SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 24, 1998 Commission File No. 1-10275
BRINKER INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1914582
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
6820 LBJ Freeway, Dallas, Texas 75240
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code (972) 980-9917
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.10 par value
Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ___
The aggregate market value of the voting stock held by
persons other than directors and officers of registrant (who
might be deemed to be affiliates of registrant) at September 1,
1998 was $1,149,450,489.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest
practicable date.
Outstanding at
Class September 1, 1998
Common Stock, $0.10 par value 65,859,510 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders
for the fiscal year ended June 24, 1998 are incorporated by
reference into Parts I, II and IV hereof, to the extent indicated
herein. Portions of the registrant's Proxy Statement dated
September 18, 1998, for its annual meeting of shareholders on
October 29, 1998, are incorporated by reference into Part III
hereof, to the extent indicated herein.
PART I
Item 1. BUSINESS.
General
Brinker International, Inc. (the "Company") is
principally engaged in the operation, development and
franchising of the Chili's Grill & Bar ("Chili's"),
Romano's Macaroni Grill ("Macaroni Grill"), On The Border
Mexican Cafe ("On The Border"), Cozymel's Coastal Mexican
Grill ("Cozymel's"), Maggiano's Little Italy
("Maggiano's"), and the Corner Bakery ("Corner Bakery")
restaurant concepts. In addition, the Company is involved
in the operation and development of the Eatzi's Market and
Bakery ("Eatzi's"), Big Bowl ("Big Bowl"), and Wildfire
("Wildfire") concepts. The Company was organized under
the laws of the State of Delaware in September 1983 to
succeed to the business operated by Chili's, Inc., a Texas
corporation, organized in August 1977. The Company
completed the acquisitions of Macaroni Grill, On The
Border, Cozymel's, Maggiano's, and Corner Bakery in
November 1989, May 1994, July 1995, August 1995, and
August 1995, respectively.
Restaurant Concepts and Menus
Chili's Grill & Bar
Chili's is a full-service Southwestern-themed
restaurant, featuring a casual atmosphere and a varied
menu of chicken, beef and seafood entrees, steaks,
hamburgers, ribs, fajitas, sandwiches, salads, appetizers
and desserts, all of which are prepared fresh daily
according to special Chili's recipes.
Chili's restaurants feature quick, efficient and
friendly table service designed to minimize customer
waiting time and facilitate table turnover, with an
average turnover time per table of approximately 45
minutes. Service personnel are dressed casually in jeans,
knit shirts and aprons to reinforce the casual, informal
environment. The decor of a Chili's restaurant consists of
booth seating, tile-top tables, hanging plants and wood
and brick walls covered with interesting memorabilia.
Emphasis is placed on serving substantial portions of
fresh, high quality food at modest prices. Entree
selections range in menu price from $4.99 to $12.99, with
the average revenue per meal, including alcoholic
beverages, approximating $9.87 per person. A full-service
bar is available at each Chili's restaurant, with frozen
margaritas offered as the concept's specialty drink.
During the year ended June 24, 1998, food and
non-alcoholic beverage sales constituted approximately
86.7% of the concept's total restaurant revenues, with
alcoholic beverage sales accounting for the remaining
13.3%.
Romano's Macaroni Grill
Macaroni Grill is a casual, country-style Italian
restaurant which specializes in family-style recipes and
features seafood, meat, chicken, pasta, salads, pizza,
appetizers and desserts with a full-service bar in most
restaurants. Exhibition cooking, pizza ovens and
rotisseries provide an enthusiastic and exciting
environment in the restaurants. Macaroni Grill
restaurants also feature white linen-clothed tables,
fireplaces, sous stations and prominent displays of wines.
Service personnel are dressed in white, starched shirts
and aprons, dark slacks, and bright ties.
Entree selections range in menu price from $5.29 to
$16.99 with certain specialty items priced on a daily
basis. The average revenue per meal, including alcoholic
beverages, is approximately $13.65 per person. During the
year ended June 24, 1998, food and non-alcoholic beverage
sales constituted approximately 85.6% of the concept's
total restaurant revenues, with alcoholic beverage sales
accounting for the remaining 14.4%.
On The Border Mexican Cafe
On The Border restaurants are full-service, casual Tex-
Mex theme restaurants featuring mesquite-grilled
specialties and traditional Tex-Mex entrees and appetizers
served in generous portions at modest prices. On The
Border restaurants feature an outdoor patio, a full-
service bar, booth and table seating and brick and wood
walls with a Southwest decor. On The Border restaurants
also offer enthusiastic table service intended to minimize
customer waiting time and facilitate table turnover while
simultaneously providing customers with a satisfying
casual dining experience.
Entree selections range in menu price from $5.55 to
$12.99, with the average revenue per meal, including
alcoholic beverages, approximating $11.36 per person.
During the year ended June 24, 1998, food and non-
alcoholic beverage sales constituted approximately 78.3%
of the concept's total restaurant revenues, with alcoholic
beverage sales accounting for the remaining 21.7%.
Cozymel's Coastal Mexican Grill
Cozymel's restaurants are casual, upscale authentic
Yucatan restaurants featuring fish, chicken, beef and pork
entrees, appetizers, desserts and a full-service bar
featuring a wide variety of specialty frozen beverages.
Cozymel's restaurants offer an authentic "Yucatan
vacation" atmosphere, which includes an outdoor patio.
Entree selections range in menu price from $5.49 to
$12.99 with the average revenue per meal, including
alcoholic beverages, approximating $13.36 per person.
During the year ended June 24, 1998, food and non-
alcoholic beverage sales constituted approximately 74.8%
of the concept's total restaurant revenues, with alcoholic
beverages accounting for the remaining 25.2%.
Maggiano's Little Italy
Maggiano's restaurants are designed as classic re-
creations of a New York City pre-war "Little Italy" dinner
house. Each of the Maggiano's restaurants is a casual,
full-service Italian restaurant with a full lunch and
dinner menu, a family-style menu, and banquet facilities,
offering southern Italian appetizers, homemade bread,
large portions of pasta, chicken, seafood, veal and steak,
and a full range of alcoholic beverages. Entree
selections range in menu price from $6.95 to $29.95, with
the average revenue per meal, including alcoholic
beverages, approximating $23.23 per person. During the
year ended June 24, 1998, food and non-alcoholic beverage
sales constituted approximately 79.3% of the concept's
total restaurant revenues, with alcoholic beverage sales
accounting for the remaining 20.7%.
Corner Bakery
The Corner Bakery is designed as a retail bakery in the
traditional, Old World bread bakery style. The Corner
Bakery offers handmade hearth-baked loaves, rolls,
muffins, brownies, cookies and specialty items all of
which are created fresh daily by artisan bakers. The
breads offered by the Corner Bakery include baguettes,
crusty country breads, country and specialty breads such
as raisin-pecan, Kalamata olive, chocolate sour-cherry,
cranberry-orange, multi-grain harvest, and ryes. In
addition, the Corner Bakery also offers pizza, sandwiches,
soups and salads.
While retaining an atmosphere of a working Old World
bakery, the Corner Bakery exemplifies casual elegance,
with most bakeries having both indoor and outdoor seating.
In addition to breads, breakfast and dessert sweets,
featured in the restaurants are chef-prepared fresh
salads, soups, sandwiches and pizzas. New savory foods,
breads and sweets are created seasonally to take advantage
of the highest quality ingredients available. The Corner
Bakery's catering group offers a wide range of gift
baskets, trays and lunch boxes for any scale from large
corporate events to a small, personal brunch or catered
dinner. Prices for menu items range from $1.00 to $7.95
with the average revenue per meal, including alcoholic
beverages, approximating $7.07 per person. During the
year ended June 24, 1998, food and non-alcoholic beverage
sales constituted approximately 99.9% of the concept's
total restaurant revenues, with alcoholic beverages
accounting for the remaining .1%.
Eatzi's Market and Bakery
Eatzi's is a home meal replacement retail store which
offers customers almost everything in the meal spectrum,
from fresh produce and raw meats and seafood to high-
quality, chef-prepared meals-to-go. Eatzi's also provides
a tremendous variety of "made from scratch" breads and
pastries along with dry groceries, deli meats and cheeses,
made-to-order salads and sandwiches, and fresh cut
flowers. Large selections of non-alcoholic beverages,
wine, and "create your own six-pack" beer are available to
complete the meal.
Eatzi's features an abundance of fresh, high-quality
meals, openly presented in distinctive areas, replicating
an energetic European marketplace with an exhibition
kitchen and bakery. The circular chef's display case is
the focal point of the store designed to channel customer
traffic around to other departments. There is limited
indoor and outdoor seating since the emphasis is on take-
out purchases. The chefs are professionally dressed in
white chef's coats and hats with black and white
houndstooth pants. Retail service personnel wear black
pants, white, banded collar shirts and green aprons.
Emphasis is placed on restaurant-quality cuisine,
prepared fresh daily by highly skilled and culinary-
trained chefs using Eatzi's unique recipes. Certain
designated menu items are rotated periodically to provide
variety and to augment the core menu. Corporate chefs are
constantly developing and testing new recipes to ensure
high-quality and ample variety in addition to keeping
ahead of the customer's changing taste profiles.
Individual meal selections range in price from $3.99 to
$10.99 with the average revenue per purchase, including
alcoholic beverages, approximating $15.00. During the
year ended June 24, 1998, food and non-alcoholic beverage
sales constituted 94.7% of the concept's total revenues,
with alcoholic beverages accounting for the remaining
5.3%.
Big Bowl
Big Bowl features contemporary Asian cuisine prepared
with fresh ingredients in a casual, vibrant atmosphere.
