EXHIBIT 13
SELECTED FINANCIAL DATA
(In thousands, except per share amounts and number of restaurants)
Fiscal Years
1999(a) 1998 1997 1996 1995
Income Statement Data:
Revenues $1,870,554 $1,574,414 $1,335,337 $1,162,951 $1,042,199
Operating Costs and Expenses:
Cost of Sales 507,103 426,558 374,525 330,375 283,417
Restaurant Expenses 1,036,573 866,143 720,769 620,441 540,986
Depreciation and Amortization 82,385 86,376 78,754 64,611 58,570
General and Administrative 90,311 77,407 64,404 54,271 50,362
Restructuring Charge - - - 50,000 -
Total Operating Costs and
Expenses 1,716,372 1,456,484 1,238,452 1,119,698 933,335
Operating Income 154,182 117,930 96,885 43,253 108,864
Interest Expense 9,241 11,025 9,453 4,579 595
Gain on Sales of Concepts - - - (9,262) -
Other, Net 14,402 1,447 (3,553) (4,201) (3,151)
Income Before Provision for Income
Taxes and Cumulative Effect
of Accounting Change 130,539 105,458 90,985 52,137 111,420
Provision for Income Taxes 45,297 36,383 30,480 17,756 38,676
Income Before Cumulative Effect
of Accounting Change 85,242 69,075 60,505 34,381 72,744
Cumulative Effect of
Accounting Change 6,407 - - - -
Net Income $ 78,835 $ 69,075 $ 60,505 $ 34,381 $ 72,744
Basic Earnings Per Share:
Income Before Cumulative Effect
of Accounting Change $ 1.30 $ 1.05 $ 0.82 $ 0.45 $ 1.01
Cumulative Effect of
Accounting Change 0.10 - - - -
Basic Net Income Per Share $ 1.20 $ 1.05 $ 0.82 $ 0.45 $ 1.01
Diluted Earnings Per Share:
Income Before Cumulative Effect
of Accounting Change $ 1.25 $ 1.02 $ 0.81 $ 0.44 $ 0.98
Cumulative Effect of
Accounting Change 0.09 - - - -
Diluted Net Income Per Share $ 1.16 $ 1.02 $ 0.81 $ 0.44 $ 0.98
Basic Weighted Average
Shares Outstanding 65,926 65,766 73,682 76,015 71,764
Diluted Weighted Average
Shares Outstanding 68,123 67,450 74,800 77,905 74,283
Balance Sheet Data
(end of period):
Working Capital Deficit $ (86,969) $ (92,898) $ (36,699) $(35,035) $ (2,377)
Total Assets 1,085,644 968,848 996,943 888,834 738,936
Long-term Obligations 234,086 197,577 324,066 157,274 139,645
Shareholders' Equity 661,439 593,739 523,744 608,170 496,797
Number of Restaurants
Open at End of Period:
Company-Operated 707 624 556 468 439
Franchised/Joint Venture 226 182 157 147 121
Total 933 806 713 615 560
(a) Fiscal year 1999 consisted of 53 weeks while all other periods
presented consisted of 52 weeks.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
For an understanding of the significant factors that influenced the
Company's performance during the past three fiscal years, the following
discussion should be read in conjunction with the consolidated financial
statements and related notes found elsewhere in this Annual Report.
The Company has a 52/53 week fiscal year ending on the last Wednesday in
June. Accordingly, the following discussion is for the 53 weeks ended June
30, 1999 and the 52-week periods ended June 24, 1998 and June 25, 1997.
The Company elected early adoption of the American Institute of CPA's
("AICPA") Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs
of Start-Up Activities," during fiscal 1999. This new accounting standard
requires most entities to expense all start-up and preopening costs as
incurred. The Company previously deferred such costs and amortized them
over the twelve-month period following the opening of each restaurant.
Prior to fiscal 1999, amortization of deferred preopening costs was
included within depreciation and amortization expense on the consolidated
statements of income. Effective with fiscal 1999, preopening costs are
included in restaurant expenses on the consolidated statements of income.
RESULTS OF OPERATIONS FOR FISCAL YEARS 1999, 1998, AND 1997
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
1999 1998 1997
Revenues 100.0% 100.0% 100.0%
Operating Costs and Expenses:
Cost of Sales 27.1% 27.1% 28.1%
Restaurant Expenses 55.4% 55.0% 54.0%
Depreciation and Amortization 4.4% 5.5% 5.9%
General and Administrative 4.8% 4.9% 4.8%
Total Operating Costs and Expenses 91.7% 92.5% 92.8%
Operating Income 8.3% 7.5% 7.2%
Interest Expense 0.5% 0.7% 0.7%
Other, Net 0.8% 0.1% (0.3%)
Income Before Provision for
Income Taxes and Cumulative
Effect of Accounting Change 7.0% 6.7% 6.8%
Provision for Income Taxes 2.4% 2.3% 2.3%
Income Before Cumulative Effect
of Accounting Change 4.6% 4.4% 4.5%
Cumulative Effect of Accounting
Change 0.4% - -
Net Income 4.2% 4.4% 4.5%
REVENUES
Revenue growth of 18.8% and 17.9% in fiscal 1999 and 1998, respectively,
primarily relates to the increases in sales weeks driven by new unit
expansion, increases in average weekly sales, and the addition of a fifty-
third week in fiscal 1999. Revenues for fiscal 1999 increased due to a
14.9% increase in sales weeks (2.3% of such increase is attributable to the
additional sales week during fiscal 1999) and a 3.1% increase in average
weekly sales. Revenues for fiscal 1998 increased 17.9% due to a 14.3%
increase in sales weeks and a 3.2% increase in average weekly sales. Menu
price increases were less than 1% in both fiscal 1999 and 1998.
