EXHIBIT 13
SELECTED FINANCIAL DATA
(In thousands, except per share amounts and number of restaurants)
Fiscal Years
1998 1997 1996 1995 1994
Income Statement Data:
Revenues $1,574,414 $1,335,337 $1,162,951 $1,042,199 $ 886,040
Costs and Expenses:
Cost of Sales 426,558 374,525 330,375 283,417 241,950
Restaurant Expenses 866,143 720,769 620,441 540,986 451,029
Depreciation and Amortization 86,376 78,754 64,611 58,570 51,570
General and Administrative 77,407 64,404 54,271 50,362 45,659
Interest Expense 11,025 9,453 4,579 595 441
Gain on Sales of Concepts - - (9,262) - -
Restructuring Charge - - 50,000 - -
Merger Expenses - - - - 1,949
Injury Claim Settlement - - - - 2,248
Other, Net 1,447 (3,553) (4,201) (3,151) (5,348)
Total Costs and Expenses 1,468,956 1,244,352 1,110,814 930,779 789,498
Income Before Provision
for Income Taxes 105,458 90,985 52,137 111,420 96,542
Provision for Income Taxes 36,383 30,480 17,756 38,676 34,223
Net Income $ 69,075 $ 60,505 $ 34,381 $ 72,744 $ 62,319
Basic Net Income
Per Share $ 1.05 $ 0.82 $ 0.45 $ 1.01 $ 0.88
Diluted Net Income
Per Share $ 1.02 $ 0.81 $ 0.44 $ 0.98 $ 0.83
Basic Weighted Average
Shares Outstanding 65,766 73,682 76,015 71,764 70,984
Diluted Weighted Average
Shares Outstanding 67,450 74,800 77,905 74,283 74,947
Balance Sheet Data
(end of period):
Working Capital Deficit $ (92,570) $ (36,699) $ (35,035) $ (2,377) $ (54,879)
Total Assets 989,383 996,943 888,834 738,936 558,435
Long-term Obligations 197,577 324,066 157,274 139,645 39,316
Shareholders' Equity 593,739 523,744 608,170 496,797 417,377
Number of Restaurants
Open at End of Period:
Company-Operated 624 556 468 439 369
Franchised/Joint Venture 182 157 147 121 89
Total 806 713 615 560 458
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR FISCAL YEARS 1998, 1997, AND 1996
The following table sets forth expenses as a percentage of total
revenues for the periods indicated for revenue and expense items
included in the consolidated statements of income.
Percentage of Total Revenues
Fiscal Years
1998 1997 1996
Revenues 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of Sales 27.1% 28.1% 28.4%
Restaurant Expenses 55.0% 54.0% 53.3%
Depreciation and Amortization 5.5% 5.9% 5.6%
General and Administrative 4.9% 4.8% 4.7%
Interest Expense 0.7% 0.7% 0.4%
Gain on Sales of Concepts - - (0.8%)
Restructuring Charge - - 4.3%
Other, Net 0.1% (0.3%) (0.4%)
Total Costs and Expenses 93.3% 93.2% 95.5%
Income Before Provision for Income Taxes 6.7% 6.8% 4.5%
Provision for Income Taxes 2.3% 2.3% 1.5%
Net Income 4.4% 4.5% 3.0%
REVENUES
Increases in revenues of 18% and 15% in fiscal 1998 and 1997,
respectively, primarily relate to the increases in sales weeks
driven by new unit expansion. Revenues for fiscal 1998 increased
due to a 14.3% increase in sales weeks and a 3.2% increase in
average weekly sales. Revenues for fiscal 1997 increased 15% due to
a 12.2% increase in sales weeks and a 2.3% increase in average
weekly sales. Menu price increases were less than 2% in both fiscal
1998 and 1997.
COSTS AND EXPENSES (as a percent of Revenues)
Cost of sales decreased in fiscal 1998 compared to fiscal 1997 due
to menu price increases and favorable commodity price variances
which partially offset product mix changes to menu items with
higher percentage food costs. Cost of sales also decreased in
fiscal 1997 compared to fiscal 1996 due to menu price increases
which partially offset unfavorable commodity price variances and
product mix changes to menu items with higher percentage food
costs.
Restaurant expenses increased in fiscal 1998 due primarily to
increases in rent expense and management labor. Rent expense
increased due to sale-leaseback transactions and an equipment
leasing facility entered into in fiscal 1998. Management labor
increased as a result of the cost of continuing efforts to remain
competitive in the industry and increases in monthly performance
bonuses due to the restaurants' positive performance in fiscal
1998. Restaurant labor wage rate increases due to Federal
government mandated increases in the minimum wage were offset by
improvements in labor productivity, as well as menu price
increases. Restaurant expenses also increased in fiscal 1997 due to
increases in management and restaurant labor which were partially
offset by reduced insurance costs. Labor costs increased in fiscal
1997 as a result of increases in manager base salaries and hourly
wage rates to remain competitive in the industry and comply with
Federal government mandated increases in the minimum wage.
Depreciation and amortization decreased in fiscal 1998 after
increasing in fiscal 1997. The fiscal 1998 decrease resulted from
the impact of sale-leaseback transactions and an equipment leasing
facility, as well as a declining depreciable asset base for older
units. Partially offsetting these decreases were increases in
depreciation and amortization related to new unit construction
costs and ongoing remodel costs. In fiscal 1997, additions to the
asset base caused by new unit construction offset decreases from a
declining depreciable asset base.
General and administrative expenses have remained relatively flat
in the past two fiscal years as a result of the Company's focus on
controlling corporate expenditures relative to increasing revenues
and number of restaurants. However, total costs increased in fiscal
1998 due to additional staff to support the expansion of restaurant
concepts and an increased profit sharing accrual.
Interest expense, net of capitalized interest, increased in both
fiscal 1998 and 1997 due to increased borrowings on the Company's
credit facilities primarily used to fund the Company's stock
repurchase plan.
RESTRUCTURING RELATED ITEMS
In October 1995, the Board of Directors of the Company approved a
strategic plan targeted to support the Company's long-term growth
objectives. The plan focuses on continued development of those
restaurant concepts that have the greatest return potential for the
Company and its shareholders. In conjunction with this plan, the
Company decided to dispose of or convert 30 to 40 Company-owned
restaurants that did not meet management's financial return
expectations. The Company recorded a $50 million restructuring
charge during fiscal 1996 to cover costs related to the execution
of this plan, primarily the write-down of property and equipment to
net realizable value, costs to settle lease obligations, and the
write-off of other assets. The restructuring actions were
substantially completed in fiscal 1997. In conjunction with the
strategic plan, the Company also completed the sales of the Grady's
American Grill, Spageddies Italian Kitchen, and Kona Ranch Steak
House concepts during the second quarter of fiscal 1996,
recognizing a gain of approximately $9.3 million.
