UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended February 1, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 0-20052
STEIN MART, INC.
(Exact name of registrant as specified in its charter)
Florida 64-0466198
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1200 Riverplace Blvd., Jacksonville, Florida 32207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 346-1500
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class: Name of each exchange on which registered:
Common Stock $.01 par value The Nasdaq Stock Market(R)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Aggregate market value of voting stock held by non-affiliates of the registrant,
Common Stock, based on the $5.15 closing sale price on April 1, 2003 was
$130,663,611. For purposes of this response, executive officers and directors
are deemed to be the affiliates of the registrant and the holdings by
non-affiliates was computed as 25,371,575 shares. At April 1, 2003, the
Registrant had issued and outstanding an aggregate of 41,568,678 shares of its
common stock.
Documents Incorporated By Reference:
Portions of the Registrant's Proxy Statement for its 2003 Annual Meeting are
incorporated in Part III.
STEIN MART, INC.
TABLE OF CONTENTS
FORM
10-K
REPORT
ITEM NO. PAGE
- -------- ----
PART I
1. Business 3
2. Properties 9
3. Legal Proceedings 10
4. Submission of Matters to a Vote of Security Holders 10
PART II
5. Market for Registrant's Common Equity and Related Stockholder 11
Matters
6. Selected Financial Data 12
7. Management's Discussion and Analysis of Financial Condition 13
and Results of Operations
7A. Quantitative and Qualitative Disclosures about Market Risk 18
8. Financial Statements and Supplementary Data 18
9. Changes In and Disagreements With Accountants on Accounting 18
and Financial Disclosure
PART III
10. Directors and Executive Officers of the Registrant 18
11. Executive Compensation 18
12. Security Ownership of Certain Beneficial Owners and Management 18
13. Certain Relationships and Related Transactions 18
PART IV
14. Disclosure Controls and Procedures 18
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 19
SIGNATURES 20
CERTIFICATIONS 21
TABLE OF CONTENTS TO FINANCIAL STATEMENTS AND SCHEDULES
Report of Independent Certified Public Accountants F-1
Balance Sheets F-2
Statements of Income F-3
Statements of Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6
SCHEDULES NONE
INDEX TO EXHIBITS E-1
2
PART I
ITEM 1. BUSINESS
At February 1, 2003, Stein Mart, Inc. (together with its wholly owned
subsidiary, the "Company" or "Stein Mart") operated a 265-store retail chain
offering fashionable, current-season, primarily branded merchandise comparable
in quality and presentation to that of better department and specialty stores at
prices typically 25% to 60% below those regularly charged by such stores. The
Company's focused assortment of merchandise features moderate to designer
brand-name apparel for women, men and children, as well as accessories, gifts,
linens, shoes and fragrances. Stein Mart operated a single store in Greenville,
Mississippi from the early 1900's until 1977, when it began its expansion
program. The Company has more than doubled the number of Stein Mart stores over
the past six years to 265 in 29 states at February 1, 2003. The Company's
stores, which average approximately 37,000 gross square feet, are located
primarily in neighborhood shopping centers in metropolitan areas.
Change in Fiscal Year End
In November 2001, the Company changed its fiscal year end from the Saturday
closest to December 31 to the Saturday closest to January 31. The five-week
transition period of December 31, 2000 through February 3, 2001 (the "Transition
Period") preceded the start of the 2001 fiscal year. Results for 2002, 2001 and
2000 are for the 52 weeks ended February 1, 2003, February 2, 2002 and December
30, 2000, respectively.
Business Strategy
The Company's business strategy is to (i) maintain the quality of merchandise,
store appearance, merchandise presentation and customer service levels typical
of better department and specialty stores and (ii) offer value pricing to its
customers through its vendor relationships, tight control over corporate and
store expenses and efficient management of inventory. The principal elements of
the Company's business strategy are as follows:
Timely, Consistent, Upscale Merchandise.
The Company purchases upscale, branded merchandise primarily through
preplanned buying programs similar to those used by department stores. These
preplanned buying programs enable the Company to offer fashionable,
current-season assortments on a consistent basis.
Appealing Store Location, Appearance and Merchandise Presentation.
The Company locates its stores in close proximity to the better residential
neighborhoods of a given community. Stein Mart stores are usually found in
strip centers with other retailers who cater to upscale customers with above
average household income and education. Within the store, attractive
displays and signage create an upscale ambiance. Merchandise is displayed in
lifestyle groupings to encourage multiple purchases.
Emphasis on Customer Service.
Customer service is fundamental to Stein Mart's objective of building
customer loyalty. Management believes that the Company offers customer
service superior to off-price retailers and comparable to better department
stores.
Value Pricing through Vendor Relationships.
Stein Mart has longstanding relationships with many key vendors. Management
believes that the Company's purchase terms enable it to negotiate more
favorable prices from vendors than are typical in the department store
industry. Stein Mart passes these savings on to its customers through prices
that are typically 25% to 60% below those regularly charged by better
department stores.
Efficient Inventory Handling.
Stein Mart does not rely on a large distribution center or warehousing
facility. Rather, it primarily utilizes drop shipments from its vendors
directly to its stores. Most merchandise is received pre-ticketed and on
hangers ("floor ready"). This system enables the Company to receive
merchandise at each store on a timely basis and to save the time and expense
of handling merchandise twice, which is typical of a traditional
distribution center structure.
3
Productivity Initiatives
In 2002, Stein Mart began a series of productivity initiatives designed to
increase the dollars generated in each square foot of the stores, with a goal of
leveraging its expenses more efficiently and moving more profit dollars to the
bottom line. These initiatives include:
All stores were reformatted to allocate greater space and more inventory
dollars to areas where the core customer shops most intensely, e.g. ladies
apparel and Boutique, ladies' accessories and gifts. Square footage in the
men's and children's areas was reduced and merchandise in those areas was
more highly concentrated to key categories. In 2003, space re-allocation
will continue in Ladies' Accessories, Children's and Gifts, where Home Decor
will be added in all stores.
A smaller store was tested with the opening of the first collections of
Stein Mart in Rolling Hills, California in October 2002. This sub-15,000
square foot format is designed to allow the Company to enter resort and
premium markets where a full-sized Stein Mart may not be feasible. Two more
collections of Stein Mart stores will open in 2003 as the Company seeks to
further validate this prototype format.
Store Expansion and Closing Strategies
The Company revised its approach to selecting locations for new stores effective
with stores opening in 2002. Prior to that time, the Company's principal
consideration was population demographics, including data relating to income,
education levels, age and occupation. The availability of prime real estate
locations, existing and potential competitors, and the number of Stein Mart
stores that a market can support was also considered. The Company has since
expanded its analysis to consider psychographics (such as fashion consciousness
in the marketplace) as well as local area market research. The Company has also
retained a third-party consulting firm to analyze each potential market.
Finally, a committee of senior officers considers the collected data and
analysis, and approves any potential new store location. Using this new
approach, the Company plans to open 14 new stores in 2003. While it is too early
to provide assurances, the Company's initial results suggest that this new
approach will significantly improve the Company's ability to successfully
predict performance of new store locations.
As a result of processing less than 10% of its merchandise through its
distribution center, the Company is not constrained geographically or by the
capacity limits of a central facility. The Company refurbishes existing retail
locations or occupies newly constructed stores, which typically are anchor
stores in new or existing shopping centers situated near upscale residential
areas, ideally with co-tenants that cater to a similar customer base. The
Company's historical ability to negotiate favorable leases and to construct
attractive stores with a relatively low investment has provided a significant
cost advantage over traditional department and fine specialty stores. The cost
of opening a typical new store includes approximately $450,000 to $650,000 for
fixtures, equipment, leasehold improvements and pre-opening expenses (primarily
advertising, stocking and training). Pre-opening costs are expensed when
incurred. Initial inventory investment for a new store is approximately $1.1
million (a portion of which is financed through vendor credit).
The Company regularly reviews under-performing stores and implements strategies
designed to improve their performance. In Spring 2003, following more than two
years of retail economic weakness, it was determined that a group of these
under-performing stores would be unlikely to achieve profitability despite the
Company's concerted efforts to stimulate sales. In order to improve the quality
of the Company's portfolio of stores, management decided in April to close 13
stores in addition to the three already planned for closure in 2003 (see Notes
10 and 14 to the Financial Statements). All of these store locations were
selected using prior store expansion techniques. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," the estimated pretax charges that
will be recorded in 2003 are approximately $19 million to recognize the present
value of store closing costs. In addition, approximately $10 million in
markdowns will be required to liquidate inventory in those stores.
4
Merchandising
Stein Mart's focused assortment of merchandise features moderate to designer
brand-name apparel for women, men and children, as well as accessories, gifts,
linens, shoes and fragrances. Branded merchandise is complemented by a limited
private label program that enhances the Company's assortment of current fashion
trends and provides key upper-end classifications in complete size ranges.
Management believes that Stein Mart differentiates itself from typical off-price
retailers by offering: (i) primarily current-season merchandise carried by
better department and specialty stores at moderate to better price levels, (ii)
a stronger merchandising "statement," consistently offering more depth of color
and size in individual stock-keeping units, and (iii) a merchandise presentation
more comparable to other upscale retailers. Within each major merchandise
category, the Company seeks to offer a focused assortment of the best-selling
fashion merchandise. Stein Mart's merchandise selection is driven primarily by
its own merchandising plans which are based on management's assessment of
fashion trends, color, and market conditions. This strategy distinguishes Stein
Mart from traditional off-price retailers who achieve cost savings by responding
to unplanned buying opportunities. The Company's merchandise is typically priced
at levels 25% to 60% below prices regularly charged by better department and
specialty stores, therefore offering distinct value to the Stein Mart customer.