COSTS AND EXPENSES (as a percent of Revenues)
Cost of sales remained flat for fiscal 1999 compared to fiscal 1998 due to
menu price increases, product mix changes to menu items with lower
percentage food costs, and favorable commodity price variances for meat,
seafood, bakery and bread which were offset by unfavorable commodity price
variances for poultry, dairy and cheese. 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.
Restaurant expenses increased in fiscal 1999 due to the adoption of SOP 98-
5 and the resulting expensing of preopening costs as incurred. During
fiscal 1998 and prior years, preopening costs were deferred and amortized
over the twelve-month period following the opening of each restaurant.
Also contributing to the increase in restaurant expenses was additional
rent expense incurred due to the sale-leaseback transactions which occurred
in fiscal 1998 and the continued utilization of the equipment leasing
facility. These increases were partially offset by leverage related to
increased sales in fiscal 1999.
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
remaining 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.
Depreciation and amortization decreased in both fiscal 1999 and fiscal
1998. The fiscal 1999 decrease is due primarily to the elimination of
preopening cost amortization resulting from the adoption of SOP 98-5 and
due to a declining depreciable asset base for older units. Partially
offsetting these decreases were increases in depreciation and amortization
related to new unit construction and ongoing remodel costs and an
impairment charge for reacquired franchise rights due to a change in
development plans in the related franchise area. 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 and ongoing remodel
costs.
General and administrative expenses have remained relatively flat in the
past three 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 1999 due to
additional staff to support the expansion of restaurants and an increased
profit sharing accrual.
Interest expense decreased in fiscal 1999 as compared to fiscal 1998 due to
a favorable interest rate environment compared with fiscal 1998 and an
increase in the construction-in-progress balances subject to interest
capitalization. Interest expense increased in fiscal 1998 as compared to
fiscal 1997 due to increased borrowings on the Company's credit facilities
primarily used to fund the Company's stock repurchase plan.
Other, net in both fiscal 1999 and in fiscal 1998 was negatively impacted
by the Company's share of net losses in unconsolidated equity method
investees and by the substantial liquidation of the marketable equity
securities portfolio in the last half of fiscal 1998 to fund a portion of
the Company's share repurchase plan. This liquidation resulted in a
reduction of income earned, which in fiscal 1998 partially offset the
Company's share of net losses in unconsolidated equity method investees.
As of June 30, 1999, the marketable equity securities portfolio has been
fully liquidated.
The Company's share of net losses in its unconsolidated equity method
investees in fiscal 1999 includes a charge of approximately $5.1 million
related to the decisions made by Eatzi's Corporation ("Eatzi's") to abandon
development of two restaurant sites and to dispose of a restaurant that did
not meet the financial return expectations of Eatzi's. These decisions were
made in conjunction with a strategic plan which includes slowing
development, refining the prototype, and defining profitable growth
opportunities. The types of costs recorded primarily included site
specific costs and costs to exit lease obligations. Effective June 30,
1999, the Company sold a portion of its equity interest in Eatzi's to its
partner. In addition, the Company's share of net losses in its
unconsolidated equity method investees in fiscal 1999 includes a charge of
approximately $2.5 million related to the impairment of long-lived assets
recorded by one of its investees 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."
INCOME TAXES
The Company's effective income tax rate was 34.7%, 34.5%, and 33.5%, in
fiscal 1999, 1998, and 1997, respectively. The increase in fiscal 1999 is
primarily a result of an increase in the rate effect of state income taxes.
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 equity securities portfolio.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
The cumulative effect of accounting change is the result of the Company's
early adoption of SOP 98-5 retroactive to the first quarter of fiscal 1999
as discussed previously in the "General" section. The cumulative effect of
this accounting change, net of income tax benefit, was $6.4 million or
$0.09 per diluted share. This new accounting standard accelerates the
Company's recognition of preopening costs, but will benefit the post-
opening results of new restaurants.
NET INCOME AND NET INCOME PER SHARE
Fiscal 1999 net income and diluted net income per share increased 14.1% and
13.7%, respectively, compared to fiscal 1998. Excluding the effects of the
adoption of SOP 98-5, fiscal 1999 net income increased 23.3% from $69.1
million to $85.2 million and diluted net income per share increased 22.5%
from $1.02 to $1.25. The increase in both net income and diluted net income
per share before consideration of the adoption of SOP 98-5 was due to an
increase in revenues resulting from increases in average weekly sales,
sales weeks (including an additional week in fiscal 1999) and menu prices,
and a decrease in depreciation and amortization expenses. The factors
contributing to the increase in net income and diluted net income per share
were partially offset by increases in the Company's share of losses in
unconsolidated equity method investees.
