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Brinker International 10-K 2009

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EXHIBIT 13


BRINKER INTERNATIONAL, INC.

SELECTED FINANCIAL DATA

(In thousands, except per share amounts and number of restaurants)

 
  Fiscal Years  
 
  2009   2008   2007   2006   2005  

Income Statement Data:

                               

Revenues

  $ 3,620,580   $ 4,235,223   $ 4,376,904   $ 4,151,291   $ 3,749,539  
                       

Operating Costs and Expenses:

                               
 

Cost of sales

    1,010,515     1,200,763     1,222,198     1,160,931     1,059,822  
 

Restaurant expenses

    2,050,653     2,397,908     2,435,866     2,283,737     2,085,529  
 

Depreciation and amortization

    161,800     165,229     189,162     190,206     179,908  
 

General and administrative

    152,591     170,703     194,349     207,080     153,116  
 

Other gains and charges

    134,787     203,950     (8,999 )   (17,262 )   52,779  
                       
   

Total operating costs and expenses

    3,510,346     4,138,553     4,032,576     3,824,692     3,531,154  
                       

Operating income

    110,234     96,670     344,328     326,599     218,385  

Interest expense

    33,330     45,862     30,929     22,857     25,260  

Other, net

    (9,834 )   (4,046 )   (5,071 )   (1,656 )   1,526  
                       

Income before provision for income taxes

    86,738     54,854     318,470     305,398     191,599  

Provision for income taxes

    7,572     3,132     88,421     91,448     33,143  
                       
   

Income from continuing operations

    79,166     51,722     230,049     213,950     158,456  
   

(Loss) income from discontinued operations, net of taxes

                (1,555 )   1,763  
                       
       

Net income

  $ 79,166   $ 51,722   $ 230,049   $ 212,395   $ 160,219  
                       

Basic net income per share:

                               
   

Income from continuing operations

  $ 0.78   $ 0.50   $ 1.90   $ 1.66   $ 1.19  
                       
   

(Loss) income from discontinued operations

  $   $   $   $ (0.01 ) $ 0.02  
                       
   

Net income per share

  $ 0.78   $ 0.50   $ 1.90   $ 1.65   $ 1.21  
                       

Diluted net income per share:

                               
   

Income from continuing operations

  $ 0.77   $ 0.49   $ 1.85   $ 1.63   $ 1.14  
                       
   

(Loss) income from discontinued operations

  $   $   $   $ (0.01 ) $ 0.01  
                       
   

Net income per share

  $ 0.77   $ 0.49   $ 1.85   $ 1.62   $ 1.15  
                       

Basic weighted average shares outstanding

    101,852     103,101     121,062     128,766     132,795  
                       

Diluted weighted average shares outstanding

    102,713     104,897     124,116     130,934     141,344  
                       

Balance Sheet Data:

                               

Working capital (deficit)(a)

  $ (39,667 ) $ (70,801 ) $ 111,706   $ 246,649   $ 375,283  

Total assets

    1,948,947     2,193,122     2,318,021     2,221,779     2,156,124  

Long-term obligations(a)

    893,141     1,071,209     969,468     629,600     607,208  

Shareholders' equity

    646,924     595,089     805,089     1,075,832     1,100,282  

Cash dividends per share

  $ 0.44   $ 0.42   $ 0.34   $ 0.20   $  

Number of Restaurants Open (End of Period):

                               

Company-operated

    1,024     1,265     1,312     1,290     1,268  

Franchised/Joint venture

    665     623     489     332     320  
                       
       

Total

    1,689     1,888     1,801     1,622     1,588  
                       

(a)
Prior year amounts have been updated to conform with fiscal 2009 presentation.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

        The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help you understand our company, our operations, and our current operating environment. For an understanding of the significant factors that influenced our performance during the past three fiscal years, the MD&A should be read in conjunction with the consolidated financial statements and related notes included in this annual report. Our MD&A consists of the following sections:

    Overview—a general description of our business and the casual dining segment of the restaurant industry

    Results of Operations—an analysis of our consolidated statements of income for the three years presented in our consolidated financial statements

    Liquidity and Capital Resources—an analysis of cash flows including capital expenditures, aggregate contractual obligations, share repurchase activity, known trends that may impact liquidity, and the impact of inflation

    Critical Accounting Estimates—a discussion of accounting policies that require critical judgments and estimates

OVERVIEW

        We are principally engaged in the ownership, operation, development, and franchising of the Chili's Grill & Bar ("Chili's"), On The Border Mexican Grill & Cantina ("On The Border") and Maggiano's Little Italy ("Maggiano's") restaurant brands. At June 24, 2009, we owned, operated, or franchised 1,689 restaurants. We sold Romano's Macaroni Grill ("Macaroni Grill") to Mac Acquisition LLC ("Mac Acquisition"), an affiliate of San Francisco-based Golden Gate Capital, in December 2008 and purchased an 18.2% ownership interest in the new entity.

        Fiscal 2009 was another challenging year for us and the casual dining industry. The economic environment significantly impacted our results; however, we are committed to strengthening our business model and improving profitability despite the significant challenges we currently face. We are focused on initiatives that will allow our business to operate as efficiently as possible and will allow us to maintain our position as an industry leader. We believe that the significant downturn in the economy, including financial market volatility, unemployment and the housing crisis will continue to negatively impact consumer confidence and put pressure on spending. Our negative traffic trends indicate that our guests are limiting discretionary spending by reducing the frequency of their visits to our restaurants or scaling back on check totals. We also experienced a decline in gift card sales of approximately 15% during the holiday season compared to the prior year which negatively impacted fiscal 2009 revenue. We will continually evaluate how we manage the business and make necessary changes in response to competition and the economic factors affecting the restaurant industry.

        Our goal is to take actions that will enable us to emerge from this recession in a position of strength with a strong balance sheet and improved operating profit. We are exhibiting discipline in our capital allocation and are taking steps to create sustainable margin improvements through cost controls and operational efficiencies. These steps will help maintain the health of our balance sheet and will provide the stable financial base needed to maintain our business through a depressed operating environment. We are driving profit improvements through a disciplined approach to operations, company-owned new restaurant development and the closure of underperforming restaurants. Effective management of food costs and a focus on labor productivity and reducing fixed costs is helping us gain sustainable margin improvements. Our emphasis on the operations of our existing restaurants has resulted in lower turnover which has

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positively impacted labor cost and efficiency. Additionally, generating strong cash flows has long been one of our hallmarks and we have taken steps to solidify our cash flows to provide the necessary flexibility to address current challenges and help drive the business forward. We have completed the closure of underperforming restaurants in fiscal 2009 and reduced our fiscal 2009 capital expenditures by approximately $90 million from our initial plan. Virtually all company-owned domestic new restaurant development in fiscal 2010 has been curtailed; however, we will continue development under our international joint venture arrangements. Enhanced free cash flows resulting from our financial discipline and proceeds from the sale of Macaroni Grill have allowed us to reduce our debt levels and will provide flexibility for further debt reductions.

        We are committed to our long term strategies and initiatives centered on our five areas of focus—hospitality; food and beverage excellence; restaurant atmosphere; pace and convenience; and international expansion. These strategic priorities are designed to strengthen our brands and build on the long-term health of the company by engaging and delighting our guests, differentiating our brands from the competition, reducing the costs associated with managing our restaurants and establishing a strong presence in key markets around the world. However, we will monitor the results closely as well as the current business environment in order to pace the implementation of our initiatives appropriately.

        We strongly believe investments in these five strategic priorities will strengthen our brands and allow us to improve our competitive position and deliver profitable growth over the long term for our shareholders. For example, we believe that the unique and delicious food and signature drinks; the new flavors and offerings we continue to create at each of our brands; and the warm, welcoming and revitalized atmospheres will give our guests new reasons to dine with us more often. Another top area of focus remains creating a culture of hospitality that will differentiate our brands from all others in the industry. Through our investments in team member training and guest measurement programs, we are gaining traction in this area and providing guests a reason to make our brands their preferred choice when dining out. We have recently combined the Chili's and On the Border leadership teams. This change was made to streamline decision making, enhance sharing of best practices and leverage our talent across the portfolio. We believe this structure will enhance our focus on actions that will improve the guest experience. And, with growing economic pressures in the United States and globally, international expansion allows further diversification of our portfolio, enabling us to build strength in a variety of markets and economic conditions. Our growth will be driven by cultivating relationships with franchisees and joint venture partners. Our growing percentage of franchise operations both domestically and internationally enable us to improve margins as royalty payments impact the bottom line.

        The casual dining industry is a competitive business which is sensitive to changes in economic conditions, trends in lifestyles and fluctuating costs. Our top priority remains increasing profitable traffic over time. We believe that this focus, combined with discipline around the use of capital and efficient management of operating expenses, will enable us to maintain our position as an industry leader. We remain confident in the financial health of our company, the long-term prospects of the industry as well as in our ability to perform effectively in a competitive marketplace and a variety of economic environments.

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RESULTS OF OPERATIONS FOR FISCAL YEARS 2009, 2008, AND 2007

        The following table sets forth income and expense items as a percentage of total revenues for the periods indicated:

 
  Percentage of Total Revenues
Fiscal Years
 
 
  2009   2008   2007  

Revenues

    100.0 %   100.0 %   100.0 %
               

Operating Costs and Expenses:

                   
 

Cost of sales

    27.9 %   28.4 %   27.9 %
 

Restaurant expenses

    56.7 %   56.6 %   55.7 %
 

Depreciation and amortization

    4.5 %   3.9 %   4.3 %
 

General and administrative

    4.2 %   4.0 %   4.4 %
 

Other gains and charges

    3.7 %   4.8 %   (0.2 )%
               
   

Total operating costs and expenses

    97.0 %   97.7 %   92.1 %
               

Operating income

    3.0 %   2.3 %   7.9 %

Interest expense

    0.9 %   1.1 %   0.7 %

Other, net

    (0.3 )%   (0.1 )%   (0.1 )%
               

Income before provision for income taxes

    2.4 %   1.3 %   7.3 %

Provision for income taxes

    0.2 %   0.1 %   2.0 %
               
   

Net income

    2.2 %   1.2 %   5.3 %
               

REVENUES

        Revenues for fiscal 2009 decreased to $3,620.6 million, a 14.5% decrease from the $4,235.2 million generated for fiscal 2008. The decrease in revenue was primarily attributable to net declines in capacity at company-owned restaurants as well as a decrease in comparable restaurant sales across all brands as follows:

 
  Fiscal Year Ended June 24, 2009  
 
  Capacity   Price
Increase
  Mix Shift   Comparable
Sales
 

Brinker International

    (10.7 )%   3.0 %   (1.0 )%   (6.0 )%
 

Chili's

    (1.6 )%   3.2 %   (0.8 )%   (5.6 )%
 

On The Border

    (5.1 )%   3.4 %   (1.4 )%   (4.4 )%
 

Maggiano's

    3.7 %   1.5 %   (2.2 )%   (7.3 )%
 

Macaroni Grill(1)

    (14.6 )%   2.8 %   (1.1 )%   (9.8 )%

(1)
Macaroni Grill capacity and comparable restaurant sales for the fiscal year ended June 24, 2009 includes the impact through the sale date of December 18, 2008.

