or more) for 10 of the last 30 trading days of the immediately preceding fiscal quarter, (2) specified corporate transactions occur or (3) the trading price for the Debentures falls below certain thresholds. Upon conversion, the Company will have the right to deliver, in lieu of its common stock, cash or a combination of cash and shares of its common stock. Subject to the above conditions, each $1,000 principal amount of Debentures is convertible into 45.2080 shares (equivalent to an initial conversion price of $22.12 per share of common stock) subject to adjustment.

The Company will pay cash interest on the debentures at an annual rate of 4.125% of the principal amount at issuance, payable on June 15 and December 15 of each year, commencing on December 15, 2003. The Company will pay contingent interest (in the amounts set forth in the Debentures) to holders of the Debentures during any six-month period from and including an interest payment date to, but excluding, the next interest payment date, commencing with the six-month period ending December 15, 2008, if the average trading price of the Debentures for the five consecutive trading day measurement period immediately preceding the applicable six-month period equals 120% or more of the principal amount of the Debentures.

The Company may redeem some or all of the Debentures for cash at any time on or after June 20, 2008 at 100% of their principal amount, plus accrued and unpaid interest, contingent interest and liquidated damages, if any.

23


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 5
Long-Term Debt, Continued

Each holder of the Debentures may require the Company to purchase all or a portion of the holder’s Debentures on June 15, 2010, 2013 or 2028, at a price equal to the principal amount of the Debentures to be purchased, plus accrued and unpaid interest, contingent interest and liquidated damages, if any, to the purchase date. Each holder may also require the Company to repurchase all or a portion of such holder’s Debentures upon the occurrence of a change of control (as defined in the Debentures). The Company may choose to pay the change of control purchase price in cash or shares of its common stock or a combination of cash and shares.

In January 2004, the shelf registration statement filed by the Company for the resale by investors of the Debentures and their common stock issuable upon conversion of the Debentures was declared effective by the Securities and Exchange Commission.

The issuance and sale of the Debentures and the subsequent offering of the Debentures by the initial purchasers were exempt from the registration provisions of the Securities Act of 1933 pursuant to Section 4(2) of such Act and Rule 144A promulgated thereunder. Banc of America Securities LLC, Banc One Capital Markets, Inc., J.P. Morgan Securities Inc. and Wells Fargo Securities, LLC were the initial purchasers of the Debentures.

Deferred financing costs of $2.9 million relating to the issuance were capitalized and are being amortized over seven years and are included in other non-current assets on the Balance Sheet.

The indenture pursuant to which the Debentures were issued does not restrict the incurrence of Senior Debt by the Company or other indebtedness or liabilities by the Company or any of its subsidiaries.

Note 6
Income Taxes

The Company recorded an effective income tax rate of 38.3% and 38.0% for the three months ended October 30, 2004 and November 1, 2003, respectively, and 37.1% and 38.3% for the nine months ended October 30, 2004 and November 1, 2003, respectively. Income taxes for the nine months this year included a favorable tax settlement of $0.5 million. Without the settlement, the rate would have been 38.5% for the nine month period of Fiscal 2005.

24


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 7
Defined Benefit Pension Plans and Other Benefit Plans

Components of Net Periodic Benefit Cost

                                 
    Pension Benefits
    Three Months Ended
  Nine Months Ended
    October 30,   November 1,   October 30,   November 1,
In thousands
  2004
  2003
  2004
  2003
Service Cost
  $ 520     $ 500     $ 1,644     $ 1,428  
Interest cost
    1,734       1,778       5,136       5,082  
Expected return on plan assets
    (1,862 )     (1,935 )     (5,631 )     (5,529 )
Amortization:
                               
Prior service cost
    -0-       (35 )     (70 )     (100 )
Losses
    973       760       3,043       2,172  
 
   
 
     
 
     
 
     
 
 
Net amortization
    973       725       2,973       2,072  
 
   
 
     
 
     
 
     
 
 
Curtailment gain
    -0-       -0-       (605 )     -0-  
 
   
 
     
 
     
 
     
 
 
Net Periodic Benefit Cost
  $ 1,365     $ 1,068     $ 3,517     $ 3,053  
 
   
 
     
 
     
 
     
 
 
                                 
    Other Benefits
    Three Months Ended
  Nine Months Ended
    October 30,   November 1,   October 30,   November 1,
In thousands
  2004
  2003
  2004
  2003
Service Cost
  $ 44     $ 24     $ 132     $ 72  
Interest cost
    24       38       72       114  
Expected return on plan assets
    -0-       -0-       -0-       -0-  
Amortization:
                               
Prior service cost
    -0-       -0-       -0-       -0-  
Losses
    20       17       60       51  
 
   
 
     
 
     
 
     
 
 
Net amortization
    20       17       60       51  
 
   
 
     
 
     
 
     
 
 
Net Periodic Benefit Cost
  $ 88     $ 79     $ 264     $ 237  
 
   
 
     
 
     
 
     
 
 

Curtailment

The Company’s board of directors approved freezing the Company’s defined pension benefit plan in the second quarter ended July 31, 2004, effective January 1, 2005. The action resulted in a curtailment gain of $0.6 million in the second quarter this year which is reflected in the restructuring and other, net line on the accompanying Statement of Earnings.

25


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 7
Defined Benefit Pension Plans and Other Benefit Plans, Continued

Estimated Future Benefit Payments

As a result of freezing the Company’s defined benefit pension plan, expected benefit payments have been revised.

Expected benefit payments from the trust, including future service and pay, are as follows:

         
    Pension
    Benefits
Estimated future payments
  ($ in millions)
2004
  $ 9.9  
2005
    9.6  
2006
    9.7  
2007
    9.4  
2008
    9.3  
2009 – 2013
    43.9  

26


Table of Contents

Genesco Inc. and Consolidated Subsidiaries
Notes to Consolidated Financial Statements

Note 8
Earnings Per Share

                                                 
    For the Three Months Ended   For the Three Months Ended
    October 30, 2004
  November 1, 2003
(In thousands, except   Income   Shares   Per-Share   Income   Shares   Per-Share
per share amounts)
  (Numerator)
  (Denominator)
  Amount
  (Numerator)
  (Denominator)
  Amount
Earnings from continuing operations
  $ 12,529                     $ 9,412                  
Less: Preferred stock dividends
    (73 )                     (74 )                
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Basic EPS
                                               
Income available to common shareholders
    12,456       22,041     $ .57       9,338       21,751     $ .43  
 
                   
 
                     
 
 
Effect of Dilutive Securities
                                               
Options
            348                       266          
Convertible preferred stock(1)
    21       37               -0-       -0-          
4 1/8% Convertible Subordinated Debentures(2)
    -0-       -0-               -0-       -0-          
Employees’ preferred stock(3)
            63                       64          
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Diluted EPS
                                               
Income available to common shareholders plus assumed conversions
  $ 12,477       22,489     $ .55     $ 9,338       22,081     $ .42  
 
   
 
     
 
     
 
     
 
     
 
     
 
 

(1)   The amount of the dividend on the convertible preferred stock per common share obtainable on conversion of the convertible preferred stock is higher than basic earnings per share for Series 1 and 4 for all periods presented. Therefore, conversion of Series 1 and 4 convertible preferred stock is not reflected in diluted earnings per share, because it would have been antidilutive. The shares convertible to common stock for Series 1 and 4 preferred stock would have been 30,644 and 24,946, respectively. Shares convertible to common stock for Series 3 preferred stock are included for Fiscal 2005 because the amount of the dividend on the preferred stock per common share obtainable on conversion of the convertible preferred stock is lower than basic earnings per share for the third quarter ended October 30, 2004.
 
(2)   These debentures will be included in diluted earnings per share effective for periods ending after December 15, 2004. The EITF issued Consensus No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” in November 2004. The Consensus requires companies to include the convertible debt in diluted earnings per share regardless of whether the market price trigger has been met. All prior periods will be restated.
 
(3)   The Company’s Employees’ Subordinated Convertible Preferred Stock is convertible one for one to the Company’s common stock. Because there are no dividends paid on this stock, these shares are assumed to be converted.

The weighted shares outstanding reflects the effect of the stock buy back programs of up to 7.5 million shares announced by the Company in Fiscal 1999 - 2003. The Company had repurchased 7.1 million shares as of January 31, 2004. The Company has not repurchased any shares during Fiscal 2005.

