UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 1O-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 27, 1996 ------------------------------------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------- --------------------------- Commission file number 0-27348 K&G Men's Centers, Inc. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Georgia 58-1989917 - ------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer incorporation or organization) of Identification Number) 1750-A Ellsworth Industrial Blvd., Atlanta Georgia 30318 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (404) 351-7987 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) None - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) 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 [X ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 Par Value, 6,736,350 Shares outstanding as of December 7, 1996. K&G Men's Center, Inc. and Subsidiaries Index to Form 10-Q October 27, 1996 Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets ........................... 3 Consolidated Statements of Operations ................. 4 Consolidated Statements of Cash Flows ................. 5 Condensed Notes to the Financial Statements ............ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ....... 7-9 Part II Other Information Item 4. Submission of Matters to a Vote of Security Holders........................................ 10 Item 6. Exhibits and Reports on Form 8-K........................ 10 Signatures............................................................................... 11 2 K&G Men's Center, Inc. and Subsidiaries Consolidated Balance Sheets October 27, 1996 January 28, 1996 ---------------- ---------------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash & cash equivalents $11,689,000 $ 2,504,000 Accounts receivable 1,454,000 728,000 Merchandise inventory 16,786,000 11,148,000 Other assets 1,484,000 1,069,000 ----------- ----------- Total current assets 31,413,000 15,449,000 PROPERTY AND EQUIPMENT, net 2,081,000 1,397,000 OTHER ASSETS, net 372,000 358,000 ----------- ----------- Total assets $33,866,000 $17,204,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 9,884,000 $ 5,194,000 Sales taxes payable 731,000 603,000 Accrued expenses 1,193,000 1,219,000 Income taxes payable - 619,000 ----------- ----------- Total current liabilities 11,808,000 7,635,000 LONG-TERM DEBT 205,000 205,000 MINORITY INTEREST 245,000 245,000 REDEEMABLE COMMON STOCK, Series B - 6,476,000 SHAREHOLDERS' EQUITY: Common stock 64,000 41,000 Additional paid-in capital 17,587,000 991,000 Retained earnings 3,957,000 1,611,000 ----------- ----------- Total shareholders' equity 21,608,000 2,643,000 ----------- ----------- Total liabilities and shareholders' equity $33,866,000 $17,204,000 =========== =========== See accompanying Condensed Notes to the Financial Statements. 3 K&G Men's Center, Inc. and Subsidiaries Consolidated Statements of Operations (Unaudited) Three Months Ended Nine Months Ended -------------------------------------- ----------------------------------- October 27, 1996 October 29, 1995 October 27, 1996 October 29, 1995 ---------------- ---------------- ---------------- ---------------- NET SALES $19,723,000 $12,717,000 $55,468,000 $37,820,000 COST OF SALES, including occupancy cost 15,119,000 9,640,000 42,588,000 28,812,000 ----------- ----------- ----------- ----------- GROSS PROFIT 4,604,000 3,077,000 12,880,000 9,008,000 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 3,282,000 2,087,000 9,386,000 6,104,000 ----------- ----------- ----------- ----------- OPERATING INCOME 1,322,000 990,000 3,494,000 2,904,000 OTHER INCOME (EXPENSES): Interest expense (10,000) 0 (30,000) (54,000) Other income, net 142,000 71,000 460,000 124,000 ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST IN (EARNINGS) LOSS OF AFFILIATES 1,454,000 1,061,000 3,924,000 2,974,000 PROVISION FOR INCOME TAXES 566,000 417,000 1,511,000 1,166,000 ----------- ----------- ----------- ----------- INCOME BEFORE MINORITY INTEREST IN (EARNINGS) LOSS OF AFFILIATES 888,000 644,000 2,413,000 1,808,000 MINORITY INTEREST IN (EARNINGS) LOSS OF AFFILIATES (19,000) (13,000) (55,000) 12,000 ----------- ----------- ----------- ---------- NET INCOME 869,000 631,000 2,358,000 1,820,000 DIVIDENDS ON REDEEMABLE COMMON STOCK, SERIES B 0 85,000 0 155,000 ----------- ----------- ----------- ----------- NET INCOME APPLICABLE TO COMMON STOCK $ 869,000 $ 546,000 $2,358,000 $1,665,000 =========== =========== ========== ========== NET INCOME PER COMMON AND COMMON EQUIVALENT SHARES $ 0.14 $ 0.12 $ 0.37 $ 0.35 =========== =========== ========== ========== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 6,377,500 5,250,000 6,377,500 5,250,000 =========== =========== ========== ========== See accompanying Condensed Notes to the Financial Statements. 