EX-13 4 dex13.txt EXHIBIT 13 Exhibit 13 FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (Dollar and share amounts in thousands, except per share data)
Fiscal Year Ended ------------------------------------------------------------- February 2, February 3, January 29, January 30, January 31, 2002 2001 2000 1999 1998 ----------- ----------- ----------- ----------- ----------- INCOME STATEMENT DATA: Net sales ..................................... $ 160,858 $ 167,913 $ 162,792 $ 154,446 $ 144,983 Gross profit .................................. 77,778 83,083 78,431 73,640 68,898 Selling, general and administrative expenses .................. 69,308 71,753 66,977 61,561 57,964 Interest ...................................... 375 869 1,068 772 536 Depreciation and amortization ................. 3,183 3,239 3,071 2,757 2,404 Net income .................................... 3,386 4,531 4,899 5,486 4,981 EARNINGS PER SHARE DATA: Basic earnings per share ...................... $ 0.84 $ 1.04 $ 1.04 $ 1.09 $ 0.99 Diluted earnings per share .................... 0.83 1.04 1.04 1.07 0.97 Weighted average shares outstanding - basic .................................... 4,054 4,373 4,719 5,040 5,026 Weighted average shares outstanding - including dilutive potential common shares ................................... 4,072 4,375 4,729 5,119 5,118 BALANCE SHEET DATA: Working capital ............................... $ 39,317 $ 43,769 $ 43,670 $ 45,021 $ 35,000 Inventories ................................... 44,869 52,031 51,538 50,779 43,896 Net property and equipment .................... 17,571 18,522 19,607 19,713 17,833 Total assets .................................. 76,731 79,948 79,828 79,296 69,446 Long-term debt (including current maturities) ...................... 1,440 9,230 10,019 12,377 4,260 Shareholders' equity .......................... 59,158 55,866 55,303 53,717 49,521 Book value per share .......................... 14.63 13.60 11.88 11.02 9.88 Current ratio ................................. 4.0:1 4.7:1 4.8:1 5.3:1 3.6:1 Number of stores at year-end .................. 237 238 240 233 211
MANAGEMENT'S DISCUSSION AND FINANCIAL REVIEW RESULTS OF OPERATIONS The following table sets forth certain items in the Statements of Income as a percentage of net sales for fiscal years 2002, 2001 and 2000.
Percentage of Net Sales ----------------------- Fiscal Year Ended ----------------- 2/2/02 2/3/01 1/29/00 ------------ ------------- ------------- Net sales .......................................... 100.0 100.0 100.0 Cost of sales ....................................... 51.6 50.5 51.8 ------------ ------------- ------------- Gross profit ........................................ 48.4 49.5 48.2 Other costs and expenses: Selling, general and administrative ............ 43.1 42.7 41.1 Interest ....................................... 0.2 0.5 0.7 Depreciation and amortization .................. 2.0 1.9 1.9 Other income, net .............................. (0.3) -- (0.3) ------------ ------------- ------------- Income before income taxes .......................... 3.4 4.4 4.8 Provision for income taxes .......................... 1.3 1.7 1.8 ------------ ------------- ------------- Net income .......................................... 2.1 2.7 3.0 ============ ============= =============
Year Ended February 2, 2002 Compared to Year Ended February 3, 2001 Net sales decreased by 4%, or $7.1 million, from fiscal 2001 (a 53-week year) to fiscal 2002 (a 52-week year). On a comparable 52-week basis sales would have been down 3%. Comparable store sales were down 4% on a fiscal year basis; however, on a comparable 52-week basis, same store sales decreased 3%. These decreases in comparable 52-week periods year over year were attributable to weak retail sales experienced in the second half of fiscal 2002. Additionally, during fiscal 2002 the Company opened ten new stores and closed 11 (four of which were relocations). Cost of sales in fiscal 2002 was 51.6% of net sales compared to 50.5% of net sales in fiscal 2001. The 1.1% of net sales increase was primarily due to higher markdowns, primarily to clear older season merchandise and, to a lesser extent, the expensing of previously capitalized buying and occupancy costs due to a $7.2 million reduction in ending inventory. Selling, general and administrative expenses in fiscal 2002 were 43.1% of net sales compared to 42.7% of net sales in fiscal 2001. This 0.4% of net sales increase was the net result of experiencing lower than expected sales while incurring plan levels of store payroll and supervision costs as well as higher group health insurance claims, offset in part by lower advertising costs and year-end incentive bonuses. Interest expense in fiscal 2002 was 0.2% of net sales compared to 0.5% of net sales in fiscal 2001 and is primarily the result of a decrease in the average annual interest rates from 6.8% in fiscal 2001 to 3.7% in fiscal 2002 and, to a lesser degree, lower average borrowing levels. Other income, net in fiscal 2002 included $525,000 ($325,000 after tax, or $.08 per diluted share) related to income from an insurance claim. Year Ended February 3, 2001 Compared to Year Ended January 29, 2000 Net sales increased by 3%, or $5.1 million, from fiscal 2000 (a 52-week year) to fiscal 2001 (a 53-week year). This increase in net sales is the result of an additional week of sales in fiscal 2001 as well as the addition of 15 new stores and the closing of 17 stores (seven of which were relocations). Comparable store sales were