Cracker Barrel 2006 Annual Report Download - page 58

56
In accordance with APB Opinion No. 25, no share-
based compensation cost was reflected in the Company’s
prior year net income for grants of stock options to
employees because the Company granted stock options
with an exercise price equal to the market value of
the stock on the date of grant. The reported share-
based compensation expense, net of related tax
effects, in the table below represents the amortization
of restricted stock grants.
Had the Company used the fair value based
accounting method for stock compensation expense
prescribed by SFAS Nos. 123 and 148 for 2005 and
2004, the Company’s consolidated net income and net
income per share would have been reduced to the
pro-forma amounts illustrated as follows:
2005 2004
Net income – as reported $126,640 $111,885
Add: Total share-based employee
compensation included in reported
net income, net of related tax effects 825 74
Deduct: Total share-based compensation
expense determined under fair-value
based method for all awards, net
of tax effects (9,624) (10,900)
Net income – pro forma $117,841 $101,059
Net income per share:
Basic – as reported $ 2.65 $ 2.29
Basic – pro forma $ 2.47 $ 2.07
Diluted – as reported $ 2.45 $ 2.12
Diluted – pro forma $ 2.29 $ 1.92
The Company adopted SFAS 123R “Share-Based
Payment” on July 30, 2005 (see Note 8).
Segment reporting – The Company accounts for its
segment in accordance with SFAS No. 131, “Disclosure
About Segments of an Enterprise and Related
Information.” SFAS No. 131 requires that a public
company report annual and interim financial and
descriptive information about its reportable operating
segments. Operating segments, as defined, are
components of an enterprise about which separate
financial information is available that is evaluated
regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing
performance. SFAS No. 131 allows aggregation of
similar operating segments into a single operating
segment if the businesses are considered similar under
the criteria established by SFAS No. 131. Utilizing
these criteria, the Company manages its business on
the basis of one reportable operating segment (see
Note 11).
Derivative instruments and hedging activities – The
Company accounts for derivative instruments and
hedging activities in accordance with SFAS No. 133,
“Accounting for Derivative Instruments and Hedging
Activities,” and its subsequent amendments. These
statements specify how to report and display deriva-
tive instruments and hedging activities.
The Company is exposed to market risk, such as
changes in interest rates and commodity prices. The
Company does not hold or use derivative financial
instruments for trading purposes. Prior to 2006 the
Company had no derivative financial instruments that
required fair value accounting treatment.
The Company’s policy has been to manage interest
cost using a mix of fixed and variable rate debt (see
Notes 6, 12 and 14). To manage this risk in a cost
efficient manner, the Company entered into an interest
rate swap on May 4, 2006 in which it agreed to
exchange with a counterparty, at specified intervals
effective August 3, 2006, the difference between fixed
and variable interest amounts calculated by reference
to an agreed-upon notional principal amount. Interest
rate swaps that meet specific conditions under SFAS
No. 133 are accounted for as cash flow hedges. The
swapped portion of the Term Loan B will be fixed at a
rate of 5.57% plus the Company’s then current credit
spread, or 7.07% based on today’s credit spread, over
the 7-year life of the term loan and the interest
rate swap. The swapped portion is $525,000 to May 2,
2007, $650,000 from May 3, 2007 to May 4, 2008,
$625,000 from May 5, 2008 to May 3, 2009, $600,000
from May 4, 2009 to May 2, 2010, $575,000 from
May 3, 2010 to May 2, 2011, $550,000 from May 3,
2011 to May 2, 2012, and $525,000 for May 3, 2012
to May 2, 2013. The estimated fair value of this inter-
est rate swap liability was $7,220 at July 28, 2006
and is included in other long-term obligations.
The offset to the interest rate swap liability is in
other comprehensive income (loss), net of the
deferred tax asset. Any portion of the fair value of
the swap determined to be ineffective will be recog-
nized currently in earnings.
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