Cracker Barrel 2006 Annual Report Download - page 57

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Revenue recognition – The Company records revenue
from the sale of products as they are sold. The Company
provides for estimated returns based on return history
and sales levels. Initial fees received from a franchisee
to establish a new franchise are recognized as income
when the Company has performed all of its obligations
required to assist the franchisee in opening a new
franchise restaurant, which is generally upon the
opening of that restaurant. Continuing royalties, which
are a percentage of net sales of franchised restaurants,
are accrued as income when earned. As permitted by
the provisions of EITF 06-3, “How Taxes Collected from
Customers and Remitted to Governmental Authorities
Should be Presented in the Income Statement (That Is,
Gross versus Net Presentation),” the Company’s policy
is to present sales in the Consolidated Statement of
Income on a net presentation basis after deducting
sales tax.
Unredeemed gift cards and certificates – Unredeemed
gift cards and certificates represent a liability of the
Company related to deferred revenue and are recorded
at their expected redemption value. For those states
that exempt gift cards and certificates from their
escheat laws, the Company makes estimates of the
ultimate unredeemed gift cards and certificates in the
period of the original sale and amortizes this break-
age over the redemption period that other gift cards
and certificates historically have been redeemed by
reducing its liability and recording revenue accord-
ingly. For those states that do not exempt gift cards
and certificates from their escheat laws, the Company
records breakage in the period that gift cards and
certificates are remitted to the state and reduces its
liability and records revenue accordingly. Changes
in redemption behavior or management’s judgments
regarding redemption trends in the future may
produce materially different amounts of deferred
revenue to be reported.
Income taxes – Employer tax credits for FICA taxes
paid on employee tip income and other employer tax
credits are accounted for by the flow-through method.
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 (see
Note 10).
Net income per share – Basic consolidated net
income per share is computed by dividing consolidated
net income by the weighted average number of
common shares outstanding for the reporting period.
Diluted consolidated net income per share reflects
the potential dilution that could occur if securities,
options or other contracts to issue common stock
were exercised or converted into common stock.
Additionally, diluted consolidated net income per share
is calculated excluding the after-tax interest and
financing expenses associated with the Senior Notes
since these Senior Notes are treated as if converted
into common stock (see Notes 4 and 6). The
Company’s Senior Notes, outstanding employee and
director stock options and restricted stock (also
known as unvested shares) issued by the Company
represent the only dilutive effects on diluted net
income per share.
Share-based compensation – The Company has four
share-based compensation plans for employees and
non-employee directors, which authorize the granting
of stock options, restricted stock, and other types
of awards consistent with the purpose of the plans
(see Note 8). The number of shares authorized for
issuance under the Company’s plans as of July 28, 2006
totals 26,294,452, of which 2,241,128 shares were
available for future issuance. Stock options granted
under these plans are granted with an exercise price
equal to the market price of the Company’s stock on
the date immediately preceding the date of the
grant (except grants made to employees under the
Company’s 2002 Omnibus Incentive Compensation
Plan, whose exercise price is equal to the closing price
on the day of the grant); those option awards gener-
ally vest at a cumulative rate of 33% per year beginning
on the first anniversary of the grant date and expire
ten years from the date of grant.
Prior to July 30, 2005, the Company accounted for
its share-based compensation under the recognition
and measurement principles of Accounting Principles
Board (“APB”) Opinion No. 25, “Accounting for Stock
Issued to Employees,” and related interpretations,
the disclosure-only provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation” and the
disclosures required by SFAS No. 148, “Accounting for
Stock-Based Compensation-Transition and Disclosure.”