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 November 1, 1998 ---------------------------------------------- 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 Center, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Georgia 58-1898817 - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation) Identification Number) 1225 Chattahoochee Avenue, N.W. 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, 10,252,844 shares outstanding as of December 14, 1998. K&G MEN'S CENTER, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q NOVEMBER 1, 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 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, 1998 November 1, 1998 ---------------- ---------------- (unaudited) ASSETS CURRENT ASSETS: Cash & cash equivalents $ 3,631,000 $ 6,189,000 Marketable securities 17,678,000 10,190,000 Accounts receivable 1,435,000 1,497,000 Merchandise inventory 20,948,000 34,711,000 Other assets 869,000 1,822,000 ----------- ----------- Total current assets 44,561,000 54,409,000 PROPERTY AND EQUIPMENT, net 2,927,000 5,208,000 OTHER ASSETS, net 443,000 443,000 ----------- ----------- Total assets $47,931,000 $60,060,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 5,432,000 $12,042,000 Sales tax payable 863,000 1,016,000 Accrued expenses 1,880,000 2,016,000 Income taxes payable 1,361,000 361,000 ----------- ----------- Total current liabilities 9,536,000 15,435,000 ----------- ----------- LONG-TERM DEBT 205,000 205,000 ----------- ----------- MINORITY INTEREST 373,000 315,000 ----------- ----------- SHAREHOLDERS' EQUITY: Common stock 101,000 103,000 Additional paid-in capital 25,182,000 27,931,000 Retained earnings 12,534,000 16,071,000 ----------- ----------- Total shareholders' equity 37,817,000 44,105,000 ----------- ----------- Total liabilities and shareholders' equity $47,931,000 $60,060,000 =========== =========== 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 --------------------------------- ---------------------------------- November 2, 1997 November 1, 1998 November 2, 1997 November 1, 1998 ---------------- ---------------- ---------------- ---------------- NET SALES $25,981,000 $30,972,000 $73,265,000 $91,551,000 COST OF SALES, including occupancy cost 20,052,000 24,101,000 56,547,000 70,763,000 ----------- ----------- ----------- ----------- GROSS PROFIT 5,929,000 6,871,000 16,718,000 20,788,000 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 4,203,000 5,527,000 11,779,000 15,563,000 ----------- ----------- ----------- ----------- OPERATING INCOME 1,726,000 1,344,000 4,939,000 5,225,000 OTHER INCOME (EXPENSES): Interest expense (10,000) (10,000) (28,000) (29,000) Other income, net 263,000 237,000 842,000 816,000 ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST IN EARNINGS OF AFFILIATES 1,979,000 1,571,000 5,753,000 6,012,000 PROVISION FOR INCOME TAXES 776,000 616,000 2,256,000 2,357,000 ----------- ----------- ----------- ----------- INCOME BEFORE MINORITY INTEREST IN EARNINGS OF AFFILIATES 1,203,000 955,000 3,497,000 3,655,000 MINORITY INTEREST IN EARNINGS OF AFFILIATES (36,000) (40,000) (98,000) (118,000) ----------- ----------- ----------- ----------- NET INCOME APPLICABLE TO COMMON STOCK $ 1,167,000 $ 915,000 $ 3,399,000 $ 3,537,000 =========== =========== =========== =========== BASIC EARNINGS PER SHARE $ 0.12 $ 0.09 $ 0.34 $ 0.35 =========== =========== =========== ========== DILUTED EARNINGS PER SHARE $ 0.11 $ 0.09 $ 0.33 $ 0.35 =========== =========== =========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,121,482 10,252,844 10,114,947 10,192,168 =========== =========== =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ASSUMING DILUTION 10,193,127 10,277,184 10,175,516 10,192,168 =========== =========== =========== =========== 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 November 2, 1997 November 1, 1998 --------------- -------------- Cash Flows from Operating Activities: Net income $3,399,000 $3,537,000 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Minority interest in earnings of affiliates 98,000 118,000 Depreciation and amortization 342,000 514,000 Changes in assets and liabilities: Accounts receivable (893,000) (62,000) Merchandise inventory (10,776,000) (13,763,000) Other assets, net (266,000) (953,000) Accounts payable 5,357,000 6,610,000 Sales tax payable 14,000 153,000 Accrued expenses 419,000 136,000 Income taxes payable (655,000) (76,000) --------------- -------------- Total adjustments (6,360,000) (7,323,000) --------------- -------------- Net cash used in operating activities (2,961,000) (3,786,000) --------------- -------------- Cash Flows from Investing Activities: Additions to property and equipment (918,000) (2,783,000) Sale of marketable securites 10,236,000 25,533,000 Purchase of marketable securities (4,877,000) (18,045,000) Other assets (7,000) (11,000) --------------- -------------- Net cash provided by investing activities 4,434,000 4,694,000 --------------- -------------- Cash