CBRL Group, Inc.
Selected Financial Data
(Dollars in thousands except per share data)
For each of the fiscal years ended
July 30, August 1, August 2, August 3, July 28,
2004(c) 2003 2002 2001(d)(e)(f) 2000(g)
Selected Income Statement Data:
Total revenue $2,380,947 $2,198,182 $2,071,784 $1,967,998 $1,777,119
Net income
113,262 106,529 91,789 49,181 58,998
Net income per share:
Basic 2.32 2.16 1.69 0.88 1.02
Diluted 2.25 2.09 1.64 0.87 1.02
Dividends paid per share(a) $ 0.33 $ 0.02 $ 0.02 $ 0.02 $ 0.01
As Percent of Revenues:
Cost of goods sold 33.0% 32.0% 32.7% 33.8% 34.6%
Labor and related expenses
37.0 37.3 37.5 37.2 36.3
Other store operating expenses
16.9 17.2 17.0 18.2 16.8
Store operating income
13.1 13.5 12.8 10.8 12.3
General and administrative expenses
5.3 5.6 5.6 5.2 5.4
Operating Income
7.8 7.9 7.2 4.9 6.7
Income before income taxes
7.4 7.5 6.9 4.3 5.3
Memo: Depreciation and amortization
2.7 2.9 3.0 3.3 3.7
Selected Balance Sheet Data:
Working capital $ (43,742) $ (70,665) $ (54,245) $ (37,049) $ (25,079)
Total assets 1,434,862 1,326,323 1,263,831 1,212,955 1,335,101
Long-term debt 185,138 186,730 194,476 125,000 292,000
Other Long-term obligations 23,925 20,303 18,044 13,839 6,226
Shareholders' equity 880,247 794,896 782,994 846,108 828,970
Selected Cash Flow Data:
Cash provided by operations $ 200,365 $ 240,586 $ 196,277 $ 147,859 $ 160,247
Purchase of property and equipment 144,611 120,921 96,692 91,439 138,032
Share repurchases
69,206 166,632 216,834 36,444 21,104
Selected Other Data:
Common Shares outstanding at end of
year 48,769,368 47,872,542 50,272,459 55,026,846 56,668,349
Stores Open at End of Year:
Cracker Barrel 504 480 457 437 426
Logan's company-operated 107 96 84 75 65
Logan's franchised 20 16 12 8 7
Carmine Giardini's - - - - 3
Comparable Store Sales(b):
Average Unit Annual Sales:
Cracker Barrel restaurant $ 3,217 $ 3,157 $ 3,150 $ 3,082 $ 2,922
Cracker Barrel retail $ 988 $ 939 $ 945 $ 946 $ 930
Memo: Cracker Barrel number
of stores in comparable base 445 430 414 376 326
Logan's company-operated $ 3,040 $ 2,915 $ 2,959 $ 3,041 $ 3,157
Memo: Logan's number of
restaurants in comparable base
83 71 59 40 25
Period to period increase (decrease)
in comparable store sales:
Cracker Barrel restaurant 2.0% 0.5 % 5.3% 4.6 % 0.6 %
Cracker Barrel retail 5.3% (0.4)% 2.3% 1.1 % (2.3)%
Logan's company-operated 4.8% 0.0 % 2.4% (1.1)% 3.2 %
(a)On September 25, 2003, the Company's Board of Directors (the "Board") adopted
a new policy to consider and pay dividends, if declared, on a quarterly basis,
initially declared at $0.11 per share per quarter (an annual equivalent of $0.44
per share). During 2004, the Company paid such dividends of $0.11 per share
during the second, third and fourth quarters of 2004. On July 29, 2004, the
Board declared another dividend of $0.11 per share payable on September 1, 2004
to shareholders of record on August 9, 2004. Additionally, on September 23,
2004, the Board declared a dividend of $0.12 per share payable on November 1,
2004 to shareholders of record on October 8, 2004. This dividend reflects a 9.1%
increase from the previous quarterly dividend.
(b)Comparable store sales consist of sales of units open six full quarters at
the beginning of the year; and are measured on calendar weeks.
(c)Includes charges of $5,210 before taxes, as a result of settlement of certain
lawsuits against the Company's Cracker Barrel Old Country Store(R), Inc.
("Cracker Barrel") subsidiary (see Note 9 to the Company's Consolidated
Financial Statements).
(d)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 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, which was later settled as noted in (b) above.
(e)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.
(f)Includes a sale-leaseback transaction under which $138,300 of long-term debt
was paid down. (g)Includes charges of $8,592 before taxes, principally as a
result of management changes and the resulting refocused operating priorities.
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 2004 Fiscal Year 2003
---------------- ----------------
Prices Prices
---------------- Dividends --------------- Dividends
Quarter High Low Paid High Low Paid
- -------------------------------------------------------------------------------
First $39.02 $32.25 -- $27.95 $19.54 --
Second 42.07 36.61 $.11 32.85 22.35 $.02
Third 41.24 37.09 .11 32.99 24.86 --
Fourth 38.11 30.55 .11 39.95 31.31 --
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND 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 Annual Report on
Form 10-K filed with the Securities and Exchange Commission ("SEC") for the year
ended July 30, 2004, 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:
changes in or implementation of additional governmental or regulatory rules,
regulations and interpretations affecting accounting (including but not limited
to, accounting for convertible debt under Emerging Issues Task Force ("EITF")
Issue Abstract No. 04-08 of the Financial Accounting Standards Board ("FASB")),
tax, wage and hour matters, health and safety, pensions, insurance or other
undeterminable areas; the effects of uncertain consumer confidence or general or
regional economic weakness on sales and customer travel activity; the ability of
the Company to identify, acquire and sell successful new lines of retail
merchandise; commodity, workers' compensation, group health and utility price
changes; consumer behavior based on concerns over nutritional or safety aspects
of the Company's products or restaurant food in general; competitive marketing
and operational initiatives; the effects of plans intended to improve
operational execution and performance; the actual results of pending or
threatened litigation or governmental investigations or charges and the costs
and effects of negative publicity associated with these activities; practical or
psychological effects of terrorist acts or war and military or government
responses; 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; disruptions to the Company's restaurant or retail supply chain;
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
generally accepted accounting principles in the United States of America
("GAAP") or changes in capital market conditions that could affect valuations of
restaurant companies in general or the Company's goodwill in particular;
increases in construction costs; changes in interest rates affecting the
Company's financing costs; and other factors described from time to time in the
Company's filings with the SEC, 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 or quarter are to the Company's
fiscal year or quarter unless otherwise noted.
EXECUTIVE OVERVIEW
- ------------------
CBRL Group, Inc. (the "Company," "our" or "we") is a publicly traded
(Nasdaq: CBRL) holding company that, through certain subsidiaries, is engaged in
the operation and development of the Cracker Barrel Old Country Store(R)
("Cracker Barrel") and Logan's Roadhouse(R) ("Logan's") restaurant and retail
concepts. The Company was organized under the laws of the state of Tennessee in
August 1998 and maintains an Internet website at http://www.cbrlgroup.com.