Fiscal 1998 net income and diluted net income per share increased 14.2% and
25.9%, respectively, compared to fiscal 1997. 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 and diluted net income per share 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.
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 either increasing
menu prices or reviewing, then implementing, alternative products or
processes.
LIQUIDITY AND CAPITAL RESOURCES
The working capital deficit decreased from $92.9 million at June 24, 1998
to $87.0 million at June 30, 1999, and net cash provided by operating
activities increased to $193.2 million for fiscal 1999 from $167.3 million
for fiscal 1998 due to increased profitability and the timing of
operational receipts and payments.
Long-term debt outstanding at June 30, 1999 consisted of $71.4 million of
unsecured senior notes, $110.0 million of borrowings on credit facilities
and obligations under capital leases. The Company has credit facilities
totaling $360.0 million. At June 30, 1999, the Company had $242.8 million
in available funds from credit facilities.
During fiscal 1998, the Company entered into an equipment leasing facility
for up to $55.0 million. As of June 30, 1999, $47.5 million of the leasing
facility has been utilized, including a net funding of $23.1 million in
fiscal 1999. The Company does not intend to further utilize this facility.
During the first quarter of fiscal 2000, the Company intends to enter into
a new $25.0 million equipment leasing facility, similar in terms and
structure to the Company's previous facility, which will be used to lease
equipment in fiscal 2000.
During the first quarter of fiscal 2000, the Company intends to enter into
a $50.0 million real estate leasing facility available for the construction
of new restaurants. This new facility will be used to lease real estate in
fiscal 2000 and 2001.
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 increased from $155.2 million for fiscal 1998 to
$181.1 million for fiscal 1999. The increase in 1999 capital expenditures
compared to 1998 is due mainly to an increase in the number of restaurants
being constructed or opened during fiscal 1999 as compared to fiscal 1998.
The Company estimates that its capital expenditures during fiscal 2000 will
approximate $160.0 million. These capital expenditures will be funded from
internal operations, cash equivalents, and drawdowns on the Company's
credit facilities.
During fiscal 1999, the Company increased its investments in various joint
ventures by $4.5 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, the Company's Board of Directors approved a plan to
repurchase up to $50.0 million of the Company's common stock. During
fiscal 1999, the Company's Board of Directors authorized an increase in the
plan by an additional $35.0 million. Pursuant to the plan, the Company
repurchased approximately 2,171,000 shares of its common stock for
approximately $48.1 million during fiscal 1999 and approximately 809,000
shares of its common stock for approximately $17.1 million during fiscal
1998 in accordance with applicable securities regulations. The repurchased
common stock was used by the Company to increase shareholder value, 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 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's domestic reprogramming and testing efforts have been
substantially completed. The Company expects that all mission-critical
systems will be Year 2000 ready prior to October 31, 1999.
The nature of the Company's business is such that the business risks
associated with the Year 2000 can be reduced by assessing the vendors
supplying the Company's restaurants with food and related products and also
assessing the Company's franchise and joint venture business partners to
ensure that they are aware of the Year 2000 business risks and are
appropriately 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 critical vendors to obtain reasonable assurance that
plans are being developed to address the Year 2000 issue. The returned
questionnaires have been assessed by the Company, categorized based upon
readiness for the Year 2000 issues, and prioritized in order of
significance to the business of the Company. The Company has established
contingency plans (including continued efforts to evaluate Year 2000
readiness of existing vendors or identification of alternative vendors)
responding to those high risk, critical vendors which have not provided the
Company with satisfactory evidence of their readiness to handle Year 2000
issues. Furthermore, the Company will continue to monitor all critical
vendors to ensure their Year 2000 readiness.
Based upon questionnaires returned by the Company's franchise business
partners and direct communications with the Company's joint venture
business partners, the Company has assessed the Year 2000 readiness of
these business partners and has implemented an action plan involving direct
communication and the sharing of information associated with the Year 2000
issue.
The Company has completed the inventory and assessment phases of its
evaluation of all information technology and non-information technology
equipment. Based upon results of the assessment, all mission-critical
equipment that is not Year 2000 ready will be fixed or upgraded by October
31, 1999.
The enterprise-wide program, including testing and remediation of all of
the Company's systems and applications, the cost of external consultants,
the purchase of software and hardware, and the compensation of internal
employees working on Year 2000 projects, is expected to cost approximately
$3.5 to $4.0 million (except for fringe benefits of internal employees,
which are not separately tracked) from inception in calendar year 1997
through completion in fiscal 2000. Of these costs, approximately $750,000
was incurred during fiscal 1998, and approximately $1.6 million was
incurred during fiscal 1999. The remaining costs will be incurred in fiscal
2000. All estimated costs have been budgeted and are expected to be funded
by the Company's available cash.
