Item 2. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth selected
operating data as a percentage of total revenues from continuing operations for
the periods indicated. All information is derived from the accompanying consolidated
statements of income.
|
|
Thirteen Week Periods Ended
|
|
Twenty-Six Week Periods Ended
|
|
|
|
December 26,
|
|
December 27,
|
|
December 26,
|
|
December 27,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Operating Costs and
Expenses:
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
28.2
|
%
|
28.0
|
%
|
27.8
|
%
|
27.7
|
%
|
Restaurant expenses
|
|
56.1
|
%
|
54.8
|
%
|
56.1
|
%
|
55.1
|
%
|
Depreciation and amortization
|
|
4.5
|
%
|
4.6
|
%
|
4.4
|
%
|
4.6
|
%
|
General and administrative
|
|
4.6
|
%
|
5.0
|
%
|
4.6
|
%
|
5.3
|
%
|
Other gains and charges
|
|
(2.5
|
)%
|
0.2
|
%
|
(1.2
|
)%
|
(0.1
|
)%
|
Total operating costs and expenses
|
|
90.9
|
%
|
92.6
|
%
|
91.7
|
%
|
92.6
|
%
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
9.1
|
%
|
7.4
|
%
|
8.3
|
%
|
7.4
|
%
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
1.4
|
%
|
0.7
|
%
|
1.4
|
%
|
0.7
|
%
|
Other, net
|
|
(0.1
|
)%
|
(0.1
|
)%
|
(0.1
|
)%
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
Income before provision
for income taxes
|
|
7.8
|
%
|
6.8
|
%
|
7.0
|
%
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
2.5
|
%
|
2.2
|
%
|
2.2
|
%
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
5.3
|
%
|
4.6
|
%
|
4.8
|
%
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of taxes
|
|
1.0
|
%
|
0.3
|
%
|
0.4
|
%
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
6.3
|
%
|
4.9
|
%
|
5.2
|
%
|
5.2
|
%
|
10
The following
table details the number of restaurant openings during the second quarter,
year-to-date, total restaurants open at the end of the second quarter, and
total projected openings in fiscal 2008.
|
|
Second Quarter
|
|
Year-to-Date
|
|
Total Open at End
|
|
Projected
|
|
|
|
Openings
|
|
Openings
|
|
Of Second Quarter
|
|
Openings
|
|
|
|
Fiscal
|
|
Fiscal
|
|
Fiscal
|
|
Fiscal
|
|
Fiscal
|
|
Fiscal
|
|
Fiscal
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
Chilis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned
|
|
14
|
|
28
|
|
28
|
|
56
|
|
865
|
|
944
|
|
64-67
|
|
Domestic Franchised
|
|
11
|
|
4
|
|
16
|
|
8
|
|
395
|
|
202
|
|
28-33
|
|
Total
|
|
25
|
|
32
|
|
44
|
|
64
|
|
1,260
|
|
1,146
|
|
92-100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Macaroni Grill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned
|
|
3
|
|
1
|
|
3
|
|
3
|
|
216
|
|
224
|
|
3
|
|
Domestic Franchised
|
|
4
|
|
2
|
|
4
|
|
2
|
|
17
|
|
13
|
|
7-9
|
|
Total
|
|
7
|
|
3
|
|
7
|
|
5
|
|
233
|
|
237
|
|
10-12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On The Border:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned
|
|
3
|
|
3
|
|
5
|
|
5
|
|
137
|
|
128
|
|
6-8
|
|
Domestic Franchised
|
|
1
|
|
|
|
3
|
|
2
|
|
29
|
|
23
|
|
6-8
|
|
Total
|
|
4
|
|
3
|
|
8
|
|
7
|
|
166
|
|
151
|
|
12-16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maggianos
|
|
0
|
|
1
|
|
0
|
|
2
|
|
41
|
|
39
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International: (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned
|
|
1
|
|
|
|
1
|
|
|
|
6
|
|
5
|
|
0-3
|
|
Franchised
|
|
16
|
|
11
|
|
20
|
|
15
|
|
166
|
|
134
|
|
37-45
|
|
Total
|
|
17
|
|
11
|
|
21
|
|
15
|
|
172
|
|
139
|
|
37-48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grand Total
|
|
53
|
|
50
|
|
80
|
|
93
|
|
1,872
|
|
1,712
|
|
152-177
|
|
(a)
At the end of the second
quarter of fiscal year 2008, international company-owned restaurants by brand
included five Chilis and one Macaroni Grill. International franchise restaurants by brand
included 154 Chilis, 11 Macaroni Grills and one On the Border.