4 K&G Men's Center, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended October 27, 1996 October 29, 1995 ---------------- ---------------- Cash Flows from Operating Activities: Net income $ 2,358,000 $ 1,820,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Minority interest in earnings (loss) of affiliates 55,000 (12,000) Depreciation and amortization 296,000 213,000 Deferred income tax provision (benefit) 0 (200,000) Loss on disposal of fixed assets 0 70,000 Changes in assets and liabilities: Accounts receivable (726,000) (615,000) Merchandise inventory (5,638,000) (4,108,000) Other assets, net (415,000) (585,000) Accounts payable 4,690,000 3,083,000 Sales tax payable 128,000 443,000 Accrued expenses (26,000) 1,362,000 Income taxes payable (619,000) (452,000) ------------ ----------- Total adjustments (2,255,000) (801,000) ------------ ----------- Net cash provided by (used in) operating activities 103,000 1,019,000 ------------ ----------- Cash Flows from Investing Activities: Additions to property and equipment (969,000) (581,000) Other assets (25,000) 0 ------------ ----------- Net cash used in investing activities (994,000) (581,000) ------------ ----------- Cash Flows from Financing Activities: Redemption of Common Stock, Series A 0 (6,501,000) Issuance of Redeemable Common Stock, Series B 0 6,476,000 Repayment of long term-debt 0 (113,000) Repayment of notes payable to related parties 0 (348,000) Distributions to Minority Investors (55,000) 0 Common stock issued 10,131,000 0 ------------ ----------- Net cash provided by (used in) financing activities 10,076,000 (486,000) ------------ ----------- Net Increase in Cash and Cash Equivalents 9,185,000 (48,000) Cash and Cash Equivalents at Beginning of Period 2,504,000 2,377,000 ------------ ----------- Cash and Cash Equivalents at End of Period $ 11,689,000 $ 2,329,000 ============ =========== Supplemental Disclosure of Cash Paid For: Interest $ 27,900 $ 98,000 ============ =========== Income taxes $ 2,217,000 $ 1,618,000 ============ =========== See accompanying Condensed Notes to the Financial Statements. 5 K&G Men's Center, Inc. and Subsidiaries Condensed Notes to the Financial Statements (Unaudited) 1. UNAUDITED FINANCIAL INFORMATION The accompanying financial statements of K&G Men's Center, Inc. and subsidiaries as of October 27, 1996 and October 29, 1995, and for the three months and nine months then ended, are unaudited. In the opinion of the Company's management, these statements include all adjustments considered necessary for a fair presentation of financial condition and results of operations. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of the results that may be achieved for the full year. In addition, quarterly results of operations are affected by the timing and amount of sales and cost associated with the opening of new stores. 2. SHAREHOLDERS' EQUITY The Company effected an initial public offering of its Common Stock on January 24, 1996, and the transaction closed on January 30, 1996, resulting in the conversion of the Company's outstanding redeemable Common Stock, Series B and Common Stock, Series A into common stock $.01 par value. The Company issued an additional 1,127,500 shares of its common stock at $10.00 per share and raised $10,131,000 after expenses of the offering. The Company effected a second public offering of its Common Stock on November 11, 1996, and the transaction closed on November 15, 1996. Pursuant to this offering, the Company issued an additional 358,850 shares of its common stock at $22.25 per share and raised approximately $7,446,000 after estimated expenses. Subsequent to the offering, the Company has issued and outstanding 6,736,350 shares of its common stock. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This Form 10-Q contains certain forward-looking statements with respect to the Company's operations, industry, financial condition and liquidity. These statements reflect the Company's assessment of a number of risk and uncertainties. The Company's actual results could differ materially from the results anticipated in these forward-looking statements. GENERAL As of October 27, 1996, the Company operated 16 stores in eleven states. The Company has stores in Atlanta, Georgia, Dallas, Texas, Boston, Massachusetts, Long Island, New York, Baltimore, Maryland, Cincinnati, Ohio, Denver, Colorado, Kansas City, Kansas, Indianapolis, Indiana, Washington, DC, and Rahway, New Jersey. Subsequent to October 27, 1996, the Company opened a store in Columbus, Ohio, bringing its store base to 17 stores. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, statements of operations data expressed as a percentage of net sales: Three Months Ended Nine Months Ended ------------------------- ------------------------- October 27, October 29, October 27, October 29, 1996 1995 1996 1995 ---------- ----------- ----------- ----------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales, including occupancy cost 76.7 75.8 76.8 76.2 ----- ----- ----- ----- Gross profit 23.3 24.2 23.2 23.8 Selling, general and administrative expenses 16.6 16.4 16.9 16.1 ----- ----- ----- ----- Operating income 6.7 7.8 6.3 7.7 Other income (expenses): Interest expense (0.1) - (0.1) (0.1) Other income, net 0.7 0.5 0.8 0.3 ----- ----- ----- ----- Income before income taxes and minority interest in (earnings) loss of affiliates 7.3 8.3 7.0 7.9 Provision for income taxes 2.8 3.3 2.7 3.1 ----- ----- ----- ----- Income before minority interest in (earnings) loss of affiliates 4.5 5.0 4.3 4.8 Minority interest in (earnings) loss of affiliates (0.1) 0.1 (0.1) - ----- ----- ----- ----- Net income 4.4 4.9 4.2 4.8 Dividends on redeemable common stock, Series