The Company anticipates timely completion of the internal Year 2000
readiness efforts and does not believe the costs related to the Year 2000
readiness project will be material to its financial position or results of
operations. However, if unanticipated problems arise from systems or
equipment, there could be material adverse effects on the Company's
consolidated financial position, results of operations and cash flows. As
part of the Year 2000 readiness efforts, the Company has developed
contingency plans which will need to be activated in the event of internal
systems failures, but may be modified as additional information becomes
available. Although the questionnaires and other communications received
by the Company from its significant vendors have not disclosed any material
Year 2000 issues, there is no assurance that these vendors will be Year
2000 ready on a timely basis. Unanticipated failures or significant delays
in furnishing products or services by significant vendors could have a
material adverse effect on the Company's consolidated financial position,
results of operations and cash flows. Where predictable, the Company is
assessing and attempting to mitigate its risks with respect to the failure
of its significant vendors to be Year 2000 ready as part of its ongoing
contingency planning.
Despite the Company's diligent preparation, some of the Company's internal
systems or equipment may fail to operate properly, and some of its
significant vendors may fail to perform effectively or may fail to timely
or completely deliver products. In those circumstances, the Company expects
to be able to conduct necessary business operations and to obtain necessary
products from alternative vendors, and business operations would generally
continue; however, there would be some disruption which could have a
material adverse effect on the Company's consolidated financial position,
results of operations and cash flows. Similarly, if the Company's franchise
and joint venture business partners sustain disruptions in their business
operations or there are any unanticipated general public infrastructure
failures, there could be a material adverse effect on the Company's
consolidated financial position, results of operations and cash flows. The
Company has no basis upon which to reasonably analyze the direct or
indirect effects on its guests from Year 2000 issues or experiences.
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's net exposure to interest rate risk consists of floating rate
instruments that are benchmarked to U.S. 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 30, 1999. 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 30, 1999 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 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. In June 1999, the FASB issued Statement
of Financial Accounting Standards No. 137 ("SFAS No. 137"), "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133," which defers the effective date of SFAS
No. 133 until the Company's first quarter financial statements in fiscal
2001. 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
During fiscal 1999, several key initiatives including: i) targeted,
disciplined restaurant expansion; ii) continued focus on culinary
evolution, service excellence, and overall value; iii) diligent fiscal
responsibility; and iv) an unwavering pursuit for guest satisfaction have
allowed the Company to generate the momentum that will serve as a catalyst
for increased growth and earnings and will allow the Company to improve on
its successes in fiscal 2000 and beyond.
During fiscal 2000, the Company will continue to focus on the initiatives
that helped make fiscal 1999 such a successful year. With this continued
focus and a future that indicates an increase in dining out across all age
groups, a growing importance on convenience and a desire for the Company's
guests to experience exciting new flavor profiles, the Company is confident
that it can attain its 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, the
impact of the Year 2000, availability of employees, or weather and other
acts of God.
BRINKER INTERNATIONAL, INC.
Consolidated Balance Sheets
(In thousands)
1999 1998
ASSETS
Current Assets:
Cash and Cash Equivalents $ 12,597 $ 9,382
Accounts Receivable 21,390 19,645
Inventories 15,050 13,774
Prepaid Expenses 46,431 36,576
Deferred Income Taxes (Note 4) 5,585 3,250
Other 2,097 2,007
Total Current Assets 103,150 84,634
Property and Equipment, at Cost (Note 6):
Land 169,368 145,900
Buildings and Leasehold Improvements 650,000 541,403
Furniture and Equipment 351,729 310,849
Construction-in-Progress 46,186 48,245
1,217,283 1,046,397
Less Accumulated Depreciation and Amortization 403,907 337,497
Net Property and Equipment 813,376 708,900
Other Assets:
Goodwill, Net (Note 2) 74,190 76,330
Other (Note 10) 94,928 98,984
Total Other Assets 169,118 175,314
Total Assets $ 1,085,644 $ 968,848
(continued)
BRINKER INTERNATIONAL, INC.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
Current Liabilities:
Current Installments of Long-term Debt
(Notes 5 and 6) $ 14,635 $ 14,618
Accounts Payable 74,100 75,878
Accrued Liabilities (Note 3) 101,384 87,036
Total Current Liabilities 190,119 177,532
Long-term Debt, Less Current Installments
(Notes 5 and 6) 183,158 147,288
Deferred Income Taxes (Note 4) 9,140 8,254
Other Liabilities 41,788 42,035
Commitments and Contingencies (Notes 6 and 11)
Shareholders' Equity (Notes 7 and 8):
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 65,899,445 Shares Outstanding at
June 30, 1999, and 78,150,054 Shares Issued
and 65,926,032 Shares Outstanding at June 24, 1998 7,815 7,815
Additional Paid-In Capital 285,448 276,380
Retained Earnings 542,918 464,083
836,181 748,278
Less Treasury Stock, at Cost (12,250,609 shares at
June 30, 1999 and 12,224,022 shares at
June 24, 1998) 174,742 154,539
Total Shareholders' Equity 661,439 593,739
Total Liabilities and Shareholders' Equity $1,085,644 $ 968,848
See accompanying notes to consolidated financial statements.
BRINKER INTERNATIONAL, INC.
