SELECTED FINANCIAL DATA
(In thousands except per share data)
For each of the fiscal years ended
August 1, August 2, August 3, July 28, July 30,
2003 2002 2001(b)(c)(d) 2000(e) 1999(f)
- ----------------------------------------------------------------------------------------
OPERATING RESULTS
Total revenue $2,198,182 $2,071,784 $1,967,998 $1,777,119 $1,535,994
Cost of goods sold 703,915 677,738 664,332 614,472 538,051
Gross profit 1,494,267 1,394,046 1,303,666 1,162,647 997,943
Labor & other related
expenses 819,957 777,617 732,419 645,976 538,348
Other store operating
expenses 378,343 351,977 357,640 298,419 252,577
Store operating income 295,967 264,452 213,607 218,252 207,018
General and administrative 121,886 115,152 102,541 95,289 82,006
Amortization of goodwill -- -- 14,370 3,994 2,169
Operating income 174,081 149,300 96,696 118,969 122,843
Interest expense 8,892 6,769 12,316 24,616 11,324
Interest income 73 -- 84 352 1,319
Income before income taxes 165,262 142,531 84,464 94,705 112,838
Provision for income taxes 58,733 50,742 35,283 35,707 42,653
Net income $ 106,529 $ 91,789 $ 49,181 $ 58,998 $ 70,185
SHARE DATA Net income per share:
Basic $2.16 $1.69 $ .88 $1.02 $1.16
Diluted 2.09 1.64 .87 1.02 1.16
Dividends per share(a) $.02 $.02 $ .02 $ .01 $ .02
Weighted average
shares outstanding:
Basic 49,274 54,199 56,129 57,960 60,329
Diluted 50,998 56,091 56,799 58,041 60,610
FINANCIAL POSITION
Working capital $ (70,655) $ (54,245) $ (37,049)$ (25,079) $ (2,806)
Total assets 1,326,323 1,263,831 1,212,955 1,335,101 1,277,872
Property and equipment-net 1,040,315 984,817 955,028 1,075,134 1,020,055
Long-term debt 186,730 194,476 125,000 292,000 312,000
Other long-term
obligations 20,303 18,044 13,839 6,226 3,899
Shareholders' equity 794,896 782,994 846,108 828,970 791,007
====================================================================================
(a)On November 24, 1999, CBRL Group, Inc.'s ("Company") Board of Directors
adopted a policy to consider and pay dividends, if declared, on an annual basis
each January in the future. This policy was intended to reduce
administrative and mailing costs related to dividends. On September 25, 2003,
the Company's Board of Directors adopted a new policy to consider and pay
dividends, if declared, on a quarterly basis, declared at $0.11 per share for
the initial quarter.
(b)Includes charges of $33,063 before taxes principally as a result of exiting
the Carmine Giardini's Gourmet Market(TM) business and closing four Cracker
Barrel Old Country Store(R) units and three Logan's Roadhouse(R) restaurants, as
well as an accrual for a settlement proposal for a collective action under the
Fair Labor Standards Act. See Management's Discussion and Analysis of Financial
Condition and Results of Operations. (See Notes 2 and 9 to the Company's
Consolidated Financial Statements.)
(c)The Company's fiscal year ended August 3, 2001 consisted of 53 weeks. As a
result, comparisons to fiscal 2002 and fiscal 2000 also reflect the impact of
having one more week in fiscal 2001 than in fiscal 2002 and fiscal 2000. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
(d)Includes a sale-leaseback transaction under which $138,300 of long-term debt
was paid down. (See Note 11 to the Company's Consolidated Financial Statements.)
(e)Includes charges of $8,592 before taxes, principally as a result of
management changes and the resulting refocused operating priorities.
(f)The Company acquired Logan's Roadhouse, Inc. on February 16, 1999.
MARKET PRICE AND DIVIDEND INFORMATION
The following table indicates the high and low sales prices of the
Company's common stock, as reported by The Nasdaq Stock Market (National
Market), and dividends paid.
Fiscal Year 2003 Fiscal Year 2002
---------------- ----------------
Prices Prices
------------- Dividends ------------- Dividends
Quarter High Low Paid High Low Paid
- ----------------------------------------------------------------------
First $27.95 $19.54 -- $25.96 $18.31 --
Second 32.85 22.35 $.02 31.88 23.55 $.02
Third 32.99 24.86 -- 32.75 26.25 --
Fourth 39.95 31.31 -- 34.10 24.85 --
- ---------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's consolidated results of operations and financial condition. The
discussion should be read in conjunction with the Consolidated Financial
Statements and notes thereto. Except for specific historical information, the
matters discussed in this Annual Report to Shareholders, as well as the
Company's Form 10-K filed with the Securities and Exchange Commission for the
year ended August 1, 2003, contain forward-looking statements that involve
risks, uncertainties and other factors which may cause actual results and
performance of the Company to differ materially from those expressed or implied
by these statements. All forward-looking information is provided by the Company
pursuant to the safe harbor established under the Private Securities Litigation
Reform Act of 1995 and should be evaluated in the context of these factors.
Forward-looking statements generally can be identified by the use of
forward-looking terminology such as "assumptions", "target", "guidance",
"outlook", "plans", "projection", "may", "will", "would", "expect", "intend",
"estimate", "anticipate", "believe", "potential" or "continue" (or the negative
or other derivatives of each of these terms) or similar terminology. Factors
which could materially affect actual results include, but are not limited to:
the effects of uncertain consumer confidence or general or regional economic
weakness on sales and customer travel activity; practical or psychological
effects of terrorist acts or war and military or government responses; consumer
behavior based on concerns over nutritional aspects of the Company's products or
restaurant food in general; competitive marketing and operational initiatives;
commodity, workers' compensation, group health and utility price changes; the
effects of plans intended to improve operational execution and performance; the
effects of increased competition at Company locations on sales and on labor
recruiting, cost, and retention; the ability of and cost to the Company to
recruit, train, and retain qualified restaurant hourly and management employees;
the ability of the Company to identify and acquire successful new lines of
retail merchandise; changes in foreign exchange rates affecting the Company's
future retail inventory purchases; the availability and cost of acceptable sites
for development and the Company's ability to identify such sites; changes in
accounting principles generally accepted in the United States of America or
changes in capital market conditions that could affect valuations of restaurant
companies in general or the Company's goodwill in particular; other
undeterminable areas of government or regulatory actions or regulations; changes
in interest rates affecting the Company's financing costs; increases in
construction costs; changes in or implementation of additional governmental or
regulatory rules, regulations and interpretations affecting accounting, tax,
wage and hour matters, health and safety, pensions and insurance; the actual
results of pending or threatened litigation or governmental investigations and
the costs and effects of negative publicity associated with these activities;
and other factors described from time to time in the Company's filings with the
Securities and Exchange Commission, press releases, and other communications.
All dollar amounts reported or discussed in Management's Discussion and
Analysis of Financial Condition and Results of Operations are shown in
thousands. References in Management's Discussion and Analysis of Financial
Condition and Results of Operations to a year are to the Company's fiscal year
unless otherwise noted.
The following table highlights operating results over the past three
years (immediately following the table are details of the impact of certain
charges taken in 2001 on the amounts shown in the table):
Period to Period
Relationship to Total Revenue Increase(Decrease)
2003 2002 2001 2003 vs 2002 2002 vs 2001
- -------------------------------------------------------------------------------------
Total revenue 100.0% 100.0% 100.0% 6% 5%
Cost of goods sold 32.0 32.7 33.8 4 2
Gross profit 68.0 67.3 66.2 7 7
Labor & other related
expenses 37.3 37.5 37.2 5 6
Other store operating
expenses 17.2 17.0 18.2 7 (2)
Store operating income 13.5 12.8 10.8 12 24
General & administrative 5.6 5.6 5.2 6 12
Amortization of goodwill -- -- 0.7 - (100)
Operating income 7.9 7.2 4.9 17 54
Interest expense 0.4 0.3 0.6 31 (45)
Interest income -- -- -- - (100)
Income before income taxes 7.5 6.9 4.3 16 69
Provision for income taxes 2.7 2.5 1.8 16 44
Net income 4.8 4.4 2.5 16 87
=================================================================================
The Company recorded charges of $33,063 before taxes during the quarter
ended August 3, 2001, principally as a result of exiting the Carmine Giardini's
Gourmet Market(TM) ("Carmine's") business and the closing of four Cracker Barrel
Old Country Store(R) ("Cracker Barrel") units and three Logan's Roadhouse(R)
("Logan's") restaurants, as well as an accrual for a settlement proposal for a
certain collective action under the Fair Labor Standards Act. These charges
consisted primarily of $10,428 for the write-off of goodwill related to the
acquisition of Carmine's and $14,003 for the write-down of fixed assets of all
three Carmine's units, four Cracker Barrel units and three Logan's units in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121
(see Note 2 to the Company's Consolidated Financial Statements). These charges
also consisted of $1,234 for severance and related expenses for approximately
1,000 employees, consisting primarily of store personnel, and $3,898 for other
charges primarily consisting of lease termination costs, inventory write-downs
related to the closed units and other unit closing costs. Additionally, the
Company accrued $3,500 for a settlement proposal for a certain collective action
under the Fair Labor Standards Act (see Note 9 to the Company's Consolidated
Financial Statements). These charges affect line items in the Company's
Consolidated Statement of Income in dollars and as a percent of total revenue
for the year ended August 3, 2001, respectively, as follows: Cost of goods sold
$669, 0.0%; Labor and other related expenses $924, 0.0%; Other store operating
expenses $20,552, 1.1%; General and administrative $490, 0.0%; and Amortization
of goodwill $10,428, 0.6%. As of August 3, 2001, approximately $285 of the
severance costs and $620 of the other charges had been paid with no changes from
the original estimate. The Company paid substantially all of the remaining
severance in the first quarter of 2002 with no changes from the original
estimates. After taking into effect the property and equipment write-downs, the
Company's carrying value of the property and equipment associated with the
charges is approximately $457 as of August 1, 2003. As of August 1, 2003,
substantially all of the amounts previously recorded had been paid or settled
except for $1,179 accrued for certain lease termination costs.
The Company's year ended August 3, 2001 consisted of 53 weeks. As a
result, comparisons to 2002 and 2000 also reflect the impact of having one more
week in 2001 than in 2002 and 2000. The estimated impact of the additional week
was to increase consolidated 2001 results as follows: total revenue, $40,485;
store operating income, $9,006; operating income, $8,056; net income, $4,954;
and diluted net income per share, $0.09.
The following table highlights the components of total revenue by
percentage relationships to total revenue for the past three years:
2003 2002 2001
- ----------------------------------------------------------
Net sales:
Restaurant 79.7% 79.4% 78.5%
Retail 20.2 20.5 21.5
- ----------------------------------------------------------
Total net sales 99.9 99.9 100.0
Franchise fees and royalties 0.1 0.1 --
- ----------------------------------------------------------
Total revenue 100.0% 100.0% 100.0%
==========================================================
The following table highlights comparable store sales* results over the
past two years:
Cracker Barrel Old Country Store Logan's Roadhouse
Period to Period Period to Period
Increase(Decrease) Increase
------------------ --------
2003 vs 2002 2002 vs 2001 2003 vs 2002 2002 vs 2001
(430 Stores) (414 Stores) (71 Stores) (59 Stores)
- -----------------------------------------------------------------------------------
Restaurant 0.5% 5.3% 0.0% 2.4%
Retail (0.4) 2.3 -- --
Restaurant & retail 0.3 4.6 0.0 2.4
================================================================================
*Comparable store sales consist of sales of stores open six full quarters at the
beginning of the year; and are measured on comparable calendar weeks.