We are in the business of delivering excellent guest dining experiences,
and we strive to do that in 41 states at a collective total of 611 company-owned
units and an additional 20 franchised units as of July 30, 2004. While each
restaurant concept offers its own unique atmosphere and an array of distinct
menu items, both are equally committed to executing outstanding guest service
while focusing on delivery of high quality products at affordable prices. During
2004 we served approximately 206 million meals in Cracker Barrel and
approximately 27 million meals in Logan's.
Restaurant Industry
- -------------------
Our businesses operate in the full-service segment of the restaurant
industry in the United States. The restaurant business is highly competitive
with respect to quality, variety and price of the food products offered. The
industry is often affected by changes in the taste and eating habits of the
public, local and national economic conditions affecting spending habits, and
population and traffic patterns. There are many segments within the restaurant
industry, which overlap and often provide competition for widely diverse
restaurant concepts. Competition also exists in securing prime real estate
locations for new restaurants, in hiring qualified employees, in advertising, in
the attractiveness of facilities and among competitors with similar menu
offerings or convenience.
The restaurant industry has experienced sharp increases in the prices of
many key commodities over the last year, and commodity price pressures are
expected to continue for various beef, pork, poultry, dairy and egg products. We
have developed various initiatives to focus on purchasing of the same or higher
quality products more efficiently and at lower costs or to mitigate or manage
cost pressures.
Additionally, seasonal aspects also affect the restaurant business.
Historically, interstate tourist traffic and the propensity to dine out during
the summer months have been much higher, thereby attributing to higher profits
in our fourth quarter. While retail sales in Cracker Barrel are almost
exclusively to restaurant customers, such sales are strongest in the second
quarter, which includes the Christmas holiday shopping season.
Key Performance Indicators
- --------------------------
Management uses a number of key performance measures to evaluate the
Company's operational and financial performance, including the following:
Comparable store sales and traffic consist of sales and number of guests,
respectively, of units open six full quarters at the beginning of the year; and
are measured on comparable calendar weeks. This measure highlights performance
of existing stores as the impact of new stores openings are excluded.
Percentage of restaurant sales by day-part assists management in
identifying the breakdown of sales provided by meals served for breakfast, lunch
or dinner. This measure not only provides a financial measure of revenues by
type of meal, but also assists operational management in analyzing staffing
levels needed throughout the day.
Average check per person is an indicator which management uses to analyze
the dollars spent in our stores per guest. This measure aids management in
identifying trends in guest preferences as well as the effectiveness of menu
price increases and other menu changes.
Turnover rates are considered separately for both hourly turnover and
managerial turnover. These indicators help management to anticipate future
training needs and costs, as well as helping management to recognize trends in
staffing levels that would potentially affect operating performance.
Store Operating Margins are defined as total revenue less cost of goods
sold, labor and other related expenses and other store operating expenses.
Management uses this indicator as a primary measure of operating profitability.
Results of Operations
The following table highlights operating results over the past three years:
Relationship Period to Period
to Total Revenue Increase(Decrease)
2004 2003 2002 2004 vs 2003 2003 vs 2002
- -------------------------------------------------------------------------------------
Total revenue: 100.0% 100.0% 100.0% 8% 6%
Cost of goods sold 33.0 32.0 32.7 12 4
Gross profit 67.0 68.0 67.3 7 7
Labor and other related
expenses 37.0 37.3 37.5 7 5
Other store operating
expenses 16.9 17.2 17.0 7 7
Store operating income 13.1 13.5 12.8 5 12
General and administrative 5.3 5.6 5.6 4 6
Operating income 7.8 7.9 7.2 6 17
Interest expense 0.4 0.4 0.3 (5) 31
Interest income -- -- -- -- --
Income before income taxes 7.4 7.5 6.9 7 16
Provision for income taxes 2.6 2.7 2.5 8 16
Net income 4.8 4.8 4.4 6 16
=================================================================================
The Company recorded charges of $5,210 before taxes, during the quarter
ended July 30, 2004, as a result of a settlement in principle of certain
previously reported lawsuits against its Cracker Barrel subsidiary (see Note 9
to the Company's Consolidated Financial Statements). The charge increased
general and administrative expense in the Company's Consolidated Statement of
Income in both dollars and as a percent of total revenue for the year ended July
30, 2004 by $5,210 and 0.2%, respectively.
Total Revenue
The following table highlights the components of total revenue by
percentage relationships to total revenue for the past three years:
2004 2003 2002
----------------------
Net sales:
Cracker Barrel restaurant 66.1% 67.3% 67.8%
Logan's company-operated 13.4 12.4 11.6
---- ---- ----
Total restaurant 79.5 79.7 79.4
Cracker Barrel retail 20.4 20.2 20.5
--------------------------------------------------------------------------
Total net sales 99.9 99.9 99.9
Franchise fees and royalties 0.1 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 Logan's
Period to Period Period to Period
Increase(Decrease) Increase
------------------ --------
2004 vs 2003 2003 vs 2002 2004 vs 2003 2003 vs 2002
(445 Stores) (430 Stores) (83 Stores) (71 Stores)
- -------------------------------------------------------------------------------
Restaurant 2.0% 0.5% 4.8% 0.0%
Retail 5.3 (0.4) -- --
Restaurant & retail 2.8 0.3 4.8 0.0
===============================================================================
*Comparable store sales consist of sales of units open six full quarters at
the beginning of the year; and are measured on calendar weeks.
Cracker Barrel comparable store restaurant sales increased 2.0% for 2004
versus 2003. Comparable store restaurant sales increased 0.5% in 2003 versus
2002. The increase in comparable store restaurant sales from 2003 to 2004 was
due to an increase in average check of 1.7%, including 1.0% of menu pricing and
0.7% of product mix changes, and an increase in guest traffic of 0.3%.
Cracker Barrel comparable store retail sales increased 5.3% for 2004 versus
2003. Comparable store retail sales decreased 0.4% in 2003 versus 2002. The
comparable store retail sales increase from 2003 to 2004 was due to improved
merchandise selection with broader appeal and greater variety at lower price
points, improved merchandise planning, and retail staff sales training as well
as the restaurant guest traffic increase.
In 2004 total net sales (restaurant and retail) in the 445 Cracker Barrel
comparable stores averaged $4,206. Restaurant sales were 76.5% of total net
sales in the comparable 445 stores in 2004 and 77.1% in 2003.
Logan's comparable store sales increased 4.8% for 2004 versus 2003 at an
average of $3,040 per restaurant. Comparable store sales were flat in 2003
versus 2002. The increase in comparable store sales from 2003 to 2004 was due to
an increase in guest traffic of 3.1% and an increase in average check of 1.7%.
The higher check included 1.1% of menu pricing and 0.6% lower sales deductions
for complimentary meals (resulting from focus on execution and less need to
resolve guest product and service issues).