At
December 26, 2007, we owned the land and buildings for 231 of the 1,048
company-owned restaurants (excluding Macaroni Grill). The net book values of the land and buildings
associated with these restaurants totaled $184.3 million and $195.4 million,
respectively.
11
GENERAL
The following Managements Discussion and Analysis of
Financial Condition and Results of Operations (MD&A) is intended to help
the reader understand Brinker International, our operations, and our current
operating environment. For an understanding of the significant factors that
influenced our performance during the quarters ended December 26, 2007 and
December 27, 2006, the MD&A should be read in conjunction with the
consolidated financial statements and related notes included in this quarterly
report. The results of operations
discussed in MD&A exclude discontinued operations, except where otherwise
noted.
OVERVIEW
At December 26,
2007, we owned, operated, or franchised 1,872 restaurants through our four
brands: Chilis, Macaroni Grill, On The
Border, and Maggianos. The casual
dining industry continues to face a challenging operating environment due to
various factors such as the continually expanding array of food options in the
marketplace. Consumers have also limited
their discretionary spending in response to economic uncertainties and price
increases for essential goods and services.
In addition, commodity and labor costs have continued to increase, all
of which negatively impacted our results during the second quarter of fiscal
2008. While our results for the second
quarter fell short of expectations, we are fully committed to aggressively
pursuing all avenues to enhance shareholder return from both an operational and
financial perspective. We have continued
to drive shareholder value by executing several operational and financial
strategies over the last eighteen months including selling company-owned
restaurants to strong franchisees, closing underperforming locations, divesting
of brands, returning capital directly to our shareholders through aggressive
share repurchases, growth of our dividend program, reimaging Chilis
restaurants and growing our international presence. The achievement of these strategies can be
seen in the following highlights from the second quarter of fiscal 2008:
·
Sold 76 Chilis restaurants to ERJ Dining IV, LLC;
·
Increased royalty revenues from franchisees by 57.4
percent;
·
Built 18 new company-owned restaurants and saw
franchisees build 27 new restaurants;
·
Entered into an agreement with CMR,
S.A.B. de C.V. for the joint investment in a new corporation to develop 50
Chilis Grill & Bar and Maggianos Little Italy restaurants in Mexico,
6 of which have recently opened;
·
Increased quarterly dividend by 22 percent to $0.11
per share; and
·
Repurchased 4.1 million common shares.
In addition, we have been
very focused on managing operating expenses, including general and
administrative expenses, which allows us to deliver the best possible value to
our guests. We believe the financial
discipline demonstrated during these difficult times gives us the flexibility
to make the necessary long-term changes to evolve the business. Our ultimate goal is to build a business
model that will enable us to be successful in all macro-economic
environments. We believe the key to
reaching this goal resides within our existing restaurants, which will be our
focus in the coming months. Growing
profitable ongoing comparable restaurant sales is a critical component of
building this business model, the basis of which will be grounded in our five
areas of key focus hospitality; food and beverage excellence; atmosphere;
pace and convenience of the dining experience; and international expansion.