        Our capacity decreased 10.7% in fiscal 2009 (as measured by average-weighted sales weeks). The reduction in capacity was primarily due to the sale of 198 restaurants (189 of which were Macaroni Grills) and 55 restaurant closures (five of which were Macaroni Grills) during fiscal 2009, partially offset by the development of new company-owned restaurants. Including the impact of the sale of Macaroni Grill and other restaurant sales to franchisees, we experienced a net decrease of 241 company-owned restaurants since June 25, 2008.

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        Comparable restaurant sales decreased 6.0% in fiscal 2009 compared to fiscal 2008. The decrease in comparable restaurant sales resulted from a decline in guest traffic and unfavorable product mix shifts across all brands, partially offset by an increase in menu prices across all brands.

        Revenues for fiscal 2008 decreased to $4,235.2 million, a 3.2% decrease from the $4,376.9 million generated for fiscal 2007. The decrease in revenue was primarily attributable to net declines in capacity at company-owned restaurants as well as a decrease in comparable restaurant sales as follows:

 
  Fiscal Year Ended June 25, 2008  
 
  Capacity   Price
Increase
  Mix Shift   Comparable
Sales
 

Brinker International

    (4.3 )%   2.9 %   0.5 %   (0.5 )%
 

Chili's

    (5.9 )%   3.1 %   0.8 %   0.8 %
 

On The Border

    5.5 %   2.5 %   (0.2 )%   (3.3 )%
 

Maggiano's

    6.4 %   2.8 %   (1.9 )%   0.4 %
 

Macaroni Grill

    (4.8 )%   2.2 %   1.1 %   (4.4 )%

        Our capacity decreased 4.3% in fiscal 2008 primarily due to the sale of 95 Chili's restaurants to Pepper Dining, Inc. on June 27, 2007 as well as the sale of 76 Chili's restaurants to ERJ Dining IV, LLC during fiscal 2008. The reduction in capacity was also due to 44 restaurant closures (27 of which were Macaroni Grills) during fiscal 2008, partially offset by the development of new company-owned restaurants. Including the impact of restaurant sales to franchisees, we experienced a net decrease of 47 company-owned restaurants since June 27, 2007.

        Comparable restaurant sales decreased 0.5% in fiscal 2008 compared to fiscal 2007. The decrease in comparable restaurant sales resulted from a decline in guest traffic across all brands and unfavorable product mix shifts at On The Border and Maggiano's. These decreases were partially offset by an increase in menu prices at all brands and favorable mix shifts at Chili's and Macaroni Grill.

COSTS AND EXPENSES

        Cost of sales, as a percent of revenues, decreased 0.5% in fiscal 2009. Cost of sales was favorably impacted by decreased commodity usage from efforts to reduce waste, menu item changes, menu price increases and favorable product mix shifts, partially offset by unfavorable commodity price changes primarily in beef, poultry, produce and cooking oils. Cost of sales, as a percent of revenues, increased 0.5% in fiscal 2008 primarily due to increased inventory costs, partially offset by an increase in menu prices and an increase in franchise revenues. The cost increase was primarily driven by unfavorable pricing for beef, ribs, chicken, and dairy products. The increase was also due to unfavorable product mix shifts related to new menu items.

        Restaurant expenses, as a percent of revenues, increased 0.1% in fiscal 2009 primarily driven by sales deleverage on fixed costs, partially offset by lower restaurant opening expenses due to fewer restaurant openings and lower labor costs due to efficiency improvements. Restaurant expenses, as a percent of revenues, increased 0.9% in fiscal 2008 primarily due to minimum wage increases and higher insurance costs. The increase was partially offset by a decrease in restaurant opening expenses.

        Depreciation and amortization decreased $3.4 million in fiscal 2009. The decrease in depreciation expense was primarily driven by restaurant closures and fully depreciated assets, partially offset by an increase in depreciation due to remodel investments and the addition of new restaurants. Depreciation and amortization decreased $23.9 million in fiscal 2008. The decrease in depreciation expense was primarily due to the sale of restaurants to franchisees as well as the classification of Macaroni Grill assets as held for sale in September 2007, at which time the assets were no longer depreciated. These decreases were partially offset by the addition of new restaurants and remodel investments.

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        General and administrative expenses decreased $18.1 million in fiscal 2009. The decrease was primarily due to reduced salary expense from lower headcount driven by organizational changes and the sale of Macaroni Grill, a decrease in professional fees, and income related to transitional services provided to Macaroni Grill that offset the internal cost of providing the services. The decrease was partially offset by higher annual performance based compensation expense. General and administrative expenses decreased $23.6 million in fiscal 2008. The decrease was primarily due to lower annual performance and stock-based compensation expense as well as reduced salary and team member related expenses subsequent to a corporate restructuring that eliminated certain administrative positions during fiscal 2008.

        Other gains and charges in fiscal 2009 includes a $71.2 million charge primarily related to long-lived asset impairments and lease termination charges resulting from the decision to close or decline lease renewals for 43 underperforming restaurants, including eight international restaurants, based on a comprehensive analysis that examined restaurants not performing at required levels of return. We recorded a goodwill impairment charge of $7.7 million as a result of the international restaurant closings. Additionally during fiscal 2009, we incurred a $14.3 million charge related to the impairment of long-lived assets associated with 16 underperforming restaurants based on the excess of the carrying amount of the long-lived assets over the estimated fair value. We also completed the sale of Macaroni Grill to Mac Acquisition and recorded a loss on the sale of $40.4 million. Lastly, we made some organizational changes designed to streamline decision making across our brands resulting in a $6.0 million net charge for severance and other costs. Other gains and charges in fiscal 2008 includes $155.7 million in charges related to the sale of Macaroni Grill primarily due to the write down of the brand's long-lived assets held for sale to estimated fair value less costs to sell. In addition, we made the decision to close or decline lease renewals for 61 restaurants based on a comprehensive analysis that examined restaurants not performing at required levels of return. As a result, we incurred a $51.1 million charge primarily related to the impairment of long-lived assets at these restaurants as well as lease obligation charges for the restaurants that closed in fiscal 2008. Additionally, we recorded a $7.5 million charge related to the impairment of long-lived assets associated with two underperforming restaurants based on the excess of the carrying amount of the long-lived assets over the estimated fair value. During fiscal 2008, we also made the decision to reduce future domestic company-owned restaurant development as well as discontinue certain projects that did not align with our strategic goals. As a result, we incurred a $13.2 million charge related to asset write-offs and a $7.2 million net charge for severance and other benefits. These charges were partially offset by a $29.7 million gain related to the sale of 76 company-owned Chili's restaurants to ERJ Dining IV, LLC. Other gains and charges in fiscal 2007 includes $19.1 million in gains related to the sale of company-owned restaurants to franchisees, including 95 Chili's restaurants to Pepper Dining, Inc. Also included is a $3.2 million gain related to the termination of interest rate swaps on an operating lease commitment. These gains were partially offset by a $12.9 million charge related to the impairment of long-lived assets at 13 restaurants as well as lease obligation charges for seven of the restaurants that closed during fiscal 2007.

        Interest expense decreased $12.5 million in fiscal 2009 primarily due to lower average borrowing balances on our credit facilities and lower interest rates on our debt carrying variable interest rates, partially offset by a decrease in capitalized interest due to a reduction in company-owned restaurants developed in fiscal 2009 compared to fiscal 2008. Additionally, we repurchased and retired $10.0 million of the 5.75% notes at a discount in April 2009 and recorded a $1.3 million gain on the extinguishment of debt. Interest expense increased $14.9 million in fiscal 2008 primarily due to outstanding borrowings on our $400 million three-year term loan agreement used to fund share repurchases in fiscal 2007 and for general corporate purposes. The increase was partially offset by a decrease in interest rates on our debt carrying variable interest rates.

        Other, net increased $5.8 million in fiscal 2009 primarily due to a gain from insurance proceeds. The increase was also attributed to lease income from Mac Acquisition as part of the sale agreement. Other, net decreased $1.0 million in fiscal 2008 due to the realized gains from the liquidation of our investments

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in mutual funds in fiscal 2007, partially offset by higher interest income on cash balances in our captive insurance company.

INCOME TAXES

        The effective income tax rate was 8.7%, 5.7% and 27.8% for fiscal 2009, 2008 and 2007, respectively. The increase in the tax rate in fiscal 2009 was primarily due to an increase in profits before taxes driven by a decrease in other gains and charges, partially offset by a decline in operating profitability and the impact of nontaxable insurance proceeds. The decrease in the tax rate in fiscal 2008 was primarily due to a decrease in profits before taxes driven by an increase in other gains and charges, partially offset by prior year favorable settlement of certain tax audits and prior year benefits from state income tax planning.

LIQUIDITY AND CAPITAL RESOURCES

        Our primary source of liquidity is cash flows generated from our restaurant operations. While our operating cash flows have decreased in the current year, we expect our ability to generate solid cash flows from operations to stabilize and remain strong into the future. Net cash provided by operating activities decreased to $274.5 million for fiscal 2009 from $361.5 million in fiscal 2008 primarily due to a decline in operating profitability as well as the timing of operational payments which was primarily due to the sale of Macaroni Grill, restaurant closures and the reduction of company-owned new restaurant development in the current year. This decrease was partially offset by the cash impact of recognizing the loss on the sale of Macaroni Grill in fiscal 2009 for tax purposes.

        Capital expenditures consist of ongoing remodel investments, new restaurants under construction, purchases of new and replacement restaurant furniture and equipment, investments in information technology infrastructure, and purchases of land for future restaurant sites. Capital expenditures were $93.6 million for fiscal 2009 compared to $270.4 million for fiscal 2008. The reduction in capital expenditures is primarily due to a decrease in company-owned restaurants developed in fiscal 2009 compared to the prior year. We estimate that our capital expenditures during fiscal 2010 will be approximately $85 million and will be funded entirely by cash from operations.