Total revenue, which increased 8.3% and 6.1% in 2004 and 2003,
respectively, benefited from the opening of 24, 23 and 20 Cracker Barrel stores
in 2004, 2003 and 2002, respectively, and the opening of 11, 12 and 9
company-operated and 4, 4 and 4 franchised Logan's restaurants in 2004, 2003 and
2002, respectively. Average unit volumes, based on weeks of operation, were
approximately $61.7 per week for Cracker Barrel restaurants in 2004 (compared
with $60.9 in 2003 and $60.6 in 2002), $19.1 for Cracker Barrel retail (compared
with $18.2 for 2003 and $18.3 for 2002), and $59.5 for Logan's (compared with
$57.0 for 2003 and $56.6 for 2002).
Cost of Goods Sold
Cost of goods sold as a percentage of total revenue increased in 2004 to
33.0% from 32.0% in 2003. This increase was due to higher commodity costs for
beef, butter, bacon and other dairy, including eggs, all of which had high
single-digit percentage increases due to unfavorable market conditions. Also
affecting cost of goods sold in 2004 was a higher mix of retail sales as a
percent of total revenue (retail has a higher product cost than restaurant) and
higher markdowns of retail merchandise versus the prior year. Management
believes that increases in 2004 were unusual in both magnitude and the breadth
of commodities affected. These increases were partially offset by higher menu
pricing and higher initial mark-ons of retail merchandise.
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 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.
Labor and Related Expenses
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 37.0%, 37.3% and 37.5% in 2004, 2003 and 2002, respectively.
The year to year decrease from 2003 to 2004 was due to higher menu pricing,
lower hourly labor, including wage rates, and decreased workers' compensation
and group health costs offset partially by increases in manager wages and
bonuses versus the prior year. The year to year decrease from 2002 to 2003 was
due 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.
Other Store Operating Expenses
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 16.9%, 17.2% and 17.0%
in 2004, 2003 and 2002, respectively. The year to year decrease from 2003 to
2004 was due to lower advertising and depreciation and higher menu pricing
versus the prior year offset partially by higher losses on disposition of
property and equipment versus the prior year. The increase from 2002 to 2003 was
due to higher maintenance versus the prior year offset partially by higher menu
pricing versus the prior year.
General and Administrative Expenses
General and administrative expenses as a percentage of total revenue were
5.3%, 5.6% and 5.6% in 2004, 2003 and 2002, respectively. The year to year
decrease from 2003 to 2004 was due to lower professional fees and the decrease
in bonus accruals reflective of lower performance against financial objectives
versus the prior year offset partially by the legal settlement discussed
earlier. Higher professional fees, higher costs for store manager conferences
and higher corporate bonuses reflective of performance improvements in 2003
versus 2002 were offset by higher revenues from menu pricing and new stores in
2003 versus 2002.
Interest Expense
Interest expense decreased to $8,444 in 2004 from $8,892 in 2003, which
represented an increase from $6,769 in 2002. The year to year decrease from 2003
to 2004 was due to lower average outstanding debt versus the prior year. The
increase from 2002 to 2003 resulted from higher average outstanding debt as
compared to the prior year offset partially by lower average interest rates as
compared to the prior year.
Provision for Income Taxes
Provision for income taxes as a percent of income before income taxes was
35.9% for 2004, 35.5% for 2003 and 35.6% for 2002. The reason for the increase
in the tax rate from 2003 to 2004 was the expiration of certain federal tax
credit legislation on January 1, 2004. The reason for the decrease in the tax
rate from 2002 to 2003 was a decrease in effective state tax rates.
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 September 28, 2004, 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. At July 30, 2004, the Company had no outstanding
borrowings under the Revolving Credit Facility, and the Company's percentage
point spread from LIBOR was 1.25%, as it was through all of 2004. The percentage
point spread will decrease to 1.0% for the first quarter of 2005 then increase
to 1.25% in the second quarter of 2005. The percentage point spread from LIBOR
for the third and fourth quarters of 2005 remains to be determined. 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.
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. Four food categories (beef, dairy, including eggs, pork
and poultry) account for the largest shares of the Company's food purchases at
approximately 18%, 13%, 11% and 10%, respectively. Other categories affected by
the commodities markets, such as produce, seafood and coffee, may each account
for as much as 9% 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 depending on the terms and
duration of supply contracts, sometimes 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, or over the longer term, the
Company believes it will be able to pass through some or much of the increased
commodity costs by adjusting its menu pricing. From time to time, competitive
circumstances, or judgments about consumer acceptance of price increases, may
limit menu price flexibility, and in those circumstances increases in commodity
prices can result in lower margins for the Company, as happened in 2004. 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 Statement of Financial Accounting Standards ("SFAS") Nos. 133, "Accounting
for Derivative Investments and Hedging Activities," 137, "Accounting for
Derivative Investments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133," 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities, an Amendment of FASB Statement No. 133," and
149, "Amendments of Statement 133 on Derivative Instruments and Hedging
Activities." However, these features that could be classified as derivative
financial instruments are exempt from fair value accounting based on the normal
purchases exemption.
Liquidity and Capital Resources
The following table presents a summary of the Company's cash flows for the
last three years:
2004 2003 2002
- -------------------------------------------------------------------------------
Net cash provided by operating activities $200,365 $240,586 $196,277
Net cash used in investing activities (143,666) (118,953) (90,879)
Net cash used in financing activities (42,313) (122,318) (102,131)
- -------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents $ 14,386 $ (685) $ 3,267
===============================================================================
The Company's cash generated from operating activities was $200,365 in
2004. Most of this cash was provided by net income adjusted by depreciation and
amortization, the tax benefit realized upon exercise of stock options, accretion
on zero coupon contingently convertible senior notes and loss on disposition of
property. Increases in deferred income taxes, income taxes payable, other
accrued expenses, deferred revenues, other long-term obligations, taxes withheld
and accrued and accrued employee benefits and decreases in prepaid expenses were
partially offset by decreases in accounts payable and accrued employee
compensation and increases in inventories, other assets and receivables.
The Company had negative working capital of $43,742 at July 30, 2004 versus
negative working capital of $70,655 at August 1, 2003. In the restaurant
industry, substantially all sales are either for cash or third-party 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 $144,611,
$120,921 and $96,692 in 2004, 2003 and 2002, respectively. Costs of new
locations accounted for the majority of these expenditures.
The Company's internally generated cash, along with cash at August 1, 2003,
the Company's new operating leases, proceeds from stock option exercises and,
for interim periods of time, the Company's available revolver, were sufficient
to finance all of its growth, share repurchases and other cash payment
obligations in 2004.