Cracker Barrel comparable store restaurant sales increased 0.5% for 2003
versus 2002. Comparable store restaurant sales increased 5.3% in 2002 versus the
comparable 52-weeks of 2001. The increase in comparable store restaurant sales
from 2002 to 2003 was due primarily to an increase in average check of 1.9%,
including 1.1% of menu pricing and 0.8% of product mix, and a decrease in guest
traffic of 1.4%.
Cracker Barrel comparable store retail sales decreased 0.4% for 2003 versus
2002. Comparable store retail sales increased 2.3% in 2002 versus the comparable
52-weeks of 2001. The comparable store retail sales decrease from 2002 to 2003
was primarily due to the restaurant guest traffic decrease.
In 2003 total net sales (restaurant and retail) in the 430 Cracker Barrel
comparable stores averaged $4,096. Restaurant sales were 77.1% of total net
sales in the comparable 430 stores in 2003 and 76.9% in 2002.
Logan's comparable store sales were flat for 2003 versus 2002 at an average
of $2,915 per store. Comparable store sales increased 2.4% for 2002 versus the
comparable 52 weeks of 2001. The unchanged comparable store sales from 2002 to
2003 was primarily due to an increase in average check of 1.7%, including 1.0%
of menu pricing and 0.7% of product mix (which reflected lower alcohol mix and
increased food and non-alcoholic beverage mix), offset by a decrease in guest
traffic of 1.7%.
Total revenue, which increased approximately 6% and 5% in 2003 and 2002,
respectively, benefited from the opening of 23, 20 and 15 new Cracker Barrel
stores in 2003, 2002 and 2001, respectively, and the opening of 12, 9 and 13 new
company-operated Logan's restaurants in 2003, 2002 and 2001, respectively.
Additionally, 2001 revenues benefited from a 53rd week, which accounted for
approximately 2% of total revenue. Average unit volumes, based on weeks of
operation, were approximately $60.9 per week for Cracker Barrel restaurants in
2003 (compared with $60.6 in 2002 and $57.5 in 2001), $18.2 for Cracker Barrel
retail (compared with $18.3 for 2002 and $17.9 for 2001), and $57.0 for Logan's
(compared with $56.6 for 2002 and $54.9 for 2001).
Cost of goods sold as a percentage of total revenue decreased in 2003 to
32.0% from 32.7% in 2002. Cracker Barrel has had various focused initiatives
aimed at improving cost of product from vendors. This decrease was due primarily
to lower commodity costs for orange juice and certain pork and dairy products
versus the prior year, higher menu pricing, higher initial mark-ons of retail
merchandise, lower retail shrink and in-store damages, a lower mix of retail
sales as a percent of total revenues (retail has a higher product cost than
restaurant) and improvements in restaurant-level execution. These decreases were
offset partially by higher markdowns of retail merchandise and higher commodity
costs for beef, eggs and butter versus the prior year. Food cost as a percentage
of net restaurant sales in 2003 decreased from 2002 primarily for reasons
described above.
Cost of goods sold as a percentage of total revenue decreased in 2002 to
32.7% from 33.8% in 2001. This decrease was primarily due to a higher average
check, an increased mix of restaurant sales, which have a lower cost of goods
than retail sales, improvements in store-level food cost execution, lower beef
and rib prices, higher initial mark-ons and lower markdowns of retail
merchandise, lower retail shrinkage and lower retail freight. These decreases
were partially offset by higher potato prices. Food cost as a percentage of net
restaurant sales in 2002 decreased from 2001 primarily for the reasons described
above.
Labor and other related expenses include all direct and indirect labor
and related costs incurred in store operations. Labor expenses as a percentage
of total revenue were 37.3%, 37.5% and 37.2% in 2003, 2002 and 2001,
respectively. The year to year decrease from 2002 to 2003 was due primarily to
higher menu pricing, lower hourly labor, including wage rates, decreased
compensation under unit-level bonus programs and decreased workers' compensation
costs offset partially by increases in manager wages and increased group health
costs versus the prior year. The year to year increase in labor and other
related expenses in 2002 versus 2001 was due primarily to increases in wages,
increases under the store-level bonus programs and increases in workers'
compensation costs. These increased workers' compensation costs reflected higher
than expected claims cost development (as determined annually by an independent
actuarial evaluation) from claims incurred in prior years. These increases were
partially offset by lower group health costs, higher average check and improved
volume.
Other store operating expenses include all unit-level operating costs,
the major components of which are operating supplies, utilities, repairs and
maintenance, advertising, rent, depreciation and amortization. Other store
operating expenses as a percentage of total revenue were 17.2%, 17.0% and 18.2%
in 2003, 2002 and 2001, respectively. The increase from 2002 to 2003 was due
primarily to higher maintenance versus the prior year offset partially by higher
menu pricing versus the prior year. The year to year decrease in 2002 versus
2001 was due primarily to the non-recurrence of the charges in the fourth
quarter of 2001 of $20,552, which totaled 1.0% of total revenue, consisting
primarily of impairment losses of $14,003 (See Note 2 to the Company's
Consolidated Financial Statements). This decrease was also due to lower utility
costs, lower advertising spending, higher average check and improved volume
partially offset by higher general liability insurance costs and credit card
fees.
General and administrative expenses as a percentage of total revenue
were 5.6%, 5.6% and 5.2% in 2003, 2002 and 2001, respectively. Higher
professional fees, higher costs for store manager conferences and higher
corporate bonuses reflective of performance improvements versus a year ago were
offset by higher revenues from menu pricing and new stores versus the prior
year. General and administrative expenses as a percentage of total revenue
increased from 2001 to 2002 primarily due to bonus accruals reflective of
performance improvements, higher professional fees, and various staffing and
infrastructure changes. These increases were partially offset by a higher
average check, improved volume and the non-recurrence of the $490 in charges
related to management's decision during the fourth quarter of 2001 to exit the
Carmine's business and to close four Cracker Barrel units and three Logan's
units (see Note 2 to the Company's Consolidated Financial Statements).
Interest expense increased to $8,892 in 2003 from $6,769 in 2002 and
decreased from $12,316 in 2001. The increase from 2002 to 2003 resulted
primarily from higher average outstanding debt as compared to the prior year
offset partially by lower average interest rates as compared to the prior year.
The decrease from 2001 to 2002 was primarily due to lower interest rates (see
Note 4 to the Company's Consolidated Financial Statements).
Interest income increased to $73 in 2003 from $0 in 2002 and decreased from
$84 in 2001. The increase from 2002 to 2003 was due primarily to higher average
funds available for investment as compared to the prior year. The primary reason
for the decrease from 2001 to 2002 was lower average funds available for
investment.
Provision for income taxes as a percent of pretax income was 35.5% for
2003, 35.6% for 2002 and 41.8% for 2001. The primary reason for the decrease in
the tax rate from 2002 to 2003 was a decrease in effective state tax rates. The
primary reason for the decrease in the tax rate from 2001 to 2002 was the
non-deductibility of the $10,428 write-off of goodwill related to Carmine's in
2001. (See Note 2 to the Company's Consolidated Financial Statements.)
Impact of Recent Accounting Pronouncements Not Yet Adopted
In May 2003, The Financial Accounting Standards Board ("FASB") issued
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity". SFAS No. 150 establishes standards for how a
Company classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that a company
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances) because that freestanding financial instrument
embodies an obligation of the Company. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company does not expect the adoption of this standard to have a
material effect on the Company's consolidated financial statements or its
financial position.
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. With certain instruments entered into for other
than trading purposes, the Company is subject to market risk exposure related to
changes in interest rates. As of October 15, 2003, the Company has in place a
$300,000 revolving credit facility, which matures February 21, 2008. The
facility bears interest, at the Company's election, either at the prime rate or
a percentage point spread from LIBOR based on certain financial ratios set forth
in the loan agreement. As of August 1, 2003, the Company had $7,000 outstanding
under the revolving credit facility at an interest rate of 2.36%. While changes
in the prime rate or LIBOR would affect the cost of funds borrowed in the
future, the Company believes that the effect, if any, of reasonably possible
near-term changes in interest rates on the Company's consolidated financial
position, results of operations or cash flows would not be material. The impact
on the Company's annual results of operations of a one-point interest rate
change on the $7,000 outstanding under the Company's revolving credit facility
as of August 1, 2003 would be approximately $70. Based on discounted cash flows
of future payment streams, assuming rates equivalent to the Company's
incremental borrowing rate on similar liabilities, the fair value of the $7,000
outstanding under the revolving credit facility approximates carrying value as
of August 1, 2003.
Commodity Price Risk. 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 which are
generally unpredictable. Three food categories (beef, pork and poultry) account
for the largest shares of the Company's food purchases at approximately 17%, 11%
and 11%, respectively. Other items affected by the commodities markets, such as
dairy, produce and coffee, may each account for as much as 10% of the Company's
food purchases. While the Company has some of its food items prepared to its
specifications, the Company's food items are based on generally available
products, and if any existing suppliers fail, or are unable to deliver in
quantities required by the Company, the Company believes that there are
sufficient other quality suppliers in the marketplace that its sources of supply
can be replaced as necessary. The Company also recognizes, however, that
commodity pricing is extremely volatile and can change unpredictably and over
short periods of time. Changes in commodity prices would affect the Company and
its competitors generally and often simultaneously. The Company also enters into
supply contracts for certain of its products in an effort to minimize volatility
of supply and pricing. In many cases, the Company believes it will be able to
pass through any increased commodity costs by adjusting its menu pricing. From
time to time, competitive circumstances may limit menu price flexibility, and in
those circumstances increases in commodity prices can result in lower margins
for the Company. Some of the Company's purchase contracts are used to hedge
commodity prices and may contain features that could be classified as derivative
financial instruments under SFAS Nos. 133, 137, 138 and 149. However, these
features that could be classified as derivative financial instruments are exempt
from fair value accounting based on the normal purchases exemption.
Additionally, the Company believes that any changes in commodity pricing which
cannot be adjusted for by changes in menu pricing or other product delivery
strategies would not be material.
Liquidity and Capital Resources
The following table presents a summary of the Company's cash flows for
the last three years:
2003 2002 2001
Net cash provided by operating activities $ 240,586 $ 196,277 $ 147,859
Net cash (used in)/provided by investing
activities (118,953) (90,879) 49,844
Net cash (used in) financing activities (122,318) (102,131) (199,761)
--------- --------- ---------
Net (decrease) increase in cash
and cash equivalents $ (685) $ 3,267 $ (2,058)
========= ========= =========
The Company's cash generated from operating activities was $240,586 in
2003. Most of this cash was provided by net income adjusted by depreciation and
amortization, accretion on zero-coupon contingently convertible senior notes and
the tax benefit realized upon exercise of stock options. Decreases in prepaid
expenses and increases in accounts payable, taxes withheld and accrued, accrued
employee compensation, accrued employee benefits, other accrued expenses, other
long-term obligations and deferred income taxes were partially offset by
increases in receivables, inventories and other assets and decreases in income
taxes payable.