Flows from Financing Activities: Distribution to minority investors (114,000) (176,000) Common stock issued 113,000 1,826,000 --------------- -------------- Net cash (used in) provided by financing activities (1,000) 1,650,000 --------------- -------------- Net Increase in Cash and Cash Equivalents 1,472,000 2,558,000 Cash and Cash Equivalents at Beginning of Period 6,440,000 3,631,000 --------------- -------------- Cash and Cash Equivalents at End of Period $7,912,000 $6,189,000 ============== ============= Supplemental Disclosure of Cash Paid For: Interest $16,000 $16,000 ============== ============= Income taxes $3,022,000 $1,324,000 ============== ============= 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 November 1, 1998 and November 2, 1997, and for the 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. 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 nine months ended November 1, 1998 and November 2, 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 0 and 60,569 shares, respectively, had been exercised on November 1, 1998 and November 2, 1997, respectively. 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 Nine Months Ended ------------------------------ ------------------------------ 11/1/98 11/2/97 11/1/98 11/2/97 ------- ------- ------- ------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales, including occupancy cost 77.8 77.2 77.3 77.2 ----- ----- ----- ----- Gross profit 22.2 22.8 22.7 22.8 Selling, general and administrative expenses 17.9 16.2 17.0 16.1 ----- ----- ----- ----- Operating income 4.3 6.6 5.7 6.7 Other income (expenses): Interest expense (0.0) (0.0) (0.0) (0.1) Other income, net 0.8 1.0 0.9 1.2 ----- ----- ----- ----- Income before income taxes and minority interest in earnings of affiliates 5.1 7.6 6.6 7.8 Provision for income taxes 2.0 3.0 2.6 3.1 ----- ----- ----- ----- Income before minority interest in earnings of affiliates 3.1 4.6 4.0 4.7 Minority interest in earnings of affiliates (0.1) (0.1) (0.1) (0.1) ----- ----- ----- ------- Net income 3.0% 4.5% 3.9% 4.6% ===== ===== ===== ======= THREE MONTHS ENDED NOVEMBER 1, 1998 AND NOVEMBER 2, 1997 Net sales of $31.0 million for the three months ended November 1, 1998 represents an increase of $5.0 million, or 19.2% over net sales of $26.0 million for the three months ended November 2, 1997. On a comparable store basis, net sales increased 2.0% for the three months ended November 1, 1998, compared to 16.5% for the three months ended November 2, 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 comparable store sales and the opening of eight new stores since November 2, 1997. Although sales levels for the three months ended November 1, 1998 increased over sales for the three months ended November 2, 1997, the Company believes that the unseasonably hot weather, which was prevalent in may of its markets throughout the quarter, had a negative impact on sales revenues and comparable store sales. Gross profit increased $942,000, or 15.9% to $6.9 million for the three months ended November 1, 1998. Gross profit as a percentage of sales decreased to 22.2% for the three months ended November 1, 1998 from 22.8% for the three months ended November 2, 1997. The decrease in gross profit, as a percentage of sales, is mainly due to the Company's new stores having a higher occupancy cost as a percentage of net sales, partially offset by an improvement in merchandise margins. Selling, general and administrative expenses increased $1.3 million or 31.5%, to $5.5 million for the three months ended November 1, 1998. Selling, general and administrative expenses as a percentage of net sales increased to 17.9% for the three months ended November 1, 1998, from 16.2% for the three months ended November 2, 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 7 marketing efforts in certain new markets, partially offset by a decrease in new store expenses as a percentage of sales. The decrease in new store expenses as a percentage of sales is attributable to opening one new store during the quarter ended November 1, 1998 compared to three new stores during the quarter ended November 2, 1997. Additionally, payroll cost as a percentage of net sales increased due to the Company's relatively high proportion of younger stores. These younger stores have traditionally had a payroll cost as a percentage of net sales greater than that of the Company's more mature stores. Operating income was $1.3 million for the three months ended November 1, 1998 compared to $1.7 million for the three months ended November 2, 1997. Operating income as a percentage of net sales decreased to 4.3% for the three months ended November 1, 1998 from 6.6% for the three months ended November 2, 1997. The factors discussed above resulted in net income of $915,000 for the three months ended November 1, 1998 compared with $1.2 million for the three months ended November 2, 1997. NINE MONTHS ENDED NOVEMBER 1, 1998 AND NOVEMBER 2, 1997 Net sales of $91.6 million for the nine months ended November 1, 1998 represents an increase of $18.3 million, or 25.0% over net sales of $73.3 million for the nine months ended November 2, 1997. On a comparable store basis, net sales increased 5.7% for the nine months ended November 1, 1998, compared to 15.0% for the nine months ended November 2, 1997 (computed using the comparable 39-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 eight new stores since November 2, 1997. Gross profit increased $4.1 million, or 24.3% to $20.8 million for the nine months ended November 1, 1998. Gross profit as a percentage of sales decreased to 22.7% for the nine months ended November 1, 1998 from 22.8% for the nine months ended November 2, 1997. The slight decrease in gross profit as a percentage of sales is mainly due to an improvement in merchandise margins, 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 $3.8 million or 32.1%, to $15.6 million for the nine months ended November 1, 1998. Selling, general and administrative expenses as a percentage of net sales increased to 17.0% for the nine months ended November 1, 1998, from 16.1% for the nine months ended November 2, 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, combined with an increase in payroll cost as a percentage of net sales due to the Company's relatively high proportion of younger stores. These 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 $5.2 million for the nine months ended November 1, 1998 compared to $4.9 million for the nine months ended November 2, 1997. Operating income as a percentage of net sales decreased to 5.7% for the nine months ended November 1, 1998 from 6.7% for the nine months ended November 2, 1997. The factors discussed above resulted in an increase in net income to $3.5 million for the nine months ended November 1, 1998 from $3.4 million for the nine months ended November 2, 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 8 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 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 $39.0 million and $35.0 million at November 1, 1998 and February 1, 1998, respectively. The principal use of working capital is to purchase inventory. The Company had $16.4 million in cash, cash equivalents and marketable securities as of November 1, 1998. The Company's capital expenditures totaled $2,783,000, and $918,000 for the nine months ended November 1, 1998 and November 2, 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 November 1, 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 10 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 as part of its Year 2000 readiness process. The Company believes that the proceeds of its previous 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 major 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 computer-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 has completed the preliminary development and programming phase of this project and intends to begin the initial live installation during January 1999. Complete rollout to all current and future locations is intended to commence in February 1999, and is intended to be complete prior to December 31, 1999. The Company does not believe that the costs to modify any of its other current systems (both information technology systems and non-information technology systems) to be Year 2000 ready will be material to its financial condition or results of operations. The Company has developed a plan to determine the Year 2000 readiness its suppliers or other third parties with which the Company conducts business. Additionally, the Company 9 has begun to develop a contingency plan to address the possibility of failure of any of the Company's significant suppliers to reach Year 2000 readiness. In the event that the Company, or 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. "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, Quarterly Report on Form 10-Q and Registration Statement on Form S-3. Further, any forward-looking statements speak only as of the date on which such statements are 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 statements are 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 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 Part II - Other Information Item 1. Legal Proceedings As previously reported, a former 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 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 27. Financial Date Schedule (b) Reports on Form 8-K None 11 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 15, 1998 /s/ Stephen H. Greenspan --------------------- ------------------------------------- Stephen H. Greenspan Chairman of the Board, President and Chief Executive Officer (principal executive officer) Date: December 15, 1998 /s/ John C. Dancu --------------------- ------------------------------------- John C. Dancu Chief Operating and Financial Officer (principal financial and chief accounting officer) 12