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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 25, 2002
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
December 25, 2002: 96,956,412
BRINKER INTERNATIONAL, INC.
INDEX
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
December 25, 2002 (Unaudited) and June 26, 2002 3
Consolidated Statements of Income
(Unaudited) - Thirteen week and twenty-six week
periods ended December 25, 2002 and
December 26, 2001 4
Consolidated Statements of Cash Flows
(Unaudited) - Twenty-six week periods ended
December 25, 2002 and December 26, 2001 5
Notes to Consolidated
Financial Statements (Unaudited) 6 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 14
Item 4. Controls and Procedures 14
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17 - 18
Signatures 19
Certifications 20 - 22
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BRINKER INTERNATIONAL, INC.
Consolidated Balance Sheets
(In thousands, except per share amounts)
December 25, June 26,
2002 2002
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 20,123 $ 10,091
Accounts receivable 34,726 22,613
Inventories 25,798 25,190
Prepaid expenses and other 68,495 66,727
Income taxes receivable - 15,673
Deferred income taxes 1,709 1,660
Total current assets 150,851 141,954
Property and Equipment, at Cost:
Land 263,261 254,000
Buildings and leasehold improvements 1,178,805 1,091,434
Furniture and equipment 576,214 635,403
Construction-in-progress 57,562 57,015
2,075,842 2,037,852
Less accumulated depreciation and amortization (643,788) (682,435)
Net property and equipment 1,432,054 1,355,417
Other Assets:
Goodwill, net 193,899 193,899
Other 85,528 92,066
Total other assets 279,427 285,965
Total assets $1,862,332 $1,783,336
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current installments of long-term debt $ 17,492 $ 17,292
Accounts payable 84,134 118,418
Accrued liabilities 192,570 166,510
Income taxes payable 41,756 -
Total current liabilities 335,952 302,220
Long-term debt, less current installments 400,756 426,679
Deferred income taxes 17,899 17,295
Other liabilities 71,988 60,046
Shareholders' Equity:
Common stock - 250,000,000 authorized shares; $0.10
par value; 117,499,541 shares issued and
96,956,412 shares outstanding at December 25,
2002, and 117,500,054 shares issued and
97,440,391 shares outstanding at June 26, 2002 11,750 11,750
Additional paid-in capital 332,397 330,191
Retained earnings 1,036,930 954,701
1,381,077 1,296,642
Less:
Treasury stock, at cost (20,543,129 shares at
December 25, 2002 and 20,059,663 shares at
June 26, 2002 (342,609) (317,674)
Unearned compensation (2,731) (1,872)
Total shareholders' equity 1,035,737 977,096
Total liabilities and shareholders' equity $1,862,332 $1,783,336
See accompanying notes to consolidated financial statements.
BRINKER INTERNATIONAL, INC.
Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Thirteen Week Periods Ended Twenty-Six Week Periods Ended
December 25, December 26, December 25, December 26,
2002 2001 2002 2001
Revenues $ 794,510 $ 685,751 $ 1,568,402 $ 1,358,406
Operating Costs and
Expenses:
Cost of sales 217,671 190,834 428,097 376,658
Restaurant expenses 447,343 377,260 870,949 744,080
Depreciation and amortization 38,701 30,151 75,858 58,337
General and administrative 31,776 30,688 64,321 58,247
Total operating costs and expenses 735,491 628,933 1,439,225 1,237,322
Operating income 59,019 56,818 129,177 121,084
Interest expense 2,450 2,837 6,421 6,621
Other, net 760 1,021 (830) 808
Income before provision for
income taxes 55,809 52,960 123,586 113,655
Provision for income taxes 18,584 18,324 41,357 39,385
Net income $ 37,225 $ 34,636 $ 82,229 $ 74,270
Basic net income per share $ 0.38 $ 0.35 $ 0.85 $ 0.76
Diluted net income per share $ 0.38 $ 0.35 $ 0.83 $ 0.74
Basic weighted average
shares outstanding 96,784 97,718 96,981 98,366
Diluted weighted average
shares outstanding 98,848 100,131 99,041 100,875
See accompanying notes to consolidated financial statements.
