Chili's 2002 Annual Report Download - page 37

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
stock were repurchased for $136.1 million during fiscal 2002. As of June 26, 2002, approximately 16.0 million
shares had been repurchased for $327.6 million under the stock repurchase plan. The Company repurchases
common stock to offset the dilutive effect of stock option exercises, satisfy obligations under its savings plans, and
for other corporate purposes. The repurchased common stock is reflected as a reduction of shareholders’ equity.
The Company financed the repurchase program through a combination of cash provided by operations,
drawdowns on its available credit facilities and the issuance of the zero coupon convertible senior debentures.
In August 2002, the Company entered into a letter of intent with Philip J. Romano and Eatzi’s Corporation
to divest its interest in the Eatzi’s concept. As a result, an approximate $8.7 million impairment charge was
recorded reducing the Eatzi’s notes receivable to $11.0 million. The Company expects to collect the remaining
balance of the notes in the second quarter of fiscal 2003.
The Company is not aware of any other event or trend which would potentially affect its liquidity. In the
event such a trend develops, the Company believes that there are sufficient funds available under its credit
facilities and from its strong internal cash generating capabilities to adequately manage the expansion of the
business.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on debt and certain leasing facilities
and from changes in commodity prices. A discussion of the Company’s accounting policies for derivative
instruments is included in the summary of significant accounting policies in the notes to the consolidated
financial statements.
The Company may from time to time utilize interest rate swaps to manage overall borrowing costs and
reduce exposure to adverse fluctuations in interest rates. The Company does not use derivative instruments for
trading purposes and has procedures in place to monitor and control derivative use.
The Company is exposed to interest rate risk on short-term and long-term financial instruments carrying
variable interest rates. The Company’s variable rate financial instruments, including the outstanding borrowings
of credit facilities and notional amounts of interest rate swaps, totaled $224.1 million at June 26, 2002. The
impact on the Company’s annual results of operations of a one-point interest rate change on the outstanding
balance of these variable rate financial instruments as of June 26, 2002 would be approximately $2.2 million.
The Company purchases certain commodities such as beef, chicken, flour, and cooking oil. These
commodities are generally purchased based upon market prices established with vendors. These purchase
arrangements may contain contractual features that limit the price paid by establishing certain price floors or
caps. The Company does not use financial instruments to hedge commodity prices because these purchase
arrangements help control the ultimate cost paid and any commodity price aberrations are generally short term
in nature.
This market risk discussion contains forward-looking statements. Actual results may differ materially from
this discussion based upon general market conditions and changes in domestic and global financial markets.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are disclosed in Note 1 to our consolidated financial statements. The
following discussion addresses our most critical accounting policies, which are those that are most important to
the portrayal of our financial condition and results, and that require significant judgment.
Property and Equipment
Property and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets.
The useful lives of the assets are based upon the Company’s expectations for the period of time that the asset will
be used to generate revenue. The Company periodically reviews the assets for changes in circumstances which
may impact their useful lives.
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