Cracker Barrel 2006 Annual Report Download - page 63

61
as of July 29, 2005, based on the grant date fair value
estimated in accordance with the original provisions
of SFAS No. 123 and (2) all share-based payments
granted subsequent to July 29, 2005, based on the
grant date fair value estimated using a binomial
lattice-based option valuation model. Before adoption
of SFAS No. 123R, pro forma disclosures reflected the
fair value of each option grant estimated on the date
of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
Year Ended
July 29, 2005
Dividend yield range 1.1% -1.3%
Expected volatility range 33% - 38%
Risk-free interest rate range 3.3% -4.1%
Expected lives (in years) 5
Under the Black-Scholes option-pricing model, the
Company estimated volatility using only its historical
share price performance over the expected life of the
option. Under SFAS No. 123R, however, the Company
estimates expected volatility using a blend of implied
volatility based on market-traded options on the
Company’s common stock and historical volatility of
the Company’s common stock over the contractual life
of the options. Results of prior periods do not reflect
any restated amounts and the Company had no cumu-
lative effect adjustment upon adoption of SFAS No.
123R under the modified prospective method. The
Company’s policy is to recognize compensation cost
for awards with only service conditions and a
graded vesting schedule on a straight-line basis over
the requisite service period for the entire award.
Additionally, the Company’s policy is to issue new
shares of common stock to satisfy stock option exercises
or grants of restricted shares.
The adoption of SFAS No. 123R decreased 2006
reported operating income and income before income
taxes by $9,900, reported net income by $6,851 and
reported basic and diluted net income per share
by $0.16 and $0.15 per share, respectively for 2006.
The pre-tax expense is included in general and
administrative expense. The adoption of SFAS No. 123R
resulted in a decrease in reported cash flow from
operating activities of $6,441 offset by an increase in
reported cash flow from financing activities of $6,441
in 2006. The Company’s adoption of SFAS No. 123R
did not affect operating income, income before income
taxes, cash flows from operating activities, cash
flows from financing activities, net income or basic
and diluted net income per share in 2005.
In recent years, partly in anticipation of the adop-
tion of SFAS No.123R, the Company has adjusted the
mix of employee long-term incentive compensation by
reducing stock options awarded and increasing
certain cash-based compensation and other equity-
based awards. Compensation cost for share-based
payment arrangements recognized in general and
administrative expenses for 2006 was $9,900 for stock
options and $3,539 for restricted stock. The total
income tax benefit recognized in the Consolidated
Statement Income for 2006 for share-based compen-
sation arrangements was $4,139.
The fair value of each option award is estimated on
the date of grant using a binomial lattice-based
option valuation model, which incorporates ranges of
assumptions for inputs as shown in the following
table. The assumptions are as follows:
•The expected volatility is a blend of implied
volatility based on market-traded options on the
Company’s common stock and historical volatility
of the Company’s stock over the contractual life
of the options.
•The Company uses historical data to estimate option
exercise and employee termination behavior within
the valuation model; separate groups of employees
that have similar historical exercise behavior are
considered separately for valuation purposes. The
expected life of options granted is derived from the
output of the option valuation model and repre-
sents the period of time the options are expected to
be outstanding.
•The risk-free interest rate is based on the U.S.
Treasury yield curve in effect at the time of grant for
periods within the contractual life of the option.
•The expected dividend yield is based on the
Company’s current dividend yield as the best esti-
mate of projected dividend yield for periods within
the contractual life of the option.
Year Ended
July 28, 2006
Dividend yield range 1.18% - 1.59%
Expected volatility 28.0 % -31.0 %
Risk-free interest rate range 3.8 % - 5.5 %
Expected term (in years) 2.12 - 6.22