BRINKER INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Twenty-Six Week Periods Ended
December 25, December 26,
2002 2001
Cash Flows from Operating Activities:
Net income $ 82,229 $ 74,270
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 75,858 58,337
Amortization of deferred costs 6,182 2,516
Deferred income taxes 555 5,318
Impairment of intangible asset 4,123 -
Changes in assets and liabilities, excluding
effects of acquisitions:
Receivables (12,843) (3,565)
Inventories (608) 983
Prepaid expenses and other 1,738 (1,052)
Other assets 1,485 5,789
Current income taxes 57,429 11,472
Accounts payable (34,284) 3,584
Accrued liabilities 28,328 30,365
Other liabilities 3,469 1,516
Net cash provided by operating activities 213,661 189,533
Cash Flows from Investing Activities:
Payments for property and equipment (155,867) (115,220)
Payments for purchases of restaurants - (60,491)
Proceeds from sale of affiliate - 4,000
Investment in equity method investees (1,750) (12,322)
Repayment of notes receivable from affiliate 11,000 325
Issuance of loan to affiliate (1,400) (1,000)
Net repayments from (advances to) affiliates 730 (861)
Net cash used in investing activities (147,287) (185,569)
Cash Flows from Financing Activities:
Net payments on credit facilities (29,089) (147,779)
Net proceeds from issuance of debt - 244,243
Proceeds from issuances of treasury stock 13,469 14,520
Purchases of treasury stock (40,722) (87,503)
Net cash (used in)provided by financing activities (56,342) 23,481
Net change in cash and cash equivalents 10,032 27,445
Cash and cash equivalents at beginning of period 10,091 13,312
Cash and cash equivalents at end of period $ 20,123 $ 40,757
See accompanying notes to consolidated financial statements.
BRINKER INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The consolidated financial statements of Brinker International, Inc.
and its wholly-owned subsidiaries (collectively, the "Company") as
of December 25, 2002 and June 26, 2002 and for the thirteen-week and
twenty-six week periods ended December 25, 2002 and December 26,
2001, respectively, have been prepared by the Company pursuant to
the rules and regulations of the Securities and Exchange Commission
("SEC"). The Company owns, operates, or franchises various
restaurant concepts under the names of Chili's Grill & Bar
("Chili's"), Romano's Macaroni Grill ("Macaroni Grill"), On The
Border Mexican Grill & Cantina ("On The Border"), Maggiano's Little
Italy ("Maggiano's"), Corner Bakery Cafe ("Corner Bakery"), Big Bowl
Asian Kitchen ("Big Bowl"), and Cozymel's Coastal Grill
("Cozymel's"). In addition, the Company owns an approximately 43%
interest in the legal entities (collectively, the "Rockfish
Partnership") owning and developing Rockfish Seafood Grill
("Rockfish").
The information furnished herein reflects all adjustments
(consisting only 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 SEC rules and regulations. The notes
to the consolidated financial statements should be read in
conjunction with the notes to the consolidated financial statements
contained in the June 26, 2002 Form 10-K. Company management
believes that the disclosures are sufficient for interim financial
reporting purposes.
Certain prior year amounts in the accompanying consolidated
financial statements have been reclassified to conform with fiscal
2003 classifications. These reclassifications have no effect on the
Company's net income or financial position as previously reported.
2. Stock Option Plans
The Company accounts for its stock based compensation under the
recognition and measurement principles of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations ("APB 25"), and has adopted the disclosure-
only provisions of Statement of Financial Accounting Standard
("SFAS") No. 123. Under APB 25, no stock-based compensation cost is
reflected in net income for grants of stock options to employees
because the Company grants stock options with an exercise price
equal to the market value of the stock on the date of grant. Had
the Company used the fair value based accounting method for stock
compensation expense prescribed by SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro-
forma amounts illustrated as follows (in thousands, except per share
data):
Thirteen Week Periods Ended Twenty-Six Week Periods Ended
December 25, December 26, December 25, December 26,
2002 2001 2002 2001
Net income - as reported $ 37,225 $ 34,636 $ 82,229 $ 74,270
reported
Add: Reported stock-based
compensation expense,
net of taxes 621 692 1,195 1,074
Deduct: Fair value based
compensation expense,
net of taxes (4,714) (4,510) (9,031) (8,158)
Net income - pro-forma $ 33,132 $ 30,818 $ 74,393 $ 67,186
Earnings per share:
Basic - as reported $ 0.38 $ 0.35 $ 0.85 $ 0.76
Basic - pro-forma $ 0.34 $ 0.32 $ 0.77 $ 0.68
Diluted - as reported $ 0.38 $ 0.35 $ 0.83 $ 0.74
Diluted - pro-forma $ 0.34 $ 0.31 $ 0.75 $ 0.67
3. Investment in Unconsolidated Entities
In July 2001, the Company acquired a partnership interest in
Rockfish Partnership, a privately held Dallas-based restaurant
company. The Company made a $12.3 million capital contribution to
Rockfish Partnership in exchange for an approximate 40% ownership
interest. In October 2002, the Company made an additional $1.8
million capital contribution to Rockfish Partnership increasing its
ownership interest to 43%.
