EXHIBIT 13
SELECTED FINANCIAL DATA
(In thousands, except per share amounts and number of restaurants)
<TABLE>
Fiscal Years
2000 1999(a) 1998 1997 1996
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues $2,159,837 $1,870,554 $1,574,414 $1,335,337 $1,162,951
Operating Costs and Expenses:
Cost of Sales 575,570 507,103 426,558 374,525 330,375
Restaurant Expenses 1,197,828 1,036,573 866,143 720,769 620,441
Depreciation and Amortization 90,647 82,385 86,376 78,754 64,611
General and Administrative 100,123 90,311 77,407 64,404 54,271
Restructuring Charge - - - - 50,000
Total Operating Costs and
Expenses 1,964,168 1,716,372 1,456,484 1,238,452 1,119,698
Operating Income 195,669 154,182 117,930 96,885 43,253
Interest Expense 10,746 9,241 11,025 9,453 4,579
Gain on Sales of Concepts - - - - (9,262)
Other, Net 3,381 14,402 1,447 (3,553) (4,201)
Income Before Provision for
Income Taxes and Cumulative
Effect of Accounting Change 181,542 130,539 105,458 90,985 52,137
Provision for Income Taxes 63,702 45,297 36,383 30,480 17,756
Income Before Cumulative Effect
of Accounting Change 117,840 85,242 69,075 60,505 34,381
Cumulative Effect of
Accounting Change - 6,407 - - -
Net Income $ 117,840 $ 78,835 $ 69,075 $ 60,505 $ 34,381
Basic Earnings Per Share:
Income Before Cumulative
Effect of Accounting Change $ 1.80 $ 1.30 $ 1.05 $ 0.82 $ 0.45
Cumulative Effect of
Accounting Change - 0.10 - - -
Basic Net Income Per Share $ 1.80 $ 1.20 $ 1.05 $ 0.82 $ 0.45
Diluted Earnings Per Share:
Income Before Cumulative
Effect of Accounting Change $ 1.75 $ 1.25 $ 1.02 $ 0.81 $ 0.44
Cumulative Effect of
Accounting Change - 0.09 - - -
Diluted Net Income Per Share $ 1.75 $ 1.16 $ 1.02 $ 0.81 $ 0.44
Basic Weighted Average
Shares Outstanding 65,631 65,926 65,766 73,682 76,015
Diluted Weighted Average
Shares Outstanding 67,410 68,123 67,450 74,800 77,905
Balance Sheet Data
(End of Period):
Working Capital Deficit $ (127,377) $ (86,969) $ (92,898) $ (36,699) $ (35,035)
Total Assets 1,162,328 1,085,644 968,848 996,943 888,834
Long-term Obligations 169,120 234,086 197,577 324,066 157,274
Shareholders' Equity 762,208 661,439 593,739 523,744 608,170
Number of Restaurants
Open (End of Period):
Company-Operated 774 707 624 556 468
Franchised/Joint Venture 264 226 182 157 147
Total 1,038 933 806 713 615
</TABLE>
(a) Fiscal year 1999 consisted of 53 weeks while all other periods
presented consisted of 52 weeks.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
For an understanding of the significant factors that influenced the
Company's performance during the past three fiscal years, the following
discussion should be read in conjunction with the consolidated financial
statements and related notes found elsewhere in this Annual Report.
The Company has a 52/53 week fiscal year ending on the last Wednesday in
June. Fiscal years 2000 and 1998, which ended on June 28, 2000 and June 24,
1998, respectively, each contained 52 weeks, while fiscal year 1999, which
ended on June 30, 1999, contained 53 weeks.
The Company elected early adoption of the American Institute of CPA's
("AICPA") Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs
of Start-Up Activities," during fiscal 1999. This accounting standard
requires most entities to expense all start-up and preopening costs as
incurred. The Company previously deferred such costs and amortized them
over the twelve-month period following the opening of each restaurant.
Prior to fiscal 1999, amortization of deferred preopening costs was
included within depreciation and amortization expense on the consolidated
statements of income. Effective with fiscal 1999, preopening costs are
included in restaurant expenses on the consolidated statements of income.
RESULTS OF OPERATIONS FOR FISCAL YEARS 2000, 1999, AND 1998
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
2000 1999 1998
Revenues 100.0% 100.0% 100.0%
Operating Costs and Expenses:
Cost of Sales 26.6% 27.1% 27.1%
Restaurant Expenses 55.5% 55.4% 55.0%
Depreciation and Amortization 4.2% 4.4% 5.5%
General and Administrative 4.6% 4.8% 4.9%
Total Operating Costs and Expenses 90.9% 91.7% 92.5%
Operating Income 9.1% 8.3% 7.5%
Interest Expense 0.5% 0.5% 0.7%
Other, Net 0.2% 0.8% 0.1%
Income Before Provision for Income
Taxes and Cumulative Effect of
Accounting Change 8.4% 7.0% 6.7%
Provision for Income Taxes 2.9% 2.4% 2.3%
Income Before Cumulative Effect
of Accounting Change 5.5% 4.6% 4.4%
Cumulative Effect of Accounting Change - 0.4% -
Net Income 5.5% 4.2% 4.4%
REVENUES
Revenue growth of 15.5% and 18.8% in fiscal 2000 and 1999, respectively, is
attributable primarily to the increases in sales weeks driven by new unit
expansion and in comparable store sales. Revenues for fiscal 2000 increased
due to a 9.5% increase in sales weeks (a 12.2% increase in sales weeks on a
comparable 52-week basis) and a 6.3% increase in comparable store sales on
a 52-week basis. Revenues for fiscal 1999 increased due to a 14.9% increase
in sales weeks (2.3% of such increase is attributable to the additional
sales week during fiscal 1999) and a 4.2% increase in comparable store
sales. Menu price increases were less than 1.5% in both fiscal 2000 and
1999.
COSTS AND EXPENSES (as a Percent of Revenues)
Cost of sales decreased for fiscal 2000 due to menu price increases and
favorable commodity price variances for poultry, dairy and cheese, and
produce, which were partially offset by unfavorable commodity price
variances for beef and product mix changes to menu items with higher
percentage food costs. Cost of sales remained flat in fiscal 1999 compared
to fiscal 1998 due to menu price increases and product mix changes to menu
items with lower percentage food costs, which were offset by unfavorable
commodity price variances.