The following reflects the percentage of the Company's sales by major
merchandise category (including sales from leased shoe and fragrance
departments) for the periods indicated:
For The 52 Weeks Ended
----------------------------------------------
February 1, February 2, December 30,
2003 2002 2000
------------- ------------- --------------
Ladies' and Boutique apparel 38% 40% 38%
Ladies' accessories 12 10 11
Men's 17 17 18
Gifts and linens 20 19 19
Leased departments 6 7 7
Children's 5 5 5
Other 2 2 2
------ ------ ------
100% 100% 100%
====== ====== ======
Ladies' apparel, the Company's largest contributor of revenues, comprises
dresses, sportswear, petites, and women's sizes at moderate to upper-moderate
prices. Stein Mart's Boutique is a key element of the Company's merchandising
strategy to attract the more fashion-conscious customers. The Boutique, a
store-within-a-store department, carries better to designer ladies' apparel and
offers the presentation and service levels of a specialty boutique. Each Stein
Mart store has its own Boutique, staffed generally by women employed on a
part-time basis who are civically and socially prominent in the community. The
Boutique highlights the Company's strategy of offering upscale merchandise,
presentation and service levels at value prices.
The Company's typical store layout emphasizes ladies' accessories as the fashion
focus at the front of each store. The key merchandise in this department is
fashion-oriented, brand-name, designer and private label jewelry, as well as
handbags, scarves, hosiery, eyewear, bath products and fragrances.
The Men's area includes sportswear, sportcoats, slacks and dress furnishings.
Even with the reduction in space in 2002, this business maintained its same
percentage of total sales due to merchants putting sharper, more focused fashion
in this area and increasing the amount of replenishable programs.
5
Stein Mart's gifts and linens departments consist primarily of a broad
assortment of fashion-oriented gifts (rather than basic items) for the home and
a wide range of table, bath and bed linens. The presentation in this signature
department emphasizes fashion, lifestyle and seasonal themes. Both gifts and
linens continued to perform well in 2002 as indicated by a slight increase in
its percentage of total sales. Luxury linens and decorative gifts were the
leaders in this area. The strength of this category has been the consistent
presentation with a higher percentage mix of better goods and a coordination of
trends between gifts and linens.
Stein Mart's children's department offers a range of apparel for infants and
children and features an infants' gift boutique. In 2003, Stein Mart will
further edit the children's department to concentrate on apparel for infants and
pre-school age children only.
The Company's shoe department is a leased department operated in individual
stores by one of two shoe retailers. The merchandise in this department is
presented in a manner consistent with the Company's overall presentation in
other departments, stressing fashionable, current-season footwear at value
prices. This department offers a variety of men's and women's casual and dress
shoes, which complement the range of apparel available in other departments.
Shoe department leases provide for the Company to be paid base rent and/or a
percentage of sales. In 2002, a new shoe lessee, whose offerings more closely
mirror the Stein Mart apparel assortment, was chosen for approximately 60% of
Stein Mart stores.
Historically, the Company has leased its fragrance department to a third-party
operator. The operating agreement required the third-party operator to pay the
Company the greater of an annual base amount or a percentage of sales. As of
March 2003, the Company owns and operates the fragrance department.
Store Appearance
Stein Mart's stores are designed to reflect an upscale ambiance and appearance
through attractive layout, displays and in-store signage. The typical store is
approximately 37,000 gross square feet with convenient check-out and customer
service areas and attractive, individual dressing rooms. The Company seeks to
create excitement in its stores through the continual flow of brand-name
merchandise, sales promotions, store layout, merchandise presentation, and the
quality, value and depth of its merchandise assortment.
The Company displays merchandise in lifestyle groupings of apparel and
accessories. Management believes that the lifestyle grouping concept strengthens
the fashion image of its merchandise and enables the customer to locate desired
merchandise in a manner that encourages multiple purchases.
Customer Service
Customer service is fundamental to Stein Mart's objective of building customer
loyalty. The Company's stores offer most of the same services typically found in
better department and specialty stores such as a liberal merchandise return
policy. Each store is staffed to provide a number of sales associates to
properly attend to customer needs.
The Company's training programs for sales associates and cashiers emphasize
attentiveness and courtesy. The Company reinforces its training programs by
employing independent shopping services to monitor associates' success in
implementing the principles taught in training. Associates who are highly rated
by the shopping service receive both formal recognition and cash awards.
Management believes this program emphasizes the importance of customer service
necessary to create customer loyalty. In 2003, the Company is introducing a new
customer service initiative to its employees, which is designed to improve sales
and reduce employee turnover.
Vendor Relationships and Buying
Stein Mart buys from approximately 1,800 vendors. Many of these are considered
key vendors, with whom the Company enjoys longstanding working relationships
that create a continuity of preplanned buying opportunities for upscale,
current-season merchandise. Purchases are from vendors who manufacture
merchandise in the United States
6
and overseas to ensure the best value for its customers. Stein Mart is always
looking for new products and vendors to keep the merchandise assortment fresh.
The Company does not have long-term or exclusive contracts with any particular
vendor. In 2002, approximately 8% of Stein Mart's purchases were from a single
vendor and less than 2% of total purchases were from any other single vendor.
The Company's buying staff is headed by the Vice Chairman, Chief Merchandising
Officer, who is supported by four Vice Presidents-General Merchandising
Managers, nine Divisional Merchandising Managers, a Vice President-Planning,
four Divisional Planning Managers, 36 buyers and 34 planners. In addition to
base salary, the merchandising staff receives incentive compensation for
achieving certain sales, margin and turnover goals within their areas of
responsibility.
The Company employs several purchasing strategies to provide its customers with
a consistent selection of quality, fashionable merchandise at value prices: (i)
Stein Mart commits to its purchases from vendors well in advance of the selling
season, in the same manner as department stores, unlike typical off-price
retailers who rely heavily on buys of close-out merchandise or overruns; (ii)
the Company purchases some in-season off-price and end-of-season close-out
merchandise to supplement core merchandise assortments; (iii) the Company's
information systems enable it to acquire merchandise and track sales information
on a store-by-store basis, allowing its buying staff to respond quickly to
customer buying trends; (iv) key predictable items are replenished bi-weekly or
monthly; and (v) an in-house merchandise development department works with
buyers and brand-name vendors to ensure that the merchandise assortments offered
are unique, fashionable, color-forward and of high quality.
The correct distribution of merchandise goes hand in hand with choosing the
right items. The planning organization has greatly improved the selectivity of
merchandise by store, allowing for more targeted seasonal, lifestyle and volume
characteristics in each location. As the Company continues to analyze sales,
profitability and marketing information, the planners continue to refine the
assortments. In 2002, the Company instituted a sophisticated basic stock
replenishment program that is improving the Company's ability to be in-stock
every day in every store, at a level that minimizes the inventory investment.
Information Systems
The Company's information systems provide daily financial and merchandising
information that is used by management to make timely and effective purchasing
and pricing decisions and for inventory control.
The Company's inventory control system enables it to achieve economies of scale
from bulk purchases while at the same time ordering and tracking separate drop
shipments by store. Store inventory levels are regularly monitored and adjusted
as sales trends dictate. The inventory control system provides information that
enhances management's ability to make informed buying decisions and accommodate
unexpected increases or decreases in demand for a particular item. The Company
uses bar codes and bar code scanners as part of an integrated inventory
management and check-out system in its stores.
The Company's merchandise planning and allocation system enables the buyers and
planners to customize their merchandise assortments at the individual store and
department level, based on selected criteria, such as a store's selling
patterns, geography and merchandise color preferences. The ability to customize
individual store assortments enables the Company to more effectively manage
inventory, capitalize on sales trends and reduce markdowns.
A computerized merchandise replenishment system addresses the unique
requirements of store-level replenishment, allowing management to get the right
items to the stores at the right time. This system responds to market demands
quickly, efficiently and accurately, allowing merchandisers to focus on other
profit oriented tasks.
Store Operations
The store organization is supervised by three Vice Presidents-Regional Directors
of Stores who report to the Senior Vice President-Director of Stores. District
Directors of Stores and two Vice President-Regional Directors of Stores
7
report to the three supervising Regional Directors. Each of these field
supervisors is responsible for overseeing 9 to 13 stores. Each Vice President's
and District Director's compensation includes an incentive component based on
overall performance. Each Stein Mart store is managed by a general manager who
reports directly to a Vice President or a District Director. Store general
managers are responsible for individual store operations, including hiring,
motivating and supervising sales associates; receiving and effectively
presenting merchandise; and implementing price change determinations made by the
Company's buying staff. Store general managers receive incentive compensation
based upon operating results in several key areas, including increases in store
sales. In addition to the store general manager and two assistant store
managers, each Stein Mart store employs an average of 55 persons as area
managers, sales associates, cashiers and in other positions.
Stein Mart stores are generally open 11 hours per day, 6 days a week, and on
Sunday afternoons. The store hours are extended during the Christmas selling
season.
Marketing
The Company's advertising strategy stresses the offering of upscale, branded
merchandise at significant savings. The Company allocates the majority of its
advertising budget to color inserts distributed by newspaper circulation and
direct mail. Newspaper advertising, radio and direct mail are also utilized.
Stein Mart's per-store advertising expense is reduced by spreading its
advertising over multiple stores in a single market. Management believes the
Company also enjoys substantial word-of-mouth advertising benefits from its
customer base.
Stein Mart's Preferred Customer program, launched in May 2001 to recognize and
reward the Company's most devoted shoppers, now has over 1.5 million active
members. Preferred Customers receive regular mailings promoting key events,
members-only shopping days and special discounts exclusive to these individuals.
These mailings will become more specialized to recognize a customer's shopping
preferences.
In 2002, the Company conducted a major consumer research project designed to
validate an earlier project that identified ideal Stein Mart customers, their
shopping preferences and the optimal marketing approaches to reach them.
Additionally, the 2002 research sought to define the key demographic and
psychographic attributes of the Company's best customers and determine how best
to find new customers with those same attributes.
Competition
Management believes that the Company occupies a market niche closer to better
department and specialty stores than typical off-price retail chains. The
Company faces competition for customers and for access to quality merchandise
from better department stores, fine specialty stores and, to a lesser degree,
from off-price retail chains. Many of these competitors are units of large
national or regional chains that have substantially greater resources than the
Company. The retail apparel industry is highly fragmented and competitive, and
the off-price retail business may become even more competitive in the future.
The principal competitive factors in the retail apparel industry are assortment,
presentation, quality of merchandise, price, customer service, vendor relations
and store location. Management believes that the Company is well-positioned to
compete on the basis of each of these factors.
Employees
At February 1, 2003, the Company's work force consisted of approximately 15,000
employees (8,600 40-hour equivalent employees). The number of employees
fluctuates based on the particular selling season.