The Company entered into a note agreement (the "Note") with Rockfish
Partnership in December 2002. The Note is intended to fund future
Rockfish development and allows Rockfish Partnership to borrow up to
$4.0 million, bears interest at LIBOR plus 1.5%, and matures in
March 2003. At December 25, 2002, $1.4 million was outstanding
under the Note.
4. Provision for Impaired Assets and Restaurant Closings
During the second quarter of fiscal 2003, the Company recorded a
$5.4 million charge for long-lived asset impairments and exit costs
resulting from the decision to close nine restaurants and to write
down the assets of one under-performing restaurant. Substantially
all of the assets were fully impaired. The impairment charges and
exit costs are included in restaurant expenses in the consolidated
statement of income.
During the second quarter of fiscal 2003, the Company closed one of
the two remaining PIZZAAHHH! restaurant locations and cancelled all
future development plans for the concept. As a result of this
decision, a $4.1 million impairment charge was recorded,
representing the remaining net book value of the intellectual
property rights associated with the PIZZAAHHH! concept. The
impairment charge is included in restaurant expenses in the
consolidated statement of income.
5. Shareholders' Equity
Pursuant to the Company's stock repurchase plan, the Company
repurchased approximately 1,443,000 shares of its common stock for
$40.7 million during the first and second quarters of fiscal 2003,
resulting in a cumulative repurchase total of approximately 17.5
million shares of its common stock for $368.3 million of the
approved $410 million repurchase program. The Company's stock
repurchase plan is used by the Company to increase shareholder
value, offset the dilutive effect of stock option exercises, satisfy
obligations under its savings plans, and for other corporate
purposes. The repurchased common stock is reflected as a reduction
of shareholders' equity.
6. Supplemental Cash Flow Information
Cash paid for interest and income taxes is as follows (in
thousands):
Dec. 25, Dec. 26,
2002 2001
Interest, net of amounts capitalized $ 1,454 $ 6,170
Net income tax (refunds) payments (16,627) 22,595
Non-cash investing and financing activities are as follows (in
thousands):
Dec. 25. Dec. 26,
2002 2001
Restricted common stock issued, net of forfeitures $ 4,524 $ 2,354
Increase in fair value of interest rate swaps and debt 94 409
Increase (decrease) in fair value of interest rate
swaps on real estate leasing facility 8,473 (1,441)
7. Related Party Transaction
In fiscal 2002, the Company recorded an approximate $8.7 million
charge in restaurant expenses to reduce its notes receivable from
Eatzi's Corporation ("Eatzi's") to their net realizable value of
$11.0 million. In November 2002, the Company completed the
divestiture of Eatzi's and received an $11.0 million cash payment and
a $4.0 million promissory note. The promissory note is unsecured
and payable only upon the closing of an initial public offering by
Eatzi's. Due to the uncertainty of collecting the promissory note,
the Company has established a reserve for the entire principal balance.
Item 2. 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 consolidated
statements of income.