        In December 2008, we completed the sale of Macaroni Grill for cash proceeds of approximately $88.0 million and contributed $6.0 million for an 18.2% ownership interest in the new entity. In April 2009, we received a $6.0 million distribution representing substantially all of our equity investment in the entity while retaining our ownership interest.

        Excluding the impact of assets held for sale, the working capital deficit decreased to $39.7 million at June 24, 2009 from $188.2 million at June 25, 2008 primarily due to the timing of operational payments related to the sale of Macaroni Grill, restaurant closures and the reduction of company-owned new restaurant development in the current year. The decrease was also due to the retention of cash to fund operational needs and the net tax effect of impairment charges and the loss on the sale of Macaroni Grill in fiscal 2009.

        In fiscal 2009, we declared and paid quarterly dividends in the amount of $0.11 per share to common stock shareholders. Total dividends paid during fiscal 2009 were $45.4 million.

        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. As of June 24, 2009, approximately $60 million was available under our share repurchase authorizations. We did not repurchase any common shares under our share repurchase plan during fiscal 2009. We have currently placed a moratorium on share repurchases but, in the future, we may consider additional share repurchases under our plan based on several factors, including our cash position, share price, operational liquidity, and planned investment and financing needs.

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        As of June 25, 2008, we had credit facilities aggregating $550.0 million, consisting of a revolving credit facility of $300 million and uncommitted credit facilities of $250 million. In fiscal 2009, we completed the renewal of our revolving credit facility which was set to expire in October 2009. The new facility was reduced to $250 million, 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 3.75% and expires in February 2012. Based on our current credit rating, the revolving credit facility carries an interest rate of LIBOR plus 3.25%. The decision to downsize our total borrowing capacity under the new revolving credit facility was a result of the Macaroni Grill divestiture, reduced new company-owned restaurant development and our focus on debt repayment.

        In fiscal 2009, Standard and Poor's ("S&P") reaffirmed our debt rating of BBB- (investment grade) with a stable outlook. However, Moody's downgraded our corporate family rating to Ba1 (non-investment grade) and our senior unsecured note rating to Ba2 (non-investment grade) with a stable outlook. Under the terms and conditions of our uncommitted credit facility agreements, we had to maintain an investment grade rating with both S&P and Moody's in order to utilize the credit facilities. As a result of our split rating, our uncommitted credit facilities totaling $250 million are no longer available and the spread over LIBOR has increased since prior year-end on our term loan to LIBOR plus 0.95% at June 24, 2009. Outstanding balances on the uncommitted credit facilities were repaid in the second quarter of fiscal 2009 with funds drawn on the revolving credit facility. The balance on the revolving credit facility was paid down to zero by the end of fiscal 2009. As of June 24, 2009, we have $250 million available to us under our revolving credit facility and we are in compliance with all financial debt covenants.

        Our balance sheet is a primary focus as we have committed to reducing our leverage allowing us to retain the investment grade rating from S&P and ultimately regain our investment grade rating from Moody's. Cash payments on credit facilities and long-term debt in fiscal 2009 totaled $177.7 million. We currently plan to continue utilizing available free cash flow to pay down debt in fiscal 2010. We have also reduced capital expenditures for fiscal 2009, curtailed virtually all company-owned new restaurant development in fiscal 2010, placed a moratorium on all share repurchase activity, and kept dividends stable to ensure we maintain adequate cash flow to meet our current obligations and continue to pay down debt.

        We believe that our various sources of capital, including cash flow from operating activities and availability under our existing credit facility 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 facility and from our internal cash generating capabilities to adequately manage our ongoing business.

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        Payments due under our contractual obligations for outstanding indebtedness, purchase obligations as defined by the Securities and Exchange Commission ("SEC"), and the expiration of credit facilities as of June 24, 2009 are as follows:

 
  Payments Due by Period
(in thousands)
 
 
  Total   Less than
1 Year
  1-3
Years
  3-5
Years
  More than
5 Years
 

Long-term debt(a)

  $ 762,628   $ 16,675   $ 423,350   $ 322,603   $  

Capital leases

    78,887     5,039     10,363     10,758     52,727  

Operating leases

    723,659     108,646     199,233     163,565     252,215  

Purchase obligations(b)

    161,767     36,365     34,769     25,408     65,225  

 

 
  Amount of Credit Facility Expiration by Period
(in thousands)
 
 
  Total
Commitment
  Less than
1 year
  1-3
Years
  3-5
Years
  More than
5 Years
 

Credit facility

  $ 250,000   $   $ 250,000   $   $  

      (a)
      Long-term debt consists of amounts owed on the three-year term loan, 5.75% notes, and accrued interest on fixed-rate obligations totaling $83.4 million. No amount was outstanding under the credit facility as of June 24, 2009.

      (b)
      A "purchase obligation" is defined as an agreement to purchase goods or services that is enforceable and legally binding on us and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase obligations primarily consist of long-term obligations for the purchase of fountain beverages, energy, and telecommunication services and exclude agreements that are cancelable without significant penalty.

        In addition to the amounts shown in the table above, $27.7 million of unrecognized tax benefits have been recorded as liabilities in accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). The timing and amounts of future cash payments related to the FIN 48 liabilities are uncertain.

IMPACT OF INFLATION

        We have experienced impact from inflation. Inflation has caused increased food, labor and benefits costs and has increased our operating expenses. To the extent permitted by competition, increased costs are recovered through a combination of menu price increases and reviewing, then implementing, alternative products or processes, or by implementing other cost reduction procedures.

CRITICAL ACCOUNTING ESTIMATES

        Our significant accounting policies are disclosed in Note 1 to our consolidated financial statements. The following discussion addresses our most critical accounting estimates, which are those that are most important to the portrayal of our financial condition and results, and that require significant judgment.

Stock Based Compensation

        Statement of Financial Accounting Standards ("SFAS") No. 123 (Revised 2004), "Share-Based Payment," ("SFAS 123R"), requires the measurement and recognition of compensation cost at fair value for all share-based payments, including stock options. We determine the fair value of our stock option

F-9



awards using the Black-Scholes option valuation model. The Black-Scholes model requires judgmental assumptions including expected life and stock price volatility. We base our expected life assumptions on historical experience regarding option life. Stock price volatility is calculated based on historical prices and the expected life of the options. We determine the fair value of our performance shares using a Monte Carlo simulation model. The Monte Carlo method is a statistical modeling technique that requires highly judgmental assumptions regarding our future operating performance compared to our plan designated peer group in the future. The simulation is based on a probability model and market-based inputs that are used to predict future stock returns. We use the historical operating performance and correlation of stock performance to the S&P 500 composite index of us and our peer group as inputs to the simulation model. These historical returns could differ significantly in the future and as a result, the fair value assigned to the performance shares could vary significantly to the final payout. We believe the Monte Carlo simulation model provides the best evidence of fair value at the grant date and is an appropriate technique for valuing share-based awards under SFAS 123R. SFAS 123R also requires that we recognize compensation expense for only the portion of share-based awards that are expected to vest. Therefore, we apply estimated forfeiture rates that are derived from our historical forfeitures of similar awards.

Income Taxes

        In determining net income for financial statement purposes, we make certain estimates and judgments in the calculation of tax expense and the resulting tax liabilities and in the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense. When considered necessary, we record a valuation allowance to reduce deferred tax assets to a balance that is more likely than not to be recognized. We use an estimate of our annual effective tax rate at each interim period based on the facts and circumstances available at that time while the actual effective tax rate is calculated at year-end.

        In the ordinary course of business, there may be many transactions and calculations where the ultimate tax outcome is uncertain. At the beginning of fiscal 2008, we adopted the provisions of FIN 48. The adoption of this standard was consistent with FASB Staff Position ("FSP") FIN 48-1, "Definition of Settlement in FASB Interpretation No. 48", that was issued in May 2007 and that provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing unrecognized tax benefits.

        In addition to the risks related to the effective tax rate described above, the effective tax rate reflected in forward-looking statements is based on current tax law. Any significant changes in the tax laws could affect these estimates.

Property and Equipment

        Property and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets. The useful lives of the assets are based upon our expectations for the period of time that the asset will be used to generate revenues. We periodically review the assets for changes in circumstances, which may impact their useful lives.

Impairment of Long-Lived Assets and Goodwill

        We review property and equipment for impairment when events or circumstances indicate that the carrying amount of a restaurant's assets may not be recoverable. We test for impairment using historical cash flows and other relevant facts and circumstances as the primary basis for our estimates of future cash flows. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment. In addition, at least annually we assess the recoverability of goodwill related to our restaurant brands. This impairment test requires us to estimate fair values of our restaurant brands by making assumptions regarding future profits and cash flows, expected growth rates, terminal values, and other

F-10



factors. In the event that these assumptions change in the future, we may be required to record impairment charges related to goodwill.

Self-Insurance

        We are self-insured for certain losses related to health, general liability and workers' compensation. We maintain stop loss coverage with third party insurers to limit our total exposure. The self-insurance liability represents an estimate of the ultimate cost of claims incurred and unpaid as of the balance sheet date. The estimated liability is not discounted and is established based upon analysis of historical data and actuarial estimates, and is reviewed on a quarterly basis to ensure that the liability is appropriate. If actual trends, including the severity or frequency of claims, differ from our estimates, our financial results could be impacted.

Recent Accounting Pronouncements

        In December 2006, the FASB issued SFAS 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, but does not change existing guidance as to whether or not an instrument is carried at fair value. For financial assets and liabilities, SFAS 157 is effective for fiscal years beginning after November 15, 2007, which required that we adopt these provisions in first quarter fiscal 2009. For nonfinancial assets and liabilities, SFAS 157 is effective for fiscal years beginning after November 15, 2008, which will require us to adopt these provisions in fiscal 2010. We do not expect the adoption of SFAS 157 to have a material impact on our consolidated financial statements.

        In December 2007, the FASB issued SFAS No. 141R, "Business Combinations," ("SFAS 141R"). Under SFAS 141R, all business combinations will be accounted for by applying the acquisition method. SFAS 141R requires most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at full fair value. SFAS 141R is effective for annual reporting periods beginning on or after December 15, 2008 and will be effective for us beginning in the first quarter of fiscal 2010 for business combinations occurring on or after the effective date.

        In December 2007, the FASB issued SFAS 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, which required that we adopt these provisions beginning in the third quarter of fiscal 2009. The adoption of SFAS 160 did not have a material impact on our financial statements.