In 2002, the Company issued $422,050 (face value at maturity) of 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 (face value at maturity) Note is convertible into 10.8584
shares of the Company's common stock (approximately 4.6 million shares in the
aggregate) if any of the following conditions occur: 1) the closing price of the
Company's common 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, with a specified price of $48.21 at July 30,
2004); 2) the Company exercises its option to redeem the Notes; 3) 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) certain specified corporate events. The
accreted conversion price is equal to the issue price of the Note plus accrued
original issue discount divided by 10.8584 shares, and was $40.40 per share at
July 30, 2004. The Company's closing share price, as reported by Nasdaq, on July
30, 2004 was $33.22. Although the holders of the Notes have the ability to
require the Company to repurchase the Notes on April 3, 2005, the Company has
classified this debt as long-term due to its intent and ability, in the event of
a requirement to repurchase any portion of the Notes by the holders, to
refinance this indebtedness on a long-term basis through borrowings under the
Revolving Credit Facility. In addition to the many risks and uncertainties
listed above, the Company notes a certain specific risk that would have a
material impact on future results if it occurred. This risk is the potential
effect of a change in accounting rules for convertible debt proposed by the EITF
Issue Abstract No. 04-08, that would require the use of "if-converted"
accounting for contingently convertible debt regardless of whether the
contingency allowing debt holders to convert is met. Under current rules (SFAS
No. 128, "Earnings Per Share"), contingently issuable shares should be included
as diluted shares outstanding only when the contingency (i.e., when the common
stock trades for a specified period of time at or above the specified contingent
conversion price, $48.21 as of July 30, 2004) is met. Should the rule change be
adopted, the Company would be required, among other things, to include
approximately 4.6 million shares in its diluted shares outstanding related to
its convertible debt. The likelihood and timing of implementation of the rule
change is uncertain. The Company noted that, if implemented, the change would
have no economic effect because the terms of the Notes would be unchanged. The
Company has not yet determined what response or change in policy, if any, it
would make if the new accounting took effect.
On February 21, 2003, the Company entered into a new five-year $300,000
Revolving Credit Facility and terminated its previous $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. At July 30, 2004, the Company had no outstanding borrowings under the
Revolving Credit Facility.
During 2004, the Company's Board of Directors (the "Board") authorized the
repurchase of up to 4 million shares of the Company's common stock under two
separate repurchase authorizations. The repurchases are to be made from time to
time in the open market at prevailing market prices. The Company completed
repurchases of 1,769,300 shares of its common stock for a net expenditure of
$69,206, or approximately $39.11 per share. The total 2004 share repurchases
were made up of the following: 661,300 shares were repurchased under a
repurchase authorization previously in effect at the end of fiscal 2003 and
1,108,000 shares were repurchased under the first 2004 repurchase authorization.
The Company presently expects to complete the remaining 892,000 shares of the
first repurchase authorization and the 2 million shares of the second repurchase
authorization during 2005, although there can be no assurance that such
repurchases actually will be completed in that period of time. The Company's
principal criteria for share repurchases are that they be accretive to net
income per share and that they do not unfavorably affect the Company's
investment grade debt rating and target capital structure.
During 2004 the Company received proceeds of $50,210 from the exercise of
stock options on 2,634,126 shares of its common stock and tax benefit upon
exercise of stock options of $12,641.
During the first quarter of 2004, the Board approved a quarterly dividend
policy declaring a quarterly dividend of $0.11 per common share (an annual
equivalent of $0.44 per share), an increase from an annual dividend of $0.02
paid in 2003. The Company paid such dividends of $0.11 per share during the
second, third and fourth quarters of 2004. Additionally, on July 29, 2004, the
Board declared another dividend of $0.11 per share payable on September 1, 2004
to shareholders of record on August 9, 2004. Additionally, on September 23,
2004, the Board declared a dividend of $0.12 per share payable on November 1,
2004 to shareholders of record on October 8, 2004. This dividend reflects a 9.1%
increase from the previous quarterly dividend.
The Company estimates that its capital expenditures (purchase of property
and equipment) for 2005 will be approximately $160,000 to $165,000, most of
which will be related to the acquisition of sites and construction of 25 new
Cracker Barrel stores and 18 new Logan's restaurants and openings that will
occur after 2005.
Management believes that cash at July 30, 2004, 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 2005. At July 30, 2004, the
Company had $300,000 available under its Revolving Credit Facility. The Company
estimates that it will generate excess cash of approximately $100,000 to
$110,000, which it defines as net cash provided by operating activities less
cash used for purchase of property and equipment (the most comparable measure
under GAAP). The Company intends to use this excess cash along with proceeds
from the exercise of stock options in 2005 to apply toward completing its
remaining 2,892,000 share repurchase authorization, possible future share
repurchase authorizations and dividend payments or other general corporate
purposes.
Material Commitments
The Company's contractual cash obligations and commitments as of July 30,
2004, are summarized in the tables below:
Payments due by Year
- -----------------------------------------------------------------------------------------
2006- 2008- After
Total 2005 2007 2009 2009
- -----------------------------------------------------------------------------------------
Convertible debt $ 185,138 -- -- -- $185,138
Revolving credit facility -- -- -- -- --
- -----------------------------------------------------------------------------------------
Long-term Debt(a) 185,138 -- -- -- 185,138
Operating leases - excluding
billboards 442,824 $30,156 $59,610 $59,486 293,572
Operating leases for billboards 39,489 20,218 19,162 109 --
Trade letters of credit 7,497 7,497 -- -- --
Capital leases 637 235 359 43 --
Purchase obligations (b) 330,271 253,268 77,003 -- --
- ----------------------------------------------------------------------------------------
Total contractual cash
obligations $1,005,856 $311,374 $156,134 $59,638 $478,710
========================================================================================
Amount of Commitment Expirations by Year
2006- 2008- After
Total 2005 2007 2009 2009
- -------------------------------------------------------------------------------
Revolving credit facility $300,000 -- -- $300,000 --
Standby letters of credit 17,830 $17,830 -- -- --
Guarantees (c) 4,473 457 $913 913 $2,190
- -------------------------------------------------------------------------------
Total commitments $322,303 $18,287 $913 $300,913 $2,190
===============================================================================
(a) The convertible debt was issued at a discount representing a yield to
maturity of 3.00% per annum. The $185,138 balance is the accreted carrying
value of the debt at July 30, 2004. 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. Additionally, since the Company had no
amounts outstanding under its variable rate Revolving Credit Facility as
of July 30, 2004 interest is excluded from the contractual cash obligations
table.
(b) Purchase obligations consist of purchase orders for food and retail
merchandise; purchase orders for capital expenditures, supplies and other
operating needs and other services; and commitments under contracts for
maintenance needs and other services. We excluded long-term agreements for
services and operating needs that can be cancelled within 60 days without
penalty. We included long-term agreements for services and operating needs
that can be cancelled with more than 60 days notice without penalty only
through the term of the notice. We included long-term agreements for
services and operating needs that can be cancelled with a penalty through
the entire term of the contract. Due to uncertainties of seasonal demands
and promotional calendar changes, our best estimate of usage for food,
supplies and other operating needs and services is ratably over either the
notice period or the remaining life of the contact, as applicable, unless
we had better information available at the time related to each contract.