13 Week Periods Ended 26 Week Periods Ended
Dec. 25, Dec. 26, Dec. 25, Dec. 26,
2002 2001 2002 2001
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Operating Costs and Expenses:
Cost of sales 27.4 % 27.8 % 27.3 % 27.7 %
Restaurant expenses 56.3 % 55.0 % 55.5 % 54.8 %
Depreciation and amortization 4.9 % 4.4 % 4.8 % 4.3 %
General and administrative 4.0 % 4.5 % 4.1 % 4.3 %
Total operating costs and expenses 92.6 % 91.7 % 91.7 % 91.1 %
Operating income 7.4 % 8.3 % 8.3 % 8.9 %
Interest expense 0.3 % 0.4 % 0.4 % 0.5 %
Other, net 0.1 % 0.1 % 0.0 % 0.1 %
Income before provision for income taxes 7.0 % 7.8 % 7.9 % 8.3 %
Provision for income taxes 2.3 % 2.7 % 2.6 % 2.9 %
Net income 4.7 % 5.1 % 5.3 % 5.4 %
The following table details the number of restaurant openings
during the second quarter and year-to-date and total restaurants
open at the end of the second quarter.
Second Quarter Year-to-Date Total Open at End
Openings Openings Of Second Quarter
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
2003 2002 2003 2002 2003 2002
Chili's:
Company-owned 17 16 36 25 664 606
Franchised 7 8 10 14 200 182
Total 24 24 46 39 864 788
Macaroni Grill:
Company-owned 9 4 12 7 188 166
Franchised - - - - 6 6
Total 9 4 12 7 194 172
On The Border:
Company-owned 3 1 4 3 115 105
Franchised - 1 1 1 19 20
Total 3 2 5 4 134 125
Maggiano's 3 2 3 3 23 17
Corner Bakery:
Company-owned 3 2 5 6 78 67
Franchised 1 - 1 - 3 2
Total 4 2 6 6 81 69
Big Bowl 2 - 4 - 16 9
Cozymel's - - - - 15 14
Rockfish Partnership 1 2 4 2 16 10
Grand Total 46 36 80 61 1,343 1,204
REVENUES
Revenues for the second quarter of fiscal 2003 increased to $794.5
million, 15.9% over the $685.8 million generated for the same
quarter of fiscal 2002. Revenues for the twenty-six week period
ended December 25, 2002 rose 15.5% to $1,568.4 million from the
$1,358.4 million generated for the same period of fiscal 2002. The
increases are primarily attributable to a net increase of 115
company-owned restaurants since December 26, 2001 and an increase
in comparable store sales for the second quarter and year-to-date
of fiscal 2003 as compared to the same periods of fiscal 2002. The
Company increased its capacity (as measured in sales weeks) for the
second quarter and year-to-date of fiscal 2003 by 13.7% and 14.5%,
respectively, compared to the respective prior year periods.
Comparable store sales increased 2.1% and 1.5% for the second
quarter and year-to-date, respectively, from the same periods of
fiscal 2002. Menu prices in the aggregate increased 1.5% in fiscal
2003 as compared to fiscal 2002.
COSTS AND EXPENSES (as a Percent of Revenues)
Cost of sales decreased 0.4% for the second quarter and year-to-
date of fiscal 2003 as compared to the same periods of fiscal 2002.
These decreases were due to a 0.4% increase in menu prices for
meat, seafood, poultry and alcohol and a 1.0% decrease in commodity
prices for meat, seafood, dairy and cheese, offset by a 1.0%
unfavorable product mix shift for meat, seafood and produce.
Restaurant expenses increased 1.3% for the second quarter of fiscal
2003, as compared to the same period of fiscal 2002. The increase
was primarily due to $5.4 million in charges resulting from the
decision to close nine restaurants and to write down the assets of
one under-performing restaurant and a $4.1 million impairment of
intellectual property rights (see Note 4). The remaining increase
was due primarily to increases in preopening expenses. Restaurant
expenses increased 0.7% for year-to-date fiscal 2003 as compared to
the same period of fiscal 2002. The increase was primarily due to
the store closing and impairment charges previously discussed,
partially offset by decreases in utility costs.
Depreciation and amortization increased 0.5% for the second quarter
and year-to-date of fiscal 2003 as compared to the same periods of
fiscal 2002. The increase was due to new unit construction,
ongoing remodel costs, the acquisition of previously leased
equipment and real estate assets and restaurants acquired during
fiscal 2002. These increases were partially offset by increased
sales leverage and a declining depreciable asset base for older
units.