Restaurant expenses increased in fiscal 2000 due primarily to increases in
labor. Restaurant labor wage rates and monthly performance bonuses were
higher than in the prior year, but were partially offset by increased sales
leverage, improvements in labor productivity, menu price increases, and a
decrease in preopening costs. Restaurant expenses increased in fiscal 1999
due to the adoption of SOP 98-5 and the resulting expensing of preopening
costs as incurred. During fiscal 1998 and prior years, preopening costs
were deferred and amortized over the twelve-month period following the
opening of each restaurant. Also contributing to the increase in
restaurant expenses was additional rent expense incurred due to the sale-
leaseback transactions which occurred in fiscal 1998 and the continued
utilization of the equipment leasing facility. These increases were
partially offset by leverage related to increased sales in fiscal 1999.
Depreciation and amortization decreased in both fiscal 2000 and fiscal
1999. The fiscal 2000 decrease is due primarily to utilization of
equipment leasing facilities, increased sales leverage and a declining
depreciable asset base for older units. In addition, fiscal 1999 included
an impairment charge for reacquired franchise rights due to a change in
development plans in the related franchise area. Partially offsetting these
decreases were increases in depreciation and amortization related to new
unit construction and ongoing remodel costs. The fiscal 1999 decrease is
due primarily to the elimination of preopening cost amortization resulting
from the adoption of SOP 98-5 and a declining depreciable asset base for
older units. Partially offsetting these decreases are increases in
depreciation and amortization related to new unit construction and ongoing
remodel costs.
General and administrative expenses decreased in fiscal 2000 as compared to
the prior fiscal year as a result of the Company's continued focus on
controlling corporate expenditures relative to increasing revenues and the
number of restaurants.
Interest expense remained flat for fiscal 2000 compared to fiscal 1999.
Interest expense increased as a result of increased borrowings on the
Company's credit facilities primarily used to fund the Company's continuing
stock repurchase plan. This increase was fully offset by increased sales
leverage as well as a decrease in interest expense on senior notes due to
the scheduled repayments made in April 1999 and 2000. Interest expense
decreased in fiscal 1999 as compared to fiscal 1998 due to a favorable
interest rate environment compared with fiscal 1998 and an increase in the
construction-in-progress balances subject to interest capitalization.
Other, net decreased in fiscal 2000 as compared to fiscal 1999 as a result
of reduced equity losses related to the Company's share in equity method
investees.
The Company's share of net losses in its equity method investees in fiscal
1999 includes a charge of approximately $5.1 million related to the
decisions made by Eatzi's Corporation ("Eatzi's") to abandon development of
two restaurant sites and to dispose of a restaurant that did not meet the
financial return expectations of Eatzi's. These decisions were made in
conjunction with a strategic plan which included slowing development,
refining the prototype, and defining profitable growth opportunities. The
types of costs recorded primarily included site specific costs and costs to
exit lease obligations. Effective June 30, 1999, the Company sold a portion
of its equity interest in Eatzi's to its partner. In addition, the
Company's share of net losses in its equity method investees in fiscal 1999
included a charge of approximately $2.5 million related to the impairment
of long-lived assets recorded by one of its investees.
INCOME TAXES
The Company's effective income tax rate was 35.1%, 34.7%, and 34.5%, in
fiscal 2000, 1999, and 1998, respectively. The increases in fiscal 2000 and
1999 are primarily a result of an increase in the rate effect of state
income taxes due to increased profitability.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
The cumulative effect of accounting change is the result of the Company's
early adoption of SOP 98-5 retroactive to the first quarter of fiscal 1999
as discussed previously in the "General" section. The cumulative effect of
this accounting change, net of income tax benefit, was $6.4 million or
$0.09 per diluted share in fiscal 1999. This new accounting standard
accelerated the Company's recognition of preopening costs, but has
benefited the post-opening results of new restaurants.
NET INCOME AND NET INCOME PER SHARE
Fiscal 2000 net income and diluted net income per share increased 49.5% and
50.9%, respectively, compared to fiscal 1999. Excluding the effects of the
adoption of SOP 98-5 in fiscal 1999, fiscal 2000 net income increased 38.2%
from $85.2 million to $117.8 million and diluted net income per share
increased 40.0% from $1.25 to $1.75. The increase in both net income and
diluted net income per share, before consideration of the adoption of SOP
98-5, was mainly due to an increase in comparable store sales, sales weeks
(partially offset by an additional week in fiscal 1999) and menu prices,
and decreases in cost of sales and other, net.
Excluding the effects of the adoption of SOP 98-5, fiscal 1999 net income
and diluted net income per share increased 23.4% and 22.5%, respectively,
compared to fiscal 1998. The increase in both net income and diluted net
income per share was due to an increase in average weekly sales, sales
weeks (including an additional week in fiscal 1999) and menu prices, and a
decrease in depreciation and amortization expenses. The factors
contributing to the increase in net income and diluted net income per share
were partially offset by increases in the Company's share of losses in
equity method investees.
IMPACT OF INFLATION
The Company has not experienced a significant overall impact from
inflation. As operating expenses increase, the Company, to the extent
permitted by competition, recovers increased costs by either increasing
menu prices or reviewing, then implementing, alternative products or
processes.
LIQUIDITY AND CAPITAL RESOURCES
The working capital deficit increased from $87.0 million at June 30, 1999
to $127.4 million at June 28, 2000, and net cash provided by operating
activities increased to $269.0 million for fiscal 2000 from $193.2 million
for fiscal 1999 due to increased profitability and the timing of
operational receipts and payments.
Long-term debt outstanding at June 28, 2000 consisted of $57.1 million of
unsecured senior notes, $51.8 million of borrowings on credit facilities
and obligations under capital leases. The Company has credit facilities
totaling $335.0 million. At June 28, 2000, the Company had $281.3 million
in available funds from credit facilities.
During fiscal 2000, the Company entered into a $25.0 million equipment
leasing facility. As of June 28, 2000, $16.2 million of the facility had
been utilized. The remaining equipment leasing facility can be used to
lease equipment through the first quarter of fiscal year 2001. In
addition, the Company entered into a $50.0 million real estate leasing
facility in fiscal 2000. As of June 28, 2000, $9.4 million of the facility
had been utilized. The remaining real estate leasing facility will be used
to lease real estate through fiscal year 2002.
