<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
ON THE BORDER CAFES, INC.
- ------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
ON THE BORDER CAFES, INC.
- ------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2)
/ / $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3)
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11:*
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
/X/ Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: $11,531
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.: Form S-4
------------------------------------------------------------------------
3) Filing Party: Brinker International, Inc.
------------------------------------------------------------------------
4) Date Filed: March 17, 1994
- -------------------
* Set forth the amount on which the filing fee is calculated and state how it
was determined.
<PAGE>
ON THE BORDER CAFES, INC.
----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 18, 1994
------------------------
To The Shareholders of
ON THE BORDER CAFES, INC.:
Notice is hereby given that the Annual Meeting of Shareholders of On The
Border Cafes, Inc., a Texas corporation ("OTB"), will be held on Wednesday, May
18, 1994 beginning at 9:00 a.m. CDT at the Clarion Hotel, 1241 West Mockingbird
Lane, Dallas, Texas 75247, for the following purposes:
1. To consider and vote upon a proposal to approve that certain Amended and
Restated Agreement and Plan of Merger, by and among OTB, Brinker
International, Inc. ("Brinker") and Rio Acquisition Corp., pursuant to
which (a) OTB would become a subsidiary, directly or indirectly, of
Brinker, and (b) each outstanding share of common stock of OTB would be
converted into shares of common stock of Brinker pursuant to the formula
described therein;
2. To elect nine directors of OTB;
3. To consider and vote upon a proposal to amend and restate OTB's Amended
and Restated Stock Option Plan (the "Option Plan") to permit grants of
options under the Option Plan to consultants of OTB; and
4. To transact any other business as may properly come before the meeting
or any adjournment thereof.
Shareholders of record at the close of business on April 20, 1994 are
entitled to notice of and to vote at the meeting or any adjournment thereof. The
list of shareholders entitled to vote at the meeting will be available for
inspection by any shareholder for any purpose relating to the meeting during
regular business hours at OTB's corporate office at 7800 N. Stemmons Freeway,
Suite 580, Dallas, Texas 75247 for ten days prior to the meeting.
If the Merger is consummated, the holders of record of OTB's common stock
who comply with the requirements of Articles 5.11 through 5.13 of the Texas
Business Corporation Act, which Articles are attached as Appendix C to the
attached Proxy Statement/Prospectus, may dissent from the merger and exercise
their appraisal rights in accordance with Texas law. See "The Merger --
Appraisal Rights of Dissenting Shareholders" in the attached Proxy
Statement/Prospectus for a description of the procedures which must be followed
to perfect appraisal rights under the Texas Business Corporation Act.
WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING, PLEASE MARK, SIGN, DATE AND
RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE ENCLOSED POSTAGE
PREPAID ENVELOPE.
By Order of the Board of Directors
RAYMOND E. YOAKUM
SECRETARY
Dallas, Texas
April 22, 1994
<PAGE>
PROXY STATEMENT/PROSPECTUS
PROXY STATEMENT
ON THE BORDER CAFES, INC.
ANNUAL MEETING OF SHAREHOLDERS TO BE
HELD ON MAY 18, 1994
------------------------
PROSPECTUS
BRINKER INTERNATIONAL, INC.
1,134,726 SHARES OF COMMON STOCK
------------------------
This Proxy Statement/Prospectus is being furnished to shareholders of On The
Border Cafes, Inc., a Texas corporation ("OTB"), in connection with the
solicitation of proxies by the Board of Directors of OTB for use at the Annual
Meeting of Shareholders to be held at 9:00 a.m., local time, on May 18, 1994 at
the Clarion Hotel, 1241 West Mockingbird Lane, Dallas, Texas (together with any
adjournment or postponement thereof, the "Annual Meeting").
This document also constitutes a Prospectus of Brinker International, Inc.,
a Delaware corporation ("Brinker"), under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to 1,134,726 shares, subject to possible
adjustment (the "Brinker Shares"), of common stock of Brinker, $.10 par value
per share (the "Brinker Common Stock"), to be issued to the shareholders of OTB.
The Brinker Shares will be issued in exchange for all of the outstanding shares
(the "OTB Shares") of common stock of OTB, $.02 par value per share (the "OTB
Common Stock") (other than OTB Shares held by OTB or its subsidiaries and OTB
Shares held by dissenting shareholders, if any), in the merger (the "Merger") of
Rio Acquisition Corp., a wholly owned subsidiary of Brinker (the "Brinker
Subsidiary"), into OTB in accordance with the Amended and Restated Agreement and
Plan of Merger (the "Merger Agreement"), by and among Brinker, OTB and the
Brinker Subsidiary. As a result of the Merger, the separate corporate existence
of the Brinker Subsidiary will cease, and OTB will continue its existence as a
direct or indirect subsidiary of Brinker.
The principal executive offices of Brinker are located at 6820 LBJ Freeway,
Dallas, Texas 75240 and its telephone number is (214) 980-9917. The principal
executive offices of OTB are located at 7800 North Stemmons Freeway, Suite 580,
Dallas, Texas 75247 and its telephone number is (214) 905-7500.
This Proxy Statement/Prospectus and the enclosed proxy card are first being
mailed to shareholders of OTB on or about April 22, 1994.
THE BRINKER SHARES TO BE OFFERED IN CONNECTION WITH THE MERGER HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMIS-
SION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTA-
TION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS APRIL 22, 1994.
<PAGE>
AVAILABLE INFORMATION
This Proxy Statement/Prospectus does not contain all of the information set
forth in the Registration Statement and exhibits thereto which Brinker has filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Act. As permitted by the rules and regulations of the Commission,
this Proxy Statement/Prospectus omits certain information, exhibits and
undertakings contained in the Registration Statement. Reference is made to the
Registration Statement and to the exhibits thereto for further information,
which may be inspected without charge at the office of the Commission at 450
Fifth Street, Washington, D.C. 20549, and copies of which may be obtained from
the Commission at prescribed rates. Statements contained in this Proxy
Statement/ Prospectus relating to the contents of any contract or other document
referred to herein or therein are not necessarily complete and, in each
instance, reference is made to the copy of such document filed as an exhibit to
the Registration Statement. Each such statement is qualified in its entirety by
such reference.
In addition, both Brinker and OTB are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith file reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 or at the Regional Offices of the
Commission which are located as follows: Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of such material can also
be obtained from the Commission at prescribed rates. Written requests for such
material should be addressed to the Public Reference Section, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Brinker
Common Stock is listed on the New York Stock Exchange, Inc. ("NYSE") and such
reports, proxy statements and other information concerning Brinker can be
inspected and copies can be obtained at the offices of the NYSE, 20 Broad
Street, New York, New York 10005.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN CONNECTION
WITH THE OFFERS MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY BRINKER OR
OTB. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER IN SUCH PERSON'S JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT, SINCE THE DATE OF THIS PROXY STATEMENT/PROSPECTUS,
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF BRINKER OR OTB.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information.................................................................................... 2
Summary of Proxy Statement/Prospectus.................................................................... 4
Annual Meeting of OTB.................................................................................... 9
The Merger............................................................................................... 10
Pro Forma Financial Information.......................................................................... 28
Market Price of and Dividends on the Common Stock of Brinker and OTB and Related Shareholder Matters..... 35
Brinker Selected Financial Data.......................................................................... 36
Brinker Management's Discussion and Analysis of Financial Condition and Results of Operations............ 37
Business of Brinker...................................................................................... 41
Management and Principal Shareholders of Brinker......................................................... 47
Description of Capital Stock of Brinker.................................................................. 54
OTB Selected Financial Data.............................................................................. 55
OTB Management's Discussion and Analysis of Financial Condition and Results of Operations................ 56
Business of OTB.......................................................................................... 62
Management and Principal Shareholders of OTB............................................................. 67
Amendment of Amended and Restated Stock Option Plan...................................................... 75
Legal Matters............................................................................................ 78
Experts.................................................................................................. 78
Shareholders' Proposals.................................................................................. 78
Index to Financial Statements............................................................................ F-1
Appendix A -- Amended and Restated Agreement and Plan of Merger.......................................... A-1
Appendix B -- Opinion of Armata Partners................................................................. B-1
Appendix C -- Certain Provisions of the Texas Business Corporation Act................................... C-1
</TABLE>
3
<PAGE>
SUMMARY OF PROXY STATEMENT/PROSPECTUS
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT/ PROSPECTUS. THE SUMMARY IS NECESSARILY INCOMPLETE AND
SELECTIVE AND IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION
CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS, INCLUDING THE APPENDICES HERETO.
THE TERMS "OTB" AND "BRINKER" REFER RESPECTIVELY TO ON THE BORDER CAFES, INC.
AND ITS SUBSIDIARIES AND PREDECESSORS AND BRINKER INTERNATIONAL, INC. AND ITS
SUBSIDIARIES AND PREDECESSORS, UNLESS THE CONTEXT OTHERWISE REQUIRES. ALL SHARE
AND PER SHARE INFORMATION CONCERNING THE BRINKER COMMON STOCK (INCLUDING THE
NUMBER OF BRINKER SHARES TO BE RECEIVED BY THE OTB SHAREHOLDERS IN THE MERGER)
AND THE OTB COMMON STOCK HAS BEEN RESTATED TO REFLECT STOCK DIVIDENDS, STOCK
SPLITS AND REVERSE STOCK SPLITS EFFECTED PRIOR TO THE DATE HEREOF, INCLUDING A
THREE-FOR-TWO STOCK DIVIDEND EFFECTED BY BRINKER ON MARCH 30, 1994.
MATTERS TO BE VOTED UPON. At the Annual Meeting, the shareholders of OTB
will be asked to consider and vote upon proposals to approve and adopt the
Merger Agreement, amend and restate OTB's Amended and Restated Stock Option Plan
(the "Option Plan") and elect nine directors.
MERGER. Pursuant to the proposed Merger, the Brinker Subsidiary would be
merged into OTB and OTB would become a subsidiary of Brinker. Upon completion of
the Merger, each OTB Share would be converted into the right to receive the
number of Brinker Shares equal to the "Conversion Amount" (as defined herein);
provided, however, OTB Shares held by OTB and OTB Shares held by shareholders
who perfect their appraisal rights under Texas law (the "Unconverted Shares")
would not be converted into shares of Brinker Common Stock upon completion of
the Merger. If the average closing price of the Brinker Common Stock on the NYSE
for the ten trading days ending on the date which is five trading days before
the consummation of the Merger (the "Brinker Trading Price") is between $28.583
and $32.00, the Conversion Amount for each OTB Share would be equal to .301171.
If the Brinker Trading Price is more than $32.00, then the Conversion Amount for
each OTB Share would be equal to the quotient of (A) 9.637473 divided by (B) the
Brinker Trading Price. If the Brinker Trading Price is less than $28.583, the
Conversion Amount for each OTB Share would be equal to the quotient of (X)
8.608472 divided by (Y) the Brinker Trading Price; however, if the Conversion
Amount would exceed .3472325, OTB and Brinker would either determine in good
faith the Conversion Amount or terminate the Merger Agreement. A VOTE IN FAVOR
OF THE MERGER BY AN OTB SHAREHOLDER WILL BE DEEMED TO BE AUTHORIZATION OF OTB'S
EXECUTIVE OFFICERS AND DIRECTORS TO AGREE TO ANY CONVERSION AMOUNT THEY DEEM IS
APPROPRIATE IF THE CONVERSION AMOUNT (PURSUANT TO THE FORMULA DESCRIBED ABOVE)
EXCEEDS .3472325. See "The Merger."
BUSINESS OF BRINKER. Brinker is principally engaged in the operation and
development of the "Chili's Grill & Bar," "Grady's American Grill," "Romano's
Macaroni Grill" and "Spageddies Italian Italian Food" restaurant concepts. As of
February 2, 1994, Brinker's system of company-operated, joint venture and
franchised units included 413 restaurants located in 42 states, Canada, Mexico
and Singapore. The principal executive offices of Brinker are located at 6820
LBJ Freeway, Dallas, Texas 75240, and its telephone number is (214) 980-9917.
See "Business of Brinker."
BUSINESS OF OTB. OTB owns and operates casual dining Mexican food
restaurants. OTB's system of restaurants includes 21 restaurants system-wide,
with 14 operated by OTB and seven operated by franchisees. The principal
executive offices of OTB are located at 7800 North Stemmons Freeway, Suite 580,
Dallas, Texas 75247, and its telephone number is (214) 905-7500. See "Business
of OTB."
EFFECTIVE TIME OF THE MERGER. It is currently contemplated that the Merger
will be consummated as soon as practicable after the Annual Meeting. The Merger
will be effective upon the filing of Articles of Merger with the Secretary of
State of Texas (the "Effective Time").
EXCHANGE OF OTB STOCK CERTIFICATES. As soon as practicable after the
Effective Time, instructions and a letter of transmittal will be furnished to
all OTB shareholders for use in exchanging their stock certificates for
certificates evidencing the Brinker Shares they will be entitled to receive as a
4
<PAGE>
result of the Merger. SHAREHOLDERS OF OTB SHOULD NOT SUBMIT THEIR STOCK
CERTIFICATES FOR EXCHANGE UNTIL SUCH INSTRUCTIONS AND LETTER OF TRANSMITTAL ARE
RECEIVED. See "The Merger -- Exchange of Certificates Representing OTB Shares."
VOTES REQUIRED. The affirmative votes of the holders of a majority of the
outstanding OTB Shares are required to approve the Merger on behalf of OTB.
Approval of the amendment to the Option Plan requires the affirmative vote of a
majority of the OTB Shares represented in person or by proxy at the Annual
Meeting. The election as a director of each nominee for election as a director
requires the affirmative vote of a plurality of the OTB Shares represented in
person or by proxy at the Annual Meeting. See "Annual Meeting of OTB." Directors
and executive officers of OTB and their affiliates own approximately 38% of the
OTB Shares entitled to vote at the Annual Meeting. Certain directors of OTB who
own a total of approximately 37% of the OTB Shares have agreed to vote all of
their OTB Shares in favor of the adoption and approval of the Merger Agreement.
The consummation of the Merger will not require the vote of the shareholders
of Brinker, and the Merger is not being presented to the shareholders of Brinker
for their approval. Brinker, the sole shareholder of the Brinker Subsidiary, has
approved and adopted the Merger on behalf of the Brinker Subsidiary.
NO SOLICITATION. The Merger Agreement provides that OTB will not directly
or indirectly (i) solicit or initiate discussions with or (ii) enter into any
negotiations or agreements with, or furnish any information that is not publicly
available to, any third party concerning any proposal for a merger, sale of
substantial assets, sale of shares of stock or securities or other takeover or
business combination transaction, subject to the fiduciary duties of the OTB
Board of Directors (the "OTB Board"). See "The Merger -- Certain Covenants."
INTERESTED PERSONS. Two shareholders of OTB (the "Optionees") and the
Brinker Subsidiary have entered into an Option Agreement, dated January 24, 1994
(the "Option Agreement"). Under the terms of the Option Agreement, the Optionees
granted to the Brinker Subsidiary an irrevocable option to purchase
approximately 1,089,000 OTB Shares owned by them. The Option will become
effective, subject to certain conditions, if OTB, its directors, executive
officers or the Optionees decide to enter into negotiations or agreements with,
or furnish any information that is not publicly available to, any entity, person
or group concerning any proposal for a merger or sale of OTB or its
subsidiaries. The exercise price to be paid by the Brinker Subsidiary for each
of these shares upon the exercise of the Option will be $8.78 per share together
with an amount payable from time to time equal to the federal income taxes
payable by the Optionees due to the sale of the shares to the Brinker
Subsidiary. The exercise price may be paid at the option of the Optionees in
cash or in shares of Brinker Common Stock. In the event that the Brinker
Subsidiary exercises the Option and OTB consummates a transaction such that
other shareholders of OTB receive an amount per share in excess of the amount
payable to the Optionees as previously described, then the Brinker Subsidiary
will pay to the Optionees an amount equal to such difference, on an after-tax
basis, with respect to each OTB Share purchased pursuant to the Option. The
Optionees also agreed to vote all of their OTB Shares in favor of the Merger at
the Annual Meeting, to take all action necessary to adopt and implement the
Merger Agreement and to refrain from asserting any appraisal rights. See "The
Merger -- Interested Persons."
APPRAISAL RIGHTS OF DISSENTING SHAREHOLDERS. Subject to certain other
conditions, a shareholder of record of OTB who does not vote his or her OTB
Shares in person or by proxy in favor of the Merger and who files with OTB a
written objection to the Merger before the vote at the Annual Meeting, stating
that his or her right to dissent will be exercised if the Merger is effective
and giving his or her name and address, will be eligible to make a written
demand on OTB for appraisal rights following the consummation of the Merger.
Neither a proxy nor a vote opposing or abstaining from the Merger will
constitute a written objection to the Merger. An OTB shareholder who files a
written objection will not be entitled to appraisal rights unless such
shareholder also makes a written demand following the
5
<PAGE>
consummation of the Merger and takes certain other steps in the manner required
by Texas law. A vote in favor of the Merger, in person or by proxy, will
constitute a waiver of appraisal rights. See "The Merger -- Appraisal Rights of
Dissenting Shareholders."
FEDERAL INCOME TAX CONSEQUENCES. The Merger is intended to be a tax-free
reorganization under the federal income tax laws, and, as such, no gain or loss
will be recognized by the shareholders of OTB upon their receipt of the Brinker
Shares in exchange for their OTB Shares. Gain or loss will be recognized,
however, by holders of OTB Shares to the extent of any cash received by the OTB
shareholders who perfect their appraisal rights or for any fractional share
amount. See "The Merger -- Federal Income Tax Consequences."
ACCOUNTING TREATMENT. Brinker intends to account for the Merger as a
pooling-of-interests.
CONDITIONS OF THE MERGER; TERMINATION. In addition to approval by the
shareholders of OTB, consummation of the Merger is subject to the satisfaction
or waiver of a number of conditions and to certain regulatory matters. Brinker's
obligation to consummate the Merger is also conditioned upon the delivery of a
favorable letter from the independent accountants for Brinker with respect to
the qualification of the Merger as a pooling-of-interests transaction in
conformity with certain accounting guidelines. Other than approval of the Merger
by the OTB shareholders, substantially all of the conditions to the Merger may
be waived, in whole or in part, by the parties for whose benefit they have been
created, without the approval of their respective shareholders. However, after
approval by the shareholders of OTB, no amendment or modification may be made
which by law requires further approval by such shareholders unless such approval
is obtained. In addition, the Merger may be abandoned under certain
circumstances, and such abandonment will not require shareholder approval. See
"The Merger -- Conditions to Merger, and "-- Termination of Merger Agreement."
REASONS FOR MERGER. The OTB Board considered a number of factors,
including, without limitation, the following: (i) the arm's-length negotiations
with Brinker which resulted in the agreement by Brinker to acquire all of the
outstanding OTB Shares for a premium over the prevailing market price of the OTB
Shares; (ii) OTB's restricted ability to open additional restaurants based upon
its limited capital resources and the impact of its recent operating results and
the financial obligations resulting from the settlement of claims arising from
the March 1993 airplane accident (see "OTB Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources"); (iii) limitations on OTB's ability to compete effectively with
other Mexican food restaurant companies with greater access to capital; (iv)
current market conditions, historical market prices and trading information for
both the OTB Common Stock and the Brinker Common Stock; (v) the structure of the
Merger, which provides that shareholders of OTB will receive an equity interest
in a larger, higher growth, more diversified restaurant company with a stronger
balance sheet and cash flow and with depth of management personnel and training
resources; (vi) the historical and current financial condition, results of
operations, prospects and businesses of OTB and Brinker; (vii) the expectation
that OTB shareholders will receive the Brinker Shares in a tax-free transaction;
(viii) the expectation that the Merger would be beneficial to the employees of
OTB; and (ix) the opinion of Armata Partners, L.P. ("Armata Partners"), OTB's
financial advisor, that the consideration to be received by holders of OTB
Shares in the Merger is fair, from a financial point of view, to such
shareholders. See "The Merger -- Interested Persons."
OPINION OF FINANCIAL ADVISOR. Armata Partners has delivered its written
opinion to the OTB Board to the effect that, as of the date of its opinion, the
consideration to be received by the OTB shareholders in the Merger was fair,
from a financial point of view, to the OTB shareholders. A copy of the opinion
of Armata Partners, which sets forth the assumptions made, is attached to this
Proxy Statement/Prospectus as Appendix B and should be read in its entirety. See
"The Merger -- Opinion of OTB Financial Advisor."
COMPARISON OF RIGHTS OF BRINKER SHAREHOLDERS AND OTB SHAREHOLDERS. Brinker
is incorporated under the laws of the State of Delaware, and OTB is incorporated
under the laws of the State of Texas. Shareholders of OTB will, upon
consummation of the Merger and to the extent they receive Brinker
6
<PAGE>
Shares, become shareholders of Brinker and their rights as such will be governed
by Delaware law and Brinker's Certificate of Incorporation and Bylaws. See "The
Merger -- Comparison of Rights of Holders of Brinker Common Stock and OTB Common
Stock."
MARKET, DIVIDEND AND SHARE PRICE INFORMATION. On April 19, 1994, the last
reported closing price of the Brinker Common Stock on the NYSE was $25.125 per
share. On such date, the last reported closing price of the OTB Common Stock on
the Nasdaq National Market was $8.00 per share. On January 24, 1994, the trading
day immediately prior to the public announcement that Brinker and OTB had
entered into the Merger Agreement, the last reported closing price of the
Brinker Common Stock was $29.083 per share and of the OTB Common Stock was
$7.25. No cash dividends have been paid to date on either the Brinker Common
Stock or the OTB Common Stock. See "Market Price of and Dividends on the Common
Stock of Brinker and OTB and Related Shareholder Matters."
SUMMARY OF SELECTED FINANCIAL INFORMATION. The following tables set forth
selected financial information for Brinker for each of the five fiscal years in
the period ended June 30, 1993 and for the six months ended December 31, 1992
and the 26 weeks ended December 29, 1993, and for OTB for each of the five
fiscal years in the period ended January 3, 1994. Such information should be
read in conjunction with the historical financial statements of Brinker and OTB
and the notes thereto which are included herein. Selected financial information
for Brinker for the six months ended December 31, 1992 and the 26 weeks ended
December 29, 1993 has been derived from the unaudited historical financial
statements and, in the opinion of the management of Brinker, includes all
adjustments (consisting only of normal recurring adjustments) that are
considered necessary for a fair presentation of the operating results for such
interim periods. Results for the interim periods are not necessarily indicative
of results for the full year.
The unaudited pro forma combined information presented below provides
financial information giving effect to the Merger on a pooling-of-interests
basis for the periods presented. The pro forma information is provided for
informational purposes only and is not necessarily indicative of actual results
that would have been achieved had the Merger been consummated at the beginning
of the periods presented or of future results. The pro forma information is
derived from the Pro Forma Financial Information appearing elsewhere herein and
should be read in conjunction with those statements. See "Pro Forma Financial
Information."
BRINKER -- HISTORICAL
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
26 WEEKS 6 MONTHS
FISCAL YEARS ENDED JUNE 30, ENDED ENDED DEC.
----------------------------------------------------- DEC. 29, 31,
1993 1992 1991 1990 1989 1993 1992
--------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................ $ 652,943 $ 519,260 $ 426,848 $ 347,127 $ 285,943 $ 389,968 $ 303,125
Net Income.......................... 48,933 35,712 26,099 18,090 13,938 29,408 21,464
Fully Diluted Net Income Per Share.. 0.68 0.51 0.40 0.33 0.26 0.40 0.30
Fully Diluted Weighted Average
Shares Outstanding................. 71,594 70,163 64,832 55,611 54,606 73,238 71,078
Dividends Per Share................. -- -- -- -- -- -- --
BALANCE SHEET DATA (AT PERIOD END):
Total Assets........................ $ 435,259 $ 337,312 $ 266,332 $ 197,718 $ 154,024 $ 484,642
Long-term Liabilities............... 25,622 21,060 18,729 23,755 49,682 28,503
Shareholders' Equity................ 334,731 254,095 207,466 132,394 78,314 366,741
Book Value Per Outstanding Share.... 4.88 3.91 3.25 2.30 1.54 5.30
</TABLE>
7
<PAGE>
OTB -- HISTORICAL
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS
-----------------------------------------------------
1993 1992 1991 1990 1989(1)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................ $ 30,585 $ 23,350 $ 20,985 $ 20,817 $ 19,303
Net Income (Loss)................... (2,703) 786 (16) (1,239) 289
Fully Diluted Net Income (Loss) Per
Share.............................. (0.84) 0.29 (0.01) (0.92) N/A
Fully Diluted Weighted Average
Shares Outstanding................. 3,209 2,674 1,470 1,349 N/A
Dividends Per Share................. -- -- -- -- N/A
BALANCE SHEET DATA (AT PERIOD END):
Total Assets........................ $ 14,454 $ 11,418 $ 4,110 $ 3,926 $ 4,239
Long-term Liabilities............... 3,659 1,204 987 1,989 2,222
Shareholders' Equity (Deficit)...... 4,889 7,767 (610) (605) 258
Book Value Per Outstanding Share.... 1.52 2.41 (0.41) (0.41) N/A
<FN>
- ------------------------------
(1) OTB began operations in 1990 when stock was issued in exchange for the net
assets of several limited partnerships and stock of a corporation. Amounts
shown reflect that of the combined predecessor entities.
</TABLE>
BRINKER AND OTB -- UNAUDITED PRO FORMA COMBINED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
26 WEEKS 6 MONTHS
FISCAL YEARS ENDED JUNE 30, ENDED ENDED
------------------------------- DEC. 29, DEC. 31,
1993 1992 1991 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.................................................. $ 678,558 $ 541,025 $ 447,457 $ 407,461 $ 315,648
Net Income................................................ 49,903 35,692 25,066 27,222 21,928
Fully Diluted Net Income Per Share(1)..................... 0.69 0.50 0.38 0.37 0.30
Fully Diluted Weighted Average Shares Outstanding(1)...... 72,556 70,770 65,273 74,200 72,046
Dividends Per Share....................................... -- -- -- -- --
BALANCE SHEET DATA (AT PERIOD END):
Total Assets.............................................. $ 447,784 $ 348,095 $ 269,949 $ 499,096
Long-term Liabilities..................................... 27,569 22,277 20,445 32,162
Shareholders' Equity...................................... 342,830 261,470 207,328 372,654
Book Value Per Outstanding Share.......................... 4.93 3.96 3.22 5.31
<FN>
- ------------------------
(1) The unaudited pro forma combined net income per share is based on the
combined average number of common and common equivalent shares of Brinker
Common Stock and OTB Common Stock outstanding during the period, based on
an exchange ratio of 0.30 of a share of Brinker Common Stock for each
share of OTB Common Stock.
</TABLE>
OTB EQUIVALENT -- UNAUDITED PRO FORMA COMBINED(1)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30, 26 WEEKS 6 MONTHS
ENDED DEC. ENDED DEC.
------------------------------- 29, 31,
1993 1992 1991 1993 1992
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Fully Diluted Net Income Per Share.................................. $ 0.21 $ 0.15 $ 0.11 $ 0.11 $ 0.09
Dividends Per Share................................................. -- -- -- -- --
Book Value Per Outstanding Share.................................... 1.48 1.19 0.97 1.59
<FN>
- ------------------------------
(1) These amounts are calculated by multiplying the "Brinker and OTB --
Unaudited Pro Forma Combined" data by the exchange ratio of 0.30 for OTB
Common Stock.
</TABLE>
8
<PAGE>
ANNUAL MEETING OF OTB
This Proxy Statement/Prospectus is furnished to shareholders of OTB in
connection with the solicitation of proxies on behalf of the OTB Board for use
at the Annual Meeting to be held on May 18, 1994. Proxies in the form enclosed
will be voted at the Annual Meeting, if properly executed, returned to OTB prior
to the meeting and not revoked. A proxy may be revoked at any time before it is
voted by giving written notice to the Secretary of OTB. The approximate date on
which this Proxy Statement/ Prospectus and the enclosed proxy card will first be
sent to shareholders is April 22, 1994.
OUTSTANDING CAPITAL STOCK AND RECORD DATE. The record date for shareholders
of OTB entitled to vote at the Annual Meeting is April 20, 1994. At the close of
business on that day, there were 3,209,795 shares of OTB Common Stock
outstanding and entitled to vote at the Annual Meeting.
QUORUM AND VOTING. The presence, in person or by proxy, of the holders of a
majority of the outstanding shares of OTB Common Stock is necessary to
constitute a quorum at the meeting. In deciding all questions, a holder of OTB
Common Stock is entitled to one vote, in person or by proxy, for each share held
in his or her name on the record date. Abstentions will be included in vote
totals and, as such, will have the same effect on each proposal other than the
election of directors as a negative vote. Broker non-votes, if any, will not be
included in vote totals and, as such, will have no effect on any proposal (other
than the proposal to approve the Merger Agreement, in which case such non-votes
will have the same effect as a negative vote). Approval of the Merger Agreement
requires the affirmative vote of holders of a majority of the issued and
outstanding OTB Common Stock. Assuming the presence of a quorum, directors will
be elected by a plurality of the votes cast. The affirmative vote of the holders
of a majority of the shares represented at the Annual Meeting will be required
for the approval of the amendment to the Option Plan and all other proposals
submitted for a vote at the Annual Meeting.
ACTION TO BE TAKEN AT THE ANNUAL MEETING. The accompanying proxy, unless
the shareholder otherwise specifies in the proxy, will be voted (i) for the
proposal to approve the Merger Agreement, (ii) for the election of each of the
nine nominees named herein for the office of director, (iii) for the proposal to
amend and restate the Option Plan to permit grants of options under the Option
Plan to consultants of OTB and (iv) at the discretion of the proxy holders on
any other matter that may properly come before the meeting or any adjournment
thereof. Where shareholders have appropriately specified how their proxies are
to be voted, they will be voted accordingly. If any other matter of business is
brought before the meeting, the proxy holders may vote the proxies at their
discretion. The directors do not know of any such other matter of business. A
representative of Coopers & Lybrand, OTB's independent auditors, is expected to
be present at the Annual Meeting and will be available to answer questions.
SOLICITATION OF PROXIES. The accompanying proxy is being solicited on
behalf of the OTB Board. The expense of preparing, printing and mailing the form
of proxy and the material used in the solicitation thereof will be borne by
Brinker. In addition to the use of the mails, proxies may be solicited by
personal interview, telephone and telegram by directors, officers and employees
of OTB. Arrangements have also been made with brokerage houses, banks and other
custodians, nominees and fiduciaries for the forwarding of soliciting materials
to the beneficial owners of the OTB Shares held of record by such persons, and
OTB will reimburse them for reasonable out-of-pocket expenses incurred by them
in connection therewith.
All information contained in this Proxy Statement/Prospectus relating to the
occupations, affiliations and securities holdings of directors and officers of
OTB and their relationship and transactions with OTB is based upon information
received from the individual directors and officers. Corporate Investor
Communications, Inc. will assist in the solicitation of proxies by OTB for a fee
of $3,000.
OTB's Annual Report on Form 10-K for the fiscal year ended January 3, 1994,
which includes financial statements and accompanies or precedes this Proxy
Statement/Prospectus, does not form any part of the material for the
solicitation of proxies.
9
<PAGE>
THE MERGER
GENERAL
The terms and conditions of the Merger are set forth in the Merger
Agreement, the text of which is attached to this Proxy Statement/Prospectus as
Appendix A. The summary of the Merger Agreement contained in this Proxy
Statement/Prospectus does not purport to be complete and is qualified in its
entirety by reference to the complete text of such document.
At the time the Merger becomes effective, the Brinker Subsidiary will be
merged with and into OTB in accordance with Texas law. As a result of the
Merger, the separate corporate existence of the Brinker Subsidiary (which was
formed solely for the purposes of the Merger and has not engaged in any
operations or businesses) will cease, and OTB will continue its existence as a
separate subsidiary of Brinker.
Upon the consummation of the Merger, the OTB Shares (other than the
Unconverted Shares) outstanding immediately prior to the time the Merger becomes
effective will be converted into the Brinker Shares. Any fractional shares
resulting from such conversion will entitle the holder to receive cash. See "The
Merger -- No Fractional Shares." The shares of capital stock of Brinker
outstanding immediately prior to the Merger will not be affected as a result of
the Merger.
Brinker will treat the Merger as a pooling-of-interests for financial
reporting purposes. See "The Merger -- Accounting Treatment." The Merger is
intended to be a tax-free reorganization under the federal income tax laws, and,
as such, no gain or loss will be recognized by the shareholders of OTB upon
their receipt of the Brinker Shares in exchange for their OTB Shares. Gain or
loss will be recognized, however, by holders of OTB Shares to the extent of any
cash received by the OTB shareholders who perfect their appraisal rights or for
any fractional share amount. See "The Merger -- Federal Income Tax
Consequences."
BACKGROUND OF THE MERGER
In mid-October, 1993, certain senior officers of Brinker participated in an
informal meeting to discuss strategic development within the Mexican food
segment of the restaurant industry. At such time, Brinker was actively engaged
in research and development of its own Mexican food restaurant, and at this
meeting, among other things, the parties present discussed the competitive
pressures involved in building a new restaurant concept from infancy. Due to the
considerable national activity in the Mexican food segment of the restaurant
industry, it was determined to be in the best interest of Brinker to evaluate
potential acquisition targets to allow Brinker to add a proven Mexican theme
concept to its multi-concept system of restaurants.
After performing an internal evaluation of Mexican theme restaurants that
might be suitable acquisition targets, Brinker senior officers decided to
investigate further the potential acquisition of OTB. Certain senior officers of
Brinker contacted a representative of Montgomery Securities ("Montgomery") to
discuss the possibility of an acquisition of OTB.
In late October 1993, a representative of Montgomery contacted Louis P.
Neeb, an outside director of OTB, inquiring whether OTB might be interested in a
business combination with Brinker. Mr. Neeb suggested that the Montgomery
representative call David deN. Franklin, the Chairman of the Board and a major
shareholder of OTB. Brinker senior officers then held an informal meeting with
Mr. Franklin and Frederick G. Molsen, a director and a major shareholder of OTB.
At this meeting, among other things, the parties discussed in general terms the
restaurant industry and possible benefits that might be derived from a business
combination between Brinker and OTB. Both Brinker and OTB then began reviewing
publicly available financial information about each other.
On November 13, 1993, the OTB Board informally met, and Messrs. Franklin and
Molsen conveyed to the OTB Board that they had met with representatives of
Brinker. The OTB Board determined it was interested in engaging in discussions
with Brinker. The OTB Board then authorized Raymond C. Hemmig, a director of
OTB, and Stephen D. Fenstermacher, the Chief Executive Officer
10
<PAGE>
and a director of OTB, to act as OTB's representatives in connection with
discussions with Brinker. The OTB Board also discussed investment banking
representation and authorized Mr. Hemmig to contact the investment banking firm
of Armata Partners, which contact was made later that week. OTB subsequently
entered into an engagement letter with Armata Partners.
On December 1, 1993, OTB entered into a confidentiality agreement with
Brinker relating to non-public information of OTB. As part of that
confidentiality agreement, (i) Brinker agreed that, without the prior written
consent of OTB, it would not, for a period of two years, seek control of OTB and
(ii) OTB agreed that, except as required by applicable law, it would not discuss
an acquisition of OTB with any other party until the close of business on
December 23, 1993 (which date was subsequently extended until January 6, 1994).
Upon execution of the confidentiality agreement, Brinker made a formal request
to OTB for delivery of certain non-public information for use in its analysis of
OTB.
On December 9, 1993, January 6, 1994 and January 14, 1994 informal meetings
were held among Brinker representatives and OTB representatives pursuant to
which exploratory discussions took place and the companies engaged in
preliminary due diligence of each other.
The OTB Board and the Brinker senior officers who participated in the
discussions thought it would be difficult to proceed with a possible business
combination until a claim against OTB asserted by the wife of a former employee
of OTB relating to a 1993 airplane accident was settled (see "OTB Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources"). The Brinker representatives advised OTB that
Brinker was unwilling to engage in substantive or definitive discussions with
OTB until the claim was resolved. The settlement agreement resolving this claim
was executed on January 15, 1994, and the settlement was publicly announced on
January 17, 1994.
On January 19, 1994, representatives of Brinker and OTB negotiated the price
and principal structure terms of the Merger Agreement, subject to the approval
of the Boards of Directors of Brinker and OTB. Between January 20, 1994 and
January 24, 1994, representatives of Brinker and OTB negotiated the other terms
of the Merger Agreement. On January 24, 1994, the Merger was approved by the
Boards of Directors of OTB and Brinker, the Merger Agreement was executed by OTB
and Brinker and a public announcement of the Merger was made.
On January 31, 1994, counsel for OTB was contacted by an investment banker
("Investment Banker") representing a publicly traded restaurant company who
inquired whether OTB would be interested in another acquisition offer. Counsel
for OTB referred the call to Armata Partners. The Investment Banker and a
representative of Armata Partners engaged in several conversations that week in
which the Investment Banker indicated his client might consider offering to
acquire OTB in a stock for stock merger valued in the range of $37 million. The
Armata Partners representative advised the Investment Banker about restrictions
on OTB's engaging in merger discussions, subject to the OTB Board's fiduciary
obligations to shareholders, and the Option Agreement affecting OTB Shares held
by certain major OTB shareholders. The Investment Banker sent public information
about his client to Armata Partners. In accordance with the Merger Agreement,
OTB notified Brinker about the inquiry.
After discussing the indication of interest with several of the OTB
directors, the Armata Partners representative communicated to the Investment
Banker that based on his conversations with several of the directors, there did
not seem to be a substantial amount of interest in a stock for stock transaction
with the Investment Banker's client at the $37 million price range. The
Investment Banker indicated that he realized the OTB Board could not make any
real decisions about the interest of his client without something in writing
from his client and that he realized that it was incumbent on his client to
provide something in writing to OTB if it desired to pursue a possible
acquisition. As of the date of this Proxy Statement/Prospectus, OTB has not
received additional correspondence from the Investment Banker.
11
<PAGE>
The Merger Agreement originally provided that, as a condition to Brinker's
obligation to complete the Merger, Brinker must have completed its due diligence
review of the business, operations and records of OTB by February 23, 1994 and
have been satisfied in its sole discretion with the results of such due
diligence review. On February 23, 1994, this due diligence review period was
extended. On February 28, 1994, Brinker completed its due diligence review of
OTB and determined to proceed with the Merger. In addition, the Merger Agreement
was amended in the following respects: (i) a condition precedent to Brinker's
obligation to close was added which is the receipt by Brinker of evidence
reasonably satisfactory to Brinker that FGM Corporation (which is an affiliate
of Frederick G. Molsen, a director of OTB) and all of the shareholders of FGM
Corporation will have released OTB from certain claims (see "Management and
Principal Shareholders of OTB -- Certain Transactions"); (ii) the formula
relating to the number of Brinker Shares an OTB shareholder would receive in the
Merger was changed so that if the Brinker Trading Price (as described in "The
Merger -- Effective Time and Consequences of the Merger") exceeds $32.00 per
share, the OTB shareholders would receive fewer Brinker Shares (as originally
executed, the Merger Agreement provided that the $32.00 and 9.637473 numbers
described in the above-referenced section had been $33.5417 and 10.101778,
respectively); (iii) each OTB Share held by OTB or its subsidiaries which were
to be cancelled in the Merger will continue to be outstanding and will not be
converted into Brinker Common Stock; and (iv) the officers and members of the
board of directors of the surviving corporation after the Merger were changed to
the officers and members of the board of directors of the Brinker Subsidiary
immediately prior to the Merger rather than the officers and members of the OTB
Board immediately prior to the Merger.
REASONS FOR THE MERGER
At a meeting held on January 24, 1994, the OTB Board unanimously determined
that the Merger was advisable and in the best interests of OTB shareholders and
approved the Merger Agreement. See "The Merger--Interested Persons."
At the meeting held on January 24, 1994, the OTB Board received a
presentation from its financial advisor, Armata Partners, and reviewed with
legal counsel the terms of the Merger Agreement, including the representations,
warranties, covenants and closing conditions contained therein. The OTB Board
also received the oral opinion of Armata Partners that, as of the date of such
opinion, the consideration to be received by the OTB shareholders in the Merger
was fair, from a financial point of view, to such shareholders.
At the OTB Board meeting held on February 24, 1994, the OTB Board received a
presentation from Armata Partners and reviewed with legal counsel the terms of
the proposed amendment to the Merger Agreement that was entered into on February
28, 1994. The OTB Board also received the oral opinion of Armata Partners that,
as of February 24, 1994, the consideration to be received by the OTB
shareholders in the Merger (pursuant to the formula described in the amended
Merger Agreement) was fair, from a financial point of view, to such
shareholders.
In reaching its conclusion to enter into the Merger Agreement and to
recommend adoption of the Merger Agreement by the OTB shareholders, the OTB
Board considered a number of factors, including, without limitation, the
following:
(i) the arm's-length negotiations with Brinker, which resulted in the
agreement by Brinker to acquire all outstanding OTB Shares for the Brinker
Shares, which represented between an approximately 18.7% and 32.9% premium
(depending upon the Conversion Amount) over the closing price for the OTB
Common Stock immediately prior to the announcement of the signing of the
Merger Agreement (and between an approximately 27.5% and 42.8% premium over
the closing price for the OTB Common Stock on the day before representatives
of Brinker and OTB negotiated the price and principal structure terms of the
Merger Agreement);
(ii) OTB's restricted ability to open additional restaurants based upon
its limited capital resources and the impact of its recent operating results
and the financial obligations resulting
12
<PAGE>
from the settlement of claims arising from the March 1993 airplane accident
(see "OTB Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources");
(iii) limitations on OTB's ability to compete effectively with other
Mexican food restaurant companies with greater access to capital;
(iv) the historical and current financial condition, results of
operations, prospects and businesses of OTB and Brinker before and after
giving effect to the Merger (see "OTB Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Brinker Management's
Discussion and Analysis of Financial Condition and Results of Operations");
(v) current market conditions, historical market prices and trading
information for both the OTB Common Stock and the Brinker Common Stock;
(vi) the structure of the Merger, which provides that shareholders of OTB
will receive an equity interest in a larger, higher growth, more diversified
restaurant company, with a stronger balance sheet and cash flow and with
depth of management personnel and training resources;
(vii) the expectation that the Merger will afford OTB shareholders the
opportunity to receive Brinker Common Stock in a tax-free transaction;
(viii) the expectation that the Merger would be beneficial to the
employees of OTB; and
(ix) the opinion of Armata Partners that as of such date the
consideration to be received by holders of OTB Shares in the Merger was
fair, from a financial point of view, to such shareholders. In considering
the opinion of Armata Partners, the OTB Board took into account, among other
things, the terms of Armata Partners' engagement by OTB and the fees payable
to Armata Partners thereunder. See "The Merger -- Opinion of OTB Financial
Advisor."
In view of the wide variety of factors considered in connection with its
evaluation of the Merger Agreement, the OTB Board did not find it practicable
to, and did not, quantify or otherwise attempt to assign relative weights to
specific factors considered in reaching its determinations.
THE OTB BOARD BELIEVES THAT THE MERGER IS IN THE BEST INTERESTS OF THE OTB
SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS A VOTE FOR THE MERGER.
OPINION OF OTB FINANCIAL ADVISOR
OTB has engaged Armata Partners to act as its financial advisor in
connection with the transactions contemplated by the Merger Agreement and to
render its opinion as to the fairness, from a financial point of view, to the
OTB shareholders of the consideration to be received by such shareholders in the
Merger.
On January 24, 1994, in connection with the evaluation by the OTB Board of
the Merger Agreement, and again on February 24, 1994, in connection with the
evaluation by the OTB Board of the amendment to the Merger Agreement that was
entered into on February 28, 1994, Armata Partners made presentations to the OTB
Board with respect to the consideration to be received by the OTB shareholders
in the Merger and rendered its oral opinion (confirmed in a written opinion
dated the date of this Proxy Statement/Prospectus) that, as of the date of each
such opinion, and subject to assumptions, factors and limitations set forth in
such opinion as described below, the consideration to be received by the OTB
shareholders in the Merger was fair, from a financial point of view, to the OTB
shareholders.
THE FULL TEXT OF THE WRITTEN OPINION OF ARMATA PARTNERS DATED THE DATE OF
THIS PROXY STATEMENT/ PROSPECTUS, WHICH SETS FORTH ASSUMPTIONS MADE, FACTORS
CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY ARMATA PARTNERS, IS
INCLUDED AS APPENDIX B TO THIS PROXY STATEMENT/PROSPECTUS. OTB SHAREHOLDERS ARE
URGED TO READ SUCH OPINION CAREFULLY AND IN ITS ENTIRETY.
13
<PAGE>
No limitations were imposed by OTB on the scope of Armata Partners'
investigation or the procedures to be followed by Armata Partners in rendering
its opinion, except that OTB did not authorize Armata Partners to solicit, and
Armata Partners did not solicit, any indications of interest from any third
party with respect to the purchase of all or a part of OTB's business. In
arriving at its opinion, Armata Partners did not ascribe a specific range of
value to OTB, but made its determination as to the fairness, from a financial
point of view, of the consideration to be received by the OTB shareholders in
the Merger on the basis of the analyses referenced below. Armata Partners'
opinion is directed to the OTB Board only and does not constitute a
recommendation to any OTB shareholder as to how such shareholder should vote at
the Annual Meeting. Armata Partners was not requested to opine as to, and its
opinion does not address, OTB's underlying business decision to proceed with or
effect the Merger.
In arriving at its opinion, Armata Partners reviewed and analyzed: (i) the
Merger Agreement, the terms of the Merger and a comparison of those terms with
the terms of other transactions which Armata Partners deemed relevant; (ii)
publicly available information concerning OTB and Brinker which Armata Partners
believed to be relevant to its inquiry; (iii) financial and operating
information with respect to the business, operations and prospects of OTB and
Brinker furnished to Armata Partners by their respective managements, and
discussions held with various members of the senior managements of OTB and
Brinker concerning the historical and current operations, financial conditions
and future prospects of OTB and Brinker and the benefits expected to result from
consolidating OTB and Brinker; (iv) the prices and trading histories of the
common stocks of OTB and Brinker and a comparison of the trading histories of
other companies which Armata Partners deemed relevant; (v) a comparison of the
historical financial results and present financial conditions of OTB and Brinker
with those of other companies which Armata Partners deemed relevant; and (vi)
such other financial studies, analyses, investigations and other factors as
Armata Partners deemed relevant or appropriate.
In connection with its review, Armata Partners assumed and relied upon the
accuracy and completeness of the financial and other information provided to it
or discussed with it by OTB or Brinker or otherwise used by it in arriving at
its opinion, without independent verification. Armata Partners further relied
upon the assurances of the respective managements of OTB and Brinker that such
managements were not aware of any facts that would make such information
inaccurate or misleading with respect to the financial forecasts (including on a
pro forma basis) of OTB and Brinker. Armata Partners also relied upon the advice
of OTB's and Brinker's managements concerning the business, operations and
strategic benefits and implications of the Merger, including information
provided to Armata Partners by Brinker relating to the benefits expected to be
achieved through the combination of the operations of OTB and Brinker. With
respect to the financial forecasts provided to Armata Partners by the
managements of OTB and Brinker, Armata Partners assumed that such forecasts and
projections were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the respective managements of OTB and
Brinker as to the future financial performance of OTB and Brinker (including on
a pro forma basis), and further assumed that OTB and Brinker will perform in
accordance with such projections. In arriving at its opinion, Armata Partners
did not conduct physical inspections of the properties and facilities of OTB or
Brinker and did not make or obtain any evaluation or appraisals of the assets or
liabilities of OTB or Brinker. Armata Partners' opinion was necessarily based
upon market, economic and other conditions as they existed on, and could be
evaluated as of, the date of its investigation.
Armata Partners performed a variety of financial and comparative analyses,
including those described below. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances, and therefore such an opinion is not readily susceptible to
summary description. In its analyses, Armata Partners made numerous assumptions
with respect to industry performance, general business, regulatory and economic
conditions and other matters, many of which are beyond the control of OTB,
Brinker and Armata Partners. Any estimates contained therein are not necessarily
indicative of future results or actual values, which may be significantly more
or less
14
<PAGE>
favorable than such estimates. Because such estimates are inherently subject to
uncertainty, none of OTB, Armata Partners or any other person assumes
responsibility for their accuracy. Furthermore, in arriving at its fairness
opinion, Armata Partners did not attribute any particular weight to any analysis
or factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Armata
Partners believes that its analyses must be considered as a whole and that
considering any portions of such analyses and of the factors considered, without
considering all analyses and factors, could create a misleading or incomplete
view of the process underlying the opinion.
In connection with its review and determination that the Merger is fair,
from a financial point of view, to the shareholders of OTB, Armata Partners
considered the following factors, among others, to be important: (i) the fact
that the shareholders of OTB will receive a premium value for their shares of
between 18.7% and 32.9% (depending upon the Conversion Price) over the market
price of the OTB Common Stock immediately prior to the announcement of the
signing of the Merger Agreement; (ii) OTB's latest 12 month compound growth in
sales, earnings before interest and taxes ("EBIT") and net income compared to
companies deemed comparable; (iii) OTB's projected one year growth rate in
revenues and net income (based on management's estimates) compared to companies
deemed comparable (with respect to which estimates are publicly available); (iv)
OTB's latest four quarters sales less cost of goods sold (gross profit), EBIT,
and net income compared with companies deemed comparable; (v) calculation of the
range of market multiples for companies deemed comparable based on the market
capitalization, sales, EBIT and market value as compared with those of OTB and
Brinker; (vi) financial terms of the Merger compared with certain financial
terms of selected other business combinations deemed relevant; (vii) OTB's
restricted ability to open additional restaurants based upon its limited capital
resources and the impact of its recent operating results and the financial
obligations resulting from the settlement of claims arising from the March 13,
1993 airplane accident; (viii) limitations on OTB's ability to compete
effectively with other restaurant companies whose operating formats are similar
to OTB with greater access to capital; (ix) the historical and current financial
condition, results of operations, prospects and businesses of OTB and Brinker
before and after giving effect to the Merger; (x) current market conditions,
historical market prices and trading information for both the OTB Common Stock
and the Brinker Common Stock; (xi) the structure of the Merger, (xii) the fact
that the earnings of OTB have declined in recent quarters and for its last
fiscal year; and (xiii) the fact that the shareholders of OTB are entitled to
vote on the Merger and that they may elect to dissent and receive cash for their
shares.
The OTB Board selected Armata Partners as its financial advisor because
several of the directors were familiar with the expertise in the restaurant
industry and the reputation of one of the partners of Armata Partners and some
of the directors had worked with that partner in prior restaurant transactions.
Armata Partners is an investment banking firm regularly engaged in the valuation
of businesses and their securities in connection with mergers and acquisitions,
private placements and valuations for estate, corporate and other purposes.
There is no material relationship between OTB and, to its knowledge, its
affiliates and Armata Partners which existed in the past two years or is
mutually understood to be contemplated in the future.