INCOME TAXES
The Company's effective income tax rate was 34.5%, 33.5%, and
34.1%, in fiscal 1998, 1997, and 1996, respectively. The increase
in fiscal 1998 is primarily a result of a decrease in the rate
effect of a dividends received deduction resulting from the
liquidation of the Company's marketable securities portfolio. The
decrease in fiscal 1997 is primarily a result of a decrease in the
rate effect of state income taxes.
NET INCOME AND NET INCOME PER SHARE
Fiscal 1998 net income and diluted net income per share increased
14.2% and 25.9%, respectively. The increase in both net income and
diluted net income per share was due to an increase in revenues as
a result of increases in average weekly sales, sales weeks, and
menu price increases and decreases in commodity prices. This
favorable component of the increase in net income was somewhat
offset by increases in management labor, incentive compensation,
wage rates, and non-operating costs. The increase in diluted net
income per share was proportionately larger than the increase in
net income due to the effect of continuing share repurchases.
Fiscal 1997 net income and diluted net income per share increased
76.0% and 84.1%, respectively, compared to fiscal 1996. Excluding
the effects of the 1996 restructuring charges and gain on sales of
concepts, fiscal 1997 net income actually decreased 0.6% from $60.9
million to $60.5 million and diluted net income per share increased
3.8% from $0.78 to $0.81. The decrease in net income before
restructuring related items in light of the increase in revenues
was due to the increases in costs and expenses previously
mentioned. Before 1996 restructuring related items, diluted net
income per share increased despite the decline in net income due to
a 4.0% reduction in the weighted average number of shares
outstanding mainly resulting from the 1997 $150 million stock
repurchase plan (12.5 million shares).
IMPACT OF INFLATION
The Company has not experienced a significant overall impact from
inflation. As operating expenses increase, the Company, to the
extent permitted by competition, recovers increased costs by
increasing menu prices.
LIQUIDITY AND CAPITAL RESOURCES
The working capital deficit increased from $36.7 million at June
25, 1997 to $92.6 million at June 24, 1998, and net cash provided
by operating activities increased to $200.9 million for fiscal 1998
from $145.6 million for fiscal 1997 due to increased profitability
and the timing of operational receipts and payments.
Long-term debt outstanding at June 24, 1998 consisted of $85.7
million of unsecured senior notes, $59.5 million of borrowings on
credit facilities, and obligations under capital leases. The
Company has credit facilities totaling $360 million. At June 24,
1998, the Company had $292.2 million in available funds from credit
facilities.
During fiscal 1998, the Company entered into an equipment leasing
facility for up to $55 million, of which funding commitments of
$47.5 million have been obtained. As of June 24, 1998, $24.4
million of the leasing facility has been utilized, including a
$10.2 million sale and leaseback of existing equipment. The
facility balance will continue to be used to lease equipment in
fiscal 1999. Also, during fiscal 1998, the Company executed a $124
million sale and leaseback of certain real estate assets. The net
proceeds were used to retire $115 million of the Company's credit
facilities.
Capital expenditures consist of purchases of land for future
restaurant sites, new restaurants under construction, purchases of
new and replacement restaurant furniture and equipment, and ongoing
remodeling programs. Capital expenditures were $167.1 million for
fiscal 1998. The decrease in 1998 capital expenditures compared to
1997 is due largely to the utilization of the equipment leasing
facility. The Company estimates that its capital expenditures
during fiscal 1999 will approximate $190 million. These capital
expenditures will be funded from internal operations, cash
equivalents, build-to-suit lease agreements with landlords, and
drawdowns on the Company's available lines of credit.
During fiscal 1998, the Company increased its investments in
various joint ventures by $35.5 million. The joint ventures are
accounted for using the equity method and are classified in other
assets in the Company's consolidated balance sheets.
During fiscal 1998, pursuant to a $50 million plan approved by the
Company's Board of Directors, the Company repurchased 809,000
shares of its common stock for approximately $17 million in
accordance with applicable securities regulations. The repurchased
common stock will be used by the Company to increase shareholder
value by offsetting the dilutive effect of stock option exercises,
to satisfy obligations under its savings plans, and for other
corporate purposes. The repurchased common stock is reflected as a
reduction of shareholders' equity. During fiscal 1997, the Company
repurchased 12.5 million shares of its common stock under a similar
plan for approximately $150 million. The Company financed the
repurchase program through a combination of cash provided by
operations, liquidation of its marketable securities portfolio, and
drawdowns on its available credit facilities.
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 from credit facilities and from strong internal cash
generating capabilities to adequately manage the expansion of the
business.
YEAR 2000
The Year 2000 will have a broad impact on the business environment
in which the Company operates due to the possibility that many
computerized systems across all industries will be unable to
process information containing dates beginning in the Year 2000.
The Company has established an enterprise-wide program to prepare
its computer systems and applications for the Year 2000 and is
utilizing both internal and external resources to identify, correct
and test the systems for Year 2000 compliance. The Company
anticipates that the majority of its domestic reprogramming will be
completed by December 31, 1998 and testing efforts will be
substantially concluded by March 31, 1999. Further validation
through testing will be conducted throughout calendar year 1999.
The Company expects that all mission-critical systems will be Year
2000 compliant prior to the end of the 1999 calendar year.
The nature of the Company's business is such that the business
risks associated with the Year 2000 can be reduced by working
closely wassessing the vendors supplying the Company's restaurants
with food and related products and with the Company's franchise
business partners to ensure that they are aware of the Year 2000
business risks and are appropriately assessing and addressing them.
Because third party failures could have a material impact on the
Company's ability to conduct business, questionnaires have been
sent to substantially all of the Company's vendors to obtain
reasonable assurance that plans are being developed to address the
Year 2000 issue. The returned questionnaires are currently being
assessed by the Company, and are being categorized based upon
readiness for the Year 2000 issues and prioritized in order of
significance to the business of the Company. To the extent that
vendors do not provide the Company with satisfactory evidence of
their readiness to handle Year 2000 issues, contingency plans will
be developed. to obtain qualified replacement vendors.
Furthermore, information has been provided to all franchisees
business partners regarding the potential business risks associated
with the Year 2000 issue. and Tthe Company intends to make every
reasonable effort to assess the Year 2000 readiness of these
business partners and to create action plans to address the
identified risks.in developing contingency plans.
The Company anticipates that it will have substantially completed
an inventory of all information technology and non-information
technology equipment by December 31, 1998, and will then address
the Year 2000 compliance of such equipment. and made determinations
as to the Year 2000 compliance of such equipment. The Company
currently believes that all items of mission-critical equipment
which are not Year 2000 compliant have been identified for
replacement.