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, net of amounts funded under the respective equipment
and real estate leasing facilities, were $165.4 million for fiscal 2000
compared to $181.1 million for fiscal 1999. The decrease is due primarily
to a decrease in the number of store openings, partially offset by a
reduction in the amount of new restaurant expenditures funded by leasing
facilities. The Company estimates that its fiscal 2001 capital
expenditures, net of amounts expected to be funded under leasing
facilities, will approximate $200 million. These capital expenditures will
be funded entirely from existing operations.
During fiscal 2000, the Company's Board of Directors authorized an increase
in the stock repurchase plan initially adopted in fiscal 1998 by an
additional $125.0 million to a total of $210.0 million. Pursuant to the
plan, the Company repurchased approximately 2,445,000 shares of its common
stock for approximately $60.7 million during fiscal 2000 in accordance with
applicable securities regulations. Currently, approximately 5,425,000
shares have been repurchased for approximately $125.9 million under the
plan. The repurchased common stock was or will be used by the Company to
increase shareholder value, offset the dilutive effect of stock option
exercises, satisfy obligations under its savings plans, and for other
corporate purposes. The repurchased common stock is reflected as a
reduction of shareholders' equity. The Company financed the repurchase
program through a combination of cash provided by operations and drawdowns
on its available credit facilities.
The Company is not aware of any other event or trend which would
potentially affect its liquidity. In the event such a trend develops, the
Company believes that there are sufficient funds available from its credit
facilities and from strong internal cash generating capabilities to
adequately manage the expansion of the business.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on
debt and certain leasing facilities and from changes in commodity prices.
A discussion of the Company's accounting policies for derivative
instruments is included in the Summary of Significant Accounting Policies
in the Notes to the Consolidated Financial Statements.
The Company's net exposure to interest rate risk consists of floating rate
instruments that are benchmarked to U.S. and European short-term interest
rates. The Company may from time to time utilize interest rate swaps and
forwards to manage overall borrowing costs and reduce exposure to adverse
fluctuations in interest rates. The Company does not use derivative
instruments for trading purposes, and the Company has procedures in place
to monitor and control derivative use.
The Company is exposed to interest rate risk on short-term and long-term
financial instruments carrying variable interest rates. The Company's
variable rate financial instruments, including the outstanding credit
facilities and interest rate swap, totaled $73.2 million at June 28, 2000.
The impact on the Company's results of operations of a one-point interest
rate change on the outstanding balance of the variable rate financial
instruments as of June 28, 2000 would be immaterial.
The Company purchases certain commodities such as beef, chicken, flour and
cooking oil. These commodities are generally purchased based upon market
prices established with vendors. These purchase arrangements may contain
contractual features that limit the price paid by establishing certain
price floors or caps. The Company does not use financial instruments to
hedge commodity prices because these purchase arrangements help control the
ultimate cost paid and any commodity price aberrations are generally short
term in nature.
This market risk discussion contains forward-looking statements. Actual
results may differ materially from this discussion based upon general
market conditions and changes in domestic and global financial markets.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," subsequently amended in
June 1999 by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133," which delays the effective date of SFAS No. 133 until the Company's
first quarter financial statements in fiscal 2001. SFAS No. 133 will
require the Company to recognize all derivatives on the balance sheet at
fair value. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged item through earnings, or
recognized in other comprehensive income until the hedged item is
recognized in earnings. In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Hedging Activities (an amendment of SFAS No. 133),"
which amends the accounting and reporting standards of SFAS No. 133 for
certain derivative instruments and certain hedging activities. The Company
adopted SFAS No. 133 and SFAS No. 138 effective June 29, 2000, and the
adoption did not have a material effect on the Company's results of
operations or financial position.
In March 2000, the FASB issued Interpretation No. 44 ("FIN No. 44"),
"Accounting for Certain Transactions involving Stock Compensation: An
Interpretation of APB Opinion No. 25." Among other issues, FIN No. 44
clarifies the application of Accounting Principles Board Opinion No. 25
("APB No. 25") regarding (a) the definition of an employee for purposes of
applying APB No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock option or
award, and (d) the accounting for an exchange of stock compensation awards
in a business combination. The provisions of FIN No. 44 affecting the
Company are to be applied on a prospective basis effective July 1, 2000.
The adoption did not have a material effect on the Company's results of
operations or financial position.
MANAGEMENT OUTLOOK
During fiscal 2000, the Company experienced a record-breaking year by
successfully executing well-defined strategies in a very favorable macro
environment for the industry. The results were achieved by disciplined
capacity growth, diligent fiscal responsibility, unwavering guest
satisfaction and a passionate culinary culture that keeps the Company's
concept menus on the leading edge.
During fiscal 2001, the Company will continue to emphasize many of the
initiatives that propelled it to new heights in fiscal 2000. Positive
lifestyle, demographic, and demand trends in a strong economic environment
coupled with ongoing efforts across all brands to enhance guest experience
reaffirm the Company's belief in its ability to continue to deliver the
best combination of operating and financial performance to enhance
shareholder value.
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,
identification and availability of suitable and economically viable
locations for new restaurants, food and labor costs, availability of
materials and employees, or weather and other acts of God.
BRINKER INTERNATIONAL, INC.
Consolidated Balance Sheets
(In thousands)
2000 1999
ASSETS
Current Assets:
Cash and Cash Equivalents $ 12,343 $ 12,597
Accounts Receivable 20,378 21,390
Inventories 16,448 15,050
Prepaid Expenses 50,327 46,431
Deferred Income Taxes (Note 3) 2,127 5,585
Other 2,000 2,097
Total Current Assets 103,623 103,150
Property and Equipment, at Cost (Note 5):
Land 178,025 169,368
Buildings and Leasehold Improvements 739,795 650,000
Furniture and Equipment 396,089 351,729
Construction-in-Progress 57,167 46,186
1,371,076 1,217,283
Less Accumulated Depreciation and Amortization 482,944 403,907
Net Property and Equipment 888,132 813,376
Other Assets:
Goodwill, Net 71,561 74,190
Other (Note 9) 99,012 94,928
Total Other Assets 170,573 169,118
Total Assets $1,162,328 $1,085,644
(continued)
BRINKER INTERNATIONAL, INC.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
Current Liabilities:
Current Installments of Long-term Debt
(Notes 4 and 5) $ 14,635 $ 14,635
Accounts Payable 104,461 74,100
Accrued Liabilities (Note 2) 111,904 101,384
Total Current Liabilities 231,000 190,119
Long-term Debt, Less Current Installments
(Notes 4 and 5) 110,323 183,158
Deferred Income Taxes (Note 3) 7,667 9,140
Other Liabilities 51,130 41,788
Commitments and Contingencies (Notes 5 and 10)
Shareholders' Equity (Notes 6 and 7):
Preferred Stock - 1,000,000 Authorized Shares;
$1.00 Par Value; No Shares Issued - -
Common Stock - 250,000,000 Authorized Shares;
$.10 Par Value; 78,362,441 Shares Issued
and 65,866,529 Shares Outstanding at
June 28, 2000, and 78,150,054 Shares Issued
and 65,899,445 Shares Outstanding at
June 30, 1999 7,836 7,815
Additional Paid-In Capital 298,172 285,448
Retained Earnings 660,758 542,918
966,766 836,181
Less:
Treasury Stock, at Cost (12,495,912 shares at
June 28, 2000 and 12,250,609 shares at
June 30, 1999) 201,531 174,742
Unearned Compensation 3,027 -
Total Shareholders' Equity 762,208 661,439
Total Liabilities and Shareholders' Equity $1,162,328 $1,085,644
See accompanying notes to consolidated financial statements.