Big Bowl is distinguished by its authentic, full-flavored
menu that features five kinds of fresh noodles, chicken
pot stickers and dumplings, hand-rolled summer rolls,
seasonal stir-fry dishes featuring local produce, wok-
seared fish, and signature beverages, such as "homemade"
fresh ginger ale and tropical cocktails. Big Bowl's focus
on quality means garlic, ginger and lemon grass are
chopped daily, lemon juice is hand squeezed, and peanut
sauce is prepared with home-roasted peanuts. Big Bowl's
flavorful broths, curry pastes, dip sauces and condiments
are made from scratch. Big Bowl's interactive stir-fry
bar allows the guests to help themselves to a "Farmers'
Market" array of vegetables to be wok-cooked with their
own choice of sauces and meats with noodles or rice.
While honoring its Asian culinary tradition, Big Bowl
strives to deliver fine quality at great value, assisted
by a service team carefully trained to guide guests
through this new culinary experience. Entree selections
range in menu price from $6.95 to $12.95, with the average
revenue per meal, including alcoholic beverages,
approximating $16.46 per person. During the year ended
June 24, 1998, food and non-alcoholic beverage sales
constituted approximately 87.5% of the concept's total
restaurant revenues, with alcoholic beverage sales
accounting for the remaining 12.5%.
Wildfire
Wildfire restaurants are authentic 1940's style steak
houses featuring an open kitchen consisting of a hardwood
burning oven and rotisserie. Each of the Wildfire
restaurants is a casual, full-service restaurant offering
broiled steaks, chops, fresh seafood, barbecued ribs,
pizza, spit-roasted chicken, salads to share, and a full
line of cocktails with a complete wine list to complement
the menu. Entree selections range from $12.95 to $26.95,
with the average revenue per meal, including alcoholic
beverages, approximating $28.84 per person. During the
year ended June 24, 1998, food and non-alcoholic beverage
sales constituted approximately 77.5% of the concept's
total restaurant revenues, with alcoholic beverages
accounting for the remaining 22.5%.
Restaurant Locations
At June 24, 1998, the Company's system of company-
operated, joint venture and franchised units included 806
restaurants located in 46 states, Washington, D.C.,
Australia, Canada, China, Egypt, Great Britain, France,
Indonesia, Kuwait, Malaysia, Mexico, Peru, Philippines,
Puerto Rico, Singapore, South Korea, and United Arab
Emirates. The Company's portfolio of restaurants is
illustrated below:
Chili's:
Company-Operated 414
Franchise 159
Macaroni Grill:
Company-Operated 111
Franchise 2
On The Border:
Company-Operated 50
Franchise 15
Cozymel's 12
Maggiano's 7
Corner Bakery 30
Eatzi's 3
Big Bowl 2
Wildfire 1
TOTAL 806
The 573 Chili's restaurants include domestic locations
in 46 states and Washington, D.C. and foreign
locations in 16 countries. The 113 Macaroni Grill
restaurants include domestic locations in 33 states and
foreign locations in Canada. The On The Border, Cozymel's,
Maggiano's, Corner Bakery, Big Bowl, and Wildfire
restaurants, and Eatzi's markets, are located exclusively
within the United States in 23, 8, 4, 7, 1, 1, and 2
states, respectively.
Business Development
The Company's long-term objective is to continue
expansion of its restaurant concepts by opening
Company-operated units in strategically desirable markets.
The Company intends to concentrate on development of
certain identified markets to achieve penetration levels
deemed desirable by the Company in order to improve the
Company's competitive position, marketing potential and
profitability. Expansion efforts will be focused not only
on major metropolitan areas in the United States but also
on smaller market areas and nontraditional locations (such
as airports, kiosks, and food courts) which can adequately
support any of the Company's restaurant concepts.
The Company considers the restaurant site selection
process critical to its long-term success and devotes
significant effort to the investigation of new locations
utilizing a variety of sophisticated analytical techniques.
The site selection process focuses on a variety of factors
including: trading-area demographics such as target
population density and household income levels; an
evaluation of site characteristics such as visibility,
accessibility and traffic volume; proximity to activity
centers such as shopping malls, hotel/motel complexes and
offices; and an analysis of the potential competition.
Members of management inspect and approve each restaurant
site prior to its acquisition.
The Company periodically reevaluates restaurant sites
to ensure that site selection attributes have not
deteriorated below minimum standards. In the event site
deterioration were to occur, the Company makes a concerted
effort to improve the restaurant's performance by providing
physical, operating and marketing enhancements unique to
each restaurant's situation. If efforts to restore the
restaurant's performance to acceptable minimum standards
are unsuccessful, the Company considers relocation to a
proximate, more desirable site, or evaluates closing the
restaurant if the Company's criteria, such as return on
investment and area demographic data do not support a
relocation. Since inception, the Company has closed 19
restaurants, including 4 in fiscal 1998, which were
performing below the Company's standards primarily due to
declining trading-area demographics. The Company operates
pursuant to a strategic plan targeted to support the
Company's long-term growth objectives, with a focus on
continued development of those restaurant concepts that
have the greatest return potential for the Company and its
shareholders.
The following table illustrates the system-wide
restaurants opened in fiscal 1998 and the planned openings
in fiscal 1999:
Fiscal 1998 Fiscal 1999
Openings Projected Openings
Chili's:
Company-Operated 22 30
Franchise 15 34
Macaroni Grill:
Company-Operated 14 18
Franchise 0 2
On The Border:
Company-Operated 16 18
Franchise 8 8
Cozymel's 0 1
Maggiano's 2 2
Corner Bakery 15 25
Eatzi's 2 3
Big Bowl 0 2
Wildfire 0 2
TOTAL 94 145
The Company anticipates that some of the fiscal 1999
projected restaurant openings will be constructed pursuant
to "build-to-suit" agreements, in which the lessor
contributes the land cost and all, or substantially all, of
the building construction costs. In other cases, the
Company may either lease or own the land (paying for any
owned land from its own funds) and either lease or own the
building, furniture, fixtures and equipment (paying for any
owned items from its own funds).
The following table illustrates the approximate average
capital investment for a typical unit in the Company's
primary restaurant concepts:
Chili's Macaroni Grill Corner Bakery On The Border Cozymel's Maggiano's
Land $ 650,000 $ 900,000 $ 800,000 $ 800,000 $1,000,000 $3,500,000
Building 1,050,000 1,300,000 750,000 1,300,000 1,300,000 3,000,000
Furniture &
Equipment 430,000 525,000 350,000 600,000 600,000 1,000,000
Other 80,000 100,000 70,000 90,000 100,000 350,000
TOTAL $2,210,000 $2,825,000 $1,970,000 $2,790,000 $3,000,000 $7,850,000
The specific rate at which the Company is able to open
new restaurants is determined by its success in locating
satisfactory sites, negotiating acceptable lease or
purchase terms, securing appropriate local governmental
permits and approvals, and by its capacity to supervise
construction and recruit and train management personnel.
Joint Venture and Franchise Operations
The Company intends to continue its expansion through
joint venture and franchise development, both domestically
and internationally. During the year ended June 24, 1998,
15 new Chili's and 8 On The Border franchised restaurants
were opened.
The Company has entered into international franchise
agreements which will bring Chili's to Bahrain, Venezuela,
Saudi Arabia, Lebanon, Guam, and Austria and Macaroni Grill
to the United Kingdom and Mexico in the 1999 fiscal year.
In fiscal 1998, the first Chili's restaurants opened in
China (July 1997), Peru (July 1997), and Kuwait (January
1998).
The Company intends to selectively pursue international
expansion and is currently contemplating development in
other countries. A typical franchise development agreement
provides for payment of area development and initial
franchise fees in addition to subsequent royalty and
advertising fees based on the gross sales of each
restaurant. Future franchise development agreements are
expected to remain limited to enterprises having
significant experience as restaurant operators and proven
financial ability to develop multi-unit operations.
The Company has previously entered into agreements for
research and development activities related to the testing
of new restaurant concepts and has a significant equity
interest in such ventures, which interests are typically
accounted for under the equity method. The Company
currently owns a 50% interest in the four Eatzi's stores
currently operating in Dallas and Houston, Texas, Atlanta,
Georgia and Westbury, New York. In addition, the Company
holds a 50% interest in the legal entity owning the two Big
Bowl restaurants located in Chicago, Illinois and a 13%
interest in the legal entity owning the two Wildfire
restaurants (one of which was opened subsequent to the end
of the fiscal year in August 1998) located in Chicago,
Illinois.
At June 24, 1998, 41 total joint venture or franchise
development agreements existed. The Company anticipates
that an additional 34 franchised Chili's, two franchised
Macaroni Grill, and eight franchised On The Border
restaurants will be opened during fiscal 1999. In
addition, the Company anticipates that three Eatzi's
stores, two Big Bowl restaurants, and two Wildfire
restaurants will be opened during fiscal 1999.
Restaurant Management
The Company's philosophy to maintain and operate each
concept as a distinct and separate entity ensures that the
culture, recruitment and training programs and unique
operating environments are preserved. These factors are
critical to the viability of each concept. Each concept is
directed by a president and one or more concept vice
presidents and senior vice presidents.
The Company's restaurant management structure varies by
concept. The individual restaurants themselves are led by
a management team including a general manager and between
two to five additional managers. The level of restaurant
supervision depends upon the operating complexity and sales
volume of each concept. An area director/supervisor is
responsible for the supervision of, on average, three to
seven restaurants. For those concepts with a significant
number of units within a geographical region, additional
levels of management may be provided.
The Company believes that there is a high correlation
between the quality of restaurant management and the long-
term success of a concept. In that regard, the Company
encourages increased tenure at all management positions
through various short and long-term incentive programs,
including equity ownership. These programs, coupled with a
general management philosophy emphasizing quality of life,
have enabled the Company to attract and retain management
employees at levels above the industry norm.
