<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (Date of earliest event reported): JUNE 1, 1999
THE MEN'S WEARHOUSE, INC.
(Exact name of registrant as specified in charter)
<TABLE>
<CAPTION>
TEXAS 000-20036 74-1790172
<S> <C> <C>
(State of Incorporation) (Commission File No.) (I.R.S. Employer Identification No.)
</TABLE>
5803 GLENMONT DRIVE
HOUSTON, TEXAS 77081
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 592-7200
================================================================================
Page 1
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On June 1, 1999, The Men's Wearhouse, Inc., a Texas corporation (the
"Company"), effected the acquisition of K&G Men's Center, Inc., a Georgia
corporation ("K&G"), through the merger (the "Merger") of TMW Combination
Company, a Georgia corporation and wholly owned subsidiary of the Company
("Combination Company"), with and into K&G, which resulted in K&G becoming a
wholly owned subsidiary of the Company. The Merger was effected pursuant to an
Agreement and Plan of Merger (as amended, the "Merger Agreement") dated March 3,
1999, by and between the Company, Combination Company and K&G. Based on an
exchange ratio of .43 of a share of the Company's common stock, par value $.01
per share ("Company Common Stock"), for each share of K&G's common stock, par
value $.01 per share, the shareholders of K&G will receive approximately 4.4
million shares of Company Common Stock in exchange for all of the outstanding
capital stock of K&G. There is no assumption of any significant debt of K&G. The
number of shares issued in the Merger was based on arms-length negotiations
between the parties. The Merger will be accounted for as a pooling of interests.
In accordance with the terms of the Merger Agreement, upon
effectiveness of the Merger the board of directors of the Company increased the
number of directors by one and elected Stephen H. Greenspan as a director to
serve until the next annual meeting of the shareholders of the Company. The
Company's board of directors has also included Mr. Greenspan in its nominees for
election at the 1999 Annual Meeting of Shareholders of the Company. In addition,
Mr. Greenspan entered into an amended and restated employment agreement with K&G
whereby K&G agreed to employ Mr. Greenspan as Chief Executive Officer. A copy of
the amended and restated employment agreement is filed as Exhibit 10.1 and is
hereby incorporated herein by reference.
K&G is a superstore retailer of a complete line of men's apparel and
accessories and presently operates 34 stores in 16 states. The Company intends
to continue to operate the business of K&G and to integrate K&G's operations
with the Company's existing men's retail operations.
In connection with the closing of the K&G transaction, the Company's
management is evaluating K&G's and the Company's operations with regard to
duplicate facilities within existing markets. The Company expects to close
approximately five stores as a result of this process and to replace SuitMax
signage in connection with adopting K&G's store branding. Management estimates
that the cost of these store closing and the write-off of abandoned signage
will be approximately $3 million before income taxes.
A copy of the press release announcing the closing of the Merger is
filed as Exhibit 99.1 and is hereby incorporated herein by reference.
Page 2
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of business acquired.
The following financial statements of K&G Men's Center, Inc.
are included in Appendix A hereto and filed herewith:
Report of Independent Public Accountants
Consolidated Balance Sheets as of February 1, 1998
and January 31, 1999
Consolidated Statements of Operations for the fiscal
years ended February 2, 1997, February 1, 1998 and
January 31, 1999
Consolidated Statements of Shareholders' Equity for
the fiscal years ended February 2, 1997, February 1,
1998 and January 31, 1999
Consolidated Statements of Cash Flows for the fiscal
years ended February 2, 1997, February 1, 1998 and
January 31, 1999
Notes to Consolidated Financial Statements
(b) Pro forma financial information.
The following pro forma financial information is included in
Appendix B hereto and filed herewith:
Pro Forma Combined Financial Statements - Basis of
Presentation
Pro Forma Combined Balance Sheet at January 30, 1999
Pro Forma Combined Statements of Earnings:
For the Year Ended January 30, 1999
For the Year Ended January 31, 1998
For the Year Ended February 1, 1997
Notes to Pro Forma Combined Financial Statements
Page 3
<PAGE> 4
(c) Exhibits.
2.1 - Agreement and Plan of Merger dated March 3, 1999, by and
between The Men's Wearhouse, Inc., TMW Combination Company
and K&G Men's Center, Inc. (incorporated by reference from
Exhibit 2.2 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 30, 1999).
2.2 - Amendment No. 1 to Agreement and Plan of Merger dated
March 30, 1999, by and between The Men's Wearhouse, Inc.,
TMW Combination Company and K&G Men's Center, Inc.
(incorporated by reference from Exhibit 2.3 to the
Company's Annual Report on Form 10-K for the fiscal year
ended January 30, 1999).
10.1 - Amended and Restated Employment Agreement dated as of June
1, 1999, by and between K&G Men's Center, Inc. and Stephen
H. Greenspan.
23.1 - Consent of Arthur Andersen LLP.
99.1 - Press Release of the Company dated June 1, 1999,
announcing the closing of the Merger.
Page 4
<PAGE> 5
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 hereunto duly authorized.
THE MEN'S WEARHOUSE, INC.
Dated: June 11, 1999 /s/ GARY G. CKODRE
----------------------------------
Gary G. Ckodre
Vice President - Finance
Page 5
<PAGE> 6
Appendix A
K&G Men's Center, Inc. and Subsidiaries
Consolidated Financial Statements
<PAGE> 7
K&G MEN'S CENTER, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF K&G MEN'S CENTER, INC. AND SUBSIDIARIES:
Report of Independent Public Accountants.......................................................... A-2
Consolidated Balance Sheets as of February 1, 1998 and January 31, 1999.......................... A-3
Consolidated Statements of Operations for the fiscal years ended February 2, 1997,
February 1, 1998, and January 31, 1999......................................................... A-4
Consolidated Statements of Shareholders' Equity for the fiscal years ended February 2, 1997,
February 1, 1998, and January 31, 1999.......................................................... A-5
Consolidated Statements of Cash Flows for the fiscal years ended February 2, 1997,
February 1, 1998, and January 31, 1999.......................................................... A-6
Notes to Consolidated Financial Statements........................................................ A-7
</TABLE>
A-1
<PAGE> 8
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of K&G Men's Center, Inc.:
We have audited the accompanying consolidated balance sheets of K&G
Men's Center, Inc. (a Georgia corporation) and subsidiaries as of February 1,
1998 and January 31, 1999 and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended January 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of K&G Men's Center,
Inc. and subsidiaries as of February 1, 1998 and January 31, 1999 and the
results of their operations and their cash flows for each of the three years in
the period ended January 31, 1999 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 17, 1999
A-2
<PAGE> 9
K&G MEN'S CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 3,631,000 $ 11,361,000
Marketable securities........................................................... 17,678,000 6,025,000
Accounts receivable............................................................. 1,435,000 1,460,000
Merchandise inventory........................................................... 20,948,000 30,771,000
Other assets.................................................................... 869,000 1,570,000
------------ ------------
Total current assets....................................................... 44,561,000 51,187,000
------------ ------------
PROPERTY AND EQUIPMENT:
Furniture and fixtures.......................................................... 1,646,000 2,779,000
Computer equipment.............................................................. 645,000 1,177,000
Leasehold improvements.......................................................... 2,388,000 4,147,000
------------ ------------
4,679,000 8,103,000
Less accumulated depreciation................................................... (1,752,000) (2,517,000)
------------ ------------
Property and equipment, net................................................... 2,927,000 5,586,000
------------ ------------
OTHER ASSETS, net.................................................................. 443,000 457,000
------------ ------------
Total assets............................................................... $ 47,931,000 $ 57,230,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 5,432,000 $ 4,873,000
Sales taxes payable............................................................. 863,000 968,000
Accrued expenses................................................................ 1,880,000 2,517,000
Income taxes payable............................................................ 1,361,000 1,470,000
------------ ------------
Total current liabilities.................................................. 9,536,000 9,828,000
------------ ------------
NOTES PAYABLE...................................................................... 205,000 205,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
MINORITY INTEREST.................................................................. 373,000 400,000
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 2,000,000 shares authorized and unissued....... 0 0
Common Stock, $.01 par value; 40,000,000 shares authorized, 10,127,482
and 10,252,844 shares issued and outstanding, respectively.................... 101,000 103,000
Additional paid-in capital...................................................... 25,182,000 27,931,000
Retained earnings............................................................... 12,534,000 18,763,000
------------ ------------
Total shareholders' equity................................................. 37,817,000 46,797,000
------------ ------------
Total liabilities and shareholders' equity................................. $ 47,931,000 $ 57,230,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
A-3
<PAGE> 10
K&G MEN'S CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------------------------
FEBRUARY 2, FEBRUARY 1, JANUARY 31,
1997 1998 1999
------------ ------------- ------------
<S> <C> <C> <C>
NET SALES................................................. $ 88,104,000 $ 112,795,000 $139,234,000
COST OF SALES, including occupancy costs.................. 67,344,000 86,513,000 107,081,000
------------ ------------- ------------
GROSS PROFIT.............................................. 20,760,000 26,282,000 32,153,000
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES............................................... 13,752,000 16,675,000 22,617,000
------------ ------------- ------------
OPERATING INCOME.......................................... 7,008,000 9,607,000 9,536,000
OTHER INCOME (EXPENSE):
Interest expense....................................... (43,000) (29,000) (29,000)
Other income, net...................................... 735,000 1,166,000 1,061,000
------------ ------------- ------------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST IN EARNINGS 7,700,000 10,744,000 10,568,000
OF AFFILIATES..........................................