BRINKER INTERNATIONAL, INC.
Consolidated Statements of Income
(In thousands, except per share amounts)
Fiscal Years
2000 1999 1998
Revenues $2,159,837 $1,870,554 $1,574,414
Operating Costs and Expenses:
Cost of Sales 575,570 507,103 426,558
Restaurant Expenses (Note 5) 1,197,828 1,036,573 866,143
Depreciation and Amortization 90,647 82,385 86,376
General and Administrative 100,123 90,311 77,407
Total Operating Costs and Expenses 1,964,168 1,716,372 1,456,484
Operating Income 195,669 154,182 117,930
Interest Expense 10,746 9,241 11,025
Other, Net 3,381 14,402 1,447
Income Before Provision for
Income Taxes and Cumulative Effect
of Accounting Change 181,542 130,539 105,458
Provision for Income Taxes (Note 3) 63,702 45,297 36,383
Income Before Cumulative
Effect of Accounting Change 117,840 85,242 69,075
Cumulative Effect of
Accounting Change (net of Income
Tax Benefit of $3,404) - 6,407 -
Net Income $ 117,840 $ 78,835 $ 69,075
Basic Earnings Per Share:
Income Before Cumulative Effect
of Accounting Change $ 1.80 $ 1.30 $ 1.05
Cumulative Effect of
Accounting Change - 0.10 -
Basic Net Income Per Share $ 1.80 $ 1.20 $ 1.05
Diluted Earnings Per Share:
Income Before Cumulative Effect
of Accounting Change $ 1.75 $ 1.25 $ 1.02
Cumulative Effect of
Accounting Change - 0.09 -
Diluted Net Income Per Share $ 1.75 $ 1.16 $ 1.02
Basic Weighted Average
Shares Outstanding 65,631 65,926 65,766
Diluted Weighted Average
Shares Outstanding 67,410 68,123 67,450
See accompanying notes to consolidated financial statements.
BRINKER INTERNATIONAL, INC.
Consolidated Statements of Shareholders' Equity
(In thousands)
<TABLE>
Additional
Common Stock Paid-In Retained Treasury Unearned
Shares Amount Capital Earnings Stock Compensation Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 25, 1997 65,234 $7,771 $ 271,196 $395,008 $(150,231) $ - $523,744
Net Income - - - 69,075 - - 69,075
Purchases of Treasury
Stock (809) - - - (17,077) - (17,077)
Issuances of Common Stock 1,501 44 614 - 12,769 - 13,427
Tax Benefit from Stock
Options Exercised - - 4,570 - - - 4,570
Balances at June 24, 1998 65,926 7,815 276,380 464,083 (154,539) - 593,739
Net Income - - - 78,835 - - 78,835
Purchases of Treasury Stock (2,171) - - - (48,125) - (48,125)
Issuances of Common Stock 2,144 - (811) - 27,922 - 27,111
Tax Benefit from Stock
Options Exercised - - 9,879 - - - 9,879
Balances at June 30, 1999 65,899 7,815 285,448 542,918 (174,742) - 661,439
Net Income - - - 117,840 - - 117,840
Purchases of Treasury
Stock (2,445) - - - (60,707) - (60,707)
Issuances of Common Stock 2,194 - (3,187) - 33,832 - 30,645
Tax Benefit from Stock
Options Exercised - - 10,837 - - - 10,837
Long-term Incentive Plan 219 21 5,074 - 86 (3,027) 2,154
Balances at June 28, 2000 65,867 $7,836 $ 298,172 $660,758 $(201,531) $ (3,027) $762,208
</TABLE>
See accompanying notes to consolidated financial statements.
BRINKER INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
Fiscal Years
2000 1999 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 117,840 $ 78,835 $ 69,075
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 90,647 82,385 86,376
Amortization of Unearned Compensation 2,124 - -
Deferred Income Taxes 1,985 1,955 (1,220)
Cumulative Effect of Accounting Change - 6,407 -
Changes in Assets and Liabilities:
Receivables 1,109 (1,886) (829)
Inventories (1,398) (1,276) (743)
Prepaid Expenses (371) (9,855) (6,212)
Other Assets (4,032) 14,458 (9,649)
Accounts Payable 41,198 8,102 3,808
Accrued Liabilities 10,520 14,348 14,377
Other Liabilities 9,372 (247) 12,352
Net Cash Provided by Operating Activities 268,994 193,226 167,335
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for Property and Equipment (165,397) (181,088) (155,246)
Payment for Purchases of Restaurants, Net - - (2,700)
Net Proceeds from Sale-Leasebacks - - 125,961
Proceeds from Sales of Marketable Securities - 51 23,962
Investments in Equity Method Investees (954) (4,484) (35,500)
Net (Advances to) Repayments from Affiliates - (19,363) 5,942
Additions to Other Assets - - (6,850)
Net Cash Used in Investing Activities (166,351) (204,884) (44,431)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (Payments) Borrowings on Credit Facilities (58,200) 50,505 (132,980)
Payments of Long-term Debt (14,635) (14,618) (390)
Proceeds from Issuances of Common Stock 30,645 27,111 13,731
Purchases of Treasury Stock (60,707) (48,125) (17,077)
Net Cash (Used in) Provided by Financing
Activities (102,897) 14,873 (136,716)
Net (Decrease) Increase in Cash and Cash
Equivalents (254) 3,215 (13,812)
Cash and Cash Equivalents at Beginning of Year 12,597 9,382 23,194
Cash and Cash Equivalents at End of Year $ 12,343 $ 12,597 $ 9,382
CASH PAID DURING THE YEAR:
Interest, Net of Amounts Capitalized $ 10,192 $ 9,531 $ 11,479
Income Taxes, Net of Refunds $ 36,646 $ 39,618 $ 31,807
NON-CASH TRANSACTIONS DURING THE YEAR:
Tax Benefit from Stock Options Exercised $ 10,837 $ 9,879 $ 4,570
Restricted Common Stock Issued $ 5,181 $ - $ -
</TABLE>
See accompanying notes to consolidated financial statements.
