Chili's 2005 Annual Report Download - page 35

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
7
Impairment of Long-Lived Assets
The Company reviews property and equipment for impairment when events or circumstances indicate that
the carrying amount of a restaurant’s assets may not be recoverable. The Company tests for impairment using
historical cash flows and other relevant facts and circumstances as the primary basis for its estimates of future
cash flows. This process requires the use of estimates and assumptions, which are subject to a high degree of
judgment. In addition, at least annually the Company assesses the recoverability of goodwill related to its
restaurant concepts. This impairment test requires the Company to estimate fair values of its restaurant concepts
by making assumptions regarding future profits and cash flows, expected growth rates, terminal values, and other
factors. In the event that these assumptions change in the future, the Company may be required to record
impairment charges related to goodwill.
Financial Instruments
The Company enters into interest rate swaps to maintain the value of certain lease obligations. The fair
value of these swaps is estimated using widely accepted valuation methods. The valuation of derivatives involves
considerable judgment, including estimates of future interest rate curves. Changes in those estimates may
materially affect the amounts recognized in the balance sheet for the Company’s derivatives and interest costs in
future periods.
Self-Insurance
The Company is self-insured for certain losses related to health, general liability and workers’ compensation.
The Company maintains stop loss coverage with third party insurers to limit its total exposure. The self-insurance
liability represents an estimate of the ultimate cost of claims incurred and unpaid as of the balance sheet date.
The estimated liability is not discounted and is established based upon analysis of historical data and actuarial
estimates, and is reviewed by the Company on a quarterly basis to ensure that the liability is appropriate. If actual
trends, including the severity or frequency of claims, differ from our estimates, our financial results could be
impacted.
RECENT ACCOUNTING PRONOUNCEMENT
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS 123R”), which
amends SFAS No. 123 and SFAS No. 95. SFAS 123R requires all companies to measure and record
compensation cost for all share-based payments, including employee stock options, at fair value and will be
effective for annual periods beginning after June 15, 2005. The Company estimates that stock-based
compensation expense for fiscal 2006 will be $31.0 to $33.0 million ($24.0 to $26.0 million after tax). This estimate
includes costs related to unvested stock options and restricted stock grants associated with new compensation
programs.
FORWARD-LOOKING STATEMENTS
The Company wishes to caution readers that the following important factors, among others, could cause the
actual results of the Company to differ materially from those indicated by forward-looking statements made in
this report and from time to time in news releases, reports, proxy statements, registration statements and other
written or electronic communications, as well as verbal forward-looking statements made from time to time by
representatives of the Company. Such forward-looking statements involve risks and uncertainties that may cause
the Company’s or the restaurant industry’s actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by these forward-looking statements.
Factors that might cause actual events or results to differ materially from those indicated by these forward-
looking statements may include matters such as future economic performance, restaurant openings, operating
margins, the availability of acceptable real estate locations for new restaurants, the sufficiency of the Company’s
cash balances and cash generated from operating and financing activities for the Company’s future liquidity and