UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-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
August 2, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-27348
K&G Men's Center, Inc.
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(Exact name of registrant as specified in its charter)
Georgia 58-1898817
- - ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1225 Chattahoochee Avenue, N.W. 30318
- - ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(404) 351-7987
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(Registrant's telephone number, including area code)
None
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(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, 10,252,844 shares outstanding as of September 15,
1998.
K&G Men's Center, Inc. and Subsidiaries
Index to Form 10-Q
August 2, 1998
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....... 7-10
Item 3. Quantitative and Qualitative Disclosure about
Market Risk......................................... 10
Part II. Other Information
Item 1. Legal Proceedings................................... 11
Item 4. Submission of Matters to a Vote of
Security Holders.................................... 11
Item 6. Exhibits and Reports on Form 8-K.................... 11
Signatures............................................................ 12
2
K&G MEN'S CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 1, August 2,
1998 1998
----------- -----------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 3,631,000 $ 3,265,000
Marketable securities 17,678,000 12,854,000
Accounts receivable 1,435,000 1,593,000
Merchandise inventory 20,948,000 28,283,000
Other assets 869,000 2,714,000
----------- -----------
Total current assets 44,561,000 48,709,000
PROPERTY AND EQUIPMENT, net 2,927,000 4,543,000
OTHER ASSETS, net 443,000 447,000
----------- -----------
Total assets $47,931,000 $53,699,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,432,000 $ 6,737,000
Sales tax payable 863,000 971,000
Accrued expenses 1,880,000 1,406,000
Income taxes payable 1,361,000 915,000
----------- -----------
Total current liabilities 9,536,000 10,029,000
----------- -----------
LONG-TERM DEBT 205,000 205,000
----------- -----------
MINORITY INTEREST 373,000 275,000
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock 101,000 103,000
Additional paid-in capital 25,182,000 27,931,000
Retained earnings 12,534,000 15,156,000
----------- -----------
Total shareholders' equity 37,817,000 43,190,000
----------- -----------
Total liabilities and shareholders' equity $47,931,000 $53,699,000
=========== ===========
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 Six Months Ended
------------------------------ ------------------------------
August 3,1997 August 2, 1998 August 3, 1997 August 2, 1998
------------- -------------- -------------- --------------
NET SALES $23,542,000 $30,270,000 $47,284,000 $60,579,000
COST OF SALES, including occupancy cost 18,205,000 23,234,000 36,495,000 46,662,000
----------- ----------- ----------- -----------
GROSS PROFIT 5,337,000 7,036,000 10,789,000 13,917,000
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 3,784,000 5,099,000 7,576,000 10,037,000
----------- ----------- ----------- -----------
OPERATING INCOME 1,553,000 1,937,000 3,213,000 3,880,000
OTHER INCOME (EXPENSES):
Interest expense (9,000) (10,000) (18,000) (19,000)
Other income, net 286,000 273,000 578,000 580,000
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND MINORITY
INTEREST IN EARNINGS OF AFFILIATES 1,830,000 2,200,000 3,773,000 4,441,000
PROVISION FOR INCOME TAXES 718,000 862,000 1,480,000 1,741,000
----------- ----------- ----------- -----------
INCOME BEFORE MINORITY INTEREST IN
EARNINGS OF AFFILIATES 1,112,000 1,338,000 2,293,000 2,700,000
MINORITY INTEREST IN EARNINGS
OF AFFILIATES (26,000) (38,000) (61,000) (78,000)
----------- ----------- ----------- -----------
NET INCOME APPLICABLE TO COMMON STOCK $ 1,086,000 $ 1,300,000 $ 2,232,000 $ 2,622,000
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $0.11 $0.13 $0.22 $0.26
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE $0.11 $0.13 $0.22 $0.26
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 10,118,063 10,178,514 10,111,681 10,155,485
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING ASSUMING DILUTION 10,184,827 10,282,398 10,175,114 10,197,582
=========== =========== =========== ===========
See accompanying Condensed Notes to the Financial Statements.