The Company ensures consistent quality standards in all
concepts through the issuance of operations manuals
covering all elements of operations and food and beverage
manuals which provide guidance for preparation of Company
formulated recipes. Routine visitation to the restaurants
by all levels of supervision enforce strict adherence to
Company standards.
The director of training for each concept is
responsible for maintaining each concept's operational
training program. The training program includes a four to
five month training period for restaurant management
trainees, a continuing management training process for
managers and supervisors, and training teams consisting of
groups of employees experienced in all facets of restaurant
operations that train employees to open new restaurants.
The training teams typically begin on-site training at a
new restaurant seven to ten days prior to opening and
remain on location two to three weeks following the opening
to ensure the smooth transition to operating personnel.
Purchasing
The Company's ability to maintain consistent quality of
products throughout each of its restaurant concepts depends
upon acquiring food products and related items from
reliable sources. Suppliers are pre-approved by the
Company and are required along with the restaurants to
adhere to strict product specifications established through
the Company's quality assurance program to ensure that high
quality, wholesome food and beverage products are served in
the restaurants. The Company negotiates directly with the
major suppliers to obtain competitive prices and uses
purchase commitment contracts to stabilize the potentially
volatile pricing associated with certain commodity items.
All essential food and beverage products are available, or
upon short notice can be made available, from alternative
qualified suppliers in all cities in which the Company's
restaurants are located. Because of the relatively rapid
turnover of perishable food products, inventories in the
restaurants, consisting primarily of food, beverages and
supplies, have a modest aggregate dollar value in relation
to revenues.
Advertising and Marketing
The Company's concepts generally focus on the 18 to 54
year old age group, which constitutes approximately half of
the United States population. Members of this population
segment grew up on fast food, but the Company believes
that, with increasing maturity, they prefer a more adult,
upscale dining experience. To attract this target group,
the Company relies primarily on television, radio, direct
mail advertising and word-of-mouth information communicated
by customers.
The Company's franchise agreements require advertising
contributions to the Company to be used exclusively for the
purpose of maintaining, directly administering and
preparing standardized advertising and promotional
activities. Franchisees spend additional amounts on local
advertising when approved by the Company.
Employees
At June 24, 1998, the Company employed approximately
53,000 persons, of whom approximately 830 were corporate
personnel, 3,200 were restaurant area directors, managers
or trainees and 49,000 were employed in non-management
restaurant positions. The executive officers of the
Company have an average of approximately 19 years of
experience in the restaurant industry.
The Company considers its employee relations to be good
and believes that its employee turnover rate is
commensurate with the industry average. Most employees,
other than restaurant management and corporate personnel,
are paid on an hourly basis. The Company believes that it
provides working conditions and wages that compare
favorably with those of its competition. The Company's
employees are not covered by any collective bargaining
agreements.
Trademarks
The Company has registered, among other marks, "Big
Bowl", "Brinker International", "Chili's", "Chili's Too",
"Chili's Bar & Bites", "Chili's Southwest Grill & Bar",
"Corner Bakery", "Cozymel's", "Cozymel's Coastal Mexican
Grill", "Eatzi's", "Eatzi's Market & Bakery", "Romano's
Macaroni Grill", "Macaroni Grill", "Maggiano's Little
Italy", "On The Border", "On The Border Mexican Cafe", and
"Wildfire" as trademarks with the United States Patent and
Trademark Office.
Risk Factors/Forward-Looking Statements
The Company wishes to caution readers that the
following important factors, among others, could cause the
actual results of the Company to differ materially from
those indicated by forward-looking statements contained
herein regarding future economic performance, restaurant
openings, operating margins, the availability of acceptable
real estate locations for new restaurants, the sufficiency
of the Company's cash balances and cash generated from
operating and financing activities for the Company's future
liquidity and capital resource needs, and other matters.
Except for historical information, matters discussed in
such statements are forward-looking statements that involve
risks and uncertainties.
Competition. The restaurant business is highly competitive
with respect to price, service, restaurant location and
food quality, and is often affected by changes in consumer
tastes, economic conditions, population and traffic
patterns. The Company competes within each market with
locally-owned restaurants as well as national and regional
restaurant chains, some of which operate more restaurants
and have greater financial resources and longer operating
histories than the Company. There is active competition
for management personnel and for attractive commercial real
estate sites suitable for restaurants. In addition,
factors such as inflation, increased food, labor and
benefits costs, and difficulty in attracting hourly
employees may adversely affect the restaurant industry in
general and the Company's restaurants in particular.
Seasonality. The Company's sales volumes fluctuate
seasonally, and are generally higher in the summer months
and lower in the winter months.
Governmental Regulations. Each of the Company's
restaurants is subject to licensing and regulation by
alcoholic beverage control, health, sanitation, safety and
fire agencies in the state and/or municipality in which the
restaurant is located. The Company has not encountered any
difficulties or failures in obtaining the required licenses
or approvals that could delay or prevent the opening of a
new restaurant and does not, at this time, anticipate any.
The Company is subject to federal and state
environmental regulations, but these have not had a
material negative effect on the Company's operations. More
stringent and varied requirements of local and state
governmental bodies with respect to zoning, land use and
environmental factors could delay or prevent development of
new restaurants in particular locations. The Company is
subject to the Fair Labor Standards Act which governs such
matters as minimum wages, overtime and other working
conditions, along with the American With Disabilities Act
and various family leave mandates. The Company does not
expect any further significant increases in payroll
expenses as a result of the recently-mandated increases in
the minimum wage, but is uncertain of the repercussion, if
any, on other expenses as vendors are impacted by higher
minimum wage standards.
Inflation. The Company has not experienced a
significant overall impact from inflation. If operating
expenses increase due to inflation, the Company recovers
increased costs by increasing menu prices. However,
competition may prohibit such increases in menu prices.
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 closely assessing 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. Furthermore,
information has been provided to all franchise business
partners regarding the potential business risks associated
with the Year 2000 issue. The 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.
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.
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 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 effect
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.
Other Risk Factors. Other risk factors that could
cause the Company's actual results to differ material from
those indicated in the forward-looking statements include,
without limitation, changes in economic conditions,
consumer perceptions of food safety, changes in consumer
tastes, governmental monetary policies, changes in
demographic trends, availability of employees, and weather
and other acts of God.
Item 2. PROPERTIES.
The following table illustrates the approximate average
dining capacity for each current prototypical unit in
primary restaurant concepts:
Chili's Macaroni Grill On The Border Cozymel's Maggiano's
Square Feet 5,547-5,612 6,702-8,679 7,175-8,034 9,429 13,300-19,306
Dining Seats 203-214 244-300 222-262 422 571-742
Dining Tables 45-51 54-69 55-62 94 100-164
Corner Bakery's size and dining capacity varies based
upon whether it is an in-line or kiosk location. For a
Corner Bakery located in a kiosk, the square footage ranges
from 150 to 2000 square feet, the number of dining seats
range from 0 to 50, and the number of dining tables range
from 0 to 15. For in-line Corner Bakery locations, the
square footage ranges from 3,500 to 4,500, the number of
dining seats range from 80 to 130, and the number of dining
tables range from 30 to 50.
Certain of the Company's restaurants are leased for an
initial term of 5 to 30 years, with renewal terms of 1 to
30 years. The leases typically provide for a fixed rental
plus percentage rentals based on sales volume. At June 24,
1998, the Company owned the land and/or building for 424 of
the 624 Company-operated restaurants. The Company
considers that its properties are suitable, adequate, well-
maintained and sufficient for the operations contemplated.
The Company leases warehouse space totalling
approximately 26,300 square feet in Dallas, Texas, which it
uses for storage of equipment and supplies. The Company
purchased an office building containing approximately
105,000 square feet for its corporate headquarters in July
1989. This office building was expanded in May 1997 by the
addition of a 2,470 square foot facility used for menu
development activities. In January 1996, the Company
purchased an additional office complex containing three (3)
buildings and approximately 198,000 square feet for the
expansion of its corporate headquarters. Approximately
68,400 square feet of this complex is currently utilized by
the Company, with the remaining 129,600 square feet under
lease, listed for lease to third party tenants, or reserved
for future expansion of the Company headquarters. In
November 1997, the Company sold the office complex and is
leasing it back under a 20-year operating lease.
Item 3. LEGAL PROCEEDINGS.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS.
The Company's Common Stock is traded on the New York
Stock Exchange ("NYSE") under the symbol "EAT". Bid prices
quoted represent interdealer prices without adjustment for
retail markup, markdown and/or commissions, and may not
necessarily represent actual transactions. The following
table sets forth the quarterly high and low closing sales
prices of the Common Stock, as reported by the NYSE.
Fiscal year ended June 24, 1998:
First Quarter 17 1/2 13 13/16
Second Quarter 17 13/16 13 15/16
Third Quarter 21 5/8 15 1/16
Fourth Quarter 24 5/16 18 9/16
Fiscal year ended June 25, 1997:
First Quarter 17 1/2 13
Second Quarter 18 3/4 16 1/8
Third Quarter 16 5/8 11
Fourth Quarter 14 1/4 11
As of September 1, 1998, there were 1,553 holders of
record of the Company's Common Stock.
The Company has never paid cash dividends on its Common
Stock and does not currently intend to do so as profits are
reinvested into the Company to fund expansion of its
restaurant business. Payment of dividends in the future
will depend upon the Company's growth, profitability,
financial condition and other factors which the Board of
Directors may deem relevant.
During the three-year period ending on September 1,
1998, the Company issued no securities which were not
registered under the Securities Act of 1933, as amended.