In
the near-term, we are significantly reducing our domestic development and
shifting a greater proportion of new restaurant development to our expanding
franchise network in the United States and internationally. With our focus on existing company-owned
restaurants, we will restrict development to a limited number of restaurants in
selected high-potential markets. The
restaurant site selection process is critical to our long-term success, and we
devote significant effort to the investigation of new locations utilizing a
variety of sophisticated analytical techniques. Multiple factors are considered
when locating satisfactory sites including lease or purchase terms,
construction and equipment costs, our ability to secure appropriate local
governmental permits and approvals, and our capacity to supervise construction
and recruit and train management personnel.
We intend to concentrate on the development of
12
certain
identified markets to achieve penetration levels deemed desirable in order to
improve competitive position, marketing potential and profitability. Expansion
efforts by us and our franchisees will be focused not only on major
metropolitan areas, but also on smaller market areas and non-traditional
locations (such as airports and food courts) that can adequately support any of
our restaurant brands.
In addition, we intend to pursue
domestic and international franchise expansion to achieve our goal of
increasing franchise ownership of our brands to at least 35% by the end of
fiscal year 2008 through an active program of franchising company-owned Chilis,
On The Border and Maggianos restaurants and development commitments from
franchisees. Future franchise development agreements are expected to remain
limited to enterprises having significant restaurant or enterprise management
experience and proven financial ability to develop multi-unit operations.
As evidenced
during fiscal 2008, the restaurant industry is a highly competitive business,
which is sensitive to changes in economic conditions, trends in lifestyles and
fluctuating costs. Operating margins for restaurants are susceptible to
fluctuations in prices of commodities, which include among other things, beef,
pork, chicken, seafood, dairy, cheese, produce, energy, wage rates and other
necessities to operate a restaurant. Additionally, the restaurant
industry is characterized by a high initial capital investment, coupled with
high labor costs. Despite these risks,
we remain confident in the long-term prospects of the industry and in our
ability to perform effectively in an extremely competitive marketplace.
REVENUES
Revenues for
the second quarter of fiscal 2008 were $868.2 million, a 3.5% decrease from the
$899.6 million generated for the same quarter of fiscal 2007. Revenues for the
twenty-six week period ended December 26, 2007 were $1,763.3 million, a
0.3% decrease from the $1,768.9 million generated for the same period in fiscal
2007. The decrease in revenue was primarily attributable to declines in
comparable restaurant sales and capacity at company-owned restaurants.
|
|
Thirteen Week Period Ended December 26, 2007
|
|
|
|
Comparable
Sales
|
|
Price
Increase
|
|
Mix Shift
|
|
Capacity
|
|
|
|
|
|
|
|
|
|
|
|
Brinker International (1)
|
|
(2.1
|
)%
|
2.8
|
%
|
0.3
|
%
|
(2.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
Chilis
|
|
(2.4
|
)%
|
2.8
|
%
|
0.9
|
%
|
(4.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
On The Border
|
|
(4.3
|
)%
|
2.2
|
%
|
0.1
|
%
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
Maggianos
|
|
1.7
|
%
|
3.1
|
%
|
(2.7
|
)%
|
6.6
|
%
|
13
|
|
Thirteen Week Period Ended December 27, 2006
|
|
|
|
Comparable Sales
|
|
Price
Increase
|
|
Mix Shift
|
|
Capacity
|
|
|
|
|
|
|
|
|
|
|
|
Brinker International (1)
|
|