PROVISION FOR INCOME TAXES................................ 2,991,000 4,189,000 4,137,000
------------ ------------- ------------
INCOME BEFORE MINORITY INTEREST IN
EARNINGS OF AFFILIATES................................. 4,709,000 6,555,000 6,431,000
MINORITY INTEREST IN EARNINGS OF
AFFILIATES............................................. (125,000) (172,000) (202,000)
------------ ------------- ------------
NET INCOME................................................ $ 4,584,000 $ 6,383,000 $ 6,229,000
============ ============= ============
BASIC EARNINGS PER SHARE.................................. $0.47 $0.63 $0.61
============ ============= ============
DILUTED EARNINGS PER SHARE................................ $0.47 $0.63 $0.61
============ ============= ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING............................................ 9,682,320 10,117,555 10,207,338
============ ============= ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING ASSUMING DILUTION.......................... 9,786,925 10,210,911 10,207,338
============ ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
A-4
<PAGE> 11
K&G MEN'S CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 28, 1996................... 6,168,487 $ 62,000 $ 997,000 $ 1,584,000 $ 2,643,000
Initial public offering, net of
expenses................................ 1,691,250 17,000 10,115,000 0 10,132,000
Conversion of Redeemable Common
Stock, Series B and Common Stock 1,706,513 17,000 6,475,000 (17,000) 6,475,000
Series A to Common Stock...............
Issuance of Common Stock, net of expenses 538,275 5,000 7,441,000 0 7,446,000
Net income.................................. 0 0 0 4,584,000 4,584,000
---------- --------- ------------ ------------ ------------
BALANCE, February 2, 1997................... 10,104,525 101,000 25,028,000 6,151,000 31,280,000
Issuance of stock for stock option
exercise................................ 22,957 0 154,000 0 154,000
Net income............................... 0 0 0 6,383,000 6,383,000
---------- --------- ------------ ------------ ------------
BALANCE, February 1, 1998................... 10,127,482 101,000 25,182,000 12,534,000 37,817,000
---------- --------- ------------ ------------ ------------
Issuance of Common Stock, net of
expenses................................ 88,263 1,000 1,563,000 0 1,564,000
Tax effect of stock option exercise...... 0 0 924,000 0 924,000
Issuance of stock for stock option
exercise................................ 37,099 1,000 262,000 0 263,000
Net income............................... 0 0 0 6,229,000 6,229,000
---------- --------- ------------ ------------ ------------
BALANCE, January 31, 1999................... 10,252,844 $ 103,000 $ 27,931,000 $ 18,763,000 $ 46,797,000
========== ========= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
A-5
<PAGE> 12
K&G MEN'S CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------------
FEBRUARY 2, FEBRUARY 1, JANUARY 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $ 4,584,000 $ 6,383,000 $ 6,229,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in earnings of affiliates..... 125,000 172,000 202,000
Depreciation and amortization................... 409,000 479,000 781,000
Deferred income tax provision (benefit)......... 0 8,000 (71,000)
Changes in assets and liabilities:
Accounts receivable.......................... (272,000) (436,000) (25,000)
Merchandise inventory........................ (4,691,000) (5,109,000) (9,823,000)
Other assets, net............................ 252,000 (105,000) (647,000)
Accounts payable............................. 2,216,000 (1,978,000) (559,000)
Sales taxes payable.......................... 157,000 103,000 105,000
Accrued expenses............................. 321,000 340,000 637,000
Income taxes payable......................... 255,000 487,000 1,033,000
------------ ------------ ------------
Total adjustments......................... (1,228,000) (6,039,000) (8,367,000)
------------ ------------ ------------
Net cash (used in) provided by operating
activities............................ 3,356,000 344,000 (2,138,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.................... (1,128,000) (1,261,000) (3,424,000)
Purchase of marketable securities...................... (15,794,000) (17,658,000) (18,045,000)
Sale of marketable securities.......................... 0 15,774,000 29,698,000
Other assets........................................... (21,000) (48,000) (11,000)
------------ ------------ ------------
Net cash provided by (used in) investing
activities............................ (16,943,000) (3,193,000) 8,218,000
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to minority investors.................... (55,000) (114,000) (176,000)
Issuance of common stock............................... 17,578,000 154,000 1,826,000
------------ ------------ ------------
Net cash provided by
financing activities.................. 17,523,000 40,000 1,650,000
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS....................................... 3,936,000 (2,809,000) 7,730,000
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD.................................... 2,504,000 6,440,000 3,631,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD.......................................... $ 6,440,000 $ 3,631,000 $ 11,361,000
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
Interest............................................... $ 23,000 $ 20,000 $ 20,000
============ ============ ============
Income taxes........................................... $ 2,819,000 $ 3,839,000 $ 3,183,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
A-6
<PAGE> 13
K&G MEN'S CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
K&G Men's Center, Inc. (the "Company" or "K&G") is a superstore
retailer of a complete line of men's apparel and accessories. As of January 31,
1999, the Company operated 33 stores.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the operations of K&G and
certain entities which are affiliated by virtue of K&G's effective control and
ownership of at least 50% of each. All significant intercompany accounts and
transactions have been eliminated. Certain information regarding each of the
subsidiary entities is as follows:
T&C Liquidators, Inc.
A Texas corporation operating five stores in Texas and two
stores in Colorado; K&G owns 100%.
K&G of Indiana, Inc.
A Georgia corporation operating one store in Indiana; K&G owns
67%.
K&G Associates of New Jersey, Inc.
A New Jersey corporation operating one store in New Jersey;
K&G owns 100%.
K&G of Ohio, Inc.
A Georgia corporation operating one store in Ohio; K&G owns
60%.
GARES Cigar, LLC
A limited liability corporation which operates one cigar
humidor in an Atlanta superstore; K&G owns 70%.
Fiscal Year
The Company's fiscal year covers a 52- or 53-week period which ends on
the Sunday closest to January 31. Fiscal year 1996 ended on February 2, 1997,
fiscal year 1997 ended on February 1, 1998, and fiscal year 1998 ended on
January 31, 1999. Fiscal year 1996 was a 53-week period, fiscal year 1997 was a
52-week period, and fiscal year 1998 was a 52-week period.
Cash and Cash Equivalents
The Company considers cash on deposit and investments with original
maturities of three months or less to be cash equivalents.
A-7
<PAGE> 14
Marketable Securities
Marketable securities consist primarily of federal agency discount
notes. These securities have been categorized as "held-to-maturity" (Note 3).
Inventory
Inventory is stated at the lower of cost or market determined using the
first-in, first-out ("FIFO") method. FIFO cost is determined using the retail
inventory method.
Cost of Sales
Cost of sales includes the cost of merchandise sold, occupancy costs,
and certain purchasing and merchandise handling costs.
Revenue Recognition
Revenue from retail sales is recognized at the time of sale.
Store Pre-opening Expenses
Cost associated with the opening of new stores is expensed when the
store is opened.