Testing and remediation of all of the Company's systems and
applications is expected to cost approximately $6 million from
inception in calendar year 1997 1998 through completion in calendar
year 1999. Of these costs, approximately $750,000 was incurred
through June 24, 1998. Approximately $3.5 million is expected to be
incurred in fiscal 1999 with the remaining $1.75 million to be
incurred in fiscal 2000. All estimated costs have been budgeted
and are expected to be funded by cash flows from operations.
The Company does not believe the costs related to the Year 2000
compliance project will be material to its financial position or
results of operations. However, the cost of the project and the
date on which the Company plans to complete the Year 2000
modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including
the continued availability of certain resources, third party
modification plans, and other factors. Unanticipated failures by
critical vendors and franchise partners, as well as the failure by
the Company to execute its own remediation efforts, could have a
material adverse eaffect on the cost of the project and its
completion date. As a result, there can be no assurance that these
forward-looking estimates will be achieved and the actual cost and
vendor compliance could differ materially from those plans,
resulting in material financial risk.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest
rates on debt and 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's net exposure to interest rate risk consists of
floating rate instruments that are benchmarked to US and European
short-term interest rates. The Company may from time to time
utilize interest rate swaps and forwards 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 the Company has procedures in place to
monitor and control derivative use. No financial derivatives were
in place at June 24, 1998. The impact on the Company's results of
operations of a one-point interest rate change on the outstanding
balance of the variable rate debt as of June 24, 1998 would be
immaterial.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement No. 130 ("SFAS No. 130"), "Reporting Comprehensive
Income." SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components in the financial
statements. SFAS No. 130 is effective for the Company's first
quarter financial statements in fiscal 1999.
In June 1997, the FASB issued Statement No. 131 ("SFAS No. 131"),
"Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for the way
public business enterprises report information about operating
segments in annual financial statements and requires those
enterprises to report selected information about operating segments
in interim financial reports. SFAS No. 131 is effective for the
Company's fiscal 1999 annual financial statements.
The adoption of these standards will have no impact on the
Company's consolidated results of operations, financial position,
or cash flow.
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5 ("SOP 98-5"),
"Reporting of the Costs of Start-up Activities." SOP 98-5 is
effective for financial statements issued for years beginning after
December 15, 1998; therefore, the Company will be required to
implement its provisions by the first quarter of fiscal 2000. At
that time, the Company will be required to change the method
currently used to account for preopening costs. The application of
SOP 98-5 will result in deferred preopening costs on the Company's
consolidated balance sheet as of the date of adoption, net of
related tax effects, being charged to operations as the cumulative
effect of a change in accounting principle. Under the new
requirements for accounting for preopening costs, the subsequent
costs of start-up activities will be expensed as incurred. A
resulting benefit of this change is the discontinuance of
amortization expense in subsequent periods. As of June 24, 1998,
the balance of deferred preopening costs, net of related tax
effects, is approximately $5.6 million. However, the ultimate
impact of adopting SOP 98-5 on the accounting for preopening costs
is contingent upon the number of future restaurant openings and
thus, cannot be reasonably estimated at this time.
In June 1998, the FASB issued Statement No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. SFAS No. 133 is
effective for the Company's first quarter financial statements in
fiscal 2000. The Company is currently not involved in derivative
instruments or hedging activities, and therefore, will measure the
impact of this statement as it becomes necessary.
MANAGEMENT OUTLOOK
In fiscal 1997, the Company realigned its management structure to
more directly support its various restaurant concepts. This
realignment included upgrading certain strategic functions and
decentralizing functions which are more effectively performed at
the concept level. As a result of this realignment, fiscal 1998
delivered improved financial results, developed a strong foundation
for the future of the Company, demonstrated how the Company's
dynamic multi-concept strategy will allow for sustainable long-term
growth, and most importantly, enhanced shareholder value. During
fiscal 1999, the Company will build on the momentum generated in
fiscal 1998 through the following initiatives: (i) continued focus
on culinary evolution, service excellence, and overall value, (ii)
disciplined unit expansion in traditional casual dining locations,
(iii) developing and expanding Chili's into nontraditional casual
dining locations, such as malls and airports, (iv) enhanced
marketing and brand awareness across all concepts, and (v)
continuing to explore the market potential of emerging concepts:
Eatzi's, Cozymel's, Big Bowl, and Wildfire. With this strong line-
up, management expects to open over 140 new restaurants system-wide
and to approach sales of $2 billion system-wide during fiscal 1999.
In fiscal 1998 and 1997, the Company experienced a difficult
operating environment due to intense competition and increasing
labor costs caused by low unemployment and a strong economy.
Management expects these trends to continue in fiscal 1999.
However, management believes that with its strong, well-positioned
brands, experienced management team, and a commitment to its
customers, the Company will attain growth and profitability
objectives while creating value for its shareholders.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein are forward-looking regarding
future economic performance, restaurant openings, operating
margins, the availability of acceptable real estate locations for
new restaurants, the sufficiency of cash balances and cash
generated from operating and financing activities for future
liquidity and capital resource needs, and other matters. These
forward-looking statements involve risks and uncertainties and,
consequently, could be affected by general business conditions, the
impact of competition, the seasonality of the Company's business,
governmental regulations, inflation, changes in economic
conditions, consumer perceptions of food safety, changes in
consumer tastes, governmental monetary policies, changes in
demographic trends, availability of employees, or weather and other
acts of God.
BRINKER INTERNATIONAL, INC.
Consolidated Balance Sheets
(In thousands)
1998 1997
ASSETS
Current Assets:
Cash and Cash Equivalents $ 31,101 $ 23,194
Marketable Securities (Note 4) 51 24,469
Accounts Receivable 18,789 15,258
Inventories 13,774 13,031
Prepaid Expenses 36,576 30,364
Deferred Income Taxes (Note 6) 3,250 1,050
Other 1,956 5,068
Total Current Assets 105,497 112,434
Property and Equipment, at Cost (Note 8):
Land 145,900 171,551
Buildings and Leasehold Improvements 541,403 533,579
Furniture and Equipment 310,849 294,985
Construction-in-Progress 48,245 42,977
1,046,397 1,043,092
Less Accumulated Depreciation and Amortization 337,825 293,483
Net Property and Equipment 708,572 749,609
Other Assets:
Goodwill, Net (Note 2) 76,330 78,291
Other 98,984 56,609
Total Other Assets 175,314 134,900
Total Assets $ 989,383 $ 996,943
(continued)
BRINKER INTERNATIONAL, INC.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
Current Liabilities:
Current Installments of Long-term Debt (Notes 7 and 8) $ 14,618 $ 280
Accounts Payable 97,597 76,640
Accrued Liabilities (Note 5) 85,852 72,213
Total Current Liabilities 198,067 149,133
Long-term Debt, Less Current Installments (Notes 7 and 8) 147,288 287,521
Deferred Income Taxes (Note 6) 8,254 7,426
Other Liabilities 42,035 29,119
Commitments and Contingencies (Notes 8 and 12)
Shareholders' Equity (Notes 2, 9, and 10):
Preferred Stock - 1,000,000 Authorized Shares;
$1.00 Par Value; No Shares Issued - -
Common Stock - 250,000,000 Authorized Shares;
$.10 Par Value; 78,150,054 Shares Issued
and 65,926,032 Shares Outstanding at
June 24, 1998, and 77,710,016 Shares Issued
and 65,233,900 Shares Outstanding at June 25, 1997 7,815 7,771
Additional Paid-In Capital 276,380 270,892
Unrealized Gain on Marketable Securities (Note 4) - 304
Retained Earnings 464,083 395,008
748,278 673,975
Less: Treasury Stock, at Cost (12,224,022 shares at
June 24, 1998, and 12,476,116 shares at June 25, 1997) (154,539) (150,231)
Total Shareholders' Equity 593,739 523,744
Total Liabilities and Shareholders' Equity $ 989,383 $ 996,943
See accompanying notes to consolidated financial statements.
