Cracker Barrel 2005 Annual Report Download - page 58

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Activities – Deferral of the Effective Date of FASB
Statement No. 133,” and 138, “Accounting for Certain
Derivative Instruments and Certain Hedging Activities,
an Amendment of FASB Statement No. 133,” in 2001
and SFAS No. 149, “Amendments of Statement 133 on
Derivative Instruments and Hedging Activities,” in
the fourth quarter of 2003. These statements specify
how to report and display derivative instruments and
hedging activities. The adoption of these statements
did not have a material effect on the Company’s
Consolidated Financial Statements. During 2005, 2004
and 2003, the Company had no derivative financial
instruments that required fair value accounting treatment.
The Company is exposed to market risk, such as
changes in interest rates and commodity prices. To
manage the volatility relating to these exposures, the
Company nets the exposures on a consolidated basis
to take advantage of natural offsets. The Company does
not hold or use derivative financial instruments for
trading purposes. The Company’s historical practice has
been not to enter into derivative financial instruments.
The Company’s policy has been to manage interest
cost using a mix of fixed and variable rate debt (see
Notes 5, 10 and 12).
Many of the food products purchased by the
Company are affected by commodity pricing and are,
therefore, subject to price volatility caused by
weather, production problems, delivery difficulties and
other factors which are outside the control of the
Company and generally are unpredictable. Changes in
commodity prices would affect the Company and its
competitors generally and, depending on terms and
duration of supply contracts, sometimes simultane-
ously. In many cases, the Company believes it will be
able to pass through some or much of increased
commodity costs by adjusting its menu pricing. From
time to time, competitive circumstances or judgments
about consumer acceptance of price increases may
limit menu price flexibility, and in those circumstances,
increases in commodity prices can result in lower
margins for the Company.
Use of estimates – Management of the Company has
made certain estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure
of contingent liabilities at the date of the Consolidated
Financial Statements and the reported amounts of
revenues and expenses during the reporting periods to
prepare these Consolidated Financial Statements in
conformity with GAAP. Management believes that
such estimates have been based on reasonable and
supportable assumptions and that the resulting
estimates are reasonable for use in the preparation of
the Consolidated Financial Statements. Actual results,
however, could differ from those estimates.
Recent accounting pronouncements not yet adopted –
In December 2004, the FASB issued SFAS No. 123
(Revised 2004) “Share-Based Payment” (“SFAS No.
123R”). SFAS No. 123R replaces SFAS No. 123 and
supersedes APB Opinion No. 25. SFAS No. 123R
requires that the cost of employee services received in
exchange for equity instruments issued or liabilities
incurred are recognized in the financial statements.
Compensation cost will be measured using a fair-value
based method over the period that the employee
provides service in exchange for the award. As
disclosed above, based on the current assumptions
and calculations used, had the Company recognized
compensation expense based on the fair value of
awards of equity instruments, net income would have
been reduced by approximately $8,799 for the year
ended July 29, 2005. This compensation expense is
the after-tax net of the stock-based compensation
expense determined under the fair-value based method
for all awards and stock-based employee compensation
included previously in reported net income under APB
No. 25. This statement will apply to all awards granted
after the effective date and to modifications, repur-
chases or cancellations of existing awards. SFAS No.
123R is effective as of the beginning of the first
annual reporting period that begins after June 15,
2005 and therefore the Company will adopt in its first
quarter of 2006. Partly in anticipation of these new
accounting rules, the Company modified its compensa-
tion plans to limit eligibility to receive share-based
compensation and shifted a portion of share-based
compensation primarily to cash-based incentive com-
pensation. We expect the 2006 impact of the adoption
of SFAS 123R combined with the modifications to the
Company’s compensation plans to be approximately
$0.14 to $0.16 per diluted share. The effect of future
awards will vary depending on timing, amount and
valuation methods used for such awards, the past
awards are not necessarily indicative of future awards.
SFAS 123R also requires the benefits of tax deductions
in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an