27


Table of Contents

Genesco Inc. and Consolidated Subsidiaries
Notes to Consolidated Financial Statements

Note 8
Earnings Per Share, Continued

                                                 
    For the Nine Months Ended   For the Nine Months Ended
    October 30, 2004
  November 1, 2003
(In thousands, except   Income   Shares   Per-Share   Income   Shares   Per-Share
per share amounts)
  (Numerator)
  (Denominator)
  Amount
  (Numerator)
  (Denominator)
  Amount
Earnings from continuing operations
  $ 23,128                     $ 11,858                  
Less: Preferred stock dividends
    (219 )                     (221 )                
 
   
 
                     
 
                 
Basic EPS
                                               
Income available to common shareholders
    22,909       21,902     $ 1.05       11,637       21,750     $ .54  
 
                   
 
                     
 
 
Effect of Dilutive Securities
                                             
Options
            391                       240          
Convertible preferred stock(1)
    -0-       -0-               -0-       -0-                  
4 1/8% Convertible Subordinated
Debentures(2)
    -0-       -0-               -0-       -0-                  
Employees’ preferred stock(3)
            64                       65          
 
   
 
     
 
             
 
     
 
         
Diluted EPS
                                               
Income available to common shareholders plus assumed conversions
  $ 22,909       22,357     $ 1.02     $ 11,637       22,055     $ .53  
 
   
 
     
 
     
 
     
 
     
 
     
 
 

(1)   The amount of the dividend on the convertible preferred stock per common share obtainable on conversion of the convertible preferred stock is higher than basic earnings per share for all periods presented. Therefore, conversion of the convertible preferred stock is not reflected in diluted earnings per share, because it would have been antidilutive. The shares convertible to common stock for Series 1, 3 and 4 preferred stock would have been 30,644, 37,263 and 24,946, respectively.

(2)   These debentures will be included in diluted earnings per share effective for periods ending after December 15, 2004. The EITF issued Consensus No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” in November 2004. The Consensus requires companies to include the convertible debt in diluted earnings per share regardless of whether the market price trigger has been met. All prior periods will be restated.

(3)   The Company’s Employees’ Subordinated Convertible Preferred Stock is convertible one for one to the Company’s common stock. Because there are no dividends paid on this stock, these shares are assumed to be converted.

The weighted shares outstanding reflects the effect of the stock buy back programs of up to 7.5 million shares announced by the Company in Fiscal 1999 - 2003. The Company had repurchased 7.1 million shares as of January 31, 2004. The Company has not repurchased any shares during Fiscal 2005.

28


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 9
Legal Proceedings

Environmental Matters

New York State Environmental Matters

In 1995, the Company received notice from the New York State Department of Environmental Conservation (the “Department”) that it deemed remedial action to be necessary with respect to certain contaminants in the vicinity of a knitting mill operated by a former subsidiary of the Company from 1965 to 1969, and that it considered the Company a potentially responsible party. In August 1997, the Department and the Company entered into a consent order whereby the Company assumed responsibility for conducting a remedial investigation and feasibility study (“RIFS”) and implementing an interim remediation measure (“IRM”) with regard to the site, without admitting liability or accepting responsibility for any future remediation of the site. In conjunction with the consent order, the Company entered into an agreement with the owner of the site providing for a release from liability for property damage and for necessary access to the site, for payments totaling $400,000. The Company estimates that the cost of conducting the RIFS and implementing the interim remedial measure will be in the range of $5.9 million to $6.1 million, $2.5 million of which the Company has already paid which is net of insurance recoveries. The Company believes that it has adequately accrued for the costs of conducting the RIFS and implementing the interim remedial measure contemplated by the consent order, but there is no assurance that the consent order will ultimately resolve the matter.

As part of its analysis of whether to undertake further voluntary action, the Company has assessed various methods of preventing potential future impact of contamination from the site on two public wells that are in the expected future path of the groundwater plume from the site. The Village of Garden City has proposed the installation at the supply wells of enhanced treatment measures at an estimated cost of approximately $2.6 million, with estimated future costs of up to $2.0 million. In the third quarter of Fiscal 2005, the Company provided for the estimated cost of a remedial alternative it considers adequate to prevent such impact and which it would be willing to implement voluntarily. The Village of Garden City has also asserted that the Company is liable for historical costs of treatment at the wells totaling approximately $3.4 million. Because of evidence with regard to when contaminants from the site of the Company’s former operations first reached the wells, the Company believes it should have no liability with respect to such historical costs.

The Company has not ascertained what responsibility, if any, it has for any contamination in connection with the facility or what other parties may be liable in that connection and is unable to predict the extent of its liability, if any, beyond that voluntarily assumed by the consent order. The Company’s voluntary assumption of responsibility for the IRM and the RIFS, its decision to settle with the owner of the site and its willingness to implement a remedial alternative with respect to the supply wells were based upon its judgment that such actions were preferable to litigation to determine its liability, if any, for contamination related to the site. The Company intends to continue to evaluate the costs of further voluntary remediation versus the costs and uncertainty of litigation.

29


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 9
Legal Proceedings, Continued

In October 2004, the Company received and responded to a questionnaire to its former Whitehall Leather division from the U.S. Environmental Protection Agency in connection with contamination at two sites in western New York State. The sites were reportedly used for waste disposal by a glue manufacturer not related to the Company which purchased byproducts of leather tanning operations to use as raw materials in the manufacture of glue. The Company found no evidence that Whitehall Leather sent any materials to the New York sites.

Whitehall Environmental Matters

Pursuant to a work plan approved by the Michigan Department of Environmental Quality (“MDEQ”) the Company has performed sampling and analysis of soil, sediments, surface water, groundwater and waste management areas at the Company’s former Volunteer Leather Company facility in Whitehall, Michigan.

In June 1999, the Company submitted a remedial action plan (the “Plan”) for the site to MDEQ and subsequently amended it to include additional upland remediation to bring the property into compliance with regulatory standards for non-industrial uses. The Company, with the approval of MDEQ, had previously installed horizontal wells to capture groundwater from a portion of the site and treat it by air sparging. The Plan proposed continued operation of this system for an indefinite period and monitoring of groundwater samples to ensure that the system is functioning as intended. In the fourth quarter of Fiscal 2004 and again in the third quarter of Fiscal 2005, the Company proposed and provided for costs associated with certain enhancements to the system. Management cannot reasonably estimate the range of costs associated with future remediation of the site or predict whether it will have a material effect on the Company’s financial condition or results of operations.

On June 30, 1999, the City of Whitehall filed an action against the Company in the circuit court for the City of Muskegon primarily seeking to require the Company to remediate lake sediment contamination at the site. The Company, the City of Whitehall and MDEQ settled their disagreement over lake sediments for a lump sum payment of $3.4 million by the Company in the first quarter of Fiscal 2003. In connection with the settlement, the City’s lawsuit was dismissed with prejudice.

Related to all outstanding environmental contingencies, the Company had accrued $5.6 million as of October 30, 2004, $2.7 million as of January 31, 2004 and $1.2 million as of November 1, 2003. All such provisions reflect the Company’s estimates of the most likely cost (undiscounted, including both current and noncurrent portions) of resolving the contingencies, based on facts and circumstances as of the time they were made. There is no assurance that relevant facts and circumstances will not change, necessitating future changes to the provisions. Such contingent liabilities are included in the liability arising from provision for discontinued operations on the accompanying balance sheet. Additional provision less insurance proceeds/recoveries realized, totaled approximately $705,000 for the three month period ended October 30, 2004 and $739,000 for the nine month period ended October 30, 2004. Such amounts were recognized in provision for discontinued operations, net on the accompanying Statements of Earnings.

30


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 9
Legal Proceedings, Continued

Insurance Matter

In May 2003, the Company filed a declaratory judgment action in the U. S. District Court for the Middle District of Tennessee against former general liability insurance carriers that underwrote policies covering the Company during periods relevant to the New York State knitting mill matter described above and the matters described below under the caption “Whitehall Environmental Matters.” The action sought a determination that the carriers’ defense and indemnity obligations under the policies extend to the site. During the third quarter of Fiscal 2005, the Company and the carriers reached definitive settlement agreements and the Company received cash payments from the carriers totaling approximately $3.0 million in exchange for releases from liability with respect to the two sites. Net of the insurance proceeds, additional provisions totaling approximately $0.8 million for future remediation expenses associated with the New York State knitting mill matter described above and the Whitehall matter described above, are reflected in the loss from discontinued operations for the third quarter of Fiscal 2005.

Other Matters

Patent Action

In January 2003, the Company was named a defendant in an action filed in the United States District Court for the Eastern District of Pennsylvania, Schoenhaus, et al. vs. Genesco Inc., et al., alleging that certain features of shoes in the Company’s Johnston & Murphy line infringe the plaintiff’s patent, misappropriate trade secrets and involve conversion of the plaintiff’s proprietary information and unjust enrichment of the Company. The Company has filed an answer denying plaintiffs’ claims and a motion to dismiss a portion of the claims and intends to defend the matter vigorously.

California Employment Matter

On October 22, 2004, the Company was named a defendant in a putative class action filed in the Superior Court of the State of California, Los Angeles, Schreiner vs. Genesco Inc., et al., alleging violations of California wages and hours laws, and seeking damages of $40 million plus punitive damages. The Company has retained counsel and is assessing the allegations in the complaint, and intends to defend the matter vigorously.

31


Table of Contents

Genesco Inc.and Subsidiaries

Notes to Consolidated Financial Statements

Note 10
Business Segment Information

The Company currently operates five reportable business segments (not including corporate): Journeys, comprised of Journeys and Journeys Kidz retail footwear operations; Underground Station Group, comprised of the Underground Station and Jarman retail footwear operations; Hat World/Lids, comprised of Hat World, Lids, Hat Zone, Cap Connection and Headquarters retail headwear operations; Johnston & Murphy, comprised of Johnston & Murphy retail operations and wholesale distribution; and Dockers Footwear. All the Company’s segments sell footwear or headwear products to either retail or wholesale markets/customers.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

The Company’s reportable segments are based on the way management organizes the segments in order to make operating decisions and assess performance along types of products sold. Journeys, Underground Station Group and Hat World/Lids sell primarily branded products from other companies while Johnston & Murphy and Dockers sell primarily the Company’s owned and licensed brands.