BRINKER INTERNATIONAL, INC.
Consolidated Statements of Income
(In thousands, except per share amounts)
Fiscal Years
1998 1997 1996
Revenues $1,574,414 $1,335,337 $1,162,951
Costs and Expenses:
Cost of Sales 426,558 374,525 330,375
Restaurant Expenses (Note 8) 866,143 720,769 620,441
Depreciation and Amortization 86,376 78,754 64,611
General and Administrative 77,407 64,404 54,271
Interest Expense (Note 7) 11,025 9,453 4,579
Gain on Sales of Concepts (Note 3) - - (9,262)
Restructuring Charge (Note 3) - - 50,000
Other, Net (Note 4) 1,447 (3,553) (4,201)
Total Costs and Expenses 1,468,956 1,244,352 1,110,814
Income Before Provision for
Income Taxes 105,458 90,985 52,137
Provision for Income Taxes (Note 6) 36,383 30,480 17,756
Net Income $ 69,075 $ 60,505 $ 34,381
Basic Net Income Per Share $ 1.05 $ 0.82 $ 0.45
Diluted Net Income Per Share $ 1.02 $ 0.81 $ 0.44
Basic Weighted Average
Shares Outstanding 65,766 73,682 76,015
Diluted Weighted Average
Shares Outstanding 67,450 74,800 77,905
See accompanying notes to consolidated financial statements.
BRINKER INTERNATIONAL, INC.
Consolidated Statements of Shareholders' Equity
(In thousands)
Unrealized
Gain (Loss)
Additional on
Common Stock Paid-in Marketable Retained Treasury
Shares Amount Capital Securities Earnings Stock Total
Balances at
June 28, 1995 72,073 $7,207 $ 190,919 $(1,451) $300,122 $ - $496,797
Net Income - - - - 34,381 - 34,381
Change in Unrealized
Gain (Loss) on
Marketable Securities - - - 831 - - 831
Issuances of
Common Stock 5,183 519 75,642 - - - 76,161
Balances at
June 26, 1996 77,256 7,726 266,561 (620) 334,503 - 608,170
Net Income - - - - 60,505 - 60,505
Change in Unrealized
Gain (Loss) on
Marketable Securities - - - 924 - - 924
Purchases of
Treasury Stock (12,486) - - - - (150,350) (150,350)
Issuances of
Common Stock 464 45 4,331 - - 119 4,495
Balances at
June 25, 1997 65,234 7,771 270,892 304 395,008 (150,231) 523,744
Net Income - - - - 69,075 - 69,075
Change in Unrealized
Gain (Loss) on
Marketable Securities - - - (304) - - (304)
Purchases of
Treasury Stock (809) - - - - (17,077) (17,077)
Issuances of
Common Stock 1,501 44 5,488 - - 12,769 18,301
Balances at
June 24, 1998 65,926 $7,815 $ 276,380 $ - $464,083 $(154,539) $593,739
See accompanying notes to consolidated financial statements.
BRINKER INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
(In thousands)
Fiscal Years
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 69,075 $ 60,505 $ 34,381
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization of
Property and Equipment 70,257 63,866 54,138
Amortization of Goodwill and Other Assets 16,119 14,888 10,473
Gain on Sales of Concepts (Note 3) - - (9,262)
Restructuring Charge (Note 3) - - 50,000
Deferred Income Taxes (1,220) 4,657 (8,313)
Changes in Assets and Liabilities, Excluding
Effects of Acquisitions and Dispositions:
Receivables (419) (4,666) 4,783
Inventories (743) (1,944) (1,236)
Prepaid Expenses (6,212) (5,632) (3,920)
Other Assets 2,563 (15,309) (17,717)
Accounts Payable 25,527 18,953 1,537
Accrued Liabilities 13,639 7,392 (1,596)
Other Liabilities 12,352 2,369 3,607
Other - 496 2,220
Net Cash Provided by Operating Activities 200,938 145,575 119,095
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for Property and Equipment (167,130) (191,194) (187,141)
Payment for Purchase of Restaurants, Net (Note 2) (2,700) (15,863) -
Net Proceeds from Sale-Leasebacks 125,961 - -
Proceeds from Sales of Concepts (Note 3) - - 73,115
Purchases of Marketable Securities - (38,543) (61,390)
Proceeds from Sales of Marketable Securities 23,962 80,796 25,137
Investments in Equity Method Investees (35,500) (3,230) -
Net Repayments from (Advances to) Affiliates 5,942 (4,002) (4,166)
Additions to Other Assets (6,850) - -
Other - - 375
Net Cash Used in Investing Activities (56,315) (172,036) (154,070)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (Payments) Borrowings on Credit Facilities (132,980) 170,000 15,000
Payments of Long-term Debt (390) (348) (1,530)
Proceeds from Issuances of Common Stock 13,731 3,280 3,667
Purchases of Treasury Stock (17,077) (150,350) -
Net Cash (Used in) Provided by Financing
Activities (136,716) 22,582 17,137
Net Increase (Decrease) in Cash and Cash Equivalents 7,907 (3,879) (17,838)
Cash and Cash Equivalents at Beginning of Year 23,194 27,073 44,911
Cash and Cash Equivalents at End of Year $ 31,101 $ 23,194 $ 27,073
CASH PAID DURING THE YEAR:
Interest, Net of Amounts Capitalized $ 11,479 $ 7,459 $ 4,188
Income Taxes $ 31,807 $ 26,240 $ 24,558
NON-CASH TRANSACTIONS DURING THE YEAR:
Tax Benefit from Stock Options Exercised $ 4,570 $ 1,215 $ 729
Common Stock Issued in Connection with Acquisitions$ - $ - $ 71,765
Notes Received in Connection with Sales of Concepts$ - $ - $ 9,800
See accompanying notes to consolidated financial statements.
