Stein Mart 2008 Annual Report Download - page 32

STEIN MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables in thousands, except per share amounts)
F-8
term" and records the excess of the amounts charged to expense and the rent paid as a deferred rent liability. Contingent rent such as that
based on a percentage of sales is recognized as incurred.
The landlord/lessor constructs the building leasehold improvements for the majority of the Company’s stores. However, in certain
“replacement-tenant” situations, the Company/lessee may be required to perform the remodeling. To determine the proper recording of
improvements, we first ascertain whether the remodeling falls within the scope of EITF No. 97-10, The Effect of Lessee Involvement in
Asset Construction. If it does not, we assess whether such improvements are to be accounted for as lessor or lessee assets. If the
landlord/lessor makes the improvements and presents us with the finished space on a "turnkey" basis, we view the assets as being lessor
assets. In situations where the Company/lessee does the remodeling work and receives an allowance that may or may not cover all the
costs, we make a judgment as to the classification between lessor and lessee assets. We consider an asset to be a lessor asset if all of the
following criteria are met:
xthe lease specifically requires the lessee to make the improvement,
xthe improvement is fairly generic,
xthe improvement increases the fair value of the property, and
xthe useful life of the improvement is longer than our lease term.
If any of the above criteria are not met, we consider the assets to be lessee assets, which are recorded as leasehold improvements in the
balance sheet. Payments received from the lessor to fund any portion of the cost of lessee assets are accounted for as lease incentives (in
accordance with FASB Technical Bulletin No. 88-1). Assets considered to be lessor assets are not reflected on the Company’s balance
sheet. To the extent that the Company paid for such lessor assets and was not reimbursed through construction allowances, such net
payments are recorded as prepaid rent, which is amortized to rent expense over the lease term.
Advertising Expense. Advertising costs are expensed as incurred. Advertising expenses of $51.5 million, $65.8 million and $60.1 million
are reflected in SG&A expenses in the Consolidated Statements of Operations for 2008, 2007 and 2006, respectively.
Income Taxes. The Company follows SFAS No. 109, Accounting for Income Taxes, which requires recognition of deferred tax assets and
liabilities for the expected future income tax consequences of events that have been included in the consolidated financial statements or tax
returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement
carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are
expected to reverse. Deferred tax assets are reduced by a valuation allowance for amounts that do not satisfy the realization criteria of
SFAS No. 109. See Note 6 for further discussion.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), on February 4,
2007. FIN 48 clarifies the accounting for income taxes in the financial statements by prescribing a minimum probability recognition
threshold and measurement process for recording uncertain tax positions taken or expected to be taken in a tax return and provides
guidance on derecognition, classification, accounting and disclosure requirements. We recognize interest and penalties related to
unrecognized tax benefits in income tax expense.
Share-Based Compensation. Effective January 29, 2006, the Company adopted the provisions of SFAS No. 123R, Share-Based
Payments, and elected to apply the modified prospective transition method. SFAS No. 123R requires companies to recognize expense in
the financial statements for the fair values of all share-based payments to employees over the employees’ requisite service periods.
Earnings Per Share (“EPS”). Basic EPS is computed by dividing net income (loss) by the basic weighted-average number of common
shares outstanding for the period. Diluted EPS is calculated by also considering the impact of potential common stock equivalents on both
net income and weighted-average number of common shares outstanding.
A reconciliation of basic weighted-average number of common shares to diluted weighted-average number of common shares is as follows
(shares in thousands):
2008 2007 2006
Basic weighted-average number of common shares 41,366 42,123 43,196
Incremental shares from share-based compensation plans -- 681
Diluted weighted-average number of common shares 41,366 42,123 43,877