The sale-leaseback transaction that the Company entered into at the
beginning of 2001 generated cash of $138,280 from the sale of 65 Cracker Barrel
units that was used to reduce the Company's borrowings under its revolving
credit facility. This transaction caused the change from net cash used in
investing activities to change to net cash provided by investing activities and
caused the significant increase from 2000 in net cash used in financing
activities. (See Note 11 to the Company's Consolidated Financial Statements.)
The Company had negative working capital of $70,655 at August 1, 2003
versus negative working capital of $54,245 at August 2, 2002. In the restaurant
industry, substantially all sales are either for cash or credit card. Like many
other restaurant companies, the Company is able to, and may from time to time,
operate with negative working capital. Restaurant inventories purchased through
the Company's principal food distributor are on terms of net zero days, while
restaurant inventories purchased locally generally are financed from normal
trade credit. Retail inventories purchased domestically generally are financed
from normal trade credit, while imported retail inventories generally are
purchased through letters of credit and wire transfers. These various trade
terms are aided by rapid turnover of the restaurant inventory. Employees
generally are paid on weekly, bi-weekly or semi-monthly schedules in arrears for
hours worked, and certain expenses such as certain taxes and some benefits are
deferred for longer periods of time.
Capital expenditures (purchase of property and equipment) were $120,921,
$96,692 and $91,439 in 2003, 2002 and 2001, respectively. Costs of new locations
accounted for substantially all of these expenditures.
The Company's internally generated cash, along with cash at August 2,
2002, the Company's new operating leases, proceeds from stock option exercises
and the Company's available revolver, were sufficient to finance all of its
growth, share repurchases and other cash payment obligations in 2003.
In April 2002, the Company issued $422,050 face value at maturity of
zero coupon convertible senior notes (the "Notes"), maturing on April 2, 2032,
and received proceeds totaling approximately $172,756 prior to debt issuance
costs. The Notes require no cash interest payments and were issued at a discount
representing a yield to maturity of 3.00% per annum. The Notes are redeemable at
the Company's option on or after April 3, 2007, and the holders of the Notes may
require the Company to redeem the Notes on April 3, 2005, 2007, 2012, 2017, 2022
or 2027, and in certain other circumstances. In addition, each $1 Note is
convertible into 10.8584 shares of the Company's common stock (approximately 4.6
million shares in the aggregate) under the following conditions: 1) If the
stock's market price exceeds a specified price (initially, 120% of the accreted
conversion price, and declining .08474% per quarter thereafter to approximately
110% of the accreted conversion price on the last day of the quarter ending
January 30, 2032); 2) If the Company exercises its option to redeem the Notes;
3) If the credit rating of the Notes is reduced by Moody's and Standard and
Poor's to or below both Ba3 and BB-, respectively; or 4) Upon the occurrence of
certain specified corporate transactions. The accreted conversion price is equal
to the issue price of the Note plus accrued original issue discount divided by
10.8584 shares. All subsidiaries of the Company have fully and unconditionally
guaranteed on a joint and several basis the obligations under the Notes. Each
guarantor directly or indirectly is a wholly-owned affiliate of the parent
company, CBRL Group, Inc., which has no independent assets or operations.
On February 21, 2003, the Company entered into a new five-year $300,000
revolving credit facility and terminated its existing $250,000 revolving credit
facility, which was set to expire on December 31, 2003. The new facility has
substantially the same terms as the prior facility; however, there is a slightly
more favorable credit spread grid, as well as certain less restrictive
covenants. The new $300,000 revolving credit facility will expire on February
21, 2008.
During 2003, the Company's Board of Directors authorized the repurchase
of up to 6 million shares of the Company's common stock under four separate
repurchase authorizations. The purchases are to be made from time to time in the
open market at prevailing market prices. The Company completed the 5 million
shares in the first three repurchase authorizations and 338,700 shares of the
fourth repurchase authorization during 2003 for total consideration of $166,632
or $31.21 per share. The Company presently expects to complete the remaining
661,300 shares of this fourth repurchase authorization during 2004, although
there can be no assurance that such repurchase actually will be completed in
that period of time.
During 2003 the Company received proceeds of $59,649 from the exercise
of stock options on 2,922,783 shares of its common stock and tax benefit upon
exercise of stock options of $13,399. During the second quarter of 2003, the
Company declared and paid a dividend of $.02 per share.
On September 25, 2003 the Company's Board of Directors approved a new
quarterly dividend policy, declaring the first such quarterly dividend of $0.11
per common share payable on November 10, 2003 to shareholders of record on
October 17, 2003.
The Company estimates that its capital expenditures (purchase of
property and equipment) for 2004 will be approximately $140,000 to $145,000,
substantially all of which will be related to the construction of 24 new Cracker
Barrel stores and 11 new Logan's restaurants.
Management believes that cash at August 1, 2003, along with cash
generated from the Company's operating activities, stock option exercises and
its available revolving credit facility, will be sufficient to finance its
continued operations, its remaining share repurchase authorization, its
continued expansion plans and its dividend payments through 2004. At August 1,
2003, the Company had $293,000 available under its revolving credit facility.
The Company estimates that its net cash provided by operating activities in 2004
(most comparable measure under generally accepted principles in the United
States of America) less capital expenditures will generate excess cash of
approximately $55,000 to $60,000. The Company intends to use this excess cash
along with proceeds from the exercise of stock options in 2004 to apply toward
completing its remaining 661,300 share repurchase authorization, possible future
share repurchase authorizations, dividend payments, and possible debt reduction
or other purposes. The Company's principal criteria for share repurchases are
that they be accretive to earnings per share and that they do not unfavorably
affect the Company's investment grade debt rating and target capital structure.
Material Commitments
The Company's contractual cash obligations and commitments as of August
1, 2003, are summarized in the tables below:
Payments due by Year
----------------------------------
2005- 2007- After
Total 2004 2006 2008 2008
----- ---- ---- ---- ----
Convertible debt (a) $179,730 -- -- -- $179,730
Revolving credit facility 7,000 -- -- $7,000 --
-------- ------- ------- ------- --------
Long-term Debt 186,730 -- -- 7,000 179,730
Operating leases - excluding
billboards 446,068 $28,744 $56,532 55,629 305,163
Operating leases for billboards 33,611 17,993 15,443 175 --
Capital leases 451 100 247 104 --
-------- ------- ------- ------- --------
Total contractual cash
obligations $666,860 $46,837 $72,222 $62,908 $484,893
======== ======= ======= ======= ========
Amount of Commitment Expirations by Year
----------------------------------
2005- 2007- After
Total 2004 2006 2008 2008
----- ---- ---- ----- ----
Revolving credit facility $300,000 -- -- $300,000 --
Standby letters of credit 13,725 $13,725 -- -- --
Trade letters of credit 4,871 4,871 -- -- --
Guarantees (b) 4,924 451 $913 913 $2,647
-------- ------- ---- -------- ------
Total commitments $323,520 $19,047 $913 $300,913 $2,647
======== ======= ==== ======== ======
(a) The convertible debt was issued at a discount representing a yield to
maturity of 3.00% per annum. The $179,730 balance is the accreted carrying
value of the debt at August 1, 2003. The convertible debt will continue to
accrete at 3.00% per annum and if held to maturity on April 2, 2032 the
obligation will total $422,050.
(b)Consists solely of guarantees associated with properties that have been
subleased or assigned. The Company is not aware of any non-performance
under these arrangements that would result in the Company having to perform
in accordance with the terms of those guarantees
Critical Accounting Policies
The Company prepares its Consolidated Financial Statements in
conformity with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires the Company to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period (see Note 2 to the Company's Consolidated Financial
Statements). Actual results could differ from those estimates. Critical
accounting policies are those that management believes are both most important
to the portrayal of the Company's financial condition and operating results, and
require management's most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain. The Company bases its estimates on historical experience,
outside advice from parties believed to be experts in such matters, and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Judgments and uncertainties affecting the application of those
policies may result in materially different amounts being reported under
different conditions or using different assumptions. The Company considers the
following policies to be most critical in understanding the judgments that are
involved in preparing its Consolidated Financial Statements.
Impairment of Long-Lived Assets and Provision for Asset Dispositions
The Company assesses the impairment of identifiable intangibles,
long-lived assets and goodwill whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Recoverability of
assets is measured by comparing the carrying value of the asset to the future
cash flows expected to be generated by the asset. If the total expected future
cash flows were less than the carrying amount of the asset, the carrying amount
is written down to the estimated fair value, and a loss resulting from
impairment is recognized by a charge to earnings. Judgments and estimates made
by the Company related to the expected useful lives of long-lived assets are
affected by factors such as changes in economic conditions and changes in
operating performance. As the Company assesses the ongoing expected cash flows
and carrying amounts of its long-lived assets, these factors could cause the
Company to realize a material impairment charge. From time to time the Company
has decided to exit from or dispose of certain operating units. Typically such
decisions are made based on operating performance or strategic considerations
and must be made before the actual costs of proceeds of disposition are known,
and management must make estimates of these outcomes. Such outcomes could
include the sale of a property or leasehold, mitigating costs through a tenant
or subtenant, or negotiating a buyout of a remaining lease term. In these
instances management evaluates possible outcomes, frequently using outside real
estate and legal advice, and records in the financial statements provisions for
the effect of such outcomes. The accuracy of such provisions can vary materially
from original estimates, and management regularly monitors the adequacy of the
provisions until final disposition occurs. In addition, at least annually the
Company assesses the recoverability of goodwill and other intangible assets
related to its restaurant concepts with assistance from an outside expert. The
impairment tests require the Company to estimate fair values of its restaurant
concepts by making assumptions regarding future cash flows and other factors.
This valuation may reflect, among other things, such external factors as capital
market valuation for public companies comparable to the operating unit. If these
assumptions change in the future, the Company may be required to record
impairment charges for these assets and such charges could be material.
Insurance Reserves
The Company self-insures a significant portion of expected losses under
its workers' compensation, general liability and health insurance programs. The
Company has purchased insurance for individual claims that exceed $250 for
workers' compensation and general liability insurance prior to 2003, but has now
increased this amount to $500 for 2003 and to $1,000 for certain coverages for
2004 going forward. The Company has decided not to purchase such insurance for
its primary group health program, but its offered benefits are limited to not
more than $1,000 during the lifetime of any employee (including dependents) in
the program. The Company records a liability for workers' compensation and
general liability for all unresolved claims and for an estimate of incurred but
not reported claims at the anticipated cost to the Company based upon an
actuarially determined reserve as of the end of the Company's third quarter and
adjusting it by the actuarially determined losses and actual claims payments for
the fourth quarter. Those reserves and these losses are determined actuarially
from a range of possible outcomes within which no given estimate is more likely
than any other estimate. In accordance with SFAS No. 5, "Accounting for
Contingencies", the Company records the losses at the low end of that range and
discounts them to present value using a risk-free interest rate based on
actuarially projected timing of payments. The Company records a liability for
its group health program for all unpaid claims based primarily upon a loss
development analysis derived from actual group health claims payment experience
provided by the Company's third party administrator. The Company's accounting
policies regarding insurance reserves include certain actuarial assumptions or
management judgments regarding economic conditions, the frequency and severity
of claims and claim development history and settlement practices. Unanticipated
changes in these factors may produce materially different amounts of expense
that would be reported under these insurance programs.