Item 6. SELECTED FINANCIAL DATA.
"Selected Financial Data" on page 31 of the Company's
1998 Annual Report to Shareholders is incorporated herein
by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
"Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 32 through 39
of the Company's 1998 Annual Report to Shareholders is
incorporated herein by reference.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS.
"Quantitative and Qualitative Disclosures About Market
Risks" contained within "Management's Discussion and
Analysis of Financial Condition and Results of Operations"
on page 37 of the Company's 1998 Annual Report to
Shareholders is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a)(1).
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
"Directors and Executive Officers" on pages 4 through 9
and "Section 16(a) Beneficial Ownership Reporting
Compliance" on page 15 of the Company's Proxy Statement
dated September 18, 1998, for the annual meeting of
shareholders on October 29, 1998, are incorporated herein
by reference.
Item 11. COMPENSATION INFORMATION.
"Executive Compensation" on pages 9 through 11 and
"Report of the Compensation Committee" on pages 11 through
14 of the Company's Proxy Statement dated September 18,
1998, for the annual meeting of shareholders on October
29, 1998, are incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
"Principal Shareholders" on page 2 and "Security
Ownership of Management and Election of Directors" on
pages 3 through 4 of the Company's Proxy Statement dated
September 18, 1998, for the annual meeting of shareholders
on October 29, 1998, are incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
"Certain Transactions" on page 15 of the Company's
Proxy Statement dated September 18, 1998, for the annual
meeting of shareholders on October 29, 1998, is
incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements.
Reference is made to the Index to Financial Statements
attached hereto on page 18 for a listing of all financial
statements incorporated herein from the Company's 1998
Annual Report to Shareholders.
(a) (2) Financial Statement Schedules.
None.
(a) (3) Exhibits.
Reference is made to the Exhibit Index preceding the
exhibits attached hereto on page E-1 for a list of all
exhibits filed as a part of this Report.
(b) Reports on Form 8-K
The Company was not required to file a current report
on Form 8-K during the three months ended June 24, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BRINKER INTERNATIONAL, INC.,
a Delaware corporation
By:
Russell G. Owens, Executive Vice
President and Chief Financial
and Strategic Officer
Dated: September 18, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
of the registrant and in the capacities indicated on
September 18, 1998.
Name Title
___________________ President, Chief Executive
Ronald A. McDougall Officer and Director
(Principal Executive Officer)
_________________ Executive Vice President,
Russell G. Owens and Chief Financial and
Strategic Officer
(Principal Financial and
Accounting Officer)
___________________ Chairman of the Board
Norman E. Brinker
___________________ Director
Donald J. Carty
___________________ Director
Gerard V. Centioli
___________________ Director
Dan W. Cook, III
___________________ Director
Rae F. Evans
_____________________ Director
Marvin J. Girouard
_____________________ Director
J.M. Haggar, Jr.
_____________________ Director
Frederick S. Humphries
______________________ Director
Ronald Kirk
_______________________ Director
Jeffrey A. Marcus
_______________________ Director
James E. Oesterreicher
_______________________ Director
Roger T. Staubach
INDEX TO FINANCIAL STATEMENTS
The following is a listing of the financial statements which are
incorporated herein by reference. The financial statements of
the Company included in the Company's 1998 Annual Report to
Shareholders are incorporated herein by reference in Item 8.
1998 Annual
Report Page
Consolidated Balance Sheets - 40-41
June 24, 1998 and June 25, 1997
Consolidated Statements of Income - 42
Years Ended June 24, 1998, June 25, 1997
and June 26, 1996
Consolidated Statements of Shareholders' 43
Equity - Years Ended June 24, 1998,
June 25, 1997 and June 26, 1996
Consolidated Statements of Cash Flows - 44
Years Ended June 24, 1998, June 25, 1997
and June 26, 1996
Notes to Consolidated Financial Statements 45-58
Independent Auditors' Report 59
All schedules are omitted as the required information is
inapplicable or the information is presented in the
financial statements or related notes.
INDEX TO EXHIBITS
Exhibit
3(a) Certificate of Incorporation of the registrant, as
amended. (1)
3(b) Bylaws of the registrant. (1)
10(a) Registrant's 1983 Incentive Stock Option Plan. (2)
10(b) Registrant's 1991 Stock Option Plan for Non-Employee
Directors and Consultants. (3)
10(c) Registrant's 1992 Incentive Stock Option Plan. (3)
13 1998 Annual Report to Shareholders. (5)
21 Subsidiaries of the registrant. (4)
23 Independent Auditors' Consent. (4)
27(a) Financial Data Schedule. (6)
27(b) Restated Financial Data Schedule as of and for the year
ended June 25, 1997. (6)
27(c) Restated Financial Data Schedule as of and for the year
ended June 26, 1996. (6)
99 Proxy Statement of registrant dated September 18, 1998. (5)
(1) Filed as an exhibit to annual report on Form 10-K for
year ended June 28, 1995 and incorporated herein by
reference.
(2) Filed as an exhibit to annual report on Form 10-K for
year ended June 26, 1996 and incorporated herein by
referenced.
(3) Filed as an exhibit to annual report on Form 10-K for
year ended June 25, 1997 and incorporated herein by
reference.
(4) Filed herewith.
(5) Portions filed herewith, to the extent indicated herein.
(6) Filed with EDGAR version.
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
EXHIBIT 21
BRINKER INTERNATIONAL, INC., A DELAWARE CORPORATION
SUBSIDIARIES
REGISTRANT'S subsidiaries operate full-service restaurants in
various locations throughout the United States under the names
Chili's Grill & Bar, Romano's Macaroni Grill, On The Border
Mexican Cafe, Cozymel's Coastal Mexican Grill, Maggiano's Little
Italy, Corner Bakery, and a market store and bakery under the
name Eatzi's Market and Bakery.
BRINKER RESTAURANT CORPORATION, a Delaware corporation
MAGGIANO'S/CORNER BAKERY, INC., an Illinois corporation
BRINKER ALABAMA, INC., a Delaware corporation
BRINKER ARKANSAS, INC., a Delaware corporation
BRINKER AUSTRALIA PTY LIMITED, an Australian corporation
BRINKER CONNECTICUT CORPORATION, a Delaware corporation
BRINKER DELAWARE, INC., a Delaware corporation
BRINKER FLORIDA, INC., a Delaware corporation
BRINKER GEORGIA, INC., a Delaware corporation
BRINKER INDIANA, INC., a Delaware corporation
BRINKER IOWA, INC., a Delaware corporation
BRINKER KENTUCKY, INC., a Delaware corporation
BRINKER LOUISIANA, INC., a Delaware corporation
BRINKER MASSACHUSETTS CORPORATION, a Delaware corporation
BRINKER MISSOURI, INC., a Delaware corporation
BRINKER MISSISSIPPI, INC., a Delaware corporation
BRINKER OF MONTGOMERY COUNTY, INC., a Maryland corporation
BRINKER NEVADA, INC., a Nevada corporation
BRINKER NEW JERSEY, INC., a Delaware corporation
BRINKER NORTH CAROLINA, INC., a Delaware corporation
BRINKER OHIO, INC., a Delaware corporation
BRINKER OKLAHOMA, INC., a Delaware corporation
BRINKER SOUTH CAROLINA, INC., a Delaware corporation
BRINKER UK CORPORATION, a Delaware corporation
BRINKER VIRGINIA, INC., a Delaware corporation
BRINKER TEXAS, L.P., a Texas limited partnership
CHILI'S BEVERAGE COMPANY, INC., a Texas corporation
CHILI'S, INC., a Tennessee corporation
CHILI'S OF MINNESOTA, INC., a Minnesota corporation
CHILI'S OF KANSAS, INC., a Kansas corporation
BRINKER PENN TRUST, a Pennsylvania business trust
CHILI'S OF WEST VIRGINIA, INC., a West Virginia corporation
CHILI'S OF WISCONSIN, INC., a Wisconsin corporation
BRINKER FREEHOLD, INC., a New Jersey corporation
MAGGIANO'S OF TYSON'S, INC., a Virginia corporation
ROMANO'S OF ANNAPOLIS, INC., a Maryland corporation
CHILI'S OF BEL AIR, INC., a Maryland corporation
CHILI'S OF MARYLAND, INC., a Maryland corporation
BRINKER OF BALTIMORE COUNTY, INC., a Maryland corporation
BRINKER OF HOWARD COUNTY, INC., a Maryland corporation
BRINKER RHODE ISLAND, INC., a Rhode Island corporation
BRINKER OF D.C., INC., a Delaware corporation
CHILI'S, INC., a Delaware corporation
EATZI'S CORPORATION, a Delaware corporation
EATZI'S INVESTMENT COMPANY, a Delaware corporation
EATZI'S TEXAS HOLDING CORPORATION, a Delaware corporation
EATZI'S TEXAS, L.P., a Texas limited partnership
EATZI'S BEVERAGE COMPANY, a Texas corporation
EATZI'S MASSACHUSETTS BEVERAGE CORPORATION, a Massachusetts
corporation
EATZI'S OF MONTGOMERY COUNTY, INC., a Delaware corporation
MAGGIANO'S/CORNER BAKERY BEVERAGE COMPANY, a Texas corporation
MAGGIANO'S/CORNER BAKERY HOLDING CORPORATION, a Delaware
corporation
MAGGIANO'S/CORNER BAKERY, L.P., a Texas limited partnership
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Brinker International, Inc.:
We consent to incorporation by reference in Registration
Statement Nos. 33-61594, 33-56491, and 333-02201 on Form S-8
and Nos. 33-53965, 33-55181, 33-63551, 333-00169, and 333-
07481 on Form S-3, of Brinker International, Inc. of our
report dated July 29, 1998, relating to the consolidated
balance sheets of Brinker International, Inc. and
subsidiaries 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 years in the three-
year period ended June 24, 1998, which report is
incorporated by reference in the June 24, 1998 annual report
on Form 10-K of Brinker International, Inc.