BRINKER INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements include the accounts of Brinker
International, Inc. and its wholly-owned subsidiaries ("Company"). All
intercompany accounts and transactions have been eliminated in
consolidation. The Company owns and operates, or franchises, various
restaurant concepts principally located in the United States. Investments
in unconsolidated affiliates in which the Company exercises significant
influence, but does not control, are accounted for by the equity method,
and the Company's share of the net income or loss is included in other, net
in the consolidated statements of income.
The Company has a 52/53 week fiscal year ending on the last Wednesday in
June. Fiscal years 2000 and 1998, which ended on June 28, 2000 and June 24,
1998, respectively, each contained 52 weeks, while fiscal year 1999, which
ended on June 30, 1999, contained 53 weeks.
Certain prior year amounts in the accompanying consolidated financial
statements have been reclassified to conform with fiscal 2000
classifications.
(b) Financial Instruments
The Company's policy is to invest cash in excess of operating requirements
in income-producing investments. Income producing investments with
maturities of three months or less at the time of investment are reflected
as cash equivalents. Cash equivalents of $114,000 and $2.6 million at June
28, 2000 and June 30, 1999, respectively, consist primarily of money market
funds and commercial paper.
The Company's financial instruments at June 28, 2000 and June 30, 1999
consist of cash equivalents, accounts receivable, notes receivable, 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 and accounts receivable approximate
their carrying amounts due to the short duration of those items; notes
receivable are based on the present value of expected future cash flows
discounted at the interest rate currently offered by the Company which
approximates rates currently being offered by local lending institutions
for loans of similar terms to companies with comparable credit risk; and
long-term debt is based on the amount of future cash flows discounted using
the Company's expected borrowing rate for debt of comparable risk and
maturity.
The Company's 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 currently
limited to interest rate hedges which are entered into with the intent of
managing overall borrowing costs. Amounts receivable or payable under
interest swap agreements are recorded as adjustments to interest expense.
Cash flows related to derivative transactions are included in operating
activities. See Note 4 for additional discussion of debt related
agreements.
(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 $3.2 million, $4.0 million, and $3.6 million during
fiscal 2000, 1999, and 1998, respectively.
(f) Advertising
Advertising costs are expensed as incurred. Advertising costs were $80.7
million, $73.6 million, and $60.6 million in fiscal 2000, 1999, and 1998,
respectively, and are included in restaurant expenses in the consolidated
statements of income.
(g) Preopening Costs
The Company elected early adoption of Statement of Position 98-5 ("SOP 98-
5"), "Reporting on the Costs of Start-Up Activities," retroactive to the
first quarter of fiscal 1999. This accounting standard requires the Company
to expense all start-up and preopening costs as they are incurred. The
Company previously deferred such costs and amortized them over the twelve-
month period following the opening of each restaurant. The cumulative
effect of this accounting change, net of income tax benefit, was $6.4
million ($0.09 per diluted share) in fiscal 1999. This new accounting
standard accelerated the Company's recognition of preopening costs, but has
benefited the post-opening results of new restaurants. Excluding the one-
time cumulative effect, the adoption of the new accounting standard reduced
the Company's reported results for fiscal 1999 by approximately $1.7
million ($0.03 per diluted share).
(h) Goodwill and Other Intangible Assets
Intangible assets include both goodwill and identifiable intangibles
arising from the allocation of the purchase prices of assets acquired.
Goodwill represents the residual purchase price after allocation to all
other identifiable net assets of the businesses acquired. Other intangibles
consist mainly of reacquired franchise rights, trademarks, and intellectual
property. All intangible assets are stated at historical cost less
accumulated amortization. Intangible assets are amortized on a straight-
line basis over 30 to 40 years for goodwill and 15 to 25 years for other
intangibles. The Company assesses the recoverability of intangible assets,
including goodwill, by determining whether the asset balance can be
recovered over its remaining life through undiscounted future operating
cash flows of the acquired asset. The amount of impairment, if any, is
measured based on projected discounted future operating cash flows.
During fiscal 1999, the Company recorded an impairment charge of
approximately $3 million for reacquired franchise rights. The impairment
charge, which is included in amortization expense, is the result of a
change in development plans in the related franchise area. Management
believes that no reduction of the estimated useful life is warranted.
Accumulated amortization for goodwill was $10.9 million and $8.7 million as
of June 28, 2000 and June 30, 1999, respectively. Accumulated amortization
for other intangible assets was $5.9 million and $4.8 million as of June
28, 2000 and June 30, 1999, respectively.
(i) Recoverability of Long-Lived Assets
The Company evaluates long-lived assets and certain identifiable
intangibles 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 the asset and the
expected proceeds upon sale of the asset less its carrying amount. Assets
held for sale are reported at the lower of carrying amount or fair value
less costs to sell. During fiscal 1999, the Company's share of net losses
in equity method investees included charges of approximately $6.5 million
related to impairment.
(j) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(k) Treasury Stock
During fiscal 1998, the Company's Board of Directors approved a plan to
repurchase up to $50.0 million of the Company's common stock. During
fiscal 1999 and fiscal 2000, the Company's Board of Directors authorized
increases in the plan by an additional $35.0 million and $125.0 million,
respectively. Pursuant to the plan, the Company repurchased approximately
2,445,000 shares of its common stock for approximately $60.7 million during
fiscal 2000, approximately 2,171,000 shares of its common stock for
approximately $48.1 million during fiscal 1999, and approximately 809,000
shares of its common stock for approximately $17.1 million during fiscal
1998 in accordance with applicable securities regulations. The repurchased
common stock was or will be used by the Company to increase shareholder
value, offset the dilutive effect of stock option exercises, satisfy
obligations under its savings plans, and for other corporate purposes. The
repurchased common stock is reflected as a reduction of shareholders'
equity.
