Chili's 2005 Annual Report Download - page 45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17
(m) Stock-Based Compensation
The Company accounts for its stock based compensation under the recognition and measurement principles
of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
interpretations (“APB 25”), and has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for
Stock-Based Compensation.” Under APB 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. Had the Company used the fair value based accounting
method for stock compensation expense prescribed by SFAS No. 123, the Company’s net income and earnings
per share would have been reduced to the pro-forma amounts illustrated as follows (in thousands, except per
share amounts):
2005 2004 2003
Net income—as reported........................... $ 160,219 $ 150,918 $ 166,200
Add: Reported stock-based compensation expense, net
of taxes......................................... 1,383 1,756 1,863
Deduct: Fair value based compensation expense, net of
taxes(a) ........................................ (16,700) (18,663 ) (17,697)
Net income—pro forma............................ $ 144,902 $ 134,011 $ 150,366
Earnings per share:
Basic—as reported................................. $ 1.81 $ 1.57 $ 1.71
Basic—pro forma.................................. $ 1.64 $ 1.39 $ 1.55
Diluted—as reported .............................. $ 1.73 $ 1.48 $ 1.61
Diluted—pro forma................................ $ 1.57 $ 1.31 $ 1.47
(a) The fiscal 2005 compensation expense includes prior year forfeiture adjustments of $1.5 million, net of tax.
The weighted average fair value of option grants was $11.48, $11.38, and $10.76 during fiscal 2005, 2004, and
2003, respectively. The fair value is estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions:
2005 2004 2003
Expected volatility.................................. 31.2% 33.0% 34.0%
Risk-free interest rate............................... 3.4% 3.4% 3.0%
Expected lives...................................... 5 years 5 years 5 years
Dividend yield...................................... 0.0% 0.0% 0.0%
The pro forma disclosures provided are not likely to be representative of the effects on reported net income
for future years due to future grants. The Company will begin recognizing stock-based compensation expense in
fiscal 2006 in accordance with the provisions of SFAS 123R. The estimated impact of adopting SFAS 123R for
fiscal 2006 will be $31.0 to $33.0 million ($24.0 to $26.0 million, net of tax). This estimate includes costs related to
unvested stock options and restricted stock grants associated with new compensation programs.
(n) 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. Fiscal 2005, 2004 and 2003
comprehensive income consists of net income and the unrealized portion of changes in the fair value of the
Company’s investments in mutual funds.
(o) Net Income Per Share
Basic earnings 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 earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue common stock were exercised or
converted into common stock. For the calculation of diluted net income per share, the basic weighted average
number of shares is increased by the dilutive effect of stock options determined using the treasury stock method