8
Trademarks
The Company owns the federally registered trademark Stein Mart(R), together with
a number of other marks used in conjunction with its private label merchandise
program. Stein Mart primarily sells branded merchandise. However, in certain
classifications of merchandise, the Company uses several private label programs
to provide additional availability of items. Management believes that its
trademarks are important but, with the exception of Stein Mart(R), not critical
to the Company's merchandising strategy.
ITEM 2. PROPERTIES
At February 1, 2003, the Company operated stores in the following states:
State Number of Stores
----- ----------------
Alabama 12
Arizona 6
Arkansas 5
California 17
Colorado 5
Florida 35
Georgia 19
Illinois 5
Indiana 9
Iowa 1
Kansas 1
Kentucky 3
Louisiana 10
Michigan 1
Mississippi 4
Missouri 3
Nevada 4
New Mexico 2
New York 2
North Carolina 17
Ohio 11
Oklahoma 5
Pennsylvania 2
South Carolina 12
Tennessee 14
Texas 44
Utah 3
Virginia 10
Wisconsin 3
---
265
===
The Company leases all of its store locations and therefore has been able to
grow without incurring indebtedness to acquire real estate. Management believes
that the Company has earned a reputation as an "anchor tenant," which, along
with its established operating history, has enabled it to negotiate favorable
lease terms. Most of the leases provide for minimum rents, as well as percentage
rents that are based on sales in excess of predetermined levels.
9
The table below reflects (i) the number of the Company's leases (as of February
1, 2003) that will expire each year if the Company does not exercise any of its
renewal options, and (ii) the number of the Company's leases that will expire
each year if the Company exercises all of its renewal options (assuming the
lease is not otherwise terminated by either party pursuant to any other
provision).
Number of Leases Number of Leases
Expiring Each Year Expiring Each Year
if no Renewals if all Renewals
Exercised Exercised
---------------------- ----------------------
2003 7 -
2004 19 2
2005 24 -
2006 26 1
2007 23 1
2008-2012 130 22
2013-2017 36 23
2018-2046 - 216
The Company has made consistent capital commitments to maintain and improve
existing store facilities. During 2002, approximately $6.2 million was spent for
fixtures, equipment and leasehold improvements in stores opened prior to 2002.
The Company leases approximately 73,000 gross square feet of office space for
its corporate headquarters in Jacksonville, Florida. The Company also leases a
92,000 square foot distribution center in Jacksonville for the purpose of
processing a limited amount of merchandise purchases (less than 10% of total
purchases).
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various routine legal proceedings incidental to the
conduct of its business. Management does not believe that any of these legal
proceedings will have a material adverse effect on the financial condition or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal 2002.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low sales prices of the Common Stock
for each fiscal quarter in fiscal 2002 and 2001:
HIGH LOW
Fiscal 2002:
May 4, 2002 $12.12 $8.74
August 3, 2002 12.32 6.89
November 2, 2002 8.75 5.37
February 1, 2003 7.85 5.20
Fiscal 2001:
May 5, 2001 $12.31 $8.69
August 4, 2001 12.47 7.85
November 3, 2001 9.08 6.12
February 2, 2002 9.20 7.96
Stein Mart's common stock trades on The Nasdaq Stock Market(R) under the trading
symbol SMRT. On April 11, 2003, there were 1,135 stockholders of record.
The Company intends to reinvest future earnings in the business and accordingly
does not anticipate paying dividends in the foreseeable future.
11
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in Thousands Except Per Share Amounts and Operating Data)
For the Fiscal Year Ended
----------------------------------------------------------------------------
Feb. 1, Feb. 2, Dec. 30, Jan. 1, Jan. 2,
2003 2002 (1) 2000 2000 1999
------------ ------------ ------------ ------------ ------------
Statement of Income Data:
Net Sales $1,408,648 $1,320,190 $1,206,624 $1,034,561 $897,821
Cost of Merchandise Sold 1,060,117 1,003,567 896,560 781,038 677,334
------------ ------------ ------------ ------------ ------------
Gross Profit 348,531 316,623 310,064 253,523 220,487
Selling, General and Administrative Expenses (2) 326,509 301,937 257,042 244,100 195,460
Other Income, Net 13,953 14,078 13,766 12,129 10,420
------------ ------------ ------------ ------------ ------------
Income From Operations 35,975 28,764 66,788 21,552 35,447
Interest Expense 2,604 4,000 3,309 2,485 2,368
------------ ------------ ------------ ------------ ------------
Income Before Income Taxes 33,371 24,764 63,479 19,067 33,079
Provision For Income Taxes 12,681 9,410 24,122 7,245 12,570
------------ ------------ ------------ ------------ ------------
Net Income $ 20,690 $ 15,354 $ 39,357 $ 11,822 $ 20,509
============ ============ ============ ============ ============
Earnings Per Share - Basic (3) $0.50 $0.37 $0.92 $0.26 $0.45
Earnings Per Share - Diluted (3) $0.50 $0.37 $0.91 $0.26 $0.44
Selected Operating Data:
Stores Open at End of Period 265 253 226 205 182
Average Sales Per Store (000's) (4) $ 5,741 $ 5,922 $ 6,068 $ 5,663 $ 5,958
Average Sales Per Square Foot of Selling Area (5) $ 184 $ 189 $ 192 $ 176 $ 185
Comparable Store Net Sales (Decrease) Increase (6) (0.8%) (0.7%) 9.7% 2.3% 1.2%
Balance Sheet Data:
Working Capital $ 145,787 $ 179,212 $ 120,602 $ 117,284 $110,985
Total Assets 410,217 417,672 389,989 354,094 318,012
Long-term Debt (7) - 57,750 - - -
Total Stockholders' Equity 223,307 201,895 194,028 179,912 177,979
(1) Beginning with fiscal 2001, the Company changed to a 52-53 week year ending
on the Saturday closest to January 31; previously, the Company's fiscal
year ended on the Saturday closest to December 31. See Note 12 to the
Financial Statements for financial data for the five-week Transition Period
ended February 3, 2001.
(2) Selling, General and Administrative Expenses include store closing/asset
impairment charges of $2.7 million in 2002; $2.9 million in 2001; and $15.9
million in 1999. A $3.4 million credit related to store closings was
recorded in 2000.
(3) Basic and Diluted Earnings Per Share are presented for all periods in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share."
(4) Average sales per store (including sales from leased shoe and fragrance
departments) for each period have been calculated by dividing (a) total
sales during such period by (b) the number of stores open at the end of
such period, in each case exclusive of stores open for less than 12 months.
All periods are calculated on a 52-week basis.
(5) Includes sales and selling space of the leased shoe and fragrance
departments. Selling area excludes administrative, receiving and storage
areas. All periods are calculated on a 52-week basis.
(6) Comparable store information for a period reflects stores open throughout
that period and for the same 52-week period in the prior year.
(7) Notes payable to banks of $41,350 at February 1, 2003 is classified as
current (see Note 4 to the Financial Statements).
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This document includes a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
Wherever used, the words "plan", "expect", "anticipate", "believe", "estimate"
and similar expressions identify forward-looking statements.
All such forward-looking statements contained in this document are subject to
risks and uncertainties that could cause the Company's actual results of
operations to differ materially from historical results or current expectations.
These risks include, without limitation, ongoing competition from other
retailers many of whom are larger and have greater financial and marketing
resources, the availability of suitable new store sites at acceptable lease
terms, ability to successfully implement strategy to exit or improve
under-performing stores, changes in store closings, changing preferences in
apparel, changes in the level of consumer spending due to current events and/or
general economic conditions, adequate sources of designer and brand-name
merchandise at acceptable prices, and the Company's ability to attract and
retain qualified employees to support planned growth.
The Company does not undertake to publicly update or revise its forward-looking
statements even if experience or future changes make clear that any projected
results expressed or implied therein will not be realized.
The following should be read in conjunction with the "Selected Financial Data"
and the notes thereto and the Financial Statements and notes thereto of the
Company.
Results of Operations
The following table sets forth, for the periods indicated, the percentage of the
Company's net sales represented by each line item presented:
52 Weeks Ended
------------------------------------
Feb. 1, Feb. 2, Dec. 30,
2003 2002 2000
---------- ---------- ----------
Net sales 100.0% 100.0% 100.0%
Cost of merchandise sold 75.3 76.0 74.3
---------- ---------- ----------
Gross profit 24.7 24.0 25.7
Selling, general and administrative expenses 23.1 22.9 21.3
Other income, net 1.0 1.1 1.2
---------- ---------- ----------
Income from operations 2.6 2.2 5.6
Interest expense 0.2 0.3 0.3
---------- ---------- ----------
Income before income taxes 2.4% 1.9% 5.3%
========== ========== ==========
2003 Store Closings
The Company regularly reviews under-performing stores and implements strategies
designed to improve their performance. In Spring 2003, following more than two
years of retail economic weakness, it was determined that a group of these
under-performing stores would be unlikely to achieve profitability despite the
Company's concerted efforts to stimulate sales. In order to improve the quality
of the Company's portfolio of stores, management decided in April to close 13
stores in addition to the three already planned for closure in 2003 (see Notes
10 and 14 to the Financial Statements). In accordance with SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities," the
estimated pretax charges that will be recorded in 2003 are approximately $19
million to recognize the present value of store closing costs. In addition,
approximately $10 million in markdowns will be required to liquidate inventory
in those stores.
Year Ended February 1, 2003 Compared to Year Ended February 2, 2002
In 2002 the Company opened 16 stores and closed four stores bringing to 265 the
number of stores in operation at year-end. The Company revised its approach to
selecting locations for new stores effective with stores opening in
13
2002. Prior to that time, the Company's principal consideration was population
demographics, including data relating to income, education levels, age and
occupation. The availability of prime real estate locations, existing and
potential competitors, and the number of Stein Mart stores that a market can
support was also considered. The Company has since expanded its analysis to
consider psychographics (such as fashion consciousness in the marketplace) as
well as local area market research. The Company has also retained a third-party
consulting firm to analyze each potential market. Finally, a committee of senior
officers considers the collected data and analysis, and approves any potential
new store location. While it is too early to provide assurances, the Company's
initial results suggest that this new approach will significantly improve the
Company's ability to successfully predict performance of new store locations.