even for the 53-week year; however, on a basis comparable to the previous year's 52-week period, same store sales decreased 1%. Cost of sales in fiscal 2001 was 50.5% of net sales compared to 51.8% of net sales in fiscal 2000. The 1.3% of net sales reduction was primarily due to a change in the mix of merchandise sold to inventory with higher initial markup and, to a lesser extent, lower markdowns as a percentage of merchandise sold. Selling, general and administrative expenses in fiscal 2001 were 42.7% of net sales compared to 41.1% of net sales in fiscal 2000. This 1.6% of net sales increase was primarily attributable to higher cost and frequency of advertising in the first half of fiscal 2001 related to the Company's heavier emphasis on marketing, which included the launch of a branding message campaign. The Company's second half marketing costs were generally in-line with levels experienced in fiscal 2000. To a lesser degree, the increase is related to higher store occupancy and supervision costs, as well as year-end incentive bonuses. Interest expense in fiscal 2001 was 0.5% of net sales compared to 0.7% of net sales in fiscal 2000 and is primarily attributable to lower average borrowing levels in fiscal 2001 offset in part by average annual interest rates which increased from 5.6% to 6.8%. Other income, net in fiscal 2000 included $665,000 ($412,000 after tax, or $.09 per diluted share) representing a non-recurring gain on the sale of real estate. LIQUIDITY AND CAPITAL RESOURCES In fiscal 2002, the Company funded its operating activities, including capital expenditures for the opening of new stores, from internally generated funds and from bank borrowings. During fiscal 2002, the Company opened ten new stores, closed 11 stores (four of which were relocations), and remodeled several others. During fiscal 2003, the Company believes it will open approximately ten new stores while also closing/relocating approximately five under-performing locations and does not expect this activity to significantly impact liquidity or capital resources. Operating activities provided net cash of $14.8 million, $7.5 million and $9.0 million in fiscal 2002, 2001 and 2000, respectively. The change between fiscal 2002 and 2001 related primarily to the $7.7 million reduction in inventory growth year over year and, to a lesser extent, the year over year growth in payables. These increases in working capital were slightly offset by the reduction in net income. The change between fiscal 2001 and 2000 related primarily to increases in working capital. Net cash used for investing activities in fiscal 2002 and 2001 approximated $2.9 million and $2.8 million, respectively, and was primarily for the purpose of store expansion and remodelings, and, to a lesser degree, in fiscal 2001 the development of the Company's internet store. In fiscal 2000, net cash used in investing activities approximated $3.0 million, comprised of $4.3 million in capital expenditures related to store expansion, remodelings and completion of the Company's point of sale equipment rollout in approximately 150 stores, offset in part by proceeds from property disposals. Financing activities used net cash of $8.1 million, $4.9 million and $5.9 million in fiscal 2002, 2001 and 2000, respectively. Financing activities primarily related to fluctuations in the borrowing levels under the Company's revolving credit agreements, which had an aggregate borrowing capacity of $40.0 million. At the end of fiscal 2002, the Company had paid off the revolver and had $3.9 million invested in cash equivalents. Additionally, financing activities for the last three fiscal years included $0.3 million, $4.1 million and $3.6 million, respectively, used for the repurchase of approximately 37,100, 564,600, and 403,800 shares of the Company's common stock. On March 27, 2002, the Company announced a tender for approximately 1.8 million shares of its common stock at a price of $11.00 per share, with the tender to commence on March 28, 2002 and scheduled to expire on April 26, 2002. Assuming the full purchase of the number of shares tendered, the cost to the Company for the purchase of shares and associated fees and expenses would be approximately $20.5 million. The Company will obtain these funds through new credit facilities with Branch Banking and Trust Company of Virginia and SunTrust Bank and from available cash and cash equivalents. The maximum amount available to the Company under the credit facilities is $46.0 million, with a $26.0 million revolving loan, a term loan of up to $8.0 million and a credit line loan equal to the difference between $20.0 million and the amount of the term loan. The facilities will be collateralized by liens on the Company's inventory and the Company's headquarters property and adjacent store. Amounts outstanding under the facilities will bear interest at a variable rate based on LIBOR. The facilities will mature in 2007, with monthly principal payments on the term loan beginning one month after the initial drawdown and principal reductions on the line of credit loan beginning in 2003. The credit facilities contain customary financial covenants, including restrictions on the Company's ability to pay dividends and to repurchase its capital stock, other than as part of the proposed tender offer. Among other things, the Company's capital expenditures are limited to $3,250,000 annually; it must maintain a base amount of consolidated tangible net worth and designated minimum ratios of current assets to