General and administrative expenses decreased 0.5% and 0.2% for the
second quarter and year-to-date of fiscal 2003, respectively, as
compared to the same periods of fiscal 2002. These decreases were
primarily due to the Company's continued focus on controlling
corporate expenditures and an increase in sales leverage.
Interest expense decreased 0.1% for the second quarter and year-to-
date of fiscal 2003 as compared with the same periods of fiscal
2002. These decreases were primarily due to a decrease in interest
expense on the revolving lines-of-credit resulting from a lower
average outstanding balance, and an increase in interest
capitalization related to increased new restaurant construction
activity. These decreases were partially offset by the
amortization of debt issuance costs and debt discounts on the
Company's $431.7 million convertible debt.
Other, net remained flat for the second quarter of fiscal 2003 as
compared with the same period of fiscal 2002. During the second
quarter of fiscal 2003, the Company recorded a $1.3 million gain
from life insurance proceeds, which was offset by an approximate
$950,000 increase in net savings plan obligations and increased
equity losses related to the Company's share in equity method
investees. Other, net decreased 0.1% for the first six months of
fiscal 2003 as compared to the same period of fiscal 2002. The
decrease was primarily due to gains from life insurance proceeds
received during the first and second quarters of fiscal 2003
totaling approximately $3.5 million. These gains were partially
offset by a $1.5 million increase in the Company's net savings plan
obligations and a $1.2 million increase in equity losses.
INCOME TAXES
The Company's effective income tax rate decreased to 33.3% from
34.6% for the second quarter of fiscal 2003 and to 33.5% from 34.7%
year-to-date of fiscal 2002. The decrease is primarily due to the
non-taxable gains from life insurance proceeds.
NET INCOME AND NET INCOME PER SHARE
Net income for the second quarter and year-to-date of fiscal 2003
increased 7.5% and 10.7%, respectively, compared to the same
periods of fiscal 2002. Diluted net income per share increased for
the second quarter and year-to-date of fiscal 2003 8.6% and 12.2%,
respectively, compared to the same periods of fiscal 2002.
Excluding the after-tax effects of the provision for impaired
assets and restaurant closings ($6.4 million), net income for the
second quarter and year-to-date of fiscal 2003 increased 25.7% and
19.2%, respectively, compared to the same periods of fiscal 2002.
Diluted net income per share, excluding the provision for impaired
assets and restaurant closings, increased 25.7% and 21.5% for the
second quarter and year-to-date of fiscal 2003, respectively,
compared to the same periods of fiscal 2002. The increase in both
net income and diluted net income per share, excluding the
provision for impaired assets and restaurant closings, was
primarily due to increasing revenues driven by increases in sales
weeks, comparable store sales, and menu prices and decreases in
cost of sales and general and administrative expenses, partially
offset by increases in restaurant and depreciation and amortization
expenses as a percent of revenues.
LIQUIDITY AND CAPITAL RESOURCES
The working capital deficit increased from $160.3 million at June
26, 2002 to $185.1 million at December 25, 2002. Net cash provided
by operating activities increased to $213.7 million for the first
six months of fiscal 2003 from $189.5 million during the same
period in fiscal 2002 due to increased profitability and the timing
of operational receipts and payments. The Company believes that
its various sources of capital, including availability under
existing credit facilities and cash flow from operating activities,
are adequate to finance operations as well as the repayment of
current debt obligations.
The Company's contractual obligations and credit facilities as of
December 25, 2002 are as follows:
Payment Due by Period
(in thousands)
Less than 2-3 4-5 After 5
Total 1 Year Years Years Years
Convertible debt (a) $ 258,493 $ - $ - $ - $ 258,493
Senior notes 46,047 15,923 30,124 - -
Credit facilities 35,700 - 35,700 - -
Capital leases 85,875 5,328 9,431 9,157 61,959
Mortgage loan
obligations 42,444 2,218 7,132 4,359 28,735
Operating leases 885,732 92,245 177,241 160,001 456,245
Amount of Credit Facility Expiration by Period
(in thousands)
Total Less than 2-3 4-5 Over 5
Commitment 1 year (b) Years Years Years
Credit facilities $ 375,000 $ 100,000 $ 275,000 $ - $ -
(a) The convertible debt was issued at a discount
representing a yield to maturity of 2.75% per annum. The
$258.5 million balance is the accreted carrying value of the
debt at December 25, 2002. The convertible debt will continue
to accrete at 2.75% per annum and if held to maturity in
October 2021 the obligation will total $431.7 million.
