FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 25, 1998 Commission File Number 1-10275 BRINKER INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-1914582 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6820 LBJ FREEWAY, DALLAS, TEXAS 75240 (Address of principal executive offices) (Zip Code) (972) 980-9917 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Number of shares of common stock of registrant outstanding at March 25, 1998: 66,291,592 BRINKER INTERNATIONAL, INC. INDEX Part I - Financial Information Condensed Consolidated Balance Sheets - March 25, 1998 and June 25, 1997 3 - 4 Condensed Consolidated Statements of Income - Thirteen week and thirty-nine week periods ended March 25, 1998 and March 26, 1997 5 Condensed Consolidated Statements of Cash Flows - Thirty-nine week periods ended March 25, 1998 and March 26, 1997 6 Notes to Condensed Consolidated Financial Statements 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 11 Part II - Other Information 12 PART I. FINANCIAL INFORMATION BRINKER INTERNATIONAL, INC. Condensed Consolidated Balance Sheets (In thousands) (Unaudited) March 25, June 25, 1998 1997 ASSETS Current Assets: Cash and Cash Equivalents $ 28,209 $ 23,194 Marketable Securities 51 24,469 Accounts Receivable 15,275 15,258 Inventories 14,138 13,031 Prepaid Expenses 34,764 30,364 Deferred Income Taxes 794 1,050 Other 1,312 5,068 Total Current Assets 94,543 112,434 Property and Equipment, at Cost: Land 142,664 171,551 Buildings and Leasehold Improvements 521,382 533,579 Furniture and Equipment 302,727 294,985 Construction-in-Progress 44,357 42,977 1,011,130 1,043,092 Less Accumulated Depreciation and Amortization 325,257 293,483 Net Property and Equipment 685,873 749,609 Other Assets: Goodwill 76,886 78,291 Other 89,955 56,609 Total Other Assets 166,841 134,900 Total Assets $ 947,257 $ 996,943 (continued) BRINKER INTERNATIONAL, INC. Condensed Consolidated Balance Sheets (In thousands, except share and per share amounts) (Unaudited) March 25, June 25, 1998 1997 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current Installments of Long-term Debt $ 308 $ 280 Accounts Payable 73,292 76,640 Accrued Liabilities 87,052 72,213 Total Current Liabilities 160,652 149,133 Long-term Debt, Less Current Installments 162,173 287,521 Deferred Income Taxes 10,286 7,426 Other Liabilities 38,720 29,119 Commitments and Contingencies Shareholders' Equity: Preferred Stock - 1,000,000 Authorized Shares; $1.00 Par Value; No Shares Issued - - Common Stock - 250,000,000 Authorized Shares; $.10 Par Value; 78,150,054 Shares Issued and 66,291,592 Shares Outstanding at March 25, 1998, and 77,710,016 Shares Issued and 65,233,900 Shares Outstanding at June 25, 1997 7,815 7,771 Additional Paid-In Capital 271,934 270,892 Unrealized Gain on Marketable Securities - 304 Retained Earnings 441,020 395,008 720,769 673,975 Less Treasury Stock, at Cost (11,858,462 shares at March 25, 1998 and 12,476,116 shares at June 25, 1997) (145,343) (150,231) Total Shareholders' Equity 575,426 523,744 Total Liabilities and Shareholders' Equity $ 947,257 $ 996,943 See accompanying notes to condensed consolidated financial statements. BRINKER INTERNATIONAL, INC. Condensed Consolidated Statements of Income (In thousands, except per share amounts) (Unaudited) <TABLE> 13 Week Periods Ended 39 Week Periods Ended Mar. 25, 1998 Mar. 26, 1997 Mar. 25, 1998 Mar. 26, 1997 <S> <C> <C> <C> <C> Revenues $ 401,002 $ 345,510 $1,151,467 $ 965,099 Costs and Expenses: Cost of Sales 108,480 96,450 313,016 272,812 Restaurant Expenses 222,318 189,596 637,328 522,023 Depreciation and Amortization 21,329 20,608 65,011 57,059 General and Administrative 21,042 17,381 55,962 48,899 Interest Expense 2,100 2,289 8,953 5,494 Other, Net 1,107 (862) 950 (3,377) Total Costs and Expenses 376,376 325,462 1,081,220 902,910 Income Before Provision for Income Taxes 24,626 20,048 70,247 62,189 Provision for Income Taxes 8,496 6,716 24,235 20,833 Net Income $ 16,130 $ 13,332 $ 46,012 $ 41,356 Basic Net Income Per Share $ 0.24 $ 0.18 $ 0.70 $ 0.54 Diluted Net Income Per Share $ 0.24 $ 0.18 $ 0.69 $ 0.53 Basic Weighted Average Shares Outstanding 65,894 74,248 65,694 76,363 Diluted Weighted Average Shares Outstanding 67,596 75,224 67,160 77,579 </TABLE> See accompanying notes to condensed consolidated financial statements. BRINKER INTERNATIONAL, INC. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Thirty-Nine Week Periods Ended March 25, March 26, 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 46,012 $ 41,356 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization of Property and Equipment 52,607 46,842 Amortization of Goodwill and Other Assets 12,404 10,217 Deferred Income Taxes 3,268 2,814 Changes in Assets and Liabilities: Receivables 3,739 (4,995) Inventories (1,107) (950) Prepaid Expenses (4,400) (3,620) Other Assets 1,615 (10,043) Accounts Payable (3,348) 10,491 Accrued Liabilities 14,839 4,910 Other Liabilities 9,037 (5,394) Other - 481 Net Cash Provided by Operating Activities 134,666 92,109 CASH FLOWS FROM INVESTING ACTIVITIES: Payments for Property and Equipment (124,468) (153,536) Payments for Purchase of Restaurants (2,700) (15,863) Net Proceeds from Sale-Leasebacks 125,961 - Proceeds from Sales of Marketable Securities 23,962 59,003 Purchases of Marketable Securities - (38,795) Increase in Equity Investments (20,500) - Net Advances to Affiliates (5,710) (2,730) Additions to Other Assets (6,850) (3,390) Net Cash Used in Investing Activities (10,305) (155,311) CASH FLOWS FROM FINANCING ACTIVITIES: Net (Payments) Borrowings on Credit Facilities (125,000) 167,373 Payments of Long-term debt (320) (234) Proceeds from Issuances of Common Stock 7,231 2,925 Purchases of Treasury Stock (1,257) (122,767) Net Cash Provided by (Used in) Financing Activities (119,346) 47,297 Net Increase (Decrease) in Cash and Cash Equivalents 5,015 (15,905) Cash and Cash Equivalents at Beginning of Period 23,194 27,073 Cash and Cash Equivalents at End of Period $ 28,209 $ 11,168 CASH PAID DURING THE PERIOD: Income Taxes, Net $ 26,204 $ 22,359 Interest, Net of Amounts Capitalized $ 9,996 $ 3,035 See accompanying notes to condensed consolidated financial statements. BRINKER INTERNATIONAL, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Basis of Presentation The condensed consolidated financial statements of Brinker International, Inc. and its wholly-owned subsidiaries (collectively, the "Company") as of March 25, 1998 and June 25, 1997 and for the thirteen week and thirty-nine week periods ended March 25, 1998 and March 26, 1997 have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission. The Company owns or franchises 780 restaurants under the names of Chili's Grill & Bar ("Chili's"), Romano's Macaroni Grill ("Macaroni Grill"), On The Border Cafes ("On The Border"), Cozymel's Coastal Mexican Grill ("Cozymel's"), Maggiano's Little Italy ("Maggiano's"), Corner Bakery, and Eatzi's Market & Bakery ("Eatzi's"). The Company owns a 50% interest in Eatzi's. The information furnished herein reflects 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. However, these operating results are not necessarily indicative of the results expected for the full fiscal year. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The notes to the condensed consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements contained in the June 25, 1997 Form 10-K. Company management believes that the disclosures are sufficient for interim financial reporting purposes. Certain prior year amounts in the accompanying condensed consolidated financial statements have been reclassified to conform with current year presentation. 2. Net Income Per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share," which requires presentation of basic and diluted earnings per share. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. As required, the Company adopted the provisions of SFAS No. 128 in the quarter ended December 24, 1997. All prior year weighted average and per share information has been restated in accordance with SFAS No. 128. Outstanding stock options issued by the Company represent the only dilutive effect reflected in diluted weighted average shares. 3. Shareholders' Equity On January 27, 1998, the Board of Directors approved a plan to repurchase up to $50 million of the Company's common stock. Repurchases will be made from time to time to offset the dilutive effect on earnings per share of stock option exercises or whenever market conditions warrant. Under this plan, the Company repurchased $670,000 of its common stock during the quarter in accordance with applicable securities regulations. The repurchased common stock may be used by the Company to satisfy obligations under its savings plans, to meet the needs of its various stock option plans, or for other corporate purposes. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth selected operating data as a percentage of total revenues for the periods indicated. All information is derived from the accompanying unaudited condensed consolidated statements of income. <TABLE> 13 Week Periods Ended 39 Week Periods Ended Mar. 25, 1998 Mar. 26, 1997 Mar. 25,1998 Mar. 26, 1997 <S> <C> <C> <C> <C> Revenues 100.0% 100.0% 100.0% 100.0% Costs and Expenses: Cost of Sales 27.1% 27.9% 27.2% 28.3% Restaurant Expenses 55.4% 54.9% 55.3% 54.1% Depreciation and Amortization 5.3% 6.0% 5.6% 5.9% General and Administrative 5.2% 5.0% 4.9% 5.1% Interest Expense 0.6% 0.7% 0.8% 0.6% Other, Net 0.3% (0.3)% 0.1% (0.4)% Total Costs and Expenses 93.9% 94.2% 93.9% 93.6% Income Before Provision for Income Taxes 6.1% 5.8% 6.1% 6.4% Provision for Income Taxes 2.1% 1.9% 2.1% 2.1% Net Income 4.0% 3.9% 4.0% 4.3% </TABLE> The following table details the number of restaurant openings during the third quarter and year-to-date, as well as total restaurants open at the end of the third quarter. Total Open at End 3rd Quarter Openings Year-to-Date Openings of Third Quarter Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal 1998 1997 1998 1997 1998 1997 Chili's: Company-owned 3 6 16 25 408 389 Franchised 3 7 15 19 155 141 Total 6 13 31 44 563 530 Macaroni Grill: Company-owned 6 10 14 23 111 92 Franchised -- -- -- -- 2 2 Total 6 10 14 23 113 94 On The Border: Company-owned 4 6 14 9 48 31 Franchised 3 1 6 3 13 5 Total 7 7 20 12 61 36 Corner Bakery -- 2 7 5 22 13 Cozymel's -- -- -- 1 12 12 Maggiano's -- 1 2 2 7 5 Eatzi's -- -- 1 -- 2 1 Grand total 19 33 75 87 780 691 REVENUES Revenues for the third quarter of fiscal 1998 increased to $401.0 million, 16.1% over the $345.5 million generated for the same quarter of fiscal 1997. Revenues for the thirty-nine week period ended March 25, 1998 rose 19.3% to $1,151.5 million from the $965.1 million generated for the same period of fiscal 1997. These increases are attributable to a net increase of 66 Company-operated restaurants since March 26, 1997, partially offset by the impact of one less trading day in the current quarter as discussed below. The Company increased its capacity (as measured in sales weeks) for the third quarter and year-to-date of fiscal 1998 by 13.0% and 15.2%, respectively, compared to the respective prior year periods. Average weekly sales at Company-owned stores increased 2.8% and 3.7% for the third quarter and year-to-date, respectively, from the same periods of fiscal 1997. On a concept basis, average weekly sales increased for the quarter and year-to-date compared to the same periods of fiscal 1997 by 2.6% and 3.4% at Chili's and 1.2% and 5.2% at On The Border and declined by 2.0% and 3.7% at Macaroni Grill, respectively. Overall, revenues and average weekly sales were impacted by one less day during which the Company's stores were open for business during the current quarter as compared to the respective prior year quarter. During the current fiscal year, Christmas Day (a day on which the Company's stores are closed) fell in the Company's third quarter. In the prior fiscal year, Christmas Day fell in the second quarter. The current quarter negative impact of this change was offset by a positive impact in the second quarter. COSTS AND EXPENSES (as a percent of Revenues) Cost of sales decreased for the third quarter and year-to-date of fiscal 1998 as compared to the respective periods for fiscal 1997. Favorable commodity prices for meat, poultry, produce, and other food items, as well as menu price increases were somewhat offset by unfavorable commodity prices for seafood, dairy, non-alcoholic beverages and alcoholic beverages. Restaurant expenses increased on both a comparative third quarter and year-to-date basis, primarily as a result of an increase in rent expense due to sale-leaseback transactions and an equipment leasing facility entered into in the current fiscal year. In addition, management labor increased as a result of the cost of continuing efforts to remain competitive with the industry and increases in monthly performance bonuses due to Chili's positive performance in fiscal 1998. Furthermore, wage rate increases were offset by improvements in labor productivity and costs associated with new product rollouts, as well as menu price increases. Depreciation and amortization decreased for both the third quarter and year-to-date of fiscal 1998. Depreciation and amortization decreases resulted from the impact of sale-leaseback transactions and an equipment leasing facility, as well as a declining depreciable asset base for older units. Offsetting these decreases were increases in depreciation and amortization related to new unit construction costs and ongoing remodel costs. General and administrative expenses increased for the third quarter but decreased for year-to-date fiscal 1998 compared to the respective periods in fiscal 1997. The decrease for the year is mainly a result of the Company's continued focus on controlling corporate expenditures relative to increasing revenues and number of restaurants. These efforts were partially offset in the third quarter by increased fiscal 1998 profit sharing accruals based on the Company's continued strong performance. Total dollar costs increased during the periods due to profit sharing accruals and