(1.4
|
)%
|
2.0
|
%
|
0.3
|
%
|
9.4
|
%
|
|
|
|
|
|
|
|
|
|
|
Chilis
|
|
(1.2
|
)%
|
2.0
|
%
|
(0.1
|
)%
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
On The Border
|
|
(3.6
|
)%
|
1.8
|
%
|
3.3
|
%
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Maggianos
|
|
(1.3
|
)%
|
1.8
|
%
|
(0.1
|
)%
|
5.7
|
%
|
|
|
Twenty-Six Week Period Ended December 26, 2007
|
|
|
|
Comparable Sales
|
|
Price
Increase
|
|
Mix Shift
|
|
Capacity
|
|
|
|
|
|
|
|
|
|
|
|
Brinker International (1)
|
|
(1.2
|
)%
|
2.4
|
%
|
0.4
|
%
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
Chilis
|
|
(1.0
|
)%
|
2.5
|
%
|
1.1
|
%
|
(1.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
On The Border
|
|
(4.8
|
)%
|
1.7
|
%
|
(0.4
|
)%
|
7.3
|
%
|
|
|
|
|
|
|
|
|
|
|
Maggianos
|
|
1.2
|
%
|
2.6
|
%
|
(2.3
|
)%
|
8.1
|
%
|
|
|
Twenty-Six Week Period Ended December 27, 2006
|
|
|
|
Comparable Sales
|
|
Price
Increase
|
|
Mix Shift
|
|
Capacity
|
|
|
|
|
|
|
|
|
|
|
|
Brinker International (1)
|
|
(1.8
|
)%
|
2.5
|
%
|
0.4
|
%
|
9.7
|
%
|
|
|
|
|
|
|
|
|
|
|
Chilis
|
|
(1.7
|
)%
|
2.6
|
%
|
|
%
|
10.4
|
%
|
|
|
|
|
|
|
|
|
|
|
On The Border
|
|
(2.9
|
)%
|
2.1
|
%
|
3.4
|
%
|
5.2
|
%
|
|
|
|
|
|
|
|
|
|
|
Maggianos
|
|
(1.3
|
)%
|
2.2
|
%
|
(0.2
|
)%
|
8.8
|
%
|
(1)
Brinker International excludes Macaroni Grill.
Our capacity decreased 2.9% for the
second quarter and 0.2% for the year-to-date period (as measured by
average-weighted sales weeks) compared to the respective prior year periods.
The reduction in capacity is primarily due to the sale of 173 company-owned
restaurants to franchisees since the second quarter of fiscal 2007 and other
restaurant closures. The decline in capacity was partially offset by the
development of new company-owned restaurants.
Including the impact of restaurant sales to franchisees, we experienced
a net decrease of 67 company-owned restaurants since December 27,
2006. Comparable restaurant sales for
the second quarter of fiscal 2008 decreased 2.1% compared to the same quarter
of prior year primarily due to declines in guest traffic at Chilis and On the
Border partially offset by price increases at all brands. Royalty revenues from
franchisees increased 57.4% to $13.7 million in the second quarter of fiscal
2008 compared to $8.7 million in the prior year. For the year-to-date period, royalty revenues
from franchisees increased 50.6% to $25.9 million compared to $17.2 million in
fiscal 2007. The increases are primarily
due to the net addition of 229 franchise restaurants since December 27,
2006. In addition, the company recognized franchise and development fee revenue
of $6.3 million for the second quarter of fiscal 2008 and $7.7 million for the
year-to-date as compared to $615,000 and $2.8 million in the respective prior
year periods.
14
COSTS
AND EXPENSES
Cost of sales, as a
percent of revenues increased to 28.2% for the second quarter from 28.0% in the
prior year. Cost of sales, as a percent
of revenues increased to 27.8% for the year-to-date period from 27.7% in the
prior year. Cost of sales was negatively impacted in the current year by
unfavorable commodity prices, primarily beef, ribs, and cheese. Cost of sales was also affected by
unfavorable product mix shifts related to new menu items, offset by favorable
menu price changes and increased revenues from franchisees.
Restaurant expenses, as a
percent of revenues, increased to 56.1% for the second quarter and year-to-date
period of fiscal 2008 as compared to 54.8% and 55.1% in the same periods of the
prior year. The increase was driven by increased labor costs caused by
increases in state minimum wage rates and increased restaurant supply costs,
partially offset by increased revenues from franchisees and lower pre-opening
and stock-based compensation expenses.