(b) The portion of the credit facilities that expires in less
than one year is an uncommitted obligation giving the lenders
the option not to extend the Company funding. However, the
lenders have not exercised this option in the past and the
Company anticipates that these funds will be available in the
future. Should any or all of these obligations not be
extended, the Company has adequate capacity under the
committed facility, which does not expire until fiscal 2006.
In October 2002, the Company made an additional $1.8 million
capital contribution to Rockfish Partnership increasing its
ownership interest to 43%. Additionally, the Company continued its
investment strategy related to Rockfish by entering into a note
agreement (the "Note") with Rockfish Partnership in December 2002.
The Note is intended to fund future Rockfish development and allows
Rockfish Partnership to borrow up to $4.0 million, bears interest
at LIBOR plus 1.5%, and matures in March 2003. Rockfish intends to
replace the Note with long-term financing upon maturity. At
December 25, 2002, $1.4 million was outstanding under the Note.
Capital expenditures consist of purchases of land for future
restaurant sites, new restaurants under construction, purchases of
new and replacement restaurant furniture and equipment, and ongoing
remodeling programs. Capital expenditures, net of amounts funded
under the respective equipment and real estate leasing facilities,
were $155.9 million for the first six months of fiscal 2003
compared to $115.2 million for the same period of fiscal 2002. The
increase is due primarily to an increase in the number of new store
openings and the elimination of the use of equipment and real
estate leasing facilities beginning in the third quarter of fiscal
2002. The Company estimates that its capital expenditures during
the third quarter of fiscal 2003 will approximate $85 million.
These capital expenditures will be funded entirely from operations
and existing credit facilities.
Pursuant to the Company's stock repurchase plan, approximately
1,443,000 shares of its common stock were repurchased for $40.7
million during the first and second quarters of fiscal 2003. As of
December 25, 2002, approximately 17.5 million shares had been
repurchased for $368.3 million under the approved $410 million
stock repurchase plan. The Company repurchases common stock to
increase shareholder value, offset the dilutive effect of stock
option exercises, satisfy obligations under its savings plans, and
for other corporate purposes. The repurchased common stock is
reflected as a reduction of shareholders' equity. The Company
financed the repurchase program through a combination of cash
provided by operations and drawdowns on its available credit
facilities.
The Company is not aware of any other event or trend which would
potentially affect its liquidity. In the event such a trend
develops, the Company believes that there are sufficient funds
available under its lines of credit and from its strong internal
cash generating capabilities to adequately manage the expansion of
business.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board
("FASB") issued FASB Interpretation No. ("FIN") 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". This
interpretation supercedes FIN 34 "Disclosure of Indirect Guarantee
of Indebtedness of Others". FIN 45 addresses the disclosures to
be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees. It also
requires that a guarantor recognize a liability, at the inception
of a guarantee, for the fair value of the obligation undertaken in
issuing the guarantee. The initial measurement and recognition
provisions of FIN 45 are effective for guarantees issued or
modified after December 31, 2002. The disclosure requirements are
effective for interim or annual periods ending after December 15,
2002. There were no disclosures required during the second
quarter of fiscal 2003 and the Company does not expect the
adoption of the measurement and recognition provisions of this
interpretation to have a material impact on its results of
operations or financial position.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the quantitative and
qualitative market risks of the Company since the prior reporting
period.
Item 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an
evaluation was carried out under the supervision and with the
participation of the Company's management, including its Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rule 13a-14(c) under the
Securities Exchange Act of 1934). Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that
the design and operation of these disclosure controls and
procedures were effective.