        In June 2008, the FASB issued FSP EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities." FSP EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends that are paid or unpaid are participating securities and shall be included in the computation of earnings per share based on the two-class method. The two-class method is an earnings allocation method for computing earnings per share when an entity's capital structure includes either two or more classes of common stock or common stock and participating securities. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, which will require us to adopt these provisions in fiscal 2010. We do not expect the adoption of FSP EITF 03-6-1 to have a material impact on our financial statements.

        In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165") which establishes the requirements for evaluating, recording and disclosing events or transactions occurring after the balance sheet date in an entity's financial statements. SFAS 165 is effective for interim and annual periods ending

F-11



after June 15, 2009, which required that we adopt these provisions beginning in the fourth quarter of fiscal 2009. The adoption of SFAS 165 did not have a material impact on our financial statements.

        In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles" ("SFAS 168"). SFAS 168 provides for the FASB Accounting Standards Codification (the "Codification") to become the single official source of authoritative, nongovernmental U.S. generally accepted accounting principles ("GAAP"). The Codification did not change GAAP but reorganizes the literature. SFAS 168 is effective for interim and annual periods ending after September 15, 2009, which will require us to adopt these provisions in the first quarter of fiscal 2010.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We are exposed to interest rate risk on short-term and long-term financial instruments carrying variable interest rates. The variable rate financial instruments consist of the outstanding borrowings on our term loan and revolving credit facility. At June 24, 2009, $390.0 million was outstanding under the term loan and no amount was outstanding under the revolving credit facility. The impact on our annual results of operations of a one-point interest rate change on the outstanding balance of these variable rate financial instruments as of June 24, 2009 would be approximately $3.9 million. We may from time to time utilize interest rate swaps to manage overall borrowing costs and reduce exposure to adverse fluctuations in interest rates.

        We purchase certain commodities such as beef, pork, poultry, seafood, produce, and dairy. These commodities are generally purchased based upon market prices established with vendors. These purchase arrangements may contain contractual features that fix the price paid for certain commodities. We do not use financial instruments to hedge commodity prices because these purchase arrangements help control the ultimate cost paid and any commodity price aberrations are generally short-term in nature.

        This market risk discussion contains forward-looking statements. Actual results may differ materially from this discussion based upon general market conditions and changes in domestic and global financial markets.

F-12



BRINKER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

 
  Fiscal Years  
 
  2009   2008   2007  

Revenues

  $ 3,620,580   $ 4,235,223   $ 4,376,904  
               

Operating Costs and Expenses:

                   
 

Cost of sales

    1,010,515     1,200,763     1,222,198  
 

Restaurant expenses

    2,050,653     2,397,908     2,435,866  
 

Depreciation and amortization

    161,800     165,229     189,162  
 

General and administrative

    152,591     170,703     194,349  
 

Other gains and charges

    134,787     203,950     (8,999 )
               
   

Total operating costs and expenses

    3,510,346     4,138,553     4,032,576  
               

Operating income

    110,234     96,670     344,328  

Interest expense

   
33,330
   
45,862
   
30,929
 

Other, net

    (9,834 )   (4,046 )   (5,071 )
               

Income before provision for income taxes

    86,738     54,854     318,470  

Provision for income taxes

   
7,572
   
3,132
   
88,421
 
               
   

Net income

  $ 79,166   $ 51,722   $ 230,049  
               

Basic net income per share

  $ 0.78   $ 0.50   $ 1.90  
               

Diluted net income per share

  $ 0.77   $ 0.49   $ 1.85  
               

Basic weighted average shares outstanding

    101,852     103,101     121,062  
               

Diluted weighted average shares outstanding

    102,713     104,897     124,116  
               

Cash dividends per share

  $ 0.44   $ 0.42   $ 0.34  
               

See accompanying notes to consolidated financial statements.

F-13



BRINKER INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 
  2009   2008  

ASSETS

             

Current Assets:

             
 

Cash and cash equivalents

  $ 94,156   $ 54,714  
 

Accounts receivable

    49,509     52,304  
 

Inventories

    36,709     35,377  
 

Prepaid expenses and other

    96,436     106,183  
 

Income taxes receivable

    41,620      
 

Deferred income taxes

    50,785     71,595  
 

Assets held for sale

        135,850  
           
   

Total current assets

    369,215     456,023  
           

Property and Equipment:

             
 

Land

    205,483     198,554  
 

Buildings and leasehold improvements

    1,577,694     1,571,601  
 

Furniture and equipment

    648,677     665,271  
 

Construction-in-progress

    10,559     35,104  
           

    2,442,413     2,470,530  
 

Less accumulated depreciation and amortization

    (1,042,061 )   (940,815 )
           
   

Net property and equipment

    1,400,352     1,529,715  
           

Other Assets:

             
 

Goodwill

    130,719     140,371  
 

Deferred income taxes

        23,160  
 

Other

    48,661     43,853  
           
   

Total other assets

    179,380     207,384  
           
   

Total assets

  $ 1,948,947   $ 2,193,122  
           

LIABILITIES AND SHAREHOLDERS' EQUITY

             

Current Liabilities:

             
 

Current installments of long-term debt

  $ 1,815   $ 1,973  
 

Accounts payable

    121,483     168,619  
 

Accrued liabilities

    285,584     331,878  
 

Income taxes payable

        5,946  
 

Liabilities associated with assets held for sale

        18,408  
           
   

Total current liabilities

    408,882     526,824  
           

Long-term debt, less current installments

   
727,447
   
901,604
 

Deferred income taxes

    4,295      

Other liabilities

    161,399     169,605  

Commitments and Contingencies (Notes 10 and 14)

             

Shareholders' Equity:

             
 

Common stock—250,000,000 authorized shares; $.10 par value; 176,246,649 shares issued and 102,124,842 shares outstanding at June 24, 2009, and 176,246,649 shares issued and 101,316,461 shares outstanding at June 25, 2008

    17,625     17,625  
 

Additional paid-in capital

    463,980     464,666  
 

Accumulated other comprehensive loss

        (168 )
 

Retained earnings

    1,834,307     1,800,300  
           

    2,315,912     2,282,423  
 

Less treasury stock, at cost (74,121,807 shares at June 24, 2009 and 74,930,188 shares at June 25, 2008)

    (1,668,988 )   (1,687,334 )
           
   

Total shareholders' equity

    646,924     595,089  
           
   

Total liabilities and shareholders' equity

  $ 1,948,947   $ 2,193,122  
           

See accompanying notes to consolidated financial statements.

F-14



BRINKER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands)

 
  Common Stock    
   
   
  Accumulated
Other
Comprehensive
Income (Loss)
   
 
 
  Additional
Paid-In
Capital
  Retained
Earnings
  Treasury
Stock
   
 
 
  Shares   Amount   Total  

Balances at June 28, 2006

    125,307   $ 17,625   $ 406,626   $ 1,602,786   $ (951,978 ) $ 773   $ 1,075,832  

Net income

   
   
   
   
230,049
   
   
   
230,049
 

Currency translation adjustment

                        (37 )   (37 )

Change in fair value of investments, net of tax

                        181     181  

Realized gain on sale of investments, net of tax

                        (954 )   (954 )
                                           
 

Comprehensive income

                                        229,239  
                                           

Cash dividends ($0.34 per share)

                (41,524 )           (41,524 )

Stock-based compensation

            31,510                 31,510  

Purchases of treasury stock

    (18,617 )               (569,347 )       (569,347 )

Issuances of common stock

    3,409         (15 )       66,302         66,287  

Tax benefit from stock options exercised

            13,092                 13,092  

Issuance of restricted stock, net of forfeitures

    28         (548 )       548          
                               

Balances at June 27, 2007

    110,127     17,625     450,665     1,791,311     (1,454,475 )   (37 )   805,089  

Net income

   
   
   
   
51,722
   
   
   
51,722
 

Currency translation adjustment

                        (131 )   (131 )
                                           
 

Comprehensive income

                                        51,591  
                                           

Adjustment to initially apply FIN 48

                847             847  

Cash dividends ($0.42 per share)

                (43,580 )           (43,580 )

Stock-based compensation

            16,100                 16,100  

Purchases of treasury stock

    (9,130 )       (465 )       (240,319 )       (240,784 )

Issuances of common stock

    345         (2,472 )       7,749         5,277  

Tax benefit from stock options exercised

            549                 549  

Forfeitures of restricted stock, net of issuances

    (26 )       289         (289 )        
                               

Balances at June 25, 2008

    101,316     17,625     464,666     1,800,300     (1,687,334 )   (168 )   595,089  

Net income

   
   
   
   
79,166
   
   
   
79,166
 

Currency translation adjustment

                        (2,068 )   (2,068 )

Realized loss on currency translation

                        2,236     2,236  
                                           
 

Comprehensive income

                                        79,334  
                                           

Cash dividends ($0.44 per share)

                (45,159 )           (45,159 )

Stock-based compensation

            17,518                 17,518  

Purchases of treasury stock

    (30 )       (3,116 )       (623 )       (3,739 )

Issuances of common stock

    816         (13,721 )       18,371         4,650  

Tax benefit from stock options exercised

            (769 )               (769 )

Issuances of restricted stock, net of forfeitures

    23         (598 )       598          
                               

Balances at June 24, 2009

    102,125   $ 17,625   $ 463,980   $ 1,834,307   $ (1,668,988 ) $   $ 646,924  
                               

See accompanying notes to consolidated financial statements.