Tax Provision
The Company must make estimates of certain items that comprise its
income tax provision. These estimates include employer tax credits for items
such as FICA taxes paid on employee tip income, Work Opportunity and Welfare to
Work, as well as estimates related to certain depreciation and capitalization
policies. These estimates are made based on the best available information at
the time of the provision and historical experience. The Company files its
income tax returns many months after its year end. These returns are subject to
audit by various federal and state governments years after the returns are filed
and could be subject to differing interpretations of the tax laws. The Company
then must assess the likelihood of successful legal proceedings or reach a
settlement, either of which could result in material adjustments to the
Company's Consolidated Financial Statements and its consolidated financial
position. The Internal Revenue Service has examined the Company's federal income
tax returns for 1997 through 2001. On August 1, 2002 the Company reached a
settlement with the Internal Revenue Service for these tax periods. Adjustments
related primarily to temporary or timing differences. The settlement had no
material effect on the Company's Consolidated Financial Statements.
Additionally, the Internal Revenue Service has examined the Company's federal
payroll tax filings for the calendar years ended December 31, 1997 through
December 31, 2001. This examination was completed on July 21, 2003 resulting in
no adjustment to the payroll taxes originally reported by the Company. See Note
7 to the Company's Consolidated Financial Statements.
Legal Proceedings
As more fully discussed in Note 9 to the Consolidated Financial
Statements, the Company's principal subsidiary, Cracker Barrel Old Country
Store, Inc., is a defendant in certain lawsuits, several of which have been
brought by the same plaintiffs' attorneys. Of the existing cases discussed in
Note 9, three are recent cases that appear to be directly related to one of the
previously existing cases, one is provisionally certified as a collective
action, and motions for decertification and other matters are pending, in one
the plaintiffs' attorneys never moved for class certification, and in two cases
the Court has issued its ruling denying class certification. With respect to the
cases in which class certification has been denied, the time to appeal the
court's ruling has expired in one case, and in the other case, the 11th Circuit
Court of Appeals has refused the plaintiffs' appeal. The Company believes that
its subsidiary has substantial defenses in these actions and it continues to
defend each of them vigorously. Nevertheless, the Company made offers totaling
$3,500 to resolve one of the cases, but those offers were not accepted by the
plaintiffs' attorneys. As a result, the Company recorded an accrual of this
amount in the fourth quarter of 2001 in accordance with SFAS No. 5. Except for
that accrual, there currently is no provision for any potential liability with
respect to these lawsuits in the Consolidated Financial Statements. If there
were to be an unfavorable outcome in any of these cases, beyond amounts covered
under the various insurance policies of the Company and its subsidiaries, if
applicable, the Company's results of operations, financial position and
liquidity could be materially and adversely affected.
In addition to the litigation described in the preceding paragraph,
the Company and its subsidiaries are party to other legal proceedings incidental
to their business. In the opinion of management, based upon information
currently available, the ultimate liability with respect to these other actions
will not materially affect the Company's Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEET
(In thousands except share data)
August 1, August 2,
Assets 2003 2002
- --------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 14,389 $ 15,074
Receivables 9,013 8,161
Inventories 136,020 124,693
Prepaid expenses 9,069 12,022
Deferred income taxes 7,568 11,632
- --------------------------------------------------------------------------
Total current assets 176,059 171,582
- --------------------------------------------------------------------------
Property and Equipment:
Land 273,831 261,857
Buildings and improvements 625,541 603,381
Buildings under capital leases 3,289 3,289
Restaurant and other equipment 331,065 321,544
Leasehold improvements 164,937 122,869
Construction in progress 19,268 16,106
- --------------------------------------------------------------------------
Total 1,417,931 1,329,046
Less: Accumulated depreciation and
amortization of capital leases 377,616 344,229
- --------------------------------------------------------------------------
Property and equipment - net 1,040,315 984,817
- --------------------------------------------------------------------------
Goodwill 92,882 92,882
Other Assets 17,067 14,550
- --------------------------------------------------------------------------
Total $1,326,323 $1,263,831
==========================================================================
Liabilities and Shareholders' Equity
- --------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 82,172 $ 73,806
Current maturities of long-term debt
and other long-term obligations 100 87
Taxes withheld and accrued 32,103 28,681
Income taxes payable 11,952 18,519
Accrued employee compensation 50,153 43,462
Accrued employee benefits 38,782 33,421
Other accrued expenses 31,452 27,851
- --------------------------------------------------------------------------
Total current liabilities 246,714 225,827
- --------------------------------------------------------------------------
Long-term Debt 186,730 194,476
- --------------------------------------------------------------------------
Other Long-term Obligations 20,303 18,044
- --------------------------------------------------------------------------
Deferred Income Taxes 77,680 42,490
- --------------------------------------------------------------------------
Commitments and Contingencies (Note 9)
Shareholders' Equity:
Preferred stock - 100,000,000 shares of
$.01 par value authorized; no shares
issued -- --
Common stock - 400,000,000 shares of $.01
par value authorized; 2003 - 47,872,542
shares issued and outstanding; 2002 -
50,272,459 shares issued and outstanding 479 503
Retained earnings 794,417 782,491
- --------------------------------------------------------------------------
Total shareholders' equity 794,896 782,994
- --------------------------------------------------------------------------
Total $1,326,323 $1,263,831
==========================================================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF INCOME
(In thousands except share data)
Fiscal years ended
August 1, August 2, August 3,
2003 2002 2001
- -----------------------------------------------------------------------
Total revenue $2,198,182 $2,071,784 $1,967,998
Cost of goods sold 703,915 677,738 664,332
- -----------------------------------------------------------------------
Gross profit 1,494,267 1,394,046 1,303,666
- -----------------------------------------------------------------------
Labor & other related expenses 819,957 777,617 732,419
Other store operating expenses 378,343 351,977 357,640
- -----------------------------------------------------------------------
Store operating income 295,967 264,452 213,607
General and administrative 121,886 115,152 102,541
Amortization of goodwill -- -- 14,370
- -----------------------------------------------------------------------
Operating income 174,081 149,300 96,696
Interest expense 8,892 6,769 12,316
Interest income 73 -- 84
- -----------------------------------------------------------------------
Income before income taxes 165,262 142,531 84,464
Provision for income taxes 58,733 50,742 35,283
- -----------------------------------------------------------------------
Net income $ 106,529 $ 91,789 $ 49,181
=======================================================================
Net income per share - basic $2.16 $1.69 $.88
=======================================================================
Net income per share - diluted $2.09 $1.64 $.87
=======================================================================
Basic weighted average shares
outstanding 49,274,373 54,198,845 56,128,956
=======================================================================
Diluted weighted average shares
Outstanding 50,998,339 56,090,940 56,799,124
=======================================================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands except per share data)
Additional Total
Common Paid-In Retained Treasury Shareholders'
Stock Capital Earnings Stock Equity
- --------------------------------------------------------------------------------
Balances at July 28, 2000 $627 $284,429 $648,489 $(104,575) $828,970
Cash dividends - $.020 per
share -- -- (1,185) -- (1,185)
Exercise of stock options 3 5,152 -- -- 5,155
Tax benefit realized upon
exercise of stock options -- 431 -- -- 431
Purchases and retirement of
common and treasury stock (80) (140,939) -- 104,575 (36,444)
Net income -- -- 49,181 -- 49,181
- --------------------------------------------------------------------------------
Balances at August 3, 2001 550 149,073 696,485 -- 846,108
Cash dividends - $.020 per
share -- -- (1,163) -- (1,163)
Exercise of stock options 29 53,074 -- -- 53,103
Tax benefit realized upon
exercise of stock options -- 9,991 -- -- 9,991
Purchases and retirement of
common stock (76) (212,138) (4,620) -- (216,834)
Net income -- -- 91,789 -- 91,789
- --------------------------------------------------------------------------------
Balances at August 2, 2002 503 -- 782,491 -- 782,994
Cash dividends - $.020 per
share -- -- (1,043) -- (1,043)
Exercise of stock options 29 59,620 -- -- 59,649
Tax benefit realized upon
exercise of stock options -- 13,399 -- -- 13,399
Purchases and retirement of
common stock (53) (73,019) (93,560) -- (166,632)
Net income -- -- 106,529 -- 106,529
- --------------------------------------------------------------------------------
Balances at August 1, 2003 $479 $ -- $794,417 $ -- $794,896
================================================================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Fiscal years ended
August 1, August 2, August 3,
2003 2002 2001
- -------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 106,529 $ 91,789 $ 49,181
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 64,376 62,759 64,902
Loss (gain) on disposition of property
and equipment 903 (781) 671
Impairment loss -- -- 24,431
Accretion on zero-coupon contingently
convertible senior notes 5,254 1,720 --
Tax benefit realized upon
exercise of stock options 13,399 9,991 431
Changes in assets and liabilities:
Receivables (852) 2,040 1,369
Inventories (11,327) (8,103) (9,213)
Prepaid expenses 2,953 (1,920) (3,108)
Other assets (3,136) (813) (1,376)
Accounts payable 8,366 17,108 1,025
Taxes withheld and accrued 3,422 (1,153) 1,456
Income taxes payable (6,567) (3,146) 8,230
Accrued employee compensation 6,691 7,169 3,376
Accrued employee benefits 5,361 7,871 2,221
Other accrued expenses 3,601 5,769 1,753
Other long-term obligations 2,359 4,232 7,803
Deferred income taxes 39,254 1,745 (5,293)
- -------------------------------------------------------------------------------------------
Net cash provided by
operating activities 240,586 196,277 147,859
- -------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and
equipment (120,921) (96,692) (91,439)
Proceeds from sale of property and
equipment 1,968 5,813 141,283
- -------------------------------------------------------------------------------------------
Net cash (used in) provided by investing
activities (118,953) (90,879) 49,844
- -------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of
long-term debt 353,200 591,756 355,600
Proceeds from exercise of
stock options 59,649 53,103 5,155
Principal payments under
long-term debt and other
long-term obligations (366,287) (524,140) (522,790)
Purchases and retirement of common stock (166,632) (216,834) (36,444)
Deferred financing costs (1,205) (4,853) (97)
Dividends on common stock (1,043) (1,163) (1,185)
- -------------------------------------------------------------------------------------------
Net cash used in financing activities (122,318) (102,131) (199,761)
- -------------------------------------------------------------------------------------------
Net (decrease) increase in cash
and cash equivalents (685) 3,267 (2,058)
Cash and cash equivalents,
beginning of year 15,074 11,807 13,865
- -------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of year $ 14,389 $ 15,074 $ 11,807
===========================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,604 $ 4,839 $ 12,739
Income taxes 15,229 43,340 32,642
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
1. Description Of The Business
CBRL Group, Inc. and its affiliates (collectively, in the Notes, the
"Company") are principally engaged in the operation and development in the
United States of the Cracker Barrel Old Country Store(R) ("Cracker Barrel")
restaurant and retail concept and the Logan's Roadhouse(R) ("Logan's")
restaurant concept. Logan's has two area development agreements and accompanying
franchise agreements covering development of its concept in all or part of five
states. The Company exited its Carmine Giardini's Gourmet Market(TM)
("Carmine's") concept at the end of fiscal 2001. (See Note 2.) CBRL Group, Inc.
Common Stock is traded on The Nasdaq Stock Market (National Market) under the
symbol CBRL.
2. Summary Of Significant Accounting Policies
Fiscal year - The Company's fiscal year ends on the Friday nearest July
31st and each quarter consists of thirteen weeks unless noted otherwise. The
Company's fiscal year ended August 3, 2001 consisted of 53 weeks and the fourth
quarter of fiscal 2001 consisted of 14 weeks. References in these Notes to a
year are to the Company's fiscal year unless otherwise noted.