There were no significant changes in the Company's internal
controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
FORWARD-LOOKING STATEMENTS
The Company wishes to caution readers that the following important
factors, among others, could cause the actual results of the
Company to differ materially from those indicated by forward-
looking statements made in this report and from time to time in
news releases, reports, proxy statements, registration statements
and other written communications, as well as verbal forward-looking
statements made from time to time by representatives of the
Company. Such forward-looking statements involve risks and
uncertainties that may cause the Company's or the restaurant
industry's actual results, level of activity, performance or
achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or
implied by these forward-looking statements. Factors that might
cause actual events or results to differ materially from those
indicated by these forward-looking statements may include matters
such as future economic performance, restaurant openings, operating
margins, the availability of acceptable real estate locations for
new restaurants, the sufficiency of the Company's cash balances and
cash generated from operating and financing activities for the
Company's future liquidity and capital resource needs, and other
matters, and are generally accompanied by words such as "believes,"
"anticipates," "estimates," "predicts," "expects" and similar
expressions that convey the uncertainty of future events or
outcomes. An expanded discussion of some of these risk factors
follows.
Competition may adversely affect the Company's operations and
financial results.
The restaurant business is highly competitive with respect to
price, service, restaurant location and food quality, and is often
affected by changes in consumer tastes, economic conditions,
population and traffic patterns. The Company competes within each
market with locally-owned restaurants as well as national and
regional restaurant chains, some of which operate more restaurants
and have greater financial resources and longer operating histories
than the Company. There is active competition for management
personnel and for attractive commercial real estate sites suitable
for restaurants. In addition, factors such as inflation, increased
food, labor and benefits costs, and difficulty in attracting hourly
employees may adversely affect the restaurant industry in general
and the Company's restaurants in particular.
The Company's sales volumes generally decrease in winter months.
The Company's sales volumes fluctuate seasonally, and are generally
higher in the summer months and lower in the winter months, which
may cause seasonal fluctuations in the Company's operating results.
Changes in governmental regulation may adversely affect the
Company's ability to open new restaurants and the Company's
existing and future operations.
Each of the Company's restaurants is subject to licensing and
regulation by alcoholic beverage control, health, sanitation,
safety and fire agencies in the state and/or municipality in which
the restaurant is located. The Company has not encountered any
difficulties or failures in obtaining the required licenses or
approvals that could delay or prevent the opening of a new
restaurant and although the Company does not, at this time,
anticipate any occurring in the future, there can be no assurance
that the Company will not experience material difficulties or
failures that could delay the opening of restaurants in the future.
The Company is subject to federal and state environmental
regulations, and although these have not had a material negative
effect on the Company's operations, there can be no assurance that
there will not be a material negative effect in the future. More
stringent and varied requirements of local and state governmental
bodies with respect to zoning, land use and environmental factors
could delay or prevent development of new restaurants in particular
locations. The Company is subject to the Fair Labor Standards Act,
which governs such matters as minimum wages, overtime and other
working conditions, along with the Americans With Disabilities Act,
various family leave mandates, and a variety of other laws enacted
by the states that govern these and other employment law matters.
Although the Company expects increases in payroll expenses as a
result of federal and state mandated increases in the minimum wage,
and although such increases are not expected to be material, there
can be no assurance that there will not be material increases in
the future. However, the Company's vendors may be affected by
higher minimum wage standards, which may result in increases in the
price of goods and services supplied to the Company.
Inflation may increase the Company's operating expenses.
The Company has not experienced a significant overall impact from
inflation. As operating expenses increase, the Company, to the
extent permitted by competition, recovers increased costs by
increasing menu prices, by reviewing, then implementing,
alternative products or processes, or by implementing other cost-
reduction procedures. There can be no assurance, however, that the
Company will be able to continue to recover increases in operating
expenses due to inflation in this manner.
Increased energy costs may adversely affect the Company's
profitability.
The Company's success depends in part on its ability to absorb
increases in utility costs. Various regions of the United States
in which the Company operates multiple restaurants, particularly
California, experienced significant increases in utility prices
during the 2001 fiscal year. If these increases should recur, they
will have an adverse effect on the Company's profitability.
If the Company is unable to meet its growth plan, the Company's
profitability in the future may be adversely affected.