F-15



BRINKER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 
  Fiscal Years  
 
  2009   2008   2007  

Cash Flows from Operating Activities:

                   

Net income

  $ 79,166   $ 51,722   $ 230,049  

Adjustments to reconcile net income to net cash provided by operating activities:

                   
 

Depreciation and amortization

    161,800     165,229     189,162  
 

Restructure charges and other impairments

    91,791     225,945     13,812  
 

Deferred income taxes

    47,654     (68,064 )   (18,823 )
 

Loss (Gain) on sale of assets

    37,178     (29,682 )   (21,207 )
 

Stock-based compensation

    18,054     16,577     29,870  
 

Other

    (823 )   283     (130 )
 

Changes in assets and liabilities, excluding effects of acquisitions and dispositions:

                   
   

Accounts receivable

    322     (972 )   3,394  
   

Inventories

    (2,578 )   (6,640 )   3,229  
   

Prepaid expenses and other

    2,956     1,454     25,541  
   

Other assets

    1,545     459     (5,168 )
   

Income taxes payable

    (48,886 )   2,581     (1,945 )
   

Accounts payable

    (43,512 )   13,320     (1,978 )
   

Accrued liabilities

    (68,237 )   (20,458 )   19,966  
   

Other liabilities

    (1,895 )   9,786     19,225  
               
   

Net cash provided by operating activities

    274,535     361,540     484,997  
               

Cash Flows from Investing Activities:

                   

Payments for property and equipment

    (93,613 )   (270,413 )   (430,532 )

Proceeds from sale of assets

    82,829     127,780     180,966  

Decrease (Increase) in restricted cash

    4,688     (34,435 )    

Payments for purchases of restaurants

        (2,418 )    

Investment in equity method investee

    (4,612 )   (8,711 )    

Proceeds from sale of investments

            5,994  
               
   

Net cash used in investing activities

    (10,708 )   (188,197 )   (243,572 )
               

Cash Flows from Financing Activities:

                   

Net (payments) borrowings on credit facilities

    (160,757 )   (323,586 )   338,188  

Net proceeds from issuance of long-term debt

        399,287      

Payments on long-term debt

    (19,735 )   (1,062 )   (12,979 )

Purchases of treasury stock

    (3,739 )   (240,784 )   (569,347 )

Proceeds from issuances of treasury stock

    4,650     5,277     66,287  

Payments of dividends

    (45,355 )   (42,914 )   (40,906 )

Excess tax benefits from stock-based compensation

    551     330     7,139  
               
   

Net cash used in financing activities

    (224,385 )   (203,452 )   (211,618 )
               

Net change in cash and cash equivalents

   
39,442
   
(30,109

)
 
29,807
 

Cash and cash equivalents at beginning of year

    54,714     84,823     55,016  
               

Cash and cash equivalents at end of year

  $ 94,156   $ 54,714   $ 84,823  
               

See accompanying notes to consolidated financial statements.

F-16



BRINKER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)    Nature of Operations

        We are principally engaged in the ownership, operation, development, and franchising of the Chili's Grill & Bar ("Chili's"), On The Border Mexican Grill & Cantina ("On The Border") and Maggiano's Little Italy ("Maggiano's") restaurant brands. At June 24, 2009, we owned, operated, or franchised 1,689 restaurants in the United States and 27 countries and two territories outside of the United States. We sold Romano's Macaroni Grill ("Macaroni Grill") to Mac Acquisition LLC ("Mac Acquisition"), an affiliate of San Francisco-based Golden Gate Capital, in December 2008 and purchased an 18.2% ownership interest in the new entity.

(b)    Basis of Presentation

        Our consolidated financial statements include the accounts of Brinker International, Inc. and our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

        We have a 52/53 week fiscal year ending on the last Wednesday in June. Fiscal years 2009, 2008, and 2007, which ended on June 24, 2009, June 25, 2008, and June 27, 2007, respectively, each contained 52 weeks.

        Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform with fiscal 2009 presentation. These reclassifications have no effect on our net income or financial position as previously reported.

(c)    Use of Estimates

        The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and costs and expenses during the reporting period. Actual results could differ from those estimates.

(d)    Revenue Recognition

        We record revenue from the sale of food, beverages and alcohol as products are sold. Initial fees received from a franchisee to establish a new franchise are recognized as income when we have performed our obligations required to assist the franchisee in opening a new franchise restaurant, which is generally upon the opening of such restaurant. Continuing royalties, which are a percentage of net sales of franchised restaurants, are accrued as income when earned. Proceeds from the sale of gift cards are recorded as deferred revenue and recognized as income when the gift card is redeemed by the holder or the likelihood of redemption, based upon our historical redemption patterns, becomes remote.

(e)    Financial Instruments

        Our policy is to invest cash in excess of operating requirements in income-producing investments and to pay down debt. Income-producing investments with original maturities of three months or less are reflected as cash equivalents.

F-17



BRINKER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        Our financial instruments at June 24, 2009 and June 25, 2008 consist of cash equivalents, accounts receivable, and long-term debt. The fair value of cash equivalents and accounts receivable approximates their carrying amounts reported in the consolidated balance sheets. The fair value of the 5.75% notes, based on quoted market prices, totaled approximately $269.0 million and $283.4 million at June 24, 2009 and June 25, 2008, respectively. The fair value of capital lease obligations is based on the amount of future cash flows discounted using our expected borrowing rate for debt of comparable risk and maturity.

        We are required by our insurers to collateralize a part of the self-insured portion of our workers' compensation and liability claims. We have satisfied these collateral requirements by depositing funds into an insurance escrow account and by issuing a cash secured letter of credit. Our total pledged collateral was $29.7 million as of June 24, 2009 and $34.4 million as of June 25, 2008. These cash balances have been classified as restricted and are included within prepaid expenses and other in the consolidated balance sheets (see Note 5).

        We entered into interest rate swaps in December 2001 with the intent of hedging exposures to changes in value of certain fixed-rate lease obligations. These fair value hedges changed the fixed-rate interest component of an operating lease commitment for certain real estate properties entered into in November 1997 to variable-rate interest. We terminated our interest rate swaps in fiscal 2007 and recorded a $3.2 million gain, which is included in other gains and charges in the consolidated statements of income. At June 24, 2009 we do not have any outstanding derivative instruments.

(f)    Accounts Receivable

        Accounts receivable, net of the allowance for doubtful accounts, represents their estimated net realizable value. Provisions for doubtful accounts are recorded based on management's judgment regarding our ability to collect as well as the age of the receivables. Accounts receivable are written off when they are deemed uncollectible.

(g)    Inventories

        Inventories, which consist of food, beverages, and supplies, are stated at the lower of cost (weighted average cost method) or market.

(h)    Property and Equipment

        Property and equipment is stated at cost. Buildings and leasehold improvements are depreciated using the straight-line method over the lesser of the life of the lease, including renewal options, or the estimated useful lives of the assets, which range from 5 to 20 years. Furniture and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, which range from 3 to 10 years. Routine repair and maintenance costs are expensed when incurred. Major replacements and improvements are capitalized.

        We evaluate property and equipment held and used in the business for impairment whenever events or changes in circumstances indicate that the carrying amount of a restaurant's assets may not be recoverable. An impairment is determined by comparing estimated undiscounted future operating cash flows for a restaurant to the carrying amount of its assets. If an impairment exists, the amount of impairment is measured as the excess of the carrying amount over the estimated discounted future

F-18



BRINKER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


operating cash flows of the asset and the expected proceeds upon sale of the asset. Assets held for sale are reported at the lower of the carrying amount or fair value less costs to sell.

(i)    Operating Leases

        Rent expense for leases that contain scheduled rent increases is recognized on a straight-line basis over the lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty such that the renewal appears reasonably assured. The straight-line rent calculation and rent expense includes the rent holiday period, which is the period of time between taking control of a leased site and the rent commencement date.

        Contingent rents are generally amounts due as a result of sales in excess of amounts stipulated in certain restaurant leases and are included in rent expense as they are incurred. Landlord contributions are recorded when received as a deferred rent liability and amortized as a reduction of rent expense on a straight-line basis over the lesser of the lease term, including renewal options, or 20 years.

(j)    Capitalized Interest

        Interest costs capitalized during the construction period of restaurants were approximately $0.7 million, $3.7 million and $6.0 million during fiscal 2009, 2008, and 2007, respectively.

(k)    Advertising

        Advertising production costs are expensed in the period when the advertising first takes place. Other advertising costs are expensed as incurred. Advertising costs were $113.2 million, $133.6 million and $135.5 million in fiscal 2009, 2008, and 2007, respectively, and are included in restaurant expenses in the consolidated statements of income.

(l)    Goodwill

        Goodwill represents the residual purchase price after allocation to all other identifiable net assets acquired. Goodwill is not subject to amortization but is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," requires a two-step process for testing impairment of goodwill. First, the fair value of each reporting unit is compared to its carrying value to determine whether an indication of impairment exists. If an impairment is indicated, then the fair value of the reporting unit's goodwill is determined by allocating the unit's fair value to its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The amount of impairment for goodwill is measured as the excess of its carrying value over its implied fair value. See Note 6 for additional disclosures related to goodwill.

(m)    Sales Taxes

        Sales taxes collected from guests are excluded from revenues. The obligation is included in accrued liabilities until the taxes are remitted to the appropriate taxing authorities.

F-19



BRINKER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(n)    Self-Insurance Program

        We utilize a paid loss self-insurance plan for health, general liability and workers' compensation coverage. Predetermined loss limits have been arranged with insurance companies to limit our per occurrence cash outlay. Accrued liabilities include the estimated incurred but unreported costs to settle unpaid claims and estimated future claims.

        We utilize a wholly-owned captive insurance company for our general liability and workers' compensation coverage. We make premium payments to the captive insurance company and accrue for claims costs based on the actuarially predicted ultimate losses, and the captive insurance company then pays administrative fees and the insurance claims.

(o)    Income Taxes

        Income taxes are accounted for under the asset and liability method prescribed by SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

(p)    Stock-Based Compensation

        Stock-based compensation is accounted for under SFAS No. 123 (Revised 2004), "Share-Based Payment," ("SFAS 123R"), which requires the measurement and recognition of compensation cost at fair value for all share-based payments, including stock options. Stock-based compensation expense for fiscal 2009, 2008 and 2007 includes compensation expense, recognized over the applicable vesting periods, for new share-based awards and for share-based awards granted prior to, but not yet vested, as of June 29, 2005. We record compensation expense using a graded-vesting schedule over the vesting period, or to the date on which retirement eligibility is achieved, if shorter (non-substantive vesting period approach).

        Certain employees are eligible to receive stock options, performance shares, restricted stock and restricted stock units, while non-employee members of the Board of Directors are eligible to receive stock options, restricted stock and restricted stock units. Performance shares represent a right to receive shares of common stock upon satisfaction of performance goals or other specified metrics at the end of a three-year cycle. Performance shares are paid out in common stock and will be fully vested upon issuance. The fair value of performance shares is determined on the date of grant based on a Monte Carlo simulation model. The fair value of restricted stock and restricted stock units are based on our closing stock price on the date of grant.

        Stock-based compensation expense totaled approximately $17.5 million, $15.6 million and $29.9 million for fiscal 2009, 2008 and 2007, respectively. The total income tax benefit recognized in the consolidated statements of income related to stock-based compensation was approximately $6.5 million, $6.1 million and $10.5 million during fiscal 2009, 2008 and 2007, respectively.