current liabilities and unsubordinated liabilities to tangible net worth; and it must maintain on a quarterly basis a designated coverage ratio of cash flows to fixed charges. Any of the covenants may be waived in the discretion of the lenders. In addition, upon payment of a fee and satisfaction of certain conditions, the Company may automatically obtain a waiver of the fixed charge coverage ratio for up to four consecutive fiscal quarters. In addition to financing the tender offer, the credit facilities will be available for general corporate purposes, including seasonal borrowing needs. Assuming approximately $20.0 million is used for the tender offer, the $26.0 million revolving credit facility will be available for such needs until maturity of the credit facilities in 2007. In the past three years, the maximum amount the Company has borrowed at any time against its previously existing facility was $21.7 million. The Company believes that, even if it experienced some deterioration in operating results, it could continue to comply with the covenants under the credit facilities and use them for seasonal borrowing needs. If the Company were no longer able to maintain compliance, it would be necessary to seek replacement funding from other lenders. Contractual Obligations Assuming an $8.0 million term loan and a $12.0 million line of credit loan under the credit facilities discussed above, the Company's contractual obligations to make future payments under existing loan agreements, leases and other long-term obligations is summarized below: Payments Due by Period ($ millions)
Less than After 5 Contractual obligations Total 1 Year 1-3 Years 4-5 Years Years ------------------------------------ ------------- ------------- ------------- ------------- ------------- Long-term debt $20.1 $00.5 $ 4.2 $ 4.7 $10.7 Operating leases 41.7 13.5 16.2 7.1 4.9 ------------- ------------- ------------- ------------- ------------- Total contractual obligations $61.8 $14.0 $20.4 $11.8 $15.6 ============= ============= ============= ============= =============
OTHER MATTERS Critical Accounting Policies In conformity with generally accepted accounting principles, the preparation of our financial statements requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Although the estimates are based on our knowledge of current events and actions we may under- take in the future, actual results could differ from those estimates. Significant accounting policies used in the preparation of the Company's financial statements are summarized in Note 1 of the Company's Financial Statements. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 138, was effective for the Company in the first quarter of fiscal year 2002. This new standard did not have a material effect on the Company's financial statements. Historically, inflation has not significantly affected the Company's gross margins. When necessary, the Company has generally been able to pass through price increases as the cost of merchandise has increased. Off Balance Sheet Arrangements The Company does not have transactions, arrangements or relationships with "special purpose" entities, and except for one Letter of Credit for approximately $800,000 which expires April 2002, the Company does not have any off balance sheet debt. Interest Rate Risk The Company's bank credit facilities and Industrial Development Bonds bear interest at variable rates, which expose the Company to risk from interest rate fluctuations. If interest rates were to increase or decrease by 10%, the effect on net income and cash flows would not be material. Forward-Looking Statements This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the Company's actual results in future periods to differ materially from forecasted or expected results. Those risks include, among other things, the competitive environment in the value-priced men's apparel industry in general and in the Company's specific market area, inflation, changes in costs of goods and services, economic conditions in general and in the Company's specific market area. Those and other risks are more fully described in the Company's filings with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2002. STATEMENTS OF INCOME (in thousands, except per share data)
Fiscal Year Ended ----------------------------------------------------------- February 2, February 3, January 29, 2002 2001 2000 ---------------- --------------- -------------- Net sales ................................................... $ 160,858 $ 167,913 $ 162,792 Cost of sales ............................................... 83,080 84,830 84,361 --------- ------------ ----------- Gross profit ................................................ 77,778 83,083 78,431 Other costs and expenses: Selling, general and administrative .................... 69,308 71,753 66,977 Interest ............................................... 375 869 1,068 Depreciation and amortization .......................... 3,183 3,239 3,071 Other income, net ...................................... (549) (86) (585) --------- ------------ ----------- Income before income taxes .................................. 5,461 7,308 7,900 Provision for income taxes .................................. 2,075 2,777 3,001 --------- ------------ ----------- Net income .................................................. $ 3,386 $ 4,531 $ 4,899 ========= ============ =========== Earnings per common share: Basic .................................................. $ 0.84 $ 1.04 $ 1.04 ========= ============ =========== Diluted ................................................ $ 0.83 $ 1.04 $ 1.04 ========= ============ =========== Weighted average common shares outstanding - basic .................................................. 4,054 4,373 4,719 Dilutive effect of stock options ............................ 18 2 10 --------- ------------ ----------- Weighted average common shares outstanding - including dilutive potential common shares ............. 4,072 4,375 4,729 ========= ============ ===========