BRINKER INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements include the accounts of Brinker
International, Inc. and its wholly-owned subsidiaries ("Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation. The Company owns and operates, or franchises, various
restaurant concepts principally located in the United States. Investments
in unconsolidated affiliates in which the Company exercises significant
influence, but does not control, are accounted for by the equity method,
and the Company's share of the net income or loss is included in other, net
in the consolidated statements of income.
The Company has a 52/53 week fiscal year ending on the last Wednesday in
June. The fiscal years 1998, 1997, and 1996, which ended on June 24, 1998,
June 25, 1997, and June 26, 1996, respectively, all contained 52 weeks.
Certain prior year amounts in the accompanying consolidated financial
statements have been reclassified to conform with fiscal 1998
classifications.
(b) Financial Instruments
The Company's policy is to invest cash in excess of operating requirements
in income-producing investments. Cash invested in instruments with
maturities of three months or less at the time of investment is reflected
as cash equivalents. Cash equivalents of $319,000 and $7.4 million at June
24, 1998 and June 25, 1997, respectively, consist primarily of money market
funds and commercial paper.
The Company's financial instruments at June 24, 1998 and June 25, 1997
consist of cash equivalents, marketable securities, accounts receivable,
short-term debt, and long-term debt. The fair value of these financial
instruments approximates the carrying amounts reported in the consolidated
balance sheets. The following methods were used in estimating the fair
value of each class of financial instrument: cash equivalents, accounts
receivable, and short-term debt approximate their carrying amounts due to
the short duration of those items; marketable securities are based on
quoted market prices; 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. None of these financial instruments are
held for trading purposes.
(c) Inventories
Inventories, which consist of food, beverages, and supplies, are stated at
the lower of cost (weighted average cost method) or market.
(d) 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 5 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
8 years.
(e) Capitalized Interest
Interest costs capitalized during the construction period of restaurants
were approximately $3.6 million, $4.5 million, and $4.4 million during
fiscal 1998, 1997, and 1996, respectively.
(f) Advertising
Advertising costs are expensed as incurred. Advertising costs were $60.6
million, $47.0 million, and $41.2 million in fiscal 1998, 1997, and 1996,
respectively, and are included in restaurant expenses in the consolidated
statements of income.
(g) Preopening Costs
Capitalized preopening costs include the direct and incremental costs
typically associated with the opening of a new restaurant which primarily
consist of costs incurred to develop new restaurant management teams,
travel and lodging for both the training and opening unit management teams,
and the food, beverage, and supplies costs incurred to perform role play
testing of all equipment, concept systems, and recipes. Preopening costs
are included in other assets and amortized over a period of twelve months.
(h) Goodwill and Other Intangible Assets
Intangible assets include both goodwill and identifiable intangibles
arising from the allocation of the purchase prices of assets acquired.
Goodwill represents the residual purchase price after allocation to all
identifiable net assets of businesses acquired. Other intangibles consist
mainly of reacquired franchise rights, trademarks, and intellectual
property. All intangible assets are stated at historical cost less
accumulated amortization. Intangible assets are amortized on a straight-
line basis over 30 to 40 years for goodwill and 15 to 25 years for other
intangibles. The Company assesses the recoverability of intangible assets
by determining whether the asset balance can be recovered over its
remaining life through undiscounted future operating cash flows of the
acquired asset. The amount of impairment, if any, is measured based on
projected discounted future operating cash flows. Management believes that
no impairment of intangible assets has occurred and that no reduction of
the related estimated useful lives is warranted. Accumulated amortization
for goodwill was $6.5 million and $4.3 million as of June 24, 1998 and June
25, 1997, respectively. Accumulated amortization for other intangible
assets was $691,000 and $257,000 as of June 24, 1998 and June 25, 1997,
respectively.
(i) Recoverability of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121
("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," the Company evaluates long-lived
assets and certain identifiable intangibles to be held and used in the
business for impairment 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. 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. The adoption of
SFAS No. 121 in fiscal 1997 did not have a material effect on the Company's
consolidated financial statements.
(j) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(k) Treasury Stock
During fiscal 1998, pursuant to a $50 million plan approved by the
Company's Board of Directors, the Company repurchased $17 million of its
common stock (809,000 shares) in accordance with applicable securities
regulations. The repurchased common stock will be used by the Company to
satisfy obligations under its savings and stock option plans and for other
corporate purposes. The repurchased common stock is reflected as a
reduction of shareholders' equity. During fiscal 1997, the Company
repurchased approximately $150 million of its common stock (12.5 million
shares) under a similar plan.
(l) Derivative Instruments
The Company's policy prohibits the use of derivative instruments for
trading purposes and the Company has procedures in place to monitor and
control their use. The Company's use of derivative instruments is primarily
limited to interest rate swaps and forwards which are entered into with the
intent of managing overall borrowing costs.
As of June 24, 1998, the Company was not involved in any derivative
instruments. During 1998 and 1997, the Company participated in interest
rate forwards to effectively fix the interest rate in anticipation of a
sale and leaseback of certain real estate assets which was executed in
1998. These forwards were designated as hedges and the resulting loss on
settlement was deferred and is being amortized to rent expense over the
life of the lease.
(m) Stock-Based Compensation
In accordance with Accounting Principles Board No. 25, the Company uses the
intrinsic value-based method for measuring stock-based compensation cost
which measures compensation cost as the excess, if any, of the quoted
market price of Company common stock at the grant date over the amount the
employee must pay for the stock. The Company's policy is to grant stock
options at fair value at the date of grant. Proceeds from the exercise of
common stock options issued to officers, directors, and key employees under
the Company's stock option plans are credited to common stock to the extent
of par value and to additional paid-in capital for the excess. Required pro
forma disclosures of compensation expense determined under the fair value
method of Statement of Financial Accounting Standards No. 123 ("SFAS No.
123"), "Accounting for Stock-Based Compensation," are presented in Note 9.
(n) Net Income Per Share
During fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128"), "Earnings per Share." SFAS No. 128
requires disclosure of basic and diluted earnings per share. In accordance
with SFAS No. 128, all prior period earnings per share have been restated.
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 common equivalent shares (stock options)
determined using the treasury stock method based on the average market
price exceeding the exercise price of the stock options.
(o) Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and costs and expenses during the reporting period. Actual results
could differ from those estimates.