Consolidated Statements of Income
(In thousands, except per share amounts)
Fiscal Years
1999 1998 1997
Revenues $1,870,554 $1,574,414 $1,335,337
Operating Costs and Expenses:
Cost of Sales 507,103 426,558 374,525
Restaurant Expenses (Notes 1 and 6) 1,036,573 866,143 720,769
Depreciation and Amortization (Note 1) 82,385 86,376 78,754
General and Administrative 90,311 77,407 64,404
Total Operating Costs and Expenses 1,716,372 1,456,484 1,238,452
Operating Income 154,182 117,930 96,885
Interest Expense (Note 5) 9,241 11,025 9,453
Other, Net (Notes 1 and 10) 14,402 1,447 (3,553)
Income Before Provision for
Income Taxes and Cumulative Effect
of Accounting Change 130,539 105,458 90,985
Provision for Income Taxes (Note 4) 45,297 36,383 30,480
Income Before Cumulative
Effect of Accounting Change 85,242 69,075 60,505
Cumulative Effect of
Accounting Change (net of income
tax benefit of $3,404) 6,407 - -
Net Income $ 78,835 $ 69,075 $ 60,505
Basic Earnings Per Share:
Income Before Cumulative Effect
of Accounting Change $ 1.30 $ 1.05 $ 0.82
Cumulative Effect of
Accounting Change 0.10 - -
Basic Net Income Per Share $ 1.20 $ 1.05 $ 0.82
Diluted Earnings Per Share:
Income Before Cumulative Effect
of Accounting Change $ 1.25 $ 1.02 $ 0.81
Cumulative Effect of
Accounting Change 0.09 - -
Diluted Net Income Per Share $ 1.16 $ 1.02 $ 0.81
Basic Weighted Average
Shares Outstanding 65,926 65,766 73,682
Diluted Weighted Average
Shares Outstanding 68,123 67,450 74,800
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 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
Net Income - - - - 78,835 - 78,835
Purchases of
Treasury Stock (2,171) - - - - (48,125) (48,125)
Issuances of
Common Stock 2,144 - 9,068 - - 27,922 36,990
Balances at
June 30, 1999 65,899 $7,815 $ 285,448 $ - $542,918$(174,742) $661,439
See accompanying notes to consolidated financial statements.
BRINKER INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
(In thousands)
Fiscal Years
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 78,835 $ 69,075 $ 60,505
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization of
Property and Equipment 75,857 70,257 63,866
Amortization of Goodwill and Other Assets 6,528 16,119 14,888
Cumulative Effect of Accounting Change (Note 1) 6,407 - -
Deferred Income Taxes 1,955 (1,220) 4,657
Changes in Assets and Liabilities, Excluding
Effects of Acquisitions:
Receivables (1,886) (829) (5,112)
Inventories (1,276) (743) (1,944)
Prepaid Expenses (9,855) (6,212) (5,632)
Other Assets 14,458 (9,649) (15,309)
Accounts Payable 8,102 3,808 18,953
Accrued Liabilities 14,348 14,377 7,838
Other Liabilities (247) 12,352 2,369
Other - - 496
Net Cash Provided by Operating Activities 193,226 167,335 145,575
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for Property and Equipment (181,088) (155,246) (191,194)
Payment for Purchases of Restaurants, Net (Note 2) - (2,700) (15,863)
Net Proceeds from Sale-Leasebacks - 125,961 -
Purchases of Marketable Securities - - (38,543)
Proceeds from Sales of Marketable Securities 51 23,962 80,796
Investments in Equity Method Investees (4,484) (35,500) (3,230)
Net (Advances to) Repayments from Affiliates (19,363) 5,942 (4,002)
Additions to Other Assets - (6,850) -
Net Cash Used in Investing Activities (204,884) (44,431) (172,036)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Borrowings (Payments) on Credit Facilities 50,505 (132,980) 170,000
Payments of Long-term Debt (14,618) (390) (348)
Proceeds from Issuances of Common Stock 27,111 13,731 3,280
Purchases of Treasury Stock (48,125) (17,077) (150,350)
Net Cash Provided by (Used in) Financing
Activities 14,873 (136,716) 22,582
Net Increase (Decrease) in Cash and Cash
Equivalents 3,215 (13,812) (3,879)
Cash and Cash Equivalents at Beginning of Year 9,382 23,194 27,073
Cash and Cash Equivalents at End of Year $ 12,597 $ 9,382 $ 23,194
CASH PAID DURING THE YEAR:
Interest, Net of Amounts Capitalized $ 9,285 $ 11,479 $ 7,459
Income Taxes $ 39,618 $ 31,807 $ 26,240
NON-CASH TRANSACTIONS DURING THE YEAR:
Tax Benefit from Stock Options Exercised $ 9,879 $ 4,570 $ 1,215
See accompanying notes to consolidated financial statements.
BRINKER INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
1. SUMMARY OF 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. Fiscal year 1999, which ended on June 30, 1999, contained 53 weeks,
while fiscal years 1998 and 1997, which ended on June 24, 1998 and June 25,
1997, respectively, contained 52 weeks.
Certain prior year amounts in the accompanying consolidated financial
statements have been reclassified to conform with fiscal 1999
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 $2.6 million and $319,000 at June
30, 1999 and June 24, 1998, respectively, consist primarily of money market
funds and commercial paper.