Corporate assets include cash, deferred income taxes, deferred note expense and corporate fixed assets. The Company charges allocated retail costs of distribution to each segment and unallocated retail costs of distribution to the corporate segment. The Company does not allocate certain costs to each segment in order to make decisions and assess performance. These costs include corporate overhead, interest expense, interest income and restructuring and other charges and credits.

                                                         
Three Months Ended           Underground                        
October 30, 2004           Station   Hat World/   Johnston           Corporate    
In thousands
  Journeys
  Group
  Lids
  & Murphy
  Dockers
  & Other
  Consolidated
Sales
  $ 137,985     $ 34,273     $ 59,477     $ 38,256     $ 18,400     $ 73     $ 288,464  
Intercompany sales
    -0-       -0-       -0-       -0-       (66 )     -0-       (66 )
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Net sales to external customers
  $ 137,985     $ 34,273     $ 59,477     $ 38,256     $ 18,334     $ 73     $ 288,398  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Segment operating income (loss)
  $ 17,967     $ 770     $ 7,681     $ 1,866     $ 2,140     $ (6,307 )   $ 24,117  
Restructuring and other
    -0-       -0-       -0-       -0-       -0-       (667 )     (667 )
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Earnings (loss) from operations
    17,967       770       7,681       1,866       2,140       (6,974 )     23,450  
Interest expense
    -0-       -0-       -0-       -0-       -0-       (3,204 )     (3,204 )
Interest income
    -0-       -0-       -0-       -0-       -0-       66       66  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Earnings (loss) before income taxes from continuing operations
  $ 17,967     $ 770     $ 7,681     $ 1,866     $ 2,140     $ (10,112 )   $ 20,312  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Total assets
  $ 169,188     $ 61,765     $ 233,423     $ 63,434     $ 23,199     $ 90,430     $ 641,439  
Depreciation
    2,537       804       1,934       627       31       1,340       7,273  
Capital expenditures
    2,443       1,927       4,430       1,083       10       1,666       11,559  

32


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 10
Business Segment Information, Continued

                                                 
Three Months Ended           Underground                    
November 1, 2003           Station   Johnston           Corporate    
In thousands
  Journeys
  Group
  & Murphy
  Dockers
  & Other
  Consolidated
Sales
  $ 121,602     $ 34,996     $ 38,760     $ 17,308     $ 102     $ 212,768  
Intercompany sales
    -0-       -0-       -0-       (285 )     -0-       (285 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Net sales to external customers
  $ 121,602     $ 34,996     $ 38,760     $ 17,023     $ 102     $ 212,483  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Segment operating income (loss)
  $ 16,484     $ 1,390     $ 455     $ 1,315     $ (2,942 )   $ 16,702  
Restructuring and other
    -0-       -0-       -0-       -0-       -0-       -0-  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Earnings (loss) from operations
    16,484       1,390       455       1,315       (2,942 )     16,702  
Interest expense
    -0-       -0-       -0-       -0-       (1,590 )     (1,590 )
Interest income
    -0-       -0-       -0-       -0-       80       80  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Earnings (loss) before income taxes from continuing operations
  $ 16,484     $ 1,390     $ 455     $ 1,315     $ (4,452 )   $ 15,192  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total assets
  $ 165,221     $ 61,532     $ 64,210     $ 20,935     $ 133,728     $ 445,626  
Depreciation
    2,497       825       680       32       1,516       5,550  
Capital expenditures
    4,203       1,576       196       -0-       798       6,773  
                                                         
Nine Months Ended           Underground                        
October 30, 2004           Station   Hat World/   Johnston           Corporate    
In thousands
  Journeys
  Group
  Lids
  & Murphy
  Dockers
  & Other
  Consolidated
Sales
  $ 358,011     $ 97,864     $ 135,518     $ 118,210     $ 50,485     $ 223     $ 760,311  
Intercompany sales
    -0-       -0-       -0-       -0-       (448 )     -0-       (448 )
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Net sales to external customers
  $ 358,011     $ 97,864     $ 135,518     $ 118,210     $ 50,037     $ 223     $ 759,863  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Segment operating income (loss)
  $ 33,297     $ 907     $ 16,767     $ 5,492     $ 5,195     $ (16,319 )   $ 45,339  
Restructuring and other
    -0-       -0-       -0-       -0-       -0-       (627 )     (627 )
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Earnings (loss) from operations
    33,297       907       16,767       5,492       5,195       (16,946 )     44,712  
Interest expense
    -0-       -0-       -0-       -0-       -0-       (8,138 )     (8,138 )
Interest income
    -0-       -0-       -0-       -0-       -0-       222       222  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Earnings (loss) before income taxes from continuing operations
  $ 33,297     $ 907     $ 16,767     $ 5,492     $ 5,195     $ (24,862 )   $ 36,796  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Total assets
  $ 169,188     $ 61,765     $ 233,423     $ 63,434     $ 23,199     $ 90,430     $ 641,439  
Depreciation
    7,645       2,349       4,287       1,892       93       4,272       20,538  
Capital expenditures
    6,802       4,267       9,505       2,570       31       4,639       27,814  

33


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 10
Business Segment Information, Continued

                                                 
Nine Months Ended           Underground                    
November 1, 2003           Station   Johnston           Corporate    
In thousands
  Journeys
  Group
  & Murphy
  Dockers
  & Other
  Consolidated
Sales
  $ 317,791     $ 100,291     $ 118,368     $ 48,948     $ 224     $ 585,622  
Intercompany sales
    -0-       -0-       -0-       (915 )     -0-       (915 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Net sales to external customers
  $ 317,791     $ 100,291     $ 118,368     $ 48,033     $ 224     $ 584,707  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Segment operating income (loss)
  $ 28,758     $ 3,181     $ 2,429     $ 3,605     $ (10,614 )   $ 27,359  
Restructuring and other
    -0-       -0-       -0-       -0-       139       139  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Earnings (loss) from operations
    28,758       3,181       2,429       3,605       (10,475 )     27,498  
Interest expense
    -0-       -0-       -0-       -0-       (6,162 )     (6,162 )
Interest income
    -0-       -0-       -0-       -0-       471       471  
Loss on early retirement of debt
    -0-       -0-       -0-       -0-       (2,581 )     (2,581 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Earnings (loss) before income taxes from continuing operations
  $ 28,758     $ 3,181     $ 2,429     $ 3,605     $ (18,747 )   $ 19,226  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total assets
  $ 165,221     $ 61,532     $ 64,210     $ 20,935     $ 133,728     $ 445,626  
Depreciation
    7,376       2,454       1,968       99       4,292       16,189  
Capital expenditures
    9,046       3,868       1,147       9       1,902       15,972  

34


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 11
Acquisitions

Hat World Acquisition

On April 1, 2004, the Company completed the acquisition of 100% of the outstanding common shares of Hat World Corporation (“Hat World”) for a total purchase price of approximately $179 million, including adjustments for $12.6 million of net cash acquired, a $1.2 million subsequent working capital adjustment and direct acquisition expenses of $2.8 million. The release of the final escrow that could result in further adjustments to the purchase price will occur after April 1, 2005. The results of Hat World’s operations have been included in the consolidated financial statements since that date. Headquartered in Indianapolis, Indiana, Hat World is a leading specialty retailer of licensed and branded headwear sold through 525 retail stores as of October 30, 2004. The Company believes the acquisition will enhance its strategic development and prospects for growth.

The acquisition has been accounted for using the purchase method in accordance with SFAS No. 141, “Business Combinations.” Accordingly, the total purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values at acquisition as follows (amounts in thousands):

At April 1, 2004

         
Inventories
  $ 33,888  
Property and equipment
    24,278  
Unamortizable intangible assets (indefinite-lived trademarks)
    47,324  
Amortizable intangibles (primarily lease write-up)
    8,586  
Goodwill
    97,431  
Other assets
    3,830  
Accounts payable
    (19,036 )
Noncurrent deferred tax liability
    (23,036 )
Other liabilities
    (6,947 )
 
   
 
 
Net Assets Acquired
  $ 166,318  
 
   
 
 

The trademarks acquired include the concept names and are deemed to have an indefinite life. Finite-lived intangibles include a $0.3 million customer list and an $8.3 million asset to reflect the adjustment of acquired leases to market. The weighted average amortization period for the asset to adjust acquired leases to market is 4.2 years. The goodwill related to the Hat World acquisition is not deductible for tax purposes.

35


Table of Contents

Genesco Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 11
Acquisitions, Continued

The following pro forma information presents the results of operations of the Company as if the Hat World acquisition had taken place at the beginning of all periods presented in the table below. Pro forma adjustments have been made to reflect additional interest expense from the $100.0 million in debt associated with the acquisition. The pro forma results of operations include $2.0 million of non-recurring transaction costs incurred by Hat World for the two months ended March 31, 2004.