The increase in state minimum wages began impacting restaurant expense
in January 2007; therefore, we
expect that labor costs will be more comparable beginning with the third
quarter of fiscal 2008. We anticipate that state and federal minimum wage
increases planned for calendar 2008 will have less of an impact on our labor
costs in future quarters.
Depreciation and amortization decreased
$1.7 million for the second quarter and $3.4 million for the year-to-date
period in fiscal 2008 compared to the same periods of the prior year primarily
driven by the sale of 95 company-owned Chilis restaurants to Pepper Dining, Inc.
in the fourth quarter of fiscal 2007 and the sale of 76 company-owned Chilis
restaurants to ERJ Dining IV, LLC in the second quarter of fiscal 2008. An increase in fully depreciated assets and
restaurant closures also contributed to the decrease. These decreases were
partially offset by an increase in depreciation due to the addition of new restaurants
and remodel investments.
General and
administrative expenses decreased $5.4 million, or 11.9%, for the second
quarter of fiscal 2008 as compared to the same period of fiscal 2007. General
and administrative expenses decreased $12.6 million, or 13.5%, for the
year-to-date period of fiscal 2008 as compared to the same period of fiscal
2007. The decrease in fiscal 2007 was primarily due to lower performance and
stock-based compensation expenses.
Other gains and
charges consist of net gains of $21.9 and $21.4 million for the second quarter
and year-to-date periods of fiscal 2008 respectively compared to a $2.0 million
net charge for the second quarter and a $1.2 million net gain for the
year-to-date period in fiscal 2007. The increase in fiscal 2008 was primarily
related to the $29.2 million gain recorded in the second quarter related to the
sale of 76 Chilis restaurants to ERJ Dining IV, LLC, partially offset by $7.3
million in charges primarily related to long-lived asset impairments.
Interest expense
was $12.5 million for the second quarter and $25.4 million for the year-to-date
period of fiscal 2008 compared to $6.6 million for the second quarter and $12.9
million for the year-to-date period of prior year. The increase in interest expense in fiscal
2008 is primarily due to additional debt outstanding of $400 million borrowed
under a three-year term loan used to fund share repurchases in fiscal 2007 and
general corporate purposes.
INCOME TAXES
The effective
income tax rate for continuing operations decreased to 31.7% for the second quarter
of fiscal 2008 from 32.7% in the prior year and to 31.3% for year-to-date
fiscal 2008 as compared to 32.6% for the same period of fiscal 2007. The decrease in the tax rate was primarily
due to an increase in federal tax credits, leverage from FICA tip credits and a
decrease in stock-based compensation expense.
15
LIQUIDITY
AND CAPITAL RESOURCES
Our primary source of liquidity is cash flows generated from our
restaurant operations. We expect our ability
to generate strong cash flows from operations to continue into the future. Net cash provided by operating activities of
continuing operations decreased to $214.4 million for the first two quarters of
fiscal 2008 from $256.6 million for the first two quarters of fiscal 2007
primarily due to the sale of 173 restaurants to franchisees as well as declines
in operating earnings adjusted for non-cash items and the timing and amount of
operational receipts and payments.
Capital expenditures consist of purchases
of land for future restaurant sites, new restaurants under construction,
purchases of new and replacement restaurant furniture and equipment, and
ongoing remodeling programs. Capital
expenditures were $149.4 million for the first two quarters of fiscal 2008
compared to $185.8 million for the same period of fiscal 2007. We estimate that our capital expenditures for
fiscal 2008 will be approximately $330 to $340 million and will be funded
entirely from operations and existing credit facilities.
In November 2007, we announced the
declaration of a cash dividend to common stock shareholders in the amount of
$0.11 per share which represented a 22% increase in our quarterly
dividend. Dividends of $11.1 million
were paid in December 2007 and we have paid approximately $20.6 million in
dividends year-to-date.