F-20



BRINKER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        The weighted average fair values of option grants were $5.52, $7.18 and $7.37 during fiscal 2009, 2008 and 2007, respectively. The fair value of stock options is estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

 
  2009   2008   2007  

Expected volatility

    37.8%     23.6%     26.1%  

Risk-free interest rate

    2.9%     4.2%     4.6%  

Expected lives

    5 years     5 years     5 years  

Dividend yield

    2.8%     1.2%     1.1%  

        Expected volatility and the expected life of stock options are based on historical experience. The risk-free rate is based on the yield of a Treasury Note with a term equal to the expected life of the stock options.

(q)    Preferred Stock

        Our Board of Directors is authorized to provide for the issuance of 1.0 million preferred shares with a par value of $1.00 per share, in one or more series, and to fix the voting rights, liquidation preferences, dividend rates, conversion rights, redemption rights, and terms, including sinking fund provisions, and certain other rights and preferences. As of June 24, 2009, no preferred shares were issued.

(r)    Shareholders' Equity

        Our Board of Directors has authorized a total of $2,060.0 million of share repurchases. As of June 24, 2009, approximately $60 million was available under our share repurchase authorizations. We did not repurchase any common shares under our share repurchase plan during fiscal 2009. Our stock repurchase plan 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. We have currently placed a moratorium on share repurchases but, in the future, we may consider additional share repurchases under our plan based on several factors, including our cash position, share price, operational liquidity, and planned investment and financing needs. Repurchased common stock is reflected as a reduction of shareholders' equity.

(s)    Comprehensive Income

        Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Fiscal 2009 comprehensive income consists of net income, currency translation adjustments and a realized loss on currency translation adjustments related to the closure of international company-owned restaurants (see Note 4). Fiscal 2008 comprehensive income consists of net income and currency translation adjustments. Fiscal 2007 comprehensive income consists of net income, currency translation adjustments, and the realized gain on the sale of our investments in mutual funds.

(t)    Net Income Per Share

        Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock

F-21



BRINKER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


were exercised or converted into common stock. For the calculation of diluted net income per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and restricted share awards, determined using the treasury stock method. We had approximately 7.4 million stock options and restricted share awards outstanding at June 24, 2009, 5.8 million stock options and restricted share awards outstanding at June 25, 2008, and 28,000 stock options and restricted share awards outstanding at June 27, 2007 that were not included in the dilutive earnings per share calculation because the effect would have been antidilutive.

(u)    Segment Reporting

        Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" permits two or more operating segments to be aggregated into a single operating segment if they have similar economic characteristics and are similar in the following areas:

    The nature of products and services

    Nature of production processes

    Type or class of customer

    Methods used to distribute products or provide services

    The nature of the regulatory environment, if applicable

        Our three brands have similar types of products, contracts, customers, and employees and all operate as full-service restaurants offering lunch and dinner in the casual-dining segment of the industry. In addition, we have similar long-term average margins across all of our brands. Therefore, we believe we meet the criteria for aggregating operating segments into a single reporting segment.

(v)    Subsequent Events

        We evaluated events occurring between the end of our most recent fiscal year and August 24, 2009, the date the financial statements were issued.

2. SALE OF MACARONI GRILL

        In August 2008, we entered into an agreement with Mac Acquisition for the sale of Macaroni Grill. The assets and liabilities associated with these restaurants were classified as held for sale in the consolidated balance sheet for the fiscal year ended June 25, 2008. Macaroni Grill operating results were included in continuing operations for fiscal 2009 (through the sale date of December 18, 2008) and prior years in accordance with the reporting provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," as we will have involvement in the ongoing operations of Macaroni Grill. The sale was completed on December 18, 2008. We received cash proceeds of approximately $88.0 million and recorded a loss of $40.4 million in other gains and charges in the consolidated statement of income in fiscal 2009. The net assets sold totaled approximately $110 million and consisted primarily of property and equipment of $105 million. Assets previously held for sale of $21.3 million were retained by us and are included in property, plant and equipment as of June 24, 2009. The land and buildings related to these locations were leased to Mac Acquisition as part of the sale agreement.

F-22



BRINKER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SALE OF MACARONI GRILL (Continued)

        On December 18, 2008, we contributed $6.0 million representing an 18.2% ownership interest in the new entity. We account for the investment under the equity method of accounting and record our share of the net income or loss from the investee within operating income since the operations of Macaroni Grill are similar to our ongoing operations. This amount is included in restaurant expense in our consolidated statements of income due to the immaterial nature of the amount. In April 2009, we received a $6.0 million distribution representing substantially all of our equity investment while retaining our ownership interest.

        As part of the sale, we entered into an agreement with Mac Acquisition whereby we provide corporate support services for the new entity for one year following closing with an option for one additional year.

        During fiscal 2008, we recorded impairment charges of $152.7 million to write-down the net assets of Macaroni Grill to their estimated fair value less costs to sell in accordance with SFAS 144. This amount has been included in other gains and charges in the consolidated statements of income. Our estimate of fair value was based on the executed purchase agreement.

3. OTHER EQUITY METHOD INVESTMENTS AND RESTAURANT DISPOSITIONS

        In November 2007, we entered into an agreement with CMR, S.A.B. de C.V. for a joint venture investment in a new corporation to develop 50 Chili's and Maggiano's restaurants in Mexico. We made a $4.6 million and an $8.7 million capital contribution to the joint venture in fiscal 2009 and fiscal 2008, respectively. We account for the investment under the equity method of accounting and record our share of the net income or loss of the investee within operating income since the operations of the joint venture are similar to our ongoing operations. This amount has been included in restaurant expense in our consolidated statements of income due to the immaterial nature of the amount. At June 24, 2009, 16 Chili's restaurants were operating in the joint venture.

        In May 2007, we entered into an agreement with ERJ Dining IV, LLC to sell 76 company-owned Chili's restaurants for approximately $121.9 million. The sale was completed in November 2007 and we recorded a gain of $29.7 million in other gains and charges in the consolidated statement of income in fiscal 2008. The net assets sold totaled approximately $88.2 million and consisted primarily of property and equipment of $86.4 million and goodwill of $2.7 million.

        In January 2007, we entered into an agreement with Pepper Dining, Inc. to sell 95 company-owned Chili's restaurants for approximately $155.0 million. The sale was completed in June 2007 and we recorded a gain of $17.1 million in other gains and charges in the consolidated statement of income in fiscal 2007. The net assets sold totaled approximately $127.9 million and consisted primarily of property and equipment of $126.1 million and goodwill of $3.9 million.

F-23



BRINKER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. OTHER GAINS AND CHARGES

 
  2009   2008   2007  

Restaurant closure charges

  $ 71,178   $ 51,143   $ 12,854  

Charges related to the sale of Macaroni Grill
(see Note 2)

    40,362     155,661      

Restaurant impairment charges

    14,254     7,450      

Impairment of goodwill

    7,713          

Severance and other benefits

    6,047     7,237      

Gains on the sale of assets, net (also see Note 3)

    (3,861 )   (29,684 )   (19,116 )

Development-related costs

        13,223      

Other gains and charges, net

    (906 )   (1,080 )   (2,737 )
               

  $ 134,787   $ 203,950   $ (8,999 )
               

        In fiscal 2009, we recorded $71.2 million in charges primarily related to long-lived asset impairments resulting from the decision to close or decline lease renewals for 43 company-owned restaurants, including eight international restaurants. The charges related to the domestic restaurant closures include $44.2 million of long-lived asset impairments, $14.1 million in lease termination charges and $1.2 million of charges related to the write-off of other assets and liabilities. The charges related to the international restaurant closures include $5.6 million of long-lived asset impairments and $2.1 million of charges related to realized foreign currency translation losses. Additionally, we recorded a goodwill impairment charge of $7.7 million as a result of the international restaurant closings. The decision to close the restaurants and decline lease renewals was based on a comprehensive analysis that examined restaurants not performing at required levels of return.

        Additionally, we recorded a $14.3 million charge in fiscal 2009 related to the impairment of long-lived assets associated with 16 underperforming restaurants. The impairment charge was measured as the excess of the carrying amount of the long-lived assets over the fair value based on projected discounted future operating cash flows of the restaurant.

        In fiscal 2009, we made organizational changes designed to streamline decision making and maximize our leadership talent while achieving better operational efficiencies across our brands. As a result, we incurred $6.0 million in severance and other benefits, net of income related to the forfeiture of stock-based compensation awards resulting from these actions. We also incurred gains of $3.9 million related to the sale of nine restaurants to a franchisee and other land sales.

        In fiscal 2008, we recorded $51.1 million in charges primarily related to long-lived asset impairments resulting from the decision to close or decline lease renewals for 61 company-owned restaurants. The charges include $39.8 million of long-lived asset impairments and $9.3 million in lease obligation charges. The decision to close the restaurants and decline lease renewals was based on a comprehensive analysis that examined restaurants not performing at required levels of return. Also included is a $1.9 million charge related to the decrease in the estimated sales value of land associated with previously closed restaurants. Additionally, we recorded a $7.5 million charge related to the impairment of long-lived assets associated with two underperforming restaurants. The impairment charge was measured as the excess of the carrying amount of the long-lived assets over the fair value based on projected discounted future operating cash flows of the restaurants.

F-24



BRINKER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. OTHER GAINS AND CHARGES (Continued)

        In fiscal 2008, we also made the decision to reduce future domestic company-owned restaurant development as well as discontinue certain projects that did not align with our strategic goals. As a result, we evaluated our infrastructure needed to support this evolving business model, which resulted in the restructuring of our Restaurant Support Center and the elimination of certain administrative positions. In connection with these actions, we incurred $13.2 million in charges related to asset write-offs for sites under development and other discontinued projects. In addition, we incurred approximately $7.2 million in severance, vacation and other benefits, net of income related to the forfeiture of stock-based compensation awards.

        In fiscal 2007, we recorded $12.9 million in charges resulting from the decision to close 13 restaurants. The charges include $10.7 million of long-lived asset impairments and $2.2 million in lease termination charges.