4
K&G Men's Center, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
August 3, 1997 August 2, 1998
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Cash Flows from Operating Activities:
Net income $ 2,232,000 $ 2,622,000
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Minority interest in earnings of affiliates 61,000 78,000
Depreciation and amortization 225,000 332,000
Changes in assets and liabilities:
Accounts receivable (353,000) (158,000)
Merchandise inventory (4,451,000) (7,335,000)
Other assets, net (472,000) (1,845,000)
Accounts payable 440,000 1,305,000
Sales tax payable (262,000) 108,000
Accrued expenses 176,000 (474,000)
Income taxes payable (678,000) 478,000
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Total adjustments (5,314,000) (7,511,000)
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Net cash used in operating
activities (3,082,000) (4,889,000)
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Cash Flows from Investing Activities:
Additions to property and equipment (356,000) (1,940,000)
Sale of marketable securities 6,270,000 12,679,000
Purchase of marketable securities (3,879,000) (7,855,000)
Other assets (7,000) (11,000)
----------- -----------
Net cash (used in) provided by
investing activities 2,028,000 2,873,000
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Cash Flows from Financing Activities:
Distribution to Minority Investors (114,000) (176,000)
Common stock issued 107,000 1,826,000
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Net cash provided by financing
activities (7,000) 1,650,000
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Net (Decrease) Increase in Cash and Cash Equivalents (1,061,000) (366,000)
Cash and Cash Equivalents at Beginning of
Period 6,440,000 3,631,000
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Cash and Cash Equivalents at End of
Period $ 5,379,000 $ 3,265,000
=========== ===========
Supplemental Disclosure of Cash Paid For:
Interest $ 15,000 $ 14,000
=========== ===========
Income taxes $ 2,270,000 $ 1,263,000
=========== ===========
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 August 2, 1998 and August 3, 1997, and for the six 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. EARNINGS PER SHARE
Effective February 3, 1997, the Company Adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share", which establishes
new standards for computing and presenting earnings per share ("EPS")
information. The adoption of SFAS 128 did not have a material effect on the
Company's currently or previously reported earnings per share.
Basic earnings per share was computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted earnings per share for the six months ended August 2, 1998 and August 3,
1997 were determined on the assumption that the net weighted average outstanding
stock options granted under the Company's plans (the Company's only potentially
dilutive shares) of 42,097 and 63,433 shares, respectively, had been exercised
on August 2, 1998 and August 3, 1997, respectively. Such calculations were not
dilutive to earnings for the periods presented.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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 Six Months Ended
---------------------- ----------------------
8/2/98 8/3/97 8/2/98 8/3/97
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, including occupancy cost 76.8 77.3 77.0 77.2
------ ------ ------ ------
Gross profit 23.2 22.7 23.0 22.8
Selling, general and administrative expenses 16.8 16.1 16.6 16.0
------ ------ ------ ------
Operating income 6.4 6.6 6.4 6.8
Other income (expenses):
Interest expense (0.0) (0.1) (0.0) (0.1)
Other income, net 0.9 1.2 0.9 1.2
------ ------ ------ ------
Income before income taxes and minority
interest in earnings of affiliates 7.3 7.7 7.3 7.9
Provision for income taxes 2.9 3.0 2.9 3.1
------ ------ ------ ------
Income before minority interest in earnings
of affiliates 4.4 4.7 4.4 4.8
Minority interest in earnings of affiliates (0.1) (0.1) (0.1) (0.1)
------ ------ ------ ------
Net income 4.3% 4.6% 4.3% 4.7%
====== ====== ====== ======
THREE MONTHS ENDED AUGUST 2, 1998 AND AUGUST 3, 1997
Net sales of $30.3 million for the three months ended August 2, 1998
represents an increase of $6.7 million, or 28.6% over net sales of $23.5
million for the three months ended August 3, 1997. On a comparable store basis,
net sales increased 6.8% for the three months ended August 2, 1998, compared to
15.8% for the three months ended August 3, 1997 (using the comparable 13-week
period of the second quarter of fiscal years 1997 and 1996). The increase in
net sales is a result of the Company's strong comparable store sales and the
opening of 10 new stores opened since August 3, 1997.
Gross profit increased $1.7 million, or 31.8% to $7.0 million for the three
months ended August 2, 1998. Gross profit as a percentage of sales increased to
23.2% for the three months ended August 2, 1998 from 22.7% for the three months
ended August 3, 1997. The slight increase in gross profit, as a percentage of
sales, is mainly due to an improvement in merchandise margins, partially offset
by some of the Company's new stores having a higher occupancy cost as a
percentage of net sales.