(c)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 GAAP. 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, or if operating performance declines, 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
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 actuarially determined
estimate of incurred but not reported claims at the anticipated cost to the
Company 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 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 ("IRS") completed its examination of the
Company's federal income tax returns for 1997 through 2001. On August 1, 2002
the Company reached a settlement with the IRS 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 IRS 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 Cracker Barrel subsidiary, on September 8, 2004, agreed in
principle to settle certain litigation alleging violations of the Fair Labor
Standards Act as well as allegations of discrimination in employment and public
accommodations. The total payment agreed to by Cracker Barrel was $8,720
(including $3,500 accrued in the fourth quarter of 2001), in full satisfaction
of all claims, including attorneys' fees and costs. The effects of this charge
upon net income and earnings per share in both the fourth quarter of and the
entire 2004 year are discussed above.
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)
July 30, August 1,
Assets 2004 2003
- -------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 28,775 $ 14,389
Receivables 9,802 9,150
Inventories 141,820 136,020
Prepaid expenses 8,369 8,932
Deferred income taxes 14,274 7,568
- -------------------------------------------------------------------
Total current assets 203,040 176,059
- -------------------------------------------------------------------
Property and Equipment:
Land 298,233 273,831
Buildings and improvements 662,682 625,541
Buildings under capital leases 3,289 3,289
Restaurant and other equipment 315,512 331,065
Leasehold improvements 193,859 164,937
Construction in progress 28,739 19,268
- -------------------------------------------------------------------
Total 1,502,314 1,417,931
Less: Accumulated depreciation and
amortization of capital leases 383,741 377,616
- -------------------------------------------------------------------
Property and equipment - net 1,118,573 1,040,315
- -------------------------------------------------------------------
Goodwill 92,882 92,882
Other Assets 20,367 17,067
- -------------------------------------------------------------------
Total $1,434,862 $1,326,323
===================================================================
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 53,295 $ 82,172
Current maturities of long-term debt
and other long-term obligations 189 100
Taxes withheld and accrued 34,539 32,103
Income taxes payable 23,118 11,952
Accrued employee compensation 49,466 50,153
Accrued employee benefits 39,290 38,782
Deferred revenues 19,347 15,634
Other accrued expenses 27,538 15,818
- -------------------------------------------------------------------
Total current liabilities 246,782 246,714
- -------------------------------------------------------------------
Long-term Debt 185,138 186,730
- -------------------------------------------------------------------
Other Long-term Obligations 23,925 20,303
- -------------------------------------------------------------------
Deferred Income Taxes 98,770 77,680
- -------------------------------------------------------------------
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; 2004 - 48,769,368
shares issued and outstanding; 2003 -
47,872,542 shares issued and outstanding 488 479
Additional paid-in capital 13,982 --
Retained earnings 865,777 794,417
- --------------------------------------------------------------------
Total shareholders' equity 880,247 794,896
- --------------------------------------------------------------------
Total $1,434,862 $1,326,323
====================================================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF INCOME
(In thousands except share data)
Fiscal years ended
July 30, August 1, August 2,
2004 2003 2002
- -----------------------------------------------------------------------
Total revenue $2,380,947 $2,198,182 $2,071,784
Cost of goods sold 785,703 703,915 677,738
- -----------------------------------------------------------------------
Gross profit 1,595,244 1,494,267 1,394,046
- -----------------------------------------------------------------------
Labor & other related expenses 880,617 819,957 777,617
Other store operating expenses 403,002 378,343 351,977
- -----------------------------------------------------------------------
Store operating income 311,625 295,967 264,452
General and administrative 126,489 121,886 115,152
- -----------------------------------------------------------------------
Operating income 185,136 174,081 149,300
Interest expense 8,444 8,892 6,769
Interest income 5 73 --
- -----------------------------------------------------------------------
Income before income taxes 176,697 165,262 142,531
Provision for income taxes 63,435 58,733 50,742
- -----------------------------------------------------------------------
Net income $ 113,262 $ 106,529 $ 91,789
=======================================================================
Net income per share - basic $ 2.32 $ 2.16 $ 1.69
=======================================================================
Net income per share - diluted $ 2.25 $ 2.09 $ 1.64
=======================================================================
Basic weighted average shares
outstanding 48,877,306 49,274,373 54,198,845
=======================================================================
Diluted weighted average shares
Outstanding 50,369,845 50,998,339 56,090,940
=======================================================================
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 Shareholders'
Stock Capital Earnings Equity
- ---------------------------------------------------------------------------
Balances at August 3, 2001 $550 $149,073 $696,485 $846,108
Cash dividends declared -
$.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 declared -
$.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
Cash dividends declared -
$.11 per share -- -- (21,556) (21,556)
Exercise of stock options 27 50,183 -- 50,210
Tax benefit realized upon
exercise of stock options -- 12,641 -- 12,641
Purchases and retirement of
common stock (18) (48,842) (20,346) (69,206)
Net income -- -- 113,262 113,262
- ---------------------------------------------------------------------------
Balances at July 30, 2004 $488 $ 13,982 $865,777 $880,247
===========================================================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Fiscal years ended
July 30, August 1, August 2,
2004 2003 2002
- ------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $113,262 $106,529 $ 91,789
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 63,868 64,376 62,759
Loss (gain) on disposition of property
and equipment 3,334 903 (781)
Accretion on zero-coupon contingently
convertible senior notes 5,408 5,254 1,720
Tax benefit realized upon
exercise of stock options 12,641 13,399 9,991
Changes in assets and liabilities:
Receivables (652) (691) 2,281
Inventories (5,800) (11,327) (8,103)
Prepaid expenses 563 2,792 (2,161)
Other assets (4,863) (3,136) (813)
Accounts payable (28,877) 8,366 17,108
Taxes withheld and accrued 2,436 3,422 (1,153)
Income taxes payable 11,166 (6,567) (3,146)
Accrued employee compensation (687) 6,691 7,169
Accrued employee benefits 508 5,361 7,871
Deferred revenues 3,712 2,673 3,921
Other accrued expenses 6,356 928 1,848
Other long-term obligations 3,606 2,359 4,232
Deferred income taxes 14,384 39,254 1,745
- ------------------------------------------------------------------------------------------
Net cash provided by
operating activities 200,365 240,586 196,277
- ------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and
equipment (144,611) (120,921) (96,692)
Proceeds from sale of property and
equipment 945 1,968 5,813
- ------------------------------------------------------------------------------------------
Net cash used in investing activities (143,666) (118,953) (90,879)
- ------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 150,000 353,200 591,756
Proceeds from exercise of stock options 50,210 59,649 53,103
Principal payments under
long-term debt and other
long-term obligations (157,125) (366,287) (524,140)
Purchases and retirement of common stock (69,206) (166,632) (216,834)
Deferred financing costs (1) (1,205) (4,853)
Dividends on common stock (16,191) (1,043) (1,163)
- ------------------------------------------------------------------------------------------
Net cash used in financing activities (42,313) (122,318) (102,131)
- -------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 14,386 (685) 3,267
Cash and cash equivalents,
beginning of year 14,389 15,074 11,807
- -------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of year $ 28,775 $ 14,389 $ 15,074
===========================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,108 $ 1,604 $ 4,839
Income taxes 26,501 15,229 43,340
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 non-affiliated area development agreements
and accompanying franchise agreements covering development of its concept in all
or part of five states. CBRL Group, Inc. Common Stock is traded on The Nasdaq
Stock Market (National Market) under the symbol CBRL.