Pursuant to an engagement letter dated November 16, 1993, OTB agreed to pay
Armata Partners (i) a monthly fee of $25,000 beginning with the signing of the
engagement letter (which fees will be credited against any fees that may be
payable pursuant to clause (ii) below); and (ii) if a sale of OTB occurs either
during the term of Armata Partners' engagement or at any time during a period of
12 months following the effective date of termination of Armata Partners'
engagement, then OTB shall pay to Armata Partners the sum of the following based
on the aggregate consideration involved in the sale: (a) $250,000 (the "Fee");
(b) if the per share consideration is between $8.50 and $9.00, then, in addition
to the Fee, Armata Partners will receive an additional fee equal to 3% of the
amount by which the aggregate consideration paid exceeds the aggregate
consideration payable if the per share consideration had been $8.50; (c) if the
per share consideration is between $9.00 and $10.00, then, in addition to the
Fee, Armata Partners will receive an additional fee equal to the sum of (x) 3%
of the
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amount by which the aggregate consideration payable if the per share
consideration had been $9.00 exceeds the aggregate consideration payable if the
per share consideration had been $8.50 (the "Incremental Fee") and (y) 4% of the
amount by which the aggregate consideration paid exceeds the aggregate
consideration payable if the per share consideration had been $9.00; (d) if the
per share consideration exceeds $10.00, then in addition to the Fee and the
Incremental Fee, Armata Partners will receive an additional fee equal to the sum
of (x) 4% of the amount by which the aggregate consideration payable if the per
share consideration had been $10.00 exceeds the aggregate consideration payable
if the per share consideration had been $9.00 and (y) 5% of the amount by which
the aggregate consideration paid exceeds the aggregate consideration payable if
the per share consideration had been $10.00. Furthermore, Armata Partners will
receive a fee of $100,000 on delivery of a fairness opinion. In addition, in
connection with the rendering of financial advisory services to OTB with respect
to the Merger, OTB has agreed to reimburse Armata Partners for reasonable
out-of-pocket expenses incurred by Armata Partners in carrying out its duties,
and to indemnify Armata Partners against certain liabilities, including
liabilities that may arise under federal securities laws to which Armata
Partners may become subject.
APPROVAL BY BRINKER
Brinker considered a number of factors in considering the Merger, including,
without limitation, the following:
(i) the opportunity to acquire an existing, proven and flexible concept
in the casual dining, Mexican-theme, segment of the restaurant industry;
(ii) the successful market penetration of OTB in the Dallas and Houston
markets which had created both name recognition and the capability of
becoming media efficient for television advertising in the future;
(iii) accelerated expansion capability by acquiring OTB versus generating
a new restaurant concept;
(iv) the expectation that OTB would provide a complementary fit with
Brinker's existing portfolio of restaurants due to their similar per person
check average, demographic profile and investment costs, and the fact that
existing OTB units have operated successfully in close proximity to Brinker
restaurants, thereby enabling Brinker to continue to expand OTB as part of
its multi-restaurant development strategy;
(v) the location of the corporate headquarters of OTB and seven of its
restaurants in the Dallas area would make the assimilation process more
smooth and limit the loss of key OTB personnel;
(vi) the expectation that the Merger could be completed quickly and in a
friendly manner; and
(vii) the expectation that the acquisition would be an integral part of
Brinker's plan to continue its rapid growth and premier reputation within
the casual dining segment of the restaurant industry, while maximizing
long-term shareholder wealth.
Accordingly, the Board of Directors of Brinker (the "Brinker Board")
approved the Merger and the Merger Agreement at a meeting on January 24, 1994.
In view of the wide variety of factors considered in connection with its
evaluation of the Merger Agreement, the Brinker Board did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weight to the specific factors considered in reaching its determinations.
INTERESTED PERSONS
OPTION AGREEMENT. Under the terms of the Option Agreement, David deN.
Franklin and Frederick G. Molsen, directors of the Company (who own in the
aggregate approximately 34% of the outstanding OTB Shares) granted to the
Brinker Subsidiary an irrevocable option to purchase approximately 1,089,000 OTB
Shares owned by them. The Option will become effective, subject to certain
conditions, if OTB, its directors, executive officers or the Optionees decide to
enter into negotiations or agreements with, or furnish any information that is
not publicly available to, any entity, person or
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group concerning any proposal for a merger or sale of OTB or its subsidiaries.
The exercise price to be paid by the Brinker Subsidiary for each of these shares
upon the exercise of the Option will be $8.78 per share, together with an amount
payable from time to time equal to the federal income taxes payable by the
Optionees due to the sale of the shares to the Brinker Subsidiary. The exercise
price may be paid at the option of the Optionees in cash or in shares of Brinker
Common Stock. In the event that the Brinker Subsidiary exercises the Option and
OTB consummates a transaction such that other shareholders of OTB receive an
amount per share in excess of the amount payable to the Optionees as previously
described, then the Brinker Subsidiary will pay to the Optionees an amount equal
to such difference, on an after-tax basis, with respect to each OTB Share
purchased pursuant to the Option. If the Optionees elect to receive shares of
Brinker Common Stock, the number of shares of Brinker Common Stock issued upon
the exercise of the Option will be equal to (i) $8.78 times the number of OTB
Shares being purchased divided by (ii) the "Brinker Closing Price" (as defined
herein), rounded to the nearest whole share. The "Brinker Closing Price" will be
equal to the average closing price of the Brinker Common Stock on the NYSE for
the five trading days ending immediately preceding the date the Option was
exercised. The Optionees also agreed to vote all of their OTB Shares in favor of
the Merger at the Annual Meeting, to take all action necessary to adopt and
implement the Merger Agreement and to refrain from asserting any appraisal
rights.
OTB STOCK OPTIONS. Each of Messrs. Hemmig, Neeb, Reed and Willingham
(directors of OTB) is a party to an option agreement with OTB pursuant to which
he has an option to acquire 5,000 shares of OTB Common Stock at an exercise
price of $8.00 per share. Mr. Neeb's and Mr. Reed's options expire in November
1994 and Mr. Hemmig's and Mr. Willingham's options expire in February 1995. All
of such options are fully vested. Each of Messrs. Lidvall and Fenstermacher
(directors of OTB) is a party to option agreements with OTB pursuant to which he
has options to acquire 85,000 shares of OTB Common Stock at exercise prices
between $5.75 and $6.50 per share. Those options expire at varying times between
August 1996 and June 1998. Options to acquire 23,750 shares of OTB Common Stock
held by Mr. Lidvall are presently exercisable and options to acquire 17,500
shares of OTB Common Stock held by Mr. Fenstermacher are presently exercisable.
Prior to the announcement of the Merger, the market price of the OTB Shares
was $7.25. If the Merger is consummated, Brinker will assume all outstanding
options granted by OTB (including those described above) and such optionees will
then have options to purchase Brinker Common Stock. The result of such
assumption will be that the exercise price for each of the above-referenced
options will likely be less than the market price of the Brinker Shares, and
that the options if exercised would likely be more valuable immediately after
the Merger than they were immediately prior to the announcement of the Merger.
In addition, the option agreements pursuant to which each of the officers,
employees and consultants of OTB is a party contains change of control
provisions and, as a result of those provisions, all of the options held by the
officers and employees of OTB (including Messrs. Fenstermacher and Lidvall) will
become fully exercisable upon consummation of the Merger. See "The Merger --
Treatment of OTB Options, Warrants and Debentures."
FENSTERMACHER AND LIDVALL EMPLOYMENT AGREEMENTS. Brinker has entered into
Employment Agreements with Messrs. Fenstermacher and Lidvall contingent on the
closing of the Merger. Those agreements are for a period of 12 months following
the closing. Each of Mr. Fenstermacher and Mr. Lidvall would generally be
entitled to be paid for the full 12 month period even if his employment were
terminated prior to the end of the 12 month period. Mr. Fenstermacher will hold
the position of Vice President/Controller -- On The Border Cafes Concept of
Brinker and receive an annual salary of $90,000. Mr. Lidvall will hold the
position of Vice President/Operations -- On The Border Cafes Concept of Brinker
and receive an annual salary of $100,000. Each of Messrs. Fenstermacher and
Lidvall will be granted options for 15,000 shares of Brinker Common Stock and
will be eligible for annual profit sharing beginning in fiscal year 1996. For a
description of bonuses payable to Messrs. Fenstermacher and Lidvall, see
"Management and Principal Shareholders of OTB -- Summary Compensation Table."
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HEMMIG FEE. In consideration for Mr. Hemmig's acting as Chairman of OTB's
negotiating committee in OTB's negotiations with Brinker, the OTB Board
authorized the payment to Mr. Hemmig of $25,000 immediately prior to the
Effective Time.
INDEMNIFICATION. The Merger Agreement provides that (i) Brinker will
indemnify the present and former officers and directors of OTB in certain
circumstances, (ii) all rights of indemnification existing in favor of the
officers and directors of OTB in the Articles of Incorporation of, and Bylaws
of, or agreement with, OTB will survive the Merger, (iii) OTB will use its best
efforts to continue to provide officers' and directors' liability insurance for
the benefit of its officers and directors; and (iv) Brinker agrees not to amend
or repeal any provisions of the Articles of Incorporation or Bylaws of OTB in
any manner which would adversely affect the indemnification or exculpatory
provisions contained therein. See "The Merger -- Certain Covenants."
BRINKER STOCK OWNERSHIP. As of January 24, 1994, Mr. Franklin owned
approximately 171,000 shares of Brinker Common Stock which is approximately 0.2%
of the total number of outstanding shares of Brinker Common Stock.
EFFECTIVE TIME AND CONSEQUENCES OF THE MERGER
If approved by the requisite vote of the shareholders of OTB and if all
other conditions to the consummation of the Merger are satisfied or waived, the
Merger will become effective, unless the Merger Agreement is terminated as
provided therein, upon the making of certain filings with the Secretary of State
of the State of Texas pursuant to the Texas Business Corporation Act (the
"TBCA"). At the Effective Time, the Brinker Subsidiary will be merged with and
into OTB, which will be the surviving corporation in the Merger, and the
separate corporate existence and identity of the Brinker Subsidiary will cease.
The corporate existence and identity of OTB will continue unaffected by the
Merger, although it will become a subsidiary of Brinker.
It is currently contemplated that the Effective Time of the Merger will
occur as promptly as practicable after the approval of the Merger by the OTB
shareholders at the Annual Meeting, subject to the conditions described under
"The Merger -- Conditions to Merger."
Upon completion of the Merger, each OTB Share (other than the Unconverted
Shares) will be converted into the right to receive the number of Brinker Shares
equal to the Conversion Amount. If the Brinker Trading Price (which is the
average closing price of the Brinker Common Stock on the NYSE for the ten
trading days ending on the date which is five trading days before the
consummation of the Merger) is between $28.583 and $32.00, the Conversion Amount
for each OTB Share will be equal to .301171. If the Brinker Trading Price is
more than $32.00, then the Conversion Amount for each OTB Share will be equal to
the quotient of (A) 9.637473 divided by (B) the Brinker Trading Price. If the
Brinker Trading Price is less than $28.583, the Conversion Amount for each OTB
Share will be equal to the quotient of (X) 8.608472 divided by (Y) the Brinker
Trading Price; however, if the Conversion Amount would exceed .3472325, OTB and
Brinker will either determine in good faith the Conversion Amount or terminate
the Merger Agreement. A VOTE IN FAVOR OF THE MERGER BY AN OTB SHAREHOLDER WILL
BE DEEMED TO BE AUTHORIZATION OF OTB'S EXECUTIVE OFFICERS AND DIRECTORS TO AGREE
TO ANY CONVERSION AMOUNT THEY DEEM IS APPROPRIATE IF THE CONVERSION AMOUNT
(PURSUANT TO THE FORMULA DESCRIBED ABOVE) EXCEEDS .3472325. If the Merger
Agreement is so terminated, Brinker has agreed to pay to OTB the fees and
expenses incurred by OTB in connection with the Merger in an amount not to
exceed the sum of $100,000 and the fees paid to OTB's financial advisor (not to
exceed $200,000).
The officers and directors of the Brinker Subsidiary will be the officers
and directors of the surviving corporation after the Effective Date. The
directors elected at the Annual Meeting described herein will serve as directors
of OTB in the event the Merger Agreement is terminated and the Merger does not
occur.
EXCHANGE OF CERTIFICATES REPRESENTING OTB SHARES
Instructions with regard to the surrender of OTB stock certificates,
together with a letter of transmittal to be used for this purpose, will be
mailed to OTB shareholders as promptly as practicable after the Effective Time.
In order to receive certificates evidencing the Brinker Shares, the shareholders
of OTB will be required to surrender their stock certificates after the
Effective Time, together with
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a duly completed and executed letter of transmittal, to Chemical Shareholder
Services Group, Inc. which will act as Exchange Agent (the "Exchange Agent") in
connection with the Merger. Promptly after the Effective Time, Brinker will
deposit in trust with the Exchange Agent certificates representing the number of
whole Brinker Shares to which the holders of OTB Shares (other than shareholders
who perfect their appraisal rights) are entitled to receive in the Merger
together with cash sufficient to pay for fractional shares. Upon receipt of such
stock certificates and letter of transmittal, the Exchange Agent will issue a
stock certificate evidencing the Brinker Shares to the registered holder or his
transferee for the number of Brinker Shares such person is entitled to receive
as a result of the Merger, together with cash in lieu of any fractional share.
No interest will be paid or accrued on the amounts payable upon the surrender of
OTB stock certificates.
SHAREHOLDERS OF OTB SHOULD NOT SUBMIT THEIR STOCK CERTIFICATES FOR EXCHANGE
UNTIL THE INSTRUCTIONS AND LETTER OF TRANSMITTAL ARE RECEIVED.
If any certificate for the Brinker Shares is to be issued or any cash
payment for a fractional share is to be made to a person other than the person
in whose name the certificate for the OTB Shares surrendered in exchange
therefor is registered, it will be a condition of such issuance or payment that
the stock certificate so surrendered be properly endorsed and otherwise in
proper form for transfer, and that the person requesting such issuance or
payment (i) pay in advance any transfer or other taxes required by reason of the
issuance of certificates for the Brinker Shares or a check representing cash for
a fractional share to a person other than the registered holder of the OTB stock
certificate surrendered or (ii) establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not applicable.
After the Effective Time, there will be no further transfers on the stock
transfer books of OTB of the OTB Shares that were outstanding immediately prior
to the Effective Time. If a certificate representing such shares is presented
for transfer, subject to compliance with the requisite transmittal procedures,
it will be cancelled and exchanged for the applicable number of Brinker Shares
and cash for any fractional share amount.
Each certificate representing OTB Shares immediately prior to the Effective
Time (other than the Unconverted Shares) will, at the Effective Time, be deemed
for all purposes to represent only the right to receive the number of whole
shares of the Brinker Shares (and the right to receive cash in lieu of any
fraction of a Brinker Share) into which the OTB Shares represented by such
certificate were converted in the Merger.
Until a certificate which formerly represented OTB Shares is actually
surrendered for exchange and received by the Exchange Agent, the holder thereof
will not be entitled to vote or receive any dividends or other distributions
with respect to Brinker Common Stock payable to holders of record after the
Effective Time. Subject to applicable law, upon such surrender of OTB stock
certificates such dividends or other distributions will be remitted (without
interest) to the record holder of certificates for the Brinker Shares issued in
exchange therefor.
Any certificates for the Brinker Shares and cash sufficient to pay for
fractional shares delivered or made available to the Exchange Agent and not
exchanged for OTB stock certificates within six months after the Effective Time
will be returned by the Exchange Agent to Brinker, which will thereafter act as
Exchange Agent. None of Brinker, OTB or the Exchange Agent will be liable to a
holder of OTB Shares for any of the Brinker Shares, dividends or other
distributions thereon or cash in lieu of fractional shares delivered to a public
official pursuant to applicable abandoned property, escheat or similar laws.
NO FRACTIONAL SHARES
No fractional shares of Brinker Common Stock will be issued in connection
with the Merger. All fractional shares of Brinker Common Stock to which a holder
of OTB Shares immediately prior to the Effective Time would otherwise be
entitled at the Effective Time will be aggregated. If a fractional share results
from such aggregation, the OTB shareholder will be entitled to received from
Brinker an amount in cash equal to the Brinker Trading Price multiplied by the
fraction of a share of Brinker
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Common Stock which the OTB shareholder would otherwise have received. Except for
such payment, no OTB shareholder will be entitled to any dividends or other
distributions or other rights of shareholders with respect to any fractional
interest.
TREATMENT OF OTB OPTIONS, WARRANTS AND DEBENTURES
OPTIONS. At January 24, 1994, a total of 376,250 shares of OTB Common Stock
was reserved for issuance upon the exercise of options outstanding under the
Option Plan. Brinker has agreed to assume all of OTB's obligations under the
Option Plan in accordance with its terms and conditions as in effect at the
Effective Time, except that (i) all actions to be taken thereunder by the OTB
Board or a committee thereof shall be taken by the Brinker Board or a committee
thereof, (ii) each option shall thereafter evidence the right to purchase only
the number of whole shares of Brinker Common Stock (rounded down) which would
have been issued if the shares of OTB Common Stock represented by the option had
been outstanding at the Effective Time, (iii) the exercise price for each share
of Brinker Common Stock issued upon the exercise of options will be determined
by multiplying (A) the option price immediately prior to the Effective Time and
(B) the number of shares of OTB Common Stock into which the option was
exercisable immediately prior to the Effective Time and dividing such product by
(C) the number of shares of Brinker Common Stock into which the option is
exercisable (as adjusted pursuant to clause (ii) above), and (iv) each reference
in the Option Plan to OTB and OTB Common Stock will be deemed to be references
to Brinker and Brinker Common Stock. Notwithstanding the provisions set forth in
clause (iii) above, with respect to each incentive option, if the new option
price calculated pursuant to clause (iii) would cause any incentive option not
to satisfy the requirements of Regulation 1.425-1(a)(1)(i) of the Internal
Revenue Code of 1986, as amended (the "Code"), the new exercise price with
respect to that option will be the minimum price that it could be and still
satisfy the requirements of the Regulation. In addition, Brinker has agreed to
take such other steps as are necessary to ensure that the incentive stock
options remain incentive options.
WARRANTS AND DEBENTURES. At January 24, 1994, OTB had 32,292 shares of OTB
Common Stock reserved for issuance upon the exercise of OTB warrants (the
"Warrants") and 150,000 shares of OTB Common Stock reserved for issuance upon
the conversion of its Senior Subordinated Convertible Debentures ("Debentures").
The obligations of OTB with respect to the Warrants and Debentures will continue
to be the obligations of OTB after the Effective Time; provided, however, upon
the exercise of such Warrants or the conversion of such Debentures after the
Effective Time, the holders will receive such number of shares of Brinker Common
Stock as such holders would have received if they had exercised such Warrants or
converted such Debentures into shares of OTB Common Stock immediately prior to
the Effective Time. In addition, Brinker has agreed to assume the obligations
and rights with respect to the shares of Brinker Common Stock issued upon the
exercise of such Warrants and the conversion of such Debentures from time to
time after the Effective Time that OTB currently has with respect to the shares
of OTB Common Stock.
CONDITIONS TO MERGER
In addition to customary conditions, the obligations of Brinker, OTB and the
Brinker Subsidiary to consummate the Merger are subject to the satisfaction or,
where permitted, waiver of certain other conditions, including (a) the absence
of any action, suit or proceeding to restrain, modify, enjoin or prohibit the
carrying out of the transactions contemplated by the Merger Agreement and (b)
the receipt of officer certificates and satisfactory opinions from legal
counsel.
In addition, Brinker's obligation to consummate the Merger is subject to
various additional conditions, including (a) the absence of any material adverse
change in OTB, subject to certain exceptions and limitations, (b) shareholders
owning no more than 5% of the outstanding OTB Shares shall have exercised their
statutory appraisal rights, (c) receipt of a satisfactory letter from OTB's
independent accountants with respect to certain financial information of OTB and
(d) the receipt of a letter from the independent accountants for Brinker dated
the Effective Time stating that such firm concurs that the Merger will qualify
as a pooling-of-interests transaction, subject to certain assumptions.
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OTB's obligation to consummate the Merger is subject to various additional
conditions, including (a) approval and adoption of the Merger Agreement by the
affirmative vote of holders of a majority of the OTB Shares; (b) the
authorization for listing on the NYSE of the Brinker Shares to be issued in the
Merger and upon the conversion of the Debentures and exercise of the Options and
Warrants; (c) the absence of any stop order suspending the effectiveness of the
Registration Statement or preventing the use thereof or any related prospectus;
(d) the receipt by OTB of an opinion of Crouch & Hallett, L.L.P., special
counsel for Brinker, that subject to certain exceptions and assumptions, no gain
or loss will be recognized by the OTB shareholders as a result of the Merger;
(e) the receipt of certain governmental approvals; and (f) the absence of any
material adverse change with respect to Brinker.
AMENDMENT OF THE MERGER AGREEMENT; WAIVER OF CONDITIONS
The respective Boards of Directors of Brinker, the Brinker Subsidiary and
OTB may, by written agreement, at any time before or after the approval of the
Merger Agreement by the OTB shareholders, amend the Merger Agreement, provided
that after such shareholder approval no amendment or modification may be made
that would materially adversely affect the rights of OTB shareholders without
the further approval of such shareholders. A vote in favor of the merger by an
OTB shareholder will be deemed to be authorization of OTB's executive officers
and directors to negotiate the Conversion Amount or to terminate the Merger
Agreement if the Conversion Amount exceeds .3472325. Each party may, to the
extent legally permitted, extend the time for the performance of any of the
obligations of any other party to the Merger Agreement, waive any inaccuracies
in the representations or warranties of any other party contained in the Merger
Agreement, waive compliance or performance by any other party with any
covenants, agreements or obligations contained in the Merger Agreement or waive
the satisfaction of any condition precedent to its performance under the Merger
Agreement.
TERMINATION OF MERGER AGREEMENT
The Merger Agreement may be terminated and the Merger abandoned, at any time
prior to the Effective Time, whether before or after the approval by the OTB
shareholders, (i) by the mutual consent of Brinker and OTB; (ii) by Brinker if
there has been a material misrepresentation or breach of warranty in the
representations and warranties of OTB made in the Merger Agreement, subject to
certain exceptions, or there has been a material failure by OTB to comply with
its obligations under the Merger Agreement; (iii) by OTB if there has been a
material misrepresentation or breach of warranty in the representations and
warranties of Brinker made in the Merger Agreement or there has been a material
failure by Brinker to comply with its obligations under the Merger Agreement;
(iv) by either Brinker or OTB if all conditions to that party's obligation to
consummate the Merger have not been satisfied or waived by June 30, 1994; (v) by
either Brinker or OTB if the consummation of the Merger would violate any
nonappealable final order, decree or judgment of any court or governmental body
or agency having competent jurisdiction; or (vi) by Brinker if at any time it is
advised by its independent accountants that the Merger would not qualify as a
pooling-of-interests for financial purposes. See "The Merger -- Effective Time
and Consequences of the Merger" for a discussion as to the possible termination
of the Merger Agreement if the Conversion Amount exceeds .3472325.
If Brinker or OTB terminates the Merger Agreement as provided above, there
will be no liability on the part of any party or its officers, directors or
shareholders, except as described in "The Merger -- Fees and Expenses" below.
FEES AND EXPENSES
Whether or not the Merger is consummated, all costs and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
will be paid by the party incurring such costs or expenses; provided, however,
that if the Merger Agreement is terminated because the Conversion Amount would
exceed .3472325 and Brinker and OTB fail to agree on a new Conversion Amount,
then Brinker will promptly reimburse OTB for its reasonable documented expenses
incurred in connection with the Merger in an amount not to exceed the sum of
$100,000 and the fees of Armata
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Partners, OTB's financial advisor (such fees of Armata Partners not to exceed
$200,000). In addition, if the Merger Agreement is terminated as a result of
OTB's breach of the covenant with respect to an Acquisition Proposal (as
described below under "The Merger -- Certain Covenants"), then OTB will promptly
reimburse Brinker (a) for its reasonable documented expenses incurred in
connection with the Merger in an amount not to exceed $200,000 and (b) the fees
of Brinker's financial advisor (such fees not to exceed $200,000) plus (c) $1.5
million.
CERTAIN COVENANTS
The Merger Agreement provides that OTB will not directly or indirectly (i)
solicit or initiate discussions with or (ii) enter into any negotiations or
agreements with, or furnish any information that is not publicly available to,
any third party concerning any proposal for a merger, sale of substantial
assets, sale of shares of stock or securities or any other takeover or business
combination transaction (an "Acquisition Proposal") involving OTB; provided,
however, that OTB may take the actions prohibited by (ii) above if such action
is taken by, or upon the authority of, the OTB Board in the exercise of its good
faith judgment as to its fiduciary duties to the OTB shareholders, which
judgment is based upon the written advice of independent, outside legal counsel
that a failure of the OTB Board to take such action would be likely to
constitute a breach of its fiduciary duties to such shareholders. OTB has agreed
to notify Brinker promptly in writing if OTB receives any inquiries or proposals
with respect to an Acquisition Proposal.
Under the Merger Agreement, OTB is generally obligated prior to the
Effective Time to conduct its operations in the ordinary and usual course of
business consistent with past and current practices, to notify Brinker of
changes in the normal course of its business and to refrain from taking certain
actions without the consent of Brinker, including, among other matters, issuing
stock (subject to certain exceptions), declaring dividends, entering into new
development and/or franchise agreements or paying in excess of $25,000 to settle
any lawsuit, claim or proceeding.
OTB and Brinker agreed in the Merger Agreement to indemnify after the
Effective Time OTB's current and former officers and directors for claims made
against such persons because they were a shareholder, director, officer,
employee or agent of OTB or its subsidiaries or serving at the request of OTB or
any subsidiary as a director, officer, employee or agent of another entity;
provided, however, OTB and Brinker will have no obligation to indemnify such a
person (a) if a court determines (and such determination becomes final and
non-appealable) that the indemnification is prohibited by law or (b) if Brinker
asserts that OTB had breached a representation or warranty in the Merger
Agreement with respect to the same matters for which indemnification is being
sought, except if such person proves that he or she had no actual knowledge of
such breach at the Effective Time. All rights of indemnification existing in
favor of OTB's officers and directors in OTB's Articles of Incorporation or
Bylaws and in any agreement between OTB and any such officer or director will
continue after the Effective Time. OTB agrees it use its best efforts to
continue to provide officers' and directors' liability insurance for the benefit
of its officers and directors for the four-year period commencing on the
Effective Time on terms consistent in scope and amount of coverage with such
insurance currently maintained by OTB. Brinker agrees not to amend OTB's
Articles of Incorporation or Bylaws in a manner which would adversely affect the
indemnification or exculpatory provisions contained therein.
CERTAIN REGULATORY MATTERS
Consummation of the Merger is conditioned upon receipt by Brinker and OTB of
such regulatory and other approvals as are required under applicable law,
including certain approvals from the Commission, state securities commissions
and state liquor control commissions as well as the issuance by the Secretary of
State of Texas of a Certificate of Merger. Other than these approvals and the
matters described below, Brinker and OTB know of no such regulatory or other
approvals required by law.
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Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR
Act"), certain acquisition transactions, including the proposed Merger, may not
be consummated unless certain information has been furnished to the Federal
Trade Commission (the "FTC") and the Antitrust Division of the Justice
Department (the "Antitrust Division") and certain waiting period requirements
have expired or been terminated. In accordance with the HSR Act, Brinker and OTB
each filed Notification and Report Forms and certain supplementary materials
with the Antitrust Division and the FTC for review in connection with the
proposed Merger. The FTC granted early termination of the waiting period under
the HSR Act on March 1, 1994.
POTENTIAL RESALES OF BRINKER SHARES RECEIVED IN THE MERGER
The Brinker Shares to be issued to OTB Shareholders in connection with the
Merger will be freely transferable under the Securities Act, except for shares
issued to any person who, at the time of the Annual Meeting, may be deemed to be
an "affiliate" of OTB within the meaning of Rule 145 under the Securities Act.
In general, affiliates of OTB include any person or entity who controls, is
controlled by or is under common control with OTB. Rule 145, among other things,
imposes certain restrictions upon the resale of securities received by
affiliates in connection with certain reclassifications, mergers, consolidations
or asset transfers. The Brinker Shares received by affiliates of OTB in the
Merger will be subject to the applicable resale limitations of Rule 145.
Additionally, consistent with the requirements of a pooling-of-interests
transaction, affiliates of Brinker and OTB will be restricted after the
Effective Time from disposing of any Brinker Common Stock until the publication
of financial statements by Brinker which include at least 30 days of post-Merger
operating results. Brinker has received a written undertaking from certain
directors, executive officers and shareholders of OTB not to sell any OTB Shares
(and Brinker Shares acquired in the Merger) owned directly or indirectly by them
until after the publication of these post-Merger financial statements.
NYSE LISTING OF THE BRINKER SHARES
Brinker has applied for listing on the NYSE of the Brinker Shares to be
issued in connection with the Merger and upon the exercise of Options and
Warrants and the conversion of the Debentures. Such shares have been approved
for listing on the NYSE, subject to notice of issuance. See "The Merger --
Conditions to Merger."
ACCOUNTING TREATMENT
Brinker will account for the business combination of Brinker and OTB in its
financial statements by the pooling-of-interests method of accounting. See "The
Merger -- Conditions to Merger."
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Crouch & Hallett, L.L.P., the Merger will be a tax-free
reorganization for federal income tax purposes so that no gain or loss will be
recognized by the OTB shareholders, except for cash received in lieu of
fractional shares or as a result of appraisal rights.
The federal income tax consequences of the Merger to the OTB shareholders
will be as follows:
(i) The Merger will constitute a reorganization within the meaning of
Section 368(a)(2)(E) of the Code;
(ii) No gain or loss will be recognized to the shareholders of OTB upon
their receipt of the Brinker Shares in exchange for their OTB Shares;
(iii) The basis of the Brinker Shares to be received by the shareholders
of OTB in the Merger will be the same as the basis of such shareholders in
the OTB Shares exchanged for such Brinker Shares (reduced by any amount
allocable to fractional share interests for which cash is received);
(iv) The holding period of the Brinker Shares to be received by the
shareholders of OTB will include the period during which they held their OTB
Shares exchanged for the Brinker Shares; and
23
<PAGE>
(v) Neither Brinker nor OTB will recognize gain or loss as a result of
the Merger.
Cash received in the Merger by an OTB shareholder in lieu of a fractional
Brinker Share will be treated under Section 302 of the Code as having been
received by the OTB shareholder in exchange for such fractional share, and the
OTB shareholder generally will recognize capital gain or loss in such exchange
equal to the difference between the cash received and such shareholder's basis
allocable to the fractional share. An OTB shareholder who perfects his or her
appraisal rights under Texas law and who receives payment in cash for the "fair
value" of his or her OTB Shares will be treated as having received such payment
in a redemption of the OTB Shares subject to the provisions of Section 302 of
the Code. In general, a dissenting OTB shareholder will recognize capital gain
or loss measured by the difference between the amount of cash received by such
shareholder in payment for his or her OTB Shares and the basis of such
shareholder's OTB Shares.
OTB's obligation to consummate the Merger is conditioned upon its receipt of
a written opinion (the "Tax Opinion") of Crouch & Hallett, L.L.P., Brinker's
special counsel, that the Merger will constitute a reorganization within the
meaning of Section 368(a)(2)(E) of the Code and that no gain or loss will be
recognized by the OTB shareholders as a result of the Merger (except gain or
loss recognized by dissenting shareholders or shareholders who receive cash in
lieu of fractional shares) and that OTB will not recognize gain or loss as a
result of the Merger.
In connection with the Tax Opinion, Crouch & Hallett, L.L.P. will make such
factual assumptions as are customary in similar tax opinions. The Tax Opinion
cannot be relied upon if any such factual assumption is, or later becomes,
inaccurate. No ruling from the Internal Revenue Service concerning the tax
consequences of the Merger has been requested, and the Tax Opinion will not be
binding upon the Internal Revenue Service or the courts. If the Merger is
consummated, and it is later determined that the Merger did not qualify as a
tax-free reorganization under the Code, OTB shareholders would recognize taxable
gain or loss in the Merger equal to the difference between the fair market value
of the Brinker Shares they received and their tax basis in their OTB Shares.
THE FOREGOING SUMMARY OF MATERIAL FEDERAL INCOME TAX CONSEQUENCES IS NOT
INTENDED TO CONSTITUTE ADVICE REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF
THE MERGER TO ANY HOLDER OF OTB SHARES. THIS SUMMARY DOES NOT DISCUSS TAX
CONSEQUENCES UNDER THE LAWS OF STATES OR LOCAL GOVERNMENTS OR OF ANY OTHER
JURISDICTION OR TAX CONSEQUENCES TO CATEGORIES OF SHAREHOLDERS THAT MAY BE
SUBJECT TO SPECIAL RULES, SUCH AS FOREIGN PERSONS, TAX-EXEMPT ENTITIES,
INSURANCE COMPANIES, FINANCIAL INSTITUTIONS AND DEALERS IN STOCKS AND
SECURITIES. EACH HOLDER OF OTB SHARES IS URGED TO OBTAIN, AND SHOULD RELY UPON,
HIS OWN TAX ADVICE.
COMPARISON OF RIGHTS OF HOLDERS OF BRINKER COMMON STOCK AND OTB COMMON STOCK
Brinker is incorporated under the laws of the State of Delaware, and OTB is
incorporated under the laws of the State of Texas. The OTB shareholders, whose
rights as shareholders are currently governed by Texas law and OTB's Articles of
Incorporation and Bylaws, will become, upon consummation of the Merger and to
the extent they receive Brinker Shares, shareholders of Brinker, and their
rights will be governed by Delaware law and Brinker's Certificate of
Incorporation and Bylaws. Certain differences between the rights of holders of
Brinker Common Stock and the OTB Common Stock are set forth below.
The following summary does not purport to be a complete statement of the
rights of Brinker shareholders under applicable Delaware law and Brinker's
Certificate of Incorporation and Bylaws as compared with the rights of OTB
shareholders under applicable Texas law and OTB's Articles of Incorporation and
Bylaws. The summary is qualified in its entirety by the Delaware General
Corporation Law and the Texas Business Corporation Act, to which shareholders
are referred.
Under Texas law, shareholders have the right to vote on all mergers to which
the corporation is a party (except for the merger into the surviving corporation
of subsidiaries owned 90% or more by the surviving corporation, for which a
shareholder vote also is not required under Delaware law). In certain
circumstances, different classes of securities may be entitled to vote
separately as classes with respect to such transactions. Approval of the holders
of at least two-thirds of all outstanding shares
24
<PAGE>
entitled to vote is required by Texas law unless a corporation amends its
Articles of Incorporation to provide differently. OTB's Articles of
Incorporation have been amended to provide that any vote of the OTB's
shareholders which would require the affirmative of two-thirds of the
outstanding shares will be authorized by the affirmative vote of a majority of
the outstanding shares. Under Delaware law, shareholders of the surviving
corporation have no right to vote, except under limited circumstances, on the
acquisition by merger directly into the surviving corporation of companies in
cases where the amount of the surviving corporation's common stock to be issued
or delivered under the plan of merger does not exceed 20% of the shares of
common stock outstanding immediately prior to the effective date of the merger.
Under a Delaware statute, no person who has acquired 15% of a Delaware
corporation's voting stock (with certain exceptions) may enter into a business
combination with the corporation for three years after acquiring 15% ownership,
unless the board of directors of the corporation has approved the transaction or
exempted the person before he reached the 15% threshold or unless one of two
exceptions is satisfied: (i) upon consummation of the transaction resulting in
such person reaching the 15% threshold, he owned at least 85% of the
corporation's outstanding voting stock (excluding shares owned by certain
corporate insiders and employee stock plans) or (ii) the business combination is
approved by the corporation's board of directors and authorized by holders of at
least two-thirds of the outstanding voting stock (excluding that owned by the
acquiring person). This statute applies automatically to several classes of
Delaware corporations, including those with voting stock authorized for trading
on a national exchange, unless a majority of a corporation's shareholders elects
to opt out of the statute's coverage by amendment to the bylaws or certificate
of incorporation. Since Brinker stockholders have not elected to opt out of the
coverage of this statute, the provisions of this statute are applicable to
Brinker. No similar statute currently exists under Texas law.
Shareholders of Texas corporations have appraisal rights in the event of a
merger, consolidation or sale, lease, exchange or other disposition (not
including any pledge, mortgage, deed of trust or trust indenture, unless
otherwise provided in the articles of incorporation) of all, or substantially,
all the property and assets of the corporation. The appraisal rights of a
shareholder of a Texas corporation are summarized herein under "The Merger --
Appraisal Rights of Dissenting Shareholders" below. Shareholders of a Delaware
corporation have no appraisal rights in the event of a merger or consolidation
of the corporation in which they receive solely stock of the surviving
corporation and (i) stock of the Delaware corporation is listed on a national
securities exchange; (ii) such stock is held of record by more than 2,000
shareholders; or (iii) in the case of a merger, if a Delaware corporation is the
surviving corporation, (x) the agreement of merger does not amend the
certificate of incorporation of the surviving corporation, (y) each share of
stock of the surviving corporation outstanding immediately prior to the
effective date of the merger is to be an identical outstanding share of the
surviving corporation after the effective date of the merger and (z) the
increase in the outstanding shares as a result of the merger does not exceed 20%
of the shares of the surviving corporation outstanding immediately prior to the
merger. Otherwise, shareholders of a Delaware corporation have appraisal rights
in consolidations and mergers.
Under Texas law, any vacancy occurring in the board of directors may be
filled by the shareholders or by the affirmative vote of a majority of the
remaining directors. A directorship to be filled by reasons of an increase in
the number of directors may be filled by the shareholders or by the board of
directors for a term of office continuing only until the next election of one or
more directors by the shareholders, provided that the board of directors may not
fill more than two such directorships during the period between any two
successive annual meetings of shareholders. Under Delaware law, unless the
certificate of incorporation or bylaws provide otherwise, vacancies and newly
created directorships resulting from any increase in the authorized number of
directors may be filled by a majority of the directors then in office.
Under Texas law, holders of not less than 10% of all the shares entitled to
vote have the right to call a special shareholders' meeting, unless the articles
of incorporation provide for a number of shares greater than or less than 10%,
in which event, special meetings of the shareholders may be called by
25
<PAGE>
the holders of at least the percentage of shares so specified in the articles of
incorporation, but in no event shall the articles of incorporation provide for a
number of shares greater than 50%. OTB's Articles of Incorporation state that a
special meeting of shareholders may be called by the holders of at least 25% of
the outstanding shares entitled to vote at such meeting. Delaware law provides
that special meetings of the shareholders may be called by the board of
directors or such other persons authorized in the certificate of incorporation
or bylaws. The Certificate of Incorporation and Bylaws of Brinker do not provide
for the calling of a special meeting by anyone other than the Brinker Board.
APPRAISAL RIGHTS OF DISSENTING SHAREHOLDERS
Any holder of record of the OTB Shares who objects to the Merger may dissent
from the Merger and may exercise his or her appraisal right in accordance with
Texas law. Any shareholder of OTB contemplating the exercise of his or her right
of appraisal is urged to review carefully the provisions of Articles 5.11
through 5.13 of the TBCA, which Articles are attached as Appendix C to this
Proxy Statement/Prospectus, particularly with respect to the procedural steps
required to perfect the exercise of such right of appraisal and the right of a
shareholder who has demanded payment for his or her OTB Shares to withdraw such
demand. A person who owns OTB Shares beneficially, but not of record, and who
desires to dissent from the Merger and to exercise his or her right to appraisal
may do so only by and through the holder of record of such shares. References to
"shareholders" in the following summary are to shareholders of record. Set forth
below is a summary of the steps to be taken by a holder of record if a right of
appraisal is to be exercised. Such summary should be read in conjunction with
the full text of Articles 5.11 through 5.13 referred to above.
The TBCA provides that any shareholder of OTB who files a written objection
to the Merger with OTB prior to the vote of the OTB shareholders thereon,
setting out that his or her right to dissent will be exercised if the Merger is
effective and giving his or her name and address, and who does not later vote in
favor of the Merger, may, within ten days from the delivery or mailing of notice
by OTB to such shareholder that the Merger has been consummated, make written
demand upon OTB for the payment of the fair value of the OTB Shares. This demand
must set forth the number of OTB Shares owned and their fair value as estimated
by the shareholder. A proxy or vote opposing or abstaining from the Merger will
not satisfy the statutory requirement that a shareholder give notice of the
intention to dissent and to demand payment for the OTB Shares. Fair value is
defined by the TBCA to mean the value as of the day before the vote was taken
authorizing the Merger, excluding any appreciation or depreciation in
anticipation of the Merger.
Once the demand for payment has been filed, the dissenter is not entitled to
vote or to exercise any other rights of a shareholder with certain statutory
exceptions. Any shareholder who has made a demand for payment pursuant to the
statutory provisions may withdraw that demand at any time before payment is made
for that dissenter's shares or before a petition to determine fair value is
filed with a court of competent jurisdiction, but no such demand may be
withdrawn after payment is made or, unless OTB shall consent thereto, after any
such petition is filed.
Within 20 days of OTB's receipt of a proper written demand for payment of
the fair value of OTB Shares by the shareholder, OTB must give written notice
either (i) accepting the amount claimed in the demand and agreeing to pay such
amount within 90 days or (ii) containing an estimate by OTB of the fair value of
such OTB Shares, together with an offer to pay that amount within 90 days after
the date on which the Merger is effective, upon receipt of notice from the
shareholder within 60 days after the date the Merger is effective that he or she
agrees to accept that amount.
Within 20 days after demanding payment for OTB Shares, each shareholder so
demanding payment shall submit to OTB the certificates representing the OTB
Shares for notation thereon that such demand has been made. Failure to submit
the certificates will terminate the shareholder's right to dissent.
If, within 60 days after the effectiveness of the Merger, OTB and the
shareholder shall agree on the value of such shares, payment therefor must be
made within 90 days after the date of the
26
<PAGE>
effectiveness of the Merger. Upon payment of the agreed value, the dissenting
shareholder shall cease to have any interest in such shares. If, within the
60-day period following the date of the Merger, the dissenting shareholder and
OTB do not agree on the fair value, then the shareholder of OTB may, within 60
days after the expiration of the 60-day period following the Merger, file a
petition in any court of competent jurisdiction in the county in which the
principal office of OTB is located (Dallas County, Texas) asking for a finding
and determination of the fair value of his or her OTB Shares.
In the absence of fraud in the transaction, Article 5.12 of the TBCA
provides that the remedy contained therein is the exclusive remedy for the
recovery of the value of a dissenter's OTB Shares or money damages to such
dissenter with respect to the Merger. Precise compliance with the provisions of
the TBCA is required to perfect the rights of a dissenting shareholder.
For a discussion of certain federal income tax consequences resulting from
the exercise of dissenters' appraisal rights see "The Merger -- Federal Income
Tax Consequences."
27
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial statements
assume a business combination between Brinker and OTB accounted for on a
pooling-of-interests basis. The unaudited pro forma combined condensed financial
statements are based on the respective historical financial statements and the
notes thereto, included elsewhere herein. The unaudited pro forma combined
condensed balance sheet combines Brinker's December 29, 1993 condensed
consolidated balance sheet with OTB's January 3, 1994 condensed consolidated
balance sheet. The unaudited pro forma combined condensed statements of
operations combine Brinker's condensed consolidated statements of operations for
the fiscal years ended June 30, 1993, 1992 and 1991 and the 26 week period ended
December 29, 1993 and the six-month period ended December 31, 1992 with the
corresponding OTB condensed consolidated statements of operations for the years
ended June 14, 1993, June 15, 1992 and June 17, 1991 and the six-month periods
ended January 3, 1994 and December 28, 1992, respectively. The amounts included
as OTB historical amounts have been reclassified to conform to classifications
used by Brinker.
The unaudited pro forma combined information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the business combination had been
consummated at the beginning of the periods presented, nor is it necessarily
indicative of future operating results or financial position.
These unaudited pro forma combined condensed financial statements should be
read in conjunction with the historical financial statements and the related
notes thereto of Brinker and OTB included herein.
28
<PAGE>
BRINKER AND OTB
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
BRINKER OTB
YEAR ENDED YEAR ENDED PRO FORMA
JUNE 30, 1993 JUNE 14, 1993 COMBINED
------------- ------------- -----------
<S> <C> <C> <C>
Revenues............................................................... $ 652,943 $ 25,615 $ 678,558
------------- ------------- -----------
Costs and Expenses:
Cost of Sales........................................................ 180,772 7,072 187,844
Restaurant Expenses.................................................. 329,159 14,395 343,554
Depreciation and Amortization........................................ 36,700 805 37,505
General and Administrative........................................... 34,160 2,213 36,373
Interest Expense..................................................... -- 99 99
Other, Net........................................................... (3,661) (142) (3,803)
------------- ------------- -----------
Total Costs and Expenses........................................... 577,130 24,442 601,572
------------- ------------- -----------
Income Before Provision for Income Taxes............................... 75,813 1,173 76,986
Provision for Income Taxes............................................. 26,880 203 27,083
------------- ------------- -----------
Net Income............................................................. $ 48,933 $ 970 $ 49,903
------------- ------------- -----------
------------- ------------- -----------
Primary Net Income Per Share........................................... $ 0.68 $ 0.30 $ 0.69(1)
------------- ------------- -----------
------------- ------------- -----------
Fully Diluted Net Income Per Share..................................... $ 0.68 $ 0.30 $ 0.69(1)
------------- ------------- -----------
------------- ------------- -----------
Primary Weighted Average Shares Outstanding............................ 71,465 3,209 72,427(1)
------------- ------------- -----------
------------- ------------- -----------
Fully Diluted Weighted Average Shares Outstanding...................... 71,594 3,209 72,556(1)
------------- ------------- -----------
------------- ------------- -----------
<FN>
- ------------------------
(1) The unaudited pro forma combined net income per share is based on the
combined average number of common and common equivalent shares of Brinker
Common Stock and OTB Common Stock outstanding during the period, based on
the exchange ratio of 0.30 of a share of Brinker Common Stock for each
share of OTB Common Stock.
</TABLE>
29
<PAGE>
BRINKER AND OTB
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
BRINKER OTB
YEAR ENDED YEAR ENDED PRO FORMA
JUNE 30, 1992 JUNE 15, 1992 COMBINED
------------- ------------- -----------
<S> <C> <C> <C>
Revenues.......................................... $ 519,260 $ 21,765 $ 541,025
------------- ------------- -----------
Costs and Expenses:
Cost of Sales................................... 143,633 6,295 149,928
Restaurant Expenses............................. 268,424 13,045 281,469
Depreciation and Amortization................... 27,271 520 27,791
General and Administrative...................... 28,635 1,580 30,215
Interest Expense................................ -- 201 201
Other, Net...................................... (3,225) 118 (3,107)
------------- ------------- -----------
Total Costs and Expenses...................... 464,738 21,759 486,497
------------- ------------- -----------
Income Before Provision for Income Taxes.......... 54,522 6 54,528
Provision for Income Taxes........................ 18,810 26 18,836
------------- ------------- -----------
Net Income (Loss)................................. $ 35,712 $ (20) $ 35,692
------------- ------------- -----------
------------- ------------- -----------
Primary Net Income (Loss) Per Share............... $ 0.51 $ (0.01) $ 0.51(1)
------------- ------------- -----------
------------- ------------- -----------
Fully Diluted Net Income (Loss) Per Share......... $ 0.51 $ (0.01) $ 0.50(1)
------------- ------------- -----------
------------- ------------- -----------
Primary Weighted Average Shares Outstanding....... 70,008 2,026 70,616(1)
------------- ------------- -----------
------------- ------------- -----------
Fully Diluted Weighted Average Shares
Outstanding...................................... 70,163 2,026 70,770(1)
------------- ------------- -----------
------------- ------------- -----------
<FN>
- ------------------------
(1) The unaudited pro forma combined net income per share is based on the
combined average number of common and common equivalent shares of Brinker
Common Stock and OTB Common Stock outstanding during the period, based on
the exchange ratio of 0.30 of a share of Brinker Common Stock for each
share of OTB Common Stock.
</TABLE>
30
<PAGE>
BRINKER AND OTB
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
BRINKER OTB
YEAR ENDED YEAR ENDED PRO FORMA
JUNE 30, 1991 JUNE 17, 1991 COMBINED
------------- ------------- -----------
<S> <C> <C> <C>
Revenues.......................................... $ 426,848 $ 20,609 $ 447,457
------------- ------------- -----------
Costs and Expenses:
Cost of Sales................................... 122,579 6,158 128,737
Restaurant Expenses............................. 220,882 12,223 233,105
Depreciation and Amortization................... 21,267 659 21,926
General and Administrative...................... 23,651 2,223 25,874
Interest Expense................................ 348 215 563
Other, Net...................................... (1,543) 164 (1,379)
------------- ------------- -----------
Total Costs and Expenses...................... 387,184 21,642 408,826
------------- ------------- -----------
Income (Loss) Before Provision for Income Taxes... 39,664 (1,033) 38,631
Provision for Income Taxes........................ 13,565 -- 13,565
------------- ------------- -----------
Net Income (Loss)................................. $ 26,099 $ (1,033) $ 25,066
------------- ------------- -----------
------------- ------------- -----------
Primary Net Income (Loss) Per Share............... $ 0.41 $ (0.70) $ 0.39(1)
------------- ------------- -----------
------------- ------------- -----------
Fully Diluted Net Income (Loss) Per Share......... $ 0.40 $ (0.70) $ 0.38(1)
------------- ------------- -----------
------------- ------------- -----------
Primary Weighted Average Shares Outstanding....... 63,890 1,470 64,331(1)
------------- ------------- -----------
------------- ------------- -----------
Fully Diluted Weighted Average Shares
Outstanding...................................... 64,832 1,470 65,273(1)
------------- ------------- -----------
------------- ------------- -----------
<FN>
- ------------------------
(1) The unaudited pro forma combined net income per share is based on the
combined average number of common and common equivalent shares of Brinker
Common Stock and OTB Common Stock outstanding during the period, based on
the exchange ratio of 0.30 of a share of Brinker Common Stock for each
share of OTB Common Stock.
</TABLE>
31
<PAGE>
BRINKER AND OTB
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
BRINKER
TWENTY-SIX WEEKS OTB
ENDED SIX MONTHS
DECEMBER 29, ENDED PRO FORMA
1993 JANUARY 3, 1994 COMBINED
---------------- --------------- -----------
<S> <C> <C> <C>
Revenues.......................................... $ 389,968 $ 17,493 $ 407,461
---------------- --------------- -----------
Costs and Expenses (1):
Cost of Sales................................... 107,183 4,935 112,118
Restaurant Expenses............................. 196,948 10,915 207,863
Depreciation and Amortization................... 22,986 1,007 23,993
General and Administrative...................... 20,528 1,787 22,315
Interest Expense................................ -- 105 105
Other, Net...................................... (3,271) 2,061 (1,210)
---------------- --------------- -----------
Total Costs and Expenses...................... 344,374 20,810 365,184
---------------- --------------- -----------
Income (Loss) Before Provision for Income Taxes... 45,594 (3,317) 42,277
Provision (Benefit) for Income Taxes.............. 16,186 (107) 15,055(2)
---------------- --------------- -----------
Net Income (Loss)................................. $ 29,408 $ (3,210) $ 27,222
---------------- --------------- -----------
---------------- --------------- -----------
Primary Net Income (Loss) Per Share............... $ 0.40 $ (1.00) $ 0.37(3)
---------------- --------------- -----------
---------------- --------------- -----------
Fully Diluted Net Income (Loss) Per Share......... $ 0.40 $ (1.00) $ 0.37(3)
---------------- --------------- -----------
---------------- --------------- -----------
Primary Weighted Average Shares Outstanding....... 72,966 3,209 73,929(3)
---------------- --------------- -----------
---------------- --------------- -----------
Fully Diluted Weighted Average Shares
Outstanding...................................... 73,238 3,209 74,200(3)
---------------- --------------- -----------
---------------- --------------- -----------
<FN>
- ------------------------
(1) Costs related to the Merger will be charged to expense upon consummation
of the Merger.
(2) The unaudited pro forma combined provision for income taxes has been
reduced by the reversal of a $1,024,000 current deferred tax asset
valuation allowance recognized by OTB during the six months ended January
3, 1994. The valuation allowance was established due to the uncertainty of
OTB's ability to utilize the asset against future earnings.