Net sales of $1.409 billion were achieved for the fiscal year 2002, an increase
of $88.5 million, or 6.7 percent over net sales of $1.320 billion for the fiscal
year 2001. The 16 new stores opened in 2002 contributed $56.5 million to net
sales. Comparable store net sales decreased 0.8 percent from 2001.
Gross profit for 2002 was $348.5 million or 24.7 percent of net sales compared
to $316.6 million or 24.0 percent of net sales for 2001. The 0.7 percent
increase in the gross profit percent primarily resulted from inventory control
initiatives which resulted in lower markdowns, somewhat offset by higher
occupancy costs as a percent of sales.
Selling, general and administrative expenses were $326.5 million or 23.1 percent
of net sales for 2002, as compared to $301.9 million or 22.9 percent of net
sales in 2001. The 0.2 percent increase was primarily due to a lack of sales
leverage slightly offset by lower pre-opening costs. Selling, general and
administrative expenses include a pre-tax asset impairment charge of $2.7
million in 2002. As described in Note 10 to the Financial Statements, this
charge reduces the carrying value of property and equipment of three stores that
will close in 2003 and fifteen other under-performing stores to their respective
estimated fair value. In 2001, selling, general and administrative expenses
included a pre-tax charge of $2.9 million, including $2.2 million for lease
termination costs and $0.7 million for asset impairments, for four stores that
were closed in fiscal 2002.
Pre-opening expenses for the 16 stores opened in 2002 amounted to $3.1 million
and for the 30 stores opened in 2001, amounted to $5.0 million.
Other income, primarily from in-store leased shoe departments, was $14.0 million
in 2002, a slight decrease from the $14.1 million for 2001. In 2002, a new shoe
lessee, whose offerings more closely mirror the Stein Mart apparel assortment,
was chosen for approximately 60% of the stores. During the period preceding the
turnover date, a decrease in shoe sales of the predecessor shoe lessee resulted
in lower sublease income.
Interest expense for 2002 was $2.6 million, compared to $4.0 million in 2001.
The decrease resulted from lower average borrowings as a result of decreased
inventory levels on a per store basis, as well as lower interest rates this year
compared to last year.
Net income for 2002 was $20.7 million or $0.50 per diluted share compared to net
income of $15.4 million or $0.37 per diluted share for 2001.
Year Ended February 2, 2002 Compared to Year Ended December 30, 2000
In November 2001, the Company changed its year end (see Note 1 to the Financial
Statements). The following discussion compares the 52 weeks ended February 2,
2002 to the 52 weeks ended December 30, 2000.
In 2001 the Company opened 30 stores and closed three stores bringing to 253 the
number of stores in operation at year-end.
Net sales of $1.320 billion were achieved for the fiscal year 2001, an increase
of $113.6 million, or 9.4 percent over net sales of $1.207 billion for the
fiscal year 2000. The 30 new stores opened in 2001 contributed $74.3 million to
net sales. Comparable store net sales, which decreased 0.7 percent from 2000,
began to decline in early 2001,
14
reversing strong, double digit increases from 2000. This trend continued in the
fall season as shopping declined following the September 11 terrorist attacks.
Gross profit for 2001 was $316.6 million or 24.0 percent of net sales compared
to $310.1 million or 25.7 percent of net sales for 2000. The 1.7 percent
decrease in the gross profit percent resulted primarily from higher markdowns as
a percent of sales and decreased leverage of occupancy expenses in 2001.
Markdowns were particularly high during the fall season, primarily in the weeks
following September 11, in order to reduce in-store inventories through
promotion and markdowns.
Selling, general and administrative expenses were $301.9 million or 22.9 percent
of net sales for 2001, as compared to $257.0 million or 21.3 percent of net
sales in 2000. In 2001, selling, general and administrative expenses included a
pre-tax charge of $2.9 million for four stores that were closed in fiscal 2002.
Fiscal 2000 includes a $3.4 million store closing credit related to adjustments
of store closing reserves recorded in fiscal 1999. The increase of 1.6 percent
of net sales is primarily due to the effect of the store closing charge and
credit, increased advertising and decreased leverage of selling and
administrative expenses.
Pre-opening expenses for the 30 stores opened in 2001 amounted to $5.0 million
and for the 22 stores opened in 2000, amounted to $3.4 million.
Other income, primarily from in-store leased shoe departments, was $14.1 million
in 2001, a slight increase over the $13.8 million for 2000. The increase was
primarily from the additional stores operated during 2001.
Interest expense for 2001 was $4.0 million, compared to $3.3 million in 2000.
The increase resulted from higher average borrowings offset by lower interest
rates during 2001 compared to 2000. The increased borrowings were used to fund
operating activities and to repurchase common stock.
Net income for 2001 was $15.4 million or $0.37 per diluted share compared to net
income of $39.4 million or $0.91 per diluted share for 2000.
Five-Week Transition Period Ended February 3, 2001
See Note 12 to the Financial Statements for audited financial data for the
five-week transition period of December 31, 2000 through February 3, 2001. This
period preceded the start of the 2001 fiscal year and no comparable period
information is presented herein.
Liquidity and Capital Resources
The Company's primary capital requirements are to support inventory and capital
investments for the opening of new stores, to maintain and improve existing
stores, and to meet seasonal working capital needs. The Company's capital
requirements and working capital needs are funded through a combination of
internally generated funds, a bank line of credit and credit terms from vendors.
As of February 1, 2003, the Company had $9.9 million in cash and cash
equivalents. During the course of the Company's seasonal business cycle, working
capital is needed to support inventory for existing stores, especially during
peak selling seasons. Historically, the Company's working capital needs are
lowest in the first quarter and peak in either the third or fourth quarter in
anticipation of the fourth quarter selling season.
Net cash provided by operating activities for 2002 amounted to $34.7 million,
compared to $29.7 million for 2001. Net cash provided by operating activities in
2002 increased from the prior year primarily due to increased net income and
less cash required for the procurement of merchandise due to the Company's
inventory control initiatives which resulted in a 4.2 percent decrease in
inventories in an average store in 2002 compared to 2001. The net decrease in
accounts payable in 2002 compared to 2001 is primarily due to a shift in the
timing of merchandise receipts during the fourth quarter resulting in more
payments being made prior to year-end.
15
For 2002 and 2001, cash flows used in investing activities amounted to $19.1
million and $25.0 million, respectively, primarily for the acquisition of store
fixtures, equipment and leasehold improvements and for information system
enhancements. The decrease was primarily due to fewer stores opened in 2002.
Cash used in financing activities was $16.1 million in 2002 and $5.5 million in
2001. During 2002, cash was used to repurchase 220,000 shares of the Company's
common stock for $1.5 million and in 2001, 657,600 shares were repurchased for
$6.0 million. As of February 1, 2003, there are 2,044,200 shares which can be
repurchased pursuant to the Board of Directors current authorizations. The
decision to repurchase stock is primarily dependent on market conditions.
To facilitate an understanding of the Company's contractual obligations, the
following data is provided:
Payments Due By Period
------------------------------------------------------------------
Less than 1 - 2 3 - 5 After 5
Contractual obligations Total 1 Year Years Years Years
---------- ---------- ---------- ---------- ----------
Notes payable to banks $ 41,350 $ 41,350 $ - $ - $ -
Operating leases 415,403 61,302 58,584 146,185 149,332
---------- ---------- ---------- ---------- ----------
Total $456,753 $102,652 $58,584 $146,185 $149,332
========== ========== ========== ========== ==========
The Company has a revolving credit agreement with a group of banks, which
extends through June 2004. The agreement, which was amended in April 2002,
provides a $135 million senior revolving credit facility, including a $10
million letter of credit sub-facility. Borrowings are secured by trade and other
receivables, inventories and certain other assets. Due to the seasonal nature of
the Company's business, the Company's bank borrowings fluctuate during the year,
typically reaching their highest levels during the third or fourth quarter, as
the Company builds its inventory for the Christmas selling season. At February
1, 2003 and February 2, 2002, there was $41.3 million and $57.8 million
outstanding under the agreement, respectively.
The agreement requires the Company to maintain certain financial ratios and meet
required net worth and indebtedness tests. Notes payable to banks is classified
as current at February 1, 2003 because management's projections indicate that
the Company will not be in compliance with certain of the financial covenants as
of the end of the first quarter 2003. The Company is in the process of
negotiating a new credit agreement which is expected to close by June 2003.
The cost of opening a typical new store generally ranges from $450,000 to
$650,000 for fixtures, equipment, leasehold improvements and pre-opening costs
(primarily advertising, stocking and training). Pre-opening costs are expensed
at the time of opening. Initial inventory investment for a new store is
approximately $1.1 million (a portion of which is normally financed through
vendor credit). The Company's total capital expenditures for 2003 (including
amounts budgeted for new store expansion, improvements to existing stores and
information system enhancements) are anticipated to be approximately $17
million.
The Company believes that expected net cash provided by operating activities,
bank borrowings and vendor credit will be sufficient to fund anticipated current
and long-term capital expenditures and working capital requirements.
Seasonality
The Company's business is seasonal in nature with a higher percentage of the
Company's merchandise sales and earnings generated in the fall and holiday
selling seasons. Accordingly, selling, general and administrative expenses are
typically higher as a percent of net sales during the first three quarters of
each year.
Critical Accounting Policies
The preparation of the Company's financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, expenses and related disclosure of contingent assets and
liabilities. Management bases its estimates and judgments on historical
experience and other relevant factors, the
16
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
While the Company believes that the historical experience and other factors
considered provide a meaningful basis for the accounting policies applied in the
preparation of the financial statements, the Company cannot guarantee that its
estimates and assumptions will be accurate, which could require the Company to
make adjustments to these estimates in future periods. Following is a summary of
the more significant accounting policies:
Inventories
Merchandise inventories are valued at the lower of average cost or market, on a
first-in first-out basis, using the retail inventory method (RIM). RIM is an
averaging method that is widely used in the retail industry. The use of RIM
results in inventories being valued at the lower of cost or market as markdowns
are taken as a reduction of the retail values of inventories.