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (in thousands)
Common Stock Capital in Notes Receivable ------------------- Excess of Stock Purchase Retained Shares Amount Par Value Loan Plan Earnings Total ------------------- ---------- ---------------- -------- ------- Balance - January 30, 1999 .................... 4,874 $ 2,437 $ 5,819 $ (1,122) $ 46,583 $53,717 Net income................................... 4,899 4,899 Repurchase of common stock .................. (404) (202) (3,356) (3,558) Issuances of common stock ................... 10 5 75 80 Issuances of common stock under the Stock Purchase Loan Plan .............. 176 88 1,412 1,500 Notes receivable - stock purchase ........... (1,500) (1,500) Reduction of notes receivable ............... 165 165 -------- ------- --------- ---------- -------- ------- Balance - January 29, 2000 .................... 4,656 2,328 3,950 (2,457) 51,482 55,303 Net income .................................. 4,531 4,531 Repurchase of common stock .................. (565) (282) (3,802) (4,084) Issuances of common stock ................... 8 4 56 60 Issuances of common stock under the Stock Purchase Loan Plan .............. 10 4 62 66 Notes receivable - stock purchase ........... (67) (67) Reduction of notes receivable ............... 57 57 -------- ------- --------- ---------- -------- ------- Balance - February 3, 2001 .................... 4,109 2,054 266 (2,467) 56,013 55,866 Net income................................... 3,386 3,386 Repurchase of common stock .................. (84) (42) (357) (262) (661) Issuances of common stock ................... 19 10 103 113 Reduction of notes receivable ............... 454 454 -------- ------- --------- ---------- -------- ------- Balance - February 2, 2002 .................... 4,044 $ 2,022 $ 12 $ (2,013) $ 59,137 $59,158 ======== ======= ========= ========== ======== =======
See Notes to Financial Statements. BALANCE SHEETS (in thousands, except per share data)
February 2, February 3, 2002 2001 ---------------- --------------- ASSETS Current assets: Cash and cash equivalents ........................................ $ 4,257 $ 439 Accounts receivable .............................................. 271 255 Merchandise inventories .......................................... 44,869 52,031 Other current assets ............................................. 3,213 2,896 ---------------- --------------- Total current assets .......................................... 52,610 55,621 Property and equipment, net .......................................... 17,571 18,522 Other assets ......................................................... 6,550 5,805 ---------------- --------------- $ 76,731 $ 79,948 ================ =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt ............................. $ 180 $ 180 Accounts payable ................................................. 9,408 6,691 Accrued compensation and related items ........................... 1,566 2,131 Current and deferred income taxes ................................ 190 694 Other current liabilities ........................................ 1,949 2,156 ---------------- --------------- Total current liabilities ..................................... 13,293 11,852 Long-term debt ....................................................... 1,260 9,050 Other long-term liabilities .......................................... 1,583 1,485 Deferred income taxes ................................................ 1,437 1,695 Commitments Shareholders' equity: Preferred stock, $1 par value; authorized shares, 500; issued and outstanding shares, none.......................... Common stock, $.50 par value; authorized shares, 10,000; issued and outstanding shares, 4,044 (2002) and 4,109 (2001) ...................................................... 2,022 2,054 Capital in excess of par value ................................... 12 266 Notes receivable -- Stock Purchase Loan Plan ..................... (2,013) (2,467) Retained earnings ................................................ 59,137 56,013 ---------------- --------------- 59,158 55,866 ---------------- --------------- $ 76,731 $ 79,948 ================ ===============
See Notes to Financial Statements. STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash (in thousands)