2. Summary Of Significant Accounting Policies
GAAP - The accompanying Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principles in the
United States ("GAAP").
Fiscal year - The Company's fiscal year ends on the Friday nearest July
31st and each quarter consists of thirteen weeks unless noted otherwise.
References in these Notes to a year or quarter are to the Company's fiscal year
or quarter unless noted otherwise.
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, and accounts payable as of July 30, 2004, 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 (the "Notes")
in long-term debt at July 30, 2004 were $185,138 and $194,671, respectively. The
fair value of the Notes in long-term debt is determined based on market prices
using the average of the bid and ask prices as of July 30, 2004.
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 $62,304, $62,552 and $61,883 for 2004, 2003 and
2002, respectively. Accelerated depreciation methods are generally used for
income tax purposes.
Capitalized interest was $615, $463 and $364 for 2004, 2003 and 2002,
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.
Advertising - The Company expenses the costs of producing advertising the
first time the advertising takes place. Net advertising expense was $38,442,
$39,782 and $37,423 for 2004, 2003 and 2002, 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 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 actuarially determined
estimate of incurred but not reported claims at the anticipated cost to the
Company 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.
The reserves and 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 Statement of Financial Accounting Standards ("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 acquisition of Logan's in 1999.
Effective August 4, 2001, the Company elected early adoption of SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 eliminated 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
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 quarters of 2003 and 2004, 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.
Revenue recognition - The Company records revenue from the sale of products
as they are sold. The Company provides for estimated returns based on return
history and sales levels. Initial fees received from a franchisee to establish a
new franchise are recognized as income when the Company has performed all of its
obligations required to assist the franchisee in opening a new franchise
restaurant, which is generally upon the opening of that restaurant. Continuing
royalties, which are a percentage of net sales of franchised restaurants, are
accrued as income when earned.
Deferred revenue - 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.
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 Notes had no effect on diluted shares in 2004, 2003 or 2002, since none of
the contingencies that would allow conversion had occurred (see Note 4).
Outstanding employee and director stock options and restricted stock issued by
the Company represent the only dilutive effects 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 2004,
2003 and 2002 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 three executive
officers of the Company.
Had the Company used the alternative 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 in the following table:
2004 2003 2002
---- ---- ----
Net income - as reported $113,262 $106,529 $91,789
Add: Total stock-based employee
compensation included in reported
net income, net of related tax effects 74 298 397
Deduct: Total stock-based
compensation expense determined under
fair-value based method for all
awards, net of tax effects (10,900) (11,496) (12,709)
-------- -------- --------
Pro forma, net income $102,436 $ 95,331 $ 79,477
======== ======== ========
Net income per share:
Basic - as reported $2.32 $2.16 $1.69
===== ===== =====
Basic - pro forma 2.10 1.93 1.47
==== ==== ====
Diluted - as reported 2.25 2.09 1.64
==== ==== ====
Diluted - pro forma 2.03 1.87 1.42
==== ==== ====
Segment Reporting - The Company accounts for its segment in accordance with
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information." SFAS No. 131 requires that a public company report annual and
interim financial and descriptive information about its reportable operating
segments. Operating segments, as defined, are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. SFAS No. 131 allows aggregation of similar operating
segments into a single operating segment if the businesses are considered
similar under the criteria established by SFAS No. 131. Utilizing these
criteria, the Company manages its business on the basis of one reportable
operating segment (see Note 8).
Derivative instruments and hedging activities - The Company adopted SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," in 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 2001 and
SFAS No. 149, "Amendments of Statement 133 on Derivative Instruments and Hedging
Activities," in the fourth quarter of 2003. These statements specify how to
report and display derivative instruments and hedging activities. The adoption
of these statements did not have a material effect on the Company's Consolidated
Financial Statements. During 2004, 2003 and 2002, the Company had no derivative
financial instruments that required fair value accounting treatment.
The Company is exposed to market risk, such as changes in interest rates
and commodity prices. To manage the volatility relating to these exposures, the
Company nets the exposures on a consolidated basis to take advantage of natural
offsets. 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 reviews these
derivative financial instruments on a specific exposure basis to support hedge
accounting. The changes in fair value of these hedging instruments are 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 (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 generally are unpredictable. Changes in
commodity prices would affect the Company and its competitors generally and,
depending on terms and duration of supply contracts, sometimes simultaneously.
In many cases, the Company believes it will be able to pass through some or much
of increased commodity costs by adjusting its menu pricing. From time to time,
competitive circumstances or judgments about consumer acceptance of price
increases may limit menu price flexibility, and in those circumstances,
increases in commodity prices can result in lower margins for the Company as
occurred in 2004. 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 GAAP. Management believes that such estimates have been based on
reasonable and supportable assumptions and that the resulting estimates are
reasonable for use in the preparation of the Consolidated Financial Statements.
Actual results, however, could differ from those estimates.
Reclassifications - Certain reclassifications have been made in the 2002
and 2003 financial statements to conform to the classifications used in 2004.
The balance sheet at August 1, 2003 and the cash flow statement for 2003 and
2002 reflect certain reclassifications that increased receivables and decreased
prepaid expenses.
3. Inventories
Inventories were composed of the following at:
July 30, August 1,
2004 2003
- -------------------------------------------------------------------------------
Retail $104,148 $101,955
Restaurant 19,800 17,091
Supplies 17,872 16,974
- ------------------------------------------------------------------------------
Total $141,820 $136,020
==============================================================================
4. Debt
Long-term debt consisted of the following at:
July 30, August 1,
2004 2003
- -----------------------------------------------------------------------------
$300,000 Revolving Credit Facility payable on or
before February 21, 2008 (rate at 2.36% at
August 1, 2003) $ -- $ 7,000
3.0% Zero-Coupon Contingently Convertible Senior
Notes payable on or before April 2, 2032 185,138 179,730
- -----------------------------------------------------------------------------
Long-term debt $185,138 $186,730
=============================================================================
At July 30, 2004, the Company had no outstanding borrowings under the
Revolving Credit Facility, which 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. At July 30, 2004, the
Company's percentage point spread from LIBOR was 1.25% and will decrease to 1.0%
for the first quarter of 2005 then increase to 1.25% in the second quarter of
2005. The percentage point spread from LIBOR for the third and fourth quarters
of 2005 remains to be determined.
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 July 30,
2004 and August 1, 2003, the Company was in compliance with all of those
covenants.
In 2002, the Company issued $422,050 (face value at maturity) of 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.