                                 
    Pro forma
    Three Months Ended
  Nine Months Ended
    October 30,   November 1,   October 30,   November 1,
In thousands, except per share data
  2004
  2003
  2004
  2003
Net sales
  $ 288,398     $ 260,814     $ 792,824     $ 714,960  
Net earnings
    12,089       10,898       21,217       12,963  
Net earnings per share:
                               
Basic
  $ 0.55     $ 0.50     $ 0.96     $ 0.59  
Diluted
  $ 0.54     $ 0.49     $ 0.94     $ 0.58  

The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have occurred had the Hat World acquisition occurred at the beginning of all periods presented.

Cap Connection Acquisition

On July 1, 2004, the Company acquired the assets and business of Edmonton, Alberta-based Cap Connection Ltd., consisting of 18 Cap Connection and Head Quarters stores at October 30, 2004 in Alberta, British Columbia and Ontario, Canada. The purchase price for the Cap Connection business was approximately $1.7 million, subject to adjustment, of which approximately $0.1 million is being held in escrow until certain conditions are met concerning leases. Cap Connection is a leading Canadian specialty retailer of headwear.

36


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This discussion and the notes to the Consolidated Financial Statements include certain forward-looking statements, which include statements regarding our intent, belief or expectations and all statements other than those made solely with respect to historical fact. Actual results could differ materially from those reflected by the forward-looking statements in this discussion and a number of factors may adversely affect the forward looking statements and the Company’s future results, liquidity, capital resources or prospects. These factors (some of which are beyond the Company’s control) include:

  Weakness in consumer demand for products sold by the Company.
 
  Fashion trends that affect the sales or product margins of the Company’s retail product offerings.
 
  Changes in the timing of the holidays or in the onset of seasonal weather affecting period to period sales comparisons.
 
  Changes in demand or buying patterns by significant wholesale customers.
 
  Year-to-year variations in the timing of holidays and other drivers of retail sales.
 
  Disruptions in product supply or distribution.
 
  Further unfavorable trends in foreign exchange rates and other factors affecting the cost of products.
 
  Changes in business strategies by the Company’s competitors (including pricing and promotional discounts).
 
  The integration of the Hat World and Cap Connection acquisitions.
 
  The Company’s ability to open, staff and support additional retail stores on schedule and at acceptable expense levels, to renew leases in existing stores on schedule and at acceptable expense levels and to identify and timely obtain new locations at acceptable expense levels.
 
  Certain increases in the trading price of the Company’s common stock and changes in the applicable accounting treatment of the contingent conversion feature of the Company’s 4.125% convertible subordinated debentures due 2023, either of which would result in an increase in common shares deemed outstanding in the calculation of earnings per share by 3.9 million shares.
 
  Variations from expected pension-related charges caused by conditions in the financial markets.
 
  The outcome of litigation and environmental matters involving the Company, including those discussed in Note 9 to the Consolidated Financial Statements.

Forward-looking statements reflect the expectations of the Company at the time they are made, and investors should rely on them only as expressions of opinion about what may happen in the future and only at the time they are made. The Company undertakes no obligation to update any forward-looking statement. Although the Company believes it has an appropriate business strategy and the resources necessary for its operations, predictions about future revenue and margin trends are inherently uncertain and the Company may alter its business strategies to address changing conditions.

37


Table of Contents

Overview

The Company is a leading retailer and wholesaler of branded footwear and a leading retailer of licensed and branded headwear, operating 1,603 retail footwear and headwear stores and leased departments throughout the United States, Puerto Rico and Canada as of October 30, 2004. The Company also designs, sources, markets and distributes footwear under its own Johnston & Murphy brand and under the licensed Dockers brand to over 1,075 retail accounts in the United States, including a number of leading department, discount, and specialty stores. On April 1, 2004, the Company acquired Hat World Corporation (“Hat World”), a leading retailer of licensed and branded headwear operating 525 stores at October 30, 2004. On July 1, 2004, the Company acquired the assets and business of Edmonton, Alberta — based Cap Connection Ltd., a leading Canadian specialty retailer of headwear operating 18 stores at October 30, 2004. See “Significant Developments.”

The Company operates five reportable business segments (not including corporate): Journeys, comprised of Journeys and Journeys Kidz retail footwear chains; Underground Station Group, comprised of the Underground Station and Jarman retail footwear chains; Hat World/Lids, comprised of Hat World, Lids, Hat Zone, Cap Factory, Cap Connection and Headquarters retail headwear operations; Johnston & Murphy, comprised of Johnston & Murphy retail operations and wholesale distribution; and Dockers Footwear.

The Journeys retail footwear stores sell footwear and accessories primarily for 13 — 22 year old men and women. The stores average approximately 1,650 square feet. The Journeys Kidz retail footwear stores sell footwear primarily for younger children, ages five to 12. These stores average approximately 1,400 square feet.

The Underground Station Group retail footwear stores sell footwear and accessories for men and women in the 20 — 35 age group. The Underground Station Group stores average approximately 1,550 square feet. In the fourth quarter of Fiscal 2004, the Company made the strategic decision to close 34 Jarman stores during Fiscal 2005 subject to its ability to negotiate lease terminations. These stores are not suitable for conversion to Underground Station stores. The Company intends to convert the remaining Jarman stores to Underground Station stores as quickly as it is financially feasible, subject to landlord approval. During the first nine months of Fiscal 2005, 14 Jarman stores were closed and nine Jarman stores were converted to Underground Station stores.

Hat World/Lids retail stores sell licensed and branded headwear to men and women primarily in the mid-teen to mid-20’s age group. These stores average approximately 700 square feet and are located in malls, airports, street level stores and factory outlet stores nationwide and in Canada.

Johnston & Murphy retail stores sell a broad range of men’s dress and casual footwear and accessories to business and professional consumers primarily between the ages of 25 and 54. These stores average approximately 1,300 square feet and are located primarily in better malls nationwide. Johnston & Murphy shoes are also distributed through the Company’s wholesale operations to better department and independent specialty stores. In addition, the Company sells Johnston & Murphy footwear in factory stores located in factory outlet malls. These stores average approximately 2,400 square feet.

The Company entered into an exclusive license with Levi Strauss and Company to market men’s footwear in the United States under the Dockers® brand name in 1991. The Dockers license

38


Table of Contents

agreement was renewed October 22, 2004. The Dockers license agreement, as amended, expires on December 31, 2006 with a Company option to renew through December 31, 2008, subject to certain conditions. The Company uses the Dockers name to market casual and dress casual footwear to men aged 30 to 55 through many of the same national retail chains that carry Dockers slacks and sportswear and in department and specialty stores across the country.

The Company’s net sales increased 35.7% during the third quarter of Fiscal 2005 compared to the prior year’s third quarter. The increase was driven primarily by the addition of new stores (including 525 Hat World/Lids stores acquired on April 1, 2004 or opened since April 1, 2004 and 18 Cap Connection stores acquired on July 1, 2004 or opened since July 1, 2004), as well as a 7.7% increase in Dockers Footwear sales and a 4% increase in comparable store sales for all concepts. The same store sales increase was primarily due to growth in unit comparable sales in the Journeys business, a moderation in the decline in average selling price in the Journeys and Underground Station businesses and the addition of Hat World. Gross margin increased as a percentage of sales during the third quarter of Fiscal 2005 primarily due to the acquisition of Hat World, improvements in Johnston & Murphy wholesale due to changes in sourcing and less promotional selling, and improvement in Dockers Footwear’s margin due to a reduction in close out sales compared to last year’s third quarter.

The Company’s strategy is to seek long-term growth by: 1) increasing the Company’s store base, 2) increasing retail square footage, 3) improving comparable store sales and 4) increasing operating margin. Our future results are subject to various risks, uncertainties and other challenges, including those discussed under the caption “Forward Looking Statements,” above. Among the most important of these factors are those related to consumer demand. Conditions in the external economy can affect demand, resulting in changes in sales and, as prices are adjusted to drive sales and control inventories, in gross margins. Because fashion trends influencing many of the Company’s target customers (particularly customers of Journeys, Underground Station and Hat World) can change rapidly, the Company believes that its ability to detect and respond quickly to those changes has been important to its success. Even when the Company succeeds in aligning its merchandise offerings with consumer preferences, those preferences may affect results. The Company believes its experience and discipline in merchandising and the buying power associated with its relative size in the industry are important to its ability to mitigate risks associated with changing customer preferences.

Significant Developments

Cap Connection Acquisition

On July 1, 2004, the Company acquired the assets and business of Edmonton, Alberta-based Cap Connection Ltd. The purchase price for the Cap Connection business was approximately $1.7 million, subject to adjustment. At October 30, 2004, the Company operated 18 Cap Connection and Headquarters stores, in Alberta, British Columbia and Ontario, Canada.