5. PREPAID EXPENSES AND OTHER

        Prepaid expenses and other consist of the following (in thousands):

 
  2009   2008  

Prepaid opening supplies

  $ 40,842   $ 41,543  

Restricted cash (see Note 1)

    29,749     34,435  

Other

    25,845     30,205  
           

  $ 96,436   $ 106,183  
           

6. GOODWILL

        The changes in the carrying amount of goodwill for the fiscal years ended June 24, 2009 and June 25, 2008 are as follows (in thousands):

 
  2009   2008  

Balance at beginning of year

  $ 140,371   $ 138,876  
 

Impairment of goodwill (see Note 4)

    (7,713 )    
 

Goodwill arising from acquisitions

        1,357  
 

Other

    (1,939 )   138  
           

Balance at end of year

  $ 130,719   $ 140,371  
           

F-25



BRINKER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. ACCRUED AND OTHER LIABILITIES

        Accrued liabilities consist of the following (in thousands):

 
  2009   2008  

Payroll

  $ 72,510   $ 94,389  

Gift cards

    74,926     85,897  

Property tax

    23,160     32,996  

Insurance

    30,021     32,512  

Sales tax

    23,991     30,433  

Other

    60,976     55,651  
           

  $ 285,584   $ 331,878  
           

        Other liabilities consist of the following (in thousands):

 
  2009   2008  

Straight-line rent

  $ 59,198   $ 57,099  

Insurance

    42,361     43,146  

Landlord contributions

    31,137     30,907  

Unrecognized tax benefits

    21,783     23,701  

Other

    6,920     14,752  
           

  $ 161,399   $ 169,605  
           

8. INCOME TAXES

        The provision for income taxes consists of the following (in thousands):

 
  2009   2008   2007  

Current income tax expense (benefit):

                   
 

Federal

  $ (40,988 ) $ 59,500   $ 94,418  
 

State

    (1,166 )   10,959     13,259  
 

Foreign

    1,808     1,808     1,431  
               
   

Total current income tax expense (benefit)

    (40,346 )   72,267     109,108  
               

Deferred income tax expense (benefit):

                   
 

Federal

    41,878     (62,646 )   (18,756 )
 

State

    6,040     (6,489 )   (1,931 )
               
   

Total deferred income tax expense (benefit)

    47,918     (69,135 )   (20,687 )
               

  $ 7,572   $ 3,132   $ 88,421  
               

F-26



BRINKER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INCOME TAXES (Continued)

        A reconciliation between the reported provision for income taxes and the amount computed by applying the statutory Federal income tax rate of 35% to income before provision for income taxes is as follows (in thousands):

 
  2009   2008   2007  

Income tax expense at statutory rate

  $ 30,358   $ 19,197   $ 111,465  

FICA tax credit

    (21,244 )   (23,835 )   (23,307 )

State income taxes, net of Federal benefit

    3,169     2,902     7,363  

Tax settlements

            (6,790 )

Stock-based compensation

    (5 )   (289 )   576  

Other

    (4,706 )   5,157     (886 )
               

  $ 7,572   $ 3,132   $ 88,421  
               

        The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities as of June 24, 2009 and June 25, 2008 are as follows (in thousands):

 
  2009   2008  

Deferred income tax assets:

             
 

Leasing transactions

  $ 38,936   $ 43,740  
 

Stock-based compensation

    19,351     19,601  
 

Restructure charges and impairments

    12,317     54,681  
 

Insurance reserves

    3,974     4,590  
 

Employee benefit plans

    1,055     2,019  
 

Federal credit carryforward

    18,188      
 

Other, net

    22,300     21,385  
           
   

Total deferred income tax assets

  $ 116,121   $ 146,016  
           

Deferred income tax liabilities:

             
 

Prepaid expenses

    15,197     19,810  
 

Goodwill and other amortization

    17,976     15,768  
 

Depreciation and capitalized interest on property
and equipment

    28,649     5,969  
 

Captive insurance

    1,335     2,998  
 

Other, net

    6,474     6,716  
           
   

Total deferred income tax liabilities

    69,631     51,261  
           
   

Net deferred income tax asset

  $ 46,490   $ 94,755  
           

        At June 24, 2009, we had approximately $18.2 million of U.S. Federal general business credit carryforwards. These tax credits will expire in fiscal 2029. It is anticipated that these credits will be fully utilized prior to their expiration.

        Tax reserves are evaluated and adjusted as appropriate, while taking into account the progress of audits of various taxing jurisdictions. At the beginning of fiscal 2008, we adopted the provisions of the Financial Accounting Standards Board's ("FASB") Interpretation No. 48, "Accounting for Uncertainty in

F-27



BRINKER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INCOME TAXES (Continued)


Income Taxes" ("FIN 48"). The adoption of this standard was consistent with FASB Staff Position FIN 48-1, "Definition of Settlement in FASB Interpretation No. 48", that was issued in May 2007 and that provides guidance on how to determine whether a tax position is effectively settled for the purpose of recording unrecognized tax benefits. As a result of the adoption of FIN 48 we recognized an $847,000 decrease in the liability for unrecognized tax benefits, net of the Federal deferred tax benefit, with a corresponding increase to retained earnings.

        A reconciliation of unrecognized tax benefits for the fiscal years ended June 24, 2009 and June 25, 2008 are as follows (in thousands):

 
  2009   2008  

Balance at beginning of year

  $ 27,139   $ 23,193  
 

Additions based on tax positions related to the current year

    4,130     5,587  
 

(Reductions) additions based on tax positions related to prior years

    (91 )   57  
 

Settlements with tax authorities

    (4 )   (1,081 )
 

Expiration of statute of limitations

    (3,463 )   (617 )
           

Balance at end of year

  $ 27,711   $ 27,139  
           

        The total amount of unrecognized tax benefits as of June 24, 2009 was $27.7 million ($20.3 million of which would favorably affect the effective tax rate if resolved in our favor due to the effect of deferred tax benefits). During the next twelve months, we anticipate that it is reasonably possible that the amount of unrecognized tax benefits could be reduced by approximately $5.9 million ($4.7 million of which would affect the effective tax rate due to the effect of deferred tax benefits) either because our tax position will be sustained upon audit or as a result of the expiration of the statute of limitations for specific jurisdictions.

        We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. In fiscal 2009 we recognized approximately $0.9 million in interest, compared to $1.3 million in fiscal 2008. As of June 24, 2009, we had $6.3 million ($4.5 million net of a $1.8 million deferred tax benefit) of interest and penalties accrued, compared to $5.3 million ($3.8 million net of a $1.5 million deferred tax benefit) at June 25, 2008.

9. DEBT

        Long-term debt consists of the following (in thousands):

 
  2009   2008  

Term loan

  $ 390,000   $ 400,000  

Credit facilities

        158,000  

5.75% notes

    289,253     299,070  

Capital lease obligations (see Note 10)

    50,009     46,507  
           

    729,262     903,577  

Less current installments

    (1,815 )   (1,973 )
           

  $ 727,447   $ 901,604  
           

F-28



BRINKER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. DEBT (Continued)

        As of June 25, 2008, we had credit facilities aggregating $550 million, consisting of a revolving credit facility of $300 million and uncommitted credit facilities of $250 million. In fiscal 2009, we completed the renewal of our revolving credit facility which was set to expire in October 2009. The new facility was reduced to $250 million, 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 3.75% and expires in February 2012. Based on our current credit rating, the revolving credit facility carries an interest rate of LIBOR plus 3.25% (3.56% as of June 24, 2009), although no balance was outstanding under this facility at June 24, 2009. The decision to downsize our total borrowing capacity under the new revolving credit facility was a result of the Macaroni Grill divestiture, reduced new company-owned restaurant development and our focus on debt repayment.

        In fiscal 2009, Standard and Poor's ("S&P") reaffirmed our debt rating of BBB- (investment grade) with a stable outlook. However, Moody's downgraded our corporate family rating to Ba1 (non-investment grade) and our senior unsecured note rating to Ba2 (non-investment grade) with a stable outlook. Under the terms and conditions of our uncommitted credit facility agreements, we had to maintain an investment grade rating with both S&P and Moody's in order to utilize the credit facilities. As a result of our split rating, our uncommitted credit facilities totaling $250 million are no longer available. Outstanding balances on the uncommitted credit facilities were repaid in the second quarter of fiscal 2009 with funds drawn on the revolving credit facility. The balance on the revolving credit facility was paid down to zero by the end of fiscal 2009. As of June 24, 2009, we have $250 million available to us under our revolving credit facility.

        In October 2007, we entered into a three-year term loan agreement for $400 million. 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% and expires in October 2010. At June 24, 2009, $390 million was outstanding and, based on our current credit rating, we are paying interest at a rate of LIBOR plus 0.95% (1.26%).

        In May 2004, we issued $300.0 million of 5.75% notes and received proceeds totaling approximately $298.4 million prior to debt issuance costs. The notes require semi-annual interest payments and mature in June 2014. In April 2009, we repurchased and retired $10.0 million of the notes at a discount and recorded a $1.3 million gain on the extinguishment of debt in interest expense in the consolidated statement of income in fiscal 2009.

        Our debt agreements contain various financial covenants that, among other things, require the maintenance of certain leverage and fixed charge coverage ratios. We are currently in compliance with all financial covenants.

F-29



BRINKER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. DEBT (Continued)

        Excluding capital lease obligations (see Note 10) our long-term debt maturities for the five years following June 24, 2009 are as follows (in thousands):

Fiscal
Year
  Long-Term
Debt
 

2010

  $  

2011

    390,000  

2012

     

2013

     

2014

     

Thereafter

    289,253  
       

  $ 679,253  
       

10. LEASES

(a)    Capital Leases

        We lease certain buildings under capital leases. The asset value of $36.9 million at June 24, 2009 and $32.6 million at June 25, 2008, and the related accumulated amortization of $10.6 million and $9.1 million at June 24, 2009 and June 25, 2008, respectively, are included in property and equipment. Amortization of assets under capital leases is included in depreciation and amortization expense.

(b)    Operating Leases

        We lease restaurant facilities, office space, and certain equipment under operating leases having terms expiring at various dates through fiscal 2093. The restaurant leases have renewal clauses of 1 to 35 years at our option and, in some cases, have provisions for contingent rent based upon a percentage of sales in excess of specified levels, as defined in the leases. Rent expense for fiscal 2009, 2008, and 2007 was $130.7 million, $145.6 million, and $149.1 million, respectively. Contingent rent included in rent expense for fiscal 2009, 2008, and 2007 was $6.6 million, $9.0 million, and $10.9 million, respectively.

F-30



BRINKER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. LEASES (Continued)

(c)    Commitments

        As of June 24, 2009, future minimum lease payments on capital and operating leases were as follows (in thousands):

Fiscal
Year
  Capital
Leases
  Operating
Leases
 

2010

  $ 5,039   $ 108,646  

2011

    5,133     103,514  

2012

    5,230     95,719  

2013

    5,329     87,266  

2014

    5,429     76,299  

Thereafter

    52,727     252,215  
           
 

Total minimum lease payments

    78,887   $ 723,659  
             
 

Imputed interest (average rate of 7%)

    (28,878 )      
             
 

Present value of minimum lease payments

    50,009        
 

Less current installments

    (1,815 )      
             

  $ 48,194        
             

        As of June 24, 2009, we had entered into other lease agreements for restaurant facilities currently under construction or yet to be constructed. Classification of these leases as capital or operating has not been determined as construction of the leased properties has not been completed.