(l) Stock-Based Compensation
The Company uses the intrinsic value method for measuring employee stock-
based compensation cost which measures compensation cost as the excess, if
any, of the quoted market price of the Company's common stock at the grant
date over the amount the employee must pay for the stock. The Company's
policy is to grant stock options at the market value of the underlying
stock 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 ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," are presented in Note 6.
Pursuant to shareholder approval in November 1999, the Company implemented
the Executive Long-Term Incentive Plan for certain key employees, one
component of which is the award of restricted common stock. During fiscal
2000, approximately 219,000 shares of restricted common stock were awarded,
the majority of which vests over a three-year period. Unearned compensation
was recorded as a separate component of shareholders' equity at the date of
the award based on the market value of the shares and is being amortized to
compensation expense over the vesting period.
(m) Comprehensive Income
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from non-owner sources. Comprehensive income for fiscal 2000,
1999, and 1998 is equal to net income as reported.
(n) Net Income Per Share
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding
for the reporting period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. For the
calculation of diluted net income per share, the basic weighted average
number of shares is increased by the dilutive effect of stock options
determined using the treasury stock method. The Company has no other
potentially dilutive securities.
(o) Segment Reporting
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. The Company identifies operating segments based on
management responsibility and believes it meets the criteria for
aggregating its operating segments into a single reporting segment.
(p) 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. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
2000 1999
Payroll $ 58,498 $ 46,648
Insurance 7,645 10,185
Property tax 11,775 10,783
Sales tax 11,841 13,015
Other 22,145 20,753
$111,904 $101,384
3. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
2000 1999 1998
Current income tax expense:
Federal $ 53,551 $ 38,373 $ 34,347
State 8,166 4,969 3,408
Total current income tax expense 61,717 43,342 37,755
Deferred income tax expense (benefit):
Federal 1,835 2,124 (1,212)
State 150 (169) (160)
Total deferred income tax expense
(benefit) 1,985 1,955 (1,372)
$ 63,702 $ 45,297 $ 36,383
A reconciliation between the reported provision for income taxes before
cumulative effect of accounting change and the amount computed by applying
the statutory Federal income tax rate of 35% to income before provision for
income taxes follows (in thousands):
2000 1999 1998
Income tax expense at statutory rate $ 63,540 $ 45,659 $ 36,910
FICA tax credit (5,993) (4,495) (3,575)
State income taxes, net of Federal
benefit 5,405 3,120 2,111
Other 750 1,013 937
$ 63,702 $ 45,297 $ 36,383
The income tax effects of temporary differences that give rise to
significant portions of deferred income tax assets and liabilities as of
June 28, 2000 and June 30, 1999 are as follows (in thousands):
2000 1999
Deferred income tax assets:
Insurance reserves $ 5,678 $ 10,451
Employee benefit plans 7,761 4,349
Leasing transactions 7,137 5,510
Other, net 12,792 12,277
Total deferred income tax assets 33,368 32,587
Deferred income tax liabilities:
Depreciation and capitalized interest
on property and equipment 24,119 19,375
Prepaid expenses 4,554 8,060
Goodwill and other amortization 2,346 1,936
Other, net 7,889 6,771
Total deferred income tax liabilities 38,908 36,142
Net deferred income tax liability $ 5,540 $ 3,555
At June 28, 2000, current taxes payable totaled $6.4 million, while at June
30, 1999, the current tax refund receivable was $7.8 million.
4. DEBT
The Company has credit facilities aggregating $335.0 million at June 28,
2000. A credit facility of $260.0 million bears interest at LIBOR (6.68% at
June 28, 2000) plus a maximum of 0.50% and expires in fiscal 2002. At June
28, 2000, $45.0 million was outstanding under this facility. The remaining
credit facilities bear interest based upon the lower of the banks' "Base"
rate, certificate of deposit rate, negotiated rate, or LIBOR rate plus
0.375%, and expire at various times beginning in fiscal year 2001. Unused
credit facilities available to the Company were approximately $281.3
million at June 28, 2000. 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):
2000 1999
7.8% senior notes $ 71,400 $ 85,700
Credit facilities 51,800 110,000
Capital lease obligations (see Note 5) 1,758 2,093
124,958 197,793
Less current installments 14,635 14,635
$110,323 $183,158
The $71.4 million of unsecured senior notes bear interest at an annual rate
of 7.8%. Interest is payable semi-annually and principal of $14.3 million
is due annually through fiscal 2004 with the remaining unpaid balance due
in fiscal 2005.
In April 2000, the Company entered into interest rate swap agreements to
manage interest rate risks relating to the senior notes. The Company pays
semi-annually a variable interest rate based on LIBOR plus a spread, in
arrears, compounded at three month intervals. The Company receives semi-
annually the fixed interest rate of 7.8% on the senior notes. The notional
amount of the swap agreements aggregated $71.4 million at June 28, 2000,
with interest rates ranging from LIBOR plus 0.530% to LIBOR plus 0.535%.
The term of the agreements expires April 2005. The estimated fair value of
these agreements is not material at June 28, 2000.
The Company is the guarantor of approximately $9.5 million in lines of
credit, of which $9.2 million is outstanding for certain franchisees and an
equity method investee.
5. LEASES
(a) Capital Leases
The Company leases certain buildings under capital leases. The asset values
of $6.5 million at June 28, 2000 and June 30, 1999, and the related
accumulated amortization of $5.9 million and $5.8 million at June 28, 2000
and June 30, 1999, 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 2000, 1999, and 1998 was $81.8 million, $70.0 million,
and $54.8 million, respectively. Contingent rent included in rent expense
for fiscal 2000, 1999, and 1998 was $7.2 million, $5.5 million, and $4.9
million, respectively.
In July 1993, the Company entered into operating lease agreements with
unaffiliated groups to lease certain restaurant sites. During fiscal 1995
and 1994, the Company utilized the entire commitment of approximately $30
million for the development of restaurants leased by the Company. Since
inception of the commitment, the Company has retired several properties in
the commitment, which thereby reduced the outstanding balance. At the
expiration of the lease in fiscal 2001, the Company has, at its option, the
ability to purchase all of the properties or to guarantee the residual
value related to the remaining properties, which is currently approximately
$20.6 million. Based on an analysis of the operations of these properties,
the Company believes the properties support the guaranteed residual value.