Hat World Acquisition

On April 1, 2004, the Company completed the acquisition of Hat World Corporation for a total purchase price of approximately $179 million, including adjustments for $12.6 million of net cash acquired, a $1.2 million subsequent working capital adjustment and direct acquisition expenses of $2.8 million. Hat World is a leading specialty retailer of licensed and branded headwear. As of October 30, 2004, it operated 525 stores across the U.S. under the Hat World, Lids and Hat Zone names. The Company believes the acquisition will enhance its strategic development and prospects

39


Table of Contents

for growth. The Company funded the acquisition and associated expenses with a $100.0 million, five-year term loan and the balance from cash on hand.

New $175.0 million Credit Facility

On April 1, 2004, the Company entered into new credit facilities totaling $175.0 million with 10 banks, led by Bank of America, N.A., as Administrative Agent, to fund a portion of the purchase price for the Hat World acquisition and to replace its existing revolving credit facility. The $175.0 million facility consists of a $100.0 million, five-year term loan and a $75.0 million five-year revolving credit facility. The agreement governing the facilities expires April 1, 2009. See Note 5 to the Consolidated Financial Statements.

Fiscal 2005 Other Charges and Credits

The Company recorded a pretax charge to earnings of $0.7 million in the third quarter of Fiscal 2005. The charge was primarily for lease terminations of four Jarman stores and retail store asset impairments. These lease terminations were part of a plan announced by the Company in the fourth quarter of Fiscal 2004 to close 48 stores in Fiscal 2005.

The Company recorded a pretax credit to earnings of $0.2 million in the second quarter of Fiscal 2005. The credit was primarily for the recognition of a gain on the curtailment of the Company’s defined benefit pension plan, offset by charges for retail store asset impairments and lease terminations of four Jarman stores.

The Company recorded a pretax charge to earnings of $0.1 million in the first quarter of Fiscal 2005. The charge was primarily for lease terminations of six Jarman stores.

Impairment and Other Charges

The Company recorded a pretax charge to earnings of $1.0 million ($0.6 million net of tax) in the fourth quarter of Fiscal 2004. The charge includes $2.8 million in asset impairments related to 59 underperforming retail stores identified as suitable for closing if acceptable lease terminations can be negotiated, most of which are Jarman stores. The charge is net of recognition of $1.8 million of excess restructuring provisions relating to facility shutdown costs originally accrued in Fiscal 2002. In accordance with SFAS No. 146, the Company revised its estimated liability and reduced the lease obligation during the period that the early lease termination was legally obtained.

Discontinued Operations

The Company recorded a charge to earnings (net of tax) of $0.4 million ($0.01 diluted earnings per share) in the third quarter of Fiscal 2005 primarily for anticipated costs of environmental remedial alternatives related to two manufacturing facilities formerly operated by the company, offset by $3.0 million from settlements with certain insurance carriers regarding the sites. See Note 9 to the Consolidated Financial Statements.

Results of Operations — Third Quarter Fiscal 2005 Compared to Fiscal 2004

The Company’s net sales in the third quarter ended October 30, 2004 increased 35.7% to $288.4 million from $212.5 million in the third quarter ended November 1, 2003. The sales increase included Hat World/Lids sales of $59.5 million for the third quarter this year. Hat World was acquired by the Company on April 1, 2004. Gross margin increased 44.6% to $143.4 million in the third quarter this year from $99.1 million in the same period last year and increased as a percentage

40


Table of Contents

of net sales from 46.7% to 49.7%. Selling and administrative expenses in the third quarter this year increased 44.7% from the third quarter last year and increased as a percentage of net sales from 38.8% to 41.3%. The Company records buying and merchandising and occupancy costs in selling and administrative expense. Because the Company does not include these costs in cost of sales, the Company’s gross margin may not be comparable to other retailers that include these costs in the calculation of gross margin. Explanations of the changes in results of operations are provided by business segment in discussions following these introductory paragraphs.

Pretax earnings for the third quarter ended October 30, 2004 were $20.3 million, compared to $15.2 million for the third quarter ended November 1, 2003. Pretax earnings for the third quarter ended October 30, 2004 included a restructuring and other charge of $0.7 million, primarily for lease terminations of four Jarman stores and retail store asset impairments. These lease terminations were part of the 48 stores the Company announced in the fourth quarter of Fiscal 2004 that it planned to close in Fiscal 2005. See “Significant Developments.”

Net earnings for the third quarter ended October 30, 2004 were $12.1 million ($0.54 diluted earnings per share), compared to $9.4 million ($0.42 diluted earnings per share) for the third quarter ended November 1, 2003. Net earnings for the third quarter ended October 30, 2004 included a $0.4 million ($0.01 diluted earnings per share) charge to earnings (net of tax) primarily for anticipated costs of environmental remedial alternatives related to two manufacturing facilities formerly operated by the Company, offset by $3.0 million from settlements with certain insurance carriers regarding the sites. See Note 9 to the Consolidated Financial Statements. The Company recorded an effective income tax rate of 38.3% in the third quarter this year compared to 38.0% in the same period last year.

Journeys

                         
    Three Months Ended
       
    October 30,   November 1,   %
    2004
  2003
  Change
    (dollars in thousands)        
Net sales
  $ 137,985     $ 121,602       13.5 %
Operating income
  $ 17,967     $ 16,484       9.0 %
Operating margin
    13.0 %     13.6 %        

Net sales from Journeys increased 13.5% for the third quarter ended October 30, 2004 compared to the same period last year. The increase reflects primarily a 7% increase in comparable store sales and a 6% increase in average Journeys stores operated (i.e., the sum of the number of stores open on the first day of the fiscal quarter and the last day of each fiscal month during the quarter divided by four). Footwear unit comparable sales also increased 10% for the third quarter ended October 30, 2004. The average price per pair of shoes decreased 3% in the third quarter of Fiscal 2005, reflecting fashion-related changes in product mix, while unit sales increased 17% during the same period. The Journeys business experienced a moderation in the decline in average selling price of products during the quarter, continuing a trend in the results of recent quarters. The average price fell 3% during the third quarter this year compared to 9% in the third quarter last year. Journeys operated 687 stores at the end of the third quarter of Fiscal 2005, including 41 Journeys Kidz stores, compared to 658 stores at the end of the third quarter last year, including 40 Journeys Kidz stores. With the addition of a Journeys store in Hawaii during the third quarter this year, the Journeys business has a store in every state except Montana and expects to have one there early next year.

41


Table of Contents

Journeys operating income for the third quarter ended October 30, 2004 increased 9.0% to $18.0 million, compared to $16.5 million for the third quarter ended November 1, 2003. The increase was due to increased net sales, reflecting the increase in comparable store sales and stores operated. Gross margin decreased as a percentage of net sales, reflecting changes in product mix, which caused operating margin to decrease from 13.6% for the third quarter ended November 1, 2003 to 13.0% for the third quarter ended October 30, 2004.

Underground Station Group

                         
    Three Months Ended
       
    October 30,   November 1,   %
    2004
  2003
  Change
    (dollars in thousands)        
Net sales
  $ 34,273     $ 34,996       (2.1 )%
Operating income
  $ 770     $ 1,390       (44.6 )%
Operating margin
    2.2 %     4.0 %        

Net sales from the Underground Station Group (comprised of Underground Station and Jarman retail stores) decreased 2.1% for the third quarter ended October 30, 2004 compared to the same period last year. The decrease in net sales was primarily due to a 30% decline in Jarman retail store sales, reflecting a 28% decrease in Jarman stores operated related to the Company’s strategy of closing Jarman stores or converting them to Underground Station stores. Sales for Underground Station stores increased 17% for the third quarter this year. Comparable store sales were down 5% for the Underground Station Group and comparable store sales for Underground Station stores were down only 2%, which compares to a 7% decrease for the same period last year. The 2% comparable store sales decrease in the third quarter this year compares favorably to the second quarter where comparable store sales were down 11%. Footwear unit comparable sales were also down 9% for the Underground Station Group for the third quarter ended October 30, 2004. The average price per pair of shoes increased 1% in the third quarter of Fiscal 2005, primarily reflecting changes in product mix, while unit sales decreased 8% during the same period. The average price per pair of shoes at Underground Station stores increased 4% during the third quarter this year, primarily reflecting changes in product mix. This compares to a 1% decline in average price per pair of shoes in the second quarter this year and a 4% decline in the first quarter this year. Gross margin increased as a percentage of net sales during the third quarter ended October 30, 2004, reflecting decreased markdowns. Underground Station Group operated 231 stores at the end of the third quarter of Fiscal 2005, including 158 Underground Station stores. The Underground Station Group had operated 237 stores at the end of the third quarter last year, including 132 Underground Station stores.

The Underground Station Group’s operating income for the third quarter ended October 30, 2004 was $0.8 million compared to $1.4 million in the third quarter ended November 1, 2003. The decrease was due to decreased net sales, reflecting the decrease in comparable store sales and stores operated, and to increased expenses as a percentage of net sales.

42


Table of Contents

Hat World/Lids

                         
    Three Months Ended*
       
    October 30,   November 1,   %
    2004
  2003
  Change
    (dollars in thousands)        
Net sales
  $ 59,477     $ -0-     NA
Operating income
  $ 7,681     $ -0-     NA
Operating margin
    12.9 %     0 %        

*   The Company acquired Hat World on April 1, 2004.