11. STOCK-BASED COMPENSATION

        In November 2005, our shareholders approved the Performance Share Plan, the Restricted Stock Unit Plan, and amendments to the 1998 Stock Option and Incentive Plan and the 1999 Stock Option and Incentive Plan for Non-Employee Directors and Consultants (collectively, the "Plans"). In October 2008, our shareholders approved an amendment to the 1998 Stock Option and Incentive Plan authorizing the issuance of an additional 2.0 million shares of our common stock to employees, bringing the total number of shares authorized for issuance to employees and non-employee directors and consultants under the Plans to 35.3 million. The Plans provide for grants of options to purchase our common stock, restricted stock, restricted stock units, performance shares and stock appreciation rights.

(a)    Stock Options

        Expense related to stock options issued to eligible employees under the Plans is recognized using a graded-vesting schedule over the vesting period. For options granted after the adoption of SFAS 123R on June 30, 2005, expense is recognized to the date on which retirement eligibility is achieved, if shorter than the vesting period. Stock options generally vest over a period of 1 to 4 years and have contractual terms to exercise of 8 to 10 years. Full or partial vesting of awards may occur upon a change in control (as defined in the Plans), or upon an employee's death, disability or involuntary termination.

F-31



BRINKER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. STOCK-BASED COMPENSATION (Continued)

        Transactions during fiscal 2009 were as follows (in thousands, except option prices):

 
  Number of
Options
  Weighted
Average
Exercise
Price
  Weighted
Average
Remaining
Contractual
Life (Years)
  Aggregate
Intrinsic
Value
 

Options outstanding at June 25, 2008

    7,614   $ 21.86              

Granted

    893     18.94              

Exercised

    (427 )   10.89              

Forfeited or canceled

    (707 )   22.49              
                       

Options outstanding at June 24, 2009

    7,373   $ 22.08     4.4   $ 289  
                   

Options exercisable at June 24, 2009

    5,802   $ 21.91     3.8   $ 289  
                   

        At June 24, 2009, unrecognized compensation expense related to stock options totaled approximately $3.1 million and will be recognized over a weighted average period of 2.0 years. The intrinsic value of options exercised totaled approximately $3.3 million, $1.5 million and $38.8 million during fiscal 2009, 2008 and 2007, respectively.

(b)    Restricted Share Awards

        Restricted share awards consist of performance shares, restricted stock and restricted stock units. Performance shares and most restricted stock units issued to eligible employees under the Plans generally vest in full on the third anniversary of the date of grant, while restricted stock units issued to eligible employees under our career equity plan generally vest upon each employee's retirement from the Company. Expense is recognized ratably over the vesting period, or to the date on which retirement eligibility is achieved, if shorter. Restricted stock and restricted stock units issued to eligible employees under our long-term incentive plans generally vest one-third per year beginning on the first or third anniversary of the date of grant. Restricted stock and restricted stock units issued to non-employee directors under the Plans vest in full on the fourth anniversary of the date of grant and are expensed when granted. Full or partial vesting of awards may occur upon a change in control (as defined in the Plans), or upon an employee's death, disability or involuntary termination.

        Transactions during fiscal 2009 were as follows (in thousands, except fair values):

 
  Number of
Restricted
Share
Awards
  Weighted
Average
Fair Value
Per Award
 

Restricted share awards outstanding at June 25, 2008

    2,754   $ 22.92  

Granted

    1,026     16.77  

Vested

    (837 )   22.20  

Forfeited

    (343 )   22.52  
           

Restricted share awards outstanding at June 24, 2009

    2,600   $ 20.76  
           

        At June 24, 2009, unrecognized compensation expense related to restricted share awards totaled approximately $14.4 million and will be recognized over a weighted average period of 2.1 years. The fair

F-32



BRINKER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. STOCK-BASED COMPENSATION (Continued)


value of shares that vested during fiscal 2009, 2008, and 2007 totaled approximately $12.7 million, $3.2 million and $1.8 million, respectively.

12. SAVINGS PLANS

        We sponsor a qualified defined contribution retirement plan ("Plan I") covering all employees who have attained the age of twenty-one and have completed one year and 1,000 hours of service. Plan I allows eligible employees to contribute, subject to IRS limitations on total annual contributions, up to 50% of their base compensation and 100% of their eligible bonuses, as defined in the plan, to various investment funds. We match in cash at a rate of 100% of the first 3% an employee contributes and 50% of the next 2% the employee contributes with immediate vesting. In fiscal 2009, 2008, and 2007, we contributed approximately $8.1 million, $8.9 million, and $8.2 million, respectively.

        We also sponsor a non-qualified defined contribution plan covering a select group of highly compensated employees, as defined in the plan. Eligible employees are allowed to defer receipt of up to 50% of their base compensation and bonus, as defined in the plan. There is no company match, but employee contributions earn interest based on a rate determined and announced in November prior to the start of the plan year. Employee contributions and earnings thereon vest immediately. A Rabbi Trust is used to fund obligations of the non-qualified plan. The market value of the trust assets is included in other assets and the liability to plan participants is included in other liabilities.

13. SUPPLEMENTAL CASH FLOW INFORMATION

        Cash paid for interest and income taxes is as follows (in thousands):

 
  2009   2008   2007  

Income taxes, net of refunds

  $ 5,219   $ 62,260   $ 100,593  

Interest, net of amounts capitalized

    34,473     48,919     26,167  

        Non-cash investing and financing activities are as follows (in thousands):

 
  2009   2008   2007  

Retirement of fully depreciated assets

  $ 50,887   $ 21,778   $ 40,133  

14. CONTINGENCIES

        As of June 24, 2009, we remain secondarily liable for lease payments totaling $193.7 million as a result of the sale of Macaroni Grill, the sale of other brands, and the sale of restaurants to franchisees in previous periods. This amount represents the maximum potential liability of future payments under the guarantees. These leases have been assigned to the buyers and expire at the end of the respective lease terms, which range from fiscal 2010 through fiscal 2023. In the event of default, the indemnity and default clauses in our assignment agreements govern our ability to pursue and recover damages incurred. No material liabilities have been recorded as of June 24, 2009.

        Certain current and former hourly restaurant employees filed a lawsuit against us in California Superior Court alleging violations of California labor laws with respect to meal and rest breaks. The lawsuit seeks penalties and attorney's fees and was certified as a class action in July 2006. On July 22, 2008, the California Court of Appeal decertified the class action on all claims with prejudice. On October 22,

F-33



BRINKER INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. CONTINGENCIES (Continued)


2008, the California Supreme Court granted a writ to review the decision of the Court of Appeal. We intend to vigorously defend our position. It is not possible at this time to reasonably estimate the possible loss or range of loss, if any.

        We are engaged in various other legal proceedings and have certain unresolved claims pending. The ultimate liability, if any, for the aggregate amounts claimed cannot be determined at this time. However, management, based upon consultation with legal counsel, is of the opinion that there are no matters pending or threatened which are expected to have a material adverse effect, individually or in the aggregate, on our consolidated financial condition or results of operations.

15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

        The following table summarizes the unaudited consolidated quarterly results of operations for fiscal 2009 and 2008 (in thousands, except per share amounts):

 
  Fiscal Year 2009
Quarters Ended
 
 
  Sept. 24   Dec. 24   March 25   June 24  

Revenues

  $ 984,407   $ 949,425   $ 857,378   $ 829,370  

Income (loss) before provision for income taxes

  $ 32,355   $ (44,498 ) $ 49,210   $ 49,671  

Net income (loss)

 
$

23,781
 
$

(21,764

)

$

35,003
 
$

42,146
 

Basic net income (loss) per share

 
$

0.23
 
$

(0.21

)

$

0.34
 
$

0.41
 

Diluted net income (loss) per share(a)

  $ 0.23   $ (0.21 ) $ 0.34   $ 0.41  

Basic weighted average shares outstanding

   
101,630
   
101,841
   
101,882
   
102,051
 

Diluted weighted average shares outstanding

    102,762     102,278     102,752     103,054  

 

 
  Fiscal Year 2008
Quarters Ended
 
 
  Sept. 26   Dec. 26   March 26   June 25  

Revenues

  $ 1,054,686   $ 1,029,785   $ 1,077,183   $ 1,073,569  

Income (loss) before provision for income taxes

  $ 52,863   $ 78,106   $ (70,158 ) $ (5,957 )

Net income (loss)

 
$

37,600
 
$

54,480
 
$

(38,818

)

$

(1,540

)

Basic net income (loss) per share

 
$

0.35
 
$

0.53
 
$

(0.38

)

$

(0.02

)

Diluted net income (loss) per share(a)

  $ 0.34   $ 0.52   $ (0.38 ) $ (0.02 )

Basic weighted average shares outstanding

   
106,464
   
103,498
   
101,175
   
101,267
 

Diluted weighted average shares outstanding

    109,155     105,339     102,377     102,717  

(a)
Due to the net loss in the second quarter of fiscal 2009 and the third and fourth quarters of fiscal 2008, diluted loss per share is calculated using the basic weighted average number of shares. Using the actual diluted weighted average shares would result in anti-dilution of earnings per share.

F-34



Report of Independent Registered Public Accounting Firm

The Board of Directors
Brinker International, Inc.:

        We have audited the accompanying consolidated balance sheets of Brinker International, Inc. and subsidiaries ("the Company") as of June 24, 2009 and June 25, 2008, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended June 24, 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Brinker International, Inc. and subsidiaries as of June 24, 2009 and June 25, 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended June 24, 2009, in conformity with U.S. generally accepted accounting principles.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of June 24, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 24, 2009 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

        As discussed in Note 8 of the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109," in fiscal year 2008.

    KPMG LLP

Dallas, Texas
August 24, 2009

 

 

F-35



Report of Independent Registered Public Accounting Firm

The Board of Directors
Brinker International, Inc.:

        We have audited Brinker International, Inc.'s ("the Company") internal control over financial reporting as of June 24, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 24, 2009, based on criteria established in Internal Control—Integrated Framework issued by COSO.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Brinker International, Inc. and subsidiaries as of June 24, 2009 and June 25, 2008, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended June 24, 2009, and our report dated August 24, 2009 expressed an unqualified opinion on those consolidated financial statements.

    KPMG LLP

Dallas, Texas
August 24, 2009

 

 

F-36



MANAGEMENT'S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS

        Management is responsible for the reliability of the consolidated