Principles of consolidation - The Consolidated Financial Statements include
the accounts of the Company and its subsidiaries, all of which are wholly owned.
All significant intercompany transactions and balances have been eliminated.
Financial instruments - The fair values of cash and cash equivalents,
accounts receivable, accounts payable and amounts outstanding under the
Company's revolving credit facility included in long-term debt, $7,000 as of
August 1, 2003, approximate their carrying amounts due to their short duration.
The carrying value and fair value of the Company's zero-coupon contingently
convertible senior notes in long-term debt at August 1, 2003, were $179,730 and
$201,529, respectively. The fair value of the Company's zero-coupon contingently
convertible senior notes in long-term debt is determined based on market prices
using the average of the bid and ask prices as of August 1, 2003.
Cash and cash equivalents - The Company's policy is to consider all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
Inventories - Inventories are stated at the lower of cost or market. Cost
of restaurant inventory is determined by the first-in, first-out (FIFO) method.
Approximately 70% of retail inventories are valued using the retail inventory
method and the remaining 30% are valued using an average cost method. Valuation
provisions are included for retail inventory obsolescence, returns and
amortization of certain items.
Start-up costs - Start-up costs of a new store are expensed when incurred.
Property and equipment - Property and equipment are stated at cost. For
financial reporting purposes, depreciation and amortization on these assets are
computed by use of the straight-line and double-declining balance methods over
the estimated useful lives of the respective assets, as follows:
Years
- --------------------------------------------------------------------------------
Buildings and improvements 30-45
Buildings under capital leases 15-25
Restaurant and other equipment 3-10
Leasehold improvements 1-35
- --------------------------------------------------------------------------------
Depreciation expense was $62,552, $61,883 and $60,657 for 2003, 2002 and
2001, respectively. Accelerated depreciation methods are generally used for
income tax purposes.
Capitalized interest was $463, $364 and $851 for 2003, 2002 and 2001,
respectively.
Gain or loss is recognized upon disposal of property and equipment, and the
asset and related accumulated depreciation and amortization amounts are removed
from the accounts.
Maintenance and repairs, including the replacement of minor items, are
charged to expense, and major additions to property and equipment are
capitalized.
Impairment of long-lived assets - The Company evaluates for possible
impairment of long-lived assets and certain identifiable intangibles to be held
and used in the business whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment is
determined by comparing estimated undiscounted future operating cash flows to
the carrying amounts of assets on a location by location basis. If an impairment
exists, the amount of impairment is measured as the sum of the estimated
discounted future operating cash flows of such asset and the expected proceeds
upon sale of the asset less its carrying amount. If applicable, assets held for
sale are reported at the lower of carrying amount or fair value less costs to
sell. During 2001, the Company's other store operating expense included
impairment losses of $14,003 and the Company's amortization of goodwill included
$10,428 in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Certain Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". These impairment losses consisted of
$10,428 for the write-off of goodwill related to the acquisition of Carmine's
and $14,003 for the write-down of fixed assets of all three Carmine's units,
four Cracker Barrel units and three Logan's restaurants.
Advertising - The Company expenses the costs of producing advertising the
first time the advertising takes place. Net advertising expense was $39,782,
$37,423 and $38,886 for 2003, 2002 and 2001, respectively.
Insurance - The Company self-insures a significant portion of expected
losses under its workers' compensation, general liability and health insurance
programs. The Company has purchased insurance for individual claims that exceed
$250 for workers' compensation and general liability insurance prior to 2003,
but has now increased this amount to $500 for 2003 and $1,000 for certain
coverages for 2004 going forward. The Company has decided not to purchase such
insurance for its primary group health program, but its offered benefits are
limited to not more than $1,000 during the lifetime of any employee (including
dependents) in the program. The Company records a liability for workers'
compensation and general liability for all unresolved claims and for an estimate
of incurred but not reported claims at the anticipated cost to the Company based
upon an actuarially determined reserve as of the end of the Company's third
quarter and adjusting it by the actuarially determined losses and actual claims
payments for the fourth quarter. Those reserves and these losses are determined
actuarially from a range of possible outcomes within which no given estimate is
more likely than any other estimate. In accordance with SFAS No. 5, "Accounting
for Contingencies", the Company records the losses at the low end of that range
and discounts them to present value using a risk-free interest rate based on
actuarially projected timing of payments. The Company records a liability for
its group health program for all unpaid claims based primarily upon a loss
development analysis derived from actual group health claims payment experience
provided by the Company's third party administrator. The Company's accounting
policies regarding insurance reserves include certain actuarial assumptions or
management judgments regarding economic conditions, the frequency and severity
of claims and claim development history and settlement practices. Unanticipated
changes in these factors may produce materially different amounts of expense
that would be reported under these insurance programs.
Goodwill - Goodwill represents the excess of the cost over the net tangible
and identifiable intangible assets from the Logan's acquisition. Prior to August
4, 2001, goodwill was stated at cost and was amortized, on a straight-line
basis, over the estimated future periods to be benefited (20-30 years). Prior to
August 4, 2001, on an annual basis the Company reviewed the recoverability of
goodwill based primarily upon an analysis of undiscounted cash flows from the
acquired businesses. Accumulated amortization was $8,291 at August 1, 2003,
August 2, 2002 and August 3, 2001. See Impairment of long-lived assets above
regarding the write-off of Carmine's goodwill. Effective August 4, 2001, the
Company elected early adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 eliminates the amortization for goodwill and other
intangible assets with indefinite lives. Intangible assets with lives restricted
by contractual, legal, or other means will continue to be amortized over their
useful lives. Goodwill and other intangible assets not subject to amortization
are tested for impairment annually or more frequently if events or changes in
circumstances indicate that the asset might be impaired. SFAS No. 142 requires a
two-step process for testing impairment. First, the fair value of each reporting
unit is compared to its carrying value to determine whether an indication of
impairment exists. This valuation may reflect, among other things, such external
factors as capital market valuation for public companies comparable to the
operating unit. If an impairment is indicated, then the implied fair value of
the reporting unit's goodwill is determined by allocating the unit's fair value
to its assets and liabilities (including any unrecognized intangible assets) as
if the reporting unit had been acquired in a business combination. The amount of
impairment for goodwill and other intangible assets is measured as the excess of
its carrying value over its implied fair value. The Company conducted the
initial test of the carrying value of its goodwill, as required by SFAS No. 142,
during the second quarter of 2002, which ended February 1, 2002, and concluded
that there was no current indication of impairment to goodwill. The Company
performed its annual assessment with assistance from an outside expert in the
second quarter ending January 31, 2003, and concluded that there was no current
indication of impairment. This annual assessment will be performed in the second
quarter of each year. Additionally, an assessment will be performed between
annual assessments if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying
amount.
In accordance with SFAS No. 142, the Company discontinued amortization of
goodwill effective August 4, 2001. The pro forma effects of the adoption of SFAS
No. 142 on net income and basic and diluted net income per share is as follows:
2003 2002 2001
---- ---- ----
Net income, as reported $106,529 $91,789 $49,181
Intangible amortization,
net of $0 tax -- -- 3,994
-------- ------- -------
Net income, pro forma $106,529 $91,789 $53,175
======== ======= =======
Basic net income per share:
- ---------------------------
Net income, as reported $2.16 $1.69 $.88
Intangible amortization,
net of $0 tax -- -- .07
----- ----- ----
Net income, pro forma $2.16 $1.69 $.95
===== ===== ====
Diluted net income per share:
- -----------------------------
Net income, as reported $2.09 $1.64 $.87
Intangible amortization,
net of $0 tax -- -- .07
----- ----- ----
Net income, pro forma $2.09 $1.64 $.94
===== ===== ====
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 such
restaurant. Continuing royalties, which are a percentage of net sales of
franchised restaurants, are accrued as income when earned.
Unearned income - Unredeemed gift certificates and cards represent the
Company's only liability related to unearned income and are recorded at their
expected redemption value. When gift certificates and cards are redeemed, the
Company recognizes revenue and reduces the liability. These liability balances
were $15,635, $12,985 and $9,065 at August 1, 2003, August 2, 2002 and August 3,
2001, respectively, and were recorded in other accrued expenses.
Income taxes - Employer tax credits for FICA taxes paid on employee tip
income 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 7.)
Net income per share - Basic net income per share is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the reporting period. Diluted 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. The Company's zero-coupon contingently convertible senior notes ("Note")
had no effect on diluted shares in either 2002 or 2003, since the contingency,
relating to the price of the Company's common stock, had not been met. Each $1
Note (face value at maturity) will be convertible into 10.8584 shares of the
Company's common stock (approximately 4.6 million shares in the aggregate), with
an initial conversion price of $37.69 per share accreting at 3% per annum,
compounded semi-annually, if certain conversion contingencies are met. Those
contingencies are met under the following conditions: 1) If the closing price of
the Company's stock exceeds a specified price (initially, 120% of the accreted
conversion price, and declining .08474% per quarter thereafter to approximately
110% of the accreted conversion price on the last day of the quarter ending
January 30, 2032); 2) If the Company exercises its option to redeem the Notes;
3) If the credit rating of the Notes is reduced by Moody's and Standard and
Poor's to or below both Ba3 and BB-, respectively; or 4) Upon the occurrence of
certain specified corporate transactions. Outstanding stock options issued by
the Company represent the only dilutive effect reflected in diluted weighted
average shares.
Comprehensive income - Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. Comprehensive income for 2003,
2002 and 2001 is equal to net income as reported.
Stock-based compensation - The Company accounts for its stock 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, and has adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" (see Note
6) and below is providing disclosures required by SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure". Under APB Opinion No. 25,
no stock-based compensation cost is reflected in net income for grants of stock
options to employees because the Company grants stock options with an exercise
price equal to the market value of the stock on the date of grant. The reported
stock-based compensation expense, net of related tax effects, in the table
represents the amortization of restricted stock grants to two executive officers
of the Company.
Had the Company used the fair value based accounting method for stock
compensation expense prescribed by SFAS Nos. 123 and 148, the Company's net
income and earnings per share for the past three years would have been reduced
to the pro-forma amounts illustrated as follows:
2003 2002 2001
---- ---- ----
Net Income - as reported $106,529 $91,789 $49,181
Add: Total stock-based employee
compensation included in reported
net income, net of related tax effects 298 397 44
Deduct: Total stock-based compensation
expense determined under fair-value based
method for all awards, net of tax effects (11,496) (12,709) (13,099)
------- ------- -------
Pro forma, net income $ 95,331 $79,477 $36,126
======== ======= =======
Net Income per share:
Basic - as reported $2.16 $1.69 $.88
===== ===== ====
Basic - pro forma $1.93 $1.47 $.64
===== ===== ====
Diluted - as reported $2.09 $1.64 $.87
===== ===== ====
Diluted - pro forma $1.87 $1.42 $.64
===== ===== ====
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. The Company primarily
operates restaurants under the Cracker Barrel Old Country Store(R) and Logan's
Roadhouse(R) brands. These two brands have similar investment criteria, customer
demographics and economic and operating characteristics. Therefore, the Company
has one reportable operating segment. (See Note 8.)
Derivative instruments and hedging activities - The Company adopted SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," in the
first quarter of 2000 and its subsequent amendments, SFAS Nos. 137, "Accounting
for Derivative Instruments and Hedging 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 the first quarter of 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. Upon adoption of
these statements on July 29, 2000, during 2001, 2002 and 2003 and at August 1,
2003, the Company had no derivative financial instruments that required hedge
accounting.