Property and Equipment
Property and equipment are stated at cost. Depreciation of leasehold
improvements is provided using the straight-line method over the related lease
term, which is less than the estimated useful lives of the assets. Other
property and equipment are depreciated using the straight-line method over their
estimated useful lives of five to ten years.
Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized. Expenditures for maintenance
and repairs are charged to expense as incurred.
Earnings Per Share
Effective February 3, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share", which established
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 reported 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 fiscal years 1998, 1997 and 1996 were determined
on the assumption that the weighted average outstanding stock options granted
under the Company's plans (the Company's only potentially dilutive shares) of 0,
93,356 and 104,605 shares, respectively, had been exercised.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of 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. The estimates made by management primarily relate to inventory
allowances and certain accrued liabilities.
A-8
<PAGE> 15
Effect of New Accounting Standards
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for the
reporting of comprehensive income in a company's financial statements.
Comprehensive income includes all changes in a company's equity during the
period that result from transactions and other economic events other than
transactions with its stockholders. SFAS No. 130 was effective for the Company
for its fiscal year beginning February 2, 1998. For the Company, comprehensive
income equals net income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information," which requires that an enterprise
disclose certain information about operating segments. SFAS No. 131 was
effective for the Company for its fiscal year beginning February 2, 1998. SFAS
No. 131 did not require additional disclosure or revision of prior disclosures.
The Company considers its entire business as one operating segment for purposes
of SFAS No. 131.
Advertising
Advertising costs are expensed as incurred. Advertising expenditures
were $3.5 million, $4.2 million, and $5.8 million in fiscal 1996, 1997, and
1998, respectively.
3. MARKETABLE SECURITIES:
Following is a summary of "held-to-maturity" marketable securities:
<TABLE>
<CAPTION>
February 1, January 31,
1998 1999
----------- -----------
<S> <C> <C>
Georgia state tax exempt agency notes $17,678,000 $6,025,000
=========== ==========
</TABLE>
Maturities of marketable securities range from 3 to 12 months. The fair
value of these securities approximates their cost.
4. DEBT
Following is a summary of notes payable:
<TABLE>
<CAPTION>
February 1, January 31,
1998 1999
----------- -----------
<S> <C> <C>
Note payable to shareholder of subsidiary on demand after
January 30, 2000; fixed interest rate of 12% $ 25,000 $ 25,000
Note payable to shareholder of subsidiary on demand after
January 30, 2000; fixed interest rate of 6% 180,000 180,000
---------- ----------
$ 205,000 $ 205,000
========== ==========
</TABLE>
In July 1995, the Company entered into a revolving line-of-credit
agreement with a bank (the "Credit Agreement"). The Credit Agreement provides
for borrowings up to $5,000,000 through June 30, 2000 to be used for working
capital and store expansions. No amounts were outstanding under the Credit
Agreement at January 31, 1999. Interest is due monthly either at the bank's
prime rate minus 1% or at LIBOR plus 1.5%, at the Company's option. The
commitment fee on the unused amount of the Credit Agreement is .125% per annum.
A-9
<PAGE> 16
In addition to the Credit Agreement, the Company has a $3 million and a
$5 million letter-of-credit facility for inventory purchases. As of January 31,
1999, letters-of-credit totaling approximately $3.8 million were issued and
outstanding against these facilities.
5. INCOME TAXES
The Company accounts for income taxes using SFAS No. 109, "Accounting
for Income Taxes," which requires the use of the asset and liability approach.
The provisions for income taxes consist of the following:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------------
FEBRUARY 2, FEBRUARY 1, JANUARY 31,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Current $2,991,000 $ 4,181,000 $ 4,208,000
Deferred 0 8,000 (71,000)
---------- ----------- -----------
Provision for income taxes $2,991,000 $ 4,189,000 $ 4,137,000
========== =========== ===========
</TABLE>
Reconciliations of the statutory federal income tax rate to the Company's
effective tax rates are as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------------------
February 2, February 1, January 31,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 4.8 5.0 5.2
Effective income tax rate 38.8% 39.0% 39.2%
======== ======== =======
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities as of February 1, 1998 and January 31, 1999 are summarized as
follows:
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31,
1998 1999
----------- -----------
<S> <C> <C>
Current deferred tax assets (liabilities):
Inventory $ 112,000 $ 179,000
Prepaid rent (99,000) (144,000)
Accrued expenses and other 178,000 210,000
--------- ---------
Current deferred tax asset, net 191,000 245,000
Noncurrent deferred tax asset:
Property and equipment 141,000 158,000
--------- ---------
Net deferred tax asset $ 332,000 $ 403,000
========= =========
</TABLE>
Deferred tax assets and liabilities, net, are included in other current
assets and other assets in the accompanying balance sheets. The Company has not
recorded a valuation allowance against the deferred tax assets at February 1,
1998 or January 31, 1999.
A-10
<PAGE> 17
6. COMMITMENTS AND CONTINGENCIES
The Company leases its retail locations and general offices under
operating leases. Lease terms range from one to ten years. Certain leases call
for an annual contingent payment based on gross sales at the location above a
minimum level.
Minimum future lease payments under noncancelable operating leases are
as follows:
<TABLE>
<S> <C>
Fiscal year ending:
1999 $ 3,774,000
2000 3,582,000
2001 3,066,000
2002 2,372,000
2003 1,499,000
Thereafter 3,577,000
-----------
$17,870,000
===========
</TABLE>
The minimum future lease payments include $1,862,000 associated with
two retail locations, the Company's headquarters building and warehouse space,
all of which are leased from related parties (Note 9).
Rent expense for the years ended February 2, 1997, February 1, 1998,
and January 31, 1999 was $1,990,000, $2,721,000, and $4,163,000, respectively,
composed of $1,907,000, $2,673,000, and $4,140,000, respectively, in minimum
rents and $83,000, $48,000, and $23,000, respectively, of contingent rent
expense.
As previously reported, on June 4, 1998, a former employee of the
Company filed a complaint in California Superior Court against the Company and
an officer and director 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. While the
Company believes that is has valid defenses to the plaintiff's claims, in light
of the costs of continuing to defend the litigation, the proposed merger with
The Men's Wearhouse, Inc. (Note 11) and other considerations, management is
investigating whether it might be in the Company's best interests to bring the
matter to conclusion. Accordingly, the Company has entered into settlement
negotiations with the plaintiff, but no definitive agreement has been reached
with regard to a settlement of plaintiff's claims. No assurance can be given
regarding the ultimate resolution of this dispute, or the risk or range of
possible loss to the Company, if any, resulting from such resolution. The
Company has Employment Practices Liability coverage; the insurer has asserted
certain reservations of rights with respect to this matter.
The Company is also a party to other various ongoing employment related
claims and pending litigation. The Company believes that it has a valid defense
to these claims and intends to vigorously defend them. The Company does not
believe that the ultimate outcome of these proceedings will materially affect
the Company's results of operations or financial condition. No assurance can be
given, however, regarding a range of possible loss to the Company, if any, that
will result from these matters.
7. REDEEMABLE COMMON STOCK, SERIES B
On May 10, 1995, the Company and certain private investors (the
"Investors"), including certain executive officers of the Company, entered into
an investment agreement, a registration rights agreement, and a shareholders'
agreement (collectively, the "Agreements"). Under the terms and provisions of
the Agreements, the Company raised gross proceeds of $6,501,000 through a
private placement sale of 1,706,513 shares of Series B to the Investors. All
shares of the Series B were automatically converted to Common Stock, at the
conversion rate then in effect, upon the closing of a public offering of the
Company's initial public offering discussed in Note 10.
A-11
<PAGE> 18
The holders of the Series B were entitled to receive dividends,
accruing on a daily basis, at a rate of $.191 per share per annum. As of January
28, 1996, the Company had accrued $230,000 dividends payable on the Series B.
These dividends were classified as accrued expenses in the fiscal year 1995
consolidated financial statements, as the Company was required to pay the
dividends quarterly commencing the first quarter of fiscal 1996. At the
consummation of the Company's initial public offering (Note 10), the Company
paid all accrued dividends on the Series B.
8. EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with three executive
officers. The agreements have terms ranging from two to five years and require
aggregate annual compensation of $399,000, plus certain benefits. In March 1998,
the Company entered into an employment agreement with a fourth executive
officer. This agreement has a three year term and requires annual compensation,
plus certain benefits, of $150,000 in year one, $165,000 in year two and
$181,000 in year three. These agreements contain certain noncompete provisions
and provide for severance pay if the executives are terminated by the Company
other than for cause, as defined.
9. RELATED PARTIES
Significant related-party transactions include the following:
o Historically, the Company purchased a portion of its inventory from a
company which is owned by certain of the Company's shareholders.
Pursuant to this arrangement, the Company purchased inventory in the
amounts of $29,000, $114,000, and $0 in fiscal 1996, fiscal 1997, and
fiscal 1998, respectively.
o The Company leases two retail locations, its corporate headquarters
building, and warehouse space from corporations owned by certain of
the Company's shareholders (Note 6). Rent expense of $243,000,
$262,000, and $262,000 relating to these leases is included in cost
of sales in the accompanying statements of operations in fiscal 1996,
fiscal 1997, and fiscal 1998, respectively.
10. SHAREHOLDERS' EQUITY
Stock Dividends
In March 1997, the Board of Directors approved a 3 for 2 split of the
Company's common stock effected in the form of a stock dividend, payable on
April 25, 1997. Accordingly, all previously reported share and per share data
included in the consolidated financial statements and notes have been
retroactively adjusted for all periods presented.
Public Offerings
The Company effected its initial public offering on January 24, 1996,
(before fiscal 1995 year-end) and the transaction closed on January 30, 1996,
(after fiscal 1995 year-end). The transaction was not reflected in the Company's
financial statements for fiscal year end 1995. As reflected in the Company's
financial statements for the year ended February 2, 1997, this transaction
resulted 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 1,691,250 shares of its common stock at $6.67 per
share and raised approximately $10,132,000 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 538,275 shares of its common
stock at $14.83 per share and raised approximately $7,446,000 after expenses of
the offering.
A-12
<PAGE> 19
The Company effected a third public offering of its Common Stock on
June 25, 1998, and the transaction closed on July 14, 1998. Pursuant to this
offering, the Company issued an additional 88,263 shares of its common stock at
$21.50 per share and raised approximately $1,564,000 after expenses of the
offering.
Stock Options
The Company currently has two stock option plans: The K&G Men's Center,
Inc. Plan for Employees ("Employees' Plan") and the K&G Men's Center, Inc.
Director Stock Option Plan ("Director Plan"). The Employees' Plan permits the
issuance of stock options to selected employees of the Company. The Employees'
Plan reserves 1,100,000 shares of common stock for grant and provides that the
term of each award be determined by the compensation committee of the Board of
Directors. The Director Plan reserves 112,500 shares of common stock for grant.
Under the terms of both plans, options granted may be either
nonqualified or incentive stock options. With regard to the incentive stock
options, the exercise price, determined by the committee, may not be less than
the fair market value of a share on the grant date.
Information regarding the stock option plans is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OUTSTANDING EXERCISE
OPTIONS PRICE
----------- --------
<S> <C> <C>
Outstanding at January 29, 1996 180,000 $ 6.67
Granted 6,000 11.83
Exercised - -
Cancelled (2,100) 6.67
--------- -------
Outstanding at February 2, 1997 183,900 6.84
Granted 305,250 19.66
Exercised (22,957) 6.67
Cancelled (19,000) 10.13
--------- -------
Outstanding at February 1, 1998 447,193 15.47
--------- -------
Granted 251,339 14.76
Exercised (37,099) 7.09
Cancelled (116,523) 19.38
--------- -------
Outstanding at January 31, 1999 544,910 $ 14.86
========= =======
</TABLE>
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------------ -------------------------
OPTIONS OPTIONS
RANGE OUTSTANDING WEIGHTED AVERAGE WEIGHTED EXERCISABLE WEIGHTED
OF AT REMAINING AVERAGE AT AVERAGE
EXERCISE JANUARY 31, CONTRACTUAL EXERCISE JANUARY 31, EXERCISE
PRICES 1999 LIFE (YEARS) PRICE 1999 PRICE
----------------- ----------- ----------------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$ 6.67 to $11.83 233,523 8.6 $ 8.23 68,345 $6.67
16.63 to 18.67 14,850 8.1 18.45 0 0
19.13 to 20.75 296,537 8.4 19.85 0 0
------- ------
544,910 68,345
======= ======
</TABLE>
A-13
<PAGE> 20
In March 1999, subsequent to fiscal year end January 31, 1999, the
Company entered into a rescission agreement with certain optionees who had been
granted stock options in November 1998. A total of 127,539 shares, with an
exercise price of $9.50, were cancelled. At the time of the rescission, none of
the option shares were vested, and the market price of the Company's common
stock was below the exercise price.
In March 1995, certain shareholders of the Company granted an executive
officer of the Company options to purchase, in aggregate, 354,373 shares of the
common stock from such shareholders. The options are exercisable at $2.54 per
share and are fully vested. As of January 31, 1999, 254,373 of these options
remain unexercised. The options expire ten years from the date of grant. In
management's opinion, the exercise price of these options reasonably
approximates the fair value of the common stock at the grant date.
SFAS No. 123, "Accounting for Stock Based Compensation," encourages,
but does not require, companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has elected to adopt the
disclosure-only provision of SFAS No. 123, and to continue to follow its current
method of accounting for stock-based compensation, utilizing the approach
outlined in APB No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, no compensation cost has been recorded for options
granted under the Employees' Plan or for the options granted to the executive
officer by certain shareholders. Had compensation cost for options granted under
the Employees' Plan, Director Plan and to the executive officer been determined
based on the fair value at the grant dates consistent with the provisions of
SFAS No. 123, the Company's net income and earnings per share would have been
the pro forma amounts below:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Fiscal 1998:
Net income $6,229,000 $5,491,000
Basic earnings per share $0.61 $0.54
Diluted earnings per share $0.61 $0.54
Fiscal 1997:
Net income $6,383,000 $5,826,000
Basic earnings per share $0.63 $0.58
Diluted earnings per share $0.63 $0.57
Fiscal 1996:
Net income $4,584,000 $4,482,000
Basic earnings per share $0.47 $0.46
Diluted earnings per share $0.47 $0.46
</TABLE>
The fair value of the options granted under the Employees' Plan in
fiscal years 1998, 1997 and 1996 on their respective grant dates and the related
pro forma amounts were calculated using the Black-Scholes option pricing model
with the following assumptions: expected volatility of 60%, 35% and 36% for
1998, 1997 and 1996, respectively, no dividend yield; forfeiture rate of 7% for
options granted to employees and 10% for options granted to non-employee
directors for 1998, and 3% for 1997 and 1996, risk free interest rate of 5.62%
,6.34% and 5.34% for 1998, 1997 and 1996, respectively; and an expected life
equal to the vesting period of the individual option grants. The fair value of
the options granted to certain executive officers and the related pro forma
amounts were calculated using the minimum value method with the following
assumptions: no dividend yield; forfeiture rate of 0%; risk free interest rate
of 6.69%; and expected life of four years. The table above does not include the
127,539 options rescinded subsequent to year end.
A-14
<PAGE> 21
11. SUBSEQUENT EVENTS
The Company entered into an Agreement and Plan of Merger with The Men's
Wearhouse, Inc. ("Men's Wearhouse") on March 3, 1999. Under this agreement,
shareholders of the Company would receive, subject to certain adjustments,
approximately 4.1 to 4.4 million shares of The Men's Wearhouse common stock. The
agreement provides that each share of the Company will be converted into .4 of a
share of Men's Wearhouse common stock if the price of Men's Wearhouse common
stock is $32.50 or above for a 15 trading day period ending on the third trading
day before the closing of the transaction. If the price is $27.50 or less, then
each share will be converted into .43 of a share of Men's Wearhouse common
stock. The conversion rate will vary between .4 and .43 if the stock price is
between $32.50 and $27.50 per share. The merger is subject to customary terms
and conditions, including the receipt of all required regulatory approvals.
Although there can be no assurance that the merger will close, the Company
currently anticipates that the merger will be consummated shortly after the
receipt of such regulatory approvals, the satisfaction of the remaining
conditions set forth in the Merger Agreement, and the approval of the
transaction by the Company's shareholders.