The Company's financial instruments at June 30, 1999 and June 24, 1998
consist of cash equivalents, accounts receivable, notes 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; 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. None of these
financial instruments is 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 $4.0 million, $3.6 million, and $4.5 million during
fiscal 1999, 1998, and 1997, respectively.
(f) Advertising
Advertising costs are expensed as incurred. Advertising costs were $73.6
million, $60.6 million, and $47.0 million in fiscal 1999, 1998, and 1997,
respectively, and are included in restaurant expenses in the consolidated
statements of income.
(g) Preopening Costs
The Company elected early adoption of Statement of Position 98-5 ("SOP 98-
5"), "Reporting on the Costs of Start-Up Activities," retroactive to the
first quarter of fiscal 1999. This new accounting standard requires the
Company to expense all start-up and preopening costs as they are incurred.
The Company previously deferred such costs and amortized them over the
twelve-month period following the opening of each restaurant. The
cumulative effect of this accounting change, net of income tax benefit, was
$6.4 million ($0.09 per diluted share). This new accounting standard
accelerates the Company's recognition of preopening costs, but benefits the
post-opening results of new restaurants. Excluding the one-time cumulative
effect, the adoption of the new accounting standard reduced the Company's
reported results for fiscal 1999 by approximately $1.7 million ($0.03 per
diluted share).
(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,
including goodwill, 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.
During fiscal 1999, the Company recorded an impairment charge of
approximately $3 million for reacquired franchise rights. The impairment
charge, which is included in amortization expense, is the result of a
change in development plans in the related franchise area. Management
believes that no reduction of the estimated useful life is warranted.
Accumulated amortization for goodwill was $8.7 million and $6.5 million as
of June 30, 1999 and June 24, 1998, respectively. Accumulated amortization
for other intangible assets was $4.8 million and $691,000 as of June 30,
1999 and June 24, 1998, respectively.
(i) Recoverability of Long-Lived Assets
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. Assets held for sale are reported at the lower of carrying amount
or fair value less costs to sell. During fiscal 1999, the Company's share
of net losses in unconsolidated equity method investees included charges of
approximately $6.5 million related to impairment of long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121 ("SFAS
No. 121"), "Accounting for Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of."
(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, the Company's Board of Directors approved a plan to
repurchase up to $50.0 million of the Company's common stock. During
fiscal 1999, the Company's Board of Directors authorized an increase in the
plan by an additional $35.0 million. Pursuant to the plan, the Company
repurchased approximately 2,171,000 shares of its common stock for
approximately $48.1 million during fiscal 1999 and approximately 809,000
shares of its common stock for approximately $17.1 million during fiscal
1998 in accordance with applicable securities regulations. The repurchased
common stock was used by the Company to increase shareholder value, 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. 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 30, 1999 and June 24, 1998, the Company was not involved in any
derivative instruments. During fiscal 1998, 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 Opinion 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 the Company's 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 7.
(n) Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income." SFAS No. 130,
which is effective for fiscal 1999, establishes standards for the reporting
and display of comprehensive income and its components. 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. Comprehensive income for fiscal 1999 is equal to net income as
reported, and comprehensive income for fiscal 1998 and 1997 is
substantially equal to net income as reported.
(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 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. The Company has no
other potentially dilutive securities.
(p) Segment Reporting
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS No. 131" or "Statement"), "Disclosure About Segments of an
Enterprise and Related Information." This Statement supersedes Statement
of Financial Accounting Standards No. 14, "Financial Reporting for Segments
of a Business Enterprise" and requires that a public company report annual
and interim financial and descriptive information about its reportable
operating segments. Operating segments, as defined, are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. This Statement allows
aggregation of similar operating segments into a single operating segment
if the businesses are considered similar under the criteria of this
Statement. The Company believes it meets the aggregation criteria for its
operating segments.
(q) 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 30, 1999, 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. The operations of the related
restaurants, which are not material, are included in the Company's
consolidated results of operations from the dates of acquisition.
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.
3. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
1999 1998
Payroll $ 46,648 $ 39,752
Insurance 10,185 11,718
Property tax 10,783 9,754
Sales tax 13,015 8,759
Other 20,753 17,053
$101,384 $ 87,036
4. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
1999 1998 1997
Current income tax expense:
Federal $ 38,373 $ 34,347 $ 22,471
State 4,969 3,408 3,352
Total current income tax expense 43,342 37,755 25,823
Deferred income tax expense (benefit):
Federal 2,124 (1,212) 4,113
State (169) (160) 544
Total deferred income tax expense
(benefit) 1,955 (1,372) 4,657
$ 45,297 $ 36,383 $ 30,480
A reconciliation between the reported provision for income taxes before
cumulative effect of accounting change and the amount computed by applying
the statutory Federal income tax rate of 35% to income before provision for
income taxes follows (in thousands):
1999 1998 1997
Income tax expense at statutory rate $ 45,659 $ 36,910 $ 31,845
FICA tax credit (4,495) (3,575) (2,925)
Net investment activities - (102) (688)
State income taxes, net of Federal
benefit 3,230 2,217 1,872
Other 903 933 376
$ 45,297 $ 36,383 $ 30,480
The income tax effects of temporary differences that give rise to
significant portions of deferred income tax assets and liabilities as of
June 30, 1999 and June 24, 1998 are as follows (in thousands):
1999 1998
Deferred income tax assets:
Insurance reserves $ 10,451 $ 12,361
Nonqualified savings plan 4,349 3,492
Leasing transactions 2,547 2,034
Other, net 11,615 9,444
Total deferred income tax assets 28,962 27,331
Deferred income tax liabilities:
Depreciation and capitalized interest
on property and equipment 19,375 16,664
Prepaid expenses 8,060 7,580
Preopening costs - 3,258
Goodwill and other amortization 1,936 1,697
Other, net 3,146 3,136
Total deferred income tax liabilities 32,517 32,335
Net deferred income tax liability $ 3,555 $ 5,004
5. DEBT
The Company has credit facilities aggregating $360.0 million at June 30,
1999. A credit facility of $260.0 million bears interest at LIBOR (5.24% at
June 30, 1999) plus a maximum of .50% and expires in fiscal 2002. At June
30, 1999, $110.0 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 year 2000. Unused credit facilities
available to the Company were approximately $242.8 million at June 30,
1999. 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):
1999 1998
7.8% senior notes $ 85,700 $ 100,000
Credit facilities 110,000 59,495
Capital lease obligations (see Note 6) 2,093 2,411
197,793 161,906
Less current installments 14,635 14,618
$ 183,158 $ 147,288
The $85.7 million of unsecured senior notes bear interest at an annual rate
of 7.8%. Interest is payable semi-annually and principal of $14.3 million
is due annually through fiscal 2004 with the remaining unpaid balance due
in fiscal 2005.
At June 30, 1999, the Company is the guarantor of a $7.3 million line of
credit for certain franchisees. This line of credit has been closed and
the franchisees are paying down the outstanding balance.
6. LEASES
(a) Capital Leases
The Company leases certain buildings under capital leases. The asset values
of $6.5 million at June 30, 1999 and June 24, 1998, and the related
accumulated amortization of $5.8 million and $5.6 million at June 30, 1999
and June 24, 1998, 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 1999, 1998, and 1997 was $70.0 million, $54.8 million,
and $40.3 million, respectively. Contingent rent included in rent expense
for fiscal 1999, 1998, and 1997 was $5.5 million, $4.9 million, and $3.1
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 in fiscal 2001, 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 could lease up to $55.0 million of equipment.
As of June 30, 1999, $47.5 million of the leasing facility has been
utilized, including a net funding of $23.1 million in fiscal 1999. The
Company does not intend to further utilize this facility. 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 no more than 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 is being
amortized over the remaining 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 30, 1999, future minimum lease payments on capital and operating
leases were as follows (in thousands):
Fiscal Capital Operating
Year Leases Leases
2000 $ 584 $ 64,690
2001 566 62,919
2002 566 60,222
2003 566 57,357
2004 461 52,487
Thereafter 117 347,108
Total minimum lease payments 2,860 $644,783
Imputed interest (average rate of 11.5%) 767
Present value of minimum lease payments 2,093
Less current installments 335
Capital lease obligations - noncurrent $1,758
At June 30, 1999, the Company had entered into other lease agreements for
restaurant facilities currently under construction or yet to be
constructed. In addition to 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.
7. STOCK OPTION PLANS
(a) 1983, 1992, and 1998 Employee Incentive Stock Option Plans
In accordance with the Incentive Stock Option Plans adopted in October
1983, November 1992, and October 1998, options to purchase approximately
26.8 million shares of Company common stock may be granted to officers,
directors, and eligible employees, as defined. 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 1999, 1998, and 1997 were as follows (in
thousands, except option prices):
Number of Weighted Average Share
Company Options Exercise Price
1999 1998 1997 1999 1998 1997
Options outstanding at
beginning of year 9,742 9,458 9,049 $14.43 $14.13 $14.52
Granted 1,942 1,661 1,842 26.65 14.07 11.79
Exercised (2,002)(1,068) (383) 13.01 10.76 6.83
Forfeited (821) (309)(1,050) 16.03 16.03 16.03
Options outstanding at
end of year 8,861 9,742 9,458 $17.37 $14.43 $14.13
Options exercisable at
end of year 4,232 5,556 4,735 $15.97 $15.60 $14.61
Options Outstanding Options Exercisable
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number of contractual exercise Number of exercise
prices options life (years) price options price
$ 6.05-$11.22 1,575 6.02 $10.60 941 $10.25
$12.00-$15.50 2,990 6.78 13.67 964 13.46
$16.00-$20.44 2,356 4.76 18.85 2,220 18.97
$26.75-$28.00 1,940 9.29 26.76 107 26.83
8,861 6.66 $17.37 4,232 $15.97
(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 and all
options were either exercised or forfeited in fiscal 1999.