The Board of
Directors has authorized a total of $2,060.0 million in share repurchases,
which has been and will be used to return capital to shareholders and to
minimize the dilutive impact of stock options and other share-based awards. In June 2007,
we entered into a written trading plan in compliance with Rule 10b5-1
under the Securities Exchange Act of 1934, as amended, which provided for the
purchase of up to $140.0 million of shares of our common stock. Following the expiration of this plan, we
entered into another 10b5-1 plan for the purchase of up to $100.0 million of
shares of our common stock in November 2007. We terminated the latest
trading plan on November 23, 2007.
Pursuant to our stock repurchase plan, we repurchased approximately 9.1
million shares of our common stock for approximately $240 million during the
first two quarters of fiscal 2008, which was funded through existing credit
facilities.
In the future,
we may consider additional share repurchases based on several factors,
including our cash position, share price, operational liquidity, and planned
investment and financing needs. The
repurchased common stock is reflected as a reduction of shareholders equity.
In August 2007,
we extended the $50.0 million uncommitted credit facility through August 2008. In September 2007, we increased the
$50.0 million uncommitted credit facility to $100.0 million and extended the
expiration date to September 2008.
On October 24, 2007 we entered into a three-year term
loan agreement for $400.0 million and terminated the one-year unsecured
committed credit facility of $400.0 million set to expire in April 2008. The term loan proceeds were used to pay off
all outstanding amounts under the one-year unsecured committed credit
facility. The term loan bears interest
at LIBOR plus an applicable margin, which is a function of our credit rating at
such time, but is subject to a maximum of LIBOR plus 1.5% Based on our current credit rating, we are paying
interest at a rate of LIBOR plus 0.65%.
Excluding
the impact of assets held for sale, the working capital deficit increased to
$310.0 million at December 26, 2007 from $270.7 million at June 27,
2007 primarily due to the increase in gift card liabilities as a result of
increased holiday sales and an increase in income taxes payable due to timing
of payments. These increases were
partially offset by an increase in third party gift card receivables as well as
the reclassification of certain tax exposures to long-term pursuant to the
adoption of FIN 48.
We
believe that our various sources of capital, including availability under
existing credit facilities, ability to raise additional financing, and cash
flow from operating activities of continuing operations, are adequate to
finance operations as well as the repayment of current debt obligations. We are
not aware of any other event or trend that would potentially affect our
liquidity. In the event such a trend develops, we believe that there are
sufficient funds available under our credit facilities and from our internal
cash generating capabilities to adequately manage our ongoing business.
16
RECENT
ACCOUNTING PRONOUNCEMENTS
In December 2007,
the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 141R, Business Combinations, (SFAS 141R).
SFAS 141R requires most identifiable assets, liabilities, noncontrolling
interests, and goodwill acquired in a business combination to be recorded at
full fair value. The Statement applies
to all business combinations, including combinations among mutual entities and
combinations by contract alone. Under SFAS 141R, all business combinations will
be accounted for by applying the acquisition method. SFAS 141R is effective for
periods beginning on or after December 15, 2008 and will be effective for
us beginning in the third quarter of fiscal 2009 for business combinations
occurring after the effective date.
In December 2007,
the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51, (SFAS 160).
SFAS 160 will require noncontrolling interests (previously referred to as
minority interests) to be treated as a separate component of equity, not as a
liability or other item outside of permanent equity. The Statement applies to the accounting for
noncontrolling interests and transactions with noncontrolling interest holders in
consolidated financial statements. SFAS
160 is effective for periods beginning on or after December 15, 2008 and
is effective for us beginning in the third quarter of fiscal 2009. We do not expect that SFAS 160 will have a
material impact on our financial statements.
In December 2006,
the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements, (SFAS 157).
SFAS 157 clarifies the definition of fair value, describes methods used to
appropriately measure fair value, and expands fair value disclosure
requirements. This statement applies under other accounting pronouncements that
currently require or permit fair value measurements and is effective for us
beginning in fiscal 2009. In February 2007, the FASB issued Statement of
Financial Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, (SFAS 159).