2. ACQUISITIONS
During the three years ended June 24, 1998, the Company completed the
acquisitions set forth below. These acquisitions were accounted for as
purchases and the excess of cost over the fair values of the net assets
acquired was recorded as goodwill and the operations of the related
restaurants are included in the Company's consolidated results of
operations from the dates of acquisition. The operations of the restaurants
acquired are not material.
On December 19, 1997, the Company acquired 3 Chili's restaurants from a
franchisee for approximately $2.7 million in cash. Goodwill resulting from
this transaction was not material.
On October 1, 1996, the Company acquired 13 Chili's restaurants from a
franchisee for approximately $16.2 million in cash. Goodwill of
approximately $7.3 million is being amortized on a straight-line basis over
30 years.
On July 19, 1995, the Company acquired the remaining 50% interest in its
Cozymel's restaurant concept in exchange for 430,769 shares of Company
common stock representing a cost of approximately $7.6 million. On August
29, 1995, the Company acquired the Maggiano's Little Italy and Corner
Bakery concepts in exchange for 4.0 million shares of its common stock
representing a cost of approximately $57.9 million. Goodwill of
approximately $7.6 million and $57.5 million, respectively, is being
amortized on a straight-line basis over 40 years.
3. RESTRUCTURING RELATED ITEMS
The Company recorded a $50 million restructuring charge during the second
quarter of fiscal 1996 related to the adoption of a strategic plan which
included the disposition or conversion of 30 to 40 Company-owned
restaurants that had not met management's financial return expectations.
The charge resulted in a reduction in net income of approximately $32.5
million ($0.42 per diluted share) and primarily relates to the write-down
of property and equipment to net realizable value, costs to settle lease
obligations, and the write-off of other assets. Through fiscal 1998, $47.1
million of restructuring costs have been incurred, of which $5.6 million
were cash payments primarily for lease obligations and $41.5 million were
non-cash charges primarily for asset write-downs. The restructuring actions
were substantially completed in fiscal 1997. The results of operations
from restaurants that have been disposed are not material. In addition,
the Company completed the sales of the Grady's American Grill, Spageddies
Italian Kitchen, and Kona Ranch Steak House concepts during the second
quarter of fiscal 1996, recognizing a gain of approximately $9.3 million.
4. MARKETABLE SECURITIES
At June 24, 1998 and June 25, 1997, marketable securities (primarily
investment-grade preferred stock) are classified as available-for-sale. The
cost and fair value of marketable securities at June 24, 1998 and June 25,
1997 are as follows (in thousands):
1998 1997
Cost $ 51 $ 24,013
Gross unrealized holding gains - 483
Gross unrealized holding losses - (27)
Fair value $ 51 $ 24,469
Realized gains and realized losses are determined on a specific
identification basis. Realized gains and realized losses from investment
transactions were $427,000 and $0 during fiscal 1998, $313,000 and $646,000
during fiscal 1997, and $38,000 and $949,000 during fiscal 1996. Interest
and dividend income during fiscal 1998, 1997, and 1996 was $943,000, $5.0
million, and $5.1 million, respectively. Realized gains and realized losses
as well as interest and dividend income are included in other, net in the
consolidated statements of income.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
1998 1997
Payroll $ 39,752 $ 26,798
Insurance 11,718 9,075
Property tax 9,754 8,944
Sales tax 8,759 7,514
Other 15,869 19,882
$ 85,852 $ 72,213
6. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
1998 1997 1996
Current income tax expense:
Federal $ 34,347 $ 22,471 $ 22,222
State 3,408 3,352 3,847
Total current income tax expense 37,755 25,823 26,069
Deferred income tax expense (benefit):
Federal (1,212) 4,113 (7,343)
State (160) 544 (970)
Total deferred income tax expense (benefit) (1,372) 4,657 (8,313)
$ 36,383 $ 30,480 $ 17,756
A reconciliation between the reported provision for income taxes and the
amount computed by applying the statutory Federal income tax rate of 35% to
income before provision for income taxes follows (in thousands):
1998 1997 1996
Income tax expense at statutory rate $ 36,910 $ 31,845 $ 18,248
FICA tax credit (3,575) (2,925) (2,382)
Net investment activities (102) (688) (405)
State income taxes, net of Federal benefit 2,217 1,872 1,657
Other 933 376 638
$ 36,383 $ 30,480 $ 17,756
The income tax effects of temporary differences that give rise to
significant portions of deferred income tax assets and liabilities as of
June 24, 1998 and June 25, 1997 are as follows (in thousands):
1998 1997
Deferred income tax assets:
Insurance reserves $ 12,361 $ 8,034
Leasing transactions 2,034 2,099
Other, net 12,936 11,240
Total deferred income tax assets 27,331 21,373
Deferred income tax liabilities:
Depreciation and capitalized interest
on property and equipment 16,664 12,467
Prepaid expenses 7,580 7,034
Preopening costs 3,258 3,432
Goodwill and other amortization 1,697 819
Other, net 3,136 3,997
Total deferred income tax liabilities 32,335 27,749
Net deferred income tax liability $ 5,004 $ 6,376
7. DEBT
The Company has credit facilities aggregating $360 million at June 24,
1998. A credit facility of $260 million bears interest at LIBOR (5.66% at
June 24, 1998) plus a maximum of .50% and expires in fiscal 2002. At June
24, 1998, $55 million was outstanding under this facility. The remaining
credit facilities bear interest based upon the lower of the banks' "Base"
rate, certificate of deposit rate, negotiated rate, or LIBOR rate plus
.375%, and expire during fiscal years 1999 and 2000. Unused credit
facilities available to the Company were approximately $292.2 million at
June 24, 1998. Obligations under the Company's credit facilities, which
require short-term repayments, have been classified as long-term debt,
reflecting the Company's intent and ability to refinance these borrowings
through the existing credit facilities.
Long-term debt consists of the following (in thousands):
1998 1997
7.8% senior notes $ 100,000 $ 100,000
Credit Facilities 59,495 185,000
Capital lease obligations (see Note 8) 2,411 2,801
161,906 287,801
Less current installments 14,618 280
$ 147,288 $ 287,521
The $100 million of unsecured senior notes bear interest at an annual rate
of 7.8%. Interest is payable semi-annually and the Company is required to
pay 14.3% (or $14.3 million) of the original principal balance annually
beginning in fiscal 1999 through fiscal 2004 with the remaining unpaid
balance due in fiscal 2005.
The Company is the guarantor of $10 million of an unsecured line of credit
which permits borrowing of up to $30 million for certain franchisees. The
outstanding balance at June 24, 1998 was $6.7 million.
8. LEASES
(a) Capital Leases
The Company leases certain buildings under capital leases. The asset values
of $6.5 million and $6.9 million at June 24, 1998 and June 25, 1997, and
the related accumulated amortization of $5.6 million and $5.7 million at
June 24, 1998 and June 25, 1997, respectively, are included in property and
equipment.