Hat World/Lids comparable store sales increased 12% for the third quarter ended October 30, 2004. A strong gross margin contributed to the operating margin of 12.9%. Management believes that Hat World’s comparable store sales increase resulted from favorable trends in consumer demand, driven by strong core sports products, particularly major league baseball, the Boston Red Sox and the New York Yankees, as well as strength in the fashion and branded businesses.

Johnston & Murphy

                         
    Three Months Ended
       
    October 30,   November 1,   %
    2004
  2003
  Change
    (dollars in thousands)        
Net sales
  $ 38,256     $ 38,760       (1.3 )%
Operating income
  $ 1,866     $ 455       310.1 %
Operating margin
    4.9 %     1.2 %        

Johnston & Murphy net sales decreased 1.3% to $38.3 million for the third quarter ended October 30, 2004 from $38.8 million for the third quarter ended November 1, 2003, reflecting a 1% decrease in comparable store sales for Johnston & Murphy retail operations, a 7% decrease in average stores operated and a 4% decrease in Johnston & Murphy wholesale sales. Retail operations accounted for 72.5% of Johnston & Murphy segment sales in the third quarter this year, up from 71.7% in the third quarter last year. The average price per pair of shoes for Johnston & Murphy retail operations increased 7% (7% in the Johnston & Murphy shops) in the third quarter this year, primarily due to a greater emphasis on a more focused assortment of higher-end, premium footwear, while unit sales were down 9% during the same period. The store count for Johnston & Murphy retail operations at the end of the third quarter of Fiscal 2005 included 142 Johnston & Murphy stores and factory stores compared to 152 Johnston & Murphy stores and factory stores at the end of the third quarter of Fiscal 2004. The decline in wholesale sales was due to less closeout sales. Unit sales for the Johnston & Murphy wholesale business decreased 13% in the third quarter of Fiscal 2005 while the average price per pair of shoes increased 10% for the same period. The unfilled order position for Johnston & Murphy wholesale was up at the end of the third quarter this year.

Johnston & Murphy operating income for the third quarter ended October 30, 2004 increased to $1.9 million for the third quarter this year from $0.5 million last year, primarily due to increased gross margin as a percentage of net sales, reflecting improvements in sourcing, less promotional selling and a higher mix of premium product.

43


Table of Contents

Dockers Footwear

                         
    Three Months Ended
       
    October 30,   November 1,   %
    2004
  2003
  Change
    (dollars in thousands)        
Net sales
  $ 18,334     $ 17,023       7.7 %
Operating income
  $ 2,140     $ 1,315       62.7 %
Operating margin
    11.7 %     7.7 %        

Dockers Footwear’s net sales increased 7.7% to $18.3 million for the third quarter ended October 30, 2004, from $17.0 million for the third quarter ended November 1, 2003. The sales increase was primarily attributable to the Stain Defender product line. Unit sales of Dockers footwear increased 4% for the third quarter this year and the average price per pair of shoes increased 2% for the same period, reflecting less closeout sales.

Dockers Footwear’s operating income for the third quarter ended October 30, 2004 increased to $2.1 million, compared to $1.3 million for the third quarter ended November 1, 2003, primarily due to increased sales, increased gross margin as a percentage of net sales, reflecting less closeout sales, and to decreased expenses as a percentage of net sales.

Corporate, Interest Expenses and Other Charges

Corporate and other expenses for the third quarter ended October 30, 2004 were $7.0 million, compared to $2.9 million for the third quarter ended November 1, 2003. This year’s third quarter included $0.7 million of restructuring and other charges, primarily for lease terminations of four Jarman stores and retail store asset impairments. The increase in corporate expenses in the third quarter this year reflects higher bonus accruals, increased professional fees (including increased audit department costs resulting from additional work to comply with the Sarbanes-Oxley legislation and related regulations) and the absence of similar restructuring charges in the third quarter last year.

Interest expense increased 101.5% from $1.6 million in the third quarter ended November 1, 2003 to $3.2 million for the third quarter ended October 30, 2004, primarily due to the additional $100.0 million term loan, which was used to purchase Hat World, and to the increase in revolver borrowings. There was an average of $11.1 million of borrowings under the Company’s revolving credit facility during the three months ended October 30, 2004, and no borrowings during the three months ended November 1, 2003.

Interest income decreased 17.5% in the third quarter this year compared to the third quarter last year due to the decrease in average short-term investments.

Results of Operations — Nine Months Fiscal 2005 Compared to Fiscal 2004

The Company’s net sales in the nine months ended October 30, 2004 increased 30.0% to $759.9 million from $584.7 million in the nine months ended November 1, 2003. The sales increase included Hat World/Lids sales of $135.5 million for the period April 1, 2004 through October 30, 2004. Hat World was acquired by the Company on April 1, 2004. Gross margin increased 38.9% to $375.9 million in the first nine months this year from $270.7 million in the same period last year

44


Table of Contents

and increased as a percentage of net sales from 46.3% to 49.5%. Selling and administrative expenses in the first nine months this year increased 35.9% from the first nine months last year and increased as a percentage of net sales from 41.6% to 43.5%. The Company records buying and merchandising and occupancy costs in selling and administrative expense. Because the Company does not include these costs in cost of sales, the Company’s gross margin may not be comparable to other retailers that include these costs in the calculation of gross margin. Explanations of the changes in results of operations are provided by business segment in discussions following these introductory paragraphs.

Pretax earnings for the nine months ended October 30, 2004 were $36.8 million, compared to $19.2 million for the nine months ended November 1, 2003. Pretax earnings for the nine months ended October 30, 2004 included a restructuring and other charge of $0.6 million, primarily for lease terminations of fourteen Jarman stores and retail store asset impairments offset by the gain on the curtailment of the Company’s defined benefit pension plan. These lease terminations were part of the 48 stores the Company announced in the fourth quarter of Fiscal 2004 that it planned to close in Fiscal 2005. See “Significant Developments.” Pretax earnings for the nine months ended November 1, 2003 included a $2.6 million loss on the early retirement of debt, offset by a $0.1 million adjustment to a previous restructuring charge.

Net earnings for the nine months ended October 30, 2004 were $22.7 million ($1.00 diluted earnings per share), compared to $11.9 million ($0.53 diluted earnings per share) for the nine months ended November 1, 2003. Net earnings for the nine months ended October 30, 2004 included a $0.5 million ($0.02 diluted earnings per share) charge to earnings (net of tax) primarily for anticipated costs of environmental remedial alternatives related to two manufacturing facilities formerly operated by the Company, offset by $3.3 million from settlements with certain insurance carriers regarding the sites. See Note 9 to the Consolidated Financial Statements. The Company recorded an effective income tax rate of 37.1% in the first nine months this year compared to 38.3% in the same period last year. Income taxes for the first nine months this year included a favorable tax settlement of $0.5 million. Without the settlement, the rate would have been 38.5% for the first nine months this year.

Journeys

                         
    Nine Months Ended
       
    October 30,   November 1,   %
    2004
  2003
  Change
    (dollars in thousands)        
Net sales
  $ 358,011     $ 317,791       12.7 %
Operating income
  $ 33,297     $ 28,758       15.8 %
Operating margin
    9.3 %     9.0 %        

Net sales from Journeys increased 12.7 % for the nine months ended October 30, 2004 compared to the same period last year. The increase reflects primarily a 6% increase in comparable store sales and a 7% increase in average Journeys stores operated (i.e., the sum of the number of stores open on the first day of the fiscal year and the last day of each fiscal month during the nine months divided by ten). Footwear unit comparable sales also increased 7% for the nine months ended October 30, 2004. The average price per pair of shoes decreased 3% in the first nine months of Fiscal 2005, reflecting fashion-related changes in product mix, while unit sales increased 14% during the same period. The comparable sales performance was primarily driven by the moderation

45


Table of Contents

in the decline in average selling price from 8% in the fourth quarter of Fiscal 2004 to 3% in the first nine months of Fiscal 2005 and by continued growth in unit comparable sales.

Journeys operating income for the nine months ended October 30, 2004 was up 15.8% to $33.3 million compared to $28.8 million for the nine months ended November 1, 2003. The increase was due to increased net sales, reflecting the increase in comparable store sales and stores operated, and to increased gross margin as a percentage of net sales, primarily reflecting decreased markdowns.

Underground Station Group

                         
    Nine Months Ended
       
    October 30,   November 1,   %
    2004
  2003
  Change
    (dollars in thousands)        
Net sales
  $ 97,864     $ 100,291       (2.4 )%
Operating income
  $ 907     $ 3,181       (71.5 )%
Operating margin
    0.9 %     3.2 %        

Net sales from the Underground Station Group (comprised of Underground Station and Jarman retail stores) decreased 2.4 % for the nine months ended October 30, 2004 compared to the same period last year. Comparable store sales were down 6% for the Underground Station Group and down 5% for the Underground Station stores. Footwear unit comparable sales for Underground Station Group were also down 6%. The average price per pair of shoes decreased 2% in the first nine months of Fiscal 2005, primarily reflecting changes in product mix, and unit sales decreased 4% during the same period.