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. For the residual portion, the Company may enter into various derivative
financial instruments pursuant to the Company's policies in areas such as
counterparty exposure and hedging practices. The Company would review these
derivative financial instruments on a specific exposure basis to support hedge
accounting. The changes in fair value of these hedging instruments would be
offset in part or in whole by the corresponding changes in the fair value or
cash flows of the underlying exposures being hedged. 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. The Company has accomplished this objective
through the use of its Revolving Credit Facility, its sale-leaseback transaction
and its zero-coupon contingently convertible debt. In a sale-leaseback
transaction, the Company finances its operating facilities by selling them to a
third party and then leasing them back under a long-term operating lease at
fixed terms. The Company's zero-coupon convertible debt is fixed-rate, long-term
debt. (See Notes 4,9 and 11.)
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 which are generally unpredictable.
Changes in commodity prices would affect the Company and its competitors
generally and often simultaneously. In many cases, the Company believes it will
be able to pass through any increased commodity costs by adjusting its menu
pricing. From time to time, competitive circumstances may limit menu price
flexibility, and in those circumstances, increases in commodity prices can
result in lower margins for the Company. Some of the Company's purchase
contracts are used to hedge commodity prices and may contain features that could
be classified as derivative financial instruments under SFAS Nos. 133, 137, 138
and 149. However, these features that could be classified as derivative
financial instruments are exempt from fair value accounting based on the normal
purchases exemption.
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 accounting principles generally accepted in the United States of
America. Actual results could differ from those estimates.
Recent accounting pronouncements not yet adopted - In May 2003, The
Financial Accounting Standards Board ("FASB") issued SFAS No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS No. 150 establishes standards for how a Company classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that a company classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances) because that
freestanding financial instrument embodies an obligation of the Company. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Company does not expect the adoption
of this standard to have a material effect on the Company's consolidated results
of operations or its financial position.
Reclassifications - Certain reclassifications have been made in the
2001 and 2002 financial statements to conform to the classifications used in
2003. Total revenues in 2001 and 2002 reflect reclassifications of $4,306 and
$4,892, respectively, of net return fees for the Cracker Barrel Book-on-Audio
program to net sales from other store operating expenses, where the Company
historically had reported the fees as a miscellaneous income credit to other
store operating expenses. This reclassification had no effect on net income.
Additionally, the balance sheet at August 2, 2002 and the cash flow statement
for 2002 and 2001 reflect certain other reclassifications. These certain other
reclassifications caused a net increase of $94 to total current assets and total
assets, while decreasing total current liabilities by $7,248 and increasing
other long-term obligations by $7,342 at August 2, 2002. The increase in other
long-term obligations is comprised of $5,599 for the Company's liability under
its non-qualified defined contribution retirement plan (see Note 10) and $1,743
for the Company's straight-line rent liability under SFAS No. 13, "Accounting
for Leases", (see Note 9). These certain other reclassifications had no net
effect on the net increase in cash and cash equivalents for either 2002 or 2001,
but did increase net cash provided by operating activities and decrease net cash
used in financing activities in 2002 and 2001 by $4,853 and $97, respectively,
related to the Company's deferred financing costs.
3. Inventories
Inventories were composed of the following at:
August 1, August 2,
2003 2002
- --------------------------------------------------------------------------------
Retail $101,955 $ 93,066
Restaurant 17,091 16,799
Supplies 16,974 14,828
- --------------------------------------------------------------------------------
Total $136,020 $124,693
================================================================================
4. Debt
Long-term debt consisted of the following at:
August 1, August 2,
2003 2002
- --------------------------------------------------------------------------------
$300,000 Revolving Credit Facility payable on or before
February 21, 2008 (rate at 2.36% at August 1, 2003) $ 7,000 --
$250,000 Revolving Credit Facility payable on or before
December 31, 2003 replaced on February 21, 2003
(rates ranging from 3.06% to 4.75% at August 2, 2002) -- $20,000
3.0% Zero-Coupon Contingently Convertible Senior
Notes payable on or before April 2, 2032 179,730 174,476
- --------------------------------------------------------------------------------
Long-term debt $186,730 $194,476
================================================================================
The financial covenants related to the Revolving Credit Facility require
that the Company maintain an interest coverage ratio (as defined in the
Revolving Credit Facility) of 2.5 to 1.0, a lease adjusted funded debt to total
capitalization ratio (as defined in the Revolving Credit Facility) not to exceed
0.5 to 1.0 and a lease adjusted funded debt to EBITDAR (earnings before interest
expense, income taxes, depreciation and amortization and rent expense) ratio (as
defined in the Revolving Credit Facility) not to exceed 3.0 to 1.0. At August 1,
2003, the Company was in compliance with all covenants. All subsidiaries of the
Company have fully and unconditionally guaranteed on a joint and several basis
the obligations under the Revolving Credit Facility.
In April 2002, the Company issued $422,050 of zero coupon convertible
senior notes (the "Notes"), maturing on April 2, 2032, and received proceeds
totaling approximately $172,756 prior to debt issuance costs. The Notes require
no cash interest payments and were issued at a discount representing a yield to
maturity of 3.00% per annum. The Notes are redeemable at the Company's option on
or after April 3, 2007, and the holders of the Notes may require the Company to
redeem the Notes on April 3, 2005, 2007, 2012, 2017, 2022 or 2027, and in
certain other circumstances. In addition, each $1 Note is convertible into
10.8584 shares of the Company's common stock (approximately 4.6 million shares
in the aggregate) under the following conditions: 1) If the stock's market price
exceeds a specified price (initially, 120% of the accreted conversion price, and
declining .08474% per quarter thereafter to approximately 110% of the accreted
conversion price on the last day of the quarter ending January 30, 2032); 2) If
the Company exercises its option to redeem the Notes; 3) If the credit rating of
the Notes is reduced by Moody's and Standard and Poor's to or below both Ba3 and
BB-, respectively; or 4) Upon the occurrence of certain specified corporate
transactions. The accreted conversion price is equal to the issue price of the
Note plus accrued original issue discount divided by 10.8584 shares. All
subsidiaries of the Company have fully and unconditionally guaranteed on a joint
and several basis the obligations under the Notes. Each guarantor directly or
indirectly is a wholly-owned affiliate of the parent company, CBRL Group, Inc.,
which has no independent assets or operations.
The aggregate maturities of long-term debt subsequent to August 1, 2003 are
as follows:
Year
- --------------------------------------------------------------------------------
2004 --
2005 --
2006 --
2007 --
2008 $ 7,000
2009 and thereafter 179,730
- --------------------------------------------------------------------------------
Total $186,730
================================================================================
5. Common Stock
During 1999 the Board of Directors granted a certain officer 4,100
restricted shares which were to vest over three years. In 2000 two executive
officers were granted a total of 39,000 restricted shares which were to vest
over five years. In 2002 one executive officer was granted 48,000 restricted
shares which were to vest over three years, subject to certain early vesting
provisions which did occur and resulted in early vesting at the end of 2003. The
officer granted 4,100 restricted shares in 1999 left the company in 2001 and
forfeited 4,100 restricted shares. The executive officer granted 19,000 of the
39,000 restricted shares granted in 2000 left the company in 2003 and forfeited
9,500 restricted shares. The Company's compensation expense, net of forfeitures,
for these restricted shares was $462, $616 and $69 in 2003, 2002 and 2001,
respectively.
During the second quarter of 2001, the Board of Directors authorized the
retirement of the Company's treasury stock and authorized the retirement of all
future repurchases of the Company's Common Stock. As a result of this
retirement, the Company's Treasury Stock at cost was reclassified to reduce
Common Stock and Additional Paid-in Capital at January 26, 2001. In the fourth
quarter of 2002, the Company reduced Retained Earnings by $4,620, since
Additional Paid-In Capital already was reduced to zero due to the retirement of
shares repurchased. In 2003, the Company reduced Retained Earnings by $93,559,
since Additional Paid-In Capital already was reduced to zero due to the
retirement of shares repurchased. These retired shares will remain as
authorized, but unissued, shares.
6. Stock Compensation Plans
The Company's employee stock option plans are administered by the
Compensation and Stock Option Committee (the "Committee"). Members of the
Committee are appointed by the Board of Directors. The Committee is authorized
to determine, at time periods within its discretion and subject to the direction
of the Board, which key employees shall be granted options, the number of shares
covered by the options granted to each, and within applicable limits, the terms
and provisions relating to the exercise of such options.
On September 26, 2002, the Board of Directors approved a new plan for
all employees and non-employee directors of the Company. That plan was
subsequently approved by shareholders at the Company's 2002 Annual Shareholders
Meeting on November 26, 2002. The new plan is known as the CBRL Group 2002
Omnibus Incentive Compensation Plan ("Omnibus Plan"). The Committee is
authorized by the Board of Directors to grant awards for an aggregate of
2,500,000 shares of the Company's common stock under the Omnibus Plan. The
Omnibus Plan authorizes the Committee to grant the following types of awards to
all eligible participants other than non-employee directors: stock options,
stock appreciation rights, stock awards, performance shares, cash bonuses,
qualified performance-based awards or any other type of award consistent with
the Omnibus Plan's purpose. Under the Omnibus Plan non-employee directors are
granted annually a stock option on the day of the Annual Shareholder Meeting to
purchase 5,000 shares of the Company's common stock with an option price per
share at least 100% of the fair market value of a share of the Company's common
stock based on the closing price on the day preceding the day the option is
granted. Additionally, non-employee directors newly elected or appointed between
the Annual Shareholders Meeting and July 31 of the next year receive a stock
option to purchase 5,000 shares of the Company's common stock with an option
price per share at least 100% of the fair market value of a share of the
Company's common stock based on the closing price on the day preceding the day
the option is granted. Options granted to date under the Omnibus Plan become
exercisable each year on a cumulative basis at a rate of 33% of the total shares
covered by the option beginning one year from the date of grant, to expire ten
years from the date of grant and to be transferable. At August 1, 2003, there
were 2,460,000 shares of unissued common stock reserved for issuance under the
Omnibus Plan.
On May 25, 2000, the Board of Directors approved a stock option plan
for employees who are not officers or directors of the Company. The new plan is
known as the CBRL Group, Inc. 2000 Non-Executive Stock Option Plan ("Employee
Plan"). As of August 1, 2003, the Committee is authorized by the Board of
Directors to grant options to purchase an aggregate of 4,750,000 shares of the
Company's common stock under the Employee Plan. The option price per share under
the Employee Plan must be at least 100% of the fair market value of a share of
the Company's common stock based on the closing price on the day preceding the
day the option is granted. Options granted to date under the Employee Plan
become exercisable each year on a cumulative basis at a rate of 33% of the total
shares covered by the option beginning one year from the date of grant, to
expire ten years from the date of grant and to be non-transferable. At August 1,
2003, there were 595,738 shares of unissued common stock reserved for issuance
under the Employee Plan.