Transactions during fiscal 1999, 1998, and 1997 were as follows (in
thousands, except option prices):
Number of Weighted Average Share
Company Options Exercise Price
1999 1998 1997 1999 1998 1997
Options outstanding at
beginning of year 110 481 544 $ 4.13 $ 3.75 $ 3.66
Exercised (95) (371) (61) 3.94 3.02 2.95
Forfeited (15) - (2) 5.30 - 2.45
Options outstanding and
exercisable at end of year - 110 481 $ - $ 4.13 $ 3.75
(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 1999, 1998, and 1997 were as follows (in
thousands, except option prices):
Number of Weighted Average Share
Company Options Exercise Price
1999 1998 1997 1999 1998 1997
Options outstanding at
beginning of year 230 201 202 $16.51 $16.10 $16.21
Granted 183 52 3 16.97 16.40 16.88
Exercised (46) (23) - 15.09 12.60 -
Forfeited (20) - (4) 13.08 - 23.61
Options outstanding at
end of year 347 230 201 $17.13 $16.51 $16.10
Options exercisable at
end of year 191 174 155 $15.47 $16.52 $15.25
At June 30, 1999, the range of exercise prices for options outstanding was
$11.22 to $25.44 with a weighted average remaining contractual life of 6.59
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 1999, 1998, and 1997 were as follows (in
thousands, except option prices):
Number of Weighted Average Share
Company Options Exercise Price
1999 1998 1997 1999 1998 1997
Options outstanding at
beginning of year 35 36 63 $19.39 $19.38 $19.03
Exercised (1) (1) (5) 18.24 18.24 17.99
Forfeited (7) - (22) 18.33 - 18.68
Options outstanding and
exercisable at end of year 27 35 36 $19.71 $19.39 $19.38
At June 30, 1999, the range of exercise prices for options outstanding and
exercisable was $18.24 to $19.76 with a weighted average remaining
contractual life of 4.13 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):
1999 1998 1997
Net income - as reported $ 78,835 $ 69,075 $ 60,505
Net income - pro forma $ 68,910 $ 62,745 $ 56,943
Diluted net income per share - as reported $ 1.16 $ 1.02 $ 0.81
Diluted net income per share - pro forma $ 1.01 $ 0.93 $ 0.76
The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions:
1999 1998 1997
Expected volatility 37.2% 41.5% 39.7%
Risk-free interest rate 4.6% 5.8% 6.2%
Expected lives 5 years 5 years 5 years
Dividend yield 0.0% 0.0% 0.0%
Pro forma net income reflects only options granted since fiscal 1996.
Therefore, the full impact of calculating compensation cost for stock
options is not reflected in the pro forma amounts presented above because
compensation cost is reflected over the options' vesting period and
compensation cost for options granted prior to fiscal 1996 is not
considered. In addition, 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.
8. 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.
9. SAVINGS PLANS
The Company sponsors a qualified defined contribution retirement plan
("Plan I") covering salaried employees who have completed one year of
service and have attained the age of twenty-one. Plan I allows eligible
employees to defer receipt of up to 20% of their compensation and 100% of
their eligible bonuses, as defined in the Plan, and contribute such amounts
to various investment funds. The Company matches 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 1999, 1998, and 1997, the
Company contributed approximately $688,000, $600,000, and $432,000,
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 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 1999, 1998, and 1997, the Company contributed
approximately $381,000, $298,000, and $215,000, 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.
10. RELATED PARTY TRANSACTION
The Company has secured notes receivable from Eatzi's Corporation
("Eatzi's") with a carrying value of approximately $23.9 million at June
30, 1999 and $2.2 million at June 24, 1998. Approximately $6 million of the
notes receivable is convertible into nonvoting Series A Preferred Stock of
Eatzi's at the option of the Company and matures on December 28, 2006. The
remaining notes receivable matures on September 28, 2005.
Interest on the convertible notes receivable is 10.5% per year with
payments due beginning June 28, 2000 and continuing on a quarterly basis
until the principal balance and all accrued and unpaid interest have been
paid in full. Interest on the remaining notes receivable balance is 10.0%
per year with payments due beginning September 28, 2000 and continuing on a
quarterly basis until the principal balance and all accrued and unpaid
interest have been paid in full. Interest income earned on these notes and
recorded in other, net during both fiscal 1999 and fiscal 1998 was
$900,000. The notes receivable are included in other assets in the
accompanying consolidated balance sheets. In addition, the Company sold a
portion of its equity interest in Eatzi's effective June 30, 1999.
11. 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.
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the unaudited consolidated quarterly results
of operations for fiscal 1999 and 1998(in thousands, except per share
amounts):
Fiscal Year 1999
Quarters Ended
Sept. 23(a) Dec. 23(a) March 24(a) June 30
Revenues $432,101 $443,975 $459,192 $535,286
Income Before Provision for
Income Taxes and Cumulative
Effect of Accounting Change 30,658 26,963 31,447 41,471
Income Before Cumulative
Effect of Accounting Change 20,020 17,607 20,535 27,080
Net Income 13,613 17,607 20,535 27,080
Basic Net Income Per Share:
Income Before Accounting Change 0.30 0.27 0.31 0.41
Net Income 0.21 0.27 0.31 0.41
Diluted Net Income Per Share:
Income Before Accounting Change 0.30 0.26 0.30 0.40
Net Income 0.20 0.26 0.30 0.40
Basic Weighted Average
Shares Outstanding 65,774 65,608 66,316 66,003
Diluted Weighted Average
Shares Outstanding 67,596 67,781 68,852 68,267
(a) As Restated (see note 1g)
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