B - 0.6 - 0.4 ----- ----- ----- ----- Net income applicable to common stock 4.4% 4.3% 4.2% 4.4% ===== ===== ===== ===== THREE MONTHS ENDED OCTOBER 27, 1996 AND OCTOBER 29, 1995. Net sales of $19.7 million for the three months ended October 27, 1996 represents an increase of $7.0 million, or 55.1% over net sales of $12.7 million in the three months ended October 29, 1995. The increase in net sales is a result of comparable store growth of 11.1% and the opening of eight new stores since October of 1995. Comparable store growth was 8.1% for the three months ended October 29, 1995. Gross profit increased $1.5 million, or 49.6% to $4.6 million in the three months ended October 27, 1996. Gross profit as a percentage of sales decreased to 23.3% in the three months ended October 27, 1996 from 24.2% in the three months ended October 29, 1995. The decrease in gross margin as a percentage of sales is due to the Company's new stores having a higher occupancy cost as a percentage of sales, and the Company has lowered its mark-up on specific goods in order to lower the selling price and enhance its competitive position. Selling, general and administrative expenses increased $1.2 million or 57.3%, to $3.3 million in the three months ended October 27, 1996. Selling, general and administrative expenses as a percentage of net sales increased to 16.6% in 7 the three months ended October 27, 1996, from 16.4% in the three months ended October 29, 1995. The increase was a result a higher level of advertising expenses as a percentage of sales mainly for new stores, and certain costs associated with being a public company. The Company became a public company in January 1996, and therefore did not have any costs associated with being a public company during the three months ended October 29, 1995. As a result of the above factors, operating income was $1.5 million for the three months ended October 27, 1996 compared to $1.1 million for the three months ended October 29, 1995. Operating income as a percentage of net sales decreased to 6.7% in the three months ended October 27, 1996 from 7.8% in the three months ended October 29, 1995. The Company had accrued dividends payable on its Series B redeemable common stock of $85,000 for the three months ended October 29, 1995. The consummation of the Company's initial public offering in January 1996 resulted in the conversion of all of the outstanding Series B shares. As a result, the Company did not have any accrued dividends related to these shares for the three months ended October 27, 1996. The factors discussed above resulted in an increase in net income applicable to common stock of $323,000 or 59.2% to $869,000 for the three months ended October 27, 1996 from $546,000 in the three months ended October 29, 1995. NINE MONTHS ENDED OCTOBER 27, 1996 AND OCTOBER 29, 1995. Net sales of $55.5 million for the nine months ended October 27, 1996 represents an increase of $17.6 million, or 46.7% over net sales of $37.8 million in the nine months ended October 29, 1995. The increase in net sales is a result of comparable store growth of 11.1% and the opening of eight new stores since October of 1995. Through October of the current fiscal year, the Company opened five of the eight new stores, including in March of 1996 a third store in Atlanta, Georgia, and stores in Baltimore, Maryland and Long Island, New York, and in September 1996, two stores in the Washington, DC area. Comparable store sales increased 12.8% in the nine months ended September 29, 1995. Gross profit increased $3.9 million, or 43.0% to $12.9 million in the nine months ended October 27, 1996. Gross profit as a percentage of sales decreased to 23.2% in the nine months ended October 27, 1996 from 23.8% in the nine months ended October 29, 1995. The decrease in gross margin as a percentage of sales is mainly due to the new stores having a higher occupancy cost as a percentage of sales, and the Company has lowered its mark-up on specific goods in order to lower the selling prices and enhance its competitive position. Selling, general and administrative expenses increased $3.3 million or 53.8%, to $9.4 million in the nine months ended October 27, 1996. Selling, general and administrative expenses as a percentage of net sales increased to 16.9% in the nine months ended October 27, 1996, from 16.1% in the nine months ended October 29, 1995. The increase was a result of a higher level of advertising expenses as a percentage of sales due to the new stores, and certain costs associated with being a public company. The Company did not become a public company until January 1996. Operating income was $3.9 million for the nine months ended October 27, 1996 compared to $3.0 million in the nine months ended October 29, 1995. Operating income as a percentage of net sales decreased to 6.3% in the nine months ended October 27, 1996 from 7.7% in the nine months ended October 29, 1995. The factors discussed above resulted in an increase in net income applicable to common stock of $693,000, or 41.6% to $2,358,000 in the nine months ended October 27, 1996 from $1,665,000 in the nine months ended October 29, 1995. 