Although the holders of the Notes have the ability to require the Company to
repurchase the Notes on April 3, 2005, the Company has classified this debt as
long-term due to its intent and ability, in the event it were required to
repurchase any portion of the Notes, to refinance this indebtedness on a
long-term basis through borrowings under the Revolving Credit Facility. In
addition, each $1 (face value at maturity) Note is convertible into 10.8584
shares of the Company's common stock (approximately 4.6 million shares in the
aggregate) if any of the following conditions occur: 1) the closing price of the
Company's common 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, with a specified price of $48.21 at July 30,
2004); 2) the Company exercises its option to redeem the Notes; 3) 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) certain specified corporate events. The
accreted conversion price is equal to the issue price of the Note plus accrued
original issue discount divided by 10.8584 shares, and was $40.40 per share at
July 30, 2004. The Company's closing share price, as reported by Nasdaq, on July
30, 2004 was $33.22.
All subsidiaries of the Company have fully and unconditionally guaranteed
on a joint and several basis the obligations under the Revolving Credit Facility
and the Notes. Each guarantor is, directly or indirectly, 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 July 30, 2004 are
as follows:
Year
- ------------------------------------------------------------------------------
2005 --
2006 --
2007 --
2008 --
2009 --
2010 and thereafter $185,138
- ------------------------------------------------------------------------------
Total $185,138
==============================================================================
5. Common Stock
During 2000 two executive officers were granted, respectively, 20,000 and
19,000 restricted shares of the Company's common stock that were to vest over
five years. In 2002 one executive officer was granted 48,000 restricted shares
of the Company's common stock that 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. In 2004, one executive officer was granted 7,500 restricted
shares which will vest one-third each year starting three years from the date of
the grant. The executive officer granted 19,000 restricted shares 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 $116,
$462 and $616 in 2004, 2003 and 2002, respectively.
6. Stock Compensation Plans
The Company's employee compensation plans are administered by the
Compensation and Stock Option Committee (the "Committee") of the Board. The
Committee is authorized to determine, at time periods within its discretion and
subject to the direction of the Board, which employees will be granted options
and other awards, the number of shares covered by any awards granted, and within
applicable limits, the terms and provisions relating to the exercise of any
awards.
On September 26, 2002, the Board approved the CBRL Group 2002 Omnibus
Incentive Compensation Plan ("Omnibus Plan") for all employees and non-employee
directors of the Company. That Omnibus Plan was subsequently approved by
shareholders at the Company's 2002 Annual Shareholders Meeting. The Omnibus Plan
allows the Committee to grant awards for an aggregate of 2,500,000 shares of the
Company's common stock. The Omnibus Plan authorizes 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 on the day of the Annual Shareholders Meeting an
option to purchase 5,000 shares of the Company's common stock with an option
price per share of 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 an option to purchase 5,000 shares of the Company's common stock with an
option price per share of 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, expiring ten
years from the date of grant and are non-transferable. At July 30, 2004, there
were 2,108,515 shares of the Company's common stock reserved for issuance under
the Omnibus Plan.
On May 25, 2000, the Board approved the CBRL Group, Inc. 2000 Non-Executive
Stock Option Plan ("Employee Plan") for employees who are not officers or
directors of the Company. The Employee Plan allows the Committee to grant
options to purchase an aggregate of 4,750,000 shares of the Company's common
stock. 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 are non-transferable. At July 30, 2004, there were 159,428 shares of
the Company's common stock reserved for issuance under the Employee Plan.
The Company also has an Amended and Restated Stock Option Plan (the "Plan")
that originally allowed the Committee to grant options to purchase an aggregate
of 17,525,702 shares of the Company's common stock. At July 30, 2004, there were
1,519,603 shares of the Company's 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. Beginning in 2000, a long-term incentive award
was granted to certain officers, which included stock options. The options
granted under this award would 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 options
to purchase 255,050 shares vested 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 adopted the Cracker Barrel Old Country Store, Inc. 1989
Stock Option Plan for Non-employee Directors ("Directors Plan"). 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 2004, 2003
and 2002, and changes during those years follows:
(Shares in thousands) 2004 2003 2002
-----------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Fixed Options Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------
Outstanding at
beginning of year 7,599 $20.73 9,504 $20.23 10,504 $19.77
Granted 1,146 38.35 1,907 23.85 2,506 20.13
Exercised (2,634) 19.68 (2,922) 20.90 (2,869) 18.67
Forfeited or canceled (294) 23.76 (890) 21.54 (637) 19.33
------ ------ ------
Outstanding at
end of year 5,817 24.52 7,599 20.73 9,504 20.23
====== ===== ======
Options exercisable
at year-end 3,011 20.62 3,696 20.69 5,148 22.58
Weighted-average fair
value per share of
options granted
during the year $14.14 $10.20 $ 9.46
- ------------------------------------------------------------------------------
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 2004, 2003 and 2002:
2004 2003 2002
- -------------------------------------------------------------------------------
Dividend yield range 0.1% - 1.4% 0.1% 0.1%
Expected volatility range 22% - 42% 41% - 45% 43%
Risk-free interest rate range 1.3% - 4.0% 2.2% - 3.8% 4.0% - 4.9%
Expected lives (in years) 1-8 5-8 6
- -------------------------------------------------------------------------------
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 July 30, 2004:
(Shares in thousands)
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------
Number Weighted-Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 7/30/04 Contractual Life Exercise Price at 7/30/04 Exercise Price
- ----------------------------------------------------------------------------------------
$ 5.09 - 10.00 38 1.93 $ 7.63 38 $ 7.63
10.01 - 20.00 1,186 5.50 14.94 1,186 14.94
20.01 - 30.00 3,181 6.45 22.83 1,495 23.38
30.01 - 40.00 970 7.37 35.28 292 31.28
40.01 - 41.25 442 9.32 40.26 -- --
----- ------
$ 5.09 - 41.25 5,817 5.89 24.52 3,011 20.62
========================================================================================
The Company recognizes a tax deduction, subject to certain limitations
imposed by the Internal Revenue Code, 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 on the date the option is exercised. These
tax benefits, when realized, 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:
July 30, August 1,
2004 2003
- -----------------------------------------------------------------------------
Deferred tax assets:
Financial accruals without
economic performance $24,818 $20,252
Other 3,637 8,284
----------------------------------------------------------------------------
Deferred tax assets 28,455 28,536
----------------------------------------------------------------------------
Deferred tax liabilities:
Excess tax depreciation over book 89,627 72,846
Other 23,324 25,802
----------------------------------------------------------------------------
Deferred tax liabilities 112,950 98,648
----------------------------------------------------------------------------
Net deferred tax liability $ 84,496 $70,112
============================================================================
The Company provided no valuation allowance against deferred tax assets
recorded as of July 30, 2004 and August 1, 2003, 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:
2004 2003 2002
- ------------------------------------------------------------------------------
Current:
Federal $44,758 $17,985 $45,955
State 4,293 1,494 3,042
Deferred 14,384 39,254 1,745
-----------------------------------------------------------------------------
Total income tax provision $63,435 $58,733 $50,742
=============================================================================
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:
2004 2003 2002
------------------------------------------------------------------------------
Provision computed at federal
statutory income tax rate $61,844 $57,842 $49,886
State and local income taxes,
net of federal benefit 5,598 4,410 4,635
Employer tax credits for FICA taxes
paid on employee tip income (4,781) (4,323) (3,875)
Other-net 774 800 69
------------------------------------------------------------------------------
Total income tax provision $63,435 $58,733 $50,742
==============================================================================
The Internal Revenue Service ("IRS") has completed its examinations of the
Company's federal income tax returns for 1997 through 2001. Additionally, the
IRS has completed its examinations of the Company's federal payroll tax filings
for the calendar years ended December 31, 1997 through December 31, 2001.