(3) The unaudited pro forma combined net income per share is based on the
combined average number of common and common equivalent shares of Brinker
Common Stock and OTB Common Stock outstanding during the period, based on
the exchange ratio of 0.30 of a share of Brinker Common Stock for each
share of OTB Common Stock.
</TABLE>
32
<PAGE>
BRINKER AND OTB
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
BRINKER OTB
SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 28, PRO FORMA
1992 1992 COMBINED
---------------- ---------------- -----------
<S> <C> <C> <C>
Revenues.......................................... $ 303,125 $ 12,523 $ 315,648
---------------- -------- -----------
Costs and Expenses:
Cost of Sales................................... 83,493 3,457 86,950
Restaurant Expenses............................. 154,435 7,157 161,592
Depreciation and Amortization................... 17,084 302 17,386
General and Administrative...................... 16,686 1,233 17,919
Interest Expense................................ -- 14 14
Other, Net...................................... (1,454) (102) (1,556)
---------------- -------- -----------
Total Costs and Expenses...................... 270,244 12,061 282,305
---------------- -------- -----------
Income Before Provision for Income Taxes.......... 32,881 462 33,343
Provision (Benefit) for Income Taxes.............. 11,417 (2) 11,415
---------------- -------- -----------
Net Income........................................ $ 21,464 $ 464 $ 21,928
---------------- -------- -----------
---------------- -------- -----------
Primary Net Income Per Share...................... $ 0.30 $ 0.14 $ 0.31(1)
---------------- -------- -----------
---------------- -------- -----------
Fully Diluted Net Income Per Share................ $ 0.30 $ 0.14 $ 0.30(1)
---------------- -------- -----------
---------------- -------- -----------
Primary Weighted Average Shares Outstanding....... 70,907 3,229 71,875(1)
---------------- -------- -----------
---------------- -------- -----------
Fully Diluted Weighted Average Shares
Outstanding...................................... 71,078 3,229 72,046(1)
---------------- -------- -----------
---------------- -------- -----------
<FN>
- ------------------------
(1) The unaudited pro forma combined net income per share is based on the
combined average number of common and common equivalent shares of Brinker
Common Stock and OTB Common Stock outstanding during the period, based on
the exchange ratio of 0.30 of a share of Brinker Common Stock for each
share of OTB Common Stock.
</TABLE>
33
<PAGE>
BRINKER AND OTB
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
BRINKER OTB
DECEMBER 29, JANUARY 3, PRO FORMA PRO FORMA
1993 1994 ADJUSTMENTS COMBINED
------------ ---------- -------------- ---------
<S> <C> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents....................... $ 4,380 $ 1,017 $ -- $ 5,397
Accounts Receivable............................. 7,508 762 -- 8,270
Assets Held for Sale and Leaseback.............. 50 -- -- 50
Inventories..................................... 7,467 663 -- 8,130
Prepaid Expenses................................ 12,966 275 -- 13,241
------------ ---------- ------- ---------
Total Current Assets.......................... 32,371 2,717 -- 35,088
------------ ---------- ------- ---------
Property and Equipment, at Cost:
Land............................................ 93,732 552 -- 94,284
Buildings and Leasehold Improvements............ 244,928 9,652 -- 254,580
Furniture and Equipment......................... 154,170 5,658 -- 159,828
Construction-in-Progress........................ 20,881 -- -- 20,881
------------ ---------- ------- ---------
513,711 15,862 -- 529,573
Less Accumulated Depreciation and
Amortization................................... 129,841 6,295 -- 136,136
------------ ---------- ------- ---------
Net Property and Equipment.................... 383,870 9,567 -- 393,437
------------ ---------- ------- ---------
Other Assets:
Deferred Costs.................................. 11,946 916 -- 12,862
Investment in Joint Ventures.................... 4,071 -- -- 4,071
Long-term Marketable Securities................. 32,075 -- -- 32,075
Long-term Notes Receivable...................... 3,478 240 -- 3,718
Other........................................... 16,831 1,014 -- 17,845
------------ ---------- ------- ---------
Total Other Assets............................ 68,401 2,170 -- 70,571
------------ ---------- ------- ---------
Total Assets.................................. $ 484,642 $ 14,454 $ -- $499,096
------------ ---------- ------- ---------
------------ ---------- ------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term Debt................................. $ 2,850 $ -- $ -- $ 2,850
Current Installments of Long-term Debt.......... 268 207 -- 475
Accounts Payable................................ 35,355 2,910 -- 38,265
Accrued Liabilities............................. 49,359 2,789 -- 52,148
Deferred Income Taxes........................... 1,566 -- (1,024)(2) 542
------------ ---------- ------- ---------
Total Current Liabilities..................... 89,398 5,906 (1,024) 94,280
------------ ---------- ------- ---------
Long-term Debt, Less Current Installments......... 3,655 1,081 -- 4,736
Senior Subordinated Convertible Debentures........ -- 1,200 -- 1,200
Deferred Income Taxes............................. 10,471 -- -- 10,471
Other Liabilities................................. 14,377 1,378 -- 15,755
Commitments and Contingencies.....................
Shareholders' Equity:
Common Stock.................................... 6,919 85 10(1) 7,014
Additional Paid-in Capital...................... 165,228 7,998 (10)(1) 173,216
Retained Earnings (Deficit)..................... 194,594 (3,019) 849(2)(3) 192,424
------------ ---------- ------- ---------
366,741 5,064 849 372,654
Less Treasury Stock............................. -- 175 (175)(3) --
------------ ---------- ------- ---------
Total Shareholders' Equity.................... 366,741 4,889 1,024 372,654
------------ ---------- ------- ---------
Total Liabilities and Shareholders' Equity.... $ 484,642 $ 14,454 $ -- $499,096
------------ ---------- ------- ---------
------------ ---------- ------- ---------
<FN>
- ------------------------------
(1) Represents an exchange ratio of .30 of a share of Brinker Common Stock for
each share of OTB Common Stock.
(2) To reinstate the $1,024,000 OTB current deferred income tax asset not
recognized on an OTB stand-alone basis due to the uncertainty of OTB's
ability to utilize the asset against future earnings; however, the asset
can be utilized on a combined basis.
(3) To eliminate OTB treasury stock which will not be exchanged for Brinker
Common Stock pursuant to the terms of the Merger.
</TABLE>
34
<PAGE>
MARKET PRICE OF AND DIVIDENDS ON THE COMMON STOCK OF BRINKER
AND OTB AND RELATED SHAREHOLDER MATTERS
Brinker Common Stock is listed on the New York Stock Exchange, and the OTB
Common Stock is reported on the Nasdaq National Market. As of April 8, 1994,
there were approximately 1,564 record holders of Brinker Common Stock and
approximately 237 record holders of the OTB Common Stock. The high and low
closing prices for Brinker Common Stock and for the OTB Common Stock for their
respective fiscal quarters, as reported in The Wall Street Journal, Southwest
Edition, are set forth in the following table. Stock prices in the following
table have been restated to reflect applicable stock dividends.
<TABLE>
<CAPTION>
BRINKER (1) OTB(2)
------------------ ------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
FISCAL 1992
First Quarter.................................. $13 17/27 $11 2/9 $-- $--
Second Quarter................................. 16 2/3 13 4/9 9 5 3/8
Third Quarter.................................. 18 1/3 15 5/9 6 7/8 4 3/8
Fourth Quarter................................. 18 1/18 13 5/9 8 1/4 5 3/8
FISCAL 1993
First Quarter.................................. $18 $13 8/9 $ 9 1/8 $ 7 3/8
Second Quarter................................. 18 8/9 14 17/18 8 5/8 6 1/4
Third Quarter.................................. 21 2/3 18 5/9 8 3/8 6 3/8
Fourth Quarter................................. 24 2/3 18 1/3 7 4 1/4
FISCAL 1994
First Quarter.................................. $26 1/12 $22 1/6 $ 9 1/8 $ 6
Second Quarter................................. 30 2/3 25 2/3 9 8 (3)
Third Quarter.................................. 33 1/3 26 5/6
Fourth Quarter................................. 31 1/2 25 1/8(3)
<FN>
- ------------------------
(1) Brinker's fiscal year for fiscal 1992 and 1993 ended on June 30 of each
year. Fiscal 1994 will end on June 29, 1994.
(2) OTB commenced its initial public offering on April 30, 1992. Prior to that
time, no public market existed for the OTB Common Stock. OTB's fiscal
years consist of 52/53 week years ending on the Monday nearest to December
31. The 1994 fiscal year ends on January 2, 1995.
(3) Through April 19, 1994.
</TABLE>
On January 24, 1994, the date immediately prior to the announcement of the
Merger, the closing price of Brinker Common Stock was $29.083 and the closing
price of the OTB Common Stock was $7.25. On April 19, 1994, the closing price of
Brinker Common Stock was $25.125 and the closing price of the OTB Common Stock
was $8.00.
No cash dividends have been declared or paid by either Brinker and OTB on
their respective common stock. Brinker and OTB currently do not intend to pay
cash dividends as profits are reinvested into their respective companies to fund
expansion of their restaurant businesses. Payment of dividends in the future
will depend upon their growth, profitability, financial condition and other
factors which their respective Boards may deem relevant.
35
<PAGE>
BRINKER SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND NUMBER OF RESTAURANTS)
<TABLE>
<CAPTION>
26 WEEKS 6 MONTHS
FISCAL YEARS ENDED JUNE 30, ENDED ENDED
------------------------------------------------ DEC. 29, DEC. 31,
1993 1992 1991 1990 1989 1993 1992
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................................. $652,943 $519,260 $426,848 $347,127 $285,943 $389,968 $303,125
-------- -------- -------- -------- -------- -------- --------
Costs and Expenses:
Cost of Sales.......................... 180,772 143,633 122,579 101,712 83,472 107,183 83,493
Restaurant Expenses.................... 329,159 268,424 220,882 180,168 148,326 196,948 154,435
Depreciation and Amortization.......... 36,700 27,271 21,267 17,406 15,161 22,986 17,084
General and Administrative............. 34,160 28,635 23,651 19,684 16,835 20,528 16,686
Interest Expense....................... -- -- 348 2,132 2,920 -- --
Other, Net............................. (3,661) (3,225) (1,543) (1,387) (1,509) (3,271) (1,454)
-------- -------- -------- -------- -------- -------- --------
Total Costs and Expenses............. 577,130 464,738 387,184 319,715 265,205 344,374 270,244
-------- -------- -------- -------- -------- -------- --------
Income Before Provision for Income
Taxes................................... 75,813 54,522 39,664 27,412 20,738 45,594 32,881
Provision for Income Taxes............... 26,880 18,810 13,565 9,322 6,800 16,186 11,417
-------- -------- -------- -------- -------- -------- --------
Net Income........................... $ 48,933 $ 35,712 $ 26,099 $ 18,090 $ 13,938 $ 29,408 $ 21,464
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Primary Net Income
Per Share.............................. $ 0.68 $ 0.51 $ 0.41 $ 0.33 $ 0.26 $ 0.40 $ 0.30
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Primary Weighted Average Shares
Outstanding............................. 71,465 70,008 63,890 55,080 53,391 72,966 70,907
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
BALANCE SHEET DATA
(AT END OF PERIOD):
Working Capital (Deficit).............. $(44,008) $(31,241) $ 2,147 $(18,389) $ (3,008) $(57,027) $(25,805)
Total Assets........................... 435,259 337,312 266,332 197,718 154,024 484,642 384,765
Long-term Liabilities.................. 25,622 21,060 18,729 23,755 49,682 28,503 20,594
Shareholders' Equity................... 334,731 254,095 207,466 132,394 78,314 366,741 304,491
NUMBER OF RESTAURANTS OPEN AT END OF
PERIOD:
Brinker Operated....................... 285 237 202 172 144 321 256
50% Operated Joint Ventures............ 9 10 10 12 10 9 9
Franchised............................. 73 58 50 37 27 75 68
-------- -------- -------- -------- -------- -------- --------
Total................................ 367 305 262 221 181 405 333
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
</TABLE>
36
<PAGE>
BRINKER MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth expenses as a percentage of total revenues
for the periods indicated for the revenue and expense items included in the
Brinker Consolidated Statements of Income included elsewhere herein.
<TABLE>
<CAPTION>
26 WEEKS 6 MONTHS
FISCAL YEARS ENDED ENDED
------------------------------ DEC. 29, DEC. 31,
1993 1992 1991 1990 1993 1992
------ ------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues..................................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
------ ------ ------ ------ -------- --------
Costs and Expenses:
Cost of Sales.............................. 27.7 27.7 28.6 29.3 27.5 27.5
Restaurant Expenses........................ 50.4 51.6 51.8 51.9 50.5 51.0
Depreciation and Amortization.............. 5.6 5.3 5.0 5.0 5.9 5.6
General and Administrative................. 5.2 5.5 5.6 5.7 5.3 5.5
Interest Expense........................... -- -- 0.1 0.6 -- --
Other, Net................................. (0.5 ) (0.6 ) (0.4 ) (0.4 ) (0.9 ) (0.4 )
------ ------ ------ ------ -------- --------
Total Costs and Expenses................. 88.4 89.5 90.7 92.1 88.3 89.2
------ ------ ------ ------ -------- --------
Income Before Provision for Income Taxes..... 11.6 10.5 9.3 7.9 11.7 10.8
Provision for Income Taxes................... 4.1 3.6 3.2 2.7 4.2 3.7
------ ------ ------ ------ -------- --------
Net Income............................... 7.5 % 6.9 % 6.1 % 5.2 % 7.5 % 7.1 %
------ ------ ------ ------ -------- --------
------ ------ ------ ------ -------- --------
</TABLE>
REVENUES
The increases in Revenues in the years presented primarily relate to the
increase in the number of Brinker-owned restaurants and comparable store sales
increases. The percentage increases in the average number of Brinker-owned
restaurants in operation over the prior fiscal year was 19%, 18% and 18% for
fiscal 1993, 1992 and 1991, respectively. Increases in comparable store sales
were 3.8%, 3.3%, and 3.9% in fiscal 1993, 1992 and 1991, respectively. These
favorable trends were due to increased customer counts resulting from Brinker's
commitment to providing quality food and service at an exceptional value, its
ongoing evaluation of the menu mix and its continued remodeling program to keep
its restaurants updated and the ambiance inviting to the guests. In addition,
Brinker continues to refine its real estate site selection process which focuses
on trading-area demographics, visibility and accessibility. Quality sites
provide a competitive advantage and contribute to greater sales for new
restaurants. Menu price increases had little impact on the increases in Revenues
as weighted average price increases over the past three fiscal years averaged
only 1% per year.
Revenues for the 26 weeks ended December 29, 1993 rose 28.7% to $390 million
from $303.1 million generated from the same period of fiscal 1993. The increase
is primarily attributable to the 67 Brinker-operated restaurants opened or
acquired since December 31, 1992. Consolidated comparable store sales
year-to-date rose 3.1%, which also contributed to the increase. On a concept
basis, Chili's Grill & Bar ("Chili's"), Romano's Macaroni Grill ("Macaroni
Grill") and Grady's American Grill ("Grady's") experienced comparable store
sales increases of 3.3%, 2.8% and 1.9%, respectively. The introduction of the
"Guiltless Grill" menu items at Chili's as well as the addition of new dessert
menu items has contributed to the increase in comparable store sales at the
Chili's concept.
COSTS AND EXPENSES (AS A PERCENT OF REVENUES)
Cost of Sales remained constant in fiscal 1993 as the favorable impact from
the continued emphasis on food portioning and waste and yield management
programs were offset by product mix changes to menu items with higher percentage
food costs. Significant decreases in fiscal 1992 and 1991 were attributable to
favorable commodity prices and the reformulation of certain menu items resulting
in improved yields and favorable cost comparisons.
37
<PAGE>
Cost of Sales remained stable for the 26 weeks ending December 29, 1993
compared to the respective prior year period. Favorable commodity prices for
produce and dairy experienced throughout fiscal 1994 were offset by unfavorable
commodity prices for poultry experienced in the first quarter. In addition, the
relative growth of Macaroni Grill and Grady's offset the impact of favorable
commodity prices as these concepts have higher Cost of Sales ratios than
Chili's.
Restaurant Expenses continued their downward trend in fiscal 1993 as
management labor costs were controlled by decreasing the administrative hours
required of Restaurant Managers. Excluding the effect of new restaurants, fewer
managers are now required throughout the system. Supervisory cost savings were
also realized by increasing the number of restaurants supervised by each Area
Director. In addition, the successful implementation of aggressive safety and
loss management programs in the restaurants resulted in the containment of
insurance costs. Also, occupancy costs remained stable due to increased
purchases of land for new restaurant sites. These positive results offset
incremental advertising costs attributable to the first time production of
television commercials for the Grady's concept. The effectiveness in managing
restaurant labor during fiscal 1992 and 1991 offset minimum wage rate
legislation enacted in fiscal 1991. Each fiscal year has benefitted from
increased Revenues which continue to absorb a greater portion of fixed and
semi-fixed costs and improved information systems that have enhanced operating
efficiencies in the restaurants.
Restaurant Expenses decreased for the 26 weeks ended December 29, 1993 as
compared to the six months ended December 31, 1992 as a result of continued
efficiencies achieved in supervising and managing the restaurants, a decrease in
rent expense due to the increase in percentage of restaurants owned versus
leased, a decrease in bad debt expense due to implementation of an on-line
credit card authorization system and a decrease in liquor taxes due to the
dilutive effect of new restaurant openings in states with lower tax rates. These
favorable trends were partially offset by increased insurance costs and
increases in property tax rates.
Increased Depreciation and Amortization in fiscal 1993 and 1992 were
primarily due to investments in new computer hardware and software which has
contributed to operating efficiencies both in the restaurants and the corporate
office support groups. Also, increased activity in the ongoing restaurant
remodeling program and the continued replacement of restaurant furniture and
equipment also contributed to the increases. Fiscal 1991 remained flat compared
to fiscal 1990 as increased revenues were able to absorb the impact of increased
expenditures.
Depreciation and Amortization increased for the 26 weeks ended December 29,
1993 as compared to the six months ended December 31, 1992. The increase is
primarily the result of continued investments in new computer hardware and
software. In addition, Depreciation and Amortization related to furniture and
equipment and pre-opening costs has increased over last fiscal year due to the
increased number of stores opened in the current fiscal year compared to last
fiscal year. The ongoing restaurant remodeling program as well as the continued
replacement of restaurant furniture and equipment are other factors contributing
to the increase.
General and Administrative expenses decreased in each fiscal year as a
result of Brinker's focus on controlling corporate expenditures. Efficiencies
realized from increased investments in computer hardware and software permitted
Brinker to continue with the aggressive expansion plan of the restaurant
concepts without incurring significant increases in staff and support costs.
General and Administrative declined for the 26 weeks ended December 29, 1993 as
compared to the six months ended December 31, 1992 for the same reasons. The
dollar increase in General and Administrative costs is due to additional staff
and support as Brinker accelerates expansion of its restaurant concepts,
including international franchising.
Interest Expense decreased as a result of Brinker retiring all of its
outstanding bank debt with the proceeds received from the March 1991 public
offering of Brinker Common Stock.
Other, Net is greater in fiscal 1993 and 1992 compared to fiscal 1991 as a
result of increased interest and dividend income generated from investments made
with the proceeds received from the
38
<PAGE>
March 1991 public offering of Brinker Common Stock. Other, Net increased
substantially for the 26 weeks ended December 29, 1993 as compared to the six
months ended December 31, 1992. The increase is primarily the result of a gain
of approximately $1,000,000 generated from the sale of land in the second
quarter. In addition, increases in realized gains on sales of marketable
securities contributed to the increase. Interest and dividend income remained
flat.
INCOME BEFORE PROVISION FOR INCOME TAXES
As a result of changes in the relationships between Revenues and Costs and
Expenses, Income Before Provision for Income Taxes has increased over the prior
fiscal year 39.1%, 37.5% and 44.7% in fiscal 1993, 1992 and 1991, respectively,
and increased 38.7% for the 26 weeks ended December 29, 1993 as compared to the
six months ended December 31, 1992.
INCOME TAXES
Brinker's effective income tax rate of 35.5%, 34.5% and 34.2% in fiscal
1993, 1992 and 1991, respectively, continues to increase as a result of
additional state income tax liabilities resulting from continued restaurant
expansion, particularly relating to growth in California and Florida. Brinker's
effective income tax rate increased to 35.5% from 34.7% for the 26 weeks ended
December 29, 1993 as compared to the six months ended December 31, 1992 for the
same reasons.
The Omnibus Budget Reconciliation Act was enacted in August 1993. This act
mandates certain changes in federal tax laws, which among other things, included
an increase in the statutory Federal corporate income tax rate from 34% to 35%
and reinstatement of the Targeted Jobs Tax Credit. The impact of these changes,
retroactive to January 1993, did not have a material impact on Brinker's fiscal
1993 effective income tax rate. This act also mandates a tax credit for FICA
taxes paid on tips, effective January 1994. These changes are not expected to
have a material impact on Brinker's fiscal 1994 effective income tax rate as the
amounts are offsetting.
NET INCOME AND NET INCOME PER SHARE
Net Income and Primary Net Income Per Share as a percent of Revenues
continue to increase as a result of controlling Costs and Expenses while
continuing with the expansion of the restaurant concepts. The increases in the
weighted average number of common shares outstanding arise primarily from common
stock options exercised each year and shares issued in connection with the March
1991 public offering of Brinker Common Stock.
STOCK DIVIDENDS
Stock splits in each of March 1994, May 1993, November 1991 and March 1991,
effected in the form of 50% stock dividends, resulted in the issuance of 23.2
million, 22.8 million, 21.5 million and 19.7 million shares of Brinker Common
Stock, in fiscal 1994, 1993, 1992 and 1991, respectively.
IMPACT OF INFLATION
Brinker has not experienced a significant overall impact from inflation. As
operating expenses increase, Brinker, to the extent permitted by competition,
recovers increased costs by increasing menu prices.
LIQUIDITY AND CAPITAL RESOURCES
The working capital deficit increased from $31.2 million at June 30, 1992 to
$44 million at June 30, 1993. Strong operating results from new and existing
units and the exercise of employee stock options generated cash proceeds that
were offset by Brinker's capital expenditures and the investment of available
cash in long-term marketable securities. Net cash provided by operating
activities increased from $77.9 million in fiscal 1992 to $107.2 million in
fiscal 1993 due to the increased number of restaurants in operation, strong
operating results from existing units and the effective containment of costs.
The working capital deficit increased from $44 million at June 30, 1993 to
$57 million at December 29, 1993, due primarily to Brinker's capital
expenditures as discussed below. Net cash provided by
39
<PAGE>
operating activities increased to $52.9 million for the first half of the year
from $37 million during the same period in fiscal 1993 due to the greater number
of restaurants in operation over the prior fiscal year and strong operating
results from existing units.
Brinker had available funds from credit facilities totalling $30 million at
June 30, 1993. Brinker estimates that its capital expenditures during fiscal
1994 will approximate $150 million. These capital expenditures, which will
primarily relate to the planned expansion of each restaurant concept and
Brinker's ongoing remodelling program, will be funded from internal operations,
build-to-suit lease agreements with landlords, liquidating investments and
income earned from investments.
Long-term debt outstanding at December 29, 1993 consisted of obligations
under capital leases. At December 29, 1993, Brinker had drawn $2.9 million from
its lines of credit to fund short-term operational needs, leaving $37.1 million
of available funds from lines of credit.
Capital expenditures were $62.8 million for the 26 weeks ended December 29,
1993 as compared to $54.6 million for the same period of last fiscal year.
Purchases of land for future restaurant sites, the acquisition of four
restaurants from a franchisee, new restaurants under construction, purchases of
new and replacement restaurant furniture and equipment and the ongoing
remodeling program were responsible for the increased expenditures. Brinker
estimates that its capital expenditures during the third quarter will
approximate $34 million. These capital expenditures will be funded internally
from restaurant operations, build-to-suit lease agreements with landlords,
liquidating investments and dividend and interest income from investments.
The Clinton administration continues to analyze and propose new legislation
which could adversely impact the entire business community. Mandated health care
and minimum wage measures, if passed, could increase Brinker's operating costs.
Brinker would attempt to offset increased costs through additional improvements
in operating efficiencies and menu price increases.
Brinker is not aware of any other event or trend which would potentially
affect its liquidity. In the event such a trend would develop, Brinker believes
that there are sufficient funds available to it under the lines of credit and
strong internal cash generating capabilities to adequately manage the expansion
of the business.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1990, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 106, Employers'
Accounting for Post-Retirement Benefits Other Than Pensions. In November 1992,
the FASB issued SFAS No. 112, Employers' Accounting for Post-Employment
Benefits. SFAS No. 106 and SFAS No. 112 establish standards of accounting and
reporting for employers that offer such benefits. SFAS No. 106 and SFAS No. 112
are effective for Brinker in fiscal 1994 and fiscal 1995, respectively. Brinker
presently does not provide post-retirement benefits which fall within the scope
of SFAS No. 106. In addition, Brinker does not believe the adoption of SFAS No.
112 will have a material impact on its consolidated financial statements.
In February 1992, the FASB issued SFAS No. 109, Accounting for Income Taxes,
which supersedes SFAS No. 96. SFAS No. 109 retained the asset and liability
approach for financial accounting and reporting for income taxes as in SFAS No.
96, but reduced the complexity of SFAS No. 96 and changed the criteria for
recognition and measurement of deferred tax assets. The adoption of SFAS No. 109
in the first quarter of fiscal 1994 did not have a material impact on Brinker's
consolidated financial statements.
In May 1993, the FASB issued SFAS No. 115, Accounting for Certain Marketable
Securities, which supersedes SFAS No. 12. SFAS No. 115 requires certain
marketable securities that were previously carried at cost to be carried at fair
market value. SFAS No. 115 is effective for Brinker in fiscal 1995. Brinker does
not believe the adoption of SFAS No. 115 will have a material impact on its
consolidated financial statements.
40
<PAGE>
BUSINESS OF BRINKER
Brinker is principally engaged in the operation and development of the
Chili's, Grady's, Macaroni Grill and Spageddies Italian Italian Food
("Spageddies") restaurant concepts. Brinker 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. Brinker completed
the acquisitions of Grady's, Macaroni Grill and Spageddies in February 1989,
November 1989 and June 1993, respectively.
RESTAURANT CONCEPTS AND MENUS
CHILI'S. Chili's establishments are full-service Southwestern theme
restaurants, featuring a casual atmosphere and a limited menu of freshly
prepared chicken, beef and seafood entrees, 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 or slacks, 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, quality food at
modest prices. Entree selections range in menu price from $3.85 to $9.95, with
the average revenue per meal, including alcoholic beverages, approximating $8.45
per person. A full-service bar is available at each Chili's restaurant, with
frozen margaritas offered as the concept's specialty drink. Food and
non-alcoholic beverage sales constitute approximately 85% of the concept's total
restaurant revenues, with alcoholic beverage sales accounting for the remaining
15%.
GRADY'S. Grady's restaurants are casual, upscale dinner house restaurants
which feature a broad menu focusing on fresh seafood, prime rib, steaks, chicken
and pasta entrees, salads, sandwiches, appetizers, desserts and a full-service
bar. Grady's restaurants feature booth and table seating, wood and brick walls
and brass fixtures. Service personnel are dressed smartly, in casual slacks,
white buttoned-down shirts and ties, which reinforce the upscale atmosphere.
The restaurant appeals to a slightly more sophisticated customer than
Chili's. Entree selections range in price from $4.95 to $14.95, with the average
revenue per meal, including alcoholic beverages, approximating $10.75 per
person. Food and non-alcoholic beverage sales constitute approximately 87% of
the concept's total restaurant revenues, with alcoholic beverage sales
accounting for the remaining 13%.
MACARONI GRILL. Macaroni Grill is an upscale Italian theme restaurant which
specializes in family-style recipes and features seafood, meat, chicken and
pasta entrees, salads, pizza, appetizers and desserts with limited beer and wine
selection in most restaurants and a full-service bar in recent and future
openings. Exhibition cooking, wood-burning ovens and rotisseries provide an
enthusiastic and exciting environment in the restaurants. Macaroni Grill
restaurants feature white linen-clothed tables, fireplaces, a pizza oven, sous
stations, rotisseries 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 $4.75 to $15.95 with certain
specialty items priced on a daily basis. The average revenue per meal, including
alcoholic beverages, is approximately $13.50 per person. Food and non-alcoholic
beverage sales constitute approximately 83% of the concept's total restaurant
revenues, with alcoholic beverage sales accounting for the remaining 17%.
SPAGEDDIES. Spageddies restaurants are casual, full-service,
moderately-priced Italian restaurants featuring appetizers, salads, pasta,
pizza, rotisserie chicken, steak and desserts with alcoholic beverage
selections. Spageddies restaurants feature an exhibition kitchen, a wood-burning
pizza oven,
41
<PAGE>
Italian billboards and prominent displays of peppers, parmesan and tomatoes.
Service personnel are dressed casually in black shorts or pants and red shirts
to reinforce the casual, informal, open environment.
Entree selections range in menu price from $3.45 to $12.95. The average
revenue per meal, including alcoholic beverages, is approximately $8.15 per
person. Food and non-alcoholic beverage sales constitute approximately 90% of
the concept's total restaurant revenues, with alcoholic beverage sales
accounting for the remaining 10%.
RESTAURANT LOCATIONS
At February 2, 1994, Brinker's system of company-owned, joint venture and
franchised units included 413 restaurants in 42 states, Canada, Mexico and
Singapore. Brinker operated 327 restaurants (including 262 Chili's, 30 Grady's,
30 Macaroni Grill, four Spageddies and one test concept) located in 28 states.
An additional nine joint venture restaurants, in which Brinker owns a 50%
interest, and 68 franchised Chili's restaurants were operating in 28 states,
including 14 states where no Brinker-owned restaurants are operated. Another
nine franchised Brinker restaurants were operating internationally.
BUSINESS DEVELOPMENT
Brinker's long-term objective is to continue expansion of its restaurant
concepts by opening company-operated units in strategically desirable markets.
Brinker intends to concentrate on development of certain identified markets to
achieve penetration levels deemed desirable by Brinker in order to improve
Brinker's competitive position, marketing potential and profitability as well as
reducing its supervision expense. Expansion efforts will be focused on major
metropolitan areas in the United States and smaller market areas which can
adequately support any of Brinker's restaurant concepts.
Brinker considers the specific location of a restaurant to be critical to
its long-term success and devotes significant effort to the investigation of new
locations using 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
senior management inspect and approve each restaurant site prior to its
acquisition.
Brinker periodically reevaluates restaurant sites to ensure that site
selection attributes have not deteriorated below minimum standards. In the event
site deterioration were to occur, Brinker makes a concerted effort to improve
the restaurant's performance by providing physical, operating and marketing
enhancements unique to each restaurant's situation. If internal efforts to
restore the restaurant's performance to acceptable minimum standards are
unsuccessful, Brinker considers relocation to a proximate, more desirable site,
or evaluates closing the restaurant if Brinker criteria such as return on
investment and area demographic data do not support a relocation. Since
inception, Brinker has closed only three restaurants, including one in fiscal
1993 and two in the second quarter of fiscal 1994 which were performing below
Brinker standards primarily due to declining trading-area demographics. These
and future closings will be key to a successful reallocation of resources to the
stronger performing stores.
42
<PAGE>
The following table illustrates the system-wide restaurants opened in fiscal
1993 and through February 2 of fiscal 1994 and planned openings for the
remainder of fiscal 1994:
RESTAURANT OPENINGS
<TABLE>
<CAPTION>
FISCAL 1994,
THROUGH REMAINDER OF
FISCAL 1993 FEBRUARY 2, 1994 FISCAL 1994
--------------- --------------------- ------------
<S> <C> <C> <C>
Chili's.............................................................. 28 25 6 to 7
Grady's.............................................................. 7 6 4
Macaroni Grill....................................................... 9 8 3 to 4
Spageddies........................................................... 3 1 1 to 2
R&D Concept.......................................................... 1 -- 1
Joint Venture/Franchise.............................................. 14 9 4 to 9
-- --
------------
Total............................................................ 62 49 19 to 27
-- --
-- --
------------
------------
</TABLE>
Brinker anticipates that some of these restaurants 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, Brinker either leases the land, and pays for the building, furniture,
fixtures and equipment from its own funds, or owns the land, building and
furniture, fixtures and equipment. As of February 2, 1994, Brinker had lease or
purchase commitments for future construction of 17 Chili's, six Grady's, seven
Macaroni Grill and three Spageddies restaurant sites.
The investment for a typical Chili's restaurant currently approximates
$2,000,000, including approximately $650,000 in land costs. The investment for a
typical Grady's restaurant currently approximates $2,550,000 with approximately
$800,000 in land costs. A Macaroni Grill investment currently approximates
$2,500,000, of which approximately $800,000 are land costs, while a Spageddies
investment currently approximates $2,150,000, of which approximately $650,000
are land costs. Chili's, Grady's, Macaroni Grill and Spageddies incur furniture,
fixtures, equipment and preopening costs of approximately $550,000, $650,000,
$600,000 and 600,000, respectively.
The specific rate at which Brinker 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
Brinker intends to continue its expansion through joint venture and
franchise development, both domestically and internationally. During the past
two years, Brinker has entered into several agreements for the development and
operation of Chili's in the Pacific Rim, Australia, France, Egypt and Puerto
Rico and Macaroni Grill in Canada. Brinker intends to continue pursuing
international expansion and is currently contemplating development in other
countries. Brinker has entered into a separate joint venture agreement for
research and development activities related to the testing of a new restaurant
concept and is a partner in a joint venture which operates several Chili's
restaurants. Brinker has a 50% interest in these joint ventures and they are
accounted for under the equity method. A typical joint venture or franchise
development agreement provides for payment of area development and initial
franchise fees in addition to subsequent royalty and advertising fees based on
the annual gross sales of each restaurant. Future joint venture or 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. Brinker has entered into a total of 24 joint
venture/franchise development agreements.
43
<PAGE>
RESTAURANT MANAGEMENT
Brinker'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
success of continued expansion of each concept.
Chili's operations are supervised by a Senior Vice President who reports to
Brinker's Executive Vice President -- Operations. Reporting directly to this
individual are six Regional Vice Presidents, each of whom supervises a Regional
Director and approximately seven Area Directors. Area Directors generally are
responsible for supervising approximately four to six restaurants each,
depending on the size of the geographic area. Each restaurant has one Managing
Partner or General Manager and between two and four additional managers.
Grady's is supervised by a Senior Vice President who reports to Brinker's
Executive Vice President -- Operations. Area Directors report to the Vice
President -- Grady's Operations who reports to the Senior Vice President. Each
Area Director is responsible for supervising approximately four restaurants.
Each Grady's restaurant has a General Manager and between four and seven
additional managers.
Macaroni Grill and Spageddies are each supervised by a Senior Vice President
who reports to Brinker's Executive Vice President -- Operations. Area Directors
report to the Vice President -- Macaroni Grill Operations and Vice President --
Spageddies Operations, respectively, who each reports to the Senior Vice
President. Each Area Director is responsible for supervising approximately four
to five restaurants. Each restaurant has one General Manager and between three
and seven additional managers.
New concept operations are supervised by a Senior Vice President who reports
to Brinker's Executive Vice President -- Operations. Other supervisory personnel
will be added on an as-needed basis as additional restaurant concepts are
developed and tested.
The turnover rate for managers in the Brinker restaurants is low relative to
the general experience of the restaurant industry. Brinker has initiated
incentive programs to encourage increased tenure at the management level. Senior
Vice Presidents, Vice Presidents, Regional Directors, Area Directors, and all
restaurant managers are compensated on a fixed salary basis and a bonus based
upon the performance of the restaurants under their supervision.
Brinker ensures consistent quality standards in all concepts through the
issuance of Operations Manuals covering all elements of operations and Food &
Beverage Manuals which provide guidance for preparation of Brinker's formulated
recipes. Routine visitation to the restaurants by all levels of supervision
enforce strict adherence to Brinker's standards.
The Director of Training in each concept is responsible for maintaining each
concept's operational training program, which 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 assure the smooth
transition to operating personnel.
PURCHASING
Brinker's ability to maintain consistent quality of products throughout its
chain of restaurants depends upon acquiring food products and related items from
reliable sources. Brinker approves its suppliers and requires them to adhere to
strict established product specifications for all food and beverage products
sold in its restaurants. Brinker negotiates directly with such 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
44
<PAGE>
which Brinker's restaurants are located. Because of the relatively rapid
turnover of perishable food products, inventories in the restaurants consist
primarily of food, beverages and supplies having a modest aggregate dollar value
in relation to revenues.
ADVERTISING AND MARKETING
Brinker's concepts focus generally on the 18 to 54 year old age group, which
constitutes approximately half of the population of the United States. Members
of this population segment grew up on fast food, but Brinker believes that, with
increasing maturity, they prefer a more adult, upscale dining experience. To
attract this target group, Brinker relies primarily on television, radio, direct
mail advertising and word-of-mouth information communicated by customers.
Brinker's franchise agreements require advertising contributions to Brinker
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 Brinker.
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.
Brinker 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
Brinker. There is active competition for management personnel and for attractive
commercial real estate sites suitable for restaurants.
EMPLOYEES
At February 2, 1994, Brinker employed approximately 31,500 persons, of whom
approximately 550 were corporate personnel, 1,550 were restaurant managers or
trainees and 29,400 were employed in non-management restaurant positions. Of the
550 corporate employees, 230 were in management positions and approximately 320
were general office employees. The executive officers of Brinker have an average
of more than 19 years of experience in the restaurant industry.
Brinker considers its employee relations to be good and believes that its
employee turnover rate is lower than the industry average. Most employees, other
than restaurant management and corporate personnel, are paid on an hourly basis.
Brinker believes that it provides working conditions and wages that compare
favorably with those of its competition. Brinker's employees are not covered by
any collective bargaining agreements.
SERVICE MARKS
Brinker has registered, among other marks, "Chili's", "Grady's", "Romano's
Macaroni Grill" and "Spageddies" as service marks with the United States Patent
and Trademark Office. In addition, Brinker has service mark applications pending
for "Grady's American Grill" and "Spageddies Italian Italian Food."
SEASONALITY
Brinker's sales volumes fluctuate seasonally and are generally higher in the
summer months and lower in the winter months. Continued expansion in the
southern United States has reduced the impact of seasonality and future
restaurant development should continue this trend.
GOVERNMENTAL REGULATION
Each of Brinker'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. Brinker 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.
45
<PAGE>
Brinker is subject to federal and state environmental regulations, but these
have not had a material effect on Brinker'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. Brinker is subject to the Fair Labor
Standards Act which governs such matters as minimum wages, overtime and other
working conditions, along with the Americans With Disabilities Act and various
mandates. Brinker anticipates future legislation concerning mandated health care
benefits which may have significant consequences to Brinker.
PROPERTIES
The following table illustrates the approximate average dining capacity for
each unit in primary restaurant concepts:
<TABLE>
<CAPTION>
MACARONI
CHILI'S GRADY'S GRILL SPAGEDDIES
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Square Feet.................................. 5,800 6,900 7,100 7,000
Dining Seats................................. 210-220 230-250 230-240 230-240
Dining Tables................................ 50-60 50-60 60-70 50-55
</TABLE>
Certain of Brinker's restaurants are leased for an initial term of five to
30 years, with renewal terms of five to 30 years. The leases typically provide
for a fixed rental plus percentage rentals based on sales volumes. At February
2, 1994, Brinker owned the land and/or building for 223 of the 327
Company-operated restaurants. Brinker has closed only three restaurants since
inception and considers that its properties are suitable, adequate,
well-maintained and sufficient for the operations contemplated.
Brinker leases warehouse space totalling approximately 31,500 square feet in
Dallas, Texas, which it uses for menu development activity and for storage of
equipment and supplies. Brinker purchased an office building containing
approximately 105,000 square feet for its corporate headquarters in July 1989.
Approximately 5,600 square feet of this building is leased to third party
tenants. In March 1992, Brinker leased an additional 34,000 square feet of
office space for the expansion of its corporate headquarters.
LEGAL PROCEEDINGS
From time to time, Brinker is involved in lawsuits that it considers to be
in the normal course of its business which have not resulted in any material
losses to date.
46
<PAGE>
MANAGEMENT AND PRINCIPAL SHAREHOLDERS OF BRINKER
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as to the number of
shares of Brinker Common Stock beneficially owned as of February 2, 1994 by the
principal shareholders of Brinker:
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
-------------------------
NUMBER OF
NAME AND ADDRESS SHARES(1) PERCENT
- ------------------------------------------------------------------- ----------- ------------
<S> <C> <C>
Provident Investment Counsel ...................................... 4,895,443 7.1%
300 North Lake Avenue
Pasadena, California 91101
American Express Company .......................................... 4,199,245 6.1%
American Express Tower
World Financial Center
New York, New York 10285
IDS Financial Corporation ......................................... 4,012,650 5.8%
IDS Tower 10
Minneapolis, Minnesota 55440
<FN>
- ------------------------
(1) Based on information contained in Schedule 13G dated as of December 31,
1993, and as supplemented by subsequent communication after January 31,
1994.
</TABLE>
SECURITY OWNERSHIP OF BRINKER'S DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning security
ownership of management and directors of Brinker:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK
BENEFICIALLY OWNED AS PERCENT OF
NAME OF FEBRUARY 2, 1994(1) CLASS
- ----------------------------------------------------------------- ----------------------- -------------
<S> <C> <C>
Norman E. Brinker................................................ 1,360,947 1.92%
Douglas H. Brooks................................................ 290,161 *
F. Lane Cardwell, Jr............................................. 33,772 *
Creed L. Ford, III............................................... 668,977 *
Douglas S. Lanham................................................ 47,560 *
Ronald A. McDougall.............................................. 101,272 *
Debra L. Smithart................................................ 25,335 *
Roger F. Thomson................................................. -0- -0-
Jack W. Evans, Sr................................................ 71,713 *
Rae Forker Evans................................................. 4,960 *
J.M. Haggar, Jr.................................................. 128,395 *
J. Ira Harris.................................................... -0- -0-
Ray L. Hunt...................................................... 33,750 *
William F. Regas................................................. 109,132 *
Roger T. Staubach................................................ 1,500 *
All executive officers and directors as a group (17 persons)..... 2,986,155 4.22%
<FN>
- ------------------------
* Less than 1%
(1) Includes shares of Brinker Common Stock which may be acquired prior to
April 3, 1994 by exercise of exercisable options granted under Brinker's
1983 Incentive Stock Option Plan, its 1984 Non-Qualified Stock Option Plan
and the 1991 Stock Option Plan for Non-Employee Directors and Consultants,
as applicable.
</TABLE>
47
<PAGE>
BRINKER DIRECTORS AND EXECUTIVE OFFICERS
BRINKER BOARD OF DIRECTORS
The following persons serve as directors of Brinker:
NORMAN E. BRINKER, 62, has been Chairman of the Board of Directors and Chief
Executive Officer of Brinker since September 1983, except for the period from
January 27, 1993 to May 4, 1993. During this time period, Mr. Brinker was
incapacitated due to an injury, and until his recovery the positions of Chairman
and CEO were held by Ronald A. McDougall. Mr. Brinker was the founder of S & A
Restaurant Corp. (which was acquired by The Pillsbury Company in June 1976), the
developer and operator of Steak and Ale-R- Restaurants and Bennigan's-R-
Taverns, 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 Apparel Company and as a member of the
Nominating Committee of Brinker.
F. LANE CARDWELL, JR., 41, was elected Executive Vice President -- Strategic
Development in June, 1992, having formerly held the position of Senior Vice
President -- Strategic Development since December, 1990. Mr Cardwell joined
Brinker as Vice President -- Strategic Development in August, 1988, having been
previously employed by S & A Restaurant Corp. from November 1978 to August 1988,
during which time he served as Vice President -- Strategic Planning and Senior
Vice President -- Strategic Planning.
CREED L. FORD, III, 41, joined Brinker's predecessor in September 1976 as an
Assistant Manager and was promoted to the position of Restaurant General Manager
in March 1977. In September 1978, Mr. Ford became Director of Operations of
Brinker. He was elected Vice President -- Operations of Brinker in October 1983,
Senior Vice President -- Operations in November 1984 and Executive Vice
President -- Operations in April 1986.
RONALD A. MCDOUGALL, 51, was elected President and Chief Operating Officer
of Brinker in April 1986 having formerly held the office of Executive Vice
President -- Marketing and Strategic Development of Brinker since September
1983. During the period January 27, 1993 to May 4, 1993, Mr. McDougall served as
Chairman and CEO. From March 1974 through June 1982, Mr. McDougall was employed
by S & A Restaurant Corp. in several management positions, including Senior Vice
President of Marketing and Strategic Development and a director. During the last
six months of 1982, he was Executive Vice President of 1330 Corporation, a
publishing firm. From January 1983 to July 1983, he held the position of Vice
President -- Marketing of Burger King Corporation. Mr. McDougall is a member of
the Nominating Committee of Brinker.
DEBRA L. SMITHART, 39, joined Brinker as Assistant Controller in June 1985.
In February 1986, she was promoted to the position of Controller and served in
this capacity until December 1988 when she was elected Vice President --
Controller. In March 1991, Ms. Smithart was promoted to Vice President --
Finance and held this position until September 1991 when she was promoted to
Executive Vice President -- Chief Financial Officer. Prior to joining Brinker,
Ms. Smithart worked in various financial/accounting capacities in the public
accounting, oil & gas, real estate and manufacturing industries. Ms. Smithart is
a member of the Nominating Committee of Brinker.
ROGER F. THOMSON, 44, joined Brinker as Senior Vice President, General
Counsel and Secretary in April 1993. He was promoted to Executive Vice
President, General Counsel and Secretary in March 1994. 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.
48
<PAGE>
JACK W. EVANS, 71, is currently President of Jack Evans Investments, Inc.
and is a member of the Nominating Committee and Compensation Committee of
Brinker. He served as Chairman, Chief Executive Officer and President of Cullum
Companies, Inc., a retail food and drugstore chain from 1977 to 1990. He served
as Mayor of the City of Dallas from May 1981 to May 1983. He is also a director
of Texas Utilities Corporation, Cullum Companies, Inc., Randall's Markets and
Morning Star Group.
RAE FORKER EVANS, 45, is currently Vice President, National Affairs of
Hallmark Cards, Inc. and has held such position since February 1982 and is a
member of the Audit Committee and Nominating Committee of Brinker. She was
appointed by former President Bush as a member of the Commission on White House
Fellowships and also serves as a member of the Board of Trustees of the American
Council of Young Political Leaders. Mrs. Evans also serves as a member of the
Business-Government Relations Council and is a past president of the
organization. She is a member of the Executive Committee of the National Women's
Economic Alliance, the Washington Federal City Council and National Women's
Forum and was recently appointed to the Catalyst Board of Advisors.
Additionally, she is the founder of Women at the Top, a speakers bureau of
prominent Washington, D.C. women, and is an active guest speaker on government
issues in Washington. Ms. Evans was recently elected to the Board of Directors
of Haggar Apparel Company.
J. M. HAGGAR, JR., 69, is a member of the Board of Directors of Haggar
Apparel Company, a clothing manufacturer. He retired as Chairman of the Board in
February 1994. He previously held the positions of President and Chief Executive
Officer of Haggar Apparel Company from 1971 and 1985, respectively. He is also a
director of ENSERCH Corporation. Mr. Haggar is currently a member of both the
Audit and Compensation Committees of Brinker.
J. IRA HARRIS, 55, is a Senior Partner with Lazard Freres & Co., a prominent
investment banking firm, and has held such position since joining the firm in
January 1988. Mr. Harris joined Salomon Brothers in 1969 as a General Partner
and served as a member of the Executive Committee of Salomon Brothers from 1978
to 1983. He also served as a director of Phibro-Salomon. Mr. Harris serves as a
director for various entities including, Manpower, Inc., Caremark International,
Inc., Polk Brothers Charitable Foundation, Northwestern Memorial Hospital,
Chicago Public Library Foundation and the National Center for Learning
Disabilities in New York City. He is also Trustee of Northwestern University.
Mr. Harris is currently a member of the Compensation Committee of Brinker.
RAY L. HUNT, 50, is currently Chief Executive Officer and Chairman of the
Board of Directors of Hunt Oil Company, having held such positions since 1975.
He is also President and Chairman of the Board of Directors of Hunt
Consolidated, Inc. and RRH Corporation. Mr. Hunt serves as a director of Dresser
Industries, Inc. Mr. Hunt is a member of the Compensation Committee and the
Nominating Committee of Brinker.
WILLIAM F. REGAS, 64, co-founded Grady's in 1982 and served as its Chairman
of the Board from 1982 to 1989. Mr. Regas is currently Co-Chairman of Grady's
Board of Directors. Mr. Regas has been active in the National Restaurant
Association, having served as its President from 1980 to 1981. Mr. Regas has
served as Chairman of the Board of Directors of Regas Brothers, Inc. since 1952,
and is also a general partner of Regas Real Estate Company. Mr. Regas is a
member of the Audit Committee of Brinker.
ROGER T. STAUBACH, 52, is Chairman of the Board and Chief Executive Officer
of The Staubach Company, a national real estate company specializing in tenant
representation, and is a member of the both the Compensation Committee and the
Nominating Committee of Brinker. 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 Halliburton Company, Gibson Greetings, Inc.,
First USA, Inc. and Life Partners, Inc. and is active in numerous civic, charity
and professional organizations.
49
<PAGE>
BRINKER EXECUTIVE OFFICERS
The following persons are executive officers of Brinker who do not serve on
the Brinker Board:
DOUGLAS H. BROOKS, 41, joined Brinker 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 his current position as Concept Head and Senior Vice President
- -- Chili's Operations in June 1992. Prior to joining Brinker, Mr. Brooks helped
manage the first two Luther's Barbeque units.
RICHARD L. FEDERICO, 39, joined Brinker as Director of Operations for
Grady's in February 1989. Upon Brinker's acquisition of Macaroni Grill in
November 1989, Mr. Federico became Concept Head of this new restaurant group. He
was promoted to Vice President -- Romano's Macaroni Grill Operations in December
1990 and in June 1992 was promoted to Concept Head and Senior Vice President --
Macaroni Grill Operations. In February 1994, Mr. Federico also assumed
responsibilty for the operations of Spageddies. Before joining Brinker, Mr.
Federico worked in various management capacities with S&A Corporation and
Houston's Restaurants and was also a co-founder of Grady's Goodtimes,
predecessor to Grady's.
DOUGLAS S. LANHAM, 44, joined Brinker as Eastern Region Vice President for
Chili's in 1987. In December 1989, he was promoted to Senior Vice President --
Eastern Region Operations. Mr. Lanham was promoted to Concept Head and Senior
Vice President -- Grady's operations in February 1991. Prior to joining Brinker,
he was associated with S&A Corporation, and was a partner of Sunstate
Corporation, a Chili's franchisee in Florida and Georgia.
JOHN C. MILLER, 38, joined Brinker as Vice President -- Special Concepts in
September 1987. In October 1988, he was elected Vice President -- Joint
Venture/Franchise and served in this capacity until August 1993 when he was
promoted to Senior Vice President -- New Concept Development. Prior to joining
Brinker, Mr. Miller worked in various capacities with the Taco Bueno Division of
Unigate Restaurants.
DIRECTOR COMPENSATION
During the year ended June 30, 1993, Messrs. Evans, Haggar, Hunt and Regas,
and Ms. Evans received director fees of $13,000, $13,000, $11,750, $12,000 and
$10,500, respectively. Former Brinker Board member, Thomas Landry, received
directors fees of $750. Directors who are not employees of Brinker receive $750
for each meeting of the Brinker Board attended and $500 for each meeting of any
Committee of the Brinker Board attended. Brinker also pays outside directors
$7,500 per year for serving on the Brinker Board and reimburses directors for
costs incurred by them in attending meetings of the Brinker Board. Directors who
are not employees of Brinker receive grants of stock options under Brinker's
1991 Stock Option Plan for Non-Employee Directors and Consultants. Each such
director receives 2,000 stock options annually.