8 QUARTERLY RESULTS, SEASONALITY AND INFLATION The Company's business is seasonal in nature with the fourth quarter, which includes the holiday selling season, accounting for the largest percentage of the Company's net sales volume and operating profit in any given year. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of the results that may be achieved for the full year. In addition, quarterly results of operations are affected by the timing and amount of sales and costs associated with the opening of new stores. Inflation can affect the cost incurred by the Company in the purchases of its merchandise, the leasing of its stores and certain components of its selling, general and administrative expenses. To date, inflation has not adversely affected the Company's business, although there can be no assurance that inflation will not have a material adverse effect in the future. LIQUIDITY AND CAPITAL RESOURCES The Company has historically funded its working capital and capital expenditure requirements from net cash provided by operating activities, through borrowings from related parties and under its bank credit facilities, and recently from capital received from its initial public offering in January 1996. The Company had working capital of $19.6 million and $7.8 million at October 27, 1996 and January 28, 1996, respectively. The principal use of working capital is to purchase inventory. The Company had $11.7 million in cash and cash equivalents as of October 27, 1996. The Company's capital expenditures totaled $969,000, and $581,000 in the nine months ended October 27, 1996 and October 29, 1995, respectively. These capital expenditures were primarily used to open new stores and upgrade the Company's management information systems. The Company currently has a bank credit facility, which expires June 30, 1999, and permits borrowings of up to $5.0 million. The interest rate on this facility is the prime rate less 1% or LIBOR plus 1.5% per annum, at the option of the Company. As of October 27, 1996, K&G had no debt outstanding on this facility. In May 1995, the Company raised gross proceeds of $6.5 million through the sale of Redeemable Common Stock, Series B, primarily to institutional investors. The Redeemable Common Stock, Series B, had a 5% annual dividend and automatically converted into Common Stock on a one-for-one basis upon consummation of the Company's initial public offering. The proceeds of this transaction were used to redeem shares of Common Stock, Series A, from K&G's existing shareholders. On January 24, 1996, the Company effected its initial public offering for 1.7 million common shares at $10.00 per share, of which one million were Company shares and 700,000 were offered by certain shareholders . The initial public offering which closed on January 30, 1996 raised net proceeds of approximately $10.1 million. Upon completion of the offering, all Redeemable Common Stock, Series B and Common Stock, Series A were converted on a one-for-one basis into Common Stock. On February 6, 1996, the underwriter's over-allotment issue was exercised in full for 255,000 additional shares of Common Stock which 127,500 were Company shares. The Company effected a second public offering on November 11, 1996 and the transaction closed on November 15, 1996. Pursuant to this offering, the Company issued an additional 358,850 shares of its common stock at $22.25 per share and raised approximately $7,446,000 after estimated expenses of this offering. Subsequent to this offering, the Company has issued and outstanding 6,736,350 shares of its common stock. The Company's primary capital requirements are for the opening of new stores. The Company estimates that the total cash required to open a 15,000 to 20,000 square foot prototype store, including inventory, store fixtures and equipment, leasehold improvements, other net working capital and pre-opening costs (primarily stocking and training), typically ranges from $625,000 to $900,000 depending on landlord assistance and vendor financing. The Company anticipates opening eight new stores in fiscal 1997, and eight to ten new store in fiscal 1998. Although management believes that it has carefully planned for implementation of this store opening expansion program, there can be no assurance that such openings can be executed as envisioned or that these openings will not have an adverse effect on the results of operations. The Company believes that the proceeds of its public offerings, internally generated funds, cash on hand and its bank credit facility will be adequate to fund its anticipated needs for the foreseeable future. 9 K&G Men's Center, Inc. and Subsidiaries Part II - Other Information Item 4. Submission of Matters to a Vote of Security Holders None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - None (b) Reports on Form 8-K - None 10 K&G Men's Center, Inc. and Subsidiaries Signatures 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. K&G Men's Center, Inc. (Registrant) Date: December 7, 1996 /s/ Steven H. Greenspan --------------------------- ---------------------------------------- Stephen H. Greenspan Chairman of the Board, President and Chief Executive Officer (principal executive officer) Date: December 7, 1996 /s/ John C. Dancu ---------------------------- ---------------------------------------- John C. Dancu Chief Financial Officer (principal financial and accounting officer) 11