/KPMG Peat Marwick LLP
Dallas, Texas
September 18, 1998
5
1000
12-MOS
JUN-24-1998
JUN-24-1998
31,101
51
20,938
193
13,774
105,497
1,046,397
337,825
989,383
198,067
147,288
0
0
7,815
585,924
989,383
1,559,238
1,574,414
426,558
1,378,469
0
608
11,025
105,458
36,383
69,075
0
0
0
69,075
1.05
1.02
EXHIBIT 99
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as to the
number of shares of Common Stock of the Company beneficially
owned by the principal shareholders of the Company.
Beneficial Ownership
Number of
Name and Address Shares Percent
The Capital Group Companies, Inc. 6,300,000 (1) 9.57%
333 South Hope Street
Los Angeles, California 90071
Capital Guardian Trust Company,
Capital International Limited,
and Capital International S.A. 5,427,460 (2) 8.24%
333 South Hope Street
Los Angeles, California 90071
FMR Corp. 5,107,400 (3) 7.76%
82 Devonshire Street
Boston, Massachusetts 02109
________________
(1) Based on information contained in Schedule 13G dated as
of December 31, 1997.
(2) Based on information contained in Schedule 13G dated as
of December 31, 1997. The listed companies are affiliated
entities.
(3) Based on information contained in Schedule 13G dated as
of December 31, 1997.
_____________
SECURITY OWNERSHIP OF MANAGEMENT
AND ELECTION OF DIRECTORS
Twelve (12) directors are to be elected at the meeting.
Each nominee will be elected to hold office until the next annual
meeting of the shareholders or until his or her successor is
elected and qualified. To be elected a director, each nominee
must receive a plurality of all of the votes cast at the meeting
for the election of directors. Should any nominee become unable
or unwilling to accept nomination or election, the proxy holders
may vote the proxies for the election, in his or her stead, of
any other person the Board of Directors may recommend. All
nominees have expressed their intention to serve the entire term
for which election is sought. The following table sets forth
certain information concerning security ownership of management
and nominees for election as directors of the Company:
Number of Shares Number Attributable to
of Common Stock Options Exercisable Percent
Beneficially Owned Within 60 Days of of
Name as of September 1, 1998 (1)(2) September 1, 1998 Class
Norman E. Brinker 1,984,009 (3) 1,183,750 2.96%
Douglas H. Brooks 414,294 327,470 *
Gerard V. Centioli 64,462 (4) 60,000 *
Ronald A. McDougall 965,022 940,000 1.45%
Russell G. Owens 136,469 115,447 *
Roger F. Thomson 176,000 172,500 *
Donald J. Carty 10,000 -0- *
Dan W. Cook, III -0- -0- *
Marvin J. Girouard -0- -0- *
J.M. Haggar, Jr. 77,687 23,917 *
Frederick S. Humphries 18,413 17,333 *
Ronald Kirk -0- -0- *
Jeffrey A. Marcus -0- -0- *
James E. Oesterreicher 20,500 20,000 *
Roger T. Staubach 31,500 21,000 *
All executive officers
and directors as a
group (20 persons) 4,225,094 3,143,970 6.12%
________________________
* Less than one percent (1%)
(1) Beneficial ownership has been determined in accordance
with the rules of the Securities and Exchange Commission.
Except as noted, and except for any community property
interests owned by spouses, the listed individuals have sole
investment power and sole voting power as to all shares of
stock of which they are identified as being the beneficial
owners.
(2) Includes shares of Common Stock which may be acquired
by exercise of options vested, or vesting within 60 days of
September 1, 1998, under the Company's 1983 Incentive Stock
Option Plan, 1984 Non-Qualified Stock Option Plan, 1992
Incentive Stock Option Plan and 1991 Stock Option Plan for
Non-Employee Directors and Consultants, as applicable.
(3) Includes 20,250 shares of Common Stock held of record by a
family trust of which Mr. Brinker is trustee.
(4) Includes 2,000 shares of Common Stock held of record by a
family trust of which Mr. Centioli is trustee.
The Company has established a guideline that all senior
officers of the Company own stock in the Company, believing that
it is important to further encourage and support an ownership
mentality among the senior officers that will continue to align
their personal financial interests with the long-term interests
of the Company's shareholders. Pursuant to the guideline, the
minimum amount of Company Common Stock that a senior officer will
be required to own will be determined by such officer's position
within the Company as well as annual compensation. The Company
has established a program with a third-party lender pursuant to
which the senior officers will be able to obtain financing for
purposes of attaining the stock ownership levels referred to
above. Any loans obtained by such senior officers to finance
such stock acquisitions are facilitated by the Company pursuant
to an agreement in which the senior officer pledges the
underlying stock and future incentive payments which may be
receivable from the Company as security for the loan.
DIRECTORS AND EXECUTIVE OFFICERS
Directors
A brief description of each person nominated to become a
director of the Company is provided below. All nominees are
currently serving as directors of the Company. Each of the
current directors was elected at the last annual meeting of the
Company's shareholders held on November 6, 1997, except Donald J.
Carty, who was appointed to the Board of Directors in June 1998,
and Marvin J. Girouard, who was appointed to the Board of
Directors in September 1998.
Norman E. Brinker, 67, served as Chairman of the Board of
Directors and Chief Executive Officer of the Company from
September 1983 to June 1995, with the exception of a brief period
during which Mr. Brinker was incapacitated due to an injury.
Mr. Brinker continues to serve as Chairman of the Board of
Directors. Mr. Brinker is a member of the Executive and
Nominating Committees of the Company. He was the founder of S&A
Restaurant Corp., having served as its President from February
1966 through May 1977 and as its Chairman of the Board of
Directors and Chief Executive Officer from May 1977 through July
1983. From June 1982 through July 1983, Mr. Brinker served as
Chairman of the Board of Directors and Chief Executive Officer of
Burger King Corporation, while simultaneously occupying the
position of President of The Pillsbury Company Restaurant Group.
Mr. Brinker currently serves as a member of the Board of
Directors of Haggar Clothing Company.
Ronald A. McDougall, 56, was elected President and Chief
Executive Officer of the Company in June 1995 having formerly
held the office of President and Chief Operating Officer since
1986. Mr. McDougall joined the Company in 1983 and served as
Executive Vice President - Marketing and Strategic Development
until his promotion to President. Prior to joining the Company,
Mr. McDougall held senior management positions at Proctor and
Gamble, Sara Lee, The Pillsbury Company and S&A Restaurant Corp.
Mr. McDougall has served as a member of the Board of Directors of
the Company since September 1983 and is a member of the Executive
and Nominating Committees of the Company. Mr. McDougall serves on
the Board of Directors of Excel Communications, Inc.
Gerard V. Centioli, 44, was elected Senior Vice President -
Emerging Concepts President and Chief Executive Officer in April
1997. Mr. Centioli joined the Company as Senior Vice President -
Maggiano's/Corner Bakery Concepts President and Chief Executive
Officer in August 1995 and was named Senior Vice President -
Italian Concepts President and Chief Executive Officer in January
1996. Mr. Centioli previously served as Senior Partner of
Lettuce Entertain You Enterprises, Inc. (restaurants) and
President and Chief Executive Officer of the Maggiano's Little
Italy and The Corner Bakery Divisions. Prior to joining Lettuce
Entertain You Enterprises, Inc. in 1984, Mr. Centioli served as
Vice President - Division President of Collins Foods
International, Inc. Mr. Centioli has served as a member of the
Board of Directors of the Company since November 1995.
Donald J. Carty, 51, was named Chairman, President and Chief
Executive Officer of AMR Corp. and American Airlines, Inc. in May
1998, after serving as President from March 1995 until May 1998.
From 1989 to 1995, he served American and AMR as Executive Vice
President - Finance and Planning. He joined American in 1978 and
held numerous finance and planning positions, with the exception
of a two-year hiatus as President and Chief Executive Officer of
CP Air in Canada. He is a graduate of Queen's University in
Kingston, Ontario and of the Harvard Graduate School of Business
Administration. He serves on the Board of Directors of Dell
Computer Corporation, the Canada - U.S. Foundation for
Educational Exchange, the Greater Dallas Chamber of Commerce and
the Dallas Citizens Council. He was elected to the Board of
Directors in June 1998.
Dan W. Cook, III, 63, is a limited partner with The Goldman
Sachs Group, L.P. (investment banking). Mr. Cook started with
The Goldman Sachs Group, L.P. in 1961 and was a partner when he
retired in 1992. Mr. Cook is a member of the Executive and
Compensation Committees of the Company and has served as a member
of the Board of Directors since October 1997. Mr. Cook also
serves on the Board of Directors for Centex Corporation. Mr.
Cook is a member of the Board of Trustees of Southern Methodist
University as well as Vice-Chair of the Edwin L. Cox School of
Business Executive Board.
Marvin J. Girouard, 59, is the President and Chief Executive
Officer of Pier 1 Imports, Inc., having been elected to the
position of President in August 1988 and Chief Executive Officer
in June 1998. Mr. Girouard also served as Chief Operating
Officer from 1988 to 1998. Mr. Girouard joined Pier 1 Imports in
1975 and has served on its Board of Directors since 1988. He
serves as a Director for Tandy Brands Accessories, Inc. and is a
member of the Executive Committee for the United States Committee
for UNICEF-The United Nations Children's Emergency Fund. Mr.
Girouard has served as a member of the Board of Directors of the
Company since September 1998.