50
<PAGE>
SUMMARY OF BRINKER EXECUTIVE COMPENSATION
The following summary compensation table sets forth the annual compensation
for Brinker's Chief Executive Officer and the four other highest compensated
executive officers of Brinker whose total salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
PROFIT LONG-TERM STOCK
SHARING INCENTIVE TOTAL OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER(1) PAYOUTS COMPENSATION AWARDED(2)
- ---------------------------------------- ---- -------- -------- ----------- --------- ------------ ----------
(#)
<S> <C> <C> <C> <C> <C> <C> <C>
Norman E. Brinker ...................... 1993 $573,708 $753,887 $ 10,933 $ 93,940 $ 1,432,468 225,000
Chairman of the Board and Chief 1992 $523,792 $360,308 $ 0 $ 75,164 $ 959,264 168,750
Executive Officer 1991 $472,885 $259,700 $ 0 $ 0 $ 732,585 253,125
Ronald A. McDougall .................... 1993 $444,538 $585,842 $ 5,972 $ 93,940 $ 1,130,292 225,000
President and Chief Operating Officer 1992 $406,115 $283,009 $ 500 $ 75,164 $ 764,788 135,000
1991 $372,062 $298,564 $ 500 $ 0 $ 671,126 202,500
Creed L. Ford, III ..................... 1993 $306,692 $309,847 $ 6,082 $ 68,889 $ 691,510 67,500
Executive Vice President -- Operations 1992 $290,146 $169,406 $ 500 $ 50,109 $ 510,161 67,500
1991 $264,694 $153,181 $ 500 $ 47,058 $ 465,433 101,250
Douglas H. Brooks ...................... 1993 $206,231 $174,199 $ 2,746 $ 43,839 $ 427,015 38,250
Senior Vice President -- Chili's 1992 $184,280 $ 75,598 $ 500 $ 37,582 $ 297,960 38,250
Operations 1991 $157,073 $ 65,946 $ 500 $ 35,294 $ 258,813 57,375
Douglas S. Lanham ...................... 1993 $193,769 $152,100 $ 13,962 $ 43,839 $ 403,670 38,250
Senior Vice President -- Grady's 1992 $174,577 $ 72,506 $204,792(3) $ 37,582 $ 489,457 38,250
Operations 1991 $151,052 $ 61,441 $ 500 $ 35,294 $ 248,287 57,375
<FN>
- ------------------------
(1) Other compensation represents Brinker match on 1993 deferred compensation,
club memberships and dues, tax preparation services and relocation
benefits.
(2) Stock options awarded have been restated to reflect the March 1994, May
1993, November 1991 and March 1991 stock splits effected in the form of
50% stock dividends.
(3) $204,300 represents relocation benefits.
</TABLE>
401(K) SAVINGS PLAN AND SAVINGS PLAN II
On January 1, 1993, Brinker implemented the 401(k) Savings Plan ("Plan I")
and Savings Plan II. These Plans are designed to provide Brinker's salaried
employees with a tax-deferred long-term savings vehicle. Brinker provides a
matching contribution equal to 25% of a participant's contribution, up to a
maximum of 5% of a participant's compensation.
Plan I is an ERISA 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. Brinker's matching contribution
for all Plan I participants is made in Brinker Common Stock. All participants in
Plan I are considered non-highly compensated employees according to the Internal
Revenue Service.
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 invested into various
investment funds. Brinker's matching contribution for all non-officer Plan II
participants is made in Brinker Common Stock, with corporate officers receiving
a match from Brinker in deferred cash. Participants in Plan II are considered
highly compensated employees according to the Internal Revenue Service.
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<PAGE>
LONG-TERM INCENTIVES
Executives participate in the Executive Long-Term Profit Sharing Plan, a
non-qualified long-term performance cash plan. This plan provides an additional
mechanism for focusing executives on the sustained improvements 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 Brinker's attainment of
predetermined performance objectives. Long-term operating results are measured
by evaluating both pre-tax net income and changes in shareholders' equity over
three-year cycles. No payouts are made if Brinker's actual average performance
for both performance measures over the three-year period is less than 80% of the
planned average performance during the same period.
The following table represents awards granted in the fiscal year ended June
30, 1993 under the Long-Term Executive Profit Sharing Plan.
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
NON-STOCK BASED PLAN
NUMBER OF PERFORMANCE -------------------------------
UNITS PERIOD UNTIL (DOLLARS)
NAME AWARDED PAYOUT THRESHOLD TARGET MAXIMUM
- -------------------------------------------- ----------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Norman E. Brinker........................... 750 3 Years $ 60,000 $ 75,000 $ 90,000
Ronald A. McDougall......................... 750 3 Years $ 60,000 $ 75,000 $ 90,000
Creed L. Ford, III.......................... 550 3 Years $ 44,000 $ 55,000 $ 66,000
Douglas H. Brooks........................... 350 3 Years $ 28,000 $ 35,000 $ 42,000
Douglas S. Lanham........................... 350 3 Years $ 28,000 $ 35,000 $ 42,000
</TABLE>
STOCK OPTIONS
In November 1992, the shareholders of Brinker adopted the 1992 Incentive
Stock Option Plan (the "Brinker Plan"), covering approximately 3.4 million
shares of Brinker Common Stock. Effective September 10, 1993, Brinker's 1992
Incentive Stock Option Plan was amended to provide that no single participant
could receive more than 20% of the options granted in a calendar year. The
purpose of the Brinker Plan is to strengthen Brinker's ability to attract and
retain key employees and to furnish additional incentives to such persons by
encouraging them to become owners of Brinker Common Stock. All employees of
Brinker and its subsidiaries (of which there were approximately 31,500 as of
February 2, 1994) are eligible to be granted options, although Brinker has
historically granted options only to salaried employees.
The administration of the Brinker Plan is provided by the Compensation
Committee of the Brinker Board, which has the authority to determine the terms
on which options are granted under the Brinker Plan. The terms of the Brinker
Plan are substantially identical to that of Brinker's 1983 Incentive Stock
Option Plan, as amended, which expired in October 1993.
In December 1984, the Brinker Board adopted the Non-Qualified Stock Option
Plan (the "Non-Qualified Plan"). The Non-Qualified Plan was amended periodically
with the approval of the Brinker Board to cover approximately 5,000,000 shares
of Brinker Common Stock. The Non-Qualified Plan was terminated in November 1989,
although options previously granted thereunder remain outstanding.
In May 1991, the Brinker Board adopted the 1991 Stock Option Plan for
Non-Employee Directors and Consultants (the "1991 Plan"), covering 337,500
shares of Brinker Common Stock. The administration of the 1991 Plan is provided
by the Executive Committee of the Brinker Board, which generally has the
authority to determine the terms on which options are granted under the 1991
Plan. All options granted under the 1991 Plan are at an exercise price equal to
the closing price of the Brinker Common Stock on the date of grant.
52
<PAGE>
The following table contains certain information concerning the grant of
stock options to the executive officers named in the above compensation table
during Brinker's last fiscal year:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
REALIZABLE VALUE OF
ASSUMED ANNUAL RATES
OF STOCK PRICE
% OF TOTAL APPRECIATION FOR
OPTIONS GRANTED TO OPTION TERM
OPTIONS EMPLOYEES EXERCISE OR EXPIRATION ----------------------
NAME GRANTED IN FISCAL YEAR BASE PRICE DATE 5% 10%
- ------------------------------------ ----------- ------------------ ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Norman E. Brinker................... 225,000 14.62% $ 19.33 2/17/2003 $2,735,692 $6,932,780
Ronald A. McDougall................. 225,000 14.62% $ 19.33 2/17/2003 $2,735,692 $6,932,780
Creed L. Ford, III.................. 67,500 4.39% $ 19.33 2/17/2003 $ 820,707 $2,079,834
Douglas H. Brooks................... 38,250 2.49% $ 19.33 2/17/2003 $ 465,068 $1,178,573
Douglas S. Lanham................... 38,250 2.49% $ 19.33 2/17/2003 $ 465,068 $1,178,573
</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 $22.83
fiscal year-end price of Brinker Common Stock.
STOCK OPTION EXERCISES AND FISCAL YEAR-END VALUE TABLE
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
SHARES ACQUIRED VALUE ---------------------------- --------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ --------------- ----------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Norman E. Brinker....... 947,111 $13,492,668 210,938 520,313 $ 2,927,897 $ 3,696,160
Ronald A. McDougall..... 1,362,515 $19,560,252 177,188 461,250 $ 2,483,933 $ 3,114,428
Creed L. Ford, III...... 149,198 $ 2,154,207 878,768 185,625 $16,392,494 $ 1,399,714
Douglas H. Brooks....... 74,562 $ 1,179,929 326,111 105,188 $ 6,080,128 $ 793,172
Douglas S. Lanham....... 109,689 $ 1,340,010 45,563 105,188 $ 625,893 $ 793,172
</TABLE>
CERTAIN TRANSACTIONS
Prior to Mr. Staubach's election to the Board, Brinker engaged the services
of The Staubach Company to assist it in certain real estate transactions, and
that The Staubach Company received normal and customary compensation of
approximately $145,000 for its services.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF BRINKER
The authorized capital stock of Brinker consists of 100,000,000 shares of
Common Stock, $0.10 par value, and 1,000,000 shares of Preferred Stock, $1.00
par value. At March 7, 1994, there were 69,192,719 shares of Brinker Common
Stock outstanding and no shares of Preferred Stock outstanding.
COMMON STOCK. All outstanding shares of Brinker Common Stock are fully paid
and nonassessable. All holders of Brinker Common Stock have full voting rights
and are entitled to one vote for each share held of record on all matters
submitted to a vote of the shareholders. Votes may not be cumulated in the
election of directors. Shareholders have no preemptive or subscription rights.
The Brinker Common Stock is neither redeemable nor convertible, and there are no
sinking fund provisions. Holders of Brinker Common Stock are entitled to
dividends when and as declared by the Board of Directors from funds legally
available therefor and are entitled, in the event of liquidation, to share
ratably in all assets remaining after payment of liabilities. The rights of
holders of Brinker Common Stock will be subject to any preferential rights of
any Preferred Stock which may be issued in the future.
PREFERRED STOCK. The Brinker Board is authorized to issue Preferred Stock
in one or more series and to fix the voting rights, liquidation preferences,
dividend rates, conversion rights, redemption rights and terms, including
sinking fund provisions, and certain other rights and preferences.
TRANSFER AGENT AND REGISTRAR. Chemical Shareholders Services Group, Inc. is
the transfer agent and registrar of the Brinker Common Stock.
54
<PAGE>
OTB SELECTED FINANCIAL DATA
The following table sets forth certain historical consolidated financial
data of OTB. The 1989 financial data reflect information of the combined
predecessor entities. On March 13, 1992, OTB effected a one-for-two reverse
stock split of OTB's outstanding stock. All share and per share amounts shown
below reflect the stock split retroactively. OTB's fiscal years consist of 52/53
week years ending on the Monday nearest to December 31. Certain accounts have
been reclassified to conform to the 1993 presentation. All amounts are in
thousands except per share amounts and certain restaurant operating data. See
"OTB Management's Discussion and Analysis of Financial Condition and Results of
Operations." This table should be read in conjunction with the financial
statements of OTB and the notes thereto included elsewhere in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------------------------
1993 1992 1991 1990 1989
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Revenues............................................... $ 30,585 $ 23,350 $ 20,985 $ 20,817 $ 19,303
Cost of sales.......................................... 8,550 6,568 6,167 6,302 5,904
Operating expenses..................................... 18,151 13,176 12,178 11,951 10,651
Royalty fees........................................... -- 153 424 439 311
General and administrative expenses.................... 2,548 1,975 1,281 1,504 887
Executive bonuses...................................... 220 116 -- 853 --
Injury claim settlement................................ 2,229 -- -- -- --
Depreciation and amortization.......................... 1,511 554 497 797 723
--------- --------- --------- --------- ---------
Operating income (loss).............................. (2,624) 808 438 (1,029) 827
Interest expense....................................... 189 100 213 216 163
Interest income........................................ (110) (135) (10) -- --
Minority interest...................................... -- 33 251 78 208
--------- --------- --------- --------- ---------
Income (loss) before income taxes and extraordinary
item................................................ (2,703) 810 (16) (1,323) 456
Income tax expense (benefit)........................... -- 311 -- (84) 167
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item................ (2,703) 499 (16) (1,239) 289
Extraordinary item:
Tax effect of net operating loss
carryforward........................................ -- 287 -- -- --
--------- --------- --------- --------- ---------
Net income (loss).................................... $ (2,703) $ 786 $ (16) $ (1,239) $ 289
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings (loss) per share before extraordinary item.... $ (.84) $ .18 $ (.01) $ (.92) n/a
Extraordinary item per share........................... -- .11 -- -- --
--------- --------- --------- --------- ---------
Earnings (loss) per share.............................. $ (.84) $ .29 $ (.01) $ (.92) n/a
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average number of common shares............... 3,209 2,674 1,470 1,349 n/a
RESTAURANT OPERATING DATA:
Average sales per OTB restaurant open for full year.... $ 2,827 $ 3,024 $ 2,992 $ 3,268 $ 3,224
OTB-owned restaurants at year end...................... 14 9 7 7 6
Franchised restaurants at year end..................... 7 4 2 0 0
BALANCE SHEET DATA (END OF YEAR):
Working capital (deficit).............................. $ (3,091) $ 3,740 $ (2,803) $ (1,805) $ (939)
Total assets........................................... 14,454 11,418 4,110 3,926 4,239
Long-term obligations, less current portion............ 3,659 1,204 987 1,989 2,222
Shareholders' equity (deficit)......................... 4,889 7,767 (610) (605) 258
</TABLE>
55
<PAGE>
OTB MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth the percentages which certain items in OTB's
statements of operations bear to total revenues for each period presented.
Certain items are shown as a percentage of food and beverage sales. Certain
accounts have been reclassified to conform with the 1993 presentation.
<TABLE>
<CAPTION>
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Revenues:
Food and beverage sales......................... 98.6% 99.2% 99.8%
Franchise revenue............................... 1.4 .8 .2
------- ------- -------
100.0 100.0 100.0
Costs and expenses:
Cost of sales (1)............................... 28.4 28.4 29.4
Operating expenses (1).......................... 60.2 56.9 58.1
Royalty fees (1)................................ -- .7 2.0
General and administrative expenses............. 8.3 8.5 6.1
Executive bonuses............................... .7 .5 --
Injury claim settlement......................... 7.3 -- --
Depreciation and amortization................... 4.9 2.4 2.4
Operating income (loss)........................... (8.6) 3.5 2.1
Interest expense.................................. .6 .4 1.0
Interest income................................... (.4) (.6) --
Minority interest................................. -- .2 1.2
Income taxes...................................... -- 1.3 --
Extraordinary item................................ -- (1.2) --
Net income (loss)................................. (8.8)% 3.4% (.1)%
<FN>
- ------------------------
(1) As a percentage of food and beverage sales.
</TABLE>
1993 COMPARED WITH 1992
REVENUES
Revenues increased by $7,235,000 due to increased food and beverage sales
and increased franchise revenue. Food and beverage sales increased by
$6,987,000, or 30.2%, in 1993 compared with 1992 due primarily to the addition
of five new On The Border restaurants in 1993. The five restaurants opened in
1993 and one additional restaurant opened near the end of 1992 contributed
additional food and beverage sales of $8,212,000 in 1993.
Revenues of OTB restaurants open for a full year in both 1993 and 1992
decreased $1,381,000, or 6.5%, in 1993 compared with 1992. The decrease in
same-store sales is the result of lower customer traffic in two Dallas locations
and in two Houston locations. In the Dallas market, sales declined at one unit
due in part to commercial and utility construction in the immediate proximity of
the restaurant as well as an increase in competition in that area. Another
Dallas unit, located in the "West End" area of downtown Dallas, experienced a
sales decline in 1993 due primarily to the closing of the Dallas Convention
Center for most of 1993. OTB believes the Dallas "West End" location derives a
considerable portion of its business from conventions in the Dallas Convention
Center. The Convention Center reopened in December 1993 and the "West End"
restaurant has had a significant increase in sales since the reopening.
Sales also declined at two of OTB's existing Houston locations due to a
substantial increase in competition in the area of one of OTB's restaurants and
a deterioration of the neighborhood in the
56
<PAGE>
immediate area of the other Houston location. OTB experiences vigorous
competition in each of its markets and expects competition will intensify in the
future as other full-service, casual-dining restaurants are opened in OTB's
market areas.
OTB's mix of food and beverage sales shifted from 71.1% food and 28.9%
beverage in 1992 to 74.2% food and 25.8% beverage in 1993. A lower percentage of
beverage sales was experienced in the new restaurant locations opened outside of
Texas.
Franchise revenue increased from $193,000 in 1992 to $442,000 in 1993 due to
the addition of three new franchise locations in 1993 and a full year's
operation of two franchised units opened in November 1992.
COSTS AND EXPENSES
COST OF SALES. Cost of sales, which includes primarily food and beverage
costs, remained level as a percentage of food and beverage sales at 28.4% in
1993 and 1992. Cost of sales was favorably affected by lower produce costs for
the Texas restaurants and lower liquor costs for the Colorado and Missouri
restaurants because of lower liquor taxes in those states. Offsetting these cost
reductions were higher food costs in Colorado and Missouri resulting from OTB's
lack of volume purchasing power in those markets.
OPERATING EXPENSES. Operating expenses, comprised principally of unit level
expenses such as direct and indirect labor costs, rent and other occupancy
costs, restaurant supplies, repairs, maintenance, utilities and other restaurant
operating expenses, increased as a percentage of food and beverage sales to
60.2% in 1993 from 56.9% in 1992. Wages increased as a percentage of total food
and beverage sales from 28.9% in 1992 to 31.6% in 1993 due primarily to higher
than normal labor costs associated with the initial operations of the six new
restaurants opened since December 1992. Additionally, $389,000 of manager
training costs incurred in 1993 which normally would be deferred as a preopening
cost and amortized over a 12 month period were expensed in 1993 because the
opening schedule of new restaurants in 1993 was delayed due to the airplane
accident in March 1993 and the postponement of expansion scheduled for the
fourth quarter of 1993 as a result of the claim made against OTB in October 1993
by an individual injured in that accident. See "OTB Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." Wages were also higher in 1993 due to the accrual of a
liability for vacation compensation for operating managers of approximately
$72,000 as a result of a change in company policy. Restaurant operating expenses
increased as a percentage of total food and beverage sales from 19.0% in 1992 to
19.5% in 1993 due primarily to increased marketing, utility and work-related
injury expenses. Occupancy cost as a percentage of total food and beverage sales
increased slightly from 9.0% in 1992 to 9.1% in 1993. Proposed new legislation
relating to mandated healthcare and minimum wage proposals, if passed, could
increase OTB's operating costs and adversely affect OTB's business.
ROYALTY FEES. No royalty fees were paid in 1993 due to the elimination of
royalty fees following OTB's acquisition in April 1992 of the service mark and
royalty rights held by Knox-Travis Corporation and a trust. Knox-Travis
Corporation, previously owned by certain directors of OTB, and the trust held
rights to receive royalty payments from OTB's restaurants of approximately 2% of
food and beverage sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased as a percentage of revenues from 8.5% in 1992 to 8.3% in 1993 due to
the opening of five new restaurants without incurring significant increases in
staff and support costs. General and administrative expenses increased $573,000
in 1993 compared with 1992 due to increased legal and accounting fees,
shareholder reporting expenses, travel expenses, insurance expenses, personnel
costs and financial advisor fees in 1993. Legal expense increased due to
additional legal fees incurred in connection with service mark protection,
work-related injury litigation, Commission reporting obligations, franchise
documents and liquor licensing. Accounting fees increased due to additional
accounting services performed by OTB's independent auditors. Shareholder
reporting expenses increased due to the cost
57
<PAGE>
to produce and distribute the 1992 annual report. Travel expense increased due
to the expansion of operations into new market areas in 1993. Insurance
increased due to higher premiums in 1993 due in part to operation of additional
locations. Financial advisor fees relate to a portion of the fees payable to
Armata Partners as described in "The Merger -- Opinion of Financial Advisor."
EXECUTIVE BONUSES. Executive bonuses increased from $116,000 in 1992 to
$220,000 in 1993 due primarily to (i) bonuses paid to regional managers and (ii)
the bonus arrangements described in "Management and Principal Shareholders of
OTB -- Summary Compensation Table." The increase in bonuses is attributable to
Mr. Fenstermacher's and Mr. Lidvall's increased responsibilities following the
airplane accident in March 1993.
INJURY CLAIM SETTLEMENT. OTB recorded a charge to earnings of $2,229,000 in
1993 to cover the settlement of the claim by Julie Simpson described in "OTB
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," as well as legal expenses and
previous expenditures made for the benefit of Julie Simpson and the Estate of
Michael F. Fiori.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
approximately $956,000 in 1993 compared with 1992 due primarily to an increase
in depreciation and preopening amortization with respect to the five new
restaurants opened during the year.
INTEREST EXPENSE
Interest expense increased $89,000 in 1993 compared with 1992 due to
increased indebtedness under capital leases for equipment related to the five
new restaurant locations.
INTEREST INCOME
Interest income decreased $25,000 in 1993 compared with 1992 due to reduced
cash balances available for short-term investment as cash was invested in the
five new restaurant locations opened in 1993.
MINORITY INTEREST
There were no minority interest positions in 1993 due to the acquisition of
such interests by OTB in February 1992.
INCOME TAXES AND CHANGE IN ACCOUNTING PRINCIPLE
OTB adopted SFAS No. 109, "Accounting for Income Taxes," effective December
29, 1992, which is the beginning of its 1993 fiscal year. To the extent OTB has
earnings in the future, it will be entitled to use net loss carryforwards
described in Note 9 to the financial statements.
NET INCOME (LOSS)
Net income decreased by $3,489,000 in 1993 compared with 1992 due primarily
to the charge to earnings resulting from the injury claim settlement and other
costs relating to the airplane accident, higher depreciation and amortization,
reduced same-store sales, higher operating expenses and increased general and
administrative expenses.
1992 COMPARED WITH 1991
REVENUES
Revenues increased due to increased food and beverage sales and increases in
franchise revenues. Food and beverage sales increased by $2,209,000, or 10.5%,
in 1992 compared with 1991 due primarily to the acquisition of the Garland,
Texas, On The Border restaurant in February 1992. Revenue of the Garland
restaurant after its acquisition amounted to $1,803,000 in 1992. Food and
beverage sales also increased by $185,000 as a result of a new restaurant which
opened in the north Dallas area in December 1992.
Revenues of OTB restaurants open for a full year in both 1992 and 1991
increased $221,000, or 1.1%, in 1992 compared with 1991. This increase in
same-store sales reversed a decline in same-store
58
<PAGE>
sales from the previous year in which same-store sales decreased 4.2% in 1991
compared with 1990. OTB believes the increase in same-store sales was the result
of (i) a radio advertising campaign in the Dallas market in the second quarter
of 1992 which marked OTB's first media advertising effort, (ii) a modest
improvement in 1992 in the Texas economy and (iii) other local market
advertising programs in 1992.
Franchise revenue increased from $37,000 in 1991 to $193,000 in 1992 due to
the addition of two new franchise locations in 1992 and a full year's operation
of a franchise unit opened in October 1991.
COSTS AND EXPENSES
COST OF SALES. Cost of sales decreased as a percentage of food and beverage
sales to 28.4% in 1992 from 29.4% in 1991. Food costs decreased as a percent of
food sales from 31.1% in 1991 to 30.1% in 1992 due primarily to reduced costs
for chicken and beef. Market increases in the prices of both chicken and beef in
1992 were offset by favorable purchasing contracts. Food costs were also reduced
in 1992 by more accurate portioning of food products as well as favorable
pricing obtained on certain produce items. Beverage costs decreased as a percent
of beverage sales from 25.7% in 1991 to 24.2% in 1992 due to improved inventory
controls of liquor and beer.
OPERATING EXPENSES. Operating expenses decreased as a percentage of food
and beverage sales to 56.9% in 1992 from 58.1% in 1991. Wages decreased as a
percent of total food and beverage sales from 30.4% in 1991 to 28.9% in 1992 due
to improved employee shift scheduling and overtime control. Restaurant operating
expenses increased as a percent of total food and beverage sales from 18.5% in
1991 to 19.0% in 1992 due primarily to increased marketing expenses related to
OTB's media advertising program in the second quarter of 1992. Occupancy cost
decreased as a percent of total food and beverage sales from 9.2% in 1991 to
9.0% in 1992 due to increased sales in relation to occupancy expenses which are
relatively fixed costs. Occupancy expenses increased approximately $158,000 in
1992 compared with 1991 due to increased percentage sales, rents and higher
property and casualty insurance rates.
ROYALTY FEES. Royalty fees decreased substantially in 1992 compared with
1991 due to the elimination of royalty fees following OTB's acquisition of the
service mark and royalty rights held by Knox-Travis Corporation and a trust on
April 30, 1992.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expense
increased $694,000 in 1992 compared with 1991 due to increased salaries and
related expenses associated with OTB's new executive management team hired in
the third and fourth quarters of 1991, increased legal fees, increased
directors' fees and directors' and officers' liability insurance premiums.
EXECUTIVE BONUSES. Executive bonuses of $116,000 were accrued in 1992 based
on the achievement of budgeted profit. This expense was not incurred in 1991.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
approximately $57,000 in 1992 compared with 1991 due to increased depreciation
related to capital expenditures in 1992 and the amortization of goodwill
recognized in the 1992 acquisition of minority interests in two On The Border
restaurants and the assets of a third.
INTEREST EXPENSE
Interest expense decreased $113,000 in 1992 compared with 1991 due to the
retirement of substantially all OTB's indebtedness for borrowed money, except
for its subordinated convertible debentures, following its initial public common
stock offering.
INTEREST INCOME
Interest income increased $125,000 in 1992 compared with 1991 due to the
investment of a portion of the net proceeds of OTB's initial public common stock
offering in short-term, interest-bearing accounts.
59
<PAGE>
MINORITY INTEREST
Minority interest in income of consolidated limited partnerships decreased
substantially in 1992 due to the acquisition of such interests by OTB on
February 24, 1992.
INCOME TAXES
Income tax expense increased $310,000 in 1992 compared with 1991 due to
profitable operations. The expense is comprised of $287,000 provision in lieu of
income taxes and $23,500 in current taxes, resulting in an effective tax rate of
38%. This rate is higher than the statutory rate of 34% principally because of
state income taxes and goodwill. Goodwill is not deductible for income tax
purposes.
EXTRAORDINARY ITEM
An extraordinary item of $287,000 arose in 1992 due to the tax effect of net
operating loss carryforwards utilized in the reduction of tax expenses. Because
of a net loss in 1991, such net operating loss carryforwards could not be
utilized.
NET INCOME
Net income increased by $801,000 in 1992 compared with 1991 due primarily to
increased food and beverage sales, increased franchise revenue, reduced costs of
sales and wages as percentages of food and beverage sales, reduced minority
interest in income of consolidated limited partnerships, reduced interest
expense accompanied by greater interest income and the impact of the net
operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
OTB's cash balance and working capital decreased by $4,323,000 and
$6,831,000, respectively, as of the end of the 1993 fiscal year compared with
the end of the 1992 fiscal year due primarily to the investment of funds from
OTB's initial public offering in 1992 in six new restaurant locations opened
since December 1992. Five of these new locations were opened in 1993 and one was
opened in 1992.
In March 1993, the chief executive officer of OTB and his son were killed in
an airplane accident, and another executive officer, the wife of an executive
officer and the wife of an employee were injured. In October 1993, OTB was
notified by an attorney representing Julie Simpson (the wife of the non-
executive officer employee injured in the airplane accident) that Ms. Simpson
was asserting a claim (the "Claim") against OTB for injuries sustained by her in
the airplane accident. OTB had no insurance covering the injury to Ms. Simpson
because she was not an employee of OTB. As a result of the Claim, OTB's ability
to draw on its bank line of credit and term loan facility was suspended. OTB was
also limited in its ability to obtain additional equity or debt financing until
the Claim was resolved. As a result of the Claim, OTB deferred the opening of
two restaurants it had planned to open in fiscal 1993, and announced that it
might have to defer all or a portion of its 1994 expansion plans. In November
1993, Ms. Simpson's husband voluntarily left the employment of OTB.
In January 1994, OTB and Ms. Simpson agreed to settle the Claim, and in
connection therewith, OTB agreed to pay Ms. Simpson $1,850,000 over
approximately six years, of which $600,000 is required to be paid on or before
May 3, 1994, $250,000 is required to be paid on or before each of May 3, 1995,
May 3, 1996, May 3, 1997 and May 3, 1998, $200,000 is required to be paid on or
before May 3, 1999, and $50,000 is required to be paid on or before May 3, 2000.
Payments due after May 3, 1995 bear interest at a rate of 5% per annum. OTB has
received a commitment from a bank lender to fund the initial $600,000 payment.
OTB intends to fund future payments from its operating cash flow. OTB has also
obtained releases of liability from any claims asserted by the other parties
killed or injured in the accident primarily in exchange for payments covered by
OTB's insurance and commitments to provide for certain future medical benefits.
OTB has received a commitment to amend its bank credit facility to provide
for (i) $600,000 to fund the initial installment relating to the settlement of
the Claim, (ii) an increase in its $1,250,000 construction credit to $1,500,000
to fund construction of new restaurants, and (iii) $500,000 of operating lease
financing. The $600,000 will be due and payable in November 1994, the $1,500,000
will be due and payable in August 1995 unless otherwise converted to a five year
term loan, and the
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<PAGE>
$500,000 will be due and payable in monthly installments over approximately five
years. The amendment also extended the due date of OTB's available and unused
$250,000 working capital credit line until September 1994.
OTB anticipates that if the Merger is not consummated it will incur expenses
in excess of $300,000 in connection with the Merger. OTB believes it will have
sufficient funds from the bank credit facility and from cash flow from
operations to fund its operating and financing cash requirements as well as open
one or two new locations in 1994, depending on the unit economics of the sites
selected. There is no assurance, however, that OTB would have sufficient funds
to do so. Additional expansion would require debt or equity financing. There is
no assurance such financing will be available to OTB on terms favorable to OTB.
It is anticipated any additional funding, if received, would be used to continue
OTB's expansion plans, particularly into new market areas outside the State of
Texas.
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<PAGE>
BUSINESS OF OTB
GENERAL
OTB owns and operates 14 "On The Border" restaurants and franchises seven
other "On The Border" restaurants. OTB was organized in November 1989 as a Texas
corporation to become the parent company of the On The Border restaurant
organization which was founded in 1982.
CONCEPT
OTB's strategy is to provide a casual, outdoor patio/cafe atmosphere
featuring mesquite-grilled specialties of Texas and Mexico served in generous
portions at modest prices. OTB's concept is distinguished in the casual dining
market segment through offering:
- mesquite wood-grilled chicken and beef specialties including On The
Border's signature fajitas and original recipe Mexican foods;
- fresh-cooked, flour tortillas that are continuously flame-grilled on a
flour tortilla machine which is displayed for customers' viewing;
- outdoor dining patios and an open South Texas/Mexican border interior
decor, including exposed brick, cactus and artifacts indigenous to the
South Texas/Mexican border country; and
- a full service, Mexican-style bar serving a variety of frozen margaritas,
specialty tequilas and Mexican beers.
OTB believes that natural, fresh ingredients are a cornerstone of the On The
Border concept. OTB's restaurants feature enthusiastic table service intended to
minimize customer waiting time and facilitate table turnover while at the same
time providing customers with a satisfying casual dining experience.
MENU
On The Border restaurants feature mesquite wood-grilled chicken and beef
specialties, including On The Border's signature fajitas and original recipe
Mexican foods. Mesquite wood burns at an extremely high temperature conducive to
grilling and imparts a unique smoked flavor to the grilled items, especially
when combined with On The Border's spices and marinade. OTB's fajitas are
prepared from boneless chicken breast, skirt steak or shrimp, are served on a
hot, sizzling metal platter with grilled onions and peppers, and are accompanied
by freshly cooked flour tortillas, guacamole, sour cream and pico de gallo. The
On The Border menu includes a large selection of moderately priced appetizers
such as Smoked Chicken Quesadillas and On The Border Nachos, other Mexican
specialties, a variety of salads, sandwiches and mesquite grilled hamburgers and
several desserts such as the Border Brownie Sundae and Mexican Sopaipillas. OTB
serves "Texas-sized" non-alcoholic beverages and offers complete bar service
that features a variety of frozen margaritas, specialty tequilas and Mexican
beers. During fiscal 1993, sales of alcoholic beverages accounted for
approximately 26% of OTB's total food and beverage sales.
OTB serves generous portions at modest prices. The dinner menu entrees range
in price from $5.45 to $12.95, with most items priced between $6.45 and $9.00.
The lunch menu offers a limited selection of Tex-Mex specialties and a variety
of salads and mesquite-grilled sandwiches. Lunch prices range from $3.95 to
$8.95, with most items priced between $4.75 and $6.25. OTB also has a children's
menu, a weekend brunch menu and provides banquet and catering services. The
average check per customer, including beverage, at On The Border restaurants was
approximately $9.77 in 1993.
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RESTAURANT LOCATIONS AND SITE SELECTION
The following table shows the location of OTB's restaurant locations as well
as franchised restaurant locations.
<TABLE>
<CAPTION>
MARKET AREA COMPANY-OWNED FRANCHISED
- ----------------------------------------------------------------- ------------------- -------------
<S> <C> <C>
Dallas, Texas.................................................... 7 --
Houston, Texas................................................... 3 3
Denver, Colorado................................................. 3 --
Kansas City, Missouri............................................ 1 --
Austin, Texas.................................................... -- 1
Memphis, Tennessee............................................... -- 1
Nashville, Tennessee............................................. -- 1
Orlando, Florida................................................. -- 1
--- ---
Total.......................................................... 14 7
--- ---
--- ---
</TABLE>
OTB believes that the locations of its restaurants are critical to its
long-term success. Senior management devotes significant time and resources to
analyzing each prospective site. As it has expanded, OTB has developed specific
site selection criteria which focus on local demographics, aesthetics, site
characteristics such as visibility, accessibility and traffic volume, parking
availability, and area restaurant competition. OTB's ability to open new
restaurants is contingent upon locating satisfactory sites, purchasing land or
buildings or negotiating leases on acceptable terms, securing appropriate
governmental permits and approvals, obtaining liquor licenses, recruiting and
training additional qualified management personnel and securing adequate
financing. See "OTB Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
Ten of the 14 OTB-owned restaurants are located in the Dallas and Houston
areas of Texas. As a result, OTB may be affected more by adverse economic
conditions in Texas than a restaurant company with sites in a number of
different geographic areas.
BUSINESS DEVELOPMENT
OTB's strategy has been to pursue controlled expansion into areas that can
support multiple locations with an emphasis on expansion outside the State of
Texas. During 1993, OTB entered two new markets by opening three restaurants in
Denver, Colorado and one in Kansas City, Missouri. A third On The Border
restaurant near Houston, Texas was also opened in 1993. Additionally, franchised
restaurants were opened in Houston, Texas; Orlando, Florida; and Nashville,
Tennessee.
Currently, OTB leases all of its restaurant and corporate office facilities.
Future restaurant locations may be purchased by OTB and subsequently conveyed in
sale-leaseback transactions to redeploy capital for additional growth.
RESTAURANT OPERATIONS AND MANAGEMENT
On The Border restaurants are operated under uniform standards and
specifications. Each restaurant maintains standardized food preparation and
service manuals which are designed to enhance consistency of operations among
the restaurants. Each restaurant is supervised by departmental managers who
monitor kitchen, service and host operations. The departmental managers meet
regularly with the restaurant employees to review procedures. OTB emphasizes
standards for product quality, facility maintenance, portion control and service
and sanitation and also requires licensees and franchisees to maintain these
same standards.
Each restaurant is managed by a staff which typically is composed of one
general manager who is responsible for day-to-day restaurant operations, and two
or three department managers with individual responsibility for kitchen and
service functions. Each restaurant employs approximately 90 employees, most of
whom are part-time. OTB employs three regional managers who supervise OTB-owned
and franchised restaurants. Regular meetings are held among the general manager,
the
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<PAGE>
regional manager and senior management in which the results of each accounting
period are reviewed, and suggestions for improved guest service, efficiency and
control are exchanged. Management believes that this process serves to
accelerate responses to constantly changing business and service requirements.
An incentive plan for restaurant managers has been implemented in order to
motivate and reward each management team. The plan emphasizes both sales growth
and profitability improvement on an individual unit basis. A graduated cash
bonus may be earned through the achievement of budgeted targets. Budget targets
are regularly reviewed and discussed by the general manager and senior
management in an effort to maintain targets which retain their incentive nature.
OTB maintains financial reporting and management controls for each
restaurant through the use of centralized accounting and computerized management
information systems and detailed budgets. Daily sales results are tracked and
reported by each restaurant, and major cost categories such as food, beverage,
labor and supplies expense are reported in detail on a weekly basis. Centralized
accounting furnishes each restaurant with computerized 28-day period operating
statements, which give detail to managers concerning controllable and fixed
costs. OTB has implemented a computerized point of sale operations tracking
system ("P.O.S. System") designed to streamline food preparation and service and
give OTB enhanced control and performance tracking. The P.O.S. System gives
managers and corporate officers access to daily sales, costs and menu mix
information generated by its computerized tracking capability. The information
is automatically transmitted to the central office.
OTB has developed a comprehensive employee training program designed to
enhance quality and consistency in food preparation and service. Departmental
cross-training and detailed instruction concerning financial results comprise
integral parts of the management program.
MARKETING
On The Border targets a young, up-scale, relatively-affluent customer base
in high density retail, residential and traffic areas. Management believes OTB's
active and casual atmosphere appeals to this broadly-defined group which demands
quality, fresh food with energetic service at moderate prices.
Since its inception, OTB relied on its reputation by "word of mouth" to
attract a growing customer base. As OTB has expanded to new market areas,
marketing programs were formulated for each location. Marketing programs,
including local market promotions, menu review and analysis, seasonal
advertising and media coverage, are planned annually in each major market area.
COMPETITION
The restaurant industry, and in particular the casual dining market segment,
is intensely competitive with respect to price, service, location and food
quality, and there are many well-established competitors with substantially
greater financial and other resources than OTB. Some of OTB's competitors have
been in existence for a substantially longer period than OTB and may be better
established in the markets where OTB's restaurants are or may be located. The
restaurant business is often affected by changes in consumer tastes, national,
regional or local economic conditions, demographic trends, traffic patterns and
the type, number and location of competing restaurants. In addition, factors
such as inflation, increased food, labor and benefit costs and the availability
of experienced management and hourly employees may adversely affect the
restaurant industry in general and OTB's restaurants in particular. OTB seeks to
distinguish itself in the casual dining market segment by providing a casual,
outdoor patio/cafe atmosphere featuring mesquite-grilled specialties of Texas
and Mexico served in generous portions at modest prices.
SERVICE MARKS
OTB's trade name, "On The Border," is a registered service mark in the
United States and Canada.
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<PAGE>
FRANCHISE OPERATIONS
OTB is currently the franchisor of seven On The Border restaurants. Under
the terms of its franchising arrangements, OTB is generally entitled to receive
an initial fee and subsequent periodic royalty fees based on the gross sales of
each of the franchised restaurants.
A corporation owned by Frederick G. Molsen, a director of OTB, has the
right, under the terms of a development agreement between OTB and that
corporation, to develop up to an aggregate of five On The Border restaurants in
Austin, Texas; Memphis, Tennessee; Nashville, Tennessee; Columbus, Ohio; and
Louisville, Kentucky. Three of such restaurants (one each in Austin, Memphis and
Nashville) are currently being operated. In addition, OTB has entered into a
development agreement with an experienced restaurant operator (the "Houston
Franchisee") pursuant to which the Houston Franchisee has the right, under the
terms of that development agreement, to develop up to an aggregate of five
restaurants in certain parts of Houston, Texas. Three of such restaurants are
currently operated in Houston. Additionally, a franchised restaurant owned by
CFT Cafes, Inc. ("CFT"), a corporation controlled by Paul S. Heyd, a director of
OTB, was opened in 1993 in Orlando, Florida. Under the terms of the development
agreement, CFT may open three more On The Border restaurants in the central
Florida area within the next four years. OTB has agreed not to establish or
authorize any other person to establish an On The Border restaurant in the areas
in which its current franchisees are entitled to develop On The Border
restaurants.
SEASONALITY
OTB's sales are historically higher in the spring, summer and early fall
months than in the winter months when cool weather limits the use of the
restaurants' patio dining areas.
PURCHASING
OTB negotiates directly with approved suppliers of food, beverage and
restaurant supplies to ensure the quality of the products and to control the
costs of such products. Food products are delivered fresh to each restaurant
several times each week by approved vendors and a central grocery distributor.
Menu ingredients are readily available or, upon short notice, can be made
available from alternate sources.
EMPLOYEES
At January 3, 1994, OTB employed 1,501 persons, of whom 1,370 were hourly
restaurant personnel, 104 were operating management personnel and 27 were
corporate employees. OTB considers its employee relations to be good. Most
employees, other than restaurant management and corporate personnel, are paid on
an hourly basis. OTB's employees are not covered by any collective bargaining
agreements, and OTB has never experienced any organized work stoppage, strike or
labor dispute.
WORKERS' COMPENSATION
OTB does not subscribe to any workers' compensation insurance program in the
State of Texas. As such, it is subject to negligence actions by its employees
and is not able to assert contributory negligence and certain other defenses. In
addition, employees might be able to recover certain types of damages that would
not be available to them if OTB subscribed to a workers' compensation insurance
program. OTB self-insures a portion of such risk and carries excess liability
coverage. OTB established a reserve of approximately $54,000 as of January 3,
1994 for potential claims.
GOVERNMENT REGULATION
OTB is subject to various federal, state and local laws and regulations
affecting the operation of its restaurants. On The Border restaurants are
subject to licensing and/or regulation by various fire, health, sanitation and
safety agencies in the applicable state and/or municipality. The suspension of,
or inability to renew, a license could interrupt operations at an existing
restaurant. In addition, difficulties or the failure in obtaining the required
licenses or other regulatory approvals could delay or prevent the opening of a
new restaurant.
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<PAGE>
On The Border restaurants are subject to state and local licensing and
regulation with respect to the sale and service of alcoholic beverages, which
accounted for approximately 26% of OTB's food and beverage sales for the 1993
fiscal year. The failure to receive or retain, or a delay in obtaining, a liquor
license in a particular location could adversely affect OTB's operations in that
location and could impair OTB's ability to obtain licenses elsewhere. Typically,
licenses must be renewed annually and may be revoked or suspended for cause. OTB
is subject to "dram shop" statutes, which generally give a person injured by an
intoxicated person the right to recover damages from the establishment that has
wrongfully served alcoholic beverages to the intoxicated person. OTB carries
liquor liability coverage as part of its existing comprehensive general
liability insurance.
The development and construction of additional restaurants will be subject
to compliance with applicable zoning, land use and environmental regulations.
OTB is subject to federal and state fair labor standards statutes and
regulations, which govern such matters as minimum wages, overtime and other
working conditions. A significant number of OTB's food service personnel are
paid at rates based on applicable federal and state minimum wages. Significant
additional government imposed increases in minimum wages, paid leaves of
absence, mandated health care benefits or increased tax payment requests with
respect to employees who receive gratuities could have an adverse effect on OTB.
PROPERTIES
OTB operates seven restaurants in the Dallas area, three in the Houston
area, three in the Denver, Colorado area and one in the Kansas City, Missouri
area. All restaurant properties are leased generally for periods of ten years
with renewal options of five or ten years. Restaurants have approximately 7,200
square feet of interior space on average and are generally free-standing
structures. One location occupies part of a strip center, one unit is located in
a downtown warehouse district which has been renovated as an upscale retail
shopping and restaurant area and one is attached to an office building. OTB's
corporate office in Dallas occupies approximately 5,500 square feet of a
multi-tenant office building which is leased through March 1997.
MISREPRESENTATION CLAIM
In February 1994, OTB received a letter from an attorney representing a
family of the Muslim faith alleging that his clients suffered extreme mental
anguish, shame, guilt, despair and remorse as a result of their unknowing
consumption of pork at an OTB restaurant. The claimants have alleged that OTB
misrepresented that a menu item contained only beef when it contained beef and
pork. The claimants have demanded that OTB pay them $600,000 plus attorneys'
fees. The letter indicates that the claimants have authorized their attorney to
initiate a lawsuit to seek the full measure of damages, which can be three times
the $600,000 of damages they have demanded. The attorney also indicated he and
his clients have discussed filing a class action on behalf of all other Muslims
and Jews who have also eaten the subject menu item and therefore unknowingly
consumed pork at OTB restaurants. OTB intends to vigorously contest such claim
and believes such claim will not have a material adverse effect on its financial
condition, results of operations or liquidity.
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<PAGE>
MANAGEMENT AND PRINCIPAL SHAREHOLDERS
OF OTB
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the beneficial
ownership of OTB Common Stock, as of January 31, 1994, by each person known by
OTB to own beneficially more than 5% of the outstanding OTB Common Stock,
certain executive officers and each director of OTB and all directors and
executive officers as a group. OTB believes that each of such persons has the
sole voting and dispositive power over the shares held by him except as
otherwise indicated.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
---------------------------
NUMBER OF
NAME SHARES PERCENT
- -------------------------------------------------- --------------- -------
<S> <C> <C>
Frederick G. Molsen (1)........................... 550,622(2)(3) 17.2%
David deN. Franklin (1)........................... 537,894(3) 16.8
Paul S. Heyd...................................... 118,358 3.7
Raymond C. Hemmig................................. 30,357(4)(5) *
Clark S. Willingham............................... 20,000(4) *
Ned R. Lidvall.................................... 25,250(4) *
Stephen D. Fenstermacher.......................... 18,900(4) *
Louis P. Neeb..................................... 5,500(4) *
R. Brooks Reed.................................... 5,500(4) *
All executive officers and directors as a group
(10 persons)..................................... 1,327,381(4)(5) 40.4%
<FN>
- ------------------------
* less than 1%.
(1) Mr. Molsen's address is 6116 N. Central, Suite 617, Dallas, Texas 75206.
Mr. Franklin's address is 3878 Oak Lawn Ave., Suite 606, Dallas, Texas
75219.
(2) Approximately 307,075 shares of OTB Common Stock held by Mr. Molsen are
pledged to secure certain indebtedness of Mr. Molsen. In the event of a
default under that indebtedness, the lenders would have certain rights to
foreclose on the stock. The lenders also have certain rights to receive
all or a portion of the consideration that is payable upon a sale of such
stock, whether by direct sale, merger, consolidation, exchange or
otherwise.
(3) Messrs. Molsen and Franklin have granted an option to the Brinker
Subsidiary to purchase these shares. See "The Merger -- Interested
Persons."
(4) Includes options which are exercisable within 60 days after January 31,
1994 to purchase 5,000 shares of OTB Common Stock by each of Messrs.
Hemmig, Neeb, Reed and Willingham, 23,750 shares of OTB Common Stock by
Mr. Lidvall, 17,500 shares of OTB Common Stock by Mr. Fenstermacher and
15,000 shares of OTB Common Stock by Mr. Yoakum.
(5) Includes 3,125 shares of OTB Common Stock that may be acquired upon
conversion of OTB's subordinated convertible debentures.
</TABLE>
BOARD OF DIRECTORS
Nine directors are to be elected at the OTB Annual Meeting. Each nominee
will be elected to hold office until the next annual meeting of the shareholders
or until his successor is elected and qualified. Proxy holders will not be able
to vote the proxies held by them for more than nine persons. 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 stead, of any other person the OTB Board may
recommend. Each nominee has expressed his intention to serve the entire term for
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<PAGE>
which election is sought unless the Merger is consummated. If the Merger is
consummated, the directors elected at the OTB Annual Meeting will cease to be
directors of OTB upon effectiveness of the Merger.
The OTB Board nominees for the office of director are as follows:
<TABLE>
<CAPTION>
YEAR FIRST
BECAME A
NAME AGE DIRECTOR
- ----------------------------------------------------------------------- --- ------------
<S> <C> <C>
Stephen D. Fenstermacher (E)........................................... 41 1992
David deN. Franklin (C)(E)............................................. 54 1985(1)
Raymond C. Hemmig (C)(E)(O)............................................ 44 1990
Paul S. Heyd........................................................... 45 1985(1)
Ned R. Lidvall (E)..................................................... 40 1993
Frederick G. Molsen (C)(E)............................................. 48 1985(1)
Louis P. Neeb (A)...................................................... 55 1990
R. Brooks Reed (A)(C)(E)(O)............................................ 52 1989
Clark S. Willingham (A)................................................ 49 1990
<FN>
- ------------------------
(A) Member of the Audit Committee
(C) Member of the Compensation Committee
(E) Member of the Executive Committee
(O) Member of the Stock Option Committee
(1) Messrs. Franklin, Molsen and Heyd were directors of OTB's predecessor.
</TABLE>
MR. FENSTERMACHER has been the Chief Executive Officer of OTB since March
1993. He was Senior Vice President -- Finance and Chief Financial Officer of OTB
from May 1992 until March 1993, and Vice President -- Purchasing and Planning
from September 1991 until May 1992. From 1982 until August 1991, Mr.
Fenstermacher served in various executive capacities with Chi-Chi's, Inc., the
operator of a chain of Mexican restaurants, and Foodmaker, Inc., the parent
corporation of Jack-in-the-Box and Chi-Chi's, Inc.
MR. FRANKLIN has been a private investor since August 1992 and has been a
principal of Texas Land & Cattle Co., a Texas steakhouse concept, since March
1993. He has served as Chairman of the Board of Directors of OTB since August
1991 and was the Chief Executive Officer of OTB from 1985 until August 1991.
MR. HEMMIG has been Chairman of the Board of Directors and Chief Executive
Officer of ACE Cash Express, Inc., a company in the retail financial services
business, since 1988. He was a principal in the restaurant consulting firm of
Hemmig & Martin from 1985 to 1988.
MR. HEYD has been President of CFT Cafes, Inc., a franchisee of OTB, since
June 1992. Prior thereto, he served in various executive management capacities
for OTB from 1985 until June 1992.
MR. LIDVALL has been the President and Chief Operating Officer of OTB since
March 1993, and was Vice President -- Operations of OTB from October 1991 until
March 1993. From December 1990 until October 1991, he was Vice President of Food
and Beverage for Chi-Chi's, Inc. and from 1988 to 1990 he was Vice President of
Operations of Western Sizzlin, Inc. Previously, Mr. Lidvall served as Vice
President of Franchise Operations and in other executive capacities for
Chi-Chi's, Inc.
MR. MOLSEN has been the President of FGM Corporation, a franchisee of OTB,
since December 1989. He has been Vice Chairman of the Board of OTB since August
1991, was Chairman of the Board of Directors from November 1989 until August
1991, and Vice Chairman of the Board from 1985 until November 1989.
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<PAGE>
MR. NEEB has been President of Neeb Enterprises, Inc., a personal investment
and consulting company since 1982. Mr. Neeb was President and Chief Executive
Officer of Spaghetti Warehouse, Inc., a restaurant chain, from July 1991 until
January 1994. Mr. Neeb was President of Geest Corporation, a food processing
company, from 1987 until 1991.
MR. REED has been Chairman of the Board of Directors and President of
Bestway Rental, Inc., a publicly owned retail rent-to-own business, and its
predecessor since 1974. He is also a principal of Phoenix Partners, Inc., a
private investment company engaged in the acquisition and operation of
medium-sized businesses in a variety of industries.