A-15
<PAGE> 22
Appendix B
The Men's Wearhouse, Inc. and Subsidiaries
Pro Forma Combined Financial Statements
<PAGE> 23
THE MEN'S WEARHOUSE, INC. AND SUBSIDIARIES
PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
(UNAUDITED, IN THOUSANDS)
The unaudited pro forma combined financial statements of The Men's
Wearhouse, Inc. ("TMW") give effect to (a) the February 10, 1999 combination on
a pooling-of-interests basis of TMW with Moores Retail Group Inc. ("Moores") and
(b) the combination of TMW and K&G Men's Center, Inc. ("K&G") under the
pooling-of-interests method of accounting. The unaudited pro forma combined
financial statements should be read in conjunction with the historical
consolidated financial statements and the notes thereto of TMW, which are
included in TMW's Annual Report on Form 10-K for the fiscal year ended January
30, 1999, and K&G, which are included herein. The unaudited pro forma combined
balance sheet as of January 30, 1999 first assumes that the February 10, 1999
combination of TMW and Moores was consummated on January 30, 1999 and combines
the TMW and Moores consolidated balance sheets as of January 30, 1999
("TMW/Moores Pro Forma"), then assumes that the combination of TMW and K&G was
consummated on January 30, 1999 and combines the TMW/Moores Pro Forma January
30, 1999 and K&G January 31, 1999 consolidated balance sheets. The unaudited pro
forma combined balance sheet includes adjustments which give effect to events
that are directly attributable to the transactions.
TMW/Moores Pro Forma. With respect to the February 10, 1999 combination of
TMW with Moores, the unaudited pro forma combined statements of earnings assume
that the combination was consummated at the beginning of fiscal 1997 and combine
the historical results of TMW and Moores for fiscal 1997 and 1998. The
historical results of Moores for fiscal 1996 have not been combined with TMW's
fiscal 1996 historical results as Moores commenced operations on December 23,
1996 and its reported net loss of $96 for the 40 day period from December 23,
1996 to January 31, 1997 is not significant. Nonrecurring charges totaling
$5,261, net of a $291 tax benefit, which resulted directly from the combination
and will be included in TMW's fiscal 1999 results of operations have been
excluded from the unaudited pro forma combined statements of earnings. In
addition, an extraordinary charge of $2,913, net of a $1,355 tax benefit,
relating to the refinancing of the February 10, 1999 outstanding debt of Moores
has not been reflected. The effects of these nonrecurring and extraordinary
charges have, however, been reflected in the pro forma adjustments to retained
earnings for TMW/Moores Pro Forma in the pro forma combined balance sheet.
The historical consolidated financial statements of Moores included in the
pro forma combined balance sheet and statements of earnings are stated in United
States dollars and have been prepared in accordance with generally accepted
accounting principles in the United States. The exchange rates used in
translating the historical Canadian currency financial statements of Moores
reflect the current exchange rate as of the balance sheet date and the weighted
average exchange rates for the periods presented in the statements of earnings.
The cumulative translation adjustments are reported as a separate component of
shareholders' equity. The historical statements of earnings for Moores included
in the pro forma combined statements of earnings do not reflect earnings per
share data since Moores, as a privately owned company, has not reported such
data. The TMW/Moores Pro Forma earnings per share in the pro forma combined
statements of earnings reflect the 2.5 million shares of TMW common stock that
TMW will ultimately issue to the former shareholders and option holders of
Moores as a result of the February 10, 1999 combination of TMW and Moores.
TMW/K&G Pro Forma Combined. With respect to the combination of TMW and K&G,
the unaudited pro forma combined statements of earnings assume that the
combination was consummated at the beginning of fiscal 1996 and have been
prepared by combining the historical results of K&G with the historical results
of TMW for fiscal 1996 and with the TMW/Moores pro forma combined results for
fiscal 1997 and 1998. Nonrecurring charges totaling $1,675, net of a $325 tax
benefit, which result directly from the transaction and which are expected to be
included in the results of operations of TMW within the twelve months succeeding
the transaction have been excluded from the unaudited pro forma combined
statements of earnings. The effect of these nonrecurring charges has, however,
been reflected in the pro forma adjustments to retained earnings for TMW/K&G Pro
Forma Combined in the pro forma combined balance sheet.
B-1
<PAGE> 24
The preparation of unaudited pro forma combined financial statements
requires management to make estimates and assumptions based on information
currently available. The pro forma adjustments made in connection with the
development of the pro forma information are preliminary and have been made
solely for purposes of developing such pro forma information for illustrative
purposes necessary to comply with the disclosure requirements of the Securities
and Exchange Commission. The unaudited pro forma combined financial statements
do not purport to be indicative of the results of operations for future periods
or the combined financial positions or the results that actually would have been
realized had the entities been a single entity during the periods presented.
B-2
<PAGE> 25
THE MEN'S WEARHOUSE, INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET
JANUARY 30, 1999
(UNAUDITED -- IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
AS REPORTED AS REPORTED TMW/K&G
------------------ PRO FORMA TMW/MOORES ----------- PRO FORMA PRO FORMA
TMW MOORES ADJUSTMENTS PRO FORMA K&G ADJUSTMENTS COMBINED
-------- ------- ----------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash.............................. $ 19,651 $ 19,651 $11,361 $ 31,012
Inventories....................... 236,105 $35,841 271,946 30,771 302,717
Marketable securities............. -- 6,025 6,025
Other current assets.............. 14,740 2,108 784(5)(6) 17,632 3,030 325(1) 20,987
-------- ------- ------- -------- ------- ------- --------
Total current assets........ 270,496 37,949 784 309,229 51,187 325 360,741
PROPERTY AND EQUIPMENT, net......... 107,889 10,296 118,185 5,586 123,771
OTHER ASSETS, net................... 25,347 25,869 (5,081)(5)(6) 46,135 457 46,592
-------- ------- ------- -------- ------- ------- --------
Total assets................ $403,732 $74,114 $(4,297) $473,549 $57,230 $ 325 $531,104
======== ======= ======= ======== ======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities..................... $ 89,316 $10,952 $ 569(5) $100,837 $ 8,358 $ 2,000(1) $111,195
Short-term borrowings............. 7,568 (7,568)(6) -- --
Current portion of long-term
debt............................ 3,644 (1,160)(6) 2,484 2,484
Income taxes payable.............. 7,125 575 7,700 1,470 9,170
-------- ------- ------- -------- ------- ------- --------
Total current liabilities... 96,441 22,739 (8,159) 111,021 9,828 2,000 122,849
LONG-TERM DEBT...................... 44,665 11,661(5)(6) 56,326 205 56,531
OTHER LIABILITIES................... 9,073 270 (904)(6) 8,439 8,439
-------- ------- ------- -------- ------- ------- --------
Total liabilities........... 105,514 67,674 2,598 175,786 10,033 2,000 187,819
-------- ------- ------- -------- ------- ------- --------
MINORITY INTEREST................... 400 400
------- --------
SHAREHOLDERS' EQUITY:
Common stock...................... 349 1,708 (1,683)(7) 374 103 (59)(3) 418
Capital in excess of par.......... 148,446 2,920(5)(7) 151,366 27,931 59(3) 179,356
Retained earnings................. 150,418 4,965 (8,132)(5)(6) 147,251 18,763 (1,675)(1) 164,339
-------- ------- ------- -------- ------- ------- --------
299,213 6,673 (6,895) 298,991 46,797 (1,675) 344,113
Currency translation adjustment... (233) (233) (233)
Treasury stock, at cost........... (995) (995) (995)
-------- ------- ------- -------- ------- ------- --------
Total shareholders'
equity.................... 298,218 6,440 (6,895) 297,763 46,797 (1,675) 342,885