J. M. Haggar, Jr., 73, is currently the owner of J.M.
Haggar, Jr. Investments, a business he has operated since
retiring as Chairman of the Board of Directors of Haggar Clothing
Company in February 1995. Mr. Haggar previously held the
positions of President and Chief Executive Officer of Haggar
Clothing Company until 1991. Mr. Haggar is a member of the
Compensation and Audit Committees of the Company and has served
as a member of the Company's Board of Directors since April 1985.
Frederick S. Humphries, 62, is the President of Florida A&M
University in Tallahassee, Florida, having held this position
since 1985. Prior to joining Florida A&M University,
Dr. Humphries was President of Tennessee State University in
Nashville for over 10 years. Dr. Humphries serves as a member of
the USDA Task Force of 1890 Land-Grant Institutions in addition
to being involved in various civic and community activities.
Dr. Humphries has served on the Board of Directors of the Company
since May 1994 and is a member of the Audit Committee of the
Company. He is also a member of the Board of Directors of Wal-
Mart, Inc.
Ronald Kirk, 44, is currently Mayor of the City of Dallas
and a partner in the law firm of Gardere & Wynne. He was elected
Mayor in 1995, and previously served as Secretary of State of the
State of Texas from 1994 to 1995. Mr. Kirk was engaged in the
private practice of law from 1989 to 1994, served as an Assistant
City Attorney for Dallas from 1983 to 1989 and as a legislative
aide to U.S. Senator Lloyd Bentsen from 1983 to 1989. Mayor Kirk
is an honors graduate of Austin College and earned his law degree
from The University of Texas. Mayor Kirk has served on the Board
of Directors since January 1997 and is a member of the Nominating
Committee of the Company.
Jeffrey A. Marcus, 51, is President and Chief Executive
Officer of Chancellor Media Corporation (radio broadcasting), a
position he has held since May 1998. Previously, Mr. Marcus was
Chairman, President and Chief Executive Officer of Marcus Cable
Company, a company he formed in 1990 after spending more than 20
years in the cable television industry. Mr. Marcus is active in
several civic and charitable organizations. Mr. Marcus has
served on the Board of Directors since January 1997 and is a
member of the Executive Committee of the Company.
James E. Oesterreicher, 57, is the Chairman of the Board and
Chief Executive Officer of J.C. Penney Company, Inc., having been
elected to the position of Chairman of the Board in January 1997
and to the position of Chief Executive Officer in January 1995.
Mr. Oesterreicher served as Vice Chairman of the Board from 1995
to 1997, as President of JCPenney Stores and Catalog from 1992 to
1995 and as Director of JCPenney Stores from 1988 to 1992.
Mr. Oesterreicher has been with the J.C. Penney Company since
1964 where he started as a management trainee. He serves as a
Director for various entities, including Texas Utilities Company,
Presbyterian Healthcare Systems, National Retail Federation,
Circle Ten Council--Boy Scouts of America, National 4-H Council,
National Organization on Disability and March of Dimes Birth
Defects Foundation. He also serves as a member of the Policy
Committee of the Business Roundtable. Mr. Oesterreicher has
served as a member of the Board of Directors of the Company since
May 1994 and is a member of the Compensation and Nominating
Committees of the Company.
Roger T. Staubach, 56, has been Chairman of the Board and
Chief Executive Officer of The Staubach Company, a national real
estate company specializing in tenant representation, since 1982.
He has served as a member of the Board of Directors of the
Company since May 1993 and is a member of the Executive Committee
of the Company. Mr. Staubach is a 1965 graduate of the
U.S. Naval Academy and served four years in the Navy as an
officer. In 1968 he joined the Dallas Cowboys professional
football team as quarterback and was elected to the National
Football League Hall of Fame in 1985. He currently serves on the
Board of Directors of American AAdvantage Funds and International
Home Foods, Inc., and is active in numerous civic, charity and
professional organizations.
Executive Officers
The following persons are executive officers of the Company
who are not nominated to serve on the Company's Board of
Directors:
Douglas H. Brooks, 46, joined the Company as an Assistant
Manager in February 1978 and was promoted to General Manager in
April 1978. In March 1979 Mr. Brooks was promoted to Area
Supervisor and in May 1982 to Regional Director. He was again
promoted in March 1987 to Senior Vice President-Central Region
Operations and to the position of Concept Head and Senior Vice
President - Chili's Operations in June 1992. Mr. Brooks became
Senior Vice President - Chili's Grill & Bar Concept President in
June 1994 and was promoted to his current position of Executive
Vice President and Chief Operating Officer in May 1998.
Leslie Christon, 44, was elected Senior Vice President - On
The Border President in April 1997, having previously served as
Vice President of Operations/On The Border since joining the
Company in July 1996. Prior to this time, Ms. Christon held the
position of Senior Vice President of Operations of Red Lobster
Restaurants from November 1994 to June 1996 and she was with El
Chico Restaurants, Inc. from June 1981 to November 1994. Ms.
Christon serves on the Board of Directors of the Women's
Foodservice Forum and is the past president of the Roundtable for
Women in Foodservice, Inc.
Kenneth D. Dennis, 45, joined the Company as a Manager in
November 1976 and was promoted to General Manager in June 1978.
In February 1979, he became Director of Internal Systems and in
September 1983 became Director of Marketing. Mr. Dennis was
promoted to Vice President of Marketing in August 1986 and to
Senior Vice President of Marketing in August 1993. In February
1997, Mr. Dennis became Senior Vice President - Chief Operating
Officer of Cozymel's and was elected to Senior Vice President -
Cozymel's President in September 1997. Mr. Dennis serves on the
Board of Directors of the Marketing Executives Group and is the
past Co-Chairman.
Todd E. Diener, 41, joined the Company as a Chili's Manager
Trainee in November 1981. In May 1983, Mr. Diener was promoted
to General Manager and in April 1985 to Area Director. He was
promoted to Regional Director in 1987, Regional Vice President in
1989, Senior Vice President/Chief Operating Officer in July 1996
and in May 1998, Mr. Diener was promoted to Senior Vice President
- - Chili's Grill & Bar Concept President.
Carol E. Kirkman, 41, was appointed Executive Vice President
of Human Resources in June 1997 after serving as Senior Vice
President of Human Resources since April 1996. Ms. Kirkman
joined the Company as Corporate Counsel in 1990 and was promoted
to Vice President/Assistant General Counsel in 1994. Ms. Kirkman
was an attorney in private practice in Dallas, Texas, from 1982
until 1987 and worked as a commercial and retail real estate
broker in southern California from 1987 until 1990.
John C. Miller, 43, joined the Company as Vice President-
Special Concepts in September 1987. In October 1988, he was
elected as Vice President - Joint Venture/Franchise and served in
this capacity until August 1993 when he was promoted to Senior
Vice President - New Concept Development. Mr. Miller was named
Senior Vice President - Mexican Concepts in September 1994 and
was subsequently elected Senior Vice President - Mexican Concepts
President in October 1995. In April 1997, Mr. Miller was elected
Senior Vice President - Romano's Macaroni Grill President. Prior
to joining the Company, Mr. Miller worked in various capacities
with the Taco Bueno Division of Unigate Restaurants.
Russell G. Owens, 39, joined the Company in 1983 as
Controller. He was elected Vice President of Planning in 1986
and Vice President of Operations Analysis in 1991. Mr. Owens was
promoted to Senior Vice President of Operations Analysis in 1993
and was named Senior Vice President of Strategic Development -
Italian Concepts in 1996. Mr. Owens was elected Executive Vice
President and Chief Strategic Officer in June 1997 and became
Chief Financial and Strategic Officer in September 1997. Prior
to joining the Company, Mr. Owens worked for the public
accounting firm, Deloitte & Touche.
Roger F. Thomson, 49, joined the Company as Senior Vice
President, General Counsel and Secretary in April 1993 and was
promoted to Executive Vice President, General Counsel and
Secretary in March 1994. In June 1996, Mr. Thomson was promoted
to the position of Executive Vice President, Chief Administrative
Officer, General Counsel and Secretary and was a Director of the
Company from 1993 until 1995. From 1988 until April 1993,
Mr. Thomson served as Senior Vice President, General Counsel and
Secretary for Burger King Corporation. Prior to 1988,
Mr. Thomson spent ten years at S & A Restaurant Corp. where he
was Executive Vice President, General Counsel and Secretary.
Classes of Directors
For purposes of determining whether non-employee directors
will be nominated for reelection to the Board of Directors, the
non-employee directors have been divided into four classes. Each
non-employee director will continue to be subject to reelection
by the shareholders of the Company each year. However, after a
non-employee director has served on the Board of Directors for
four years, such director shall be deemed to have been advised by
the Nominating Committee that he or she will not stand for
reelection at the subsequent annual meeting of shareholders and
shall be considered a "Retiring Director." Notwithstanding this
policy, the Nominating Committee may determine that it is
appropriate to renominate any or all of the Retiring Directors
after first considering the appropriateness of nominating new
candidates for election to the Board of Directors. The four
classes of non-employee directors are as follows: Messrs.
Girouard, Humphries and Oesterreicher comprise Class 1 and will
be considered Retiring Directors as of the annual meeting of
shareholders following the end of the 2002 fiscal year. There
are no members of Class 2. Messrs. Haggar, Kirk and Marcus
comprise Class 3 and will be considered Retiring Directors as of
the annual meeting of shareholders following the end of the 2000
fiscal year. Messrs. Carty, Cook and Staubach comprise Class 4
and will be considered Retiring Directors as of the annual
meeting of shareholders following the end of the 2001 fiscal
year.