MR. WILLINGHAM has served as Of Counsel to the law firm of Mankoff, Hill,
Held & Metzger since 1988.
All directors hold office until the next annual meeting of shareholders and
until their successors are elected and qualified. All executive officers are
chosen by the OTB Board and serve at the OTB Board's discretion. Each outside
director is paid $1,500 per OTB Board meeting attended and $500 per committee
meeting attended that is not in conjunction with a Board meeting. Directors are
reimbursed for expenses incurred for attending any such meetings.
During 1993, there were five meetings of the OTB Board. In 1993 all
directors attended at least 75% of the meetings of the OTB Board and committees
of the OTB Board on which they were members.
THE OTB BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR EACH
NOMINEE FOR THE BOARD OF DIRECTORS.
COMMITTEES OF THE OTB BOARD
OTB has an Executive Committee, an Audit Committee, a Compensation Committee
and a Stock Option Committee. The Executive Committee has the authority, between
meetings of the OTB Board of Directors, to take all actions with respect to the
management of OTB's business that require action by the OTB Board, except with
respect to certain specified matters that by law must be approved by the entire
OTB Board. The Executive Committee met three times in 1993. The Audit Committee
is responsible for (i) reviewing the scope of, and the fees for, the annual
audit, (ii) reviewing with the independent auditors the corporate accounting
practices and policies and recommending to whom reports should be submitted
within OTB, (iii) reviewing with the independent auditors their final report and
(iv) being available to the independent auditors during the year for
consultation purposes. The Audit Committee met once in 1993. The Compensation
Committee determines the compensation of the officers of OTB and performs other
similar functions. The Compensation Committee met once in 1993. The Stock Option
Committee grants options under OTB's Stock Option Plan. The Stock Option
Committee met three times in 1993.
COMPLIANCE WITH SECTION 16(A)
Section 16(a) of the Exchange Act requires OTB's directors, executive
officers and holders of more than 10% of OTB Common Stock to file with the
Commission initial reports of ownership and reports of changes in ownership of
OTB Common Stock. OTB believes that, during the preceding fiscal year, all of
OTB's directors, officers and holders of more than 10% of OTB Common Stock have
complied with all Section 16(a) filing requirements.
EXECUTIVE OFFICERS
The following persons are the executive officers of OTB:
<TABLE>
<CAPTION>
NAME POSITION
- --------------------------------------- ----------------------------------------------------
<S> <C>
Stephen D. Fenstermacher............... Chief Executive Officer
Ned R. Lidvall......................... President and Chief Operating Officer
Raymond E. Yoakum...................... Chief Financial Officer, Vice President -- Finance
and Secretary
</TABLE>
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<PAGE>
Information concerning the business experience of Messrs. Fenstermacher and
Lidvall is provided under the section entitled "Board of Directors."
MR. YOAKUM, age 48, has served as Chief Financial Officer of OTB since March
1993, as Vice-President Finance since June 1991 and as Secretary since August
1991. Mr. Yoakum was Vice President -- Finance of Hoker Broadcasting, Inc. from
1990 until 1991 and was Vice President -- Finance of Bestway Rental, Inc., a
publicly owned retail rent-to-own business, and its predecessor from 1981 until
1990. Mr. Yoakum was previously with KPMG Peat Marwick and is a CPA.
CERTAIN TRANSACTIONS
TRANSACTIONS BETWEEN OTB AND THE ENTITIES IT HAS ACQUIRED. In February
1992, OTB acquired the assets of three limited partnerships each of which owned
an "On The Border" restaurant (the "Restaurant Acquisition"). Immediately prior
to OTB's initial public offering in May 1992, OTB acquired Knox-Travis
Corporation ("KTC") (a corporation owned by Messrs. Franklin and Molsen), and
the rights of the OTB 1990 Trust (the "Trust") to royalty fees pursuant to an
agreement that OTB, KTC and the Trust had entered into in 1990. Until its
acquisition by OTB, KTC owned the name "On The Border" and certain other
proprietary rights that were licensed to OTB. In exchange for use of these
rights and assets, KTC and the Trust were generally entitled to receive royalty
fees of 2% (in the aggregate) of the gross sales from the restaurant operations
of OTB and licensed restaurants. Each of Mr. Franklin, Mr. Molsen, Mr. Heyd, Mr.
Molsen's brother (Heinz H. Molsen, Jr.), sister (Barbara Kandel) and
father-in-law (Robert M. Luby), Mr. Hemmig, MBW Realty (a partnership of which
Mr. Willingham is general partner) and Charles S. Romig (a former director of
OTB) was a limited partner in one or more of such partnerships, and each of such
persons (other than Messrs. Franklin, Molsen and Heyd) was a beneficiary of the
Trust. KTC was the general partner of one of such partnerships. The following
persons received the aggregate amount of OTB Common Stock set forth after their
names in connection with such acquisitions: David deN. Franklin (325,737);
Frederick G. Molsen (325,737); Paul S. Heyd (1,780); Raymond C. Hemmig (15,339);
MBW Realty (10,812); Charles S. Romig (12,167); Heinz H. Molsen, Jr. (31,547);
Barbara Kandel (27,486); and Robert M. Luby (10,222).
OTB was the general partner of two of the partnerships, and managed all
three restaurants, acquired in the Restaurant Acquisition. During 1992 (prior to
the Restaurant Acquisition) and 1991, the three partnerships paid OTB an
aggregate of approximately $56,000 and $417,000, respectively, as general
partner fees and/or management fees (a portion of which was paid to KTC as
royalty fees).
Until its acquisition by OTB, KTC licensed the "On The Border" service mark
to OTB and was entitled to receive royalty fees from OTB based upon the gross
sales of the restaurants owned by OTB, the partnerships in which OTB was general
partner and licensees of OTB. During 1992 and 1991, KTC was entitled to receive
from OTB an aggregate of approximately $153,000 and $356,000 for royalty fees,
of which approximately $113,000 and $201,000, respectively, was actually paid to
KTC (which unpaid royalty fees included fees incurred prior to 1991). In January
1992, OTB executed a promissory note for approximately $500,000 evidencing the
amount of unpaid royalty fees and accrued interest owed by it to KTC (which
unpaid royalty fees included fees incurred prior to 1991). The promissory note
provided for repayment in approximately equal monthly installments for five
years and bore interest at the greater of 9% per annum or prime plus 2%. In
connection with the acquisition of KTC, Mr. Franklin and Mr. Molsen (as
shareholders of KTC) received shares of OTB Common Stock based on the amount of
such note and the amount of unpaid 1992 royalty fees at the date of such
acquisition.
Prior to the acquisition by OTB of the rights to receive royalty fees, the
Trust earned royalty fees from OTB of $24,000 and $63,000 in 1992 and 1991,
respectively. The Trust's rights to royalty fees were acquired by OTB in
exchange for OTB Common Stock.
In 1990, OTB Garland, Limited (the partnership that owned OTB's Garland
restaurant and one of the partnerships acquired in the Restaurant Acquisition)
executed a promissory note payable to the
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<PAGE>
order of OTB for the amount of management fees then owing (approximately
$133,000). Upon OTB's acquisition in 1992 of the assets of OTB Garland, Limited
and its assumption of OTB Garland, Limited's liabilities, such promissory note,
along with all other amounts owed by OTB Garland, Limited to OTB (approximately
$178,000 as of December 30, 1991) were extinguished. The amount of OTB Common
Stock issued to OTB Garland, Limited for its assets reflected the extinguishment
of such amounts owed.
From time to time, Messrs. Franklin, Molsen and Heyd had guaranteed
obligations of OTB and of the partnerships acquired by OTB. In addition, from
time to time, OTB guaranteed obligations of certain of such partnerships.
Approximately $870,000 of the proceeds from OTB's public offering were used to
repay loans that were guaranteed by Messrs. Franklin and Molsen.
OTHER TRANSACTIONS. OTB and entities controlled by Frederick G. Molsen are
parties to a development agreement and three franchise agreements pursuant to
which OTB was entitled to receive from the entities controlled by Mr. Molsen
approximately $133,000 and $30,000 in franchise-related fees and other related
amounts in 1993 and 1992, respectively, of which $80,000 and $22,000 was
actually paid in those years. See "Business of OTB -- Franchise Operations." As
of January 3, 1994, the entities controlled by Mr. Molsen owed OTB approximately
$171,000. The largest aggregate amount of indebtedness outstanding at any time
pursuant to such franchise arrangements was $171,000. In response to a letter
from OTB regarding the outstanding receivables, Mr. Molsen sent a letter to OTB
alleging certain claims or causes of action against OTB. Brinker has required,
as a condition precedent to its obligation to consummate the Merger, that it
shall have received evidence reasonably satisfactory to it that Mr. Molsen and
the corporation controlled by him shall have executed a written release of all
claims and causes of action they may have against OTB. In March 1994, OTB and
Mr. Molsen agreed to a payment schedule for payment of such receivables over a
period ending in June 1995 if the Merger is consummated (or in December 1996 if
the Merger is not consummated) and entities controlled by Mr. Molsen executed
promissory notes in the aggregate principal amount of approximately $97,000 (the
then delinquent amounts owed) providing for interest at the lower of the prime
rate or 8% per annum. In connection therewith, the parties entered into mutual
releases (but not releasing Mr. Molsen from paying such notes as described
above) contingent on the consummation of the Merger. Brinker has advised OTB
that the release from Molsen is satisfactory to Brinker.
OTB and CFT, a corporation controlled by Paul S. Heyd, are parties to a
development agreement and franchise agreement pursuant to which OTB was entitled
to receive from CFT approximately $48,000 in 1993 of which $23,000 was actually
paid in 1993. See "Business of OTB -- Franchise Operations." As of January 3,
1994, CFT owed OTB approximately $75,000. The largest aggregate amount
outstanding at any time pursuant to such franchise arrangements was $75,000. As
of March 28, 1994, CFT owed OTB approximately $51,000.
Stephen D. Fenstermacher (the Chief Executive Officer of OTB) and Diane
Lidvall (the spouse of Ned R. Lidvall, the President and Chief Operating Officer
of OTB) were injured in the airplane accident described in "OTB Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." OTB agreed to pay future medical expenses
incurred by Mr. Fenstermacher and Ms. Lidvall. In addition, Mr. Fenstermacher
received a payment relating to his injuries used in part to pay medical expenses
incurred due to injuries sustained in the airplane accident, all of which was
covered by OTB's insurance. Mr. Fenstermacher and Ms. Lidvall have executed
releases releasing OTB from liability relating to the airplane accident (other
than the obligation to cover future medical expenses).
OTB leases its Arlington restaurant space from Arlington Land Joint Venture,
a partnership in which Mr. Franklin, Mr. Molsen and certain relatives of Mr.
Molsen are partners. The lease is for approximately 11,000 square feet, although
the Arlington On The Border restaurant only occupies approximately 8,000 square
feet. OTB exercised its first renewal option as of April 1991. The current
annual rent is equal to the sum of (i) $195,000, plus (ii) 6% of gross sales in
excess of $3,200,000. The
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<PAGE>
rent during the second option term will be equal to the fair market rent for the
property at the time, provided that the monthly minimum rent may not be less
than the monthly minimum rent for the immediately preceding lease term plus the
average monthly percentage rent for the immediately preceding lease term. OTB is
responsible for certain expenses relating to taxes, insurance and maintenance on
the leased premises. During OTB's 1993, 1992 and 1991 fiscal years, OTB's rent
expense was approximately $195,000, $195,000 and $185,000, respectively.
In connection with the construction of the Irving restaurant in 1987, Mr.
Hemmig and Ms. Kandel (Mr. Molsen's sister) provided financing for the
furniture, fixtures and equipment in the amount of $200,000 and $50,000,
respectively (of which there was approximately $95,000 and $24,000,
respectively, outstanding as of January 1, 1992), which loans were secured by
the furniture, fixtures and equipment. The note evidencing such debt was to have
matured in 1994, bore interest at the rate of 11% per annum and provided for
equal monthly installments throughout the term of the loan. The loans were
prepaid with a portion of the proceeds from OTB's public offering.
In 1988, OTB guaranteed approximately $230,000 of indebtedness incurred by
Messrs. Franklin and Molsen. Approximately $36,000 was outstanding as of
December 31, 1993. Messrs. Franklin and Molsen have agreed to indemnify OTB for
any liability it may incur on such guarantee.
In November 1991, certain persons lent OTB an aggregate of $400,000 (of
which each of Messrs. Franklin, Molsen and Romig and Ms. Kandel lent $50,000),
which loans were evidenced by promissory notes providing for 13% interest,
approximately quarterly interest payments and payment of the entire principal
amount on August 30, 1992. Each such lender received a 2% commitment fee. For
each $50,000 so lent by a lender (other than by Mr. Franklin and Mr. Molsen),
KTC and Mr. Heyd pledged an aggregate of 33,333 shares of OTB Common Stock to
secure such loan. Holders of $200,000 of such promissory notes exchanged those
promissory notes for the Debentures in February or March 1992. The remaining
$200,000 of promissory notes (including those held by Messrs. Franklin and
Molsen and Ms. Kandel) were repaid with a portion of the proceeds of OTB's
public offering.
In February and March 1992, OTB issued $1,200,000 of the Debentures in a
private placement. Mr. Fiori (the former President and Chief Executive Officer
of OTB) purchased $25,000 of Debentures, Mr. Romig purchased $100,000 of
Debentures, Mr. Hemmig's children purchased $25,000 of Debentures and Mr.
Fiori's sister-in-law purchased $50,000 of Debentures.
In August 1991, the OTB Board set Mr. Franklin's compensation at $24,000
annually plus a one-year consulting arrangement of $600 per day for a minimum of
200 days. During fiscal 1992 OTB paid Mr. Franklin $84,600 pursuant to such
arrangement. The consulting arrangement terminated in August 1992.
In November 1992, OTB settled a lawsuit filed against OTB and Mr. Heyd by a
former employee of OTB relating to alleged causes of action that took place in
1990 and early 1991. In December 1992, Mr. Heyd, Mr. Franklin and Mr. Molsen
agreed to transfer to OTB (and in January 1993 they transferred) 10,000, 5,000
and 5,000 shares of OTB Common Stock, respectively, in settlement of any claims
OTB may have had against the former officers regarding the lawsuit. Neither Mr.
Franklin nor Mr. Molsen were named in the lawsuit, and each of Messrs. Franklin,
Molsen and Heyd denied any and all liability.
See "The Merger -- Interested Persons."
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<PAGE>
SUMMARY COMPENSATION TABLE
The following summary compensation table sets forth the annual compensation
for the last three fiscal years earned by each person who served as OTB's Chief
Executive Officer at any time during the 1993 fiscal year and the highest
compensated executive officers who were serving as executive officers at the end
of the 1993 fiscal year whose individual total cash compensation exceeded
$100,000.
<TABLE>
<CAPTION>
STOCK
TOTAL OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER(3) COMPENSATION AWARDED
- -------------------------------------------- ---- ----------- ---------- -------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Michael F. Fiori 1993 $ 36,346(1) $ -- $ 1,869 $ 38,215 --
Chief Executive Officer 1992 $175,000 $27,000 $ 840 $ 202,840 40,000
(until March 1993) 1991 $ 84,808(2) $ -- $ 202 $ 85,010 150,000
Stephen D. Fenstermacher
Chief Executive Officer (from March 1993) 1993 $127,577 $ -- (4) $ 425 $ 128,002 40,000
and Senior Vice President -- Finance and 1992 $ 89,327 $21,000 $ 444 $ 110,771 25,000
Chief Financial Officer (until March 1993) 1991 $ 27,789(2) $ -- $ 138 $ 27,927 20,000
Ned R. Lidvall
President and Chief Operating Officer 1993 $124,539 $ -- (4) $ 411 $ 124,950 27,500
(from March 1993) and Vice President -- 1992 $ 95,000 $18,500 $ 456 $ 113,956 37,500
Operations (until March 1993) 1991 $ 20,462(2) $ -- $ 138 $ 20,600 20,000
<FN>
- ------------------------
(1) Mr. Fiori died in an airplane accident on March 13, 1993. See "OTB
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(2) Messrs. Fiori, Fenstermacher and Lidvall each joined OTB in 1991.
(3) Represents premiums paid by OTB for group term life insurance.
(4) OTB has agreed to pay Messrs. Fenstermacher and Lidvall bonuses in the
amount of $145,000 and $128,000, respectively, immediately prior to the
Effective Time of the Merger for services rendered to OTB for periods
prior to the Effective Time of the Merger.
</TABLE>
OPTION GRANTS TABLE
The following table sets forth, with respect to all options granted during
OTB's 1993 fiscal year to each person who served as OTB's Chief Executive
Officer at any time during the 1993 fiscal year and the highest compensated
executive officers listed above: (i) the number of shares covered by such
options; (ii) the percent that such options represented of total options granted
to all OTB employees during the 1993 fiscal year; (iii) the exercise price; and
(iv) the expiration date. OTB has granted no SARs.
<TABLE>
<CAPTION>
PERCENT OF TOTAL
OPTIONS GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN 1993 PRICE PER EXPIRATION
NAME GRANTED FISCAL YEAR SHARE DATE
- -------------------------------------------------- --------- --------------------- ----------- ----------
<S> <C> <C> <C> <C>
Michael F. Fiori.................................. -- -- -- --
Stephen D. Fenstermacher.......................... 40,000 43.8% $ 6.50 6/4/1998
Ned R. Lidvall.................................... 27,500 30.1 6.50 6/4/1998
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
The following table sets forth, for each person who served as OTB's Chief
Executive Officer at any time during the 1993 fiscal year and the highest
compensated executive officers listed above: (i) the number of shares of OTB
Common Stock acquired upon exercise of options during fiscal year 1993;
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<PAGE>
(ii) the aggregate dollar value realized upon exercise; (iii) the total number
of unexercised options held at the end of fiscal year 1993; and (iv) the
aggregate dollar value of in-the-money unexercised options held at the end of
fiscal year 1993.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT 1993 FISCAL YEAR IN-THE-MONEY OPTIONS AT 1993
END FISCAL YEAR END(2)
SHARES ACQUIRED VALUE REALIZED ---------------------------- ----------------------------
NAME ON EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------- ----------------- --------------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Michael F. Fiori (1)............ -- -- -- -- -- --
Stephen D. Fenstermacher........ -- -- 17,500 67,500 $ 3,438 $ 7,188
Ned R. Lidvall.................. -- -- 23,750 61,250 4,219 7,969
<FN>
- ------------------------
(1) Mr. Fiori's options granted in 1991 and 1992, which totalled 190,000, were
cancelled on August 25, 1993 under a Termination Agreement between OTB and
the Estate of Michael F. Fiori, and an option to purchase 75,000 shares of
OTB Common Stock was granted to Mrs. Fiori. See "Amendment of Amended and
Restated Stock Option Plan."
(2) Market value of underlying securities at year-end minus the exercise
price.
</TABLE>
74
<PAGE>
AMENDMENT OF AMENDED AND RESTATED STOCK OPTION PLAN
OTB has an Amended and Restated On The Border Cafes, Inc. Stock Option Plan
pursuant to which options may be granted to eligible employees and officers for
the purchase of shares of OTB Common Stock. In July 1991, the OTB Board
increased the number of shares of OTB Common Stock which may be issued upon
exercise of options granted under the Option Plan from 150,000 to 325,000. In
March 1992, the OTB Board increased the number of shares which may be issued
upon exercise of options granted under the Option Plan to 450,000 shares and
eliminated non-employee directors from the class of persons eligible to be
granted options under the Option Plan. In April 1993, the OTB Board further
increased the number of shares of OTB Common Stock which may be issued upon
exercise of options granted under the Option Plan from 450,000 shares to 550,000
shares. In August 1993, the OTB Board amended the Option Plan, subject to
shareholder approval, so that consultants of OTB would become eligible for
grants of options under the Option Plan. In August 1993, the OTB Board elected
Lynn Fiori (the spouse of Michael F. Fiori, the former Chief Executive Officer
of OTB, and the mother of William Fiori, both of whom were killed in a March
1993 plane crash in route to the opening of OTB's first restaurant in Denver,
Colorado) as an advisory director and consultant to OTB. In September 1993, the
OTB Stock Option Committee granted Lynn Fiori a five-year option under the
Option Plan to acquire 75,000 shares of OTB Common Stock for $6.50 per share,
the then fair market value of the OTB Common Stock, exercisable in full after
one year from date of grant, subject to shareholder approval of the amendment
and restatement of the Option Plan to permit grants of options to consultants.
The OTB Board elected Mrs. Fiori as an advisory director and retained her as a
consultant to OTB, and the Stock Option Committee granted options to Mrs. Fiori,
in partial recognition of the significant contributions of Michael F. Fiori to
OTB's success and as a result of the OTB Board's conclusion that her continued
relationship with OTB would benefit the morale of OTB's employees. At the Annual
Meeting, the OTB shareholders are being asked to approve such amendment.
As of January 31, 1994, options to purchase an aggregate of 379,375 shares
of OTB Common Stock (net of options cancelled) had been granted pursuant to the
Option Plan, options to purchase 3,125 shares had been exercised, options to
purchase 376,250 shares remained outstanding, and 170,625 shares remained
available for future grant. As of January 31, 1994, the market value of all
shares of OTB Common Stock subject to outstanding options was $3,104,062 (based
upon the closing sale price of OTB Common Stock as reported on the Nasdaq
National Market on such date).
As of January 31, 1994, the estate of Michael F. Fiori had no outstanding
options. Stephen D. Fenstermacher, Chief Executive Officer, and Ned R. Lidvall,
President and Chief Operating Officer, have each been granted options covering
an aggregate of 85,000 shares of OTB Common Stock. Since adoption of the Option
Plan in 1989, all current executive officers, as a group, have been granted
options covering 220,000 shares of OTB Common Stock. In fiscal 1993, options
covering 91,250 shares of OTB Common Stock were granted to employees of OTB.
SUMMARY OF THE PLAN
The Option Plan is designed to permit the granting of options to key
employees (including officers) and consultants of OTB to purchase shares of OTB
Common Stock. The option period may not be more than ten years from the date the
option is granted. The Stock Option Committee of the OTB Board of Directors (the
"Committee") will grant options to eligible participants (which amounts are
determined by the Committee in its discretion), determine the purchase price and
option period at the time the option is granted and administer and interpret the
Option Plan. The Committee, in its discretion, selects those officers, employees
and consultants whose performance and responsibilities are determined by it to
be influential to the success of OTB. There are approximately 90 persons
eligible to participate in the Option Plan.
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<PAGE>
The exercise price of options is payable in cash or, if an option agreement
so provides, the holder of an option may request approval from the Committee to
exercise an option or a portion thereof by tendering shares of OTB Common Stock
at the fair market value per share on the date of exercise in lieu of cash
payment of the exercise price.
Unless sooner terminated by action of the OTB Board, the Option Plan will
terminate on November 1, 1999, and no options may thereafter be granted under
the Option Plan. The Option Plan may be amended, altered or discontinued by the
OTB Board without the approval of the shareholders, except that the OTB Board
does not have the power or authority to materially increase the benefits
accruing to participants under the Option Plan, or to change the participants or
class of participants who are eligible to receive options or the aggregate
number of shares that may be issued under options. The OTB Board, however, may
make appropriate adjustments in the number of shares covered by the Option Plan
and the outstanding options, and in the option prices, to reflect any stock
dividend, stock split, share combination or other recapitalization and, with
respect to outstanding options and option prices, to reflect any merger,
consolidation, reorganization, liquidation or the like, of or by OTB.
Both incentive stock options and nonqualified stock options may be granted
under the Option Plan. The Option Plan requires that the exercise price of each
incentive stock option will not be less than 100% of the fair market value of
the OTB Common Stock at the time of the grant of the option. No incentive stock
option, however, may be granted under the Option Plan to anyone who owns more
than 10% of the outstanding OTB Common Stock unless the exercise price is at
least 110% of the fair market value of the OTB Common Stock at the date of grant
and the option is not exercisable more than five years after it is granted.
There is no limit on the fair market value of incentive stock options that may
be granted to an employee in any calendar year, but no employee may be granted
incentive stock options that first become exercisable during a calendar year for
the purchase of stock with an aggregate fair market value (determined as of the
date of grant of each option) in excess of $100,000. An option (or an
installment thereof) counts against the annual limitation only in the year it
first becomes exercisable.
TAX STATUS OF STOCK OPTIONS
Pursuant to the Option Plan, the Committee may provide for an option to
qualify either as an "incentive stock option ("ISO")" or as a "non-qualified
option."
INCENTIVE STOCK OPTIONS. All stock options that qualify under the rules of
Section 422 of the Code, will be entitled to ISO treatment. To receive ISO
treatment, an optionee is not permitted to dispose of the acquired stock (i)
within two years after the option is granted or (ii) within one year after
exercise. In addition, the individual must have been an employee of OTB for the
entire time from the date of granting of the option until three months (one year
if the employee is disabled) before the date of the exercise. The requirement
that the individual be an employee and the two-year and one-year holding periods
are waived in the case of death of the employee. If all such requirements are
met, no tax will be imposed upon exercise of the option, and any gain upon sale
of the stock will be entitled to capital gain treatment. The employee's gain on
exercise (the excess of fair market value at the time of exercise over the
exercise price) of an ISO is a tax preference item and, accordingly, is included
in the computation of alternative minimum taxable income.
If an employee does not meet the two-year and one-year holding requirement
(a "disqualifying disposition"), but does meet all other requirements, tax will
be imposed at the time of sale of the stock, but the employee's gain on exercise
will be treated as ordinary income rather than capital gain and OTB will get a
corresponding deduction at the time of sale. Any remaining gain on sale will be
short-term or long-term capital gain, depending on the holding period of the
stock. If the amount realized on the disqualifying disposition is less than the
value at the date of exercise, the amount includible in gross income, and the
amount deductible by OTB, will equal the excess of the amount realized on the
sale or exchange over the exercise price.
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<PAGE>
An optionee's stock option agreement may permit payment for stock upon the
exercise of an ISO to be made with other shares of OTB Common Stock. In such a
case, in general, if an employee uses stock acquired pursuant to the exercise of
an ISO to acquire other stock in connection with the exercise of an ISO, it may
result in ordinary income if the stock so used has not met the minimum statutory
holding period necessary for favorable tax treatment as an ISO.
NONQUALIFIED STOCK OPTIONS. In general, no taxable income will be
recognized by the optionee, and no deduction will be allowed to OTB, upon the
grant of an option. Upon exercise of a nonqualified option an optionee will
recognize ordinary income (and OTB will be entitled to a corresponding tax
deduction if applicable withholding requirements are satisfied) in an amount
equal to the amount by which the fair market value of the shares on the exercise
date exceeds the option price. Any gain or loss realized by an optionee on
disposition of such shares generally is a capital gain or loss and does not
result in any tax deduction to OTB.
OTHER TAX MATTERS. If an optionee's stock option agreement provides that
all or any portion of an option granted under the Option Plan (whether a
nonqualified option or an ISO) becomes immediately exercisable because of a
change in (i) the ownership or effective control of OTB or (ii) the ownership of
a substantial portion of the assets of OTB (a "Change in Control") and the
participant is an officer, shareholder or highly-compensated employee of OTB,
such acceleration could be subject to the "golden parachute" provisions of
Sections 280G and 4999 of the Code. Each of the currently existing stock option
agreements that was entered into with officers or employees of OTB contains a
provision that accelerates the vesting of the options upon certain changes in
control, including the Merger. Such golden parachute provisions of the Code (i)
disallow a federal income tax deduction to the payor of an "excess parachute
payment", and (ii) impose a non-deductible excise tax on the recipient of such
payment equal to 20% of the "excess parachute payment." In general, a payment
will be a "parachute payment" if (i) it is contingent on a change in control and
(ii) together with all other such payments to the recipient, it equals or
exceeds three times his or her "base amount" (i.e., the average of the
employee's annual compensation during the five years immediately preceding the
year in which the Change in Control occurs). "Excess parachute payments"
generally are parachute payments that exceed the greater of (i) the recipient's
base amount or (ii) reasonable compensation for personal services actually
rendered by the employee. Whether a payment will be a parachute payment or an
excess parachute payment depends upon facts and circumstances that cannot be
known until payment is made. Under the Proposed Regulations to Section 280G of
the Code, when an employee's right to exercise an option is accelerated as a
result of a Change in Control, the employee will be treated as receiving a
payment at that time if the option has an "ascertainable fair market value."
Under the Proposed Regulations, a calculation must be made of the portion of the
payment which will be treated as contingent upon a change in control, which
generally will be the sum of (i) the amount by which the accelerated payment
exceeds the present value of the payment that was expected to be made absent the
acceleration plus (ii) an amount reflecting the lapse of the obligation of the
employee to perform services in order to earn such expected payment.
The foregoing statements are based upon present federal income tax laws and
regulations and are subject to change if the tax laws and regulations, or
interpretations thereof, are changed.
REQUIRED VOTE
The favorable vote of the holders of a majority of the shares of OTB Common
Stock present and entitled to vote at the Annual Meeting in person or by proxy
is required to approve the proposed amendment to the Option Plan.
THE OTB BOARD OF DIRECTORS RECOMMENDS THAT OTB SHAREHOLDERS VOTE FOR THIS
PROPOSAL TO AMEND AND RESTATE THE OPTION PLAN.
77
<PAGE>
LEGAL MATTERS
The validity of the shares of Brinker Common Stock to be issued in
connection with the Merger is being passed upon for Brinker by Crouch & Hallett,
L.L.P., Dallas, Texas.
EXPERTS
BRINKER
The consolidated financial statements and schedules of Brinker as of June
30, 1993 and 1992, and for each of the years in the three-year period ended June
30, 1993, included herein and elsewhere in the Registration Statement, have been
included herein and in the Registration Statement in reliance upon the reports
of KPMG Peat Marwick, independent accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
OTB
The consolidated financial statements and schedules of OTB as of January 3,
1994 and December 28, 1992, and for each of the years in the three-year period
ended January 3, 1994 included herein and elsewhere in the Registration
Statement, have been included herein and in the Registration Statement in
reliance upon the reports of Coopers & Lybrand, independent accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
SHAREHOLDERS' PROPOSALS
If the Merger does not occur, OTB will have an annual meeting of
shareholders in 1995. If an annual meeting of OTB shareholders is to occur in
1995, any proposals from shareholders to be presented for consideration for
inclusion in the proxy material in connection with such annual meeting must be
submitted in accordance with the rules of the Commission and received by the
Secretary of OTB at OTB's principal executive offices no later than the close of
business on December 26, 1994.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
On The Border Cafes, Inc:
Independent Auditors' Report............................................................................. F-2
Consolidated Balance Sheets at January 3, 1994 and December 28, 1992..................................... F-3
Consolidated Statements of Operations for the fiscal years ended January 3, 1994, December 28, 1992 and
December 30, 1991....................................................................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the fiscal years ended January 3, 1994,
December 28, 1992 and December 30, 1991................................................................. F-5
Consolidated Statements of Cash Flows for the fiscal years ended January 3, 1994, December 28, 1992 and
December 30, 1991....................................................................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
Brinker International, Inc.:
Independent Auditors' Report............................................................................. F-18
Consolidated Balance Sheets at June 30, 1993 and 1992 and December 29, 1993 (unaudited).................. F-19
Consolidated Statements of Income for the years ended June 30, 1993, 1992 and 1991 and for the 26 weeks
ended December 29, 1993 (unaudited) and six months ended December 31, 1992 (unaudited).................. F-20
Consolidated Statements of Shareholders' Equity for the years ended June 30, 1993, 1992 and 1991 and for
the 26 weeks ended December 29, 1993 (unaudited)........................................................ F-21
Consolidated Statements of Cash Flows for the years ended June 30, 1993, 1992 and 1991 and for the 26
weeks ended December 29, 1993 (unaudited) and six months ended December 31, 1992 (unaudited)............ F-22
Notes to Consolidated Financial Statements............................................................... F-23
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
On The Border Cafes, Inc.:
We have audited the accompanying consolidated balance sheets of On The
Border Cafes, Inc. and subsidiaries as of January 3, 1994 and December 28, 1992,
and the consolidated statements of operations, shareholders' equity (deficit)
and cash flows for each of the years in the three-year period ended January 3,
1994. 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 consolidated financial position of
On The Border Cafes, Inc. and subsidiaries as of January 3, 1994 and December
28, 1992, and the consolidated results of their operations and cash flows for
each of the years in the three-year period ended January 3, 1994, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND
Dallas, Texas
March 16, 1994
F-2
<PAGE>
ON THE BORDER CAFES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1994 1992
------------- -------------
<S> <C> <C>
Current assets:
Cash............................................................................. $ 1,017,043 $ 5,340,260
Accounts receivable:
Trade.......................................................................... 459,612 158,327
Affiliates..................................................................... 302,841 272,477
Inventory........................................................................ 663,441 234,258
Prepaid expenses................................................................. 274,587 121,209
Current portion of note receivable............................................... 96,890 60,056
------------- -------------
Total current assets....................................................... 2,814,414 6,186,587
Note receivable, less current portion.............................................. 143,054 239,944
Property and equipment, net........................................................ 9,567,255 3,482,658
Goodwill, net of accumulated amortization of $71,190 and $38,193, respectively..... 764,526 798,269
Preopening costs, net of accumulated amortization of $532,902 at January 3, 1994... 838,594 196,934
Deferred costs..................................................................... 77,688 259,283
Other assets, net of accumulated amortization of $90,934 and $35,441,
respectively...................................................................... 248,458 254,542
------------- -------------
Total assets............................................................... $ 14,453,989 $ 11,418,217
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 2,910,005 $ 1,342,159
Accrued liabilities.............................................................. 2,789,060 1,082,649
Current maturities of capital lease obligations.................................. 206,598 22,101
------------- -------------
Total current liabilities.................................................. 5,905,663 2,446,909
Obligations under capital leases, less current maturities.......................... 609,157 4,056
Senior subordinated convertible debentures......................................... 1,200,000 1,200,000
Obligation under bank credit facility.............................................. 472,500 --
Injury claim liability, less current portion....................................... 1,377,637 --
------------- -------------
Total liabilities.......................................................... 9,564,957 3,650,965
------------- -------------
Commitments and contingencies (Note 8)
Shareholders' equity:
Preferred stock, par value $.01 per share, 1,000,000 shares authorized, no shares
issued.......................................................................... -- --
Common stock, par value $.02 per share, 10,000,000 shares authorized, 4,275,552
shares issued, 3,209,169 and 3,229,169 shares outstanding, respectively......... 85,511 85,511
Additional paid-in capital....................................................... 7,997,920 7,997,920
Deficit.......................................................................... (3,019,399) (316,179)
------------- -------------
5,064,032 7,767,252
Less treasury stock, at cost, 1,066,383 and 1,046,383 shares, respectively (Note
1).............................................................................. (175,000) --
------------- -------------
Total shareholders' equity................................................... 4,889,032 7,767,252
------------- -------------
Total liabilities and shareholders' equity................................. $ 14,453,989 $ 11,418,217
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
ON THE BORDER CAFES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 3, DECEMBER 28, DECEMBER 30,
1994 1992 1991
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Food............................................................... $ 22,367,595 $ 16,460,065 $ 14,577,253
Beverage........................................................... 7,775,599 6,696,576 6,370,149
Franchise revenue.................................................. 441,822 192,952 37,227
------------- ------------- -------------
30,585,016 23,349,593 20,984,629
------------- ------------- -------------
Cost of sales:
Food cost of sales................................................. 6,703,864 4,947,947 4,532,900
Beverage cost of sales............................................. 1,846,399 1,619,816 1,633,964
------------- ------------- -------------
8,550,263 6,567,763 6,166,864
------------- ------------- -------------
Operating expenses:
Wages.............................................................. 9,538,661 6,685,690 6,365,145
Restaurant operating expenses...................................... 5,875,080 4,397,702 3,877,269
Occupancy expenses................................................. 2,737,236 2,092,960 1,935,201
------------- ------------- -------------
18,150,977 13,176,352 12,177,615
------------- ------------- -------------
Royalty fees......................................................... -- 152,569 423,869
General and administrative expenses.................................. 2,548,142 1,975,159 1,281,386
Executive bonuses.................................................... 219,939 115,500 --
Injury claim settlement.............................................. 2,228,578 -- --
Depreciation and amortization........................................ 1,510,747 554,296 497,291
------------- ------------- -------------
6,507,406 2,797,524 2,202,546
------------- ------------- -------------
Operating income (loss).............................................. (2,623,630) 807,954 437,604
Interest expense..................................................... 189,492 100,236 213,229
Interest income...................................................... (109,902) (135,075) (10,333)
Minority interest in income of consolidated limited partnerships..... -- 33,319 250,219
------------- ------------- -------------
Income (loss) before income tax expense and extraordinary item....... (2,703,220) 809,474 (15,511)
------------- ------------- -------------
Income tax expense:
Provision in lieu of income tax.................................... -- 286,678 --
Current............................................................ -- 23,500 --
------------- ------------- -------------
-- 310,178 --
------------- ------------- -------------
Net income (loss) before extraordinary item.......................... (2,703,220) 499,296 (15,511)
Extraordinary item:
Tax effect of net operating loss carryforward...................... -- 286,678 --
------------- ------------- -------------
Net income (loss).................................................... $ (2,703,220) $ 785,974 $ (15,511)
------------- ------------- -------------
------------- ------------- -------------
Earnings (loss) per share before extraordinary item.................. $ (.84) $ .18 $ (.01)
Extraordinary item per share......................................... -- .11 --
------------- ------------- -------------
Earnings (loss) per share............................................ $ (.84) $ .29 $ (.01)
------------- ------------- -------------
------------- ------------- -------------
Weighted average shares outstanding.................................. 3,209,169 2,674,010 1,469,835
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
ON THE BORDER CAFES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JANUARY 3, 1994
DECEMBER 28, 1992 AND DECEMBER 30, 1991
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK TOTAL
------------------ ADDITIONAL RETAINED --------------------- SHAREHOLDERS'
NUMBER OF PAID-IN EARNINGS NUMBER OF EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT (DEFICIT)
--------- ------- ----------- ------------ --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1990............ 1,468,585 $29,372 $ 452,575 $ (1,086,642) -- $ -- $ (604,695)
Issuance of shares as compensation.... 2,500 50 9,950 -- -- -- 10,000
Net loss.............................. -- -- -- (15,511) -- -- (15,511)
--------- ------- ----------- ------------ --------- ---------- -------------
Balance at December 30, 1991............ 1,471,085 29,422 462,525 (1,102,153) -- -- (610,206)
Acquisition of minority interests and
assets of affiliated entity.......... 633,532 12,671 535,328 -- 445,526 -- 547,999
Acquisition of royalty rights......... 709,523 14,190 416,538 -- 89,445 -- 430,728
Public offering of common stock....... 950,000 19,000 6,593,757 -- -- -- 6,612,757
Reinstatement of previously canceled
treasury stock....................... 511,412 10,228 (10,228) -- 511,412 -- --
Net income............................ -- -- -- 785,974 -- -- 785,974
--------- ------- ----------- ------------ --------- ---------- -------------
Balance at December 28, 1992............ 4,275,552 85,511 7,997,920 (316,179) 1,046,383 -- 7,767,252
Treasury stock........................ -- -- -- -- 20,000 (175,000) (175,000)
Net loss.............................. -- -- -- (2,703,220) -- -- (2,703,220)
--------- ------- ----------- ------------ --------- ---------- -------------
Balance at January 3,
1994................................... 4,275,552 $85,511 $ 7,997,920 $ (3,019,399) 1,066,383 $ (175,000) $ 4,889,032
--------- ------- ----------- ------------ --------- ---------- -------------
--------- ------- ----------- ------------ --------- ---------- -------------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
ON THE BORDER CAFES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 3, DECEMBER 28, DECEMBER 30,
1994 1992 1991
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................... $ (2,703,220) $ 785,974 $ (15,511)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Claim settlement.............................................. 2,027,637 -- --
Depreciation and amortization................................. 1,510,748 554,296 497,291
Minority interest in income of consolidated limited
partnerships................................................. -- 33,319 250,219
Compensation expense (issuance of common stock)............... -- -- 10,000
Net change in current assets and liabilities other than
cash......................................................... 1,070,571 (194,213) 546,908
-------------- -------------- --------------
Net cash provided by operating activities................... 1,905,736 1,179,376 1,288,907
-------------- -------------- --------------
Cash flows from investing activities:
Purchases of property and equipment............................. (5,525,759) (2,806,391) (353,014)
Expenditures on site development................................ (1,041,286) (308,915) (165,674)
Other asset expenditures........................................ -- (193,286) --
Collections (advances) on note receivable....................... 60,056 (300,000) 80,235
Other........................................................... -- 120,459 --
-------------- -------------- --------------
Net cash used in investing activities..................... (6,506,989) (3,488,133) (438,453)
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from public offering of common stock................... -- 7,495,502 --
Expenses of public offering of common stock..................... -- (882,745) --
Cash proceeds from senior subordinated convertible debentures... -- 1,000,000 --
Proceeds from sale-leaseback transactions....................... -- 1,600,000 --
Proceeds from notes payable and long-term debt.................. -- -- 450,000
Proceeds from line of credit.................................... 472,500 -- --
Retirements of notes payable and long-term debt................. -- (2,100,812) (700,352)
Retirements of capital lease obligation......................... (194,464) -- --
Distributions to minority interest partners in consolidated
limited partnerships........................................... -- (49,000) (343,500)
-------------- -------------- --------------
Net cash provided by (used in) financing activities........... 278,036 7,062,945 (593,852)
-------------- -------------- --------------
Net increase (decrease) in cash................................... (4,323,217) 4,754,188 256,602
Cash balance at beginning of year................................. 5,340,260 586,072 329,470
-------------- -------------- --------------
Cash balance at end of year....................................... $ 1,017,043 $ 5,340,260 $ 586,072
-------------- -------------- --------------
-------------- -------------- --------------
Supplemental information:
Interest paid................................................... $ 188,459 $ 140,989 $ 185,504
-------------- -------------- --------------
-------------- -------------- --------------
Federal income tax paid......................................... $ -- $ 3,500 $ --
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
ON THE BORDER CAFES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
On The Border Cafes, Inc. ("OTB") was incorporated in November 1989 to
become the parent company of the On The Border restaurant organization which was
founded in 1982. On The Border restaurants are full-service restaurants which
specialize in mesquite-grilled cuisine from Texas and Mexico. OTB owns 14
restaurants of which seven were originally organized as limited partnerships
with On The Border Corporation, a wholly owned subsidiary of OTB, as general
partner of four of those limited partnerships.
Effective January 30, 1990, OTB exchanged 1,976,747 shares of OTB Common
Stock, of which 511,412 represented treasury shares, for the stock of On The
Border Corporation and the net assets and minority interests of four limited
partnerships. Immediately preceding the exchange transaction, cash of $82,000
and subordinated notes payable of $200,000 were distributed to the limited
partners of one partnership as a return of contributed capital.
On February 24, 1992, OTB acquired the minority interests of two limited
partnerships which owned two restaurants managed by OTB as well as the net
assets of a third restaurant managed by OTB but in which OTB had no prior
ownership interest. OTB issued 633,532 shares of OTB Common Stock in connection
with these acquisitions. Immediately preceding the acquisitions, cash of $49,000
and subordinated notes of $702,500 were distributed to the limited partners of
two of these partnerships as a return of contributed capital.
Immediately prior to the initial public offering of OTB Common Stock, OTB
acquired the service mark and royalty rights held by Knox-Travis Corporation, a
corporation owned by certain directors of OTB, and a trust, through issuance of
709,523 shares of OTB Common Stock. Knox-Travis Corporation and the trust had
the rights to receive royalty payments from each On The Border restaurant based
on a percentage of food and beverage sales. As a result of the acquisition, the
payment of royalties is no longer required. OTB had no ownership interest in
Knox-Travis Corporation at the time of this transaction.
The exchange transactions have been accounted for as purchases. Under
purchase accounting, the interests of OTB's founders acquired in the exchanges
were accounted for at historical cost. Accordingly, OTB's assets, liabilities
and shareholders' equity (including retained earnings of $152,718) have been
recorded at historical cost.
The applicable net assets acquired from the limited partner investors, who
were not OTB's founders were recorded at estimated fair market value with the
difference recorded as goodwill.
As discussed above, 511,412 shares of OTB Common Stock were acquired by OTB
in connection with the 1990 acquisition. Subsequently, OTB erroneously filed a
Statement of Cancellation to cancel these treasury shares. In 1992, OTB
corrected this error and these treasury shares were reinstated at no cost. The
534,971 shares of OTB's Common Stock acquired in the 1992 acquisitions were also
recorded at no cost. There was no effect on total shareholders' equity in any
year.
In May 1992, OTB completed an initial public offering of the OTB Common
Stock with the issuance of 950,000 shares of OTB Common Stock at $8.50 per
share. OTB received net proceeds of $6,612,757 after deducting the underwriters'
discount and expenses of the offering. OTB retired substantially all
indebtedness for borrowed money, except the $1,200,000 of Senior Subordinated
Convertible Debentures, with approximately $2,100,000 of the proceeds. The net
proceeds were used to fund the expansion of new restaurant locations and for
working capital.
F-7
<PAGE>
ON THE BORDER CAFES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of OTB and its
wholly owned subsidiaries, On The Border Corporation, Inc. and On The
Border-Nevada, Inc. Minority interest has been provided in the financial
statements for the limited partners' earnings and equity interests in limited
partnerships consolidated with OTB, prior to acquisition. All significant
intercompany accounts and transactions have been eliminated.
FISCAL YEAR
OTB operates on a 52 or 53 week year which ends on the Monday nearest to
December 31 each year. The year ended January 3, 1994 consists of 53 weeks and
the years ended December 28, 1992 and December 30, 1991 consist of 52 weeks.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, OTB considers all cash and
investments with an original maturity of three months or less to be cash
equivalents. OTB maintains a significant portion of its cash balance in one
bank.
INVENTORY
Inventory is stated at the lower of cost on a first-in, first-out basis or
market.
PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are recorded at cost.
Depreciation is provided by the straight-line and accelerated methods over the
estimated useful lives of the assets which range from five to 25 years.
Effective January 1, 1991, the remaining lives of certain equipment were
extended from five to seven years based on a change in the estimated useful
lives of the equipment. The remaining lives of leasehold improvements were
extended at that time to include any renewal options on certain locations
because OTB anticipates renewing such options and would forego significant
economic benefits by not renewing such options. These changes in asset lives
decreased the 1991 net loss and loss per share by $286,206 and $.19,
respectively.
Maintenance and repairs of a routine nature are charged to expense. Renewals
and betterments which substantially extend the useful lives of existing assets
are capitalized and depreciated over their estimated lives. Gains and losses
from the disposition of assets are included in operations.
GOODWILL
Goodwill represents excess acquisition costs over the fair value of net
assets acquired. Goodwill resulted from the acquisition of certain limited
partnership interests and a previously managed restaurant operation. Goodwill is
being amortized over 25 years on a straight-line basis. OTB continually
reevaluates the propriety of the carrying amount of goodwill, as well as the
amortization period to determine whether current events and circumstances
warrant adjustments to the carrying value and/ or revised estimates of useful
lives. At this time, OTB believes that no significant impairment of the goodwill
has occurred and that no reduction of the estimated useful lives is warranted.
DEFERRED COSTS
Deferred costs are costs related to site selections for future restaurants.
If the restaurant is subsequently opened, the cost is transferred to preopening
costs. If the restaurant is not opened, the cost is charged to expense.
PREOPENING COSTS
Preopening costs related to new restaurants are capitalized and amortized
over one year. Preopening advertising is amortized over a period not to exceed
one fiscal quarter. Prior to December 31,
F-8
<PAGE>
ON THE BORDER CAFES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1991, preopening costs were amortized over 24 months. If the change in
amortization periods had occurred in 1991, net loss and loss per share in 1991
would have increased by $42,096 and $.03, respectively.
OTHER ASSETS
Other assets include costs related to the acquisition of net assets of the
limited partnerships. These costs are amortized over five years.
FEDERAL INCOME TAXES
OTB adopted Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes," effective December 29, 1992. OTB files a consolidated federal
income tax return which includes the taxable income or loss of its subsidiaries.
Deferred federal income tax is provided for differences arising from the
recognition of certain income and expense items in different periods for
financial statement and federal income tax reporting purposes. Investment tax
credit is accounted for by the flow-through method.
The minority partners' interests include no provision or liability for
income taxes as such interests are in the partnerships and any tax liability
related thereto is the responsibility of the individual minority partners.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share were computed by dividing net income (loss)
by the weighted average shares of OTB Common Stock outstanding during the year.
No effect has been given to stock options or convertible debt because they would
be antidilutive.
STOCK SPLIT
Effective March 13, 1992, OTB declared a one-for-two reverse stock split.
All share and per share amounts reflect the stock split retroactively.
RECLASSIFICATION
Certain accounts in the 1992 and 1991 financial statements have been
reclassified to conform to the 1993 presentation.
(3) ACCOUNTS AND NOTE RECEIVABLE
The accounts receivable consist principally of franchise fees from
nonaffiliates, tax refunds, leasehold allowance and other miscellaneous items
from various parties. Accounts receivable from affiliates consist principally of
franchise royalties and other related items from various shareholder affiliates.
OTB generally does not require collateral for accounts receivable.
The note receivable consists of the following:
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
Note receivable from franchisee with interest at 8.75%, principal
due in monthly installments beginning May 1, 1993 through April 1,
1996, collateralized by accounts receivable, fixtures, inventory
and other tangible and intangible property of borrower............. $ 239,944 $ 300,000
Less current portion................................................ (96,890) (60,056)
----------- -----------
$ 143,054 $ 239,944
----------- -----------
----------- -----------
</TABLE>
Interest income from this note was approximately $25,300, $2,771 and $13,526
for 1993, 1992 and 1991, respectively.
F-9
<PAGE>
ON THE BORDER CAFES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1993 1992
-------------- --------------
<S> <C> <C>
Land......................................................... $ 552,373 $ --
Leasehold improvements....................................... 9,651,742 5,056,040
Furniture and equipment...................................... 5,658,255 3,832,032
-------------- --------------
15,862,370 8,888,072
Accumulated depreciation and amortization.................... (6,295,115) (5,405,414)
-------------- --------------
Net property and equipment............................... $ 9,567,255 $ 3,482,658
-------------- --------------
-------------- --------------
</TABLE>
Depreciation expense was approximately $889,701, $438,168 and $373,297 for
1993, 1992 and 1991, respectively. See Note 6 regarding equipment under capital
lease.
During 1992, OTB built a restaurant and subsequently sold the property and
leased it back. OTB's capitalized cost in the property was approximately
$2,000,000 and sales proceeds were $1,544,000. The fair value of the property
was equal to or greater than its cost; therefore, the difference between the
cost and the selling price was deferred and is being amortized over fifteen
years, the original term of the lease. OTB has no continuing involvement in the
transaction except as lessee under an operating lease. OTB used the cash
proceeds to fund subsequent new restaurant locations in 1993.
The land purchased in 1993 is related to a future Arlington, Texas
restaurant site on which no construction has been completed. Upon completion of
construction, OTB plans to sell the property and lease it back.