(b) Operating Leases
The Company leases restaurant facilities, office space, and certain
equipment under operating leases having terms expiring at various dates
through fiscal 2022. The restaurant leases have renewal clauses of 1 to 30
years at the option of the Company and have provisions for contingent rent
based upon a percentage of gross sales, as defined in the leases. Rent
expense for fiscal 1998, 1997, and 1996 was $55.4 million, $41.0 million,
and $37.9 million, respectively. Contingent rent included in rent expense
for fiscal 1998, 1997, and 1996 was $4.9 million, $3.1 million, and $3.2
million, respectively.
In July 1993, the Company entered into operating lease agreements with
unaffiliated groups to lease certain restaurant sites. During fiscal 1995
and 1994, the Company utilized the entire commitment of approximately $30
million for the development of restaurants leased by the Company. Since
inception of the commitment, the Company has retired several properties in
the commitment which thereby reduced the outstanding balance. At the
expiration of the lease term, the Company has, at its option, the ability
to purchase all of the properties, or to guarantee the residual value
related to the remaining properties, which is currently approximately $20.9
million. Based on the analysis of the operations of these properties, the
Company believes the properties support the guaranteed residual value.
In July 1997, the Company entered into an equipment leasing facility
pursuant to which the Company may lease up to $55 million of equipment. Of
this amount, the Company has received commitments to fund up to $47.5
million of the facility. As of June 24, 1998, $24.4 million of the leasing
facility has been utilized, including a $10.2 million sale and leaseback of
existing equipment. The facility, which is accounted for as an operating
lease, expires in fiscal 2003 and does not provide for a renewal. At the
end of the lease term, the Company has the option to purchase all of the
leased equipment for an amount equal to the unamortized lease balance,
which amount will be approximately 75% of the total amount funded through
the facility. The Company believes that the future cash flows related to
the equipment support the unamortized lease balance.
In November 1997, the Company executed a $124.0 million sale and leaseback
of certain real estate assets. The $8.7 million gain resulting from the
sale, along with certain transaction costs, was deferred and will be
amortized over the 20-year term of the operating lease. The net proceeds
from the sale were used to retire $115.0 million of the Company's credit
facilities.
(c) Commitments
At June 24, 1998, future minimum lease payments on capital and operating
leases were as follows (in thousands):
Fiscal Capital Operating
Year Leases Leases
1999 $ 609 $ 53,440
2000 584 52,734
2001 566 50,574
2002 566 47,406
2003 566 46,200
Thereafter 578 354,659
Total minimum lease payments 3,469 $605,013
Imputed interest (average rate of 11.5%) 1,058
Present value of minimum lease payments 2,411
Less current installments 318
Capital lease obligations - noncurrent $2,093
At June 24, 1998, the Company had entered into other lease agreements for
restaurant facilities currently under construction or yet to be
constructed. In addition to a base rent, the leases also contain provisions
for additional contingent rent based upon gross sales, as defined in the
leases. Classification of these leases as capital or operating has not been
determined as construction of the leased properties has not been completed.
9. STOCK OPTION PLANS
(a) 1983 and 1992 Employee Incentive Stock Option Plans
In accordance with the Incentive Stock Option Plans adopted in October 1983
and November 1992, options to purchase approximately 20.8 million shares of
Company common stock may be granted to officers, directors, and key
employees. Options are granted at market value on the date of grant, are
exercisable beginning one to two years from the date of grant, with various
vesting periods, and expire ten years from the date of grant.
In October 1993, the 1983 Incentive Stock Option Plan expired.
Consequently, no options were granted under that Plan subsequent to fiscal
1993. Options granted prior to the expiration of this Plan remain
exercisable through April 2003.
Transactions during fiscal 1998, 1997, and 1996 were as follows (in
thousands, except option prices):
Number of Weighted Average Share
Company Options Exercise Price
1998 1997 1996 1998 1997 1996
Options outstanding at
beginning of year 9,458 9,049 7,570 $14.13 $14.52 $14.79
Granted 1,661 1,842 2,287 14.07 11.79 12.96
Exercised (1,068) (383) (425) 10.76 6.83 8.61
Canceled (309) (1,050) (383) 16.03 16.03 17.47
Options outstanding at
end of year 9,742 9,458 9,049 $14.43 $14.13 $14.52
Options exercisable at
end of year 5,556 4,735 4,298 $15.60 $14.61 $12.85
Options Outstanding Options Exercisable
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number of contractual exercise Number of exercise
price options life (years) price options price
$ 2.45-$6.12 473 1.51 $ 5.61 473 $ 5.61
$10.89-$14.56 5,829 7.39 12.59 1,992 12.54
$15.25-$19.33 2,326 5.94 17.66 1,977 18.02
$20.38-$26.83 1,114 5.97 21.02 1,114 21.02
9,742 6.59 $14.43 5,556 $15.60
(b) 1984 Non-Qualified Stock Option Plan
In accordance with the Non-Qualified Stock Option Plan adopted in
December 1984, options to purchase approximately 5 million shares
of Company common stock were authorized for grant. Options were
granted at market value on the date of grant, are exercisable
beginning one year from the date of grant, with various vesting
periods, and expire ten years from the date of grant.
In November 1989, the Non-Qualified Stock Option Plan was
terminated. Consequently, no options were granted subsequent to
fiscal 1990. Options granted prior to the termination of this plan
remain exercisable through June 1999.
Transactions during fiscal 1998, 1997, and 1996 were as follows (in
thousands, except option prices):
Number of Weighted Average Share
Company Options Exercise Price
1998 1997 1996 1998 1997 1996
Options outstanding at
beginning of year 481 544 548 $ 3.75 $ 3.66 $ 3.63
Exercised (371) (61) (4) 3.02 2.95 0.35
Canceled - (2) - - 2.45
- -
Options outstanding and
exercisable at end of year 110 481 544 $ 6.21 $ 3.75 $ 3.66
At June 24, 1998, the exercise price for options outstanding was
$5.30 with a weighted average remaining contractual life of 1.26
years.
(c) 1991 Non-Employee Stock Option Plan
In accordance with the Stock Option Plan for Non-Employee Directors
and Consultants adopted in May 1991, options to purchase 587,500
shares of Company common stock were authorized for grant. Options
are granted at market value on the date of grant, vest one-third
each year beginning two years from the date of grant, and expire
ten years from the date of grant.