Based on a review of historical markdowns, current business trends and seasonal
inventory categories, additional inventory reserves may be recorded to reflect
estimated markdowns which may be required to liquidate certain inventories and
reduce inventories to the lower of cost or market. Management believes its
inventory valuation methods approximate the net realizable value of clearance
inventory and result in valuing inventory at the lower of cost or market.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Factors used in the review include management's plans for future
operations, recent operating results and projected cash flows. An impairment
loss is recognized if the sum of the expected future undiscounted cash flows
from the use of the asset is less than the net book value of the assets. An
impairment loss is recognized if the carrying value of the asset exceeds its
fair value.
Insurance Reserve Estimates
The Company uses a combination of insurance and self-insurance for various risks
including workers' compensation, general liability and associate-related health
care benefits, a portion of which is paid by the covered employees. The Company
is responsible for paying the claims that are under the insured limits. The
reserves recorded for these claims are estimated actuarially, based on claims
filed and claims incurred but not reported. These reserve estimates are adjusted
based upon actual claims filed and settled. The estimated accruals for these
reserves could be significantly affected if future claims differ from historical
trends and other actuarial assumptions.
For a complete listing of our significant accounting policies, please see Note 1
to the Company's Financial Statements.
New Accounting Pronouncements
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in June 2002. SFAS No. 146 requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of commitment to an exit or disposal plan. The provisions of
the Statement are effective for exit or disposal activities that are initiated
after December 31, 2002. The Company did not incur any new liability related to
a disposal cost or exit activity between the effective date of this statement
and the end of the fiscal year on February 1, 2003. See Note 14 to the Financial
Statements regarding management's plans to close certain under-performing stores
in 2003.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," was issued in December 2002 and amends SFAS No. 123, "Accounting
for Stock-Based Compensation." This standard provides two additional alternative
transition methods for recognizing an entity's voluntary decision to change its
method of accounting for stock-based employee compensation to the fair-value
method. In addition, the standard amends the disclosure requirements of SFAS No.
123 so that entities will have to make more prominent disclosures regarding the
pro forma effects of using the fair-value method of accounting for stock-based
compensation and present those disclosures in a more accessible format in the
footnotes to the annual and interim financial statements. Amendment
17
of the transition and annual disclosure requirements are effective for fiscal
years ending after December 15, 2002. The additional disclosures required under
SFAS No. 148 are presented in Note 6 to the Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through borrowings under
its revolving credit facility. At February 1, 2003, direct borrowings aggregated
$41.3 million. The facility, as amended in April 2002, permits debt commitments
up to $135.0 million, has a June 2004 maturity date and bears interest at
spreads over LIBOR. The average outstanding borrowings during fiscal 2002, 2001
and 2000 were $66.0 million, $82.3 million and $48.8 million, respectively, at
weighted-average interest rates of 3.9%, 4.9% and 6.7% respectively. Management
believes that its exposure to market risk associated with its borrowings is not
material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedules of the Company and
the Independent Auditors' Report thereon are filed pursuant to this Item 8 and
are included in this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item appears under the caption "Election of
Directors" in the Company's Proxy Statement for its 2003 Annual Meeting of
Stockholders and is incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears under the caption "Executive
Compensation" in the Company's Proxy Statement for its 2003 Annual Meeting of
Stockholders and is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appears under the caption "Voting
Securities" in the Company's Proxy Statement for its 2003 Annual Meeting of
Stockholders and is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears under the caption "Certain
Transactions; Compensation Committee Interlocks and Insider Participation" in
the Company's Proxy Statement for its 2003 Annual Meeting of Stockholders and is
incorporated by reference.
PART IV
ITEM 14. DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, including Michael D. Fisher, President and Chief
Executive Officer (principal executive officer) and James G. Delfs, Senior Vice
President and Chief Financial Officer (principal financial officer), have
evaluated the effectiveness of the Company's "disclosure controls and
procedures", as such term is defined in Rules 13a-14 and 15d-14 promulgated
under the Securities Exchange Act of 1934, as amended, within 90 days of the
filing date of this Annual Report on Form 10K. Based upon their evaluation, the
principal executive officer and principal financial officer concluded that the
Company's disclosure controls and procedures are effective. There were no
significant changes in the Company's internal controls or in other factors that
could significantly affect these control, since the date the controls were
evaluated.
18
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
15(a)(1) Financial Statements
The documents listed below are filed as part of this Form 10-K:
Page in
Form 10-K
---------
Report of Independent Certified Public Accountants F-1
Balance Sheets F-2
Statements of Income F-3
Statements of Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6
Statement of Income and Statement of Cash Flows for the five-week Transition Period ended
February 3, 2001 (see Note 12 to Financial Statements) F-15
15(a)(2) Financial Statement Schedules
All schedules are omitted because they are not applicable or the required
information is presented in the financial statements or notes thereto.
15(a)(3) Exhibits
See Index to Exhibits which begins on Page E-1.
15(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the quarter ended February
1, 2003.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
STEIN MART, INC.
Date: May 1, 2003 By: /s/ Michael D. Fisher
--------------------------------------
Michael D. Fisher, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities indicated on the 1st day of May, 2003.
/s/ Jay Stein /s/ Linda McFarland Farthing
- ------------------------------------- --------------------------------------
Jay Stein Linda McFarland Farthing
Chairman of the Board Director
/s/ John H. Williams, Jr. /s/ Mitchell W. Legler
- ------------------------------------- --------------------------------------
John H. Williams, Jr. Mitchell W. Legler
Vice Chairman Director
/s/ Michael D. Fisher /s/ Michael D. Rose
- ------------------------------------- --------------------------------------
Michael D. Fisher Michael D. Rose
President and Chief Executive Officer Director
/s/ James G. Delfs /s/ Martin E. Stein, Jr.
- ------------------------------------- --------------------------------------
James G. Delfs Martin E. Stein, Jr.
Senior Vice President and Chief Director
Financial Officer
/s/ Clayton E. Roberson, Jr. /s/ J. Wayne Weaver
- ------------------------------------- --------------------------------------
Clayton E. Roberson, Jr. J. Wayne Weaver
Vice President and Controller Director
/s/ Alvin R. Carpenter /s/ James H. Winston
- ------------------------------------- --------------------------------------
Alvin R. Carpenter James H. Winston
Director Director
20
CERTIFICATIONS
I, Michael D. Fisher, certify that:
1. I have reviewed this annual report on Form 10-K of Stein Mart, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Stein Mart, Inc. as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 1, 2003 /s/ Michael D. Fisher
-----------------------------------------
Michael D. Fisher
President and Chief Executive Officer
21
I, James G. Delfs, certify that:
1. I have reviewed this annual report on Form 10-K of Stein Mart, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Stein Mart, Inc. as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 1, 2003 /s/ James G. Delfs
-----------------------------------------
James G. Delfs
Chief Financial Officer
22
Report of Independent Certified Public Accountants
To the Board of Directors
and Stockholders of Stein Mart, Inc.
In our opinion, the accompanying financial statements appearing on pages F-2
through F-16 of this annual report present fairly, in all material respects, the
financial position of Stein Mart, Inc. at February 1, 2003 and February 2, 2002,
and the results of its operations and its cash flows for the 52 weeks ended
February 1, 2003 and February 2, 2002, for the five-week Transition Period ended
February 3, 2001, and for the 52 weeks ended December 30, 2000, 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.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
Jacksonville, Florida
March 28, 2003, except for Note 14, as to which the date is April 16, 2003
F-1
Stein Mart, Inc.
Balance Sheets
(In thousands)
February 1, February 2,
2003 2002
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,859 $ 10,276
Trade and other receivables 4,919 5,201
Inventories 297,230 296,158
Prepaid expenses and other current assets 4,361 11,324
------------- -------------
Total current assets 316,369 322,959
Property and equipment, net 86,351 88,601
Other assets 7,497 6,112
------------- -------------
Total assets $410,217 $417,672
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 70,472 $ 93,675
Accrued liabilities 53,407 46,001
Income taxes payable 5,353 4,071
Notes payable to banks 41,350 -
------------- -------------
Total current liabilities 170,582 143,747
Notes payable to banks - 57,750
Other liabilities 16,328 14,280
------------- -------------
Total liabilities 186,910 215,777
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Preferred stock - $.01 par value; 1,000,000 shares
authorized; no shares outstanding
Common stock - $.01 par value; 100,000,000 shares
authorized; 41,618,678 and 41,495,876 shares issued
and outstanding, respectively 416 415
Paid-in capital 721 -
Retained earnings 222,170 201,480
------------- -------------
Total stockholders' equity 223,307 201,895
------------- -------------
Total liabilities and stockholders' equity $410,217 $417,672
============= =============
The accompanying notes are an integral part of these financial statements.
F-2
Stein Mart, Inc.
Statements of Income
(In thousands except per share amounts)
For The 52 Weeks Ended
-------------------------------------------------
February 1, February 2, December 30,
2003 2002 2000
------------- ------------- -------------
Net sales $1,408,648 $1,320,190 $1,206,624
Cost of merchandise sold 1,060,117 1,003,567 896,560
------------- ------------- -------------
Gross profit 348,531 316,623 310,064
Selling, general and administrative expenses 326,509 301,937 257,042
Other income, net 13,953 14,078 13,766
------------- ------------- -------------
Income from operations 35,975 28,764 66,788
Interest expense 2,604 4,000 3,309
------------- ------------- -------------
Income before income taxes 33,371 24,764 63,479
Provision for income taxes 12,681 9,410 24,122
------------- ------------- -------------
Net income $ 20,690 $ 15,354 $ 39,357
============= ============= =============
Earnings per share - Basic $0.50 $0.37 $0.92
============= ============= =============
Earnings per share - Diluted $0.50 $0.37 $0.91
============= ============= =============
Weighted-average shares outstanding - Basic 41,575 41,176 42,909
============= ============= =============
Weighted-average shares outstanding - Diluted 41,764 41,493 43,409
============= ============= =============
The accompanying notes are an integral part of these financial statements.
F-3
Stein Mart, Inc.