Underground Station Group operating earnings for the nine months ended October 30, 2004 was $0.9 million compared to $3.2 million in the nine months ended November 1, 2003. The decrease was due to decreased net sales, reflecting the decrease in comparable store sales and to increased expenses as a percentage of net sales.

Hat World/Lids

                         
    Nine Months Ended*
       
    October 30,   November 1,   %
    2004
  2003
  Change
    (dollars in thousands)        
Net sales
  $ 135,518     $ -0-     NA
Operating income
  $ 16,767     $ -0-     NA
Operating margin
    12.4 %     0 %        

*The Company acquired Hat World on April 1, 2004. Results for the nine month period ended October 30, 2004 are for the period April 1, 2004 — October 30, 2004.

Hat World/Lids comparable store sales increased 15% for the period April 1, 2004 — October 30, 2004. A strong gross margin contributed to the operating margin of 12.4%. Management believes that Hat World’s comparable store sales increase resulted from several favorable trends in merchandise mix: 1) strong core major league baseball business due to the popularity of certain major market teams like the Yankees, Dodgers, Red Sox and Cubs; 2) strength in fashion categories

46


Table of Contents

featuring major league baseball and NBA teams; and 3) demand for trucker style hats across many categories of merchandise. During the second quarter this year, the Company acquired Cap Connection, a leading Canadian — based specialty retailer of headwear. “See Significant Developments.”

Johnston & Murphy

                         
    Nine Months Ended
       
    October 30,   November 1,   %
    2004
  2003
  Change
    (dollars in thousands)        
Net sales
  $ 118,210     $ 118,368       (0.1 )%
Operating income
  $ 5,492     $ 2,429       126.1 %
Operating margin
    4.6 %     2.1 %        

Johnston & Murphy net sales decreased 0.1% to $118.2 million for the nine months ended October 30, 2004 from $118.4 million for the nine months ended November 1, 2003, reflecting primarily a 10% decrease in Johnston & Murphy wholesale sales offset by a 2% increase in comparable store sales for Johnston & Murphy retail operations. The decrease in wholesale sales was the result of the Company’s strategic decision to reduce the number of individual locations in some accounts in which Johnston & Murphy products would be offered and to reduce the amount of promotional activity with the Johnston & Murphy brand in order to seek more profitable sales rather than sales growth and to emphasize Johnston & Murphy’s premium position in the market place. Unit sales for the Johnston & Murphy wholesale business decreased 17% in the first nine months of Fiscal 2005 while the average price per pair of shoes increased 9% for the same period. Retail operations accounted for 73.9% of Johnston & Murphy segment sales in the first nine months this year, up from 71.1% in the first nine months last year. The average price per pair of shoes for Johnston & Murphy retail operations increased 9% (10% in the Johnston & Murphy shops) in the first nine months this year, primarily due to a greater emphasis on a more focused assortment of higher-end, premium footwear, while unit sales were down 7% during the same period.

Johnston & Murphy operating income for the nine months ended October 30, 2004 increased 126.1% from $2.4 million last year to $5.5 million for the first nine months this year, primarily due to increased gross margin as a percentage of net sales, reflecting improvements in sourcing, less promotional selling and a higher mix of premium product.

Dockers Footwear

                         
    Nine Months Ended
       
    October 30,   November 1,   %
    2004
  2003
  Change
    (dollars in thousands)        
Net sales
  $ 50,037     $ 48,033       4.2 %
Operating income
  $ 5,195     $ 3,605       44.1 %
Operating margin
    10.4 %     7.5 %        

Dockers Footwear’s net sales increased 4.2% to $50.0 million for the nine months ended October 30, 2004, from $48.0 million for the nine months ended November 1, 2003. The sales increase reflected increased demand for the Company’s products. Unit sales of Dockers footwear increased

47


Table of Contents

2% for the first nine months this year and the average price per pair of shoes increased 1% for the same period, reflecting less markdowns.

Dockers Footwear’s operating income for the nine months ended October 30, 2004 increased 44.1% to $5.2 million compared to $3.6 million for the nine months ended November 1, 2003, primarily due to increased sales, increased gross margin as a percentage of net sales, reflecting less markdowns, and to decreased expenses as a percentage of net sales.

Corporate, Interest Expenses and Other Charges

Corporate and other expenses for the nine months ended October 30, 2004 were $16.9 million, compared to $13.1 million for the nine months ended November 1, 2003. This year’s corporate and other expenses included $0.6 million of restructuring and other charges, primarily for lease terminations of 14 Jarman stores and retail store asset impairments offset by the gain on the curtailment of the Company’s defined benefit pension plan. Corporate and other expenses last year included charges of $2.6 million on the early retirement of debt offset by a $0.1 million adjustment to a previous restructuring charge. The increase in corporate expenses in the first nine months this year is attributable primarily to higher bonus accruals and increased professional fees (including increased legal and audit department costs resulting from additional work to comply with the Sarbanes-Oxley legislation and related regulations) offset by the absence of similar restructuring charges.

Interest expense increased 32.1% from $6.2 million for the nine months ended November 1, 2003 to $8.1 million for the nine months ended October 30, 2004, primarily due to the additional $100.0 million term loan, which was used to purchase Hat World, the increase in bank activity fees as a result of new stores added due to the acquisition of Hat World and an increase in revolver borrowings. There was an average of $6.5 million of borrowings under the Company’s revolving credit facility during the nine months ended October 30, 2004, and no borrowings during the nine months ended November 1, 2003.

Interest income decreased 52.9% in the first nine months this year compared to the first nine months last year due to the decrease in average short-term investments.

Liquidity and Capital Resources

The following table sets forth certain financial data at the dates indicated.

                 
    October 30,   November 1,
    2004
  2003
    (dollars in millions)
Cash and cash equivalents
  $ 15.0     $ 44.3  
Working capital
  $ 148.6     $ 172.5  
Long-term debt (includes current maturities)
  $ 192.3     $ 86.3  

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. Historically, cash flow from operations has been generated principally in the fourth quarter of each fiscal year.

48


Table of Contents

Cash provided by operating activities was $17.5 million in the first nine months of Fiscal 2005 compared to $26.5 million in the first nine months of Fiscal 2004. The $9.0 million decrease in cash flow from operating activities reflects primarily a decrease in cash flow from changes in inventory, accounts payable and accounts receivable of $26.4 million, $14.8 million and $6.2 million, respectively, offset by an increase in cash flow from changes in other accrued liabilities of $17.7 million, a $10.8 million increase in net earnings for the first nine months this year and a $4.3 million increase in depreciation. The $26.4 million decrease in cash flow from inventory was due to growth in Journey’s inventory to support the growth in the business and the addition of Hat World. The $14.8 million decrease in cash flow from accounts payable was due to changes in buying patterns. The $6.2 million decrease in cash flow from accounts receivable was due to increased wholesale sales. The $17.7 million increase in cash flow from other accrued liabilities was due to increased bonus accruals and lower bonus payments.

The $63.7 million increase in inventories at October 30, 2004 from January 31, 2004 levels reflects seasonal increases in retail and wholesale inventories including increased seasonal requirements due to the Hat World acquisition.

Accounts receivable at October 30, 2004 increased $5.9 million compared to January 31, 2004, primarily due to increased Dockers Footwear sales in the third quarter of Fiscal 2005.

Cash provided (or used) due to changes in accounts payable and accrued liabilities are as follows:

                 
    Nine Months Ended
    October 30,   November 1,
    2004
  2003
    (in thousands)
Accounts payable
  $ 21,330     $ 36,162  
Accrued liabilities
    14,802       (2,858 )
 
   
 
     
 
 
 
  $ 36,132     $ 33,304  
 
   
 
     
 
 

The fluctuations in cash provided due to changes in accounts payable for the first nine months this year from the first nine months last year are due to changes in buying patterns and inventory levels, due to the acquisition of Hat World, and to payment terms negotiated with individual vendors. The change in cash provided due to changes in accrued liabilities for the first nine months this year from the first nine months last year was due primarily to increased bonus accruals.

There was an average of $6.5 million of revolving credit borrowings during the first nine months ended October 30, 2004 and no borrowings during the first nine months ended November 1, 2003, as cash generated from operations and cash on hand funded most of the seasonal working capital requirements and capital expenditures for the first nine months of Fiscal 2004. On April 1, 2004, the Company entered into a new credit agreement with ten banks, providing for a $100.0 million, five-year term loan and a $75.0 million five-year revolving credit facility.

The Company’s contractual obligations over the next five years have increased from January 31, 2004 as a result of the Hat World acquisition. Long-term debt increased to $192.3 million from $86.3 million due to the purchase of Hat World. As a result of the new $100.0 million, five-year term loan, long-term debt maturing during each of the next five fiscal years has increased. See Note 5 to the Consolidated Financial Statements. Operating lease obligations increased to $572.5 million

49


Table of Contents

from $478.7 million due to the addition of 525 Hat World/Lids stores and 18 Cap Connection and Head Quarters Canadian stores purchased on July 1, 2004. Purchase obligations increased to over $170.0 million from $131.8 million due to the addition of Hat World and seasonal increases in retail inventory.