additional staff and support as the Company continues the expansion of its restaurant concepts. Interest expense decreased for the third quarter but increased for year-to-date fiscal 1998 compared to the respective fiscal 1997 periods due to a higher average level of outstanding borrowings on the Company's credit facilities throughout the year which declined in the most recent quarter due to proceeds from the sale-leaseback transaction executed in November 1997. Other, net, increased for both the third quarter and year-to-date of fiscal 1998 compared to the respective periods in fiscal 1997. Other, net, was negatively impacted by the liquidation of the marketable securities portfolio initiated in the last half of fiscal 1997 resulting in a reduction of income earned. The proceeds from the liquidation were used to fund a portion of the Company's stock repurchase plan and to fund new unit openings. Furthermore, during the third quarter the Company wrote-off its equity investment in a joint venture which operates Chili's franchises in Southeast Asia. The prior year balances also include gains on sales of land. INCOME TAXES The Company's effective income tax rate was 34.5% for the third quarter and year-to-date of fiscal 1998 compared to 33.5% for the same periods of fiscal 1997. The fiscal 1998 effective income tax rate has increased primarily as a result of a decreased dividends received deduction resulting from the liquidation of the Company's marketable securities portfolio. NET INCOME AND NET INCOME PER SHARE Net income rose 21.0% and 11.1% for the third quarter and year-to- date periods of fiscal 1998, respectively, compared to the respective periods of fiscal 1997. The increase in net income for the third quarter and year to date is attributable to a combination of increases in revenues which were due to increases in average weekly sales, sales weeks, and menu price increases, decreases in commodity prices, and the effects of the sale-leaseback transaction. These favorable components of the increase in net income were somewhat offset by increases in management labor, incentive compensation, wage rates, and non-operating costs. Diluted net income per share was $0.24 and $0.69, respectively, for the third quarter and year-to-date periods of fiscal 1998 compared to $0.18 and $0.53, respectively, for the respective periods of fiscal 1997. Diluted weighted average shares outstanding for the third quarter decreased 10.1% compared to the prior year period due to a continuing stock repurchase program. IMPACT OF INFLATION The Company has not experienced a significant overall impact from inflation. As operating expenses increase, the Company, to the extent permitted by competition, recovers increased costs by raising menu prices. LIQUIDITY AND CAPITAL RESOURCES The working capital deficit increased from $43.3 million at June 25, 1997 to $66.1 million at March 25, 1998, due primarily to the sale of the Company's marketable equity securities portfolio in the current year. The proceeds of the sale were used primarily to fund investments in non-current assets. Net cash provided by operating activities increased to $134.7 million for the first thirty-nine weeks of fiscal 1998 from $92.1 million during the same period in fiscal 1997 due to increased profitability and the timing of operational receipts and payments. Long-term debt outstanding at March 25, 1998 consisted of $60.0 million of borrowings on credit facilities, $100 million of unsecured senior notes and obligations under capital leases. At March 25, 1998, the Company had $281.9 million in available funds from its $350.0 million credit facilities. Long-term liabilities increased in the first thirty-nine weeks of fiscal 1998 due to the deferred gain on the sale-leaseback transaction and increased insurance reserves resulting from Company growth. Subsequent to June 25, 1997, the Company entered into an equipment leasing facility for up to $55.0 million, of which funding commitments of $47.5 million have been obtained. As of March 25, 1998, $24.4 million of the leasing facility had been utilized. The remaining facility balance will be used to lease equipment for new unit openings. Capital expenditures were $124.5 million for the first thirty-nine weeks of fiscal 1998 as compared to $153.5 million in the first thirty-nine weeks of fiscal 1997. Capital expenditures consist of purchases of land for future restaurant sites, new restaurants under construction, purchases of new and replacement restaurant furniture and equipment, and an ongoing remodeling program. The decrease in capital expenditures compared to the first thirty-nine weeks of 1997 is due mainly to the utilization of the equipment leasing facility during fiscal 