Fiscal Year Ended ----------------------------------------------------- February 2, February 3, January 29, 2002 2001 2000 ----------------- --------------- ---------------- Cash flows from operating activities: Net income ....................................................... $ 3,386 $ 4,531 $ 4,899 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization ............................... 3,658 3,653 3,494 Proceeds received on insurance claim ........................ 868 -- -- Gain on insurance claim ..................................... (525) -- -- Loss (gain) on property dispositions, net ................... 177 220 (349) Other ....................................................... 98 92 83 Changes in assets and liabilities: Accounts receivable ...................................... (16) 165 442 Merchandise inventories .................................. 6,819 (493) (759) Other current assets ..................................... (317) (156) 546 Other assets ............................................. (745) (901) (795) Accounts payable and accrued expenses .................... 2,114 589 1,035 Current and deferred income taxes ........................ (731) (219) 365 ----------------- --------------- ---------------- Net cash provided by operating activities ........................ 14,786 7,481 8,961 ----------------- --------------- ---------------- Cash flows from investing activities: Capital expenditures ............................................. (2,915) (2,795) (4,324) Proceeds from property dispositions .............................. 31 7 1,285 ---------------- --------------- ---------------- Net cash used for investing activities ........................... (2,884) (2,788) (3,039) ----------------- --------------- ---------------- Cash flows from financing activities: ............................... Net paydowns under revolving bank lines of credit ................ (7,610) (609) (2,178) Repurchase of common stock ....................................... (294) (4,084) (3,558) Reduction of long-term debt ...................................... (180) (180) (180) Principal paid on notes receivable-- Stock Purchase Loan Plan ....................................... -- -- 66 ----------------- --------------- ---------------- Net cash used for financing activities ........................... (8,084) (4,873) (5,850) ----------------- --------------- ---------------- Net increase (decrease) in cash and cash equivalents ................ 3,818 (180) 72 Cash and cash equivalents at beginning of year ...................... 439 619 547 ----------------- --------------- ---------------- Cash and cash equivalents at end of year ............................ $ 4,257 $ 439 $ 619 ================= =============== ================ Supplemental disclosure of cash flow information: Cash paid during the year for interest ........................... $ 404 $ 880 $ 1,064 Cash paid during the year for income taxes ....................... 2,838 2,996 2,639 Non-cash financing activity--notes receivable .................... (367) 67 1,500 Non-cash financing activity--principal forgiveness on Stock Purchase Loan Plan ...................................... 87 55 100 Non-cash financing activity--issuances of common stock ........... 113 60 80
See Notes to Financial Statements. SELECTED QUARTERLY DATA (unaudited) Summarized quarterly data for fiscal 2002 and 2001 are as follows (in thousands, except per share data):
Fiscal 2002 May 5 August 4 November 3 February 2 ----------- ------------ ------------- ----------------- --------------- Net sales ............................................ $ 41,820 $ 35,499 $ 35,445 $ 48,094 Gross profit ......................................... 20,625 16,779 17,731 22,643 Net income ........................................... 1,431 5 49 1,901 Earnings per share--basic* ........................... .35 .00 .01 .47 Earnings per share--diluted .......................... .35 .00 .01 .47 Common share prices: High ............................................. 8.25 10.50 10.25 9.90 Low .............................................. 6.81 7.90 6.95 8.05 Fiscal 2001 April 29 July 29 October 28 February 3 ----------- ------------ ------------- --------------- ------------- Net sales ............................................ $ 41,350 $ 36,834 $ 37,235 $ 52,494 Gross profit ......................................... 20,729 17,826 18,731 25,797 Net income ........................................... 1,429 133 324 2,645 Earnings per share--basic* ........................... .31 .03 .08 .64 Earnings per share--diluted* ......................... .31 .03 .08 .64 Common share prices: High ............................................. 7.73 7.94 8.25 7.50 Low .............................................. 6.00 6.44 6.50 6.50
* Note: Earnings per share does not add to total for year due to rounding. S&K Famous Brands, Inc. common shares are traded on The Nasdaq Stock Market under the symbol SKFB. As of February 2, 2002, there were more than 1,000 holders of S&K common stock, including approximately 200 holders of record. The number of record holders does not reflect the number of beneficial owners of the Company's common stock for whom shares are held by Cede & Co., certain brokerage firms and others. The Company has not declared cash dividends and anticipates that for the foreseeable future it will continue to follow its present policy of retaining earnings in order to finance the expansion and development of its business. NOTES TO FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies: Principal Business S&K Famous Brands, Inc. (the Company) operates in one segment, the retail sale of menswear, including tailored clothing, furnishings, sportswear, shoes and accessories. The Company's fiscal year is the 52- or 53-week period, which ends on the Saturday closest to January 31. Fiscal year ended February 2, 2002 (fiscal 2002) was a 52-week period; February 3, 2001 (fiscal 2001) was a 53-week period and January 29, 2000 (fiscal 2000) was a 52-week period. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand and marketable securities with original maturities of 90 days or less. Merchandise Inventories Inventories are valued at the lower of average cost or market. Property and Equipment Property and equipment are stated at cost. Depreciation for financial reporting purposes is computed using both straight line and accelerated methods over the estimated service lives which are between 25 and 40 years for buildings and between three and seven years for fixtures and equipment. Leasehold improvements are generally amortized over an eight-year period. The Company annually evaluates long-lived assets for any impairment through the evaluation of the recoverability of its property and equipment based on the utilization of assets and expected cash flows. This evaluation has not resulted in adjustments to the Company's results of operations or financial position. Repair and maintenance expenditures are charged to expense as incurred. Upon retirement or sale of an asset, its cost and related accumulated depreciation are written off and any gain or loss is recognized. Other Assets Other assets consist primarily of receivables from certain officers under split dollar life insurance policies and cash surrender value related to various other life insurance policies aggregating $6.1 million and $5.5 million in fiscal 2002 and 2001, respectively. Revenue Recognition Net sales include sales of merchandise, net of returns and exclusive of sales taxes and shipping and handling revenues related to merchandise sold. Advertising Costs Advertising costs are expensed in the period in which the advertisement initially runs. Advertising expense of $12.9 million, $14.8 million and $13.1 million, respectively, was included in selling, general and administrative expenses in each of the last three fiscal years. Deferred advertising costs related to future programs included in the balance sheets were less than $100,000 in each year. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Earnings Per Share The computation of basic earnings per share is based on the weighted average number of common shares outstanding during each period. Diluted earnings per share include the dilutive effect of stock options. Options which were anti-dilutive of 118,000, 592,400 and 525,000 shares were not included in computing diluted earnings per share for fiscal 2002, 2001 and 2000, respectively. Accounting Pronouncements In 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards Nos. 141, 142, 143 and 144. Adoption of these statements is not expected to have a material impact on the Company's financial statements. In fiscal 2002, the Company adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 138. Adoption of this new standard did not have a material impact on the Company's financial statements. Note 2 - Merchandise Inventories: Inventories are costed using an average cost method, under which the Company tracks inventory costs for approximately 100 inventory categories which are used to classify its inventory. The Company's lower of cost or market inventory allowance approximated $225,000 and $215,000 for fiscal years 2002 and 2001, respectively. The Company capitalizes certain buying, holding and distribution costs to inventory, which at the end of the last two fiscal years were approximately $2.7 million and $2.8 million, respectively. Buying, holding and distribution costs charged to cost of sales in fiscal years 2002, 2001 and 2000 were approximately $4.2 million, $3.9 million and $3.8 million, respectively. Note 3 - Property and Equipment: Property and equipment consists of the following (in thousands):
February 2, February 3, 2002 2001 ------------------ ----------------- Land .............................................. $ 1,232 $ 1,232 Buildings ......................................... 5,375 5,368 Furniture, fixtures and equipment ................. 16,711 15,359 Leasehold improvements ............................ 17,142 16,789 ----------------- ---------------- 40,460 38,748 Less - accumulated depreciation and amortization .. 22,889 20,226 ----------------- ---------------- $ 17,571 $ 18,522 ================= ================
Depreciation and amortization expense of approximately $475,000, $414,000 and $423,000 was included in cost of sales for each of the last three fiscal years, respectively. Note 4 - Long-Term Debt: Long-term debt consists of (in thousands):
February 2, February 3, 2002 2001 ------------------- ---------------- Industrial Development Revenue Bond; $45 of principal plus interest at 65% of prime, due quarterly to January 1, 2010, secured by land and corporate headquarters ..................... $ 1,440 $ 1,620 Bank revolving lines of credit .................................... -- 7,610 ----------------- ---------------- 1,440 9,230 Less - current maturities ......................................... 180 180 ----------------- ---------------- $ 1,260 $ 9,050 ================= ================