Committees of the Board of Directors
The Board of Directors of the Company has established an
Executive Committee, Audit Committee, Compensation Committee, and
Nominating Committee. The Executive Committee (currently
comprised of Messrs. Brinker, McDougall, Cook, Marcus, and
Staubach) met four (4) times during the fiscal year. The
Executive Committee reviews material matters during the intervals
between Board meetings, provides advice and counsel to Company
management during such intervals, and has the authority to act
for the Board on most matters during the intervals between Board
meetings. In addition, the Executive Committee is also charged
with assuring that the Company has a satisfactory succession
management plan for all key management positions.
All of the members of the Audit and Compensation Committees
are directors independent of management who are not and never
have been officers or employees of the Company. The Audit
Committee is currently comprised of Messrs. Haggar and Humphries
and met four (4) times during the fiscal year. Included among the
functions performed by the Audit Committee are: the review with
independent auditors of the scope of the audit and the results of
the annual audit by the independent auditors, consideration and
recommendation to the Board of the selection of the independent
auditors for the next year, the review with management and the
independent auditors of the annual financial statements of the
Company, and the review of the scope and adequacy of internal
audit activities.
The Compensation Committee is currently comprised of
Messrs. Cook, Haggar and Oesterreicher and it met four (4) times
during the fiscal year. Functions performed by the Compensation
Committee include: reviewing the performance of the Chief
Executive Officer, approving key executive promotions, ensuring
the reasonableness and appropriateness of senior management
compensation arrangements and levels, the adoption, amendment and
administration of stock-based incentive plans (subject to
shareholder approval where required), management of the various
stock option plans of the Company, approval of the total number
of available shares to be used each year in stock-based plans,
and approval of the adoption and amendment of significant
compensation plans. The specific nature of the Committee's
responsibilities as they relate to executive officers is set
forth below under "Report of the Compensation Committee."
The purposes of the Nominating Committee are to recommend to
the Board of Directors potential non-employee members to be added
as new or replacement members to the Board of Directors, to
review the compensation paid to non-management Board members, and
to recommend corporate governance guidelines to the full Board of
Directors. The Nominating Committee will consider a shareholder-
recommended nomination for director to be voted upon at the 1999
annual meeting of shareholders provided that the recommendation
must be in writing, set forth the name and address of the
nominee, contain the consent of the nominee to serve, and be
submitted on or before May 21, 1999. The Nominating Committee is
composed of Messrs. Brinker, McDougall, Kirk and Oesterreicher
and it met two (2) times during the fiscal year.
Directors' Compensation
Directors who are not employees of the Company receive
$1,000 for each meeting of the Board of Directors attended and
$1,000 for each meeting of any committee of the Board of
Directors attended. The Company also reimburses directors for
costs incurred by them in attending meetings of the Board.
Directors who are not employees of the Company receive
grants of stock options under the Company's 1991 Stock Option
Plan for Non-Employee Directors and Consultants. A new director
who is not an employee of the Company will receive as
compensation (a) 20,000 stock options at the beginning of such
director's term, and (b) an annual payment of $36,000, at least
25% of which must be taken in the form of stock options. If a
director is appointed to the Board of Directors at any time other
than at an annual meeting of shareholders, the director will
receive a prorated portion of the annual cash compensation for
the period from the date of election or appointment to the Board
of Directors until the meeting of the Board of Directors held
contemporaneous with the next annual meeting of shareholders. If
a director elects to receive cash, the first payment will be made
at the Board of Directors' meeting held contemporaneous with the
next annual meeting of shareholders. The stock options will be
granted as of the 60th day following such meeting (or if the 60th
day is not a business day, on the first business day thereafter)
at the fair market value on the date of grant. One-third (1/3)
of the options will vest on each of the second, third and fourth
anniversaries of the date of grant. If a director is a Retiring
Director who is being nominated for an additional term on the
Board of Directors, each such renominated director will receive
an additional grant of 10,000 stock options at the beginning of
such director's new term.
For purposes of applying this compensation program to the
current non-employee directors of the Company, the previous
compensation program was blended with this compensation program
in order to determine annual compensation payable to non-employee
directors until such directors become Retiring Directors and
leave the Board or are approved by the Nominating Committee to
serve for an additional four years. Dr. Humphries previously has
received a grant of 15,000 stock options and has received an
annual cash retainer of $16,000; Mr. Oesterreicher previously has
received a grant of 15,000 stock options and has received an
annual cash retainer of $6,000. As Messrs. Humphries and
Oesterreicher are currently Retiring Directors, if they are re-
elected to the Board of Directors, they will be compensated
according to the new compensation plan. If Mr. Girouard is
elected to the Board of Directors, he will be compensated
according to the new compensation plan. Messrs. Carty, Cook,
Haggar, Kirk, Marcus, and Staubach are being compensated
according to the new compensation plan.
During the year ended June 24, 1998, the Board of Directors
held six (6) meetings; each incumbent director attended at least
75% of the aggregate total of meetings of the Board of Directors
and Committees on which he or she served.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the
annual compensation for the Company's five highest compensated
executive officers, including the Chief Executive Officer, whose
salary and bonus exceeded $100,000 in fiscal 1998.
Summary Compensation Table
Long-Term Compensation
Awards Payouts
Securities Long-Term
Name and Annual Compensation Underlying Incentive All Other
Principal Position Year Salary Bonus Options Payouts Compensation (1)
Ronald A. McDougall
President and Chief 1998 $ 861,442 $1,033,731 200,000 $ 76,633 $ 30,397
Executive Officer 1997 $ 825,000 $ 396,000 200,000 $ 67,289 $ 29,194
1996 $ 744,808 $ -0- 375,000 $ 69,860 $ 18,396
Douglas H. Brooks
Executive Vice 1998 $ 387,308 $ 255,623 60,000 $ 45,980 $ 16,595
President and Chief 1997 $ 333,654 $ 120,462 50,000 $ 33,645 $ 20,818
Operating Officer 1996 $ 311,058 $ -0- 90,000 $ 31,049 $ 12,830
Roger F. Thomson
Executive Vice 1998 $ 334,692 $ 267,754 50,000 $ 57,475 $ 16,501
President, Chief 1997 $ 317,231 $ 104,940 50,000 $ 40,374 $ 16,680
Administrative Officer,1996 $ 256,827 $ -0- 90,000 $ 31,049 $ 6,641
General Counsel and
Secretary
Gerard V. Centioli
Senior Vice President 1998 $ 289,841 $ 231,783 50,000 $ 30,653 $ 58,686
- Emerging Concepts 1997 $ 276,768 $ 100,000 50,000 $ -0- $ 19,791
President and Chief 1996 $ 127,739 $ -0- 90,000 $ -0- $ 5,315
Executive Officer
Russell G. Owens
Executive Vice 1998 $ 286,577 $ 229,262 50,000 $ 37,473 $ 13,319
President and Chief 1997 $ 187,231 $ 41,931 20,000 $ 26,916 $ 12,589
Financial and 1996 $ 168,846 $ -0- 90,000 $ 23,287 $ 7,437
Strategic Officer
_________________
(1) All other compensation represents Company match on deferred
compensation.
Option Grants During 1998 Fiscal Year
The following table contains certain information concerning
the grant of stock options pursuant to the Company's 1992
Incentive Stock Option Plan to the executive officers named in
the above compensation table during the Company's last fiscal
year:
% of Total Realizable Value of
Options Assumed Annual Rates of
Granted to Stock Price Appreciation
Options Employees in Exercise or Expiration for Option Term (1)
Name Granted Fiscal Year Base Price Date 5% 10%
Ronald A. McDougall 200,000 12.04% $14.00 10/31/07 $1,760,905 $4,462,479
Douglas H. Brooks 60,000 3.61% $14.00 10/31/07 $ 528,271 $1,338,744
Roger F. Thomson 50,000 3.01% $14.00 10/31/07 $ 440,226 $1,115,620
Gerard V. Centioli 50,000 3.01% $14.00 10/31/07 $ 440,226 $1,115,620
Russell G. Owens 50,000 3.01% $14.00 10/31/07 $ 440,226 $1,115,620
_________________
(1) The dollar amounts under these columns are the result of
calculations at the 5% and 10% rates set by the Securities and
Exchange Commission and, therefore, are not intended to forecast
possible future appreciation, if any, of the Company's stock
price.
Stock Option Exercises and Fiscal Year-End Value Table
The following table shows stock option exercises by the
named officers during the last fiscal year, including the
aggregate value of gains on the date of exercise. In addition,
this table includes the number of shares covered by both
exercisable and non-exercisable stock options at fiscal year-end.
Also reported are the values for "in-the-money" options which
represent the position spread between the exercise price of any
such existing options and the $19.75 fiscal year-end price of the
Company's Common Stock.
Shares Value of Unexercised
Acquired Number of Unexercised In-the-Money Options at
On Value Options at Fiscal Year End Fiscal Year End
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Ronald A. McDougall -0- -0- 877,500 712,500 $2,815,553 $5,046,875
Douglas H. Brooks 98,603 $1,739,315 369,425 185,000 $3,131,433 $1,297,500
Roger F. Thomson -0- -0- 157,500 175,000 $ 261,930 $1,240,000
Gerard V. Centioli -0- -0- 30,000 190,000 $ 183,750 $1,307,500
Russell G. Owens -0- -0- 100,447 145,000 $ 610,099 $ 981,250
Long-Term Performance Share Plan and Awards
Executives of the Company participate in the Long-Term
Performance Share Plan. See "Report of the Compensation
Committee - Long-Term Incentives" for more information regarding
this plan. The following table represents awards granted in the
last fiscal year under the Long-Term Performance Share Plan.