As of August 1, 2003, the Committee is authorized by the Company's
shareholders to grant options to purchase an aggregate of 17,525,702 shares of
the Company's common stock under the Company's Amended and Restated Stock Option
Plan ("the Plan"). At August 1, 2003, there were 1,592,028 shares of unissued
common stock reserved for issuance under the Plan. The option price per share
under the Plan must be at least 100% of the fair market value of a share of the
Company's common stock based on the closing price on the day preceding the day
the option is granted. Options granted to date under the Plan generally have
been exercisable each year on a cumulative basis at a rate of 33% of the total
number of shares covered by the option beginning one year from the date of
grant, expire ten years from the date of grant and are non-transferable. During
2000, a long-term incentive award was granted to certain officers, which
included stock options. The options granted under this award vest at the end of
five years after the grant (subject to earlier vesting upon accomplishments of
specified Company performance goals) and are non-transferable. As of August 1,
2003, options to purchase 261,826 shares of the Company's common stock vested
early and 181,368 are scheduled to vest on July 30, 2004 under the long-term
incentive award. The options have a six-month life following confirmation of
vesting by the Committee.
In 1989, the Board of Directors adopted the Cracker Barrel Old Country
Store, Inc. 1989 Stock Option Plan for Non-employee Directors ("Directors Plan")
for non-employee directors. The stock options were granted with an exercise
price equal to the fair market value of the Company's common stock as of the
date of grant and expire one year from the retirement of the director from the
board. An aggregate of 1,518,750 shares of the Company's common stock were
authorized by the Company's shareholders under this plan. Due to the overall
plan limit, no shares have been granted under this plan since 1994.
A summary of the status of the Company's stock option plans for 2003,
2002 and 2001, and changes during those years follows:
(Shares in thousands) 2003 2002 2001
- -------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Fixed Options Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------
Outstanding at
beginning of year 9,504 $20.23 10,504 $19.77 9,630 $20.89
Granted 1,907 23.85 2,506 20.13 2,481 14.76
Exercised (2,922) 20.90 (2,869) 18.67 (357) 14.23
Forfeited or canceled (890) 21.54 (637) 19.33 (1,250) 20.03
------ ------ ------
Outstanding at
end of year 7,599 20.73 9,504 20.23 10,504 19.77
====== ====== ======
Options exercisable
at year-end 3,696 20.69 5,148 22.58 5,919 23.16
Weighted-average fair
value per share of
options granted
during the year $10.20 $ 9.46 $ 7.16
- --------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2003, 2002 and 2001: dividend yield of 0.1%;
expected volatility of 41 to 45, 43 and 43 percent, respectively; risk-free
interest rate ranges of 2.2% to 3.8%, 4.0% to 4.9% and 4.8% to 5.9%; and
expected lives of five to eight years, six years and six years, respectively.
Expected volatility has been measured based on an average of past daily
fluctuations in the share price of the Company's common stock.
The following table summarizes information about fixed stock options
outstanding at August 1, 2003:
(Shares in thousands)
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------
Number Weighted-Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable verage
Exercise Prices at 8/01/03 Contractual Life Exercise Price at 8/01/03 Exercise Price
- ----------------------------------------------------------------------------------------
$ 5.09 - 10.00 38 2.11 $ 7.63 38 $ 7.63
10.01 - 20.00 2,403 5.53 14.76 1,649 14.81
20.01 - 30.00 4,654 7.18 22.78 1,537 24.14
30.01 - 31.75 504 4.49 31.19 472 31.00
----- -----
$ 5.09 - 31.75 7,599 6.45 20.73 3,696 20.69
========================================================================================
The Company recognizes a tax deduction upon exercise of non-qualified
stock options in an amount equal to the difference between the option price and
the fair market value of the common stock. These tax benefits are credited to
Additional Paid-In Capital.
7. Income Taxes
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.
Significant components of the Company's net deferred tax liability
consisted of the following at:
August 1, August 2,
2003 2002
---------------------------------------------------------------------------
Deferred tax assets:
Financial accruals without
economic performance $20,252 $19,315
Other 8,284 5,567
---------------------------------------------------------------------------
Deferred tax assets 28,536 24,882
---------------------------------------------------------------------------
Deferred tax liabilities:
Excess tax depreciation over book 72,846 42,591
Other 25,802 13,149
---------------------------------------------------------------------------
Deferred tax liabilities 98,648 55,740
---------------------------------------------------------------------------
Net deferred tax liability $70,112 $30,858
===========================================================================
The Company provided no valuation allowance against deferred tax assets
recorded as of August 1, 2003 and August 2, 2002, as the "more-likely-than-not"
valuation method determined all deferred assets to be fully realizable in future
taxable periods.
The components of the provision for income taxes for each of the three
years were as follows:
2003 2002 2001
--------------------------------------------------------------------------
Current:
Federal $17,985 $45,955 $34,959
State 1,494 3,042 5,617
Deferred 39,254 1,745 (5,293)
--------------------------------------------------------------------------
Total income tax provision $58,733 $50,742 $35,283
===========================================================================
A reconciliation of the provision for income taxes as reported and the
amount computed by multiplying the income before the provision for income taxes
by the U.S. federal statutory rate of 35% was as follows:
2003 2002 2001
---------------------------------------------------------------------------
Provision computed at federal
statutory income tax rate $57,842 $49,886 $29,562
State and local income taxes,
net of federal benefit 4,410 4,635 4,169
Amortization of goodwill and
acquisition costs 4 4 5,034
Employer tax credits for FICA taxes
paid on employee tip income (4,323) (3,875) (3,420)
Other-net 800 92 (62)
--------------------------------------------------------------------------
Total income tax provision $58,733 $50,742 $35,283
===========================================================================
The Internal Revenue Service has examined the Company's federal income
tax returns for 1997 through 2001. On August 1, 2002 the Company reached a
settlement with the Internal Revenue Service for these tax periods. Adjustments
related primarily to temporary or timing differences. The settlement had no
material effect on the Company's Consolidated Financial Statements.
Additionally, the Internal Revenue Service has examined the Company's federal
payroll tax filings for the calendar years ended December 31, 1997 through
December 31, 2001. This examination was completed on July 21, 2003 resulting in
no adjustment to the payroll taxes originally reported by the Company.
8. Segment Information
The Company operates restaurants under the Cracker Barrel Old Country Store
and Logan's Roadhouse brands. These two brands have similar investment criteria
and economic and operating characteristics. Accordingly, the Company has one
reportable operating segment. The following data is presented in accordance with
SFAS No. 131 for all periods presented.
2003 2002 2001
- ------------------------------------------------------------------------------
Net sales in Company-Owned Stores:
Restaurant $1,753,361 $1,645,696 $1,543,815
Retail 443,397 424,949 423,410
- ------------------------------------------------------------------------------
Total net sales 2,196,758 2,070,645 1,967,225
- ------------------------------------------------------------------------------
Franchise fees and royalties 1,424 1,139 773
- ------------------------------------------------------------------------------
Total revenue $2,198,182 $2,071,784 $1,967,998
==============================================================================
9. Commitments and Contingencies
The Company's Cracker Barrel Old Country Store, Inc. subsidiary ("Cracker
Barrel") is involved in certain lawsuits, four of which are filed by the same
plaintiffs' attorneys, among others, and are not ordinary routine litigation
incidental to its business: Serena McDermott and Jennifer Gentry v. Cracker
Barrel Old Country Store, Inc., 4:99-CV-0001-HLM, a collective action under the
federal Fair Labor Standards Act ("FLSA"), was served on Cracker Barrel on May
3, 1999; Kelvis Rhodes, Maria Stokes et al. v. Cracker Barrel Old Country Store,
Inc., 4:99-CV-217-HLM, an action under Title VII of the Civil Rights Act of 1964
and Section 1981 of the Civil Rights Act of 1866, was served on Cracker Barrel
on September 15, 1999; Flounice Stanley, Calvin Slack et al. v. Cracker Barrel
Old Country Store, Inc., 4:01-CV-326-HLM, a collective action under the FLSA,
was served on Cracker Barrel on April 12, 2002; and the National Association for
the Advancement of Colored People ("NAACP"), Betty Thomas et al. v. Cracker
Barrel Old Country Store, Inc., 4:01-CV-325-HLM, an action under Title II of the
Civil Rights Act of 1964 and Section 1981 of the Civil Rights Act of 1866, was
served on Cracker Barrel on April 12, 2002. All of these cases are filed, and
are pending, in the United States District Court for the Northern District of
Georgia, Rome Division.
The McDermott case alleges that certain tipped hourly employees were
required to perform excessive non-serving duties without being paid the minimum
wage or overtime compensation for that work and that certain hourly employees
were required to wait "off the clock," without pay for the wait. The McDermott
case seeks recovery of unpaid wages and overtime wages related to those claims.
On March 17, 2000, the Court granted the plaintiffs' motion in the McDermott
case to send notice to a provisional class of plaintiffs, defined as all persons
employed as servers and all second-shift hourly employees at Cracker Barrel Old
Country Store restaurants since January 4, 1996, and 10,838 potential plaintiffs
filed "opt-in" forms to the McDermott case. The Court could subsequently amend
the definition of the collective group, and if amended, the scope of the
collective action could either be reduced or increased or, if appropriate, the
Court could dismiss the collective aspects of the case entirely. In that last
situation, each opt-in plaintiff would have to decide whether or not to pursue
an independent action. Extensive discovery with respect to the merits of
individual claims has been conducted in the McDermott case. Following completion
of an extended period of discovery and briefing of motions, rulings on the
parties' motions with respect to class certification and other issues are
expected to be made in late calendar year 2003 or early calendar year 2004.
The Stanley case was initially a purported collective action, but the
plaintiffs did not timely move the court for class certification. This case was
filed by current and former employees asserting three claims based upon alleged
violations of the FLSA: (1) that Personal Achievement Responsibility (PAR) IV
level employees are routinely required to perform quasi-managerial duties or
duties related to training without receiving minimum wage or overtime
compensation for that work, (2) that employees classified as trainers routinely
work off the clock to prepare for training sessions at home or on store premises
and to conduct pre-training activities, and (3) that store opener employees were
mis-classified as salaried exempt and are due overtime compensation. The
individual plaintiffs in Stanley seek unpaid compensation and back pay,
liquidated damages, prejudgment interest, attorneys' fees and costs, and
unspecified injunctive relief. No express amount of monetary damages is claimed
in the Stanley case and no substantial discovery has taken place in that case.
After rulings and consents dismissing certain plaintiffs, only three individuals
remain in this case.
The Rhodes case sought certification as a company-wide class action, a
declaratory judgment to redress an alleged systemic pattern and practice of
racial discrimination in employment opportunities, an order to effect certain
hiring and promotion goals and back pay and other related monetary damages. In
May 2002, the Rhodes plaintiffs filed a motion for class certification proposing
a class of all current and former employees and applicants for employment who
might have suffered discrimination in hiring, promotion, job assignment and
cross-training. The court has denied certification of a class in the Rhodes
case. The plaintiffs' appeal of this ruling was denied by the 11th Circuit Court
of Appeals. There are now 13 individual plaintiffs continuing the claims
asserted in the Rhodes case.
The NAACP/Thomas case is an alleged race discrimination class action
filed by the NAACP and customers of Cracker Barrel alleging that Cracker Barrel
has a pattern and practice of race-based discriminatory treatment of
African-American customers and white customers when accompanied by
African-American customers, that sought certification as a class action.
Plaintiffs and their counsel have denied that they seek to recover compensatory
damages, instead claiming to seek only nominal, actual and punitive damages.