Capital Expenditures

Total capital expenditures in Fiscal 2005 are expected to be approximately $39.2 million. These include expected retail capital expenditures of $32.8 million to open approximately 43 Journeys stores, two Journeys Kidz stores, seven Johnston & Murphy stores and factory stores, 25 Underground Station stores and 56 Lids stores and to complete 65 major store renovations, including 14 conversions of Jarman stores to Underground Station stores. The amount of capital expenditures in Fiscal 2005 for other purposes is expected to be approximately $6.4 million, including approximately $1.6 million for new systems to improve customer service and support the Company’s growth.

Future Capital Needs

The Company used proceeds from the $100.0 million term loan and cash on hand to purchase Hat World. The Company expects that cash on hand and cash provided by operations will be sufficient to fund all of its planned capital expenditures through Fiscal 2006, although the Company plans to borrow under its credit facility from time to time, particularly in the fall, to support seasonal working capital requirements. The approximately $4.1 million of costs associated with discontinued operations that are expected to be incurred during the next twelve months are also expected to be funded from cash on hand and borrowings under the revolving credit agreement.

In total, the Company’s board of directors has authorized the repurchase, from time to time, of up to 7.5 million shares of the Company’s common stock. There were 398,300 shares remaining to be repurchased under these authorizations as of October 30, 2004. The board has subsequently reduced the repurchase authorization to 100,000 shares in view of the Hat World acquisition. Any purchases would be funded from available cash and borrowings under the revolving credit agreement. The Company has repurchased a total of 7.1 million shares at a cost of $71.3 million under a series of authorizations since Fiscal 1999. The Company has not repurchased any shares during Fiscal 2005.

There were $10.2 million of letters of credit outstanding and $6.0 million borrowings outstanding under the revolving credit agreement at October 30, 2004, leaving availability under the revolving credit agreement of $58.8 million. The revolving credit agreement requires the Company to meet certain financial ratios and covenants, including minimum tangible net worth, fixed charge coverage and debt to EBITDAR ratios. The Company was in compliance with these financial covenants at October 30, 2004.

The Company’s revolving credit agreement restricts the payment of dividends and other payments with respect to common stock, including repurchases. 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 $292,000.

Environmental and Other Contingencies

The Company is subject to certain loss contingencies related to environmental proceedings and other legal matters, including those disclosed in Note 9 to the Company’s Consolidated Financial

50


Table of Contents

Statements. The Company has made accruals for certain of these contingencies, including approximately $0.7 million for the first nine months of Fiscal 2005, $1.4 million reflected in Fiscal 2004 and $0.3 million reflected in Fiscal 2003. The Company monitors these matters on an ongoing basis and, on a quarterly basis, management reviews the Company’s reserves and accruals in relation to each of them, adjusting provisions as management deems necessary in view of changes in available information. Changes in estimates of liability are reported in the periods when they occur. Consequently, management believes that its reserve in relation to each proceeding is a reasonable estimate of the probable loss connected to the proceeding, or in cases in which no reasonable estimate is possible, the minimum amount in the range of estimated losses, based upon its analysis of the facts and circumstances as of the close of the most recent fiscal quarter. However, because of uncertainties and risks inherent in litigation generally and in environmental proceedings in particular, there can be no assurance that future developments will not require additional reserves to be set aside, that some or all reserves may not be adequate or that the amounts of any such additional reserves or any such inadequacy will not have a material adverse effect upon the Company’s financial condition or results of operations.

Financial Market Risk

The following discusses the Company’s exposure to financial market risk related to changes in interest rates and foreign currency exchange rates.

Outstanding Debt of the Company — The Company’s outstanding long-term debt of $86.3 million 4 1/8% Convertible Subordinated Debentures due June 15, 2023 bears interest at a fixed rate. Accordingly, there would be no immediate impact on the Company’s interest expense related to the debentures, due to fluctuations in market interest rates. The Company’s $100.0 million term loan bears interest according to a pricing grid providing margins over LIBOR or Alternate Base Rate. The Company entered into three separate interest rate swap agreements as a means of managing its interest rate exposure on the $100.0 million term loan. The aggregate notional amount of the swaps is $65.0 million. At October 30, 2004, the net loss on these interest rate swaps was $0.2 million. As of October 30, 2004, a 1% adverse change in the three month LIBOR interest rate would increase the Company’s interest expense on the $100.0 million term loan by approximately $0.3 million on an annual basis.

Cash and Cash Equivalents — The Company’s cash and cash equivalent balances are invested in financial instruments with original maturities of three months or less. The Company does not have significant exposure to changing interest rates on invested cash at October 30, 2004. As a result, the Company considers the interest rate market risk implicit in these investments at October 30, 2004 to be low.

Foreign Currency Exchange Rate Risk — Most purchases by the Company from foreign sources are denominated in U.S. dollars. To the extent that import transactions are denominated in other currencies, it is the Company’s practice to hedge its risks through the purchase of forward foreign exchange contracts. At October 30, 2004, the Company had $8.6 million of forward foreign exchange contracts for Euro. The Company’s policy is not to speculate in derivative instruments for profit on the exchange rate price fluctuation and it does not hold any derivative instruments for trading purposes. Derivative instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the contract. The unrealized gain on contracts outstanding at October 30, 2004 was $0.5 million based on current spot rates. As of October 30, 2004, a 10% adverse change in foreign currency

51


Table of Contents

exchange rates from market rates would decrease the fair value of the contracts by approximately $1.0 million.

Accounts Receivable — The Company’s accounts receivable balance at October 30, 2004 is concentrated in its two wholesale businesses, which sell primarily to department stores and independent retailers across the United States. Two customers each accounted for 12% and another customer accounted for 11% of the Company’s trade accounts receivable balance as of October 30, 2004. The Company monitors the credit quality of its customers and establishes an allowance for doubtful accounts based upon factors surrounding credit risk, historical trends and other information; however, credit risk is affected by conditions or occurrences within the economy and the retail industry, as well as company-specific information.

Summary — Based on the Company’s overall market interest rate and foreign currency rate exposure at October 30, 2004, the Company believes that the effect, if any, of reasonably possible near-term changes in interest rates on the Company’s consolidated financial position, results of operations or cash flows for Fiscal 2005 would not be material. However, fluctuations in foreign currency exchange rates could have a material effect on the Company’s consolidated financial position, results of operations or cash flows for Fiscal 2005.

New Accounting Principles

In November 2004, the Emerging Issues Task Force (EITF) issued Consensus No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.” The Consensus addresses when to include contingently convertible debt instruments in diluted earnings per share. The Consensus requires companies to include the convertible debt in diluted earnings per share regardless of whether the market price trigger has been met. The Company’s diluted earnings per share calculation for Fiscal 2005 will include an additional 3.9 million shares and a net after tax interest add back of $2.5 million. The Consensus is effective for periods ending after December 15, 2004 and requires restatement of prior period diluted earnings per share.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company incorporates by reference the information regarding market risk appearing under the heading “Financial Market Risk” in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 4. Controls and Procedures

(a)   Evaluation of disclosure controls and procedures. The Company’s principal executive officer and its principal financial officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Company’s principal executive officer and its principal financial officer have concluded that the Company’s disclosure controls and procedures effectively and timely provide them with material information relating to the Company and its consolidated subsidiaries required to be disclosed in the reports the Company files or submits under the Exchange Act.
 
(b)   Changes in internal control over financial reporting. In connection with its preparations to perform the assessment of internal controls required under Section 404 of the Sarbanes-

52


Table of Contents

    Oxley Act, the Company identified areas in which controls could be enhanced to increase the effectiveness of the Company’s overall internal control structure.
 
    During the quarter ended October 30, 2004, the Company made changes to enhance the effectiveness of internal controls in two areas. First, the Company increased the level of documentation, review, and analysis performed during the financial statement closing process. Second, the Company enhanced the documentation process surrounding the review and approval of retail store level employee additions. In addition to the two items identified above, the Company has identified modifications that could enhance controls related to information systems security and program changes. The Company is in the process of completing these modifications and anticipates successful completion by the middle of the fourth quarter of Fiscal 2005. While the Company expects to complete all currently planned improvements to internal controls during the fourth quarter, review and testing of controls will continue and may reveal presently unanticipated control deficiencies, which could include significant deficiencies and material weaknesses.

53


Table of Contents

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

On October 22, 2004, the Company was named a defendant in a putative class action filed in the Superior Court of the State of California, Los Angeles, Schreiner vs. Genesco Inc., et al., alleging violations of California wages and hours laws, and seeking damages of $40 million plus punitive damages. The Company has retained counsel and is assessing the allegations in the complaint, and intends to defend the matter vigorously.

Item 6. Exhibits

     
No.
  Description
(10.1)
  Trademark License Agreement, dated August 9, 2000, between Levi Strauss & Co. and Genesco Inc.*
 
   
(10.2)
  Amendment No. 1 (Renewal) to Trademark License Agreement, dated October 18, 2004, between Levi Strauss & Co. and Genesco Inc.*
 
   
(31.1)
  Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
(31.2)
  Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
(32.1)
  Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
(32.2)
  Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     

*
  Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

54


Table of Contents

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
December 9, 2004

55