-------- ------- ------- -------- ------- ------- --------
Total liabilities and
shareholders' equity...... $403,732 $74,114 $(4,297) $473,549 $57,230 $ 325 $531,104
======== ======= ======= ======== ======= ======= ========
</TABLE>
See Notes to Pro Forma Combined Financial Statements
B-3
<PAGE> 26
THE MEN'S WEARHOUSE, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF EARNINGS
FOR THE YEAR ENDED JANUARY 30, 1999
(UNAUDITED -- IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS REPORTED TMW/K&G
-------------------- PRO FORMA TMW/MOORES AS REPORTED PRO FORMA PRO FORMA
TMW MOORES ADJUSTMENTS PRO FORMA K&G ADJUSTMENTS COMBINED
--------- -------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................. $ 767,922 $130,675 -- $898,597 $139,234 -- $1,037,831
Cost of goods sold,
including buying and
occupancy costs......... 468,187 81,483 -- 549,670 107,081 $ 3,699(2) 660,450
--------- -------- -------- -------- -------- -------- ----------
Gross margin.............. 299,735 49,192 -- 348,927 32,153 (3,699) 377,381
Selling, general and
administrative
expenses................ 228,053 35,163 -- 263,216 22,617 (3,699)(2) 282,134
--------- -------- -------- -------- -------- -------- ----------
Operating income.......... 71,682 14,029 -- 85,711 9,536 -- 95,247
Other income.............. -- -- 1,061 -- 1,061
Interest expense, net..... (2,032) (6,993) -- (9,025) (29) -- (9,054)
--------- -------- -------- -------- -------- -------- ----------
Earnings before income
taxes................... 69,650 7,036 -- 76,686 10,568 -- 87,254
Provision for income
taxes................... (28,730) (4,043) (32,773) (4,137) (36,910)
--------- -------- -------- -------- -------- -------- ----------
Earnings before minority
interest................ 40,920 2,993 -- 43,913 6,431 -- 50,344
Minority interest......... -- (202) -- (202)
--------- -------- -------- -------- -------- -------- ----------
Net earnings before
extraordinary item...... $ 40,920 $ 2,993 -- $ 43,913 $ 6,229 -- $ 50,142
========= ======== ======== ======== ======== ======== ==========
EXCHANGE RATIO OF 0.43:
Net earnings before
extraordinary item per
share:
Basic................... $ 1.21 $ 1.21 $ 0.61 $ 1.23
Diluted................. 1.17 1.17 0.61 1.19
Weighted average shares
outstanding:
Basic................... 33,849 2,500(7) 36,349 10,207 (5,818)(4) 40,738
Diluted................. 36,075 2,500(7) 38,575 10,207 (5,818)(4) 42,964
</TABLE>
See Notes to Pro Forma Combined Financial Statements
B-4
<PAGE> 27
THE MEN'S WEARHOUSE, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF EARNINGS
FOR THE YEAR ENDED JANUARY 31, 1998
(UNAUDITED -- IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS REPORTED TMW/K&G
------------------- PRO FORMA TMW/MOORES AS REPORTED PRO FORMA PRO FORMA
TMW MOORES ADJUSTMENTS PRO FORMA K&G ADJUSTMENTS COMBINED
-------- -------- ----------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $631,110 $131,414 -- $762,524 $112,795 -- $875,319
Cost of goods sold,
including buying and
occupancy costs.......... 388,517 82,751 -- 471,268 86,513 $ 2,719(2) 560,500
-------- -------- ----- -------- -------- ------- --------
Gross margin............... 242,593 48,663 -- 291,256 26,282 (2,719) 314,819
Selling, general and
administrative
expenses................. 191,063 35,296 226,359 16,675 (2,719)(2) 240,315
-------- -------- ----- -------- -------- ------- --------
Operating income........... 51,530 13,367 -- 64,897 9,607 -- 74,504
Other income............... -- 1,166 1,166
Interest expense, net...... (2,366) (7,234) (9,600) (29) (9,629)
-------- -------- ----- -------- -------- ------- --------
Earnings before income
tax...................... 49,164 6,133 -- 55,297 10,744 -- 66,041
Provision for income
taxes.................... (20,281) (4,065) (24,346) (4,189) (28,535)
-------- -------- ----- -------- -------- ------- --------
Earnings before minority
interest................. 28,883 2,068 -- 30,951 6,555 -- 37,506
Minority interest.......... -- (172) -- (172)
-------- -------- ----- -------- -------- ------- --------
Net earnings before
extraordinary item....... $ 28,883 $ 2,068 -- $ 30,951 $ 6,383 $ -- $ 37,334
======== ======== ===== ======== ======== ======= ========
EXCHANGE RATIO OF
0.43:
Net earnings before
extraordinary item per
share:
Basic.................... $ 0.89 $ 0.89 $ 0.63 $ 0.95
Diluted.................. 0.87 0.87 0.63 0.93
Weighted average shares
outstanding:
Basic.................... 32,343 2,500(7) 34,843 10,118 (5,767)(4) 39,194
Diluted.................. 35,384 2,500(7) 37,884 10,211 (5,820)(4) 42,275
</TABLE>
See Notes to Pro Forma Combined Financial Statements
B-5
<PAGE> 28
THE MEN'S WEARHOUSE, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF EARNINGS
FOR THE YEAR ENDED FEBRUARY 1, 1997
(UNAUDITED -- IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS REPORTED TMW/K&G
------------------ PRO FORMA PRO FORMA
TMW K&G ADJUSTMENTS COMBINED
-------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales......................................... $483,547 $88,104 $571,651
Cost of goods sold, including buying and occupancy
costs........................................... 295,181 67,344 $ 2,218(2) 364,743
-------- ------- ------- --------
Gross margin...................................... 188,366 20,760 (2,218) 206,908
Selling, general and administrative expenses...... 150,232 13,752 (2,218)(2) 161,766
-------- ------- ------- --------
Operating income.................................. 38,134 7,008 -- 45,142
Other income...................................... 735 735
Interest expense, net............................. (2,146) (43) (2,189)
-------- ------- ------- --------
Earnings before income taxes...................... 35,988 7,700 -- 43,688
Provision for income taxes........................ (14,845) (2,991) (17,836)
-------- ------- ------- --------
Earnings before minority interest................. 21,143 4,709 -- 25,852
Minority interest................................. (125) (125)
-------- ------- ------- --------
Net earnings before extraordinary item............ $ 21,143 $ 4,584 -- $ 25,727
======== ======= ======= ========
EXCHANGE RATIO OF 0.43:
Net earnings before extraordinary item per share:
Basic........................................... $ 0.67 $ 0.47 $ 0.72
Diluted......................................... 0.67 0.47 0.72
Weighted average shares outstanding:
Basic........................................... 31,354 9,682 (5,519)(4) 35,517
Diluted......................................... 34,101 9,787 (5,579)(4) 38,309
</TABLE>
See Notes to Pro Forma Combined Financial Statements.
B-6
<PAGE> 29
THE MEN'S WEARHOUSE, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
The pro forma combined financial statements as of January 30, 1999 and for
the years ended January 30, 1999, January 31, 1998 and February 1, 1997 include
the following adjustments to reflect the combination of TMW and K&G as a
pooling-of-interests:
1. To record the estimated transaction costs to complete the
combination of TMW and K&G under pooling-of-interests accounting. The
costs, which primarily relate to investment banking fees, professional fees
and contract termination payments, are currently estimated to be
approximately $1,675, net of a tax benefit of $325, and are reflected as a
reduction in retained earnings in the accompanying balance sheet. These
costs are not reflected in the pro forma combined statements of earnings.
2. To reclassify certain K&G buying and occupancy expenses to cost of
sales to conform with classifications used by TMW.
3. To adjust common stock and capital in excess of par value to
reflect the issuance of 4.4 million shares of TMW common stock to K&G
shareholders based on an Exchange Ratio of 0.43.
4. Pro forma basic earnings per share is computed based on the
weighted average number of common shares outstanding. Pro forma diluted
earnings per share is computed based on the weighted average number of
common shares plus the dilutive impact of options and convertible
securities for each period after giving effect to the combination on a
pooling-of-interests basis. Pro forma shares and earnings per share data is
presented to reflect the issuance of TMW common stock based on the Exchange
Ratio of 0.43.