1998 to fund purchases of new restaurant furniture and equipment. The Company estimates that its capital expenditures during the fourth quarter will approximate $39.0 million. These capital expenditures will be funded from internal operations, cash equivalents, build-to-suit lease agreements with landlords, the equipment leasing facility, and drawdowns on the Company's available lines of credit. During the third quarter, the Company increased its investments in various joint ventures by $20.5 million. These investments are accounted for using the equity method and are classified as non- current assets in the Company's consolidated balance sheet. The Company is not aware of any other event or trend which would potentially affect its liquidity. In the event such a trend would develop, the Company believes that there are sufficient funds available to it under the lines of credit and internal cash generating capabilities to adequately manage the expansion of business. YEAR 2000 The Year 2000 will have a broad impact on the business environment in which the Company operates due to the possibility that many computerized systems across all industries will be unable to process information containing dates beginning in the Year 2000. The Company has established an extensive plan to prepare its computerized systems for the Year 2000. As a part of this plan, the Company has assessed its computerized systems to determine their ability to correctly identify the Year 2000 and is devoting the necessary internal and external resources to replace, upgrade, or modify all significant systems which do not correctly identify the Year 2000. Additionally, the Company has initiated formal communications with its significant external business partners to determine the extent to which they are modifying their computerized systems to correctly identify the Year 2000. The Company anticipates that all of its systems will be Year 2000 compliant prior to the end of the 1999 calendar year. Based on the Company's current estimate, the cost of resolving all Year 2000 issues is expected to have an immaterial impact on the Company's consolidated financial statements. NEW ACCOUNTING PRONOUNCEMENTS In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 ("SOP 98-5"), "Reporting of the Costs of Start-up Activities". SOP 98-5 is effective for financial statements issued for years beginning after December 15, 1998; therefore, the Company will implement its requirements beginning in fiscal 2000. At that time, the Company will be required to change the method currently used to account for preopening costs. The application of SOP 98-5 will be reported as the cumulative effect of a change in accounting principle. Under the new requirements for accounting for preopening costs, the cost for start-up activities will be expensed as incurred. The impact of SOP 98-5 on the accounting for preopening costs for the periods presented in the accompanying Condensed Consolidated Statements of Income is contingent upon the number of future restaurant openings and thus, cannot be estimated at this time. During 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income" and Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures About Segments of an Enterprise and Related Information." The Company will adopt the provisions of SFAS No. 130 in the first quarter of fiscal 1999 and SFAS No. 131 in its fiscal 1999 year end consolidated financial statements. Once implemented, these provisions will only have a disclosure impact on the consolidated financial statements. FORWARD-LOOKING STATEMENTS Certain statements contained herein are forward-looking regarding cash flow from operations, restaurant openings, operating margins, capital requirements, the availability of acceptable real estate locations for new restaurants, and other matters. These forward- looking statements involve risks and uncertainties and, consequently, could be affected by general business conditions, the impact of competition, the seasonality of the Company's business, governmental regulations, and inflation. PART II. OTHER INFORMATION Item 6: EXHIBITS Exhibit 27 Financial Data Schedule. Filed with EDGAR version. (a) Financial Data Schedule as of and for the 39 week period ended March 25, 1998. (b) Restated Financial Data Schedule as of and for the 39 week period ended March 24, 1997. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BRINKER INTERNATIONAL, INC. Date: May 11, 1998 By:___________________________________________ Ronald A. McDougall, President and Chief Executive Officer (Duly Authorized Signatory) Date: May 11, 1998 By:____________________________________________ Russell G. Owens, Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)