Selling, general and administrative expenses increased $1.3 million or
34.8%, to $5.1 million for the three months ended August 2, 1998. Selling,
general and administrative expenses as a percentage of net sales increased to
16.8% for the three months ended August 2, 1998, from 16.1% for the three months
ended August 3, 1997. The increase in selling, general and administrative
expenses as a percentage of net sales is mainly due to increased advertising
cost as a percentage of net sales, related to marketing efforts in certain new
markets. Additionally, payroll cost as a percentage of net sales increased due
to the Company's relatively high proportion of younger stores, which have not
yet reached maturity. These
7
younger stores have traditionally had a payroll cost as a percentage of sales
greater than that of the Company's more mature stores.
Operating income increased to $1.9 million for the three months ended
August 2, 1998 compared to $1.6 million for the three months ended August 3,
1997. Operating income as a percentage of net sales decreased to 6.4% for the
three months ended August 2, 1998 from 6.6% for the three months ended August 3,
1997.
The factors discussed above resulted in an increase in net income to $1.3
million for the three months ended August 2, 1998 from $1.1 million for the
three months ended August 3, 1997.
SIX MONTHS ENDED AUGUST 2, 1998 AND AUGUST 3, 1997
Net sales of $60.6 million for the six months ended August 2, 1998
represents an increase of $13.3 million, or 28.1% over net sales of $47.3
million for the six months ended August 3, 1997. On a comparable store basis,
net sales increased 7.8% for the six months ended August 2, 1998, compared to
14.0% for the six months ended August 3, 1997 (computed using the comparable 26-
week period of fiscal years 1997 and 1996). The increase in net sales is a
result of the Company's strong comparable store sales and the opening of 10 new
stores opened since August 3, 1997.
Gross profit increased $3.1 million, or 29.0% to $13.9 million for the six
months ended August 2, 1998. Gross profit as a percentage of sales increased to
23.0% for the six months ended August 2, 1998 from 22.8% for the six months
ended August 3, 1997. The slight increase in gross profit, as a percentage of
sales, is mainly due to an improvement in merchandise margins in the second half
of the six month period, partially offset by some of the Company's new stores
having a higher occupancy cost as a percentage of net sales.
Selling, general and administrative expenses increased $2.5 million or
32.5%, to $10.0 million for the six months ended August 2, 1998. Selling,
general and administrative expenses as a percentage of net sales increased to
16.6% for the six months ended August 2, 1998, from 16.0% for the six months
ended August 3, 1997. The increase in selling, general and administrative
expenses as a percentage of net sales is mainly due to increased advertising
cost as a percentage of net sales, related to marketing efforts in certain new
markets.
Operating income increased to $3.9 million for the six months ended August
2, 1998 compared to $3.2 million for the six months ended August 3, 1997.
Operating income as a percentage of net sales decreased to 6.4% for the six
months ended August 2, 1998 from 6.8% for the six months ended August 3, 1997.
The factors discussed above resulted in an increase in net income to $2.6
million for the six months ended August 2, 1998 from $2.2 million for the six
months ended August 3, 1997.
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.
8
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 proceeds from the sale of equity securities, net
cash provided by operating activities and through borrowings from related
parties and under its bank credit facilities. The Company had working capital of
$38.7 million and $35.0 million at August 2, 1998 and February 1, 1998,
respectively. The principal use of working capital is to purchase inventory. The
Company had $16.1 million in cash, cash equivalents and marketable securities as
of August 2, 1998.
The Company's capital expenditures totaled $1,940,000, and $356,000 for the
six months ended August 2, 1998 and August 3, 1997, 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, 2000,
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 August 2, 1998, K&G had no debt outstanding on this facility.
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
intends to open an additional five stores in the remainder of fiscal 1998 and 10
to 12 new stores in fiscal 1999. In addition, the Company will spend
approximately $1.5 million on its point-of-sale and management information
systems over the next year. The Company believes that the proceeds of its
securities offerings, internally generated funds, existing cash balances and its
bank credit facility will be adequate to fund its anticipated needs for the
foreseeable future.
The Company has completed a preliminary evaluation of its management
information systems to determine their readiness in terms of Year 2000 issues,
and has determined that its point-of-sale cash register systems are the only
application that will require significant modification in order to be Year 2000
ready. The Company has developed a plan to replace its current registers with a
new PC-based register system. The costs to purchase and implement these
register systems are estimated to total approximately $1.5 million. The Company
intends to finance these costs with existing working capital and cash flows from
operations. Under the Company's plan, the PC registers will be fully implemented
and operational at all of its store locations prior to December 31, 1999. The
Company does not believe that the costs to modify any of its other current
systems to be Year 2000 ready will be material to its financial condition or
results of operations. The Company does not currently have any information
concerning the Year 2000 readiness of its suppliers or other third parties with
which the Company conducts business. In the event that any of the Company's
significant suppliers or other third parties with which the Company conducts
business do not successfully and timely achieve Year 2000 readiness, the
Company's business or operations could be adversely affected. These statements
are by necessity forward-looking statements within the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). See "Safe Harbor" Statement
under the Private Securities Litigation Reform Act of 1995.