The pro forma combined financial statements as of January 30, 1999 and for
the years ended January 30, 1999 and January 31, 1998 include the following
adjustments to reflect the February 10, 1999 combination of TMW and Moores as a
pooling-of-interests and the concurrent debt refinancing:
5. To record the transaction costs incurred in the combination of TMW
and Moores under pooling-of-interests accounting. The costs, which
primarily relate to investment banking fees, professional fees, contract
termination payments and unamortized stock option compensation expenses,
totaled approximately $5,261, net of a tax benefit of $291, and are
reflected as a reduction in retained earnings in the accompanying balance
sheet. These costs are not reflected in the pro forma combined statements
of earnings.
6. To adjust the pro forma combined balance sheet for the effects of
refinancing approximately US $59 million of existing Moores debt as
follows:
<TABLE>
<S> <C>
Revolving debt refinanced with long-term debt............... $ 7,568
Current portion of long-term debt refinanced with long-term
debt...................................................... 3,644
Prepayment penalty from early retirement of long-term
debt...................................................... 1,496
-------
Addition to long-term debt.................................. $12,708
=======
Write off of Moores historical deferred financing costs, net
of tax of $814............................................ $ 1,958
Prepayment penalty from early retirement of long-term debt,
net of tax of $541........................................ 955
-------
Adjustment to retained earnings............................. $ 2,913
=======
</TABLE>
7. To adjust common stock and capital in excess of par value to
reflect the issuance of 2.5 million shares of TMW common stock issuable to
Moores shareholders and option holders upon exchange of certain
exchangeable securities of Moores issued in the February 10, 1999
combination of TMW and Moores.
B-7
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
2.1 Agreement and Plan of Merger dated March 3, 1999, by and
between The Men's Wearhouse, Inc., TMW Combination Company and
K&G Men's Center, Inc. (incorporated by reference from Exhibit
2.2 to the Company's Annual Report on Form 10-K for the fiscal
year ended January 30, 1999).
2.2 Amendment No. 1 to Agreement and Plan of Merger dated March
30, 1999, by and between The Men's Wearhouse, Inc., TMW
Combination Company and K&G Men's Center, Inc. (incorporated
by reference from Exhibit 2.3 to the Company's Annual Report
on Form 10-K for the fiscal year ended January 30, 1999).
10.1 Amended and Restated Employment Agreement dated as of June 1,
1999, by and between K&G Men's Center, Inc. and Stephen H.
Greenspan.
23.1 Consent of Arthur Andersen LLP.
99.1 Press Release of the Company dated June 1, 1999, announcing
the closing of the Merger.
</TABLE>
<PAGE> 1
EXHIBIT 10.1
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is entered into as of
June 1, 1999 (this "Employment Agreement"), between K&G MEN'S CENTER, INC., a
Georgia corporation (the "Company"), and STEPHEN H. GREENSPAN ("Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee entered into an Employment Agreement
dated as of May 10, 1995 (the "Existing Employment Agreement");
WHEREAS, the Company has entered into an Agreement and Plan of Merger
dated as of March 3, 1999 (as amended by Amendment No. 1 to Agreement and Plan
of Merger dated March 30, 1999, the "Merger Agreement"), by and between The
Men's Wearhouse, Inc.("TMW"), TMW Combination Company and the Company;
WHEREAS, Employee is the beneficial owner of 1,250,899 shares of the
Company's common stock, par value $.01 per share (the "Company Common Stock"),
and will benefit from the transactions contemplated by the Merger Agreement;
WHEREAS, the Company would not consummate the transaction contemplated
by the Merger Agreement if Employee did not enter into this Employment Agreement
and agree to be bound by the terms hereof; and
WHEREAS, Employee is willing to accept such terms and conditions.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, and intending to be legally bound hereby, the Company and
Employee hereby agree that the terms of the Existing Employment Agreement shall
be amended and restated as follows:
1. Employment.
(a) The Company hereby employs Employee as Chief Executive
Officer, and in such capacity he shall have full authority to manage the
operations of the Company. Included, without limitation, in that authority will
be discretion over personnel, facilities, budgets, and other operational
matters, subject to the review and approval by the Board of Directors of the
Company of such material changes and transactions as are ordinarily beyond the
authority of management.
(b) Employee shall faithfully and diligently discharge his
duties hereunder and shall devote his full business time to the business and
affairs of the Company, subject to allowed vacations and to reasonable periods
of illness.
<PAGE> 2
2. Term of Employment.
(a) Unless sooner terminated as provided in Section 4 hereof
or due to the death or physical or mental disability of the Employee, Employee's
employment shall be for an initial term commencing on the date of this Agreement
and ending on the third anniversary of the date hereof (the "Initial Term").
Upon completion of the Initial Term, this Agreement shall renew automatically
thereafter from year to year, unless and until terminated as provided in Section
4 hereof.
(b) The Employee shall be deemed to be physically or mentally
incapacitated for purposes of this Agreement if by reason of any physical or
mental incapacity he has been unable or it is deemed that he will be unable for
a period of at least one hundred and eighty (180) days to perform his duties and
responsibilities hereunder in a reasonably satisfactory manner. In the event of
any disagreement between Employee and the Company about whether he is physically
or mentally incapacitated such as to permit the Company to terminate his
employment pursuant to this paragraph, the question of such incapacity shall be
submitted to an impartial and reputable physician selected by mutual agreement
of Employee and the Company or, failing such agreement, selected by two
physicians (one of which shall be selected by the Company and the other by
Employee). The determination of the question of such incapacity by such
physician(s) shall be final and binding on Employee and the Company for purposes
of this Agreement. The Company shall pay the reasonable fees and expenses of
such physician(s).
3. Compensation and Benefits.
(a) As compensation for his services hereunder, the Company
shall pay to Employee a base salary of $250,000.00 per year, payable in
bi-weekly or semi-monthly installments, during the Initial Term of this
Agreement. Such base salary shall be reviewed at least annually by the Board of
Directors of the Company to determine whatever increase may be merited.
(b) Employee shall be entitled to participate, on a comparable
basis with other senior executives of the Company, in all employee benefit plans
or programs of the Company in effect from time to time, including but not
limited to any bonus or incentive compensation programs, stock option programs
and medical, dental, life and disability programs. In addition, the Company
shall reimburse Employee for all reasonable out-of-pocket expenses incurred by
him while conducting Company business in accordance with policies adopted by the
Company from time to time.
4. Termination.
(a) Notwithstanding the provisions of Section 2 hereof, the
Company may terminate Employee's employment for "cause" (as defined in Section
4(b) below) by giving written notice to Employee and such notice shall specify
the factual basis for such determination.
(b) For purposes of this Agreement, termination may be for
"cause" in the event of the occurrence of (i) the commission by Employee of a
willful or grossly negligent act which causes material harm to the Company, (ii)
the conviction of Employee for the commission or
<PAGE> 3
perpetration by Employee of any felony or any act of fraud, or (iii) habitual
absenteeism, chronic alcoholism, or drug addiction; provided, however, that if
such illness may reasonably be cured, Employee shall have a reasonable time, not
exceeding sixty (60) days, to cure such illness after receiving notice thereof
from the Company.
(c) In the event that Employee's employment is terminated by
the Company on any basis other than for cause as defined in Section 4(b), the
Company shall pay to Employee severance compensation in an amount equal to 100%
of his then current annual base salary. Such severance compensation shall be
paid during the one year period after termination in the same manner as his base
salary had been paid immediately prior thereto. Such severance compensation is
in consideration of Employee's commitment and availability and in further
consideration of Employee's agreement to relinquish continuing compensation and
benefits as provided in paragraph (e) below. In the event that Employee's
employment is terminated by the Company for cause, the Company shall not pay the
Employee any severance compensation.
(d) Except as expressly provided in paragraph (c) above or as
provided under the express terms of any benefit plan under which Employee is a
participant or as otherwise required by applicable law, and except that the
Company shall pay his COBRA health benefits premium for a one (1) year period
following any termination other than for cause as defined in Section 4(b)
hereof, upon termination of Employee's employment, the Company shall have no
further obligation to Employee for, and Employee waives and relinquishes, any
compensation or benefits except compensation for services performed prior to
such termination. At the time of termination of employment, the Company and
Employee shall enter into a mutually satisfactory form of release acknowledging
such remaining obligations (including any obligations under any agreements
between the Company and Employee still in effect) and discharging both parties,
as well as the Company's officers, directors and employees with respect to their
actions for or in behalf of the Company, from any other claims or obligations
arising out of or in connection with Employee's employment by the Company,
including the circumstances of such termination. For purposes hereof,
compensation due to Employee under this Agreement for services performed prior
to such termination shall be prorated to the date of termination and all
compensation provided pursuant to Section 3 hereof shall be prorated through the
last full week prior to the date of termination on the basis of available
information.