The Company has available an aggregate of $40.0 million from two banks under its unsecured, long-term bank revolving lines of credit. At February 2, 2002, no amounts were outstanding. Interest is payable monthly at a rate equal to the lower of the 30-day Federal Funds Rate plus three quarters of one percent or the banks' prime interest rates. The Company's financing agreements contain certain restrictive covenants, none of which is presently significant to the Company. At the Company's option, any outstanding balance at May 31, 2003 is convertible to four-year term loans at the banks' prime interest rates and is payable in monthly or quarterly installments. At February 2, 2002, maturities of long-term debt, were $180,000 for each of the next five fiscal years. Note 5 - Profit Sharing and Other Benefit Programs: The Company maintains a noncontributory profit sharing plan for all employees who meet age and service requirements. Contributions to the plan are determined annually by the Board of Directors and were $50,000, $120,000 and $120,000 in each of the last three fiscal years, respectively. Additionally, the profit sharing plan includes a qualified salary reduction plan under Section 401(k) of the Internal Revenue Code. Eligible participants in the Company's 401(k) Plan can elect to invest 1% to 15% of their pre-tax earnings. The Company's contribution to the 401(k) Plan is at the discretion of the Board of Directors, who authorized contributions of the Company's common stock in the amount of $100,000, $80,000 and $80,000 in each of the last three fiscal years, respectively. These contributions are paid into the plan within 60 days of fiscal year end. Included in Other assets at the end of the last two fiscal years are receivables from certain officers (aggregating $3,307,000 and $3,146,000, respectively) which represent accumulated premiums paid on split dollar life insurance policies. Cash surrender values of the related policies ($3,253,000 and $2,855,000, respectively) are pledged as collateral for these receivables. Other long-term liabilities consist of unfunded deferred compensation agreements with certain officers which provide a fixed level of retirement benefits to be paid based on age and years of service. Deferred compensation expense is being accrued over the vesting period using a discount rate of 8% and approximated $127,000, $120,000 and $111,000, respectively, in each of the last three fiscal years. Note 6 - Stock Incentive and Stock Purchase Loan Plans: The Company's stock incentive plan provides for the granting of up to 900,000 common shares to key management employees. Options to purchase the Company's stock are granted at no less than the market value at the date of grant, are exercisable after one to five years and expire after eight to ten years. The Company applies the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, in accounting for its stock options. Accordingly, the Company has not recognized any related compensation expense in its Statements of Income. Changes in options under the plan for the three years ended February 2, 2002 were as follows:
Weighted Weighted Average Average Options Exercise Price Exercisable Exercise Price ------------ ------------------ --------------- ---------------- Outstanding - January 30, 1999 459,836 $ 10.48 341,613 $ 10.30 Granted ........................ 94,200 8.41 ------------ Outstanding - January 29, 2000 554,036 10.13 379,725 10.32 Granted ........................ 79,300 7.38 Exercised ...................... (4,000) 6.19 Surrendered .................... (11,900) 10.56 ------------ Outstanding - February 3, 2001 617,436 9.79 421,496 10.28 Exercised ...................... (30,000) 6.28 Surrendered .................... (73,100) 9.08 Expired ........................ (50,000) 21.75 ------------ Outstanding - February 2, 2002 464,336 8.84 336,976 8.93 ============
Additional information regarding stock options outstanding at February 2, 2002 follows:
Weighted Weighted Weighted Range of Average Average Average Exercise Outstanding Exercise Remaining Exercisable Exercise Prices Options Price Contractual Life Options Price ---------------------- -------------- ------------ ------------------ --------------- --------------- $7.38 - $7.69 ..... 135,000 $ 7.53 3.7 years 79,800 $ 7.63 $8.31 - $9.63 ..... 271,036 8.83 2.8 years 222,196 8.92 $11.94 ............ 58,300 11.94 4.6 years 34,980 11.94 -------------- -------------- $7.38 - $11.94 .... 464,336 336,976 ============== ==============
FAS No. 123 requires the Company to make certain proforma disclosures as if the fair value based method of accounting had been applied to its stock option grants. There were no options granted in fiscal 2002. The fair value of the options granted in prior years, was estimated at the date of grant using the Black - Scholes option pricing model with the following weighted average assumptions for fiscal 2001 and 2000, respectively: risk free interest rates of 5.7% and 5.8%; expected volatility of 36.9% and 35.9%; expected life of 5 in each year. This pricing model resulted in a fair value per option of $3.08 and $3.48, for fiscal 2001 and 2000, respectively. Had compensation cost been determined including the weighted average fair-value of options granted in fiscal years 2001, 2000 and 1999 (which all ratably vest over five years), the Company's proforma net income (and basic earnings per share) would be $3.3 million ($0.81) in fiscal 2002, $4.4 million ($1.01) in fiscal 2001 and $4.8 million ($1.01) in fiscal 2000. Proforma disclosures are not likely to be representative of the effect on net income in future periods. Under the Company's Stock Purchase Loan Plan, the Company has full recourse loans with seventeen officers approximating $2.4 million, gross of amounts accrued for principal forgiveness. Approximately $67,000 in loans originated during fiscal 2001 when 9,368 additional shares were purchased by Company officers. The Plan annually provides for reduction of a portion of interest payable on the loans based on meeting certain operating targets, as well as the opportunity for the officer to receive a reduction of a portion of the principal balance of the loan if the officer remains an employee of the Company for seven years and maintains ownership of the stock. Compensation expense related to this program was $92,000, $55,000 and $100,000 for the last three fiscal years, respectively. At the end of fiscal 2002 and 2001, the Company has accrued interest receivable from these officers in the amount of $334,600 and $281,000, respectively. Note 7 - Provision for Income Taxes: Significant components of the Company's deferred income tax liabilities (assets) are as follows (in thousands):
Fiscal Year Ended -------------------------------------------------- 2002 2001 2000 -------------- ------------- --------------- Deferred tax liabilities: Depreciation ................................... $ 2,262 $ 2,459 $ 2,347 Other items .................................... 218 234 290 -------------- ------------- --------------- Total deferred tax liabilities ........... 2,480 2,693 2,637 Deferred tax assets, primarily compensation related ........................................ (944) (871) (814) -------------- ------------- --------------- Net deferred tax liabilities ....................... $ 1,536 $ 1,822 $ 1,823 ============== ============= ===============
The provision for income taxes consists of (in thousands):
Fiscal Year Ended -------------------------------------------------- 2002 2001 2000 -------------- ------------- --------------- Current: Federal ..................................... $ 1,945 $ 2,225 $ 2,464 State ....................................... 416 553 545 -------------- ------------- --------------- 2,361 2,778 3,009 Deferred ........................................ (286) (1) (8) -------------- ------------- --------------- $ 2,075 $ 2,777 $ 3,001 ============== ============= ===============
The effective income tax rates consist of (in thousands):
Fiscal Year Ended ----------------------------------------------------- 2002 2001 2000 ---------------- -------------- -------------- Income taxes at federal statutory rate (34%) ........................ $ 1,857 $ 2,485 $ 2,686 State income taxes, net of federal benefit ...................... 275 365 360 Other - net ................................... (57) (73) (45) ---------------- -------------- -------------- $ 2,075 $ 2,777 $ 3,001 ================ ============== ============== Effective income tax rate ..................... 38.0% 38.0% 38.0% ================ ============== ==============
Note 8 - Commitments: The Company leases all of its stores under varying terms and arrangements, which generally provide renewal options and contingent rentals based on a percentage of gross sales. Total rent expense under the leases approximated $13.0 million, $13.4 million and $12.6 million in each of the last three years, respectively. The future minimum payments under operating leases as of the end of fiscal 2002 aggregate $41.7 million and are payable as follows: fiscal 2003 - $13.5 million, fiscal 2004 - $9.8 million, fiscal 2005 - $6.4 million, fiscal 2006 - $4.5 million and fiscal 2007 - $2.6 million and $4.9 million thereafter. The Company leases a property from an immediate family member of an officer of the Company, who is also a shareholder. Rent expense included approximately $147,000, $144,000 and $141,000 in fiscal 2002, 2001 and 2000, respectively, paid to this party. The Company is also obligated under this lease agreement to pay minimum rentals approximating $150,000 through fiscal 2004. Additionally, prior to January 2001, the Company had leased a property from an officer of the Company, who is also a shareholder and incurred rent expense of approximately $49,000 and $47,000 for fiscal 2001 and 2000, respectively. At the end of fiscal 2002, the Company had one outstanding Letter of Credit approximately $800,000. Note 9 - Nonrecurring Items: During fiscal 2002, other income, net, included $525,000 ($325,000 after tax or $.08 per diluted share) related to income from an insurance claim. Gross proceeds from this insurance claim were approximately $868,000 and covered the $343,000 loss of inventory. During fiscal 2000, other income, net, included $665,000 ($412,000 after tax or $.09 per diluted share) related to a gain on the sale of real estate. Note 10 - Subsequent Event: On March 27, 2002, the Company announced a tender offer to purchase up to approximately 1.8 million shares of its common stock at $11.00 per share, commencing March 28, 2002 and scheduled to expire on April 26, 2002. The Company will finance the tender offer through available cash and a new credit facility with an aggregate of $46.0 million available from two banks. The facilities will be collateralized by liens on the Company's inventory and the Company's headquarters property and adjacent store. Amounts outstanding under the facilities will bear interest at a variable rate based on LIBOR. The facilities will mature in 2007, with monthly principal payments on the term loan beginning one month after the initial drawdown and principal reductions on the line of credit loan beginning in 2003. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of S&K Famous Brands, Inc. In our opinion, the accompanying balance sheets and the related statements of income, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of S&K Famous Brands, Inc. (the "Company") at February 2, 2002 and February 3, 2001, and the results of its operations and its cash flows for each of the three fiscal years in the period ended February 2, 2002, in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Richmond, Virginia March 15, 2002, except for Note 10, as to which the date is March 27, 2002