(5) ACCRUED LIABILITIES
Accrued liabilities consist of the following accrued amounts:
<TABLE>
<CAPTION>
1993 1992
------------- -------------
<S> <C> <C>
Current portion of claim settlement............................. $ 650,000 $ --
Accrued construction............................................ 187,365 --
Rent............................................................ 156,389 --
Wages and vacation.............................................. 659,801 321,450
Property taxes.................................................. 239,505 179,950
Manager bonuses................................................. 110,630 173,493
Sales taxes..................................................... 186,406 95,726
Liquor taxes.................................................... 78,756 62,493
Interest........................................................ 48,066 47,033
Work-related injury plan........................................ 54,335 46,793
Other........................................................... 417,807 155,711
------------- -------------
Total accrued liabilities................................... $ 2,789,060 $ 1,082,649
------------- -------------
------------- -------------
</TABLE>
F-10
<PAGE>
ON THE BORDER CAFES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1993 1992
------------ ----------
<S> <C> <C>
Obligation under revolving bank credit facility..................... $ 472,500 $ --
------------ ----------
------------ ----------
Obligations under capital leases payable in monthly installments of
approximately $160 to $5,500 including principal and interest at
approximately 7% to 9%, maturing from March 1995 to November
1998............................................................... 815,755 $ 26,157
Less current portion................................................ (206,598) (22,101)
------------ ----------
$ 609,157 $ 4,056
------------ ----------
------------ ----------
</TABLE>
The obligation under the revolving bank credit facility bears interest at
the rate of 1% over the bank's base rate of interest which was 6% at January 3,
1994. Under the facility as of January 3, 1994, OTB could have borrowed up to
$1,250,000 for construction of new restaurant properties until August 12, 1995.
Funds could be advanced under the facility, repaid by OTB and reborrowed again
for other restaurant construction. As projects are completed, any outstanding
balance, after certain criteria are met in accordance with terms of the
agreement, on each separate construction is converted after eight months from
the initial draw into a separate term loan which amortizes monthly over a
five-year period from the date of conversion. OTB borrowed $472,500 under the
credit facility in September, 1993 and had $777,500 available as of January 3,
1994. OTB also had available as of year end a working capital line of credit of
$250,000 bearing interest at the rate of 1% over the bank's base rate of
interest. The revolving credit facility is collateralized by substantially all
assets of OTB.
The terms of the revolving bank credit facility contain, among other
provisions, requirements for maintaining defined levels of working capital,
minimum net worth and various financial ratios. On March 14, 1994 and effective
as of December 31, 1993, the revolving bank credit facility was amended to
modify certain financial covenants. Had the facility not been amended, OTB would
have been in violation of those covenants.
Subsequent to year end, the bank agreed to amend the credit facility to
provide a total of $1,500,000 for restaurant construction, $500,000 in
additional lease financing and $600,000 to fund the initial payment due under
the airplane accident injury claim settlement discussed in Note 14.
Additionally, the bank agreed to extend the $250,000 working capital line of
credit from May 31, 1994 until September 30, 1994.
OTB leases certain kitchen and computer equipment and restaurant furnishings
under capital leases. The cost of the assets leased was $984,063. Accumulated
depreciation on the equipment under capital lease was approximately $148,000,
$49,000 and $38,000 at the end of 1993, 1992 and 1991, respectively.
The obligations under capital lease are collateralized by equipment of OTB.
The maturities of the capital leases described above are $206,598, $192,265,
$204,452, $189,192 and $23,248 for 1994, 1995, 1996, 1997 and 1998,
respectively.
Interest expense on the above capital lease obligations was approximately
$76,600, $100,000 and $212,000 for 1993, 1992 and 1991, respectively. OTB
capitalized interest of approximately $11,000 in 1993 and $42,000 in 1992,
related to the construction of new restaurants.
(7) SENIOR SUBORDINATED CONVERTIBLE DEBENTURES
On March 10, 1992, the Company completed the private placement of $1,200,000
of Senior Subordinated Convertible Debentures (the "Debentures"). The Debentures
bear interest at 8.5% per
F-11
<PAGE>
ON THE BORDER CAFES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) SENIOR SUBORDINATED CONVERTIBLE DEBENTURES (CONTINUED)
annum and are payable semi-annually. If not previously converted, OTB will be
required to redeem $300,000 of Debentures on each of January 15, 1996, 1997,
1998 and December 31, 1998. The Debentures may be converted into OTB Common
Stock at the rate of $8.00 per share by the holders at any time and may be
prepaid at the election of OTB.
(8) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
OTB leases restaurant facilities, office facilities, certain restaurant
equipment and computer equipment under various operating leases which expire
through November 2018 and require monthly payments from $100 to $18,000. Certain
restaurant property leases require additional rental payments based on a
percentage of gross sales above a minimum amount. Certain property leases have
renewal options which permit OTB to extend the basic lease for periods from five
to ten years beyond the original term. The Arlington lease is with a related
party.
The following is a schedule of approximate future minimum lease payments as
of January 3, 1994:
<TABLE>
<CAPTION>
RELATED
THIRD PARTY PARTY* TOTAL
-------------- ------------- --------------
<S> <C> <C> <C>
1994......................................... $ 2,329,483 $ 195,000 $ 2,524,483
1995......................................... 2,187,943 195,000 2,382,943
1996......................................... 1,992,658 65,000 2,057,658
1997......................................... 1,776,639 -- 1,776,639
1998......................................... 1,569,494 -- 1,569,494
Thereafter................................... 10,262,000 -- 10,262,000
-------------- ------------- --------------
Total.................................... $ 20,118,217 $ 455,000 $ 20,573,217
-------------- ------------- --------------
-------------- ------------- --------------
<FN>
- ------------------------
*Arlington Land Joint Venture, a partnership in which certain OTB directors are
partners.
</TABLE>
Rent expense was approximately $2,009,000 in 1993, $1,587,000 in 1992, and
$1,270,000 in 1991, of which contingent percentage rent was $134,562, $155,477,
and $102,400. Rental expense related to Arlington Land Joint Venture was
approximately $195,000, $195,000 and $185,000 in 1993, 1992 and 1991,
respectively.
WORKERS' COMPENSATION
As of August, 1990, OTB became a nonsubscriber to the Texas Workers'
Compensation Act. OTB accrues estimated costs based on its experience. As of
January 3, 1994 and December 28, 1992, the reserve for claims incurred but not
reported was approximately $54,500 and $47,000, respectively.
LEGAL
In February 1994, OTB has received a letter from an attorney representing a
family of the Muslim faith alleging that his clients suffered extreme mental
anguish, shame, guilt, despair and remorse as a result of their unknowing
consumption of pork at an OTB restaurant. The claimants have alleged that OTB
misrepresented that a menu item contained only beef when it contained beef and
pork. The claimants have demanded that OTB pay them $600,000, plus attorney's
fees. The letter indicates that the claimants have authorized their attorney to
initiate a lawsuit to seek the full measure of damages, which can be three times
the $600,000 of damages they have demanded. The attorney also indicated he and
his clients have discussed filing a class action on behalf of all other Muslims
and Jews who have also eaten the subject menu item and therefore unknowingly
consumed pork at OTB restaurants. OTB intends to vigorously contest this matter
and believes that the claim will not have a material adverse effect on its
financial condition, results of operations or liquidity.
F-12
<PAGE>
ON THE BORDER CAFES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
In addition, OTB is involved in certain legal actions and claims arising in
the ordinary course of business. It is the opinion of management that such
litigation and claims will be resolved without material effect on OTB's
liquidity, results of operations or financial position.
(9) INCOME TAXES
The provision for income tax expense consists of the following:
<TABLE>
<CAPTION>
1993 1992 1991
------------ ----------- -----------
<S> <C> <C> <C>
Provision in lieu of income tax....................... $ -- $ 286,678 $ --
Current:
Federal............................................. -- -- --
State............................................... -- 23,500 --
------------ ----------- -----------
$ -- $ 310,178 $ --
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
Income tax expense as reported differs from the expected income tax expense
based on statutory federal income tax rates because of the following:
<TABLE>
<CAPTION>
1993 1992 1991
------------ ----------- ---------
<S> <C> <C> <C>
Taxes at U.S. statutory rate............................ $ (919,095) $ 275,221 $ (5,274)
Amortization of goodwill................................ 33,743 10,185 --
State taxes............................................. -- 20,000 --
Alternative minimum tax................................. -- 3,500 --
Other................................................... 3,231 1,272 --
Net operating loss not providing current benefit........ 882,121 -- 5,274
------------ ----------- ---------
$ -- $ 310,178 $ --
------------ ----------- ---------
------------ ----------- ---------
</TABLE>
OTB and its subsidiaries adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS 109") effective December 29, 1992,
the beginning of its 1993 fiscal year and did not retroactively apply the
provisions of SFAS 109 prior to that date. SFAS 109 requires the asset and
liability approach be used to account for income taxes. Under this method,
deferred tax liabilities and assets are recorded for temporary differences
between financial statement and tax bases of assets and liabilities and tax
carryforwards using enacted rates in effect for the year in which the
differences are expected to reverse. A valuation is provided for deferred tax
assets to the extent they are not considered more likely than not to be
realized.
F-13
<PAGE>
ON THE BORDER CAFES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES (CONTINUED)
The tax effect of significant temporary differences representing deferred
tax assets and liabilities and changes were as follows:
<TABLE>
<CAPTION>
DECEMBER 29, JANUARY 3,
1992 CURRENT YEAR 1994
------------ ------------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward.......................... $ 164,580 $ 479,199 $ 643,779
Claim settlement......................................... -- 672,397 672,397
Depreciation............................................. 4,018 (4,018) --
Workers' compensation and management bonuses............. 15,980 67,965 83,945
------------ ------------- -------------
Total.................................................. 184,578 1,215,543 1,400,121
Valuation allowance........................................ (117,621) 906,525 1,024,146
------------ ------------- -------------
Deferred tax asset................................... 66,957 309,018 375,975
Deferred tax liabilities:
Preopening cost.......................................... (66,957) (210,382) (277,339)
Depreciation............................................. -- (9,664) (9,664)
Smallware inventory...................................... -- (88,972) (88,972)
------------ ------------- -------------
Total.................................................. (66,957) (309,018) (375,975)
------------ ------------- -------------
Net tax asset........................................ $ -- $ -- $ --
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
At January 4, 1994, OTB had available net operating loss carryforwards of
approximately $1,893,500, which expire beginning in 2005.
The financial statement earnings before income tax differed from taxable
income as follows:
<TABLE>
<CAPTION>
1993 1992 1991
-------------- ----------- ----------
<S> <C> <C> <C>
Earnings before income taxes per financial statements......... $ (2,703,220) $ 809,474 $ (15,511)
Excess of tax over book depreciation.......................... (40,244) -- --
Injury claim settlement....................................... 1,977,637 -- --
Amortization of pre-opening cost.............................. (618,770) -- --
Amortization of goodwill...................................... 33,743 29,956 --
Nondeductible entertainment expense........................... 3,231 -- --
State taxes................................................... -- 58,824 --
Alternative minimum tax....................................... -- 10,294 --
Net operating losses not providing current benefits........... -- -- 15,511
Other......................................................... (61,786) 3,741 --
-------------- ----------- ----------
Federal taxable income........................................ $ (1,409,409) $ 912,289 $ --
-------------- ----------- ----------
-------------- ----------- ----------
</TABLE>
Realization of the future tax benefits is dependent on OTB's ability to
generate taxable income within the carryforward period.
(10) FOURTH QUARTER TRANSACTIONS
In the fourth quarter of 1993, OTB recorded the claim settlement discussed
in Note 14 and wrote off $389,000 in deferred manager training cost. The
training cost had been incurred primarily in the second half of the year as
restaurant managers were recruited, hired and trained for OTB's new restaurant
expansion plan. Following the airplane accident in March 1993 and again
following the assertion of the claim by a passenger in the airplane, the
scheduled new restaurant opening plan was delayed several months and the
managers had to be assigned to existing restaurants.
F-14
<PAGE>
ON THE BORDER CAFES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) RELATED PARTIES
OTB is currently the franchisor of four On The Border restaurants with the
franchise owners being current members of OTB's Board of Directors. Under the
terms of its franchising arrangements, OTB is generally entitled to receive an
initial fee and subsequent periodic royalty fees based on the gross sales of
each of the franchised restaurants.
A corporation owned by Frederick G. Molsen, a director of OTB, has the
right, under the terms of a development agreement between OTB and that
corporation, to develop up to an aggregate of five On The Border restaurants in
Austin, Texas; Memphis, Tennessee; Nashville, Tennessee; Columbus, Ohio; and
Louisville, Kentucky. Three of such restaurants (one each in Austin, Memphis,
and Nashville) are currently being operated. Additionally, a franchised
restaurant owned by CFT Cafes, Inc. ("CFT"), a corporation controlled by Paul S.
Heyd, a director of OTB, was opened in 1993 in Orlando, Florida. Under the terms
of the development agreement, CFT may open three more On The Border restaurants
in the central Florida area within the next four years. OTB has agreed not to
establish or authorize any other person to establish an On The Border restaurant
in the areas in which Mr. Molsen's corporation or CFT is entitled to develop On
The Border restaurants.
The franchise revenue recognized from related parties was $181,534, $30,477
and $37,227 for the years ended January 3, 1994, December 28, 1992 and December
30, 1991, respectively.
(12) STOCK OPTIONS
OTB adopted a stock option plan in November 1989 and, as of January 3, 1994,
had shares authorized for granting to key employees and consultants. The options
granted under the plan may be either incentive stock options or nonqualified
stock options. Options are generally granted at the fair market value on the
date granted and generally expire three to five years from the date of grant.
Options under the plan are generally exercisable in installments. The plan
terminates on November 1, 1999. The plan was amended in 1993, subject to
shareholder approval, to include consultants of OTB.
The following is a summary of stock option transactions for the years ended
January 3, 1994, December 28, 1992, and December 30, 1991:
<TABLE>
<S> <C>
Options outstanding at December 30, 1990.................... 20,000
Granted................................................... 155,000
Canceled and available for grant.......................... --
-----------
Options outstanding at December 30, 1991.................... 175,000
Granted................................................... 221,250
Exercised................................................. --
Canceled and available for grant.......................... (1,250)
-----------
Options outstanding at December 28, 1992.................... 395,000
Granted................................................... 171,250
Exercised................................................. --
Canceled and available for grant.......................... (190,000)
-----------
Options outstanding at January 3, 1994...................... 376,250
-----------
-----------
Option price range per share................................ $5.75-$8.00
-----------
-----------
Options exercisable at January 3, 1994...................... 175,000
-----------
-----------
Options available for grant at January 3, 1994.............. 170,625
-----------
-----------
</TABLE>
F-15
<PAGE>
ON THE BORDER CAFES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) CASH FLOW DISCLOSURES
NONCASH FINANCING ACTIVITIES
As described in Note 1, OTB acquired On The Border Corporation and the
minority interest in limited partnerships operating On The Border restaurants in
1990 and 1992, as well as additional restaurants which OTB managed but in which
it had no ownership interest. The 1992 transactions are summarized below:
<TABLE>
<CAPTION>
COMPLETED IN 1992
-----------------------------------
ACQUISITION OF
ASSETS OF TWO
RESTAURANTS AND ONE ACQUISITION
RESTAURANT MANAGED OF ROYALTY
BY COMPANY RIGHTS
-------------------- -------------
<S> <C> <C>
Common stock issued.................................. $ 12,671 $ 14,190
Additional paid-in capital........................... 535,328 416,538
Retained earnings.................................... -- --
---------- -------------
Net assets acquired in exchange, including goodwill
of $729,384 and $107,078 in 1992 and 1990,
respectively........................................ $ 547,999 $ 430,728
---------- -------------
---------- -------------
Issuance of subordinated notes payable............... $ 702,500 $ --
---------- -------------
---------- -------------
</TABLE>
In connection with the issuance of the Senior Subordinated Convertible
Debentures in 1992, $200,000 of notes payable to certain shareholders were
converted into $200,000 of such debentures.
During 1993, OTB's noncash financing activities consisted of the incurrence
of capital lease obligations amounting to $984,063. Additionally, OTB received
$175,000 of treasury stock in payment of an investment activity receivable.
Noncash investing activity relating to construction cost of new restaurants
amounted to $464,475 in 1993.
CHANGES IN CURRENT OPERATING ACCOUNTS OTHER THAN CASH
<TABLE>
<CAPTION>
1993 1992 1991
------------- ------------ ------------
<S> <C> <C> <C>
Accounts receivable............................ $ (506,649) $ (327,151) $ (104,384)
Inventory...................................... (429,184) (63,025) 18,767
Prepaid expenses............................... (153,378) (85,126) 100,024
Preopening costs............................... -- -- --
Accounts payable and accrued
liabilities................................... 2,159,782 281,089 532,501
Income taxes payable........................... -- -- --
------------- ------------ ------------
$ 1,070,571 $ (194,213) $ 546,908
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
(14) AIRPLANE ACCIDENT AND CLAIM SETTLEMENT
On March 13, 1993, Michael F. Fiori, the former President and Chief
Executive Officer of OTB, was killed in an airplane accident, along with Mr.
Fiori's son who was the pilot of the plane. Also injured were Stephen D.
Fenstermacher, former Senior Vice President and Chief Financial Officer, and
Diane Lidvall and Julie Simpson, both of whom were the wives of two of OTB
employees.
On March 14, 1994 the OTB Board of Directors elected Mr. Fenstermacher as
Chief Executive Officer of OTB and named Ned R. Lidvall, the Vice President --
Operations, as President and Chief Operating Officer, and Raymond E. Yoakum,
Vice President -- Finance, as Chief Financial Officer.
F-16
<PAGE>
ON THE BORDER CAFES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) AIRPLANE ACCIDENT AND CLAIM SETTLEMENT (CONTINUED)
Julie Simpson, spouse of OTB's former Human Resources Director, William
Simpson, asserted a claim against OTB on October 19, 1993 for injuries sustained
in the accident. On January 17, 1994, this claim was settled and OTB was
released from all liability. OTB recorded a charge to earnings of approximately
$2,300,000 to cover the settlement, legal expenses and previous expenditures
made for the benefit of the claimant.
OTB has also received releases of liability from any claims asserted by the
other parties killed or injured in the accident. OTB has agreed to reimburse Mr.
Fenstermacher and Ms. Lidvall for any future medical expenses related to the
accident.
(15) PRO FORMA COMPARATIVE RESULTS OF OPERATIONS
The pro forma information gives effect to (i) the 1992 acquisition of the
minority interest of the two limited partnerships as well as the 1992
acquisition of the restaurant in which OTB managed but had no prior ownership
interest and (ii) the acquisition of the service mark and royalty rights held by
Knox-Travis Corporation and a trust, as though all such transactions had
occurred at the beginning of 1992 and 1991.
<TABLE>
<CAPTION>
1992 1991
-------------- --------------
<S> <C> <C>
Revenue.................................................. $ 23,696,202 $ 23,046,866
Net income before extraordinary item..................... 616,418 425,534
Extraordinary item....................................... 332,576 234,243
Net income............................................... 948,994 659,777
Earnings (loss) per share:
Before extraordinary item.............................. .21 .19
Extraordinary item..................................... .11 .10
</TABLE>
(16) SUBSEQUENT EVENT
On January 24, 1994, OTB signed an "Agreement and Plan of Merger" with
Brinker International, Inc. ("Brinker") and Rio Acquisition Corp. ("Rio"), a
wholly owned subsidiary of Brinker, under which Rio would merge into OTB and OTB
would become a wholly owned subsidiary of Brinker. The transaction would be
accounted for as a pooling-of-interests with OTB Common Stock being exchanged
for common stock of Brinker. The agreement is subject to the approval of
shareholders holding a majority of the outstanding OTB Common Stock.
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Brinker International, Inc.:
We have audited the accompanying consolidated balance sheets of Brinker
International, Inc. and subsidiaries ("the Company") as of June 30, 1993 and
1992, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the years in the three-year period ended June 30,
1993. 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 the
Company's 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 30, 1993 and 1992, and the
results of their operations and cash flows for each of the years in the
three-year period ended June 30, 1993, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick
Dallas, Texas
August 6, 1993, except as to the
first paragraph of Note 7,
which is as of
March 9, 1994
F-18
<PAGE>
BRINKER INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
------------------ DECEMBER 29,
1993 1992 1993
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents................................................ $ 5,472 $ 10,079 $ 4,380
Accounts Receivable...................................................... 5,832 5,065 7,508
Assets Held for Sale and Leaseback....................................... 1,155 1,168 50
Inventories.............................................................. 6,531 5,261 7,467
Prepaid Expenses......................................................... 11,908 9,343 12,966
-------- -------- ------------
Total Current Assets................................................... 30,898 30,916 32,371
-------- -------- ------------
Property and Equipment, at Cost (Note 8):..................................
Land..................................................................... 86,832 63,697 93,732
Buildings and Leasehold Improvements..................................... 211,779 162,285 244,928
Furniture and Equipment.................................................. 136,216 107,974 154,170
Construction-in-Progress................................................. 28,426 10,838 20,881
-------- -------- ------------
463,253 344,794 513,711
Less Accumulated Depreciation and Amortization........................... 112,889 84,617 129,841
-------- -------- ------------
Net Property and Equipment............................................. 350,364 260,177 383,870
-------- -------- ------------
Other Assets:
Deferred Costs (Note 12)................................................. 11,105 8,565 11,946
Investment in Joint Ventures, at Equity (Note 2)......................... 5,670 4,790 4,071
Long-term Marketable Securities (Note 3)................................. 28,693 25,948 32,075
Long-term Notes Receivable............................................... 938 1,427 3,478
Other (Notes 9 and 12)................................................... 7,591 5,489 16,831
-------- -------- ------------
Total Other Assets..................................................... 53,997 46,219 68,401
-------- -------- ------------
Total Assets........................................................... $435,259 $337,312 $ 484,642
-------- -------- ------------
-------- -------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term Debt.......................................................... $ -- $ -- $ 2,850
Current Installments of Long-term Debt (Note 8).......................... 268 121 268
Accounts Payable......................................................... 30,187 24,300 35,355
Accrued Liabilities (Note 4)............................................. 43,532 33,411 49,359
Deferred Income Taxes (Notes 6 and 12)................................... 919 4,325 1,566
-------- -------- ------------
Total Current Liabilities.............................................. 74,906 62,157 89,398
-------- -------- ------------
Long-term Debt, Less Current Installments (Note 8)......................... 3,788 4,163 3,655
Deferred Income Taxes (Notes 6 and 12)..................................... 8,934 11,484 10,471
Other Liabilities.......................................................... 12,900 5,413 14,377
Commitments and Contingencies (Notes 8 and 10).............................
Shareholders' Equity (Notes 7 and 12):
Preferred Stock -- 1,000,000 Authorized Shares; $1.00 Par Value; No
Shares Issued........................................................... -- -- --
Common Stock -- 100,000,000 Authorized Shares; $.10 Par Value;
68,634,596, 64,995,609, and 69,192,719 Shares Issued and Outstanding at
June 30, 1993, June 30, 1992, and December 29, 1993, Respectively....... 6,863 6,500 6,919
Additional Paid-in Capital............................................... 162,682 131,342 165,228
Retained Earnings........................................................ 165,186 116,253 194,594
-------- -------- ------------
Total Shareholders' Equity............................................. 334,731 254,095 366,741
-------- -------- ------------
Total Liabilities and Shareholders' Equity............................. $435,259 $337,312 $ 484,642
-------- -------- ------------
-------- -------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
BRINKER INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------
1993 1992 1991
--------- --------- --------- 26 WEEKS ENDED 6 MONTHS ENDED
DECEMBER 29, DECEMBER 31,
1993 1992
-------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.......................................... $ 652,943 $ 519,260 $ 426,848 $ 389,968 $ 303,125
--------- --------- --------- -------------- --------------
Cost and Expenses:
Cost of Sales................................... 180,772 143,633 122,579 107,183 83,493
Restaurant Expenses (Note 8).................... 329,159 268,424 220,882 196,948 154,435
Depreciation and Amortization................... 36,700 27,271 21,267 22,986 17,084
General and Administrative...................... 34,160 28,635 23,651 20,528 16,686
Interest Expense................................ -- -- 348 -- --
Other, Net (Note 3)............................. (3,661) (3,225) (1,543) (3,271) (1,454)
--------- --------- --------- -------------- --------------
Total Costs and Expenses...................... 577,130 464,738 387,184 344,374 270,244
--------- --------- --------- -------------- --------------
Income Before Provision for Income Taxes.......... 75,813 54,522 39,664 45,594 32,881
Provision for Income Taxes (Notes 6 and 12)....... 26,880 18,810 13,565 16,186 11,417
--------- --------- --------- -------------- --------------
Net Income.................................... $ 48,933 $ 35,712 $ 26,099 $ 29,408 $ 21,464
--------- --------- --------- -------------- --------------
--------- --------- --------- -------------- --------------
Primary Net Income Per
Share............................................ $ 0.68 $ 0.51 $ 0.41 $ 0.40 $ 0.30
--------- --------- --------- -------------- --------------
--------- --------- --------- -------------- --------------
Primary Weighted Average Shares Outstanding....... 71,465 70,008 63,890 72,966 70,907
--------- --------- --------- -------------- --------------
--------- --------- --------- -------------- --------------
Fully Diluted Net Income Per Share................ $ 0.68 $ 0.51 $ 0.40 $ 0.40 $ 0.30
--------- --------- --------- -------------- --------------
--------- --------- --------- -------------- --------------
Fully Diluted Weighted Average Shares
Outstanding...................................... 71,594 70,163 64,832 73,238 71,078
--------- --------- --------- -------------- --------------
--------- --------- --------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
BRINKER INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1993, 1992, AND 1991
AND 26 WEEKS ENDED DECEMBER 29, 1993 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL LOSS ON
-------------------- PAID-IN MARKETABLE RETAINED
SHARES AMOUNT CAPITAL SECURITIES EARNINGS TOTAL
--------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1990................ 57,645 $ 5,765 $ 73,872 $ (1,685) $ 54,442 $ 132,394
Net Income............................. -- -- -- -- 26,099 26,099
Unrealized Loss on Marketable
Securities............................ -- -- -- (156) -- (156)
Issuances of Common Stock.............. 6,282 628 48,501 -- -- 49,129
--------- --------- ----------- ----------- ----------- -----------
Balances at June 30, 1991................ 63,927 6,393 122,373 (1,841) 80,541 207,466
Net Income............................. -- -- -- -- 35,712 35,712
Recovery of Unrealized Loss on
Marketable Securities................. -- -- -- 1,841 -- 1,841
Issuances of Common Stock.............. 1,069 107 8,969 -- -- 9,076
--------- --------- ----------- ----------- ----------- -----------
Balances at June 30, 1992................ 64,996 6,500 131,342 -- 116,253 254,095
Net Income............................. -- -- -- -- 48,933 48,933
Issuances of Common Stock.............. 3,639 363 31,340 -- -- 31,703
--------- --------- ----------- ----------- ----------- -----------
Balances at June 30, 1993................ 68,635 6,863 162,682 -- 165,186 334,731
Net Income (Unaudited)................. -- -- -- -- 29,408 29,408
Issuances of Common Stock
(Unaudited)........................... 558 56 2,546 -- -- 2,602
--------- --------- ----------- ----------- ----------- -----------
Balances at December 29, 1993
(Unaudited)............................. 69,193 $ 6,919 $ 165,228 $ -- $ 194,594 $ 366,741
--------- --------- ----------- ----------- ----------- -----------
--------- --------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
BRINKER INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------
1993 1992 1991
---------- ---------- ---------
26 WEEKS ENDED 6 MONTHS ENDED
DECEMBER 29, DECEMBER 31,
1993 1992
-------------- --------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C>
Net Income........................................ $ 48,933 $ 35,712 $ 26,099 $ 29,408 $ 21,464
Adjustment to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization................... 31,253 22,159 15,705 19,142 14,596
Amortization of Deferred Costs.................. 5,447 5,112 5,562 3,844 2,488
Gain on Sale of Land............................ -- -- -- (1,000) --
Changes in Assets and Liabilities:
Decrease (Increase) in Accounts Receivable.... (767) 263 (1,128) (1,676) (285)
Increase in Inventories....................... (1,270) (1,052) (697) (936) (811)
Increase in Prepaid Expenses.................. (3,341) (1,306) (1,100) (1,058) (805)
Increase in Other Assets...................... (9,600) (9,195) (6,190) (9,524) (3,850)
Increase in Accounts Payable.................. 24,722 9,003 1,006 5,168 1,844
Increase in Accrued Liabilities............... 10,268 13,468 5,643 5,827 1,709
Increase (Decrease) in Deferred Income
Taxes........................................ (5,956) 3,622 1,745 2,184 (177)
Increase in Other Liabilities................. 7,487 140 1,481 1,477 815
---------- ---------- --------- -------------- --------------
Net Cash Provided by Operating Activities... 107,176 77,926 48,126 52,856 36,988
---------- ---------- --------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for Property and Equipment............. (120,664) (91,079) (58,223) (54,604) (54,635)
Proceeds from Sale of Land...................... -- -- -- 4,180 --
Payment for Purchase of Franchise Restaurants... -- -- -- (8,165) --
(Increase) Decrease in Assets Held for Sale and
Leaseback...................................... 13 (442) 691 1,105 661
(Increase) Decrease in Investment in Joint
Ventures....................................... (880) (154) 509 1,599 (322)
Purchases of Long-term Marketable Securities.... (62,796) (45,016) (7,029) (29,192) (31,785)
Proceeds from Sales of Long-term Marketable
Securities..................................... 60,051 36,392 -- 25,810 29,496
---------- ---------- --------- -------------- --------------
Net Cash Used in Investing Activities....... (124,276) (100,299) (64,052) (59,267) (56,585)
---------- ---------- --------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Payments on Short-term Debt................. -- -- (8,900) 2,850 2,990
Payments on Long-term Debt...................... (228) (561) (7,433) (133) (108)
Proceeds from Stock Options Exercised........... 12,721 9,076 8,439 2,602 11,557
Bond Conversion Costs........................... -- -- (302) -- --
Proceeds from Common Stock Offering, Net........ -- -- 40,992 -- --
---------- ---------- --------- -------------- --------------
Net Cash Provided by Financing Activities... 12,493 8,515 32,796 5,319 14,439
---------- ---------- --------- -------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS...................................... (4,607) (13,858) 16,870 (1,092) (5,158)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD........................................... 10,079 23,937 7,067 5,472 10,079
---------- ---------- --------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........ $ 5,472 $ 10,079 $ 23,937 $ 4,380 $ 4,921
---------- ---------- --------- -------------- --------------
---------- ---------- --------- -------------- --------------
CASH PAID DURING THE PERIOD:
Interest, Net of Amounts Capitalized............ $ -- $ 25 $ 395 $ -- $ 19
Income Taxes.................................... $ 11,675 $ 11,685 $ 8,845 $ 15,461 $ 10,089
NON-CASH TRANSACTIONS DURING THE PERIOD:
Tax Benefit from Stock Options Exercised........ $ 18,982 $ 5,817 $ 2,537 $ -- $ 17,375
Property and Equipment Received in Exchange for
Note Receivable................................ $ -- $ 2,305 $ -- $ -- $ --
Property and Equipment Received in Exchange for
Property and Equipment......................... $ -- $ 1,483 $ -- $ -- $ --
Note Receivable Obtained from Sale of Interest
in Joint Venture............................... $ -- $ -- $ 600 $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
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 ("Brinker"). All
significant intercompany accounts and transactions have been eliminated in
consolidation. All references to the number of shares and per share amounts of
Common Stock have been restated to reflect all stock dividends distributed by
the Brinker (see Note 7).
Brinker's condensed consolidated financial statements as of December 29,
1993, and for the twenty-six weeks ended December 29, 1993 and for the six
months ended December 31, 1992, have been prepared by Brinker, pursuant to the
rules and regulations of the Securities and Exchange Commission. These interim
condensed consolidated financial statements reflect all adjustments (consisting
of normal recurring accruals and adjustments) which are, in the opinion of
management, necessary to fairly state the operating results for the respective
periods. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted with respect to the interim condensed
consolidated financial statements. Brinker management believes that the
disclosures provided as of June 30, 1993 read in conjunction with Note 12 are
sufficient for interim financial reporting purposes.
(B) CASH AND CASH EQUIVALENTS
Brinker'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 $5,662,000 and $10,079,000 at June 30, 1993 and 1992,
respectively, consist primarily of money market funds, short-term municipal
funds, and commercial paper. The carrying value of these instruments
approximates market value due to their short-term maturities.
(C) INVENTORIES
Inventories, which consist of food, beverages, and supplies, are stated at
the lower of cost (first-in, first-out 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 30 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 $800,000, $1,300,000, and $1,300,000 during fiscal 1993,
1992, and 1991, respectively.
(F) DEFERRED COSTS
The costs of selecting new sites and hiring and training personnel related
to new restaurants are capitalized and amortized over the restaurants' first 24
months of operation. Deferred costs related to projected sites subsequently
determined to be unsatisfactory and general site selection costs which cannot be
identified with a specific restaurant are charged to operations. See Note 12 for
discussion of a change in accounting policy, effective July 1, 1993.
F-23
<PAGE>
BRINKER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) STOCK OPTIONS
Proceeds from the exercise of Common Stock options issued to officers,
directors, key employees, and certain non-employees under Brinker's stock option
plans are credited to Common Stock to the extent of par value and to Additional
Paid-In Capital for the excess.
(H) NET INCOME PER SHARE
Both primary and fully diluted net income per share are based on the
weighted average number of shares outstanding during the fiscal year increased
by common equivalent shares (stock options) determined using the treasury stock
method. Primary weighted average equivalent shares are determined based on the
average market price exceeding the exercise price of the stock options. Fully
diluted weighted average equivalent shares are determined based on the higher of
the average or ending market price exceeding the exercise price of the stock
options.
(2) INVESTMENT IN JOINT VENTURES
Brinker currently participates in joint ventures, one of which operates nine
Chili's Grill & Bar restaurants. Other ventures are primarily used for research
and development in testing new restaurant concepts. Brinker has a 50% interest
in its joint ventures and accounts for its interests using the equity method.
On June 30, 1993, Brinker acquired the remaining 50% interest in its three
unit Spageddies Italian Italian Food restaurant concept ("Spageddies") from its
joint venture partner in exchange for 205,716 shares of Brinker's Common Stock.
The acquisition was accounted for as a pooling of interests, and accordingly,
Brinker's 1993 consolidated financial statements include the accounts and
operations of Spageddies since the commencement of its operations in July 1992.
Spageddies' results of operations on a pro forma basis are not presented
separately as the results are not material. Likewise, Brinker's unaudited
consolidated quarterly results of operations (see Note 11) have not been
restated to include the accounts and operations of Spageddies as the combined
results are not materially different from the results as presented.
(3) INVESTMENTS
Long-term Marketable Securities include equity securities and bonds. These
securities are carried at the lower of aggregate cost or market. The aggregate
market value of the long-term investment portfolio exceeded the aggregate cost
by $883,000 and $580,000 at June 30, 1993 and 1992, respectively. Gross
unrealized losses were not material at June 30, 1993 and 1992.
Realized gains and losses are determined on a specific identification basis
and are included in Other, Net. Realized gains and losses from investment
transactions were $2,137,000 and $558,000, respectively, during fiscal 1993, and
$965,000 and $950,000, respectively, during fiscal 1992. There were no
significant realized gains or losses during fiscal 1991. Brinker earned
$2,800,000, $3,200,000, and $1,500,000 in dividend and interest income during
fiscal 1993, 1992, and 1991, respectively.
F-24
<PAGE>
BRINKER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) ACCRUED LIABILITIES
Accrued Liabilities consist of the following (In thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1993 1992
--------- ---------
<S> <C> <C>
Sales tax..................................................................... $ 3,925 $ 3,077
Insurance..................................................................... 10,528 7,928
Payroll....................................................................... 10,390 7,043
Profit sharing................................................................ 5,497 3,832
Other......................................................................... 13,192 11,531
--------- ---------
$ 43,532 $ 33,411
--------- ---------
--------- ---------
</TABLE>
(5) CREDIT FACILITIES
Brinker has available credit facilities aggregating $30 million at June 30,
1993. These credit facilities bear interest based upon the lower of the banks'
"Base" or prime rate plus 2%, CD rates, or Eurodollar rates, and expire through
fiscal 1995. Commitment fees related to these credit facilities were $51,000,
$27,000, and zero for fiscal 1993, 1992, and 1991, respectively.
(6) INCOME TAXES
Brinker adopted Statement of Financial Accounting Standards No. 96 ("SFAS
No. 96"), "Accounting for Income Taxes", in fiscal 1988. The Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 109 ("SFAS No. 109"), "Accounting for Income Taxes", in February 1992. SFAS
No. 109, which supersedes SFAS No. 96, retained the asset and liability approach
for financial accounting and reporting for income taxes as in SFAS No. 96, but
reduced the complexity of SFAS No. 96 and changed the criteria for recognition
and measurement of deferred tax assets. Brinker adopted SFAS No. 109 in fiscal
1994 using the cumulative effect method as discussed in Note 12.
The Provision for Income Taxes consists of the following (In thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Current income tax expense:
Federal............................................................ $ 29,335 $ 13,445 $ 10,304
State.............................................................. 3,501 1,743 1,516
--------- --------- ---------
Total current income tax expense................................. 32,836 15,188 11,820
--------- --------- ---------
Deferred income tax expense (benefit):
Federal............................................................ (5,754) 2,976 1,745
State.............................................................. (202) 646 --
--------- --------- ---------
Total deferred income tax expense (benefit)...................... (5,956) 3,622 1,745
--------- --------- ---------
$ 26,880 $ 18,810 $ 13,565
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-25
<PAGE>
BRINKER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES (CONTINUED)
A reconciliation between the reported Provision for Income Taxes and the
amount computed by applying the statutory Federal income tax rate of 34% to
Income Before Provision for Income Taxes follows (In thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Income tax expense at statutory rate................................. $ 25,776 $ 18,537 $ 13,486
Targeted jobs tax credit............................................. (588) (919) (345)
Foreign tax credit................................................... (50) (31) --
Net investment activities............................................ (1,094) (650) (266)
State income taxes................................................... 2,177 1,577 1,001
Other................................................................ 659 296 (311)
--------- --------- ---------
$ 26,880 $ 18,810 $ 13,565
--------- --------- ---------
--------- --------- ---------
</TABLE>
Temporary differences between the tax basis of assets and liabilities and
their financial reporting amounts that give rise to significant portions of
Deferred Income Taxes are as follows (In thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1993 1992
--------- ---------
<S> <C> <C>
Depreciation and capitalized interest on property and equipment............... $ 12,999 $ 12,213
Insurance reserves............................................................ (6,565) --
Pre-opening costs............................................................. 5,459 6,980
Investment in joint ventures.................................................. 287 434
Leasing transactions.......................................................... (1,788) (1,663)
Other, net.................................................................... (539) (2,155)
--------- ---------
$ 9,853 $ 15,809
--------- ---------
--------- ---------
</TABLE>
At June 30, 1993, Brinker has available net capital loss carryforwards of
$300,000, which will expire in fiscal 2000 if not utilized.
Certain changes in Federal corporate income tax laws were enacted in August
1993, which included an increase in the statutory Federal corporate income tax
rate from 34% to 35% and reinstatement of the Targeted Jobs Tax Credit. The
impact of these changes, retroactive to January 1993, offset each other and
would not have materially impacted Brinker's fiscal 1993 effective income tax
rate or consolidated financial statements.
The increase in the statutory Federal corporate income tax rate, the
Targeted Jobs Tax Credit, and a tax credit for FICA taxes paid on tips
(effective January 1994) are offsetting and will not have a material impact on
Brinker's fiscal 1994 effective tax rate or consolidated financial statements.
(7) SHAREHOLDERS' EQUITY
(A) STOCK DIVIDENDS AND PUBLIC OFFERING
On March 9, 1994, Brinker declared a stock split, effected in the form of a
50% stock dividend, as discussed in Note 12. All references to the number of
shares and per share amounts of Common Stock have been restated to reflect this
stock dividend.
On April 21, 1993, Brinker declared a stock split, effected in the form of a
50% stock dividend to shareholders of record on May 3, 1993, payable May 13,
1993. As a result, 22.8 million shares (as adjusted to reflect the subsequent
stock split) of Common Stock were issued, and cash was paid in lieu of
fractional shares.
F-26
<PAGE>
BRINKER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) SHAREHOLDERS' EQUITY (CONTINUED)
On October 30, 1991, Brinker declared a stock split, effected in the form of
a 50% stock dividend to shareholders of record on November 12, 1991, payable
November 26, 1991. As a result, 21.5 million shares (as adjusted to reflect
subsequent stock splits) of Common Stock were issued, and cash was paid in lieu
of fractional shares.
On March 25, 1991, Brinker completed a public offering of Common Stock in
which 4.4 million shares (as adjusted to reflect subsequent stock splits) were
issued. Net proceeds to Brinker were approximately $41,000,000.
On February 20, 1991, Brinker declared a stock split, effected in the form
of a 50% stock dividend to shareholders of record on March 4, 1991, payable
March 14, 1991. As a result, 19.7 million shares (as adjusted to reflect
subsequent stock splits) of Common Stock were issued, and cash was paid in lieu
of fractional shares.
(B) 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 12.9 million shares of
Brinker's Common Stock may be granted to officers, directors, and key employees.
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. Option prices under these plans range
from $1.27 to $19.33.
Transactions during fiscal 1993, 1992, and 1991 were as follows (In
thousands, except option prices):
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Options outstanding at beginning of year................................. 6,498 6,318 6,056
Granted.................................................................. 1,539 1,277 1,634
Exercised................................................................ (1,562) (944) (1,080)
Canceled................................................................. (191) (153) (292)
--------- --------- ---------
Options outstanding at end of year....................................... 6,284 6,498 6,318
--------- --------- ---------
--------- --------- ---------
Option price range for options granted during $18.95 $11.22 $10.89
the year................................................................ to to to
$19.33 $14.55 $10.89
Options exercisable at end of year....................................... 2,702 3,059 2,957
Options available for grant at end of year............................... 330 1,677 1,281
</TABLE>
(C) 1984 NON-QUALIFIED STOCK OPTION PLAN
In accordance with the Non-Qualified Stock Option Plan adopted in December
1984, options to purchase approximately 5.0 million shares of Brinker's 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. Option
prices under this plan range from $.35 to $5.30.
On November 30, 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.
F-27
<PAGE>
BRINKER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) SHAREHOLDERS' EQUITY (CONTINUED)
Transactions during fiscal 1993, 1992, and 1991 were as follows (In
thousands):
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Options outstanding at beginning of year................................... 2,741 2,871 3,663
Exercised.................................................................. (1,871) (127) (792)
Canceled................................................................... (12) (3) --
--------- --------- ---------
Option outstanding at end of year.......................................... 858 2,741 2,871
--------- --------- ---------
--------- --------- ---------
Options exercisable at end of year......................................... 858 2,741 2,385
</TABLE>
(D) 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 337,500 shares of Brinker's
Common Stock were authorized for grant. Options were granted at market value on
the date of grant, are exercisable beginning two years from the date of grant,
with a three year vesting period, and expire ten years from the date of grant.
Options prices under this plan range from $11.22 to $14.67.
Transactions during fiscal 1993 and 1992 were as follows (In thousands,
except option prices):
<TABLE>
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
Options outstanding at beginning of year........................................... 80 --
Granted............................................................................ 27 80
--------- ---------
Options outstanding at end of year................................................. 107 80
--------- ---------
--------- ---------
Option price for options granted during the year................................... $14.67 $11.22
Options exercisable at end of year................................................. -- --
Options available for grant at end of year......................................... 231 258
</TABLE>
(8) LEASES
(A) CAPITAL LEASES
Brinker leases certain buildings under various leases which are classified
as capital leases. The asset value of $6,900,000 at June 30, 1993 and 1992, and
the related accumulated amortization of $4,700,000 and $4,500,000 at June 30,
1993 and 1992, respectively, are included in Property and Equipment.
(B) OPERATING LEASES
Brinker leases restaurant facilities and certain equipment under operating
leases having terms expiring at various dates through fiscal 2013. The
restaurant leases have renewal clauses of 5 to 30 years at the option of Brinker
and have provisions for contingent rent based upon a percentage of gross sales,
as defined in the leases. Rent expense for the fiscal 1993, 1992, and 1991 was
$25,300,000, $22,500,000, and $21,200,000, respectively. Contingent rent
included in rent expense for the fiscal 1993, 1992, and 1991 was $2,200,000,
$1,600,000, and $1,400,000, respectively.
F-28
<PAGE>
BRINKER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) LEASES (CONTINUED)
(C) COMMITMENTS
At June 30, 1993, future minimum lease payments on capital and operating
leases were as follows (In thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
- ------------------------------------------------------------------------------- --------- -----------
<S> <C> <C>
1994........................................................................... $ 690 $ 21,858
1995........................................................................... 720 21,792
1996........................................................................... 723 21,843
1997........................................................................... 718 21,981
1998........................................................................... 657 21,557
Thereafter..................................................................... 3,540 167,063
--------- -----------
Total minimum lease payments................................................. 7,048 $ 276,094
-----------
-----------
Imputed interest (average rate of 11.5%)..................................... 2,992
---------
Present value of minimum payments............................................ 4,056
Less current installments.................................................... 268
---------
Long-term Debt............................................................... $ 3,788
---------
---------
</TABLE>
In July 1993, Brinker entered into operating lease agreements with
unaffiliated groups to begin leasing certain restaurant sites. These
unaffiliated groups have committed to make available up to $30,000,000 for the
development of restaurants to be leased by Brinker for up to 5 years. The
agreements with these groups expire in fiscal 1998, and do not provide for
renewal. Upon expiration, Brinker may either purchase the properties or allow
the lessor to sell the restaurants to an unrelated party and guarantee the
residual value of approximately $25,500,000.
At June 30, 1993, Brinker 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) SAVINGS PLANS
Effective January 1, 1993, Brinker established the Brinker Savings Plan I
("Plan I"), a qualified defined contribution retirement plan 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. Brinker matches 25% of the
first 5% an employee contributes with Brinker Common Stock. Employee
contributions vest immediately while Brinker contributions vest 25% annually
beginning in the participants' second year of eligibility since plan inception.
In fiscal 1993, Brinker contributed approximately $173,000 (which was used to
purchase 8,162 shares of Brinker's Common Stock) and incurred approximately
$48,000 in administrative fees.
Effective January 1, 1993, Brinker established the Brinker Savings Plan II
("Plan II"), a non-qualified defined contribution retirement plan 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, and contribute such amounts to
various investment funds. Brinker matches 25% of the first 5% a non-officer
contributes with Brinker Common Stock while Officers' contributions are matched
at the same rate with cash. Employee contributions vest immediately while
Brinker contributions vest 25% annually beginning in the participants'
F-29
<PAGE>
BRINKER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) SAVINGS PLANS (CONTINUED)
second year of employment since plan inception. In fiscal 1993, Brinker
contributed approximately $69,000 (of which approximately $49,000 was used to
purchase 2,373 shares of Brinker's Common Stock) and incurred approximately
$48,000 in administrative fees. Brinker has a Rabbi Trust to fund Plan II
obligations. As of June 30, 1993, assets of the trust aggregated approximately
$566,000 and are included in Other Assets. The aggregate market value of these
assets at June 30, 1993, exceeded aggregate cost by approximately $30,000.
(10) CONTINGENCIES
Brinker 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 Brinker, based
upon consultation with legal counsel, is of the opinion that there are not
matters pending or threatened which are expected to have a material adverse
effect on Brinker's consolidated financial condition or results of operations.
(11) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following summarizes the unaudited consolidated quarterly results of
operations for fiscal 1993 and 1992 (In thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1993
--------------------------------------------------
QUARTER ENDED
--------------------------------------------------
SEPT. 30 DEC. 31 MARCH 31 JUNE 30
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues...................................................... $ 151,176 $ 151,949 $ 164,713 $ 185,105
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of Sales............................................... 41,583 41,910 45,599 51,680
Restaurant Expenses......................................... 77,416 77,019 82,443 92,281
Depreciation and Amortization............................... 8,356 8,728 9,370 10,246
General and Administrative.................................. 7,985 8,701 8,306 9,168
Other, Net.................................................. (775) (679) (1,057) (1,150)
----------- ----------- ----------- -----------
Total Costs and Expenses.................................. 134,565 135,679 144,661 162,225
----------- ----------- ----------- -----------
Income Before Provision for Income Taxes...................... 16,611 16,270 20,052 22,880
Provision for Income Taxes.................................... 5,773 5,644 7,228 8,235
----------- ----------- ----------- -----------
Net Income................................................ $ 10,838 $ 10,626 $ 12,824 $ 14,645
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Primary Net Income Per Share.................................. $ 0.15 $ 0.15 $ 0.18 $ 0.20
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Primary Weighted Average Shares Outstanding................... 70,466 70,937 71,721 72,161
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
F-30
<PAGE>
BRINKER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1992
--------------------------------------------------
QUARTER ENDED
--------------------------------------------------
SEPT. 30 DEC. 31 MARCH 31 JUNE 30
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues...................................................... $ 124,099 $ 122,007 $ 131,895 $ 141,259
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of Sales............................................... 34,563 33,683 36,357 39,030
Restaurant Expenses......................................... 64,133 63,941 68,118 72,232
Depreciation and Amortization............................... 6,334 6,582 7,016 7,339
General and Administrative.................................. 6,988 7,079 7,119 7,449
Other, Net.................................................. (767) (759) (875) (824)
----------- ----------- ----------- -----------
Total Costs and Expenses.................................. 111,251 110,526 117,735 125,226
----------- ----------- ----------- -----------
Income Before Provision for Income Taxes...................... 12,848 11,481 14,160 16,033
Provision for Income Taxes.................................... 4,432 3,961 4,885 5,532
----------- ----------- ----------- -----------
Net Income................................................ $ 8,416 $ 7,520 $ 9,275 $ 10,501
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Primary Net Income Per Share.................................. $ 0.12 $ 0.11 $ 0.13 $ 0.15
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Primary Weighted Average Shares Outstanding................... 69,411 69,956 70,430 70,247
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
(12) SUBSEQUENT EVENTS (UNAUDITED)
Effective July 1, 1993, Brinker adopted a 52 week fiscal year ending on the
last Wednesday in June. Most retailing and restaurant companies operate on an
accounting calendar that is measured in weeks rather than months. Thus, a normal
fiscal year only contains 364 days. Every fifth or sixth year, lost days are
recaptured by having a 53 week fiscal year. This change enhances Brinker's
ability to measure comparative operating results. The impact of this change was
not significant.
Effective July 1, 1993, Brinker prospectively revised its policy for
capitalizing and amortizing pre-opening costs associated with the opening of new
restaurant sites. The amortization period was reduced from 24 months to 12
months. Capitalized pre-opening 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. The impact of the change in accounting
policy did not have a material impact on Brinker's consolidated financial
statements.
Effective July 1, 1993, Brinker adopted SFAS No. 109, and the impact on
Brinker's consolidated financial statements was not material.
Effective October 7, 1993, Brinker acquired the assets of a franchisee,
which operated four Chili's restaurants in Pennsylvania and Ohio, for
approximately $8,165,000 in cash. The acquisition was accounted for as a
purchase. Goodwill of approximately $6,941,000, representing the excess of cost
over the fair value of the assets acquired, was recorded in connection with the
acquisition and is included in Other Assets. Goodwill is being amortized on a
straight-line basis over 30 years.
On November 4, 1993, Brinker approved an amendment to its Certificate of
Incorporation which increased the number of authorized shares of Brinker Common
Stock from 50,000,000 to 100,000,000.
On March 9, 1994, Brinker declared a stock split in the form of a 50% stock
dividend to shareholders of record on March 21, 1994, payable March 30, 1994. As
a result, 23.2 million shares of Common Stock were issued, and cash was paid in
lieu of fractional shares.
F-31
<PAGE>
APPENDIX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AMONG
BRINKER INTERNATIONAL, INC.
(A DELAWARE CORPORATION)
RIO ACQUISITION CORP.
(A TEXAS CORPORATION)
AND
ON THE BORDER CAFES, INC.