SFAS 159 provides companies with an option to report selected assets and
liabilities at fair value. This statement contains financial statement
presentation and disclosure requirements for assets and liabilities reported at
fair value as a consequence of the election and is effective for us beginning
in fiscal 2009. We are currently in the process of assessing the impact that SFAS 157
and SFAS 159 may have on our consolidated financial statements.
The Emerging Issues Task
Force (EITF) reached a consensus on EITF 06-11, Accounting for Income Tax
Benefits of Dividends on Share-Based Payment Awards (EITF 06-11) in June 2007.
The EITF consensus indicates that the tax benefit received on dividends
associated with share-based awards that are charged to retained earnings should
be recorded in additional paid-in capital and included in the pool of excess
tax benefits available to absorb potential future tax deficiencies on
share-based payment awards. The consensus is effective for the tax benefits of
dividends declared in fiscal years beginning after December 15, 2007. EITF
06-11 will be effective for us beginning in fiscal 2009. We are currently in
the process of evaluating the impact that EITF 06-11 may have on our
consolidated financial statements.
Item 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our
quantitative and qualitative market risks since the prior reporting period.
Item 4. CONTROLS AND PROCEDURES
Based on their evaluation of our
disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15
under the Securities Exchange Act of 1934 [the Exchange Act]), as of the end
of the period covered by this report, our principal executive officer and
principal financial officer have concluded that our disclosure controls and
procedures are effective.
There
were no changes in our internal control over financial reporting during our
second quarter ended December 26, 2007, that have materially affected or
are reasonably likely to materially affect, our internal control over financial
reporting.
17
FORWARD-LOOKING STATEMENTS
We wish to caution you
that our business and operations are subject to a number of risks and
uncertainties. The factors listed below
are important factors that could cause actual results to differ materially from
our historical results and from those projected in forward-looking statements
contained in this report, in our other filings with the SEC, in our news
releases, written or electronic communications, and verbal statements by our
representatives.
You should be aware that
forward-looking statements involve risks and uncertainties. These risks and uncertainties may cause our
or our industrys actual results, performance or achievements to be materially
different from any future results, performances or achievements contained in or
implied by these forward-looking statements.
Forward-looking statements are generally accompanied by words like believes,
anticipates, estimates, predicts, expects, and other similar
expressions that convey uncertainty about future events or outcomes.
Risks
Related to Our Business
Competition may adversely
affect our operations and financial results.
The
restaurant business is highly competitive as to price, service, restaurant
location, nutritional and dietary trends and food quality, and is often
affected by changes in consumer tastes, economic conditions, financial and
credit markets, population and traffic patterns. We compete 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 ours.
There is active competition for management personnel and hourly
employees, and for attractive commercial real estate sites suitable for
restaurants.
Our sales volumes generally
decrease in winter months.
Our sales volumes fluctuate seasonally and are
generally higher in the summer months and lower in the winter months, which may
cause seasonal fluctuations in our operating results.
Changes in governmental
regulation may adversely affect our ability to open new restaurants and our
existing and future operations.
Each
of our restaurants is subject to licensing and regulation by alcoholic beverage
control, health, sanitation, safety and fire agencies in the state, county
and/or municipality where the restaurant is located. We generally have not encountered any
material difficulties or failures in obtaining the required licenses and
approvals that could delay or prevent the opening of a new restaurant, or impact
the continuing operations of an existing restaurant. Although we do not, at this time, anticipate
any occurring in the future, we cannot assure you that we will not experience
material difficulties or failures that could delay the opening of restaurants
in the future or impact the continuing operations of an existing restaurant.
We
are subject to federal and state environmental regulations, and although these
have not had a material negative effect on our operations, we cannot ensure
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.
We
are 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, the Immigration Reform and Control Act of 1986, various
family leave mandates and a variety of other laws enacted, or rules and
regulations promulgated, by federal, state and local governmental authorities
that govern these and other employment matters.