In fiscal 1998, the Company entered into a $55.0 million equipment leasing
facility, of which $47.5 million had been utilized through fiscal 1999. The
Company does not intend to further utilize this facility. In fiscal 2000,
the Company entered into a $25.0 million equipment leasing facility. As of
June 28, 2000, $16.2 million of the facility had been utilized. Each
facility is accounted for as an operating lease, expires in fiscal 2004 and
2006, respectively, and does not provide for renewal. The Company
guarantees a residual value related to the equipment of approximately 87%
of the total amount funded under the facility. At the end of each 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 not
exceed 75% of the total amount funded through the facility. The Company
believes the future cash flows related to the equipment support the
unamortized lease balance.
In fiscal 2000, the Company entered into a $50.0 million real estate
leasing facility. As of June 28, 2000, $9.4 million of the facility had
been utilized. The real estate facility, which is accounted for as an
operating lease, expires in fiscal 2007 and does not provide for renewal.
The Company guarantees the residual value related to the properties, which
will be approximately 87% of the total amount funded under the facility. At
the end of the lease term, the Company has the option to purchase all of
the leased real estate for an amount equal to the unamortized lease
balance. The Company believes the future cash flows related to the real
estate support the unamortized lease balance.
In fiscal 1998, the Company executed a $124.0 million sale and leaseback of
certain real estate assets. The $8.7 million gain resulting from the sale,
along with certain transaction costs, was deferred and is being amortized
over the remaining term of the operating lease.
(c) Commitments
At June 28, 2000, future minimum lease payments on capital and operating
leases were as follows (in thousands):
Fiscal Capital Operating
Year Leases Leases
2001 $ 566 $ 72,796
2002 566 70,497
2003 566 67,398
2004 456 62,744
2005 112 58,010
Thereafter - 330,521
Total minimum lease payments 2,266 $661,966
Imputed interest (average rate of 11.5%) 508
Present value of minimum lease payments 1,758
Less current installments 335
Capital lease obligations - noncurrent $1,423
At June 28, 2000, the Company had entered into other lease agreements for
restaurant facilities currently under construction or yet to be
constructed. In addition to base rent, the leases also contain provisions
for additional contingent rent based upon gross sales, as defined in the
leases. Classification of these leases as capital or operating has not been
determined as construction of the leased properties has not been completed.
6. STOCK OPTION PLANS
(a) 1983, 1992, and 1998 Employee Incentive Stock Option Plans
In accordance with the Incentive Stock Option Plans adopted in October
1983, November 1992, and October 1998, options to purchase approximately
26.8 million shares of Company common stock may be granted to officers,
directors, and eligible employees, as defined. Options are granted at the
market value of the underlying common stock 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 2000, 1999, and 1998 were as follows (in
thousands, except option prices):
Number of Weighted Average Share
Company Options Exercise Price
2000 1999 1998 2000 1999 1998
Options outstanding at
beginning of year 8,861 9,742 9,458 $17.37 $14.43 $14.13
Granted 1,672 1,942 1,661 24.19 26.65 14.07
Exercised (2,153) (2,002) (1,068) 13.92 13.01 10.76
Forfeited (416) (821) (309) 20.68 16.03 16.03
Options outstanding at
end of year 7,964 8,861 9,742 $19.56 $17.37 $14.43
Options exercisable at
end of year 3,668 4,232 5,556 $15.79 $15.97 $15.60
Options Outstanding Options Exercisable
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number of contractual exercise Number of exercise
prices options life (years) price options price
$10.89-$11.22 694 5.40 $11.08 694 $11.08
$12.00-$15.50 2,175 5.88 13.61 1,237 13.51
$16.00-$20.44 1,750 3.74 18.89 1,669 18.99
$23.06-$28.00 3,345 8.84 25.54 68 26.83
7,964 6.61 $19.56 3,668 $15.79
(b) 1991 and 1999 Non-Employee Stock Option Plans
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. In fiscal 2000, the 1991
Stock Option Plan for Non-Employee Directors and Consultants was replaced
by the 1999 Stock Option and Incentive Plan for Non-Employee Directors and
Consultants which authorized the issuance of up to 300,000 shares of
Company common stock. The authority to issue the remaining 131,500 stock
options under the 1991 Stock Option Plan for Non-Employee Directors and
Consultants has been terminated. Options are granted at the market value
of the underlying common stock 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 2000, 1999, and 1998 were as follows (in
thousands, except option prices):
Number of Weighted Average Share
Company Options Exercise Price
2000 1999 1998 2000 1999 1998
Options outstanding at
beginning of year 347 230 201 $17.13 $16.51 $16.10
Granted 6 183 52 23.50 16.97 16.40
Exercised (41) (46) (23) 15.48 15.09 12.60
Forfeited - (20) - - 13.08 -
Options outstanding at
end of year 312 347 230 $17.47 $17.13 $16.51
Options exercisable at
end of year 185 191 174 $15.35 $15.47 $16.52
At June 28, 2000, the range of exercise prices for options outstanding was
$11.22 to $25.44 with a weighted average remaining contractual life of 5.66
years.
(c) On The Border 1989 Stock Option Plan
In accordance with the Stock Option Plan for On The Border employees,
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. At June 28, 2000, there were 26,000 options
exercisable and outstanding at exercise prices ranging from $18.24 to
$19.76 with a weighted average remaining contractual life of 3.17 years.
(d) 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 the market value
of the underlying common stock on the date of grant, are all fully vested,
and expire ten years from the date of grant.
In November 1989, the Non-Qualified Stock Option Plan was terminated.
Consequently, no options were granted subsequent to fiscal 1990 and all
options were either exercised or forfeited in fiscal 1999.
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 diluted net income per common and equivalent share would
have been reduced to the pro forma amounts indicated below (in thousands,
except per share data):
<TABLE>
2000 1999 1998
<S> <C> <C> <C>
Net income - as reported $117,840 $ 78,835 $ 69,075
Net income - pro forma $108,503 $ 71,668 $ 62,745
Diluted net income per share - as reported $ 1.75 $ 1.16 $ 1.02
Diluted net income per share - pro forma $ 1.61 $ 1.05 $ 0.93
</TABLE>
The weighted average fair value of option grants was $10.87, $10.72, and
$6.33 during fiscal 2000, 1999, and 1998, respectively. The fair value is
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions:
2000 1999 1998
Expected volatility 40.8% 37.2% 41.5%
Risk-free interest rate 5.9% 4.6% 5.8%
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.