(A TEXAS CORPORATION)
DATED: AS OF JANUARY 24, 1994 AND CONFORMED TO REFLECT AMENDMENTS THROUGH
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS AND THE THREE-FOR-TWO STOCK SPLIT
OF THE BRINKER COMMON STOCK EFFECTED MARCH 30, 1994
<PAGE>
This Amended and Restated Agreement and Plan of Merger (the "Agreement") is
made as of the 24th day of January, 1994, among Brinker International, Inc., a
Delaware corporation (the "Parent"); Rio Acquisition Corp., a Texas corporation
(the "Subsidiary"), which is wholly owned, directly or indirectly, by the
Parent; and On The Border Cafes, Inc., a Texas corporation (the "Company"). The
Agreement reflects amendments through April 22, 1994.
In consideration of the mutual covenants and agreements contained herein,
the parties hereto covenant and agree as follows:
ARTICLE 1.
THE MERGER
1.1. MERGER. In accordance with the provisions of the business corporation
laws of the State of Texas, at the Effective Date (as hereinafter defined), the
Subsidiary shall be merged (the "Merger") into the Company, and the Company
shall be the surviving corporation (the "Surviving Corporation") and as such
shall continue to be governed by the laws of the State of Texas.
1.2. CONTINUING OF CORPORATE EXISTENCE. Except as may otherwise be set
forth herein, the corporate existence and identity of the Company, with all its
purposes, powers, franchises, privileges, rights and immunities, shall continue
unaffected and unimpaired by the Merger, and the corporate existence and
identity of the Subsidiary, with all its purposes, powers, franchises,
privileges, rights and immunities, at the Effective Date shall be merged with
and into that of the Company, and the Surviving Corporation shall be vested
fully therewith and the separate corporate existence and identity of the
Subsidiary shall thereafter cease except to the extent continued by statute.
1.3. EFFECTIVE DATE. The Merger shall become effective upon the occurrence
of the issuance of the certificate of merger (the "Effective Date") by the
Secretary of State of the State of Texas upon filing on the Closing Date (as
defined herein) of the Articles of Merger with the Secretary of State of the
State of Texas pursuant to Article 5.04 of the Texas Business Corporation Act
("TBCA").
1.4. CORPORATE GOVERNMENT.
(a) The Articles of Incorporation of the Company, as in effect on the
Effective Date, shall continue in full force and effect and shall be the
Articles of Incorporation of the Surviving Corporation.
(b) The Bylaws of the Company, as in effect as of the Effective Date, shall
continue in full force and effect and shall be the Bylaws of the Surviving
Corporation.
(c) The members of the Board of Directors and the officers of the Surviving
Corporation shall be the persons holding such offices in the Subsidiary as of
the Effective Date.
1.5. RIGHTS AND LIABILITIES OF THE SURVIVING CORPORATION. The Surviving
Corporation shall have the following rights and obligations:
(a) The Surviving Corporation shall have all the rights, privileges
immunities and powers and shall be subject to all the duties and liabilities
of a corporation organized under the laws of the State of Texas.
(b) The Surviving Corporation shall possess all of the rights,
privileges immunities and franchises, of either a public or private nature,
of the Company and the Subsidiary and all property, real, personal and
mixed, and all debts due on whatever account, including subscription to
shares, and all other choses in action, and every other interest of or
belonging or due to the Company and the Subsidiary shall be taken and deemed
to be transferred or invested in the Surviving Corporation without further
act or deed.
(c) At the Effective Date, the Surviving Corporation shall thenceforth
be responsible and liable for all liabilities and obligations of the Company
and the Subsidiary and any claim existing or action or proceeding pending by
or against the Subsidiary or the Company may be prosecuted
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as if the Merger had not occurred, or the Surviving Corporation may be
substituted in its place. Neither the rights of creditors nor any liens upon
the property of the Subsidiary or the Company shall be impaired by the
Merger.
1.6. CLOSING. Consummation of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Parent in Dallas,
Texas commencing at 10:00 a.m., local time, on (i) the date on which the Special
Meeting of the Company's Shareholders described in Section 6.3 occurs or (ii) as
soon as possible thereafter when each of the other conditions set forth in
Articles 8 and 9 have been satisfied or waived, and shall proceed promptly to
conclusion, or at such other place, time and date as shall be fixed by mutual
agreement between Parent and the Company. The day on which the Closing shall
occur is referred to herein as the "Closing Date." Each party will cause to be
prepared, executed and delivered Articles of Merger to be filed with the
Secretary of State of Texas and all other appropriate and customary documents as
any party or its counsel may reasonably request for the purpose of consummating
the transactions contemplated by this Agreement. All actions taken at the
Closing shall be deemed to have been taken simultaneously at the time the last
of any such actions is taken or completed.
1.7. TAX CONSEQUENCES. It is intended that the Merger shall constitute a
reorganization within the meaning of Section 368(a)(2)(E) of the Internal
Revenue Code of 1986, as amended (the "Code"), and that this Agreement shall
constitute a "plan of reorganization" for the purposes of Section 368 of the
Code.
1.8. POOLING OF INTERESTS. It is the intention of the parties hereto that
the Merger will be treated for financial reporting purposes as a pooling of
interests.
ARTICLE 2.
CONVERSION OF SHARES; TREATMENT OF OPTIONS
2.1. CONVERSION OF SHARES. The manner and basis of converting common
stock, $.02 par value, of the Company (the "Company Common Stock") into common
stock, $.10 par value, of Parent ("Parent Common Stock"), shall be as follows:
(a) Except as provided in Section 2.3, each share of Company Common
Stock which shall be outstanding immediately prior to the Effective Date
shall at the Effective Date, by virtue of the Merger and without any action
on the part of the holder thereof, be converted into shares of Parent Common
Stock as follows:
(i) If the average closing price of Parent Common Stock as reported
for the New York Stock Exchange -- Composite Transactions in The Wall
Street Journal, Southwest Edition, for each of the ten trading days
ending on the date which is five trading days before the Effective Date
(the "Determination Price") is between $28.583 and $32, inclusive, each
share of Company Common Stock issued and outstanding immediately prior to
the Effective Date, by virtue of the Merger and without any action on the
part of the holder thereof, shall automatically be converted into .301171
fully paid and nonassessable shares of Parent Common Stock;
(ii) If the Determination Price is less than $28.583 per share, each
share of Company Common Stock issued and outstanding immediately prior to
the Effective Date of the Merger shall, by virtue of the Merger and
without any action on the part of the holder thereof, automatically be
converted into such number of fully paid and nonassessable shares of
Parent Common Stock as is equal to the quotient of (X) 8.608472 divided
by (Y) the Determination Price; provided, however, that in the event that
such number would exceed .3472325, the Company and the Parent will either
(i) mutually determine in good faith the number of shares of Parent
Common Stock to be issued or (ii) terminate this Agreement without
liability to the other except as provided in Section 11.2(b); and
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(iii) If the Determination Price is more than $32 per share, each
share of Company Common Stock issued and outstanding immediately prior to
the Effective Date of the Merger shall, by virtue of the Merger and
without any action on the part of the holder thereof, shall automatically
be converted into such number of fully paid and nonassessable shares of
Parent Common Stock as is equal to the quotient of (X) 9.637473 divided
by (Y) the Determination Price.
(b) Each share of Common Stock, $.10 par value, of the Subsidiary which
shall be outstanding immediately prior to the Effective Date shall at the
Effective Date, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into one share of newly issued Company
Common Stock.
(c) Each share of Company Common Stock held by the Company in its
treasury or by On The Border Corporation shall not be cancelled and will
continue to be held by the Company or by On The Board Corporation, as
applicable.
2.2. FRACTIONAL SHARES. No scrip or fractional shares of Parent Common
Stock shall be issued in the Merger. All fractional shares of Parent Common
Stock to which a holder of Company Common Stock immediately prior to the
Effective Date would otherwise be entitled at the Effective Date shall be
aggregated. If a fractional share results from such aggregation, such
shareholder shall be entitled, after the later of (a) the Effective Date or (b)
the surrender of such shareholder's "Certificate" (as defined in Section 2.5) or
Certificates that represent such shares of Company Common Stock, to receive from
Parent an amount in cash in lieu of such fractional share, based on the
Determination Price. Parent will make available to the "Exchange Agent" (as
defined in Section 2.5) the cash necessary for the purpose of paying cash for
fractional shares.
2.3. DISSENTING SHARES. To the extent that appraisal rights are available
under the TBCA, shares of Company Common Stock that are issued and outstanding
immediately prior to the Effective Date and that have not been voted for
adoption of the Merger and with respect of which appraisal rights have been
properly demanded in accordance with the applicable provisions of the TBCA
("Dissenting Shares") shall not be converted into the right to receive the
consideration provided for in Sections 2.1 and 2.2 at or after the Effective
Date unless and until the holder of such shares withdraws his demand for such
appraisal (in accordance with the applicable provisions of the TBCA) or becomes
ineligible for such appraisal. If a holder of Dissenting Shares withdraws his
demand for such appraisal (in accordance with the applicable provisions of the
TBCA) or becomes ineligible for such appraisal, then, as of the Effective Date
or the occurrence of such event, whichever later occurs, such holder's
Dissenting Shares shall cease to be Dissenting Shares and shall be converted
into and represent the right to receive the consideration provided for in
Sections 2.1 and 2.2. If any holder of Company Common Stock shall assert the
right to be paid the fair value of such Company Common Stock as described above,
the Company shall give Parent notice thereof and Parent shall have the right to
participate in all negotiations and proceedings with respect to any such
demands. The Company shall not, except with the prior written consent of Parent,
voluntarily make any payment with respect to, or settle or offer to settle, any
such demand for payment. After the Effective Date, the Parent will cause the
Surviving Corporation to pay its statutory obligations to holders of Dissenting
Shares.
2.4. STOCK OPTIONS, WARRANTS AND DEBENTURES. (a) At the Effective Date,
Parent shall assume all of the Company's rights and obligations under stock
options granted by the Company pursuant to the Company's Amended and Restated
Stock Option Plan (the "Stock Option Plan") which are outstanding and
unexercised at the Effective Date (the "Options"). Such Options shall be assumed
in accordance with their terms and conditions as in effect at the Effective Date
(and the terms and conditions of the applicable plan), except that (i) all
actions to be taken thereunder by the Board of Directors of the Company or a
committee thereof shall be taken by the Board of Directors of Parent or a
committee thereof, (ii) each Option shall thereafter evidence the right to
purchase only the number of whole shares of Parent Common Stock (rounded down)
which would have been issued if the shares of Company Common Stock represented
by such Option had been outstanding at the Effective Date, (iii) the new option
price for each share of Parent Common Stock shall be determined by multiplying
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(X) the option price immediately prior to the Effective Date times (Y) the
number of shares of Company Common Stock into which the Option was exercisable
immediately prior to the Effective Date and dividing such product by (Z) the
number of shares of Parent Common Stock into which such Option is exercisable
(as adjusted pursuant to clause (ii) above), (iv) each reference in the Stock
option agreements executed in connection with the Stock Option Plan relating to
the Company shall refer to Parent and (v) all other references in the Options to
the Company and Company Common Stock shall be deemed to be references to Parent
and Parent Common Stock, respectively. Notwithstanding the provisions set forth
in clause (iii) above, with respect to each incentive stock option, if the new
option price calculated pursuant to clause (iii) would cause any incentive stock
option not to satisfy the requirements of Regulation 1.425-1(a)(1)(i) of the
Code, the new exercise price with respect to that option will be the minimum
price that it could be and still satisfy the requirements of that Regulation.
Parent agrees to take such other steps as are necessary to ensure that the
incentive stock options remain incentive stock options.
(b) It is intended that the assumed Options, as set forth herein, shall not
give to any holder thereof any benefits in addition to those which such holder
had prior to the assumption of the Option. Parent shall take all necessary
corporate action necessary to reserve for issuance a sufficient number of shares
of Parent Common Stock for delivery upon exercise of the Options. As soon as
practicable after the Effective Date, Parent shall file a registration
statement, or an amendment to an existing registration statement, under the
Securities Act of 1933, as amended (the "Securities Act") on Form S-8 (or other
successor form) with respect to the shares of Parent Stock subject to such
Options and shall use its best efforts to maintain the effectiveness of such
registration statement for so long as such Options remain outstanding. In
addition, Parent will cause such shares to be listed on the New York Stock
Exchange, Inc. ("NYSE"). As soon as practicable after the Effective Date, Parent
shall deliver to each holder of an Option an appropriate written notice setting
forth Parent's assumption of the Option in accordance with the terms of this
section.
(c) Parent hereby acknowledges that the Merger is a "Change in Control" (as
described in the Options) which will cause all Options to become immediately
exercisable as to all of the shares of Parent Common Stock subject thereto.
(d) Approval by the shareholders of the Company and Subsidiary of this
Agreement shall constitute authorization and approval of any and all of the
actions described in this Section 2.4. Immediately after the Effective Date,
Parent will cause the sole shareholder of the Surviving Corporation to approve
the amendment to the Stock Option Plan previously adopted by the Company's Board
of Directors which allows grants of options to consultants.
(e) At the Effective Date, the Company's outstanding warrants (the
"Warrants") to purchase shares of the Company Common Stock and Senior
Subordinated Convertible Debentures (the "Debentures") shall continue to be
obligations of the Company in accordance with their terms and conditions as in
effect at the Effective Date; provided, however, upon the exercise of such
Warrants and the conversion of such Debentures after the Effective Date the
holders thereof shall receive such number of shares of Parent Common Stock as
such holders would have received if they had exercised such Warrants or
converted such Debentures into Company Common Stock immediately prior to the
Effective Date. In addition, Parent shall assume the obligations and rights with
respect to the Parent Common Stock issued upon the exercise of the Warrants and
the conversion of the Debentures (including, but not limited to, the obligations
to register such Parent Common Stock under federal and state securities laws)
from time to time after the Effective Date that the Company currently has with
respect to the Company Common Stock.
2.5. EXCHANGE AGENT.
(a) Parent shall authorize Chemical Shareholder Services Group, Inc., or
such other firm as is reasonably acceptable to the Company, to serve as exchange
agent hereunder (the "Exchange Agent"). Promptly after the Effective Date,
Parent shall deposit or shall cause to be deposited in trust with the Exchange
Agent certificates representing the number of whole shares of Parent Common
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Stock to which the holders of Company Common Stock (other than holders of
Dissenting Shares) are entitled pursuant to this Article 2, together with cash
sufficient to pay for fractional shares then known to Parent (such cash amounts
and certificates being hereinafter referred to as the "Exchange Fund"). The
Exchange Agent shall, pursuant to irrevocable instructions received from Parent,
deliver the number of shares of Parent Common Stock and pay the amounts of cash
provided for in this Article 2 out of the Exchange Fund. Additional amounts of
cash, if any, needed from time to time by the Exchange Agent to make payments
for fractional shares shall be provided by Parent and shall become part of the
Exchange Fund. The Exchange Fund shall not be used for any other purpose, except
as provided in this Agreement, or as otherwise agreed to by Parent, the
Subsidiary and the Company prior to the Effective Date.
(b) As soon as practicable after the Effective Date, the Exchange Agent
shall mail and otherwise make available to each record holder (other than
holders of Dissenting Shares) who, as of the Effective Date, was a holder of an
outstanding certificate or certificates which immediately prior to the Effective
Date represented shares of Company Common Stock (the "Certificates"), a form of
letter of transmittal and instructions for use in effecting the surrender of the
Certificates for payment therefor and conversion thereof, which letter of
transmittal shall comply with all applicable rules of the NYSE. Delivery shall
be effected, and risk of loss and title to the Certificates shall pass, only
upon proper delivery of the Certificates to the Exchange Agent and the form of
letter of transmittal shall so reflect. Upon surrender to the Exchange Agent of
a Certificate, together with such letter of transmittal duly executed, the
holder of such Certificate shall be entitled to receive in exchange therefor (i)
one or more certificates as requested by the holder (properly issued, executed
and countersigned, as appropriate) representing that number of whole shares of
Parent Common Stock to which such holder of Company Common Stock shall have
become entitled pursuant to the provisions of this Article 2, and (ii) as to any
fractional share, a check representing the cash consideration to which such
holder shall have become entitled pursuant to Section 2.2, and the Certificate
so surrendered shall forthwith be cancelled. No interest will be paid or accrued
on the cash payable upon surrender of the Certificates. Parent shall pay any
transfer or other taxes required by reason of the issuance of a certificate
representing shares of Parent Common Stock; provided, however, that such
certificate is issued in the name of the person in whose name the Certificate
surrendered in exchange therefor is registered; provided further, however, that
Parent shall not pay any transfer or other tax if the obligation to pay such tax
under applicable law is solely that of the shareholder or if payment of any such
tax by Parent otherwise would cause the Merger to fail to qualify as a tax free
reorganization under the Code. If any portion of the consideration to be
received pursuant to this Article 2 upon exchange of a Certificate (whether a
certificate representing shares of Parent Common Stock or a check representing
cash for a fractional share) is to be issued or paid to a person other than the
person in whose name the Certificate surrendered in exchange therefor is
registered, it shall be a condition of such issuance and payment that the
Certificate so surrendered shall be properly endorsed or otherwise in proper
form for transfer and that the person requesting such exchange shall pay in
advance any transfer or other taxes required by reason of the issuance of a
certificate representing shares of Parent Common Stock or a check representing
cash for a fractional share to such other person, or establish to the
satisfaction of the Exchange Agent that such tax has been paid or that no such
tax is applicable. From the Effective Date until surrender in accordance with
the provisions of this Section 2.5, each Certificate (other than Certificates
representing treasury shares of the Company and Certificates representing
Dissenting Shares) shall represent for all purposes only the right to receive
the consideration provided in Sections 2.1 and 2.2. No dividends that are
otherwise payable on the Parent Common Stock will be paid to persons entitled to
receive Parent Common Stock until such persons surrender their Certificates.
After such surrender, there shall be paid to the person in whose name the Parent
Common Stock shall be issued any dividends on such Parent Common Stock that
shall have a record date on or after the Effective Date and prior to such
surrender. If the payment date for any such dividend is after the date of such
surrender, such payment shall be made on such payment date. In no event shall
the persons entitled to receive such dividends be entitled to receive interest
on such dividends. All payments in respect of shares of Company Common Stock
that are made in accordance with the terms hereof shall be deemed to have been
made in full satisfaction of all rights pertaining to such securities.
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(c) In the case of any lost, mislaid, stolen or destroyed Certificates, the
holder thereof may be required, as a condition precedent to the delivery to such
holder of the consideration described in this Article 2, to deliver to Parent a
bond in such reasonable sum as Parent may direct as indemnity against any claim
that may be made against the Exchange Agent, Parent or the Surviving Corporation
with respect to the Certificate alleged to have been lost, mislaid, stolen or
destroyed.
(d) After the Effective Date, there shall be no transfers on the stock
transfer books of the Surviving Corporation of the shares of Company Common
Stock that were outstanding immediately prior to the Effective Date. If, after
the Effective Date, Certificates are presented to the Surviving Corporation for
transfer, they shall be cancelled and exchanged for the consideration described
in this Article 2.
(e) Any portion of the Exchange Fund that remains unclaimed by the
shareholders of the Company for six months after the Effective Date shall be
returned to the Parent, upon demand, and any holder of Company Common Stock who
has not theretofore complied with Section 2.5(b) shall thereafter look only to
Parent for issuance of the number of shares of Parent Common Stock and other
consideration to which such holder has become entitled pursuant to this Article
2; provided, however, that neither the Exchange Agent nor any party hereto shall
be liable to a holder of shares of Company Common Stock for any amount required
to be paid to a public official pursuant to any applicable abandoned property,
escheat or similar law.
2.6. ADJUSTMENT. If, between the date of this Agreement and the Closing
Date or the Effective Date, as the case may be, (i) the outstanding shares of
Company Common Stock or Parent Common Stock shall have been changed into a
different number of shares or a different class by reason of any classification,
recapitalization, split-up, combination, exchange of shares, or readjustment or
a stock dividend thereon shall be declared with a record date within such period
or (ii) the Company shall have issued additional shares of Company Common Stock
(other than upon the exercise of the Options or Warrants or the conversion of
the Debentures), or options or warrants to purchase the same, or securities
convertible into the same, the number of shares of Parent Common Stock issued
pursuant to the Merger shall be adjusted to accurately reflect such change (it
being acknowledged that the Company elsewhere herein covenants not to take any
of the actions described in (i) or (ii) above).
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth on the Company's Disclosure Schedule as such Disclosure
Schedule may be amended or supplemented from time to time within the 20-day
period commencing on the date hereof, the Company hereby represents and warrants
to Parent and Subsidiary as follows:
3.1. ORGANIZATION AND GOOD STANDING OF THE COMPANY. Each of the Company
and the "Company Subsidiaries" (as defined in Section 3.2) is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation.
3.2. CAPITAL STOCK OF COMPANY SUBSIDIARIES AND OTHER OWNERSHIP
INTERESTS. The Company's Disclosure Schedule sets forth a true and complete
list of all corporations, partnerships and other entities in which the Company
owns any equity interest (the "Company Subsidiaries"), the jurisdiction in which
each Company Subsidiary is incorporated or organized, and all shares of capital
stock or other ownership interests authorized, issued and outstanding of each
Company Subsidiary. The shares of capital stock or other equity interests of
each Company Subsidiary have been duly authorized and are validly issued, fully
paid and nonassessable. All shares of capital stock or other equity interests of
each Company Subsidiary owned by the Company or any of its subsidiaries are set
forth on the Company's Disclosure Schedule and are owned by the Company, either
directly or indirectly, free and clear of all liens, encumbrances, equities or
claims.
3.3. FOREIGN QUALIFICATION. The Company and each of the Company
Subsidiaries are duly qualified or licensed to do business and are in good
standing as a foreign corporation in every
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jurisdiction where the failure so to qualify could have a material adverse
effect on the business, operations, assets or financial condition of the Company
and the Company Subsidiaries taken as a whole. The Company's Disclosure Schedule
contains a true and correct list of all jurisdictions in which the Company and
each of the Company Subsidiaries are qualified to do business as a foreign
corporation.
3.4. CORPORATE POWER AND AUTHORITY. Each of the Company and the Company
Subsidiaries has the corporate power and authority and all material licenses and
permits required by governmental authorities to own, lease and operate its
properties and assets and to carry on its business as currently being conducted.
The Company has the corporate power and authority to execute and deliver this
Agreement and, subject to the approval of this Agreement and the Merger by its
shareholders, to perform its obligations under this Agreement and the other
documents executed or to be executed by the Company in connection with this
Agreement and to consummate the Merger.
3.5. BINDING EFFECT. This Agreement and the other documents executed or to
be executed by the Company in connection with this Agreement have been or will
have been duly executed and delivered by the Company and are or will be, when
executed and delivered, the legal, valid and binding obligations of the Company
enforceable in accordance with their terms except that:
(a) enforceability may be limited by bankruptcy, insolvency or other
similar laws affecting creditors' rights;
(b) the availability of equitable remedies may be limited by equitable
principles of general applicability; and
(c) rights to indemnification may be limited by considerations of public
policy.
3.6. ABSENCE OF RESTRICTIONS AND CONFLICTS. Subject only to the approval
of the adoption of this Agreement and the Merger by the Company's shareholders,
the execution, delivery and performance of this Agreement, the consummation of
the Merger and the other transactions contemplated by this Agreement and the
fulfillment of and compliance with the terms and conditions of this Agreement do
not and will not, with the passing of time or the giving of notice or both,
violate or conflict with, constitute a breach of or default under, result in the
loss of any material benefit under, or permit the acceleration of any obligation
under, (i) any term or provision of the Articles or Certificate of Incorporation
or Bylaws of the Company or any Company Subsidiary, (ii) any "Material Contract"
(as defined in Section 3.16), (iii) any judgment, decree or order of any court
or governmental authority or agency to which the Company or any Company
Subsidiary is a party or by which the Company, any Company Subsidiary or any of
their respective properties is bound, or (iv) any statute, law, regulation or
rule applicable to the Company or any Company Subsidiary. Except for compliance
with the applicable requirements of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 (the "HSR Act"), the Securities Act, the Securities and Exchange Act
of 1934, as amended (the "Exchange Act"), and applicable state securities laws
and liquor control laws, no consent, approval, order or authorization of, or
registration, declaration or filing with, any governmental agency or public or
regulatory unit, agency, body or authority with respect to the Company or any of
the Company Subsidiaries is required in connection with the execution, delivery
or performance of this Agreement by the Company or the consummation of the
transactions contemplated hereby and the ownership and operation by the Company
of its business and properties after the Effective Date in substantially the
same manner as now owned and operated.
3.7. CAPITALIZATION OF THE COMPANY.
(a) The authorized capital stock of the Company consists of 10,000,000
shares of common stock, $.02 par value and 1,000,000 shares of preferred stock,
$.01 par value. As of the date hereof, there were (i) 3,209,169 shares of
Company Common Stock issued and outstanding and no shares of the Company's
preferred stock outstanding, (ii) 376,250 shares of Company Stock reserved for
issuance upon the exercise of outstanding options granted under the Stock Option
Plan, (iii) 32,292 shares authorized for issuance upon the exercise of the
Warrants, (iv) 150,000 shares reserved for issuance upon
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the conversion of the Debentures and (v) 1,066,383 shares of common stock held
in the Company's treasury. All of the issued and outstanding shares of Company
Common Stock have been duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights.
(b) To the Company's knowledge, there are no voting trusts, shareholder
agreements or other voting arrangements by the shareholders of the Company.
(c) Except as set forth in subsection (a) above, there is no outstanding
subscription, contract, convertible or exchangeable security, option, warrant,
call or other right obligating the Company or any of the Company Subsidiaries to
issue, sell, exchange, or otherwise dispose of, or to purchase, redeem or
otherwise acquire, shares of, or securities convertible into or exchangeable
for, capital stock of the Company or the Company Subsidiaries.
3.8 COMPANY SEC REPORTS. The Company has made available to Parent and the
Subsidiary (i) the Company's Annual Reports on Form 10-K, including all exhibits
filed thereto and items incorporated therein by reference, (ii) the Company's
Quarterly Reports on Form 10-Q, including all exhibits thereto and items
incorporated therein by reference, (ii) proxy statements relating to the
Company's meetings of shareholders and (iv) all other reports or registration
statements (as amended or supplemented prior to the date hereof), filed by the
Company with the Securities and Exchange Commission (the "SEC") since June 30,
1992, including all exhibits thereto and items incorporated therein by reference
(items (i) through (iv) being referred to as the "Company SEC Reports"). As of
their respective dates, the Company SEC Reports did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Since June 30, 1992,
the Company has filed all material forms, reports and documents with the SEC
required to be filed by it pursuant to the federal securities laws and the SEC
rules and regulations thereunder, each of which complied as to form, at the time
such form, report or document was filed, in all material respects with the
applicable requirements of the Securities Act and the Exchange Act and the
applicable rules and regulations thereunder.
3.9. FINANCIAL STATEMENTS AND RECORDS OF THE COMPANY. The Company has made
available to Parent and the Subsidiary true, correct and complete copies of the
following financial statements (the "Company Financial Statements"):
(a) the consolidated balance sheets of the Company and the Company
Subsidiaries as of December 28, 1992 and December 30, 1991 and the
consolidated statements of income, shareholders' equity and cash flows for
the fiscal years then ended, including the notes thereto, in each case
examined by and accompanied by the report of Coopers & Lybrand; and
(b) the unaudited balance sheet of the Company as of September 6, 1993
(the "Company Balance Sheet"), with any notes thereto, and the related
unaudited statement of income for the 36-week period then ended.
The Company Financial Statements have been prepared from, and are in accordance
with, the books and records of the Company and the Company Subsidiaries and
present fairly, in all material respects, the assets, liabilities and financial
position of the Company as of the dates thereof and the results of operations
and changes in financial position thereof for the periods then ended, in each
case in conformity with generally accepted accounting principles, consistently
applied, except as noted therein. Since December 28, 1992, there has been no
change in accounting principles applicable to, or methods of accounting utilized
by, the Company, except as noted in the Company Financial Statements. The books
and records of the Company have been and are being maintained in accordance with
good business practice, reflect only valid transactions, are complete and
correct in all material respects, and present fairly in all material respects
the basis for the financial position and results of operations of the Company
set forth in the Company Financial Statements.
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3.10. ABSENCE OF CERTAIN CHANGES. Since September 6, 1993 and except as
otherwise set forth on the Company's Disclosure Schedule, the Company and the
Company Subsidiaries have not (except as may result from the transactions
contemplated by this Agreement):
(a) suffered any material adverse change in the business, results of
operations, working capital, assets, liabilities or condition (financial or
otherwise) or the manner of conducting the business of the Company and the
Company Subsidiaries taken as a whole;
(b) suffered any damage or destruction to or loss of the assets of the
Company or any Company Subsidiary, whether or not covered by insurance,
which property or assets are material to the operations or business of the
Company and the Company Subsidiaries taken as a whole;
(c) forgiven, compromised, canceled, released, waived or permitted to
lapse any material rights or claims (except as set forth on the Company's
Disclosure Schedule);
(d) entered into or terminated any material agreement, commitment or
transaction, or agreed or made any changes in material leases or agreements,
other than renewals or extensions thereof and leases, agreements,
transactions and commitments entered into in the ordinary course of
business;
(e) written up, written down or written off the book value of any
material amount of assets;
(f) declared, paid or set aside for payment any dividend or distribution
with respect to the Company's capital stock;
(g) redeemed, purchased or otherwise acquired, or sold, granted or
otherwise disposed of, directly or indirectly, any of the Company's capital
stock or securities (other than shares issued upon exercise of the Options
or the Warrants or upon conversion of the Debentures) or any rights to
acquire such capital stock or securities, or agreed to changes in the terms
and conditions of any such rights outstanding as of the date of this
Agreement;
(h) increased the compensation of or paid any bonuses to any employees
or contributed to any employee benefit plan, other than in accordance with
established policies, practices or requirements and except as provided in
Section 7.1 hereof;
(i) entered into any employment, consulting, compensation or collective
bargaining agreement with any person or group;
(j) entered into, adopted or amended any employee benefit plan;
(k) entered into any transaction other than in the ordinary course of
business; or
(l) entered into any agreement to do any of the foregoing.
3.11. NO MATERIAL UNDISCLOSED LIABILITIES. There are no liabilities or
obligations of the Company or the Company Subsidiaries of any nature, whether
absolute, accrued, contingent, or otherwise, other than:
(a) the liabilities and obligations that are fully reflected, accrued,
or reserved against on the Company Balance Sheet, for which the reserves are
appropriate and reasonable, or incurred in the ordinary course of business
and consistent with past practices since September 6, 1993;
(b) liabilities or obligations not required to be disclosed in financial
statements prepared in accordance with generally accepted accounting
principles; or
(c) liabilities which in the aggregate are not material to the business
and operations of the Company and the Company Subsidiaries taken as a whole.
3.12. TAX RETURNS; TAXES. Each of the Company and the Company Subsidiaries
have duly filed all federal, state, county, local and foreign tax returns and
reports required to be filed by it, including those with respect to income,
payroll, property, withholding, social security, unemployment, franchise, excise
and sales taxes and all such returns and reports are true and correct in all
material respects;
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have either paid in full all taxes that have become due as reflected on any
return or report and any interest and penalties with respect thereto or have
fully accrued on its books or have established adequate reserves for all taxes
payable but not yet due; and have made cash deposits with appropriate
governmental authorities representing estimated payments of taxes, including
income taxes and employee withholding tax obligations. No extension or waiver of
any statute of limitations or time within which to file any return has been
granted to or requested by the Company or the Company Subsidiaries with respect
to any tax. No unsatisfied deficiency, delinquency or default for any tax,
assessment or governmental charge has been claimed, proposed or assessed against
the Company or the Company Subsidiaries, nor has the Company or the Company
Subsidiaries received notice of any such deficiency, delinquency or default. The
Company and the Company Subsidiaries have no material tax liabilities other than
those reflected on the Company Balance Sheet and those arising in the ordinary
course of business since the date thereof. The Company will make available to
Parent true, complete and correct copies of the Company's consolidated federal
tax returns for the last five years and make available such other tax returns
requested by Parent.
3.13. TITLE TO PROPERTIES.
(a) The Company and the Company Subsidiaries have good and marketable title
to or valid leasehold interests in their respective properties (the "Real
Estate") reflected on the Company Balance Sheet or acquired after the date
thereof (other than personal properties sold or otherwise disposed of in the
ordinary course of business), and all of such properties and all assets
purchased by the Company since the date of the Company Balance Sheet are free
and clear of any lien, claim or encumbrance, except as reflected in the Company
Balance Sheet or notes thereto and except for:
(i) liens for taxes, assessments or other governmental charges not yet
due and payable or the validity of which are being contested in good faith
by appropriate proceedings;
(ii) statutory liens incurred in the ordinary course of business that
are not yet due and payable or the validity of which are being contested in
good faith by appropriate proceedings;
(iii) landlord liens contained in leases entered in the ordinary course
of business; and
(iv) other liens, claims or encumbrances that, in the aggregate, do not
materially subtract from the value of, or materially interfere with, the
present use of, the Real Estate.
Except for those assets acquired since the date of the Company Balance Sheet,
all properties and assets material to the present operations of the Company are
owned or leased by the Company and are reflected on the Company Balance Sheet
and notes thereto in the manner and to the extent required by generally accepted
accounting principles.
(b) (i) Applicable zoning ordinances permit the operation of an On the
Border restaurant at the Real Estate; (ii) the Company has all easements and
rights, including easements for all utilities, services, roadways and other
means of ingress and egress, necessary to operate such a restaurant; (iii) the
Real Estate is not located within a flood or lakeshore erosion hazard area; and
(iv) neither the whole nor any portion of the Real Estate has been condemned,
requisitioned or otherwise taken by any public authority, and no notice of any
such condemnation, requisition or taking has been received; except in each case
where the failure of such provisions to be true and correct would not have a
material adverse effect on the business and operations of the Company. No such
condemnation, requisition or taking is threatened or contemplated to the
Company's knowledge, and there are no pending public improvements which may
result in special assessments against or which may otherwise materially and
adversely affect the Real Estate. To the knowledge of the Company, the Real
Estate has not been used for deposit or disposal of hazardous wastes or
substances in violation of any past or current law in any material respect and
there is no material liability under past or current law with respect to any
hazardous wastes or substances which have been deposited or disposed of on or in
the Real Estate.
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(c) The Company has received no notice of, and has no actual knowledge of,
any material violation of any zoning, building, health, fire, water use or
similar statute, ordinance, law, regulation or code in connection with the Real
Estate.
(d) To the knowledge of the Company, no hazardous or toxic material (as
hereinafter defined) exists in any structure located on, or exists on or under
the surface of, the Real Estate which is, in any case, in material violation of
applicable environmental law. For purposes of this Section, "hazardous or toxic
material" shall mean waste, substance, materials, smoke, gas or particulate
matter designated as hazardous, toxic or dangerous under any environmental law.
For purposes of this Section, "environmental law" shall include the
Comprehensive Environmental Response Compensation and Liability Act, the Clean
Air Act, the Clean Water Act and any other applicable federal, state or local
environmental, health or safety law, rule or regulation relating to or imposing
liability or standards concerning or in connection with hazardous, toxic or
dangerous waste, substance, materials, smoke, gas or particulate matter. The
Company has delivered or will deliver to the Purchaser a true and correct copy
of any environmental assessment of the Real Estate.
3.14. CONDITION OF TANGIBLE ASSETS. The tangible assets of the Company and
the Company Subsidiaries that are material to the business and operations of the
Company and the Company Subsidiaries taken as a whole are in good condition and
repair, subject only to ordinary wear and tear, and are adequate for the uses to
which they are being put or would be put in the ordinary course of their
businesses.
3.15 INTELLECTUAL PROPERTY. Set forth on the Company's Disclosure Schedule
are the permits, licenses and registrations to use the trade or service marks,
copyrights, patents, recipes (including but not limited to current recipes in
use, previously developed recipes not currently in use and recipes currently
under development, in each case to the extent the same exist), processes,
operational manuals, techniques and similar property (including applications
therefor) described thereon (collectively, the "Proprietary Assets"). The
Company and the Company Subsidiaries own all of the Proprietary Assets necessary
to operate their respective businesses except as otherwise noted on the
Company's Disclosure Schedule. The Company and the Company Subsidiaries have the
right to use the Proprietary Assets and the On the Border concept without
infringing or violating the rights of any other person. No claim has been
asserted by any person challenging the validity of the Proprietary Assets or the
use thereof by the Company. The Proprietary Assets used by the Company and the
Company Subsidiaries in their operations may continue to be so used without the
consent of, or payment of consideration to, any other person.
3.16. MATERIAL CONTRACTS. The Company's Disclosure Schedule contains a
complete and accurate lists of all of the following categories of contracts and
commitments, including summaries of oral contracts (collectively, the "Material
Contracts"), to which the Company or any of the Company Subsidiaries are a party
or bound:
(a) contracts or commitments which have been made by the Company or the
Company Subsidiaries granting any person any right to develop, franchise,
license, own, manage or operate the Company's restaurants currently existing
or under development;
(b) contracts with any labor union; employee benefit plans or contracts;
and employment, consulting, or similar contracts, including confidentiality
agreements;
(c) leases, whether as lessor or lessee; loan agreements, mortgages,
indentures, instruments of indebtedness, or commitments in each case
involving indebtedness for borrowed money or money loaned to others in
excess of $25,000; agreements, instruments and documents relating to the
purchase of real estate; and guaranty or suretyship, performance bond,
indemnification, or contribution agreements involving obligations in excess
of $25,000;
(d) contracts with suppliers that involve aggregate payments by the
Company of more than $75,000 or which cannot be terminated without penalty
with 30 days' prior notice; and marketing agreements;
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(e) insurance policies; and
(f) other material contracts not made in the ordinary course of business
or that are material to the operations, business, or financial condition of
the Company.
The Company will furnish or make available accurate and complete copies of the
Material Contracts to Parent. All the Material Contracts are valid, binding and
enforceable. There is not under any of the Material Contracts any existing
breach, default or event of default by the Company or any of the Company
Subsidiaries nor event that with notice or lapse of time or both would
constitute a breach, default or event of default by the Company or any of the
Company Subsidiaries nor does the Company know of, and the Company has not
received notice of, or made a claim with respect to, any breach or default by
any other party thereto which would, severally or in the aggregate, have a
material adverse effect on the business, results of operations, assets or the
condition, financial or otherwise, of the Company and the Company Subsidiaries
taken as a whole.
3.17. LITIGATION AND GOVERNMENT CLAIMS. There is no pending suit, claim,
action or litigation, or administrative, arbitration or other proceeding or
governmental investigation or inquiry, or any pending change in any
environmental, liquor control, zoning or building laws, regulations or
ordinances against the Company or the Company Subsidiaries to which their
businesses or assets are subject which would, severally or in the aggregate,
have a material adverse effect on the business, results of operations, assets or
the condition, financial or otherwise, of the Company and the Company
Subsidiaries taken as a whole. To the knowledge of the Company, there are no
such proceedings threatened or contemplated, or any unasserted claims (whether
or not the potential claimant may be aware of the claim) of any nature that
might be asserted against the Company or the Company Subsidiaries which would,
severally or in the aggregate, have a material adverse effect on the business,
results of operations, assets or the condition, financial or otherwise, of the
Company and the Company Subsidiaries taken as a whole. Neither the Company nor
the Company Subsidiary is subject to any judgment, decree, injunction, rule or
order of any court, or, to the knowledge of the Company, any governmental
restriction applicable to the Company or any Company Subsidiary which is
reasonably likely (i) to have a material adverse effect on the assets,
liabilities, results of operations, financial condition, business or prospects
of the Company and the Company Subsidiaries taken as a whole or (ii) to cause a
material limitation on Parent's ability to operate the business of the Company
after the Closing.
3.18. INSURANCE. The Company's Disclosure Schedule contains a true and
complete list of its current insurance coverages, including names of carriers
and amounts of coverage. The Company and the Company Subsidiaries have been and
are insured by financially sound and reputable insurers with respect to its
properties and the conduct of their business in such amounts and against such
risks as are reasonable in relation to their respective businesses, and they
will maintain such insurance at least through the Effective Date.
3.19. COMPLIANCE WITH LAWS. The Company and the Company Subsidiaries each
have all material authorizations, approvals, licenses and orders to carry on
their respective businesses as they are now being conducted, to own or hold
under lease the properties and assets they own or hold under lease and to
perform all of their obligations under the agreements to which they are a party.
The Company and the Company Subsidiaries have been and are, to the knowledge of
the Company, in compliance with all applicable laws, regulations and
administrative orders of any country, state or municipality or of any
subdivision of any thereof to which their respective businesses and their
employment of labor or their use or occupancy of properties or any part hereof
are subject, the failure to obtain or the violation of which would have a
material adverse effect upon the assets, liabilities, results of operations,
financial condition, business or prospects of the Company and the Company
Subsidiaries taken as whole.
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3.20. EMPLOYEE BENEFIT PLANS.
(a) Neither the Company, any of the Company Subsidiaries nor any other
corporation or trade or business under common control with the Company (an
"ERISA Affiliate") as determined under section 414(b), (c) or (m) of the
Code, sponsors, maintains or otherwise is a party to, or is in material
default under, or has any accrued obligations under any "employee welfare
benefit plan" within the meaning of section 3(1) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") or any "employee pension
benefit plan" within the meaning of section 3(2) of ERISA, (such plans being
hereinafter referred to collectively as the "ERISA Plans"), or any other
employee benefit or insurance plan, agreement or arrangement ("Other Plans"
and, together with ERISA Plans, the "Plans"). Except as required by law,
neither the Company, the Company Subsidiaries nor any ERISA Affiliate has
any commitment to create any additional Plan or modify or change any
existing Plan that would affect any present or former employee of the
Company or the Company Subsidiaries, or such present or former employee's
dependents or beneficiaries.
(b) Neither the Company, the Company Subsidiaries nor any ERISA
Affiliate has ever sponsored, adopted, maintained or been obligated to
contribute to a single employer, multiple employer or multi-employer defined
benefit pension plan which is or ever was subject to the provisions of Title
IV of ERISA.
(c) Neither the Company, the Company Subsidiaries nor any ERISA
Affiliate has ever sponsored, adopted, maintained or been obligated to
contribute to an ERISA Plan which is or ever was subject to the minimum
funding standards of section 302 of ERISA and section 412 of the Code, and
the Company, the Company Subsidiaries and the ERISA affiliates have made all
required contributions to all Plans and no accumulated funding deficiencies
exist with respect to any Plan.
(d) Each of the Plans has been maintained and administered in all
material respects in accordance with all applicable laws, including but not
limited to, the Age Discrimination in Employment Act, as amended, Title X of
the Consolidated Omnibus Budget Reconciliation Act of 1986, as amended
("COBRA"), ERISA, the Americans with Disabilities Act and the Code. All
reports required by any governmental agency with respect to each of the
Plans have been timely filed.
(e) Each of the Plans which is intended to be "qualified" within the
meaning of section 401(a) of the Code is so qualified, both as to form and
operation, other than amendments retroactively effective to bring the Plans
into compliance with the Code, the time for which not having yet expired,
and all necessary governmental approvals, including a favorable
determination as to the qualification under the Code of each of the Plans
and each amendment thereto, have been obtained.
(f) The Company and the Company Subsidiaries are not now, and have not
been, a part of (i) a controlled group of corporations within the meaning of
section 414(b) of the Code, or (ii) a group of trades or business under
common control within the meaning of section 414(c) of the Code.
(g) Neither the Company, the Company Subsidiaries nor any ERISA
Affiliate has provided or is obligated to provide any post-retirement
medical benefits to any present or former employee of the Company, the
Company Subsidiaries or an ERISA Affiliate, or such present or former
employee's dependents or beneficiaries except to the extent required by
COBRA.
(h) With respect to each Plan that is funded wholly or partially through
an insurance policy, there will be no liability of Parent or Company, as of
the Effective Date, under any such insurance policy or ancillary agreement
with respect to such insurance.
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(i) There are no pending and, to the best knowledge of the Company,
there are no threatened or anticipated, claims with respect to any of the
Plans by any employee or beneficiary covered under any such Plan (other than
routine claims for benefits).
(j) A true and complete copy of each Plan will be furnished or made
available to Parent together with the most recent favorable determination
letter, if any, with respect thereto, the Summary Plan Description relating
to each ERISA Plan, and the two most recent annual reports (on Form 5500
series) required to be filed with respect thereto.
(k) No event has occurred or, to the knowledge of the Company, is
threatened or about to occur that would constitute a reportable event within
the meaning of Section 4043(b) of ERISA, and no notice of termination has
been filed by a plan administrator pursuant to Section 4041 of ERISA or
issued by the Pension Benefit Guaranty Corporation pursuant to Section 4042
of ERISA with respect to any ERISA Plan, and no "prohibited transaction" as
defined in Section 406 of ERISA or Section 4975 of the Code has occurred
with respect to the Plans, excluding transactions effected pursuant to
statutory or administrative exemption.
(l) No condition exists which would justify the attachment of any
material liens to the assets of the Company, the Company Subsidiaries or
after the Effective Date the Parent as a result of the funding or
administration of any Plans.
3.21. LABOR RELATIONS. Each of the Company and the Company Subsidiaries is
in compliance in all material respects with all federal and state laws
respecting employment and employment practices, terms and conditions of
employment, wages and hours, and is not engaged in any unfair labor or unlawful
employment practice. There is no unlawful employment practice discrimination
charge pending before the EEOC or EEOC recognized state "referral agency." There
is no unfair labor practice charge or complaint against the Company or any of
the Company Subsidiaries pending before the National Labor Review Board. There
is no labor strike, dispute, slowdown or stoppage actually pending or, to the
knowledge of the Company, threatened against or involving or affecting the
Company or any of the Company Subsidiaries and no National Labor Review Board
representation question exists respecting their respective employees. No
grievances or arbitration proceeding is pending and no written claim therefor
exists. There is no collective bargaining agreement that is binding on the
Company or any of the Company Subsidiaries.
3.22. BROKERS AND FINDERS. None of the Company, the Company Subsidiaries
or, to the Company's knowledge, any of their respective officers, directors and
employees has employed any broker, finder or investment bank or incurred any
liability for any investment banking fees, financial advisory fees, brokerage
fees or finders' fees in connection with the transactions contemplated hereby,
except that the Company has engaged Armata Partners.
3.23. ACCURACY OF INFORMATION FURNISHED. No representation or warranty in
this Agreement nor any information relating to the Company and the Company
Subsidiaries which is delivered by the Company to Parent contains or will
contain any untrue statement of a material fact or omits to state any material
fact necessary to make the statements herein or therein, in light of the
circumstances under which they were made, not false or misleading. The Company
has disclosed, or will disclose in the Company's Disclosure Schedule, to Parent
all facts known to it that are material to the business, operations, financial
condition or prospects of the Company and the Company Subsidiaries taken as a
whole.
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ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUBSIDIARY
Parent and Subsidiary represents and warrants to the Company as follows:
4.1. ORGANIZATION AND GOOD STANDING OF PARENT. Each of Parent and
Subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation.
4.2. FOREIGN QUALIFICATION. Parent is duly qualified or licensed to do
business and in good standing as a foreign corporation in every jurisdiction
where the failure so to qualify could have a material adverse effect on its
business, operations, assets, or financial condition.
4.3. POWER AND AUTHORITY. Each of Parent and Subsidiary has the corporate
power and authority and all licenses and permits required by governmental
authorities to own, lease, and operate its properties and assets and to carry on
its business as currently being conducted.
4.4. CORPORATE AUTHORITY AND VALIDITY. Each of Parent and Subsidiary has
the corporate power and authority to execute, deliver, and perform its
obligations under this Agreement and the other documents executed or to be
executed by Parent or Subsidiary in connection with this Agreement and to
consummate the Merger. The execution, delivery, and performance by Parent and
Subsidiary of this Agreement and the other documents executed or to be executed
by Parent or Subsidiary, as applicable, in connection with this Agreement have
been duly authorized by all necessary corporate action.
4.5. BINDING EFFECT. This Agreement and the other documents executed or to
be executed by Parent and Subsidiary in connection with this Agreement have been
or will have been duly executed and delivered by Parent and Subsidiary and are
or will be, when executed and delivered, the legal, valid, and binding
obligations of Parent and Subsidiary, enforceable in accordance with their terms
except that:
(a) enforceability may be limited by bankruptcy, insolvency, or other
similar laws affecting creditors' rights;
(b) the availability of equitable remedies may be limited by equitable
principles of general applicability; and
(c) rights to indemnification may be limited by considerations of public
policy.
4.6. COMPLIANCE WITH OTHER INSTRUMENTS. Neither the execution and delivery
by Parent or Subsidiary of this Agreement nor the consummation by them of the
transactions contemplated hereby will violate, breach, be in conflict with, or
constitute a default under, or permit the termination or the acceleration of
maturity of, or result in the imposition of any lien, claim, or encumbrance upon
any property or asset of Parent or Subsidiary pursuant to, the Certificate or
Articles of Incorporation or Bylaws of Parent or Subsidiary, or any note, bond,
indenture, mortgage, deed of trust, evidence of indebtedness, loan or lease
agreement, other agreement or instrument, judgment, order, injunction, or decree
by which Parent or Subsidiary is bound, to which they are a party, or to which
their assets are subject.
4.7. CAPITALIZATION OF PARENT. The authorized capital stock of Parent
consists of 100,000,000 shares of Parent Common Stock, $0.10 par value, and
1,000,000 shares of Preferred Stock, $1.00 par value, of which 69,206,884 shares
of Parent Common Stock and no shares of Preferred Stock were issued and
outstanding as of December 31, 1993. All of the issued and outstanding shares of
Parent Common Stock have been duly authorized and validly issued and are fully
paid and nonassessable. The shares of Parent Common Stock to be issued at the
Closing, when issued and delivered, will be duly authorized, validly issued,
fully paid and nonassessable.
4.8. SEC REPORTS. Parent has furnished to the Company true and complete
copies of its Annual Report on Form 10-K for the year ended June 30, 1993, its
proxy statement for its 1993 annual
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meeting of shareholders, and its report on Form 10-Q for the 13-week period
ended September 29, 1993. Such documents did not, on the date of filing in the
case of such reports, or on the date of mailing in the case of a proxy
statement, contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Parent has filed all material documents required to be filed by it
with the SEC and all such documents complied as to form with the applicable
requirements of law. All financial statements and schedules included in the
documents referred to in this Section 4.8 were prepared in accordance with
generally accepted accounting principles, applied on a consistent basis except
as noted therein, and fairly present the information purported to be shown
therein.
4.9. LITIGATION AND GOVERNMENT CLAIMS. There is no pending suit, claim,
action or litigation, or administrative, arbitration or other proceeding or
governmental investigation or inquiry against Parent which would, severally or
in the aggregate, have a material adverse effect on the business, results of
operations, assets or the condition, financial or otherwise, of Parent and its
subsidiaries, taken as a whole. There are no such proceedings threatened or, to
the knowledge of Parent, contemplated, or any unasserted claims (whether or not
the potential claimant may be aware of the claim), which might, severally or in
the aggregate have a material adverse effect on the business, results of
operations, assets or the condition, financial or otherwise, of Parent and its
subsidiaries, taken as a whole.
4.10. NECESSARY APPROVALS AND CONSENTS. Except for compliance with the
applicable requirements of the HSR Act, the Securities Act, the Exchange Act and
applicable state securities laws and liquor control laws, no authorization,
consent, permit, or license or approval of, or declaration, registration, or
filing with, any person or governmental or regulatory authority or agency is
necessary for the execution and delivery by Parent of this Agreement and the
other agreements executed or to be executed by it in connection with this
Agreement and the consummation by Parent of the transactions contemplated by
this Agreement.
4.11. BROKERS AND FINDERS. None of the Parent and the Subsidiary or, to
the Parent's and the Subsidiary's knowledge, any of their respective officers,
directors and employees has employed any broker, finder or investment bank or
incurred any liability for any investment banking fees, financial advisory fees,
brokerage fees or finders' fees in connection with the transactions contemplated
hereby, except that the Parent has engaged Montgomery Securities.