We expect 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, we cannot assure you that there will not be material
increases in the future. In addition,
our vendors may be affected by higher
minimum wage standards, which may increase the price of goods and services they
supply to us.
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Inflation may increase our operating expenses.
We
have not experienced a significant overall impact from inflation. Inflation can cause increased food, labor and
benefits costs and can increase our operating expenses. As operating expenses increase, we, to the
extent permitted by competition, recover increased costs by increasing menu prices,
or by reviewing, then implementing, alternative products or processes, or by
implementing other cost reduction procedures.
We cannot ensure, however, that we will be able to continue to recover
increases in operating expenses due to inflation in this manner.
Our profitability may be adversely affected by increases in energy
costs.
Our
success depends in part on our ability to absorb increases in utility
costs. Various regions of the United
States in which we operate multiple restaurants have experienced significant
increases in utility prices. If these
increases continue to occur, it would have an adverse effect on our
profitability.
Successful
mergers, acquisitions, divestitures and other strategic transactions are
important to our future growth and profitability.
We evaluate potential mergers,
acquisitions, franchisees of new and existing restaurants, joint venture
investments, and divestitures as part of our strategic planning
initiative. These transactions involve
various inherent risks, including accurately assessing:
·
the value, future growth
potential, strengths, weaknesses, contingent and other liabilities and
potential profitability of acquisition candidates;
·
our ability to achieve projected
economic and operating synergies;
·
unanticipated changes in
business and economic conditions affecting an acquired business;
·
the ability to obtain adequate
funding and financing for the transaction; and
·
our ability to complete
divestitures on acceptable terms and at or near the prices estimated as
attainable by us.
If we are unable to meet our strategic plans, our profitability in the
future may be adversely affected.
Our ability to meet our strategic plans is dependent
upon, among other things, the ability to:
·
identify by us and our
franchisees available, suitable and economically viable locations for new
restaurants,
·
identify adequate sources of
capital to fund and finance strategic initiatives, including new restaurant
development,
·
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.
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The
costs related to restaurant and brand 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. We cannot assure you that we will be able to
expand our capacity in accordance with our growth objectives or that the new
restaurants and brands opened or acquired will be profitable.
Unfavorable publicity relating to one or more of our 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 health concerns or operating issues stemming from
one or a limited number of restaurants.
In particular, since we depend heavily on the Chilis brand for a
majority of our revenues, unfavorable publicity relating to one or more Chilis
restaurants could have a material adverse effect on the Chilis brand, and
consequently on our business, financial condition and results of operations.
Identification of material weakness in internal control may adversely
affect our financial results.
We
are subject to the ongoing internal control provisions of Section 404 of
the Sarbanes-Oxley Act of 2002. Those
provisions provide for the identification of material weaknesses in internal
control. If such a material weakness is
identified, it could indicate a lack of adequate controls to generate accurate
financial statements. We routinely
assess our internal controls, but we cannot assure you that we will be able to
timely remediate any material weaknesses that may be identified in future
periods, or maintain all of the controls necessary for continued
compliance. Likewise, we cannot assure
you that we will be able to retain sufficient skilled finance and accounting
personnel, especially in light of the increased demand for such personnel among
publicly traded companies.
Other risk factors may adversely affect our financial performance.
Other
risk factors that could cause our actual results to differ materially from
those indicated in the forward-looking statements by affecting, among many
things, pricing, consumer spending and consumer confidence, include, without
limitation, changes in economic conditions and financial and credit markets,
credit availability, increased fuel costs and availability for our employees,
customers and suppliers, health epidemics or pandemics or the prospects of
these events (such as reports on avian flu), consumer perceptions of food
safety, changes in consumer tastes and behaviors, governmental monetary
policies, changes in demographic trends, availability of employees, terrorist
acts, energy shortages and rolling blackouts, and weather (including, major
hurricanes and regional snow storms) and other acts of God.
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