7. STOCKHOLDER PROTECTION RIGHTS PLAN
The Company maintains a Stockholder Protection Rights Plan ("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.
8. SAVINGS PLANS
The Company sponsors a qualified defined contribution retirement plan
("Plan I") covering salaried and hourly employees who have completed one
year of service and have attained the age of twenty-one. Plan I allows
eligible employees to defer receipt of up to 20% of their compensation and
100% of their eligible bonuses, as defined in the plan, and contribute such
amounts to various investment funds. The Company matches in Company common
stock 25% of the first 5% a salaried employee contributes. Hourly employees
do not receive matching contributions. Employee contributions vest
immediately while Company contributions vest 25% annually beginning on the
participant's second anniversary of employment. In fiscal 2000, 1999, and
1998, the Company contributed approximately $731,000, $688,000, and
$600,000, respectively.
The Company sponsors a non-qualified defined contribution retirement plan
("Plan II") covering highly compensated employees, as defined in the plan.
Plan II allows eligible employees to defer receipt of up to 20% of their
base compensation and 100% of their eligible bonuses, as defined in the
plan. The Company matches in Company 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 on the participant's second
anniversary of employment. In fiscal 2000, 1999, and 1998, the Company
contributed approximately $543,000, $381,000, and $298,000, respectively.
At the inception of Plan II, the Company established a Rabbi Trust to fund
Plan II obligations. The market value of the trust assets is included in
other assets and the liability to Plan II participants is included in other
liabilities.
9. RELATED PARTY TRANSACTION
The Company has secured notes receivable from Eatzi's Corporation
("Eatzi's") with a carrying value of approximately $21.6 million at June
28, 2000 and June 30, 1999. Approximately $6 million of the notes
receivable is convertible into nonvoting Series A Preferred Stock of
Eatzi's at the option of the Company and matures on December 28, 2006. The
remaining note receivable matures on September 28, 2005.
Interest on the convertible note receivable is 10.5% per year with payments
due beginning June 28, 2000 and continuing on a quarterly basis until the
principal balance and all accrued and unpaid interest have been paid in
full. In accordance with the terms of the note, Eatzi's elected to pay the
interest due on June 28, 2000 by issuing approximately 973,000 shares of
its nonvoting Series A Preferred Stock in lieu of making a cash payment of
$652,000. Interest on the remaining notes receivable balance is prime rate
plus 1.5% per year with payments due beginning September 28, 2000 and
continuing on a quarterly basis until the principal balance and all accrued
and unpaid interest have been paid in full. The notes receivable are
included in other assets in the accompanying consolidated balance sheets.
In addition, the Company sold a portion of its equity interest in Eatzi's
effective June 30, 1999.
10. 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, individually or in the
aggregate, on the Company's consolidated financial condition or results of
operations.
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the unaudited consolidated quarterly results
of operations for fiscal 2000 and 1999(in thousands, except per share
amounts):
Fiscal Year 2000
Quarters Ended
Sept. 29 Dec. 29 March 29 June 28
Revenues $511,033 $520,900 $551,191 $576,713
Income Before Provision for
Income Taxes 41,510 38,931 44,275 56,826
Net Income 27,106 25,422 28,602 36,710
Basic Net Income Per Share 0.41 0.39 0.44 0.56
Diluted Net Income Per Share 0.40 0.38 0.43 0.54
Basic Weighted Average
Shares Outstanding 65,786 65,377 65,266 66,034
Diluted Weighted Average
Shares Outstanding 67,772 66,977 66,814 68,003
Fiscal Year 1999
Quarters Ended
Sept. 23 Dec. 23 March 24 June 30
Revenues $432,101 $443,975 $459,192 $535,286
Income Before Provision for
Income Taxes and Cumulative
Effect of Accounting Change 30,658 26,963 31,447 41,471
Income Before Cumulative
Effect of Accounting Change 20,020 17,607 20,535 27,080
Net Income 13,613 17,607 20,535 27,080
Basic Net Income Per Share:
Income Before Accounting Change 0.30 0.27 0.31 0.41
Net Income 0.21 0.27 0.31 0.41
Diluted Net Income Per Share:
Income Before Accounting Change 0.30 0.26 0.30 0.40
Net Income 0.20 0.26 0.30 0.40
Basic Weighted Average
Shares Outstanding 65,774 65,608 66,316 66,003
Diluted Weighted Average
Shares Outstanding 67,596 67,781 68,852 68,267
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Brinker International, Inc.:
We have audited the accompanying consolidated balance sheets of Brinker
International, Inc. and subsidiaries as of June 28, 2000 and June 30, 1999,
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the years in the three-year period ended June 28,
2000. 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 auditing standards generally
accepted in the United States of America. 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 28, 2000 and June 30, 1999,
and the results of their operations and their cash flows for each of the
years in the three-year period ended June 28, 2000 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for the cost of start-up
activities in fiscal 1999.
KPMG LLP
Dallas, Texas
July 31, 2000
MANAGEMENT'S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS
To Our Shareholders:
Management is responsible for the reliability of the consolidated
financial statements and related notes, which have been prepared in
conformity with accounting principles generally accepted in the United
States of America and include amounts based upon our estimate and
judgments, as required. The consolidated financial statements have been
audited and reported on by our independent auditors, KPMG LLP, who were
given free access to all financial records and related data, including
minutes of the meetings of the Board of Directors and Committees of the
Board. We believe that the representations made to the independent
auditors were valid and appropriate.
Brinker maintains a system of internal controls over financial reporting
designed to provide reasonable assurance of the reliability of the
consolidated financial statements. Brinker's internal audit function
monitors and reports on the adequacy of the compliance with the internal
control system and appropriate actions are taken to address significant
control deficiencies and other opportunities for improving the system as
they are identified. The Audit Committee of the Board of Directors,
which is comprised solely of outside directors, provides oversight to the
financial reporting process through periodic meetings with our
independent auditors, internal auditors, and management. Both our
independent auditors and internal auditors have free access to the Audit
Committee. Although no cost-effective internal control system will
preclude all errors and irregularities, we believe our controls as of and
for the year ended June 28, 2000 provide reasonable assurance that the
consolidated financial statements are reliable.
RONALD A. MCDOUGALL
Vice Chairman and Chief Executive Officer
RUSSELL G. OWENS
Executive Vice President and Chief Financial and
Strategic Officer