Transactions during fiscal 1998, 1997, and 1996 were as follows (in
thousands, except option prices):
Number of Weighted Average Share
Company Options Exercise Price
1998 1997 1996 1998 1997 1996
Options outstanding at
beginning of year 201 202 204 $16.10 $16.21 $16.07
Granted 52 3 3 16.40 16.88 17.50
Exercised (23) - - 12.60 - -
Canceled - (4) (5) - 23.61 11.22
Options outstanding at
end of year 230 201 202 $16.51 $16.10 $16.21
Options exercisable at
end of year 174 155 106 $16.52 $15.25 $13.16
At June 24, 1998, the range of exercise prices for options
outstanding was $11.22 to $23.92 with a weighted average remaining
contractual life of 6.01 years.
(d) On The Border 1989 Stock Option Plan
In accordance with the Stock Option Plan for On The Border
employees and consultants, options to purchase 550,000 shares of On
The Border's preacquisition common stock were authorized for grant.
Effective May 18, 1994, the 376,000 unexercised On The Border stock
options became exercisable immediately in accordance with the
provisions of the Stock Option Plan and were converted to
approximately 124,000 Company stock options and expire ten years
from the date of original grant.
Transactions during fiscal 1998, 1997, and 1996 were as follows (in
thousands, except option prices):
Number of Weighted Average Share
Company Options Exercise Price
1998 1997 1996 1998 1997 1996
Options outstanding at
beginning of year 36 63 109 $19.38 $19.03 $18.83
Exercised (1) (5) (17) 18.24 17.99 18.54
Canceled - (22) (29) - 18.68 18.58
Options outstanding and
exercisable at end of year 35 36 63 $19.39 $19.38 $19.03
At June 24, 1998, the range of exercise prices for options
outstanding was $18.24 to $19.76 with a weighted average remaining
contractual life of 4.74 years.
The Company has adopted the disclosure-only provisions of SFAS No.
123. Accordingly, no compensation cost has been recognized for
Company stock option plans. Pursuant to the employee compensation
provisions of SFAS No. 123, the Company's net income per common and
equivalent share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data).
1998 1997 1996
Net income - as reported $ 69,075 $ 60,505 $ 34,381
Net income - pro forma $ 62,745 $ 56,943 $ 32,857
Diluted net income per share - as reported $ 1.02 $ 0.81 $ 0.44
Diluted net income per share - pro forma $ 0.93 $ 0.76 $ 0.42
The fair value of each option grant is estimated using the Black-
Scholes option-pricing model with the following weighted average
assumptions:
1998 1997 1996
Expected volatility 41.5% 39.7% 36.0%
Risk-free interest rate 5.8% 6.2% 5.7%
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 and the vesting requirements of the
Company's stock option plans.
10. STOCKHOLDER PROTECTION RIGHTS PLAN
The Company maintains a Stockholder Protection Rights Plan (the
"Plan"). Upon implementation of the Plan, the Company declared a
dividend of one right on each outstanding share of common stock.
The rights are evidenced by the common stock certificates,
automatically trade with the common stock, and are not exercisable
until it is announced that a person or group has become an
Acquiring Person, as defined in the Plan. Thereafter, separate
rights certificates will be distributed and each right (other than
rights beneficially owned by any Acquiring Person) will entitle,
among other things, its holder to purchase, for an exercise price
of $60, a number of shares of Company common stock having a market
value of twice the exercise price. The rights may be redeemed by
the Board of Directors for $0.01 per right prior to the date of the
announcement that a person or group has become an Acquiring Person.
11. SAVINGS PLANS
The Company sponsors a qualified defined contribution retirement
plan ("Plan I") covering salaried employees who have completed one
year or 1,000 hours of service. Plan I allows eligible employees to
defer receipt of up to 20% of their compensation and contribute
such amounts to various investment funds. The Company matches with
its common stock 25% of the first 5% an employee contributes.
Employee contributions vest immediately while Company contributions
vest 25% annually beginning in the participants' second year of
eligibility since plan inception. In fiscal 1998, 1997, and 1996,
the Company contributed approximately $600,000 (representing 28,279
shares of Company common stock), $432,000 (representing 30,438
shares of Company common stock), and $362,000 (representing 23,582
shares of Company common stock), respectively.
The Company 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 20% of their base compensation and 100% of their
eligible bonuses, as defined in the plan. The Company matches with
its common stock 25% of the first 5% a non-officer contributes
while officers' contributions are matched at the same rate with
cash. Employee contributions vest immediately while Company
contributions vest 25% annually beginning in the participants'
second year of employment since plan inception. In fiscal 1998,
1997, and 1996, the Company contributed approximately $298,000 (of
which approximately $181,000 was used to purchase 9,584 shares of
Company common stock), $215,000 (of which approximately $138,000
was used to purchase 9,347 shares of Company common stock), and
$260,000 (of which approximately $165,000 was used to purchase
10,584 shares of Company common stock), respectively. At the
inception of Plan II, the Company established a Rabbi Trust to fund
Plan II obligations. The market value of the trust assets is
included in other assets and the liability to Plan II participants
is included in other liabilities.
12. CONTINGENCIES
The Company is engaged in various legal proceedings and has certain
unresolved claims pending. The ultimate liability, if any, for the
aggregate amounts claimed cannot be determined at this time.
However, management of the Company, based upon consultation with
legal counsel, is of the opinion that there are no matters pending
or threatened which are expected to have a material adverse effect
on the Company's consolidated financial condition or results of
operations.
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the unaudited consolidated quarterly
results of operations for fiscal 1998 and 1997(in thousands, except
per share amounts):
Fiscal Year 1998
Quarters Ended
Sept. 24 Dec. 24 March 25 June 24
Revenues $375,963 $374,502 $401,002 $422,947
Income Before Provision
for Income Taxes 25,223 20,398 24,626 35,211
Net Income 16,521 13,361 16,130 23,063
Basic Net Income Per Share 0.25 0.20 0.24 0.35
Diluted Net Income Per Share 0.25 0.20 0.24 0.34
Basic Weighted Average
Shares Outstanding 65,272 65,593 65,894 66,364
Diluted Weighted Average
Shares Outstanding 66,635 66,925 67,596 68,674
Fiscal Year 1997
Quarters Ended
Sept. 25 Dec. 25 March 26 June 25
Revenues $308,665 $310,925 $345,510 $370,237
Income Before Provision
for Income Taxes 24,631 17,511 20,048 28,795
Net Income 16,380 11,644 13,332 19,149
Basic and Diluted
Net Income Per Share 0.21 0.15 0.18 0.29
Basic Weighted Average
Shares Outstanding 77,277 77,460 74,248 66,015
Diluted Weighted Average
Shares Outstanding 78,463 78,948 75,224 66,834
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Brinker International, Inc.:
We have audited the accompanying consolidated balance sheets of Brinker
International, Inc. and subisdiaries as of June 24, 1998 and June 25, 1997,
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the three-year period ended June 24, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Brinker
International, Inc. and subsidiaries as of June 24, 1998 and June 25, 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended June 24, 1998 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
July 29, 1998