Plaintiffs also seek unspecified declaratory and injunctive relief and demanded
an award of punitive and nominal damages in the amount of $100,000, plus
reasonable attorneys' fees and costs. On October 1, 2002, the District Court
granted defendant's Rule 23 (c) Motion and denied class certification. The
plaintiffs did not appeal this ruling. There are now 34 individual plaintiffs
continuing the claims they asserted in the Thomas case.
In addition, three lawsuits have been filed recently in Arkansas, in
North Carolina and in Mississippi. It appears that these lawsuits are related to
the Thomas case, because they reiterate claims made in the Thomas Case on behalf
of certain individuals in those states.
In August 2002, Cracker Barrel received a letter from the Department of
Justice ("DOJ") informing Cracker Barrel that it was the subject of a DOJ
investigation pursuant to Title II of the Civil Rights Act of 1964. On August
20, 2002, DOJ sent a request for information to Cracker Barrel seeking basic
information about locations of restaurants and broad based data about customer
complaints and company policies. The DOJ is empowered to investigate matters
under Title II of the Civil Rights Act of 1964, and Cracker Barrel has provided
all requested information to the DOJ. Pursuant to Title II, DOJ remedies are
limited to injunctive or preventive relief. Remedies for public accommodation
claims typically relate to implementation or revision of policies and procedures
for responding to, and methods for monitoring, customer complaints. If the
Company and DOJ were not able to agree informally to resolve any concerns
raised, then the DOJ could seek to intervene in the pending Title II action. It
is not possible at this time to provide an opinion as to how likely it is that
the DOJ will have any concerns or will pursue them in court, or as to any other
likely outcome of the investigation.
The Company believes that its Cracker Barrel subsidiary has substantial
defenses to the claims made in each of these cases, and each of these cases
is being defended vigorously. Because discovery has not been completed in some
of these cases, and none of these cases are yet ready for trial, neither the
likelihood of an unfavorable outcome nor the amount of ultimate liability, if
any, with respect to these cases or the investigation can be determined at this
time. The Company has established a reserve of $3,500 with respect to the
McDermott case based on offers of judgment to those plaintiffs. None of those
offers of judgment was accepted. With the exception of that reserve, no
provision for any potential liability has been made in the consolidated
financial statements of the Company with respect to these lawsuits or the DOJ
investigation. In the event of an unfavorable result in any of these cases or in
the DOJ investigation, beyond amounts covered under various insurance policies
of the Company and its subsidiaries, if applicable, the Company's consolidated
results of operations and financial condition could be materially and adversely
affected.
In addition to the litigation and investigation described in the
preceding paragraphs, the Company and its subsidiaries are parties to other
legal proceedings incidental to its business. In the opinion of management,
based upon information currently available, the ultimate liability with respect
to these other actions will not materially affect the Company's Consolidated
Financial Statements.
The Company makes trade commitments in the course of its normal
operations. As of August 1, 2003 the Company was contingently liable for
approximately $4,871 under outstanding trade letters of credit issued in
connection with purchase commitments. These letters of credit have terms of 3
months or less and are used to collateralize obligations to third parties for
the purchase of a portion of the Company's imported retail inventories.
Additionally, the Company was contingently liable pursuant to standby letters of
credit as credit guarantees to insurers. As of August 1, 2003 the Company had
$13,725 of standby letters of credit related to workers' compensation and
commercial general liability insurance. All standby letters of credit are
renewable annually.
The Company is secondarily liable for lease payments under the terms of
an operating lease that has been assigned to a third party. The operating lease
has a remaining life of approximately 10.2 years with annual lease payments of
approximately $350. The Company's performance is only required if the assignee
fails to perform his obligations as lessee. At this time, the Company has no
reason to believe that the assignee will not perform and, therefore, no
provision has been made in the accompanying consolidated financial statements
for amounts to be paid as a result of non-performance by the assignee.
The Company also is secondarily liable for lease payments under the
terms of another operating lease that has been sublet to a third party less than
one year ago. The operating lease has a remaining life of approximately 13.2
years with annual lease payments of approximately $100. The Company's
performance is only required if the sublessee fails to perform his obligations
as lessee. The Company has a liability of approximately $500 in the accompanying
consolidated financial statements for estimated amounts to be paid in case of
non-performance by the sublessee.
The Company maintains insurance coverage for various aspects of its
business and operations. The Company has elected, however, to retain all or a
portion of losses that occur through the use of various deductibles, limits and
retentions under its insurance programs. This situation may subject the Company
to some future liability for which it is only partially insured, or completely
uninsured. The Company intends to mitigate any such future liability by
continuing to exercise prudent business judgment in negotiating the terms and
conditions of its contracts. See Note 2 for a further discussion of insurance
and insurance reserves.
As of August 1, 2003, the Company operated 132 Cracker Barrel stores and 44
Logan's Roadhouse restaurants from leased facilities and also leased certain
land and advertising billboards. (See Note 11.) These leases have been
classified as either capital or operating leases. The interest rates for capital
leases vary from 10% to 17%. Amortization of capital leases is included with
depreciation expense. A majority of the Company's lease agreements provide for
renewal options and some of these options contain escalation clauses.
Additionally, certain store leases provide for contingent lease payments based
upon sales volume in excess of specified minimum levels.
The following is a schedule by year of future minimum lease payments under
capital leases, together with the present value of the minimum lease payments as
of August 1, 2003:
Year
- ------------------------------------------------------------------------
2004 $ 153
2005 153
2006 152
2007 70
2008 43
- ------------------------------------------------------------------------
Total minimum lease payments 571
Less amount representing interest 120
- ------------------------------------------------------------------------
Present value of minimum lease payments 451
Less current portion 100
- ------------------------------------------------------------------------
Long-term portion of capital lease obligations $ 351
========================================================================
The following is a schedule by year of the future minimum rental payments
required under noncancelable operating leases, excluding leases for advertising
billboards, as of August 1, 2003:
Year
- ------------------------------------------------------------------------
2004 $ 28,744
2005 28,557
2006 27,975
2007 27,791
2008 27,838
Later years 305,163
- ------------------------------------------------------------------------
Total $446,068
========================================================================
The following is a schedule by year of the future minimum rental payments
required under operating leases for advertising billboards as of August 1, 2003:
Year
- ------------------------------------------------------------------------
2004 $17,993
2005 10,186
2006 5,257
2007 175
- ------------------------------------------------------------------------
Total $33,611
========================================================================
Rent expense under operating leases, excluding leases for advertising
billboards, for each of the three years was:
Minimum Contingent Total
- -------------------------------------------------------------------------
2003 $28,881 $753 $29,634
2002 26,158 776 26,934
2001 25,264 592 25,856
Rent expense under operating leases for billboards for each of the
three years was:
Minimum Contingent Total
- ----------------------------------------------------------------------------
2003 $22,811 -- $22,811
2002 21,442 -- 21,442
2001 19,565 -- 19,565
The Company reclassified its straight-line rent liability under SFAS
No. 13 for 2002 from other accrued expenses to agree to its 2003 presentation in
other long-term liabilities. The amount of this reclassification at August 2,
2002 was $1,743.
10. Employee Savings Plans
The Company sponsors a qualified defined contribution retirement plan
("Plan I") covering salaried and hourly employees who have completed one year of
service and have attained the age of twenty-one. Plan I allows eligible
employees to defer receipt of up to 16% of their compensation, as defined in the
plan, and contribute such amounts to various investment funds at the employee's
discretion. Such contributions, including the Company matching contribution
described below, may not be invested in the Company's common stock. The Company
matches 25% of employee contributions for each participant up to 6% of the
employee's compensation. Employee contributions vest immediately while Company
contributions vest 20% annually beginning on the participant's first anniversary
of employment. In 2003, 2002, and 2001, the Company contributed approximately
$1,524, $1,609, and $1,545, respectively.
The Company sponsors a non-qualified defined contribution retirement
plan ("Plan II") covering highly compensated employees, as defined in the plan.
Plan II allows eligible employees to defer receipt of up to 50% of their base
compensation and 100% of their eligible bonuses, as defined in the plan, and
contribute such amounts to various investment funds at the employee's
discretion. Such contributions, including the Company matching contribution
described below, may not be invested in the Company's common stock. The Company
matches 25% of employee contributions for each participant up to a total of 6%
of the employee's compensation when combined with the employee's Plan I match.
Employee contributions vest immediately while Company contributions vest 20%
annually beginning on the participant's first anniversary of employment. In
2003, 2002, and 2001, the Company contributed approximately $280, $203, and
$116, respectively, and this amount is included in other store operating
expenses. At the inception of Plan II, the Company established a Rabbi Trust to
fund Plan II obligations. The market value of the trust assets is included in
other assets and the liability to Plan II participants is included in other
long-term obligations. The market value of the liability to Plan II participants
was reclassified in 2003 from accrued employee compensation. The amount of the
reclassification was $5,599 at August 2, 2002.
11. Sale-Leaseback
On July 31, 2000, the Company, through its Cracker Barrel Old Country
Store, Inc. subsidiary, completed a sale-leaseback transaction involving 65 of
its owned Cracker Barrel Old Country Store units. Under the transaction, the
land, buildings and building improvements at the locations were sold for net
consideration of $138,325 and have been leased back for an initial term of 21
years. Equipment was not included. The leases include specified renewal options
for up to 20 additional years and have certain financial covenants related to
fixed charge coverage for the leased units. At August 1, 2003 and August 2,
2002, the Company was in compliance with all covenants. Net rent expense during
the initial term is $14,963 annually, and the assets sold and leased back
previously had depreciation expense of approximately $2,707 annually. The gain
on the sale is being amortized over the initial lease term of 21 years. Net
proceeds from the sale were used to reduce outstanding borrowing under the
Company's revolving credit facility.
12. Quarterly Financial Data (Unaudited)
Quarterly financial data for 2003 and 2002 are summarized as follows:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------
2003
Total revenue $527,539 $563,119 $527,189 $580,335
Gross profit 361,574 373,007 361,811 397,875
Income before income
taxes 35,635 38,181 36,277 55,169
Net income 22,985 24,626 23,399 35,519
Net income per
share - basic .46 .50 .48 .74
Net income per
share - diluted .45 .48 .46 .70
- --------------------------------------------------------------------------
2002
Total revenue $496,356 $523,599 $506,127 $545,702
Gross profit 333,156 341,867 344,865 374,158
Income before income
taxes 30,603 32,916 31,724 47,288
Net income 19,647 21,132 20,557 30,453
Net income per
share - basic .36 .38 .38 .59
Net income per
share - diluted .35 .37 .36 .56
- --------------------------------------------------------------------------
13. Subsequent Event
On September 25, 2003, the Company's Board of Directors approved a new
quarterly dividend policy, declaring the first such quarterly dividend of $0.11
per common share payable on November 10, 2003 to shareholders of record on
October 17, 2003.
INDEPENDENT AUDITORS' REPORT
To the Shareholders of CBRL Group, Inc.:
We have audited the accompanying consolidated balance sheets of CBRL
Group, Inc. and subsidiaries (the "Company") as of August 1, 2003 and August 2,
2002, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three fiscal years in the
period ended August 1, 2003. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the consolidated financial position of the Company at
August 1, 2003 and August 2, 2002, and the results of its operations and its
cash flows for each of the three fiscal years in the period ended August 1,
2003, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 2, the Company adopted certain provisions of
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets effective August 4, 2001, which resulted in the Company
changing the method in which it accounts for goodwill and other intangible
assets.
\s\Deloitte & Touche LLP
Nashville, Tennessee
September 10, 2003
(September 25, 2003 as to Note 13)