The Company's ability to meet its growth plan is dependent upon,
among other things, its ability to identify available, suitable and
economically viable locations for new restaurants, obtain all
required governmental permits (including zoning approvals and
liquor licenses) on a timely basis, hire all necessary contractors
and subcontractors, and meet construction schedules. The costs
related to restaurant and concept development include purchases and
leases of land, buildings and equipment and facility and equipment
maintenance, repair and replacement. The labor and materials costs
involved vary geographically and are subject to general price
increases. As a result, future capital expenditure costs of
restaurant development may increase, reducing profitability. There
can be no assurance that the Company will be able to expand its
capacity in accordance with its growth objectives or that the new
restaurants and concepts opened or acquired will be profitable.
Unfavorable publicity relating to one or more of the Company's
restaurants in a particular brand may taint public perception of
the brand.
Multi-unit restaurant businesses can be adversely affected by
publicity resulting from poor food quality, illness or other health
concerns or operating issues stemming from one or a limited number
of restaurants. In particular, since the Company depends heavily
on the "Chili's" brand for a majority of its revenues, unfavorable
publicity relating to one or more Chili's restaurants could have a
material adverse effect on the Company's business, results of
operations and financial condition.
Other risk factors may adversely affect the Company's financial
performance.
Other risk factors that could cause the Company's actual results to
differ materially from those indicated in the forward-looking
statements include, without limitation, changes in economic
conditions, consumer perceptions of food safety, changes in
consumer tastes, governmental monetary policies, changes in
demographic trends, availability of employees, terrorist acts, and
weather and other acts of God.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Proxy Statement dated September 24, 2002 for the Annual
Meeting of Shareholders held on November 14, 2002, as filed with
the Securities and Exchange Commission on September 24, 2002, is
incorporated herein by reference.
(a) The Annual Meeting of Shareholders of the Company was held on
November 14, 2002.
(b) Each of the management's nominees, as described in the Proxy
Statement referenced above, was elected a director to hold office
until the next Annual Meeting of Shareholders or until his or her
successor is elected and qualified.
Votes Against
Votes For or Withheld
Ronald A. McDougall 84,773,226 2,098,347
Douglas H. Brooks 86,460,108 411,465
Dan W. Cook, III 85,394,664 1,476,909
Marvin J. Girouard 84,572,097 2,299,476
Ronald Kirk 86,430,326 441,247
Jeffrey A. Marcus 86,385,916 485,657
Erle Nye 86,193,729 677,844
Cece Smith 84,574,970 2,296,603
James E. Oesterreicher 84,571,833 2,299,740
Roger T. Staubach 83,704,729 3,166,844
(c) The following matter was also voted upon at the meeting and
approved by the shareholders:
(i) proposal regarding an amendment to the Stock Option and
Incentive Plan
Votes For 67,825,429
Votes Against 18,947,662
Votes Abstained 98,482
(d)The following matter was also voted upon at the meeting and
rejected by the shareholders:
(i) proposal regarding genetically engineered ingredients in food
products
Votes For 4,779,957
Votes Against 58,670,236
Votes Abstained 15,978,796
Item 6. Exhibits and Reports on FORM 8-K
(a) Exhibits
99(1) Certification by Ronald A. McDougall, Chairman
of the Board and Chief Executive Officer of the
Registrant, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99(2) Certification by Charles M. Sonsteby, Executive
Vice President and Chief Financial Officer of the
Registrant, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
A current report on Form 8-K, dated October 2, 2002 was filed with
the Securities and Exchange Commission on October 2, 2002. This
Form 8-K contained the statements under oath of the Principal
Executive Officer and Principal Financial Officer issued in
accordance with the Securities and Exchange Commission's order
issued June 27, 2002 requiring the filing of sworn statements
pursuant to Section 21(a)(1) of the Securities Exchange Act of
1934.
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: February 7, 2003 By: /s/ Ronald A. McDougall
Ronald A. McDougall,
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: February 7, 2003 By: /s/ Charles M. Sonsteby
Charles M. Sonsteby,
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATIONS
I, Ronald A. McDougall, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Brinker
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: February 7, 2003 By: /s/ Ronald A. McDougall
Ronald A. McDougall,
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
I, Charles M. Sonsteby, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Brinker
International, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements
made, in light of the circumstances under which such
statements were made, not misleading with respect to the
period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there
were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 7, 2003 By: /s/ Charles M. Sonsteby
Charles M. Sonsteby,
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)