5. Trade Secrets. Employee agrees to maintain in strict confidence, and
not use or disclose except under the instruction of the Company, any information
comprising a trade secret of the Company. Trade secrets are property rights
protected by law and, for purposes of this Agreement, shall have the meaning
provided under applicable law, including, in Georgia, Section 10-1-760, et seq.
of the Official Code of Georgia Annotated.
6. Confidential Information. During his employment and for a period of
two (2) years after his employment ends (regardless of the reason), Employee
shall agree to maintain in strict confidence and except as necessary to perform
his duties as an employee of the Company, not use or disclose any confidential
business information. For this purpose, "confidential business information"
means all non-public information of a competitively sensitive nature concerning
the Company, including information (whether in writing or retained as mental
impressions) concerning pricing, cost or profit factors; quality programs;
annual and long-range business plans; marketing
<PAGE> 4
plans and methods; customers or suppliers; contracts and bids; and personnel.
This is in addition to the legal rights of the Company in any trade secrets.
7. Work Product. The Company, shall be the sole owner of Employee's
work product. For this purpose, "work product" means all inventions,
improvements, discoveries, documentation, programming, and technology (including
all associated intellectual property rights) that Employee may create during the
term of his employment (alone or with others, at work or elsewhere, during or
after the normal workday) relating to the work Employee does, the business of
the Company, or any research or development conducted by the Company.
8. Return of Information. Employee agrees that when his employment ends
(regardless of the reason), he will provide the Company with all business
records, contracts, calendars, telephone lists, rolodexes, computer files, and
other materials in his possession relating to the Company, its business and its
customers, including all copies thereof, whether in physical or electronic form.
9. Restrictions on Competition.
(a) For the longer of three years following any termination of
his employment or five years from the date the merger is effected pursuant to
the Merger Agreement, Employee shall not create, manage, or advise, or provide
procurement or marketing services in support of any business primarily engaged
in the retail sale, in a discount or "everyday low price" warehouse, outlet or
retail chain format, of men's apparel (including men's footwear), which business
is located in the contiguous United States.
(b) For the longer of three years following any termination of
his employment or five years from the date the merger is effected pursuant to
the Merger Agreement, Employee shall not solicit for hire, directly or by
assisting others, any other employee of the Company anywhere in the United
States.
10. Waiver of Amendment. Any waiver of any term or condition or any
amendment of this Agreement shall be effective only if in writing and signed by
the parties. The waiver by either party of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent breach
by either party.
11. Set-Off. The Company agrees that it will not set-off against any
payment obligations of the Company to Employee any claims which the Company may
have against Employee, or suspend any payment because of such claims, unless and
until such claims have been reduced to judgment or accepted by Employee in
writing and liquidated as to amount. Employee agrees that he will not assert any
claims which Employee may have against the Company, including any breach of this
Agreement by Company, as a defense to enforcement of Employee's obligations
hereunder.
12. Publicity. Following termination of Employee's employment, neither
party will disparage or injure the reputation of the other party. This
obligation will include, in Employee's case, refraining from negative statements
about the Company's methods of doing business, the effectiveness of its business
policies, and the quality of any of its products or personnel. In addition,
<PAGE> 5
neither party will make any statements regarding the other or regarding
Employee's former employment with the Company to any member of the print or
broadcast media except after mutual consultation.
13. Miscellaneous.
(a) The Company and Employee agree that venue for any dispute
that may arise concerning this Agreement shall be in Fulton County, Georgia.
(b) This Agreement contains the entire agreement between the
Company and Employee with respect to the subject matter hereof and thereof and
supersede all prior arrangements or understandings with respect hereto or
thereto.
(c) The descriptive headings of this Agreement are for
convenience only and shall not control or affect the meaning or construction of
any provision.
(d) Notwithstanding any other term or provision of this
Agreement, all amounts payable to Employee by the Company hereunder shall be
subject to the withholding of such sums relating to taxes as the Company may
reasonably determine it is required to withhold pursuant to any applicable law
or regulation.
(e) All notices pursuant to this Agreement shall be in writing
and sufficient if delivered personally or sent by overnight courier or
registered or certified mail, postage prepaid, addressed as follows:
If to the Company to:
K&G Men's Center, Inc.
1225 Chattahoochee Avenue, N.W.
Atlanta, Georgia 30318
If to Employee to:
Stephen H. Greenspan
74 Paces West Court
Atlanta, Georgia 30327
Either party may by written notice change the address to which notices to such
party are to be delivered or mailed.
(f) This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which
together constitute one and the same instrument.
<PAGE> 6
IN WITNESS WHEREOF, the Company and Employee have executed this Amended
and Restated Employment Agreement under seal as of the day and year first above
written.
COMPANY: K&G MEN'S CENTER, INC.
By:/s/ GARY G. CKODRE
-----------------------------------
Name: Gary G. Ckodre
Title: Chief Accounting Officer
EMPLOYEE: /s/ STEPHEN H. GREENSPAN
--------------------------------------
Stephen H. Greenspan
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated March 17, 1999 appearing on page F-2 of K&G Men's Center, Inc.'s
Form 10-K for the year ended January 31, 1999 included in this Current Report on
Form 8-K of The Men's Wearhouse, Inc.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
June 10, 1999
<PAGE> 1
EXHIBIT 99.1
WEDNESDAY JUNE 2, 8:09 AM EASTERN TIME
COMPANY PRESS RELEASE
MEN'S WEARHOUSE AND K&G MEN'S CENTER COMPLETE MERGER AGREEMENT
FREMONT, Calif.--(BUSINESS WIRE)--June 2, 1999--Men's Wearhouse, Inc.
(Nasdaq/NMS:SUIT - news) and K&G Men's Center, Inc.(Nasdaq/NMS:MENS - news) said
today that K&G shareholders voted to approve the proposed merger with Men's
Wearhouse at K&G's shareholder meeting in Atlanta.
Under terms of the transaction, K&G shareholders will receive approximately 4.4
million shares of Men's Wearhouse common stock based on a conversion of .43
shares of Men's Wearhouse common stock for each share of K&G common stock. There
is no assumption of any significant debt and Men's Wearhouse will account for
this transaction as a pooling-of-interest.
"This transaction provides Men's Wearhouse a major presence in the opening price
point category, a sector which is responsible for a significant portion of men's
tailored apparel and sportswear sales," said David Edwab, president of Men's
Wearhouse.
"We will record one-time charges related to the transaction and the closing of
overlapping store locations when we release second quarter earnings; excluding
such items we anticipate this transaction will be accretive to shareholders for
all of fiscal 1999," he added.
Founded in 1973, Men's Wearhouse operates 550 stores in the U.S. and Canada and
is one of North America's largest specialty retailers of men's tailored business
attire. The stores carry a full selection of designer, brand name and private
label suits, sport coats, furnishings and accessories. The company also operates
the second largest manufacturing facility of men's suits and sport coats in
Canada.
K&G Men's Center, Inc. is a superstore retailer of a complete line of men's
apparel and accessories and presently operates 34 stores in 16 states. Men's
Wearhouse reported sales of $767.9 million in fiscal 1998, which does not
include revenues from the Moores stores, as the combination with Moores did not
close until after the end of fiscal 1998. K&G reported sales of $139.2 million
in fiscal 1998.
For more information on Men's Wearhouse, contact the company on the World Wide
Web at www.menswearhouse.com.
This press release contains forward-looking information. The forward-looking
statements are made pursuant to the Safe Harbor provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include the company's intent to open new stores and future financial performance
and may be significantly impacted by various factors, including unfavorable
local, regional and national economic developments, severe weather conditions,
aggressive advertising or
<PAGE> 2
marketing activities of competitors and other factors described herein and in
the company's annual report on Form 10-K for the year ended Jan. 30, 1999 filed
with the Securities and Exchange Commission.
- ----------
Contact:
The Men's Wearhouse, Fremont
Neill Davis, 713/592-7200