4.12. NO MATERIAL UNDISCLOSED LIABILITIES. There are no liabilities or
obligations of Parent or the Subsidiary of any nature, whether absolute,
accrued, contingent, or otherwise, other than:
(a) the liabilities and obligations that are fully reflected, accrued,
or reserved against on Parent's balance sheet dated September 29, 1993, for
which the reserves are appropriate and reasonable, or incurred in the
ordinary course of business and consistent with past practices since
September 29, 1993;
(b) liabilities or obligations not required to be disclosed in financial
statements prepared in accordance with generally accepted accounting
principles; or
(c) liabilities which in the aggregate are not material to the business
and operations of Parent.
4.13. ACCURACY OF INFORMATION FURNISHED. No representation or warranty in
this Agreement nor any information relating to Parent and the Subsidiary which
is delivered by Parent to the Company contains or will contain any untrue
statement of a material fact or omits to state any material fact necessary to
make the statements herein or therein, in light of the circumstances under which
they were made, not false or misleading. Parent has disclosed to the Company all
facts known to it that are material to the business, operations, financial
condition or prospects of the Parent.
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ARTICLE 5.
JOINT COVENANTS OF THE COMPANY AND PARENT
The Company and Parent, jointly and severally, covenant with each other as
follows:
5.1. NOTICE OF ANY MATERIAL CHANGE. Each of the Company and Parent shall,
promptly after the first notice or occurrence thereof but not later than the
Closing Date, advise the other in writing of any event or the existence of any
state of facts that:
(a) would make any of its representations and warranties in this
Agreement untrue in any material respect; or
(b) would otherwise constitute a material adverse change in the
business, results of operation, working capital, assets, liabilities or
condition (financial or otherwise) of Parent or the Company and their
respective subsidiaries, taken as a whole.
5.2. COOPERATION. Each of the parties hereto shall, and shall cause each
of its affiliates to, use its best efforts to:
(a) proceed promptly to make or give the necessary applications,
notices, requests, and filings to obtain at the earliest practicable date
and, in any event, before the Closing Date, the approvals, authorizations,
and consents necessary to consummate the transactions contemplated by this
Agreement;
(b) cooperate with and keep the other informed in connection with this
Agreement; and
(c) take such actions as the other parties may reasonably request to
consummate the transactions contemplated by this Agreement and use its best
efforts and diligently attempt to satisfy, to the extent within its control,
all conditions precedent to the obligations to close this Agreement.
5.3 ANTITRUST LAWS. As soon as practicable but in no event later than 15
days from the date hereof, each of Parent and the Company shall make any and all
filings which are required under the HSR Act. Each of Parent and the Company
will assist the other as may be reasonably requested in connection with the
preparation of such filings.
5.4 POOLING. From and after the date hereof and until the Effective Date,
neither the Parent nor the Company nor any of their respective subsidiaries or
other affiliates shall (i) knowingly take any action, or knowingly fail to take
any action, that would jeopardize the treatment of Parent's acquisition of the
Company as a "pooling of interest" for accounting purposes or (ii) knowingly
take any action, or knowingly fail to take any action, that would jeopardize
qualification of the Merger as a reorganization within the meaning of Section
368(a)(2)(E) of the Code.
5.5. REGISTRATION STATEMENT AND PROXY STATEMENT.
(a) Parent shall promptly file a registration statement on Form S-4
(which registration statement, in the form it is declared effective by the
SEC, together with any and all amendments and supplements thereto and all
information incorporated by reference therein, is referred to herein as the
"Registration Statement") under and pursuant to the provisions of the
Securities Act for the purpose of registering the Parent Common Stock to be
issued in the Merger and issuable upon conversion of the Debentures in
accordance with the provisions of this Agreement. Parent will use its best
efforts to receive and respond to the comments of the SEC, and the Company
shall promptly mail to the shareholders of the Company the proxy statement
of the Company in its definitive form contained in the Registration
Statement (the "Proxy Statement"). Such Proxy Statement shall also serve as
the prospectus to be included in the Registration Statement.
(b) Each of Parent and the Company agrees to provide as promptly as
practicable to the other such information concerning its business and
financial statements and affairs as, in the
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reasonable judgment of the other party, may be required or appropriate for
inclusion in the Registration Statement and the Proxy Statement or in any
amendments or supplements thereto, and to cause its counsel and auditors to
cooperate with the other's counsel and auditors in the preparation of the
Registration Statement and the Proxy Statement.
(c) At the time the Registration Statement becomes effective and at the
Effective Date, as such Registration Statement is then amended or
supplemented, and at the time the Proxy Statement is mailed to the Company's
shareholders, such Registration Statement and Proxy Statement will (i) not
contain any untrue statement of a material fact, or omit to state any
material fact required to be stated therein as necessary, in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading or necessary and (ii) comply in all material respects
with the provisions of the Securities Act and Exchange Act, as applicable,
and the rules and regulations thereunder; provided, however, no
representation is made by Parent or the Company with respect to statements
made in the Registration Statement and Proxy Statement based on information
supplied by the other party expressly for inclusion or incorporation by
reference in the Proxy Statement or Registration Statement or information
omitted with respect to the other party.
ARTICLE 6.
COVENANTS OF THE COMPANY
The Company covenants and agrees with Parent as follows:
6.1. ACCESS; CONFIDENTIALITY. During the period pending the Closing Date,
the Company shall afford to Parent and to Parent officers, employees,
accountants, counsel, and other authorized representatives, full access during
regular business hours to its assets, properties, books, contracts, commitments
and records and will furnish or use its best efforts to cause representatives to
furnish promptly to Parent such additional financial and operating data and
other documents and information (certified if requested and reasonably
susceptible to certification) relating to its business and properties as Parent
or its duly authorized representatives may from time to time reasonably request.
6.2. CONDUCT OF BUSINESS PRIOR TO CLOSING DATE. During the period pending
the Closing Date, the Company:
(a) shall conduct its operations in the ordinary and usual course of
business consistent with past and current practices, and shall use its best
efforts to maintain and preserve intact its business organization and
goodwill, to retain the services of its key officers and employees, and to
maintain satisfactory relationships with suppliers, distributors, and others
having business relationships with it;
(b) shall confer with one or more representatives of Parent as
reasonably requested to report material operational matters and the general
status of ongoing operations;
(c) shall notify Parent of any emergency or other change in the normal
course of the Company business and of any governmental complaints,
investigations or hearings (or communications indicating that the same may
be contemplated) if such emergency, change, complaint, investigation or
hearing would be material to the Company business or properties including,
without limitation, complaints, investigations or hearings relating to any
liquor licenses or permits held by the Company or to the transfer to or
assumption by Parent of such licenses or permits;
(d) other than pursuant to the exercise of Options or Warrants
outstanding on the date hereof or the conversion of the Debentures, not
issue, sell or grant options, warrants or rights to purchase or subscribe
to, or enter into any arrangement or contract with respect to the issuance
or sale of any of the capital stock of the Company or any of the Company
Subsidiaries or rights or obligations convertible into or exchangeable for
any shares of the capital stock of the Company or
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any of the Company Subsidiaries and not alter the terms of any presently
outstanding options or make any changes (by split-up, combination,
reorganization or otherwise) in the capital structure of the Company or any
of the Company Subsidiaries;
(e) shall not declare, pay or set aside for payment any dividend or
other distribution in respect of the capital stock or other equity
securities of the Company (other than scheduled payments with respect to the
Debentures) and not redeem, purchase or otherwise acquire any shares of the
capital stock or other securities of the Company or any of the Company
Subsidiaries or rights or obligations convertible into or exchangeable for
any shares of the capital stock or other securities of the Company and the
Company Subsidiaries;
(f) shall not enter into any development or franchise agreements, other
than agreements with its existing franchisees which are consistent with the
terms and provisions in effect as of the date hereof contained in the
Company's existing development or franchise agreements;
(g) shall not enter into any agreements, contracts or understandings
with respect to the construction, development or acquisition of any
restaurants or related properties without prior consultation with Parent;
(h) shall not settle, compromise or discharge any lawsuit, claim or
proceeding or enter into an agreement to do any of the foregoing where the
proposed settlement amount exceeds $25,000 without the written consent of
Parent (which consent shall not be unreasonably withheld or delayed); or
(i) shall not intentionally take any action that, and shall not
intentionally fail to take any action the failure to take which, would cause
or permit its representations and warranties contained in this Agreement to
be untrue in any material respect at the Closing.
6.3. SHAREHOLDER MEETING. The Company shall as soon as practicable take
all steps necessary to duly call, give notice of, convene and hold, as soon as
practicable and in any event within 40 days of clearance by the SEC of the
Registration Statement, a special meeting of its shareholders for the purpose of
adopting and approving the Merger and all actions that require the approval of
the Company's shareholders under applicable law. The Board of Directors of the
Company has determined by the unanimous vote of all of its directors that the
Merger is advisable and in the best interests of its shareholders and, to the
extent consistent with their fiduciary obligations, will unanimously recommend
to the shareholders the adoption and approval of the Merger and the transactions
contemplated hereby. The Company will use its best efforts to solicit from its
shareholders proxies in favor of approving the Merger. Without limiting the
generality of the foregoing, if, at the special meeting of the shareholders,
less than the number of shares of Company Common Stock required to duly approve
this Agreement and the Merger would be voted in favor thereof, at the request of
the Parent, the Company will adjourn the special meeting on one or more
occasions to a convenient date not later than 30 days after the original date of
the special meeting and will continue to solicit proxies until such date.
6.4. COMPANY AFFILIATES.
(a) The Company hereby represents that Frederick G. Molsen, David deN.
Franklin, Stephen D. Fenstermacher and Paul Heyd have agreed to vote all
shares of Company Common Stock held directly or indirectly by them in favor
of the adoption and approval of this Agreement and the transactions
contemplated hereby and the Company shall provide to Parent evidence of such
agreements, in form and substance reasonably satisfactory to the Parent.
(b) Each of Frederick G. Molsen, David deN. Franklin and Stephen D.
Fenstermacher (collectively, the "Affiliates") of the Company have agreed
that, until such time as financial results of Parent covering at least
thirty days of combined operations of Parent and the Company subsequent to
the Closing Date have been published, such Affiliate will not sell or
otherwise dispose of any shares of Parent Common Stock issued pursuant to
the Merger and held by him or
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his affiliates as of the Closing Date or any of such shares thereafter
acquired by him or his affiliates at any time or from time to time prior to
the date of such publication. Parent will give instructions to its transfer
agent with respect to the shares of Parent Common Stock issued pursuant to
the Merger and owned by each Affiliate (and to each other person as to whom
counsel to the Company and the Parent reasonably believes to be an
"affiliate" within the meaning of the Securities Act), to the effect that no
transfer of such shares shall be effected until the date on which the
requisite financial results have been published.
6.5. NO SOLICITATIONS. From the date hereof until the Effective Date or
until this Agreement is terminated or abandoned as provided in this Agreement,
neither the Company nor any of the Company Subsidiaries shall directly or
indirectly (i) solicit or initiate discussion with or (ii) enter into
negotiations or agreements with, or furnish any information that is not publicly
available to, any corporation, partnership, person or other entity or group
(other than Parent, an affiliate of Parent or their authorized representatives
pursuant to this Agreement) concerning any proposal for a merger, sale of
substantial assets, sale of shares of stock or securities or other takeover or
business combination transaction (the "Acquisition Proposal") involving the
Company or any of the Company Subsidiaries, and the Company will instruct its
officers, directors, advisors and its financial and legal representatives and
consultants not to take any action contrary to the foregoing provisions of this
sentence; provided, however, that the Company, its officers, directors, advisors
and its financial and legal representatives and consultants shall not be
prohibited from taking any action described in (ii) above to the extent such
action is taken by, or upon the authority of, the Board of Directors of the
Company in the exercise of good faith judgment as to its fiduciary duties to the
shareholders of the Company, which judgment is based upon the written advice of
independent, outside legal counsel that a failure of the Board of Directors of
the Company to take such action would be likely to constitute a breach of its
fiduciary duties to such shareholders. The Company will notify Parent promptly
in writing if the Company becomes aware that any inquiries or proposals are
received by, any information is requested from or any negotiations or
discussions are sought to be initiated with, the Company with respect to an
Acquisition Proposal. Each time, if any, that the Board of Directors of the
Company determines, upon written advice of such legal counsel and in the
exercise of its good faith judgment as to its fiduciary duties to shareholders,
that it must enter into negotiations with, or furnish any information that is
not publicly available to, any corporation, partnership, person or other entity
or group (other than Parent, an affiliate of Parent or their authorized
representatives) concerning any Acquisition Proposal, the Company will give
Parent prompt notice of such determination (which shall include a copy of the
written advice of such legal counsel).
ARTICLE 7.
COVENANTS OF PARENT
Parent covenants and agrees with the Company as follows:
7.1. CERTAIN ARRANGEMENTS. Parent acknowledges and consents to the
transactions contemplated by those certain letter agreements dated as of the
date hereof between the Company and each of Mr. Stephen D. Fenstermacher and Mr.
Ned R. Lidvall, executive officers of the Company, pursuant to which the Company
agreed to pay to each such officer prior to the Effective Date a bonus for
services rendered to the Company for periods prior to the Effective Date.
Promptly after the Effective Date, Parent will cause the Company to agree to pay
certain severance amounts to each such officer if his employment is terminated
during the one-year period commencing on the Effective Date, subject to certain
exceptions.
7.2. LISTING APPLICATION. Parent will file a listing application with the
NYSE to approve for listing, subject to official notice of issuance, the shares
of the Parent Common Stock to be issued in the
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Merger and shares issuable upon exercise of the Options and Warrants and
conversion of the Debentures. Parent shall use its reasonable efforts to cause
such shares of the Parent Common Stock to be issued in the Merger to be approved
for listing on the NYSE, subject to official notice of issuance, prior to the
Effective Date.
7.3. ACCESS; CONFIDENTIALITY. During the period pending the Closing Date,
the Parent shall use its best efforts to cause its representatives to furnish
promptly to the Company access to financial and operating data and other
documents and information relating to its business and properties as the Company
or its duly authorized representatives may from time to time reasonably request.
The Company shall cause all information obtained by it or its representatives
pursuant to this Agreement or in connection with the negotiation hereof to be
treated as proprietary and confidential (other than information that is a matter
of public knowledge or is already known by the Company) and shall not use in its
business or for any other purpose or disclose, or knowingly permit others to use
or disclose, any such information in a manner detrimental to Parent. If for any
reason the transactions contemplated by this Agreement are not consummated, the
Company will return all copies of written confidential information to Parent
(except for that portion which consists of analyses, compilations, forecasts,
studies or other documents prepared by the Company or its representatives, which
will be destroyed upon receipt of Parent's written request).
ARTICLE 8.
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY
Except as may be waived by the Company, the obligations of the Company to
consummate the transactions contemplated by this Agreement shall be subject to
the satisfaction on or before the Closing Date of each of the following
conditions:
8.1. COMPLIANCE. Parent shall have, or shall have caused to be, satisfied
or complied with and performed in all material respects all terms, covenants,
and conditions of this Agreement to be complied with or performed by Parent on
or before the Closing Date.
8.2. REPRESENTATIONS AND WARRANTIES. All of the representations and
warranties made by Parent in this Agreement and in all certificates and other
documents delivered by Parent to the Company pursuant hereto or in connection
with the transactions contemplated hereby, shall have been true and correct in
all material respects as of the date hereof, and shall be true and correct in
all material respects at the Closing Date with the same force and effect as if
such representations and warranties had been made at and as of the Closing Date,
except for changes permitted or contemplated by this Agreement.
8.3. OPINION. The Company shall have received the opinions of Roger F.
Thomson, Esq., Senior Vice President and General Counsel for Parent, and Crouch
& Hallett, L.L.P., special counsel for Parent, dated the Closing Date, in form
and substance reasonably satisfactory to the Company and its counsel, as to
certain matters specified in Sections 4.1 through 4.7 and 4.9 and as to certain
matters with respect to the Registration Statement
8.4. MATERIAL ADVERSE CHANGES. Subsequent to September 29, 1993, there
shall have occurred no material adverse change in the business, properties,
assets, liabilities, results of operations or condition, financial or otherwise,
of Parent and its subsidiaries, taken as a whole.
8.5. NYSE LISTING. The Parent Common Stock issuable pursuant to the Merger
and pursuant to the exercise of the Options and Warrants and the conversion of
the Debentures after the Effective Date shall have been authorized for listing
on the NYSE.
8.6. CERTIFICATES. The Company shall have received a certificate or
certificates, executed on behalf of Parent by an executive officer of Parent, to
the effect that the conditions contained in Sections 8.2 and 8.4 hereof have
been satisfied.
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8.7. SHAREHOLDER APPROVAL. This Agreement shall have been approved and
adopted by the affirmative vote of the holders of a majority of all of the
outstanding shares of Company Common Stock.
8.8. TAX OPINIONS. The Company shall have received the opinion of Crouch &
Hallett, L.L.P., special counsel for Parent, dated as of the Closing Date, in
form and substance reasonably satisfactory to the Company substantially to the
effect that, on the basis of facts and representations set forth in such opinion
consistent with the state of facts existing at the Effective Date, for federal
income tax purposes the Merger constitutes a reorganization within the meaning
of Section 368(a)(2)(E) of the Code and that no gain or loss will be recognized
by the Company's shareholders (other than those shareholders who receive cash
for Dissenting Shares) as a result of the Merger (except gain or loss will be
recognized on the receipt of cash, if any, received by Dissenting Shareholders
or in lieu of fractional shares) and the Company will not recognize gain or loss
as a result of the Merger. In rendering the opinions described in the foregoing
sentence, Crouch & Hallett, L.L.P. may rely, to the extent such counsel deems
necessary or appropriate, upon the opinions of such other counsel and upon
representations of the managements or affiliates of the Company, Parent and the
Subsidiary.
8.9. EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration Statement
shall have become effective and no stop order shall been issued by the SEC or
any other governmental authority suspending the effectiveness of the
Registration Statement or preventing or suspending the use thereof or any
related prospectus.
8.10. CONSENTS; LITIGATION. Other than the filing of Articles of Merger as
described in Article 1, all authorizations, consents, orders or approvals of, or
declarations or filings with, or expirations or terminations of waiting periods
(including the waiting period under the HSR Act) imposed by any governmental
entity, and all required third-party consents, the failure to obtain which would
have a material adverse effect on Parent and its subsidiaries, including the
Surviving Corporation and its subsidiaries, taken as a whole, shall have been
filed, occurred or been obtained. Parent shall have received all state
securities or Blue Sky permits and other authorizations necessary to issue the
Parent Common Stock pursuant to the Merger and the other terms of this
Agreement. In addition, no action, suit or proceeding shall have been instituted
before any court or other governmental entity to restrain, modify, enjoin or
prohibit the carrying out of the transactions contemplated hereby.
ARTICLE 9.
CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT
Except as may be waived by Parent, the obligations of Parent to consummate
the transactions contemplated by this Agreement shall be subject to the
satisfaction, on or before the Closing Date, of each of the following
conditions:
9.1. COMPLIANCE. The Company shall have, or shall have caused to be,
satisfied or complied with and performed in all material respects all terms,
covenants, and conditions of this Agreement to be complied with or performed by
it on or before the Closing Date.
9.2. REPRESENTATIONS AND WARRANTIES. All of the representations and
warranties made by the Company in this Agreement, the Company Disclosure
Schedule, and in all certificates and other documents delivered by the Company
pursuant hereto or in connection with the transactions contemplated hereby,
shall have been true and correct in all material respects as of the date hereof
after giving effect to the delivery of the Company's Disclosure Schedule, and
shall be true and correct in all material respects at the Closing Date with the
same force and effect as if such representations and warranties had been made at
and as of the Closing Date, except for changes permitted or contemplated by this
Agreement and except that if information which would constitute a breach of the
representations and warranties of the Company made in this Agreement is
disclosed in the Proxy Statement on the date such Proxy Statement is mailed to
the Company's shareholders, then the Parent shall be deemed to have waived this
condition to the performance of its obligations hereunder.
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9.3. OPINIONS. Parent shall have received the opinion of Gardere & Wynne,
L.L.P., counsel for the Company, dated as of the Closing Date, in form and
substance reasonably satisfactory to Parent and its counsel, as to certain
matters specified in Sections 3.1 through 3.7 and 3.17 and as to certain matters
with respect to the Proxy Statement.
9.4. DUE DILIGENCE. Parent shall have been satisfied in its sole
discretion with its due diligence review of the business, operations and records
of the Company and the Company Subsidiaries; provided, however, that if Parent
does not terminate this Agreement as a result of such due diligence review by
March 1, 1994 this condition shall be deemed to have been fulfilled.
9.5. MATERIAL ADVERSE CHANGES. Since September 6, 1993, except as set
forth in the Company's Disclosure Schedule, there shall have occurred no
material adverse change in the business, properties, assets, liabilities,
results of operations or condition, financial or otherwise, of the Company;
provided, however, if such change is disclosed in the Proxy Statement on the
date such Proxy Statement is mailed to the Company's shareholders, then Parent
shall be deemed to have waived this condition to the performance of its
obligations hereunder.
9.6. CERTIFICATES. Parent shall have received a certificate or
certificates, executed on behalf of the Company, to the effect that the
conditions in Sections 9.2 and 9.5 hereof have been satisfied.
9.7. DISSENTERS' RIGHTS. No more than 5% of the outstanding shares of the
Company Common Stock shall qualify as Dissenting Shares.
9.8. CONSENTS; LITIGATION. Other than the filing of Articles of Merger as
described in Article 1, all authorizations, consents, orders or approvals of, or
declarations or filings with, or expirations or terminations of waiting periods
(including the waiting period under the HSR Act) imposed by, any governmental
entity, and all required third-party consents, the failure to obtain which would
have a material adverse effect on Parent and its subsidiaries, including the
Surviving Corporation and its subsidiaries, taken as a whole, shall have been
filed, occurred or been obtained. Parent shall have received all state
securities or Blue Sky permits and other authorizations necessary to issue the
Parent Common Stock pursuant to the Merger and the other terms of this
Agreement. In addition, no action, suit or proceeding shall have been instituted
before any court or other governmental entity to restrain, modify, enjoin or
prohibit the carrying out of the transactions contemplated hereby.
9.9. RECEIPT OF POOLING LETTER. Parent and the Company shall have received
a comfort letter from KPMG Peat Marwick dated the Effective Date and addressed
to Parent and the Company, stating substantially to the effect that, based on
such firm's review of this Agreement and the other procedures set forth in such
letter, such firm concurs that the Merger will qualify as a pooling of interests
transaction under Opinion 16 of the Accounting Principles Board.
9.10 RECEIPT OF LETTER. Parent shall have received a letter from Coopers &
Lybrand, dated the Effective Date, to the effect that nothing came to their
attention as a result of certain specified procedures that caused them to
believe that (i) as of a specified date not more than five days prior to the
date of delivery of such letter, there have been no changes in the capital stock
of the Company (except for issuances upon the exercise of the Options or
Warrants or the conversion of the Debentures) or increases in long-term debt of
the Company and the Company Subsidiaries as compared with the amount shown in
the financial statements of the Company included in the Proxy Statement, except
for changes, increases and decreases contemplated in the Company's Disclosure
Schedule or the Proxy Statement, and (ii) from the period from the most recent
date of the financial statements of the Company included in the Proxy Statement
to such specified date, there were no decreases in revenues, income before
income taxes or net income, in each case as compared with the comparable period
of the prior year, except as described in such letter for changes, increases and
decreases contemplated in the Company's Disclosure Schedule or the Proxy
Statement.
9.11 RELEASE BY FGM CORPORATION. Parent has received evidence reasonably
satisfactory to Parent that FGM Corporation ("FGM") and all shareholders of FGM
have executed a written release of all claims and causes of action which FGM and
such shareholders may have against the Company,
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including any and all claims or causes of action as set forth in that certain
letter of January 25, 1994 form FGM to the Company, but excluding any claims or
causes of action for which Frederick Molsen ("Molsen") is entitled to
indemnification pursuant to the Bylaws of the Company, the Indemnity Agreement
between Molsen and the Company and the provisions of Article 10 of the
Agreement.
ARTICLE 10.
INDEMNIFICATION AND INSURANCE
In the event of any threatened or actual claim, action, suit, proceeding or
investigation, whether civil, criminal or administrative, including, without
limitation, any such claim, action, suit, proceeding or investigation in which
any of the present or former officers or directors (the "Managers") of the
Company or any of the Company Subsidiaries is, or is threatened to be, made a
party by reason of the fact that he or she is or was a shareholder, director,
officer, employee or agent of the Company or any of the Company Subsidiaries, or
is or was serving at the request of the Company or any of the Company
Subsidiaries as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, whether before or after
the Effective Date, the Company shall indemnify and hold harmless, and from and
after the Effective Date each of the Surviving Corporation and Parent shall
indemnify and hold harmless, as and to the full extent permitted by applicable
law (including by advancing expenses promptly as statements therefor are
received), each such Manager against any losses, claims, damages, liabilities,
costs, expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement in connection with any such claim, action, suit, proceeding or
investigation, and in the event of any such claim, action, suit proceeding or
investigation (whether arising before or after the Effective Date), (i) if the
Company (prior to the Effective Date) or the Parent or the Surviving Corporation
(after the Effective Date) have not promptly assumed the defense of such matter,
the Managers may retain counsel satisfactory to them, and the Company, or the
Surviving Corporation and Parent after the Effective Date, shall pay all fees
and expenses of such counsel for the Managers promptly, as statements therefor
are received, and (ii) the Company, or the Surviving Corporation and Parent
after the Effective Date, will use their respective best efforts to assist in
the vigorous defense of any such matter; provided that neither the Company nor
the Surviving Corporation or Parent shall be liable for any settlement effected
without its prior written consent (which consent shall not be unreasonably
withheld); and provided further that the Surviving Corporation and Parent shall
have no obligation under the foregoing provisions of this Article 10 to any
Manager when and if a court of competent jurisdiction shall ultimately
determine, and such determination shall have become final and non-appealable,
(x) that indemnification of such Manager in the manner contemplated hereby is
prohibited by applicable law, and (y) that the Company has breached a
representation or warranty hereunder with respect to the same matters for which
indemnification is being sought by such Manager and such Manager fails to prove
that such Manager had no actual knowledge of such breach at the Effective Date.
Any Manager wishing to claim indemnification under this Article 10, upon
learning of any such claim, action, suit, proceeding or investigation, shall
notify the Company and, after the Effective Date, the Surviving Corporation and
Parent, thereof (provided that the failure to give such notice shall not affect
any obligations hereunder, except to the extent that the indemnifying party is
actually and materially prejudiced thereby). Parent and Subsidiary agree that
all rights to indemnification existing in favor of the Managers as provided in
the Company's Articles of Incorporation or Bylaws as in effect or submitted for
filing as of the date hereof, and in any agreement between the Company and any
Manager with respect to matters occurring prior to the Effective Date shall
survive the Merger. The Company will use its best efforts to continue to provide
officers' and directors' liability insurance for the benefit of its current
officers and directors and such persons who have served as an officer or
director of the Company within the four-year period commencing on the date
hereof (as such persons are designated on the Company's Disclosure Schedule) for
the four-year period commencing on the Effective Date on terms consistent in
scope and amount of coverage with such insurance currently maintained by the
Company. Parent further covenants not to amend or repeal any provisions of the
Articles of Incorporation or Bylaws of the
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Company in any manner which would adversely affect the indemnification or
exculpatory provisions contained therein. The provisions of this Article 10 are
intended to be for the benefit of, and shall be enforceable by, each indemnified
party and his or her heirs and representatives.
ARTICLE 11.
MISCELLANEOUS
11.1. TERMINATION. In addition to the provisions regarding termination set
forth elsewhere herein, this Agreement and the transactions contemplated hereby
may be terminated at any time on or before the Closing Date:
(a) by mutual consent of the Company and Parent;
(b) by Parent if there has been a material misrepresentation or breach
of warranty in the representations and warranties of the Company set forth
herein, except as set forth in the Company's Disclosure Schedule or except
as disclosed in the Proxy Statement on the date it is mailed to the
Company's shareholders, or if there has been any material failure on the
part of the Company to comply with its obligations hereunder;
(c) by the Company if there has been a material misrepresentation or
breach of warranty in the representations and warranties of Parent set forth
herein or if there has been any material failure on the part of Parent to
comply with its obligations hereunder;
(d) by either Parent or the Company if the transactions contemplated by
this Agreement have not been consummated by June 30, 1994, unless such
failure of consummation is due to the failure of the terminating party to
perform or observe the covenants, agreements, and conditions hereof to be
performed or observed by it at or before the Closing Date;
(e) by either the Company or Parent if the transactions contemplated
hereby violate any nonappealable final order, decree, or judgment of any
court or governmental body or agency having competent jurisdiction; and
(f) by Parent if at any time it is advised by its independent public
accountants that the Merger does not qualify as a pooling of interests for
financial reporting purposes.
11.2. EXPENSES.
(a) Except as provided in (b) and (c) below, if the transactions
contemplated by this Agreement are not consummated, each party hereto shall pay
its own expenses incurred in connection with this Agreement and the transactions
contemplated hereby.
(b) If this Agreement is terminated by Parent pursuant to Sections
2.1(a)(ii) or 9.4, then the Parent shall promptly reimburse the Company for (X)
any and all reasonable documented expenses incurred by the Company (including
the fees and expenses of its representatives, agents and advisors) in connection
with the transactions contemplated by this Agreement in an amount not to exceed
the sum of $100,000 and (Y) the fees paid or payable to Armata Partners in
connection with the transactions contemplated hereby and consistent with the
terms of the agreement between the Company and Armata Partners existing as of
the date hereof (such amount not to exceed $200,000).
(c) If this Agreement is terminated as a result of the Company's breach of
Section 6.5, then the Company shall promptly reimburse Parent for (X) any and
all reasonable documented expenses incurred by Parent (including the fees and
expenses of its representatives, agents and advisors) in connection with the
transactions contemplated by this Agreement in an amount not to exceed the sum
of $200,000 and (Y) the fees paid or payable to Montgomery Securities in
connection with the transactions contemplated hereby consistent with the terms
of the agreement between the Parent and Montgomery Securities existing as of the
date hereof (such amount not to exceed $200,000) plus the sum of $1.5 million.
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11.3. REMEDIES. Because a breach of the provisions of this Agreement could
not adequately be compensated by money damages, the sole remedy for a breach of
this Agreement resulting in the failure to consummate the transactions
contemplated by this Agreement shall be as set forth in Section 11.2 hereof.
11.4. ENTIRE AGREEMENT. This Agreement and the exhibits hereto contain the
complete agreement among the parties with respect to the transactions
contemplated hereby and supersede all prior agreements and understandings among
the parties with respect to such transactions; provided, however, that the
Confidentiality Agreement between the Parent and the Company shall remain in
full force and effect. Section and other headings are for reference purposes
only and shall not affect the interpretation or construction of this Agreement.
The parties hereto have not made any representation or warranty except as
expressly set forth in this Agreement or in any certificate or schedule
delivered pursuant hereto. The obligations of any party under any agreement
executed pursuant to this Agreement shall not be affected by this section.
11.5. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of each party contained herein or in any exhibit, certificate,
document or instrument delivered pursuant to this Agreement shall not survive
the Closing.
11.6. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original, and such counterparts together shall constitute only one original.
11.7. NOTICES. All notices, demands, requests, or other communications
that may be or are required to be given, served, or sent by any party to any
other party pursuant to this Agreement shall be in writing and shall be mailed
by first-class, registered or certified mail, return receipt requested, postage
prepaid, or transmitted by hand delivery, addressed as follows:
(i) If to the Company:
On the Border Cafes, Inc.
7800 Stemmons Freeway
Suite 580
Dallas, Texas 75247
Attention: Stephen D. Fenstermacher
with a copy (which shall not constitute notice) to:
Gardere & Wynne, L.L.P.
1601 Elm Street
Suite 3000
Dallas, Texas 75201
Attention: Larry Schoenbrun
(ii) If to Parent:
Brinker International, Inc.
6820 LBJ Freeway
Dallas, Texas 75240
Attention: Roger F. Thomson, Senior Vice President and General
Counsel
with a copy (which shall not constitute notice) to:
Crouch & Hallett, L.L.P.
717 North Harwood Street
Suite 1400
Dallas, Texas 75201
Attention: Bruce Hallett
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Each party may designate by notice in writing a new address to which any notice,
demand, request, or communication may thereafter be so given, served, or sent.
Each notice, demand, request, or communication that is mailed, delivered, or
transmitted in the manner described above shall be deemed sufficiently given,
served, sent, and received for all purposes at such time as it is delivered to
the addressee (with the return receipt, the delivery receipt or the affidavit of
messenger being deemed conclusive evidence of such delivery) or at such time as
delivery is refused by the addressee upon presentation.
11.8. SUCCESSORS AND ASSIGNS. This Agreement and the rights, interests,
and obligations hereunder shall be binding upon and shall inure to the benefit
of the parties hereto and their respective successors and assigns.
11.9. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Texas (except the choice of law rules
thereof).
11.10. WAIVER AND OTHER ACTION. This Agreement may be amended, modified,
or supplemented only by a written instrument executed by the parties against
which enforcement of the amendment, modification or supplement is sought.
11.11. SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable, such provision shall be fully severable, and
this Agreement shall be construed and enforced as if such illegal, invalid, or
unenforceable provision were never a part hereof; the remaining provisions
hereof shall remain in full force and effect and shall not be affected by the
illegal, invalid, or unenforceable provision or by its severance; and in lieu of
such illegal, invalid, or unenforceable provision, there shall be added
automatically as part of this Agreement, a provision as similar in its terms to
such illegal, invalid, or unenforceable provision as may be possible and be
legal, valid, and enforceable.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
ON THE BORDER CAFES, INC.
By: ___/s/__STEPHEN D. FENSTERMACHER__
Stephen D. Fenstermacher
CHIEF EXECUTIVE OFFICER
BRINKER INTERNATIONAL, INC.
By: _____/s/__RONALD A. MCDOUGALL_____
Ronald A. McDougall
PRESIDENT AND CHIEF OPERATING
OFFICER
RIO ACQUISITION CORP.
By: _____/s/__RONALD A. MCDOUGALL_____
Ronald A. McDougall
PRESIDENT AND CHIEF OPERATING
OFFICER
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<PAGE>
APPENDIX B
ARMATA PARTNERS
April 22, 1994
Board of Directors
On The Border Cafes, Inc.
7800 N. Stemmons Freeway
Dallas, TX 75247
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the shares of Common Stock, par value $0.02 per share
(the "OTB Common Stock"), of On The Border Cafes, Inc. ("OTB") of the Merger
Consideration (as hereinafter defined) to be received by such holders in the
proposed merger (the "Merger") pursuant to the Amended and Restated Agreement
and Plan of Merger, dated as of January 24, 1994 (the "Merger Agreement"), by
and among OTB, Brinker International, Inc. ("Brinker") and Rio Acquisition Corp.
("Rio"), a wholly-owned subsidiary of Brinker.
Under the terms of the Merger Agreement, at the effective time of the
Merger, each outstanding share of OTB Common Stock will be converted into the
right to receive Brinker shares based on the following variables. The number of
shares will be based on the average closing price (the "Determination Price") of
Brinker Common Stock for the ten trading day period ending five trading days
prior to the effective time of the Merger. The amount of shares of Common Stock,
par value $.10 per share, of Brinker (the "Brinker Common Stock") to be received
by holders of OTB Common Stock (the "Merger Consideration") will be determined
as follows: (i) if the Determination Price is between $28.583 and $32.00
inclusive, each share of OTB Common Stock will convert into .301171 shares of
Brinker Common Stock; (ii) if the Determination Price is more than $32.00, each
share of OTB Common Stock will convert into the number of shares of Brinker
Common Stock equal to the quotient of 9.637473 divided by the Determination
Price; (iii) if the Determination Price is less than $28.583 but equal to or
greater than $24.79167, each share of OTB Common Stock will convert into the
number of shares of Brinker Common Stock equal to the quotient of 8.608472
divided by the Determination Price, and (iv) if the Determination Price is less
than $24.79167, OTB and Brinker will either mutually determine in good faith the
number of shares of Brinker Common Stock to be issued to the holders of OTB
Common Stock or terminate the Merger Agreement.
Armata Partners, L.P. ("Armata"), as part of its investment banking
business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, private placements and
valuations for estate, corporate and other purposes. We will receive a fee for
rendering this opinion. Armata has not performed other investment banking and
financial advisory services for OTB.
In connection with our opinion, we have reviewed the Merger Agreement,
related documents and the Proxy Statement/Prospectus (the "Proxy
Statement/Prospectus") included in the Registration Statement of Brinker on Form
S-4 as filed with the Securities and Exchange Commission. We also have reviewed
certain financial and other information of OTB and Brinker that was publicly
available or furnished to us by OTB and Brinker, including certain internal
financial analyses, reports and other information prepared by their respective
managements and representatives. We have held discussions with various members
of senior management of OTB and Brinker concerning each company's historical and
current operations, financial condition and prospects. We have also held
discussions with senior management of OTB and Brinker concerning the strategic
and operating benefits anticipated from the Merger. In addition, we have (i)
reviewed the prices and trading histories of the common stock of OTB and Brinker
and compared those prices and trading histories with those of publicly traded
companies we deemed relevant; (ii) compared the financial positions and
operating results of OTB and Brinker with those of publicly traded companies we
deemed relevant; (iii) compared certain
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financial terms of the Merger to certain financial terms of selected other
business combinations we deemed relevant; (iv) conducted such other financial
studies, analyses and investigations and reviewed such other factors as we
deemed appropriate for purposes of this opinion.
We have not independently verified the information described above and for
purposes of this opinion have assumed the accuracy, completeness and fairness
thereof. With respect to information relating to the prospects of OTB, we have
assumed that such information reflects the best currently available estimates
and judgments of management of OTB as to the likely future financial performance
of OTB. In addition, we have not made an independent evaluation or appraisal of
the assets of OTB, nor have we been furnished with any such evaluation or
appraisal. Our opinion is based on market, economic and other conditions as they
exist and can be evaluated as of the date of this letter. Furthermore, we
express no opinion as to the price or trading range at which shares of Brinker
Common Stock will trade following the Merger.
It is understood that this letter is for the information of the Board of
Directors of OTB only and may not be used for any other purpose without our
prior written consent; provided, however, this letter may be reproduced in full
in the Proxy Statement/Prospectus.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Merger Consideration to be received in the Merger by the
holders of OTB Common Stock is fair, from a financial point of view, to such
holders.
Very truly yours,
ARMATA PARTNERS, L.P.
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APPENDIX C
CERTAIN PROVISIONS OF THE TEXAS BUSINESS CORPORATION ACT
5.11. RIGHTS OF DISSENTING SHAREHOLDERS IN THE EVENT OF CERTAIN CORPORATE
ACTIONS. A. Any shareholder of a domestic corporation shall have the right to
dissent from any of the following corporate actions:
(1) Any plan of merger to which the corporation is a party if
shareholder approval is required by Article 5.03 or 5.16 of this Act and the
shareholder holds shares of a class or series that was entitled to vote
thereon as a class or otherwise;
(2) Any sale, lease, exchange or other disposition (not including any
pledge, mortgage, deed of trust or trust indenture unless otherwise provided
in the articles of incorporation) of all, or substantially all, the property
and assets, with or without good will, of a corporation requiring the
special authorization of the shareholders as provided by this Act;
(3) Any plan of exchange pursuant to Article 5.02 of this Act in which
the shares of the corporation of the class or series held by the shareholder
are to be acquired.
B. Notwithstanding the provisions of Section A of this Article, a
shareholder shall not have the right to dissent from any plan of merger in which
there is a single surviving or new domestic or foreign corporation, or from any
plan of exchange, if (1) the shares held by the shareholder are part of a class
shares of which are listed on a national securities exchange, or are held of
record by not less than 2,000 holders, on the record date fixed to determine the
shareholders entitled to vote on the plan of merger or the plan of exchange, and
(2) the shareholder is not required by the terms of the plan of merger or the
plan of exchange to accept for his shares any consideration other than (a)
shares of a corporation that, immediately after the effective time of the merger
or exchange, will be part of a class or series of shares of which are (i)
listed, or authorized for listing upon official notice of issuance, on a
national securities exchange, or (ii) held of record by not less than 2,000
holders, and (b) cash in lieu of fractional shares otherwise entitled to be
received.
5.12. PROCEDURE FOR DISSENT BY SHAREHOLDERS AS TO SAID CORPORATE
ACTIONS. A. Any shareholder of any domestic corporation who has the right to
dissent from any of the corporate actions referred to in Article 5.11 of this
Act may exercise that right to dissent only by complying with the following
procedures:
(1) (a) With respect to proposed corporate action that is submitted to
a vote of shareholders at a meeting, the shareholder shall file with the
corporation, prior to the meeting, a written objection to the action,
setting out that the shareholder's right to dissent will be exercised if the
action is effective and giving the shareholder's address, to which notice
thereof shall be delivered or mailed in that event. If the action is
effected and the shareholder shall not have voted in favor of the action,
the corporation, in the case of action other than a merger, or the surviving
or new corporation (foreign or domestic) or other entity that is liable to
discharge the shareholder's right of dissent, in the case of a merger,
shall, within ten (10) days after the action is effected, deliver or mail to
the shareholder written notice that the action has been effected, and the
shareholder may, within ten (10) days from the delivery or mailing of the
notice, make written demand on the existing, surviving, or new corporation
(foreign or domestic) or other entity, as the case may be, for payment of
the fair value of the shareholder's shares. The fair value of the shares
shall be the value thereof as of the day immediately preceding the meeting,
excluding any appreciation or depreciation in anticipation of the proposed
action. The demand shall state the number and class of the shares owned by
the shareholder and the fair value of the shares as estimated by the
shareholder. Any shareholder failing to make demand within the ten (10) day
period shall be bound by the action.
(b) With respect to proposed corporate action that is approved pursuant
to Section A of Article 9.10 of this Act, the corporation, in the case of
action other than a merger, and the
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surviving or new corporation (foreign or domestic) or other entity that is
liable to discharge the shareholder's right of dissent, in the case of a
merger, shall, within ten (10) days after the date the action is effected,
mail to each shareholder of record as of the effective date of the action
notice of the fact and date of the action and that the shareholder may
exercise the shareholder's right to dissent from the action. The notice
shall be accompanied by a copy of this Article and any articles or documents
filed by the corporation with the Secretary of State to effect the action.
If the shareholder shall not have consented to the taking of the action, the
shareholder may, within twenty (20) days after the mailing of the notice,
make written demand on the existing, surviving, or new corporation (foreign
or domestic) or other entity, as the case may be, for payment of the fair
value of the shareholder's shares. The fair value of the shares shall be the
value thereof as of the date the written consent authorizing the action was
delivered to the corporation pursuant to Section A of Article 9.10 of this
Act, excluding any appreciation or depreciation in anticipation of the
action. The demand shall state the number and class of shares owned by the
dissenting shareholder and the fair value of the shares as estimated by the
shareholder. Any shareholder failing to make demand within the twenty (20)
day period shall be bound by the action.
(2) Within twenty (20) days after receipt by the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be,
of a demand for payment made by a dissenting shareholder in accordance with
Subsection (1) of this Section, the corporation (foreign or domestic) or
other entity shall deliver or mail to the shareholder a written notice that
shall either set out that the corporation (foreign or domestic) or other
entity accepts the amount claimed in the demand and agrees to pay that
amount within ninety (90) days after the date on which the action was
effected, and, in the case of shares represented by certificates, upon the
surrender of the certificates duly endorsed, or shall contain an estimate by
the corporation (foreign or domestic) or other entity of the fair value of
the shares, together with an offer to pay the amount of that estimate within
ninety (90) days after the date on which the action was effected, upon
receipt of notice within sixty (60) days after that date from the
shareholder that the shareholder agrees to accept that amount and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed.
(3) If, within sixty (60) days after the date on which the corporate
action was effected, the value of the shares is agreed upon between the
shareholder and the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, payment for the shares shall
be made within ninety (90) days after the date on which the action was
effected and, in the case of shares represented by certificates, upon
surrender of the certificates duly endorsed. Upon payment of the agreed
value, the shareholder shall cease to have any interest in the shares or in
the corporation.
B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the county
in which the principal office of the domestic corporation is located, asking for
a finding and determination of the fair value of the shareholder's shares. Upon
the filing of any such petition by the shareholder, service of a copy thereof
shall be made upon the corporation (foreign or domestic) or other entity, which
shall, within ten (10) days after service, file in the office of the clerk of
the court in which the petition was filed a list containing the names and
addresses of all shareholders of the domestic corporation who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the corporation (foreign or domestic) or other
entity. If the petition shall be filed by the corporation (foreign or domestic)
or other entity, the petition shall be accompanied by such a list. The clerk of
the court shall give notice of the time and place fixed for the hearing of the
petition by registered mail to the corporation (foreign or domestic) or other
entity and to the shareholders named
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on the list at the addresses therein stated. The forms of the notices by mail
shall be approved by the court. All shareholders thus notified and the
corporation (foreign or domestic) or other entity shall thereafter be bound by
the final judgment of the court.
C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The appraisers
shall have power to examine any of the books and records of the corporation the
shares of which they are charged with the duty of valuing, and they shall make a
determination of the fair value of the shares upon such investigation as to them
may seem proper. The appraisers shall also afford a reasonable opportunity to
the parties interested to submit to them pertinent evidence as to the value of
the shares. The appraisers shall also have such power and authority as may be
conferred on Masters in Chancery by the Rules of Civil Procedure or by the order
of their appointment.
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as court
costs, and all court costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.
E. Shares acquired by the existing, surviving, or new corporation (foreign
or domestic) or other entity, as the case may be, pursuant to the payment of the
agreed value of the shares or pursuant to payment of the judgment entered for
the value of the shares, as in this Article provided, shall, in the case of a
merger, be treated as provided in the plan of merger and, in all other cases,
may be held and disposed of by the corporation as in the case of other treasury
shares.
F. The provisions of this Article shall not apply to a merger if, on the
date of the filing of the articles of merger, the surviving corporation is the
owner of all the outstanding shares of the other corporations, domestic or
foreign, that are parties to the merger.
G. In the absence of fraud in the transaction, the remedy provided by this
Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action. If
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.
5.13. PROVISIONS AFFECTING REMEDIES OF DISSENTING SHAREHOLDERS. A. Any
shareholder who has demanded payment for his shares in accordance with either
Article 5.12 or 5.16 of this Act shall not thereafter be entitled to vote or
exercise any other rights of a shareholder except the right to receive payment
for his shares pursuant to the provisions of those articles and the right to
maintain an appropriate action to obtain relief on the ground that the corporate
action would be or was fraudulent, and the respective shares for which payment
has been demanded shall not thereafter be considered outstanding for the
purposes of any subsequent vote of shareholders.
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B. Upon receiving a demand for payment from any dissenting shareholder, the
corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such shareholder's rights under Articles
5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and
sufficient cause shown shall otherwise direct. If uncertificated shares for
which payment has been demanded or shares represented by a certificate on which
notation has been so made shall be transferred, any new certificate issued
therefor shall bear similar notation together with the name of the original
dissenting holder of such shares and a transferee of such shares shall acquire
by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making demand for payment of the fair
value thereof.
C. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act may withdraw such demand at any
time before payment for his shares or before any petition has been filed
pursuant to Article 5.12 or 5.16 of this Act asking for a finding and
determination of the fair value of such shares, but no such demand may be
withdrawn after such payment has been made or, unless the corporation shall
consent thereto, after any such petition has been filed. If, however, such
demand shall be withdrawn as hereinbefore provided, or if pursuant to Section B
of this Article the corporation shall terminate the shareholder's rights under
Article 5.12 or 5.16 of this Act, as the case may be, or if no petition asking
for a finding and determination of fair value of such shares by a court shall
have been filed within the time provided in Article 5.12 or 5.16 of this Act, as
the case may be, or if after the hearing of a petition filed pursuant to Article
5.12 or 5.16, the court shall determine that such shareholder is not entitled to
the relief provided by those articles, then, in any such case, such shareholder
and all persons claiming under him shall be conclusively presumed to have
approved and ratified the corporate action from which he dissented and shall be
bound thereby, the right of such shareholder to be paid the fair value of his
shares shall cease, and his status as a shareholder shall be restored without
prejudice to any corporate proceedings which may have been taken during the
interim, and such shareholder shall be entitled to receive any dividends or
other distributions made to shareholders in the interim.
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ON THE BORDER CAFES, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS -- MAY 18, 1994
The undersigned (1) acknowledges receipt of the Notice of Annual Meeting of
Shareholders of On The Border Cafes, Inc., a Texas corporation (the "Company"),
to be held on Wednesday, May 18, 1994, at 9:00 a.m., CDT, at the Clarion Hotel,
1241 West Mockingbird Lane, Dallas, Texas 75247, and the Proxy
Statement/Prospectus in connection therewith; and (2) appoints Stephen D.
Fenstermacher and Raymond E. Yoakum and each of them, the undersigned's proxies
with full power of substitution, for and in the name, place and stead of the
undersigned, to vote upon and act with respect to all of the shares of Common
Stock of the Company standing in the name of the undersigned, or with respect to
which the undersigned is entitled to vote and act, at the meeting and at any
adjournment thereof, and the undersigned directs that this proxy be voted as
follows:
<TABLE>
<S> <C>
1. Proposal to approve the Amended and Restated Agreement and Plan of Merger by and among the Company, Brinker
International, Inc. and Rio Acquisition Corp.
/ / FOR / / AGAINST / / ABSTAIN
2. Election of Directors
/ / FOR all nominees listed below (except as marked to the contrary below).
Stephen D. Fenstermacher, Ned R. Lidvall, David deN. Franklin, Raymond C. Hemmig,
Paul S. Heyd, Frederick G. Molsen, Louis P. Neeb, R. Brooks Reed, Clark S. Willingham
(INSTRUCTION: To withhold authority to vote for any individual nominee, write that nominee's name in the space provided
below.)
/ / WITHHOLD AUTHORITY to vote for all nominees listed above.
3. Proposal to amend and restate the Company's Amended and Restated Stock Option Plan to permit grants of options thereunder
to consultants of the Company.
/ / FOR / / AGAINST / / ABSTAIN
4. In the discretion of the proxies, on any other matter that may properly come before the meeting or any adjournment
thereof.
</TABLE>
IMPORTANT: SIGN ON OTHER SIDE
<PAGE>
CONTINUED FROM OTHER SIDE
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED.
UNLESS OTHERWISE MARKED, THIS PROXY WILL BE VOTED FOR THE ELECTION OF THE
PERSONS NAMED ON THE REVERSE SIDE HEREOF AND FOR PROPOSALS 1, 3 AND 4.
If more than one of the proxies named herein shall be present in person or
by substitute at the meeting or at any adjournment thereof, both of the proxies
so present and voting, either in person or by substitute, shall exercise all of
the powers hereby given.
The undersigned hereby revokes any proxy or proxies heretofore given to vote
upon or act with respect to such stock and hereby ratifies and confirms all that
the proxies, their substitutes, or any of them, may lawfully do by virtue
hereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY.
Date: ______________________ , 1994
___________________________________
Signature of Shareholder
_____________________________________
Signature of Shareholder
_____________________________________
Title, if applicable
Please date this proxy and sign
your name exactly as it appears
hereon. Where there is more than
one owner, each should sign. When
signing as an attorney,
administrator, executor, guardian
or trustee, please add your title
as such. If executed by a
corporation, the proxy should be
signed by a duly authorized
officer. EACH JOINT TENANT SHOULD
SIGN.
PLEASE MARK, SIGN, DATE AND RETURN
YOUR PROXY PROMPTLY IN THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED.