Number of Estimated Future Payouts
Name Units Awarded Under Non-Stock Based Plans
(Dollars)
Threshold Target Maximum
Ronald A. McDougall 1,000 * $100,000 *
Douglas H. Brooks 600 * $ 60,000 *
Roger F. Thomson 750 * $ 75,000 *
Gerard V. Centioli 400 * $ 40,000 *
Russell G. Owens 575 * $ 57,500 *
______________________
* Future payouts under the Long-Term Performance Share
Plan have no minimum threshold and have no maximum
limit as set forth in more detail in "Report of the
Compensation Committee - Long Term Incentives."
REPORT OF THE COMPENSATION COMMITTEE
Compensation Philosophy
The executive compensation program is designed as a tool to
reinforce the Company's strategic principles - to be a premier
and progressive growth company with a balanced approach towards
people, quality and profitability and to enhance long-term
shareholder value. To this end, the following principles have
guided the development of the executive compensation program:
Provide competitive levels of compensation to attract and
retain the best qualified executive talent. The Committee
strongly believes that the caliber of the Company's
management group makes a significant difference in the
Company's sustained success over the long term.
Embrace a pay-for-performance philosophy by placing
significant amounts of compensation "at risk" - that is,
compensation payouts to executives must vary according to
the overall performance of the Company.
Directly link executives' interests with those of
shareholders by providing opportunities for long-term
incentive compensation based on changes in shareholder
value.
The executive compensation program is intended to
appropriately balance the Company's short-term operating goals
with its long-term strategy through a careful mix of base salary,
annual cash incentives and long-term performance compensation
including cash incentives and incentive stock options.
Base Salaries
Executives' base salaries and total compensation are
targeted to be competitive between the 75th and 90th percentiles
of the market for positions of similar responsibility and scope
to reflect the exceptionally high level of executive talent
required to execute the growth plans of the Company. Positioning
executives' base salaries at these levels is needed for
attracting, retaining and motivating executives with the
essential qualifications for managing the Company's growth. The
Company defines the relevant labor market for such executive
talent through the use of third-party executive salary surveys
that reflect both the chain restaurant industry as well as a
broader cross-section of companies from many industries.
Individual base salary levels are determined by considering
market data for each officer's position, level of responsibility,
performance, and experience. The overall amount of base salary
increases awarded to executives reflects the financial
performance of the Company, individual performance and potential,
and/or changes in an officer's duties and responsibilities.
Annual Incentives
The Company's Profit Sharing Plan is a non-qualified annual
incentive arrangement in which all corporate employees, including
executives, participate. The program is designed to reflect
employees' contribution to the growth of the Company's common
stock value by increasing the earnings of the Company. The plan
reinforces a strong teamwork ethic by making the basis for
payouts to non-restaurant concept executives the same as for all
other non-restaurant concept corporate employees and by making
the basis for payouts to executives of one of the Company's
restaurant concepts the same as for all other members of such
restaurant concept's corporate team.
At the beginning of a fiscal year, each executive is
assigned an Individual Participation Percentage ("IPP") which is
tied to the base salary for such executive and targets overall
total cash compensation for executives between the 75th and 90th
percentiles of the market. The IPPs reflect the Committee's
desire that a significant percentage of executives' total
compensation be derived from variable pay programs.
401(k) Savings Plan and Savings Plan II
On January 1, 1993, the Company implemented the 401(k)
Savings Plan ("Plan I") and Savings Plan II ("Plan II"). These
Plans are designed to provide the Company's salaried employees
with a tax-deferred long-term savings vehicle. The Company
provides a matching contribution equal to 25% of a participant's
contribution, up to a maximum of 5% of such participant's
compensation.
Plan I is a qualified 401(k) plan. Participants in Plan I
elect the percentage of pay they wish to contribute as well as
the investment alternatives in which their contributions are to
be invested. The Company's matching contribution for all Plan I
participants is made in Company common stock. All participants
in Plan I are considered non-highly compensated employees as
defined by the Internal Revenue Service. Participants'
contributions vest immediately while Company contributions vest
25% annually, beginning in the participant's second year of
eligibility since Plan I inception.
Plan II is a non-qualified deferred compensation plan.
Plan II participants elect the percentage of pay they wish to
defer into their Plan II account. They also elect the percentage
of their deferral account to be allocated among various
investment options. The Company's matching contribution for all
non-officer Plan II participants is made in Company common stock,
with corporate officers receiving a Company match in cash.
Participants in Plan II are considered a select group of
management and highly compensated employees according to the
Department of Labor. A participant's contributions vest
immediately while Company contributions vest 25% annually,
beginning in the participant's second year of eligibility since
Plan II inception.
Long-Term Incentives
All salaried employees above a specified grade level of the
Company, including executives, are eligible for annual grants of
tax-qualified and non-qualified stock options. By tying a
significant portion of executives' total opportunity for
financial gain to increases in shareholder wealth as reflected by
the market price of the Company's common stock, executives'
interests are closely aligned with shareholders' long-term
interests. In addition, because the Company does not maintain
any qualified retirement programs for executives, the stock
option plan is intended to provide executives with opportunities
to accumulate wealth for later retirement.
Stock options are rights to purchase shares of the Company's
Common Stock at the fair market value on the date of grant.
Grantees do not receive a benefit from stock options unless and
until the market price of the Company's common stock increases.
Fifty percent (50%) of a stock option grant becomes exercisable
two years after the grant date; the remaining 50% of a grant
becomes exercisable three years after the grant date.
The number of stock options granted to an executive is
determined by the Compensation Committee and is based on grant
guidelines set by the Compensation Committee that reflect market
data and the officer's position within the Company.
Executives also participate in the Long-Term Executive
Profit Sharing Plan, a non-qualified long-term performance cash
plan. This plan provides an additional mechanism for focusing
executives on the sustained improvement in operating results over
the long term. This is a performance-related plan using
overlapping three-year cycles paid annually. Performance units
(valued at $100 each) are granted to individuals and paid in cash
based upon the Company's attainment of predetermined performance
objectives. Long-term operating results are measured by
evaluating both pre-tax net income (weighted 70%) and changes in
shareholders' equity (weighted 30%) over three-year cycles. The
Long-Term Executive Profit Sharing Plan will continue in effect
through the cycle which includes fiscal years 1997, 1998, and
1999. The Long-Term Executive Profit Sharing Plan has been
replaced by the Long-Term Performance Share Plan commencing with
the cycle which includes fiscal years 1998, 1999, and 2000. The
Long-Term Performance Share Plan is based on the Company's total
shareholder return in comparison to the S&P 500 Index and the S&P
Restaurant Industry Index. For executives to receive the target
payout, the Company must perform at the 75th percentile of each
index over the three-year cycle and must average at least 90% of
its planned annual profit before taxes over the same three-year
cycle.
Pay/Performance Nexus
The Company's executive compensation program has resulted in
a direct relationship between the compensation paid to executive
officers and the Company's performance. See "Five-Year Total
Shareholder Return Comparison" below.
CEO Compensation
The Compensation Committee made decisions regarding Mr.
McDougall's compensation package according to the guidelines
discussed in the preceding sections. Mr. McDougall was awarded a
salary increase in the amount of 6.3%, effective June 25, 1998,
to recognize his vast experience in the restaurant industry, the
Company's performance under his leadership and his significant
contributions to the Company's continued success. Mr. McDougall
was granted 1,000 units under the Long-Term Executive Profit
Sharing Plan for the cycle which includes fiscal years 1998,
1999, and 2000. Mr. McDougall was also granted 200,000 stock
options under the Company's stock option plan. Approximately
51.6% of Mr. McDougall's compensation for 1998 was incentive pay
pursuant to the Company's Profit Sharing Plan. Like all Company
executives, Mr. McDougall's compensation is significantly
affected by the Company's performance. In the 1998 fiscal year,
Mr. McDougall's total compensation increased 52% from its level
in the 1997 fiscal year.
Federal Income Tax Considerations
The Compensation Committee has considered the impact of
Section 162(m) of the Internal Revenue Code adopted under the
Omnibus Budget Reconciliation Act of 1993. This section
disallows a tax deduction for any publicly-held corporation for
individual compensation to certain executives of such corporation
exceeding $1,000,000 in any taxable year, unless compensation is
performance-based. It is the intent of the Company and the
Compensation Committee to qualify to the maximum extent possible
its executives' compensation for deductibility under applicable
tax laws. The Compensation Committee believes that the Company's
compensation programs provide the necessary incentives and
flexibility to promote the Company's performance-based
compensation philosophy while being consistent with Company
objectives.
The Compensation Committee's administration of the executive
compensation program is in accordance with the principles
outlined at the beginning of this report. The Company's
financial performance supports the compensation practices
employed during the past year.
Respectfully submitted,
COMPENSATION COMMITTEE
DAN W. COOK, III
J.M. HAGGAR, JR.
JAMES E. OESTERREICHER
5
1000
12-MOS
JUN-25-1997
JUN-25-1997
23,194
24,469
20,472
146
13,031
112,434
1,043,092
293,483
996,943
149,133
287,521
0
0
7,771
515,973
996,943
1,320,881
1,335,337
374,525
1,173,735
0
313
9,453
90,985
30,480
60,505
0
0
0
60,505
0.82
0.81
Restated to reflect the adoption of Statement of Financial Accounting Standard
No. 128, "Earnings Per Share."
5
1000
12-MOS
JUN-26-1996
JUN-26-1996
27,073
0
14,392
250
10,839
88,355
853,231
242,001
888,834
123,390
117,801
0
0
7,726
600,444
888,834
1,150,601
1,162,951
330,375
1,015,307
0
120
4,579
52,137
17,756
34,381
0
0
0
34,381
0.45
0.44
Restated to reflect the adoption of Statement of Financial Accounting Standard
No. 128, "Earnings Per Share."
