Chili's 2005 Annual Report Download - page 43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15
classified as short-term investments because they typically can be purchased and sold every 7, 28 and 35 days. The
trading of auction rate securities takes place through a dutch auction with an interest rate reset at the beginning
of each holding period. At the end of each holding period the interest is paid to the investor.
(d) Financial Instruments
The Company’s policy is to invest cash in excess of operating requirements in income-producing investments.
Income-producing investments with maturities of three months or less at the time of investment are reflected as
cash equivalents.
The Company’s financial instruments at June 29, 2005 and June 30, 2004 consist of cash equivalents, short-
term investments, accounts receivable, notes receivable, and long-term debt. The fair value of the Company’s
Notes and convertible debt, based on quoted market prices, totaled approximately $318.0 million and
$585.4 million at June 29, 2005 and June 30, 2004, respectively. The fair value of all other financial instruments
approximates the carrying amounts reported in the consolidated balance sheets. The following methods were
used in estimating the fair value of financial instruments other than the Notes and convertible debt: cash
equivalents, short-term investments and accounts receivable approximate their carrying amounts due to the short
duration of those items; notes receivable are based on the present value of expected future cash flows discounted
at the interest rate currently offered by the Company which approximates rates currently being offered by local
lending institutions for loans of similar terms to companies with comparable credit risk; and long-term debt is
based on the amount of future cash flows discounted using the Company’s expected borrowing rate for debt of
comparable risk and maturity.
The Company’s use of derivative instruments is primarily related to interest rate swaps, which are entered
into with the intent of hedging exposures to changes in value of certain fixed-rate lease obligations. The Company
records derivative instruments in the consolidated balance sheet at fair value. The accounting for the gain or loss
due to changes in fair value of the derivative instrument depends on whether the derivative instrument qualifies
as a hedge. If the derivative instrument does not qualify as a hedge, the gains or losses are reported in earnings
when they occur. However, if the derivative instrument qualifies as a hedge, the accounting varies based on the
type of risk being hedged. Amounts receivable or payable under interest rate swaps related to the hedged lease
obligations are recorded as adjustments to restaurant expenses. Cash flows related to derivative transactions are
included in operating activities. See Note 7 for additional discussion of hedging activities.
(e) Inventories
Inventories, which consist of food, beverages, and supplies, are stated at the lower of cost (weighted average
cost method) or market.
(f) Property and Equipment
Buildings and leasehold improvements are amortized using the straight-line method over the lesser of the
life of the lease, including renewal options, or the estimated useful lives of the assets, which range from 4 to 20
years. Furniture and equipment are depreciated using the straight-line method over the estimated useful lives of
the assets, which range from 3 to 10 years.
The Company evaluates property and equipment held and used in the business for impairment whenever
events or changes in circumstances indicate that the carrying amount of a restaurant’s assets may not be
recoverable. An impairment is determined by comparing estimated undiscounted future operating cash flows for
a restaurant to the carrying amount of its assets. If an impairment exists, the amount of impairment is measured
as the excess of the carrying amount over the estimated discounted future operating cash flows of the asset and
the expected proceeds upon sale of the asset. Assets held for sale are reported at the lower of carrying amount or
fair value less costs to sell.
(g) Operating Leases
Rent expense for leases that contain scheduled rent increases is recognized on a straight-line basis over the
lease term, including cancelable option periods where failure to exercise such options would result in an
economic penalty such that the renewal appears reasonably assured. The straight-line rent calculation includes
the rent holiday period, which is the period of time between the Company taking control of a leased site and the