9
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995:
Certain statements contained in the body of this Report are "forward-
looking statements" within the meaning of the Reform Act. When used herein, the
words "anticipates," "intends," "plans," "believes," "estimates," "expects" and
similar expressions are intended to identify forward-looking statements. Such
forward-looking statements involve known and unknown risks and uncertainties,
and other factors that may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, but are not limited to, (i) the youth of the Company's store
base; (ii) risks related to the Company's expansion strategy; (iii) timing of
new store openings; (iv) potential inability to sustain comparable store sales
growth; (v) merchandise and market trends; (vi) vendor relationships; (vii)
reliance on key personnel; (viii) the impact of local, regional or national
economic conditions and (ix) severe weather conditions. These and other factors
affecting the Company's future performance are further detailed in publicly
available reports filed from time to time by the Company with the Securities and
Exchange Commission, including, but not limited to, the Company's Annual Report
on Form 10-K and Registration Statement on Form S-3. Further, any forward-
looking statements speaks only as of the date on which such statement is made,
and the Company undertakes no obligation to update any forward-looking statement
or statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for management to
predict all of such factors. Further, management cannot assess the impact of
each such factor on the Company's business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
Item 3. Quantitative and Qualitative Disclosure about Market Risk.
None.
10
K&G Men's Center, Inc.
Part II - Other Information
Item 1. Legal Proceedings
As previously reported, an employee of the Company filed a complaint in
California Superior Court, on June 4, 1998, against the Company and certain
officers and directors of the Company relating to the plaintiff's employment
relationship with the Company. The several causes of action stated in the
complaint relate primarily to an alleged employment agreement between the
plaintiff and the Company and the Company's alleged breach thereof. The
plaintiff is seeking approximately $10 million plus punitive damages. The
Company believes that it has valid defenses to the plaintiff's claims and
intends to vigorously defend the complaint. The Company does not believe that
the ultimate outcome of the legal proceedings will materially affect the
Company's results of operations or financial condition. No assurance can be
given, however, regarding the risk or range of possible loss to the Company, if
any.
Item 4. Submission of Matters to a Vote of Security Holders
On June 5, 1998, the Company held its 1998 Annual Meeting of Shareholders.
The shareholders of record approved the following matters at the meeting:
1. Amended the Company's Articles of Incorporation to increase from 20,000,000
to 40,000,000 the number of shares of Common Stock the Company is authorized
to issue, with the following votes: 9,464,722 for, 58,618 against, 8,074
abstentions;
2. Amended the Company's 1995 Stock Option Plan for employees to increase the
number of shares of the Company's common stock reserved for grant under the
plan from 843,750 to 1,100,000, with the following votes: 9,403,211 for,
97,790 against, 2,949 abstentions;
3. Elected Mr. Stephen H. Greenspan as a member of the Company's Board of
Directors as a Class III director to serve a three-year term expiring in
2001 in accordance with the Company's Articles of Incorporation, with the
following votes: 9,523,502 for, 7,912 abstentions;
4. Elected Mr. W. Paul Ruben as a member of the Company's Board of Directors as
a Class III director to serve a three-year term expiring in 2001 in
accordance with the Company's Articles of Incorporation, with the following
votes: 9,523,502 for, 7,912 abstentions;
5. Ratified the appointment of Arthur Andersen LLP by the Board of Directors of
the Company as the independent public accountants of the Company, with the
following votes: 9,522,990 for, 575 against, 7,849 abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27. Financial Date Schedule
(b) Reports on Form 8-K - None
11
K&G Men's Center, Inc.
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: September 16, 1998 /s/ Stephen H. Greenspan
-------------------- ------------------------
Stephen H. Greenspan
Chairman of the Board,
President and Chief Executive Officer
(principal executive officer)
Date: September 16, 1998 /s/ John C. Dancu
-------------------- -----------------
John C. Dancu
Chief Operating and Financial Officer
(principal financial and accounting
officer)
12