8. Segment Information
Cracker Barrel units represent a single, integrated operation with two
related and substantially integrated product lines. The operating expenses of
the restaurant and retail product lines of a Cracker Barrel unit are shared and
are indistinguishable in many respects. Likewise, Logan's units are restaurant
operations with investment criteria and economic and operating characteristics
similar to those of Cracker Barrel. The chief operating decision makers
regularly evaluate the Cracker Barrel and Logan's restaurant and retail
components in determining how to allocate resources and in assessing
performance. Accordingly, the Company manages its business on the basis of one
reportable operating segment. All of the Company's operations are located within
the United States. The following data are presented in accordance with SFAS No.
131 for all periods presented.
2004 2003 2002
- -----------------------------------------------------------------------------
Net sales in Company-Owned stores:
Restaurant $1,892,487 $1,753,361 $1,645,696
Retail 486,433 443,397 424,949
- -----------------------------------------------------------------------------
Total net sales 2,378,920 2,196,758 2,070,645
- -----------------------------------------------------------------------------
Franchise fees and royalties 2,027 1,424 1,139
- -----------------------------------------------------------------------------
Total revenue $2,380,947 $2,198,182 $2,071,784
=============================================================================
9. Commitments and Contingencies
On September 8, 2004, Cracker Barrel agreed in principle to settle certain
litigation alleging violations of the Fair Labor Standards Act as well as
allegations of discrimination in employment and public accommodations. The total
payment agreed by Cracker Barrel was $8,720 (including $3,500 accrued in 2001),
in full satisfaction of all claims, including attorneys' fees and costs.
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 July 30, 2004 the Company was contingently liable for approximately $7,497
under outstanding trade letters of credit issued in connection with purchase
commitments. These letters of credit have terms of three 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 July 30, 2004, the Company had $17,830 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 9.2 years with annual lease payments of $361.
The Company's performance is required only if the assignee fails to perform the
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 more than one
year ago. The operating lease has a remaining life of approximately 12.2 years
with annual lease payments of $96. The Company's performance is required only if
the sublessee fails to perform the obligations as lessee. The Company has a
liability of $447 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 July 30, 2004, the Company operated 141 Cracker Barrel stores and 51
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 5% 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 percentage 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 July 30, 2004:
Year
- -------------------------------------------------------------------------------
2005 $ 235
2006 235
2007 124
2008 43
2009 --
- -------------------------------------------------------------------------------
Total minimum lease payments 637
Less amount representing interest 81
- -------------------------------------------------------------------------------
Present value of minimum lease payments 556
Less current portion 189
Long-term portion of capital lease obligations $ 367
===============================================================================
The following is a schedule by year of the future minimum rental payments
required under non-cancelable operating leases, excluding leases for advertising
billboards, as of July 30, 2004:
Year
- -------------------------------------------------------------------------------
2005 $ 30,156
2006 29,856
2007 29,754
2008 29,798
2009 29,688
Later years 293,572
- -------------------------------------------------------------------------------
Total $442,824
===============================================================================
The following is a schedule by year of the future minimum rental payments
required under operating leases for advertising billboards as of July 30, 2004:
Year
- -------------------------------------------------------------------------------
2005 $20,218
2006 13,604
2007 5,558
2008 109
- -------------------------------------------------------------------------------
Total $39,489
Rent expense under operating leases, excluding leases for advertising
billboards, for each of the three years was:
Minimum Contingent Total
- -------------------------------------------------------------------------------
2004 $30,962 $852 $31,814
2003 28,881 753 29,634
2002 26,158 776 26,934
- -------------------------------------------------------------------------------
Rent expense under operating leases for billboards for each of the three
years was:
Minimum Contingent Total
- -------------------------------------------------------------------------------
2004 $23,042 -- $23,042
2003 22,811 -- 22,811
2002 21,442 -- 21,442
- -------------------------------------------------------------------------------
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.
The Company also 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.
Contributions under both Plan I and Plan II may be invested in 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 in either Plan I or Plan II up to a total of 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 2004, 2003, and 2002, the Company contributed approximately
$1,321, $1,524 and $1,609, respectively, under Plan I and approximately $345,
$280 and $203, respectively, under Plan II. At the inception of Plan II, the
Company established a Rabbi Trust to fund Plan II obligations. The market value
of the trust assets of $12,479 is included in other assets and the liability to
Plan II participants of $12,479 is included in other long-term obligations.
Company contributions under Plan I and Plan II are recorded as other store
operating expenses.
11. Sale-Leaseback
On July 31, 2000, Cracker Barrel completed a sale-leaseback transaction
involving 65 of its owned units. Under the transaction, the land, buildings and
building improvements at the locations were sold for net consideration of
$138,325 and were 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 July 30, 2004 and August 1, 2003, the Company was in
compliance with all those 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.
12. Quarterly Financial Data (Unaudited)
Quarterly financial data for 2004 and 2003 are summarized as follows:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter*
- ----------------------------------------------------------------------------
2004
Total revenue $576,365 $612,801 $584,282 $607,499
Gross profit 390,465 399,274 393,564 411,941
Income before income
taxes 43,794 45,381 40,845 46,677
Net income 28,160 29,001 26,182 29,919
Net income per
share - basic .59 .59 .53 .61
Net income per
share - diluted .56 .57 .52 .60
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
*The Company recorded charges of $5,210 before taxes during the quarter ended
July 30, 2004, as a result of a settlement in principle of certain previously
reported lawsuits against its Cracker Barrel subsidiary (see Note 9).
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of CBRL Group, Inc.:
We have audited the accompanying consolidated balance sheets of CBRL Group, Inc.
and subsidiaries (the "Company") as of July 30, 2004 and August 1, 2003, 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 July 30, 2004.
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 standards of the Public Company
Accounting Oversight Board (United States). 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 financial position of the Company at July 30, 2004 and
August 1, 2003, and the results of its operations and its cash flows for each of
the three fiscal years in the period ended July 30, 2004, in conformity with
accounting principles generally accepted in the United States of America.
/s/Deloitte & Touche LLP
Nashville, Tennessee
September 23, 2004