Statements of Stockholders' Equity
(In thousands)
Total
Common Paid-in Retained Stockholders'
Stock Capital Earnings Equity
---------- ----------- ------------ -----------------
Balance at January 1, 2000 $439 $21,364 $158,109 $179,912
Net income 39,357 39,357
Common shares issued under stock
option plan and related income
tax benefits 3 2,192 2,195
Common shares issued under employee
stock purchase plan 2 955 957
Reacquired shares (29) (24,511) (3,853) (28,393)
---------- ----------- ------------ -----------------
Balance at December 30, 2000 415 - 193,613 194,028
Transition period December 31, 2000
to February 3, 2001:
Net loss (5,614) (5,614)
Common shares issued under stock
option plan and related income
tax benefits 62 62
Common shares issued under employee
stock purchase plan 469 469
Reacquired shares (454) (454)
---------- ----------- ------------ -----------------
Balance at February 3, 2001 415 77 187,999 188,491
Net income 15,354 15,354
Common shares issued under stock
option plan and related income
tax benefits 5 3,067 3,072
Common shares issued under employee
stock purchase plan 2 995 997
Reacquired shares (7) (4,139) (1,873) (6,019)
---------- ----------- ------------ -----------------
Balance at February 2, 2002 415 - 201,480 201,895
Net income 20,690 20,690
Common shares issued under stock
option plan and related income
tax benefits 2 1,193 1,195
Common shares issued under employee
stock purchase plan 1 1,027 1,028
Reacquired shares (2) (1,499) (1,501)
---------- ----------- ------------ -----------------
Balance at February 1, 2003 $416 $ 721 $222,170 $223,307
========== =========== ============ =================
The accompanying notes are an integral part of these financial statements.
F-4
Stein Mart, Inc.
Statements of Cash Flows
(In thousands)
For The 52 Weeks Ended
-------------------------------------------------
February 1, February 2, December 30,
2003 2002 2000
------------- ------------- -------------
Cash flows from operating activities:
Net income $20,690 $15,354 $39,357
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 18,770 16,822 14,373
Impairment of property and other assets 2,709 1,114 1,038
Deferred income taxes 9,193 (4,999) 2,910
Tax benefit from exercise of stock options 385 1,024 810
Changes in assets and liabilities:
Trade and other receivables 282 (1,752) (286)
Inventories (1,072) (13,260) (32,267)
Prepaid expenses and other current assets 32 (641) 4
Other assets (1,542) (619) (648)
Accounts payable (23,203) 13,180 4,465
Accrued liabilities 7,406 2,801 18,143
Income taxes payable 1,282 (728) 3,818
Other liabilities (214) 1,356 (9,281)
------------- ------------- -------------
Net cash provided by operating activities 34,718 29,652 42,436
Cash flows used in investing activities:
Capital expenditures (19,072) (24,982) (20,914)
Cash flows from financing activities:
Net borrowings under notes payable to banks (16,400) (2,486) -
Proceeds from exercise of stock options 810 2,048 1,385
Proceeds from employee stock purchase plan 1,028 997 957
Purchase of common stock (1,501) (6,019) (28,393)
------------- ------------- -------------
Net cash used in financing activities (16,063) (5,460) (26,051)
------------- ------------- -------------
Net decrease in cash and cash equivalents (417) (790) (4,529)
Cash and cash equivalents at beginning of year 10,276 11,066 17,055
------------- ------------- -------------
Cash and cash equivalents at end of year $ 9,859 $10,276 $12,526
============= ============= =============
Supplemental disclosures of cash flow information:
Interest paid $ 2,567 $ 3,980 $ 3,141
Income taxes paid 2,392 14,221 16,887
The accompanying notes are an integral part of these financial statements.
F-5
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
February 1, 2003
(Dollars in tables in thousands except per share amounts)
1. Summary of Significant Accounting Policies
At February 1, 2003 the Company operated a chain of 265 off-price retail stores
in 29 states. Each store offers women's, men's and children's apparel, as well
as accessories, gifts, linens and shoes.
Change in Fiscal Year End
In November 2001, the Company changed its fiscal year end from the Saturday
closest to December 31 to the Saturday closest to January 31. The five-week
transition period of December 31, 2000 through February 3, 2001 (the "Transition
Period") preceded the start of the 2001 fiscal year. Audited financial
information for the Transition Period is presented in Note 12. Results for 2002,
2001 and 2000 are for the 52 weeks ended February 1, 2003, February 2, 2002 and
December 30, 2000, respectively.
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 and disclosure of
contingent 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.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits and short-term
investments with original maturities of three months or less.
Inventories
Merchandise inventories are valued at the lower of average cost or market, on a
first-in first-out basis, using the retail inventory method.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided on a straight-line method using estimated
useful lives of 3-10 years. Leasehold improvements are amortized over the
shorter of the estimated useful lives of the improvements or the term of the
lease.
Impairment of Long Lived Assets
The Company follows Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
requires impairment losses to be recorded on long-lived assets used in
operations whenever events or changes in circumstances indicate that the net
carrying amounts may not be recoverable. An impairment loss is recognized if the
sum of the expected future undiscounted cash flows from the use of the assets is
less than the net book value of the assets. An impairment loss is recognized if
the carrying value of the asset exceeds its fair value. Impairment reviews are
performed for individual stores. Factors used in the review include management's
plans for future operations, recent operating results and projected cash flows.
See Note 10.
Insurance Reserves
The Company uses a combination of insurance and self-insurance for various risks
including workers' compensation, general liability and associate-related health
care benefits. Claim liabilities are estimated actuarially, based on claims
filed and claims incurred but not reported.
Store Pre-Opening Costs
New store pre-opening costs are expensed as incurred.
F-6
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
Advertising Expense
Advertising costs are expensed as incurred. Advertising expenses of $52,086,000,
$47,007,000, $2,256,000 and $43,092,000 are reflected in Selling, general and
administrative expenses in the Statements of Income for 2002, 2001, the
Transition Period and 2000, respectively.
Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share is computed by dividing net income by the weighted-average
number of common shares outstanding plus common stock equivalents related to
stock options for each period. Stock options are not included in the diluted
loss per share calculation for the Transition Period because they are
anti-dilutive.
A reconciliation of weighted-average number of common shares to weighted-average
number of common shares plus common stock equivalents is as follows (000's):
Transition
2002 2001 Period 2000
-------- -------- ---------- --------
Weighted-average number of common shares 41,575 41,176 41,476 42,909
Stock options 189 317 - 500
-------- -------- ---------- --------
Weighted-average number of common
shares plus common stock equivalents 41,764 41,493 41,476 43,409
======== ======== ========== ========
New Accounting Pronouncements
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in July 2002. SFAS No. 146 requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of commitment to an exit or disposal plan. The provisions of
the Statement are effective for exit or disposal activities that are initiated
after December 31, 2002. The Company did not incur any new liability related to
a disposal cost or exit activity between the effective date of this statement
and the end of the fiscal year on February 1, 2003. See Note 14 regarding
management's plans to close certain under-performing stores in 2003.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," was issued in December 2002 and amends SFAS No. 123, "Accounting
for Stock-Based Compensation." This standard provides two additional alternative
transition methods for recognizing an entity's voluntary decision to change its
method of accounting for stock-based employee compensation to the fair-value
method. In addition, the standard amends the disclosure requirements of SFAS No.
123 so that entities will have to make more prominent disclosures regarding the
pro forma effects of using the fair-value method of accounting for stock-based
compensation and present those disclosures in a more accessible format in the
footnotes to the annual and interim financial statements. Amendment of the
transition and annual disclosure requirements are effective for fiscal years
ending after December 15, 2002. The additional disclosures required under SFAS
No. 148 are presented in Note 8 to the Financial Statements.
F-7
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
2. Property and Equipment, Net
Property and equipment and the related accumulated depreciation and amortization
are as follows:
Feb. 1, Feb. 2,
2003 2002
----------- -----------
Furniture, fixtures and equipment $145,285 $133,072
Leasehold improvements 49,471 46,677
----------- -----------
194,756 179,749
Less: accumulated depreciation and amortization 108,405 91,148
----------- -----------
$ 86,351 $ 88,601
=========== ===========
3. Accrued Liabilities
The major components of accrued liabilities are as follows:
Feb. 1, Feb. 2,
2003 2002
----------- -----------
Taxes, other than income taxes $15,095 $16,256
Salary, wages, bonuses and benefits 14,846 10,246
Other 23,466 19,499
----------- -----------
$53,407 $46,001
=========== ===========
4. Notes Payable to Banks
In June 2001, the Company entered into a new revolving credit agreement with a
group of banks, which extends through June 2004. The agreement, which was
amended in April 2002, provides a $135 million senior revolving credit facility,
including a $10 million letter of credit sub-facility. Borrowings are secured by
trade and other receivables and inventories. Interest is payable at rates based
on spreads over the London Interbank Offering Rate (LIBOR) or the Prime Rate. A
quarterly commitment fee ranging from 0.375% to 0.50% per annum is paid on the
unused portion of the commitment. The weighted average interest rates on
borrowings during 2002, 2001, the Transition Period and 2000 were 3.9%, 4.9%,
6.4% and 6.7%, respectively. The agreement requires the Company to maintain
certain financial ratios and indebtedness tests. At February 1, 2003, the
Company was in compliance with all requirements of the amended agreement.
Notes payable to banks is classified as current at February 1, 2003 because
management's projections indicate that the Company will not be in compliance
with certain of the financial covenants as of the end of the first quarter 2003.
The Company is in the process of negotiating a new credit agreement which is
expected to close by June 2003.
5. Leased Facilities and Commitments
The Company leases all of its retail and support facilities. Annual store rent
is generally comprised of a fixed minimum amount plus a contingent amount based
on a percentage of sales exceeding a stipulated amount. Most leases also require
additional payments covering real estate taxes, common area costs and insurance.
Rent expense is as follows:
Transition
2002 2001 Period 2000
---------- ---------- ---------- ----------
Minimum rental $60,805 $55,278 $4,335 $48,329
Contingent rentals 678 889 52 689
---------- ---------- ---------- ----------
$61,483 $56,167 $4,387 $49,018
========== ========== ========== ==========
F-8
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
At February 1, 2003, for the majority of its retail and corporate facilities,
the Company was committed under noncancellable leases with remaining terms of up
to 15 years. Future minimum payments under noncancellable leases are:
2003 $ 61,302
2004 58,584
2005 53,990
2006 48,641
2007 43,554
Thereafter 149,332
----------
$415,403
==========
During all periods presented, the Company subleased the space for shoe and
fragrance departments in all of its stores. As of March 2003, the Company owns
and operates the fragrance department. Sales from leased departments are
excluded from sales of the Company. Sublease rental income of $12,519,000,
$12,610,000, $752,000 and $12,710,000 is included in Other income, net in the
Statements of Income for 2002, 2001, the Transition Period and 2000,
respectively.
6. Income Taxes
The income tax provision (benefit) is as follows:
Transition
2002 2001 Period 2000
---------- ---------- ---------- ----------
Current:
Federal $3,212 $13,271 $(3,387) $19,537
State 276 1,138 (290) 1,675
---------- ---------- ---------- -----------
Total 3,488 14,409 (3,677) 21,212
---------- ---------- ---------- ----------
Deferred:
Federal 8,467 (4,604) 217 2,680
State 726 (395) 19 230
---------- ---------- ---------- ----------
Total 9,193 (4,999) 236 2,910
---------- ---------- ---------- ----------
Income tax provision (benefit) $12,681 $ 9,410 $(3,441) $24,122
========== ========== ========== ==========
Income tax expense (benefit) differed from the amounts computed by applying the
federal statutory rate of 35 percent to income before taxes as follows:
Transition
2002 2001 Period 2000
---------- ---------- ---------- ----------
Federal tax at the statutory rate $11,680 $8,667 $(3,169) $22,218
State income taxes,
net of federal benefit 1,001 743 (272) 1,904
---------- ---------- ---------- ----------
$12,681 $9,410 $(3,441) $24,122
========== ========== ========== ==========
Effective income tax rate 38.0% 38.0% 38.0% 38.0%
========== ========== ========== ==========
F-9
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
Temporary differences, which give rise to deferred tax assets and liabilities,
are as follows:
Feb. 1, Feb. 2,
2003 2002
----------- -----------
Deferred tax assets:
NOL carryforward $ - $ 5,417
Store closing and asset impairment reserves 3,162 2,158
Accrued liabilities 3,368 2,012
Other 1,082 2,034
----------- -----------
7,612 11,621
----------- -----------
Deferred tax liabilities:
Depreciation 14,248 12,019
Inventory 3,060 -
Other 1,931 2,036
----------- -----------
19,239 14,055
----------- -----------
Net deferred tax liability $(11,627) $(2,434)
=========== ===========
At February 2, 2002, the Company had approximately $14 million in federal and
state net operating loss ("NOL") carryforwards, which were fully utilized in
2002. The NOL carryforwards were generated in the five-week tax period ended
February 2, 2002 which resulted from the Company's change in fiscal year (see
Note 1).
On March 14, 2002, the Internal Revenue Service released new rules (Rev. Proc.
2002-19), which allowed the Company an accelerated deduction of certain
components of the Company's deferred tax asset relating to inventories. As a
result, the Company's income tax payable and the corresponding deferred tax
asset as of February 2, 2002 relating to inventories were reduced by $3.8
million in the first quarter of fiscal 2002.
Deferred tax assets and liabilities are reflected on the Company's Balance
Sheets as follows:
Feb. 1, Feb. 2,
2003 2002
----------- -----------
Current deferred tax assets (included in
Prepaid expenses and other current assets) $ 196 $ 7,127
Non-current deferred tax liabilities (included
in Other liabilities) (11,823) (9,561)
----------- -----------
Net deferred tax liabilities $(11,627) $(2,434)
=========== ===========
The exercise of certain stock options which have been granted under the
Company's stock option plans gives rise to compensation which is includable in
the taxable income of the applicable employees and deductible by the Company for
federal and state income tax purposes. Such compensation results from increases
in the market value of the Company's common stock subsequent to the date of
grant of the applicable exercised stock options, and in accordance with
Accounting Principles Board Opinion No. 25, such compensation is not recognized
as an expense for financial accounting purposes and the related tax benefits are
recorded directly in Paid-in capital.
7. Stockholders' Equity
During 2002, 2001, the Transition Period and 2000, the Company repurchased
220,000, 657,600, 40,800 and 2,910,600 shares of its common stock in the open
market at a total cost of $1,501,000, $6,019,000, $454,000 and $28,393,000,
respectively. As of February 1, 2003, there are 2,044,200 shares which can be
repurchased pursuant to the Board of Directors' current authorizations.
F-10
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
8. Stock Option and Purchase Plans
In 2001, the shareholders approved a new stock option plan (the "Omnibus Plan"),
under which a maximum of 4,500,000 shares of the Company's common stock may be
issued. Shares covered by unexercised options that terminate or shares that are
forfeited may be subject to new awards. The Omnibus Plan replaced the Company's
Employee Stock and Director Stock Option Plans (the "Previous Plans") under
which there were 3,669,438 options to purchase shares outstanding as of February
1, 2003. Upon approval of the Omnibus Plan, no further options have been or will
be issued under the Previous Plans. The term of the Omnibus Plan is indefinite,
except that no incentive stock option award can be granted after the tenth
anniversary of the plan.
The Omnibus Plan, consistent with the Previous Plans, provides that shares of
common stock may be granted to certain key employees and outside directors
through non-qualified stock options, incentive stock options, stock appreciation
rights, performance awards, restricted stock, or any other award made under the
terms of the plan. The Board of Directors, or its delegated authority,
determines the exercise price and all other terms of all grants. In general,
one-third of the options granted in the past have become exercisable on the
third, fourth and fifth anniversary dates of grant and expire ten years after
the date of grant. No stock appreciation rights or restricted stock awards have
been granted under this or the prior plan.
Activity for these fixed-price option plans is as follows:
Number Weighted-
of Average
Shares Exercise
(000) Price
----------- -----------
Outstanding at January 1, 2000 4,625 $10.69
Granted 614 9.11
Exercised (260) 4.89
Forfeited (396) 12.65
----------- -----------
Outstanding at December 30, 2000 4,583 10.64
Granted - -
Exercised (8) 5.28
Forfeited (33) 12.68
----------- -----------
Outstanding at February 3, 2001 4,542 10.63
Granted 1,146 8.54
Exercised (549) 3.58
Forfeited (359) 13.90
----------- -----------
Outstanding at February 2, 2002 4,780 10.70
Granted 514 10.63
Exercised (166) 4.58
Forfeited (97) 10.49
----------- -----------
Outstanding at February 1, 2003 5,031 $10.90
=========== ===========
Exercisable stock options were 2.625 million, 2.004 million, 1.860 million and
1.870 million at February 1, 2003, February 2, 2002, February 3, 2001 and
December 30, 2000, respectively.
F-11
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
The following table summarizes information about fixed-price stock options
outstanding at February 1, 2003:
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices (000) Life (Years) Price (000) Price
- ---------------- ------------- ------------- ------------- ------------- -------------
$ 2.50 - 5.75 453 5.5 $ 5.58 159 $ 5.62
$ 6.53 - 9.63 1,656 7.2 8.09 348 7.91
$10.00 - 13.81 2,387 5.3 12.86 1,738 13.47
$14.25 - 16.59 535 5.2 15.31 380 15.15
------------- ------------- ------------- ------------- -------------
5,031 5.9 $10.90 2,625 $12.50
============= ============= ============= ============= =============
The Company has adopted the disclosure-only provisions of SFAS No. 123, as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation," and intends
to retain the intrinsic value method of accounting for stock-based compensation
which it currently uses. Accordingly, no compensation cost has been recognized
for the stock option plans. Had compensation cost of the Company's stock option
plans been determined consistent with the provisions of SFAS No. 123, the
Company's net income (loss) and earnings (loss) per share would have been
reduced to the following pro forma amounts:
Transition
2002 2001 Period 2000
---------- ---------- ---------- ----------
Net income (loss) - as reported $20,690 $15,354 $(5,614) $39,357
Stock option compensation - net of tax 1,741 2,087 179 2,891
---------- ---------- ---------- ----------
Net income (loss) - pro forma $18,949 $13,267 $(5,793) $36,466
========== ========== ========== ==========
Basic earnings (loss) per share - as reported $0.50 $0.37 $(0.14) $0.92
Diluted earnings (loss) per share - as reported 0.50 0.37 (0.14) 0.91
Basic earnings (loss) per share - pro forma $0.46 $0.32 $(0.14) $0.85
Diluted earnings (loss) per share - pro forma 0.45 0.32 (0.14) 0.84
The effects of applying this Statement for pro forma disclosures are not likely
to be representative of the effects on reported net income for future years,
because options vest over several years and additional awards are made each
year. No options were granted during the Transition Period. In determining the
pro forma compensation cost, the weighted-average fair value of options granted
during fiscal 2002, 2001 and 2000 was estimated to be $5 using the Black-Scholes
options pricing model. The following weighted-average assumptions were used for
grants made during 2002, 2001 and 2000: dividend yield of 0.0%, expected
volatility of 51.9%, 51.7% and 51.1%, respectively, risk-free interest rate of
3.8%, 4.8% and 5.2%, respectively and expected lives of 5.0, 7.0 and 7.0 years,
respectively.
The Company has an Employee Stock Purchase Plan (the "Stock Purchase Plan")
whereby all employees who complete six months employment with the Company and
who work on a full-time basis or are regularly scheduled to work more than 20
hours per week are eligible to participate in the Stock Purchase Plan.
Participants in the Stock Purchase Plan are permitted to use their payroll
deductions to acquire shares at 85% of the fair market value of the Company's
stock determined at either the beginning or end of each option period. In 2002,
2001, the Transition Period and 2000, the participants acquired 173,048 shares,
127,220 shares, 53,856 shares and 198,051 shares of the Company's common stock
at weighted average per-share prices of $5.94, $7.84, $8.71 and $4.83 per share,
respectively.
On May 7, 2001, the shareholders approved an amendment to the Stock Purchase
Plan, increasing the number of shares eligible for issuance under the Plan by
1,000,000 and extending the Plan until December 31, 2005.
F-12
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
9. Employee Benefit Plans
The Company has a defined contribution retirement plan covering employees who
are at least 21 years of age, have completed at least one year of service and
who work at least 1,000 hours annually. Under the profit sharing portion of the
plan, the Company makes discretionary contributions, which vest at a rate of 20
percent per year after two years of service. Under the 401(k) portion of the
plan the Company matches 50 percent of the employee's voluntary pre-tax
contributions up to a maximum of four percent of the employee's compensation.
The Company's matching portion vests in accordance with the plan's vesting
schedule. Total Company contributions under the retirement plan were $1,627,000,
$1,571,000, $66,000 and $1,750,000 for 2002, 2001, the Transition Period and
2000, respectively.
The Company has an executive split dollar life insurance plan wherein eligible
executives are provided with pre-retirement life insurance protection based upon
three to five times base salary. Upon retirement, the executive is provided with
life insurance protection based upon one and one-half to two and one-half times
final base salary. The expense for this plan was $331,000, $293,000 and $248,000
in 2002, 2001 and 2000, respectively. There was no expense recorded during the
Transition Period.
The Company also has an executive deferral plan providing officers and key
executives with the opportunity to participate in an unfunded, deferred
compensation program. Effective November 1, 2002, the plan was amended to
include director-level employees. Under the program, participants may defer up
to 100% of their base compensation and bonuses earned. The Company will match
the officers and key executives' contributions 100%, and the directors'
contributions 50%, up to the first 10% of income deferred. A participant's
Company matching contributions and related investment earnings are 20% vested
after four years of participation in the plan and increase 20% per year through
the eighth year, at which time a participant is fully vested. The total of
participant deferrals, which is reflected in Accrued liabilities, was $1,223,000
at February 1, 2003, $814,000 at February 2, 2002 and $402,000 at February 3,
2001. The expense for this plan was $611,000, $495,000, $25,000 and $486,000 in
2002, 2001, the Transition Period and 2000, respectively.
In connection with the above two plans, whole life insurance contracts were
purchased on the related participants. At February 1, 2003 and February 2, 2002
the cash surrender value of these policies was $3,132,000 and $2,773,000,
respectively, and is included in Other assets.
10. Store Closing Charges and Impairment of Long-Lived Assets
In April 2003 the Company decided to close 13 additional under-performing stores
in 2003. See Note 14.
During the fourth quarter of 2002, management approved a plan to close three
stores in 2003. The Company does not expect to incur significant lease exit
costs upon closing these stores. However, a pretax non-cash asset impairment
charge of $2.7 million was recorded during the fourth quarter of 2002 to reduce
the carrying value of property and equipment of these three closing stores and
fifteen other under-performing stores to their respective estimated fair value.
The estimated future undiscounted cash flows from the under-performing stores
are not expected to exceed the current net book value of their property and
equipment. This charge is included in Selling, general and administrative
expenses in the Statement of Income for 2002.
During the fourth quarter of 2001, the Company recorded a pre-tax charge of $2.9
million, including $2.2 million for the estimated cost of lease terminations and
$0.7 million for the impairment of certain property and equipment for four
stores that were closed in 2002. The charge is included in Selling, general and
administrative expenses in the Statement of Income for 2001.
During 2000, the Company recorded a net pre-tax credit of $3.4 million related
to certain store closing reserves recorded in 1999. The credit resulted from
adjustments to estimated lease obligations for changes in anticipated closing
F-13
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
dates and for favorable lease settlements ($2.5 million), unsatisfactory lease
negotiations to close two stores ($1.9 million), offset by a $1.0 million charge
for the write-down of furniture, fixtures and equipment related to store
closings. The store closing credit is included in Selling, general and
administrative expenses in the Statement of Income for 2000.
Activity in the store closing reserve is as follows:
Transition
2002 2001 Period 2000
---------- ---------- ---------- ----------
Balance at beginning of period $5,680 $4,984 $6,037 $12,589
Additions 113 2,206 - -
Payments (811) (1,510) (1,053) (2,067)
Adjustments - - - (4,485)
---------- ---------- ---------- ----------
Balance at end of period $4,982 $5,680 $4,984 $ 6,037
========== ========== ========== ==========
The store closing reserve at February 1, 2003 includes primarily the remaining
lease obligations for the four stores that closed in 2002 and the remaining
lease obligation for one store closed in December 1999. Payments during 2002
include lease termination and ongoing lease costs. The store closing reserve
includes a current portion of $1.5 million and a long-term portion of $3.5
million which are included in Accrued liabilities and Other liabilities,
respectively.
11. Quarterly Results of Operations (Unaudited)
As discussed in Note 1, the Company changed its fiscal year in 2001. The 13 week
periods of 2002 and 2001 reflect this change.
13 Weeks Ended
-------------------------------------------------------------
May 4, Aug. 3, Nov. 2, Feb. 1,
Year Ended February 1, 2003 2002 2002 2002 2003
- --------------------------- -------------------------------------------------------------
Net sales $355,979 $311,427 $332,847 $408,395
Gross profit 96,531 78,104 73,685 100,211
Net income (loss) 11,368 2,775 (3,843) 10,390
Earnings (loss) per share - Basic $0.27 $0.07 $(0.09) $0.25
Earnings (loss) per share - Diluted $0.27 $0.07 $(0.09) $0.25
13 Weeks Ended
-------------------------------------------------------------
May 5, Aug. 4, Nov. 3, Feb. 2,
Year Ended February 2, 2002 2001 2001 2001 2002
- --------------------------- -------------------------------------------------------------
Net sales $317,069 $291,473 $304,367 $407,281
Gross profit 83,077 71,810 64,179 97,557
Net income 9,132 3,048 (5,828) 9,002
Earnings (loss) per share - Basic $0.22 $0.07 $(0.14) $0.22
Earnings (loss) per share - Diluted $0.22 $0.07 $(0.14) $0.22
F-14
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
12. Transition Period Financial Information
Statement of Income for the five-week Transition Period ended February 3, 2001:
Net sales $84,013
Cost of merchandise sold 70,609
-----------
Gross profit 13,404
Selling, general and administrative expenses 23,106
Other income, net 833
-----------
Loss from operations (8,869)
Interest expense 186
-----------
Loss before income tax benefit (9,055)
Income tax benefit 3,441
-----------
Net loss $(5,614)
===========
Loss per share - Basic and Diluted $(0.14)
===========
Statement of Cash Flows for the five-week Transition Period ended February 3,
2001:
Cash flows from operating activities:
Net loss $(5,614)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,299
Tax benefit from exercise of stock options 22
Deferred income taxes 236
Changes in assets and liabilities:
Trade and other receivables 1,309
Inventories (5,445)
Prepaid expenses and other current assets 529
Other assets 50
Accounts payable (41,083)
Accrued liabilities (8,556)
Income taxes payable (3,705)
Other liabilities 55
-----------
Net cash used in operating activities (60,903)
Cash flows used in investing activities:
Capital expenditures (848)
Cash flows from financing activities:
Net borrowings under notes payable to banks 60,236
Proceeds from exercise of stock options 40
Proceeds from employee stock purchase plan 469
Purchase of common stock (454)
-----------
Net cash provided by financing activities 60,291
-----------
Net decrease in cash and cash equivalents (1,460)
Cash and cash equivalents at December 30, 2000 12,526
-----------
Cash and cash equivalents at February 3, 2001 $11,066
===========
Interest and taxes paid during the five-week Transition Period ended February 3,
2001 were $1,072,000 and $17,000, respectively.
F-15
STEIN MART, INC.
NOTES TO FINANCIAL STATEMENTS
13. Legal Proceedings
The Company is involved in various routine legal proceedings incidental to the
conduct of its business. Management does not believe that any of these legal
proceedings will have a material adverse effect on the Company's financial
condition or results of operations.
14. Subsequent Event
The Company regularly reviews under-performing stores and implements strategies
designed to improve their performance. In Spring 2003, following more than two
years of retail economic weakness, it was determined that a group of these
under-performing stores would be unlikely to achieve profitability despite the
Company's concerted efforts to stimulate sales. In order to improve the quality
of the Company's portfolio of stores, management decided in April to close 13
stores in addition to the three already planned for closure in 2003 (see Note
10). In accordance with SFAS No. 146, the estimated charges that will be
recorded in 2003 are approximately $19 million to recognize the present value of
store closing costs. In addition, approximately $10 million in markdowns will be
required to liquidate inventory in those stores.
F-16
INDEX TO EXHIBITS
*3.1 Articles of Incorporation of the registrant
3.2 Bylaws of the registrant (amended May 7, 2001)
4.1 Provisions of the Articles of Incorporation and Bylaws of the
Registrant defining rights of shareholders of Common Stock of the
Registrant (incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 30, 2000)
*4.2 Form of stock certificate for Common Stock
~*10.1 Form of Director's and Officer's Indemnification Agreement
10.2 Revolving Credit Agreement dated as of June 28, 2001 between Stein
Mart, Inc. and SunTrust Bank, as Administrative Agent
(incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001)
10.2.1 First Amendment to Revolving Credit Agreement dated as of November
9, 2001 among Stein Mart, Inc. and SunTrust Bank, as
Administrative Agent (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter year
ended September 29, 2001)
10.2.2 Second Amendment to Revolving Credit Agreement dated as of April
30, 2002 among Stein Mart, Inc. and SunTrust Bank, as
Administrative Agent (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
May 4, 2002)
~*10.3 Employee Stock Plan
~*10.4 Form of Non-Qualified Stock Option Agreement
~*10.5 Form of Incentive Stock Option Agreement
*10.6 Profit Sharing Plan
~*10.7 Executive Health Plan
~*10.8 Director Stock Option Plan
~^10.9 Executive Split Dollar Plan
~^10.10 Executive Deferral Plan
10.11 2001 Omnibus Plan (incorporated by reference to the Company's Form
S-8 Registration Statement filed on August 7, 2001)
23.1 Consent of PricewaterhouseCoopers LLP (filed herein)
99.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350 (filed herein)
99.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 (filed herein)
99.3 Audit Committee Charter, amended March 24, 2003 (filed herein)
99.4 Compensation Committee Charter, amended March 24, 2003 (filed
herein)
99.5 Corporate Governance Committee Charter (filed herein)
* Previously filed as Exhibit to Form S-1 Registration Statement 33-46322 and
incorporated herein by reference.
^ Previously filed as Exhibit to the Company's Form 10-K for the fiscal year
ended January 1, 2000 and incorporated herein by reference.
~ Management Contracts or Compensatory Plan or Arrangements filed pursuant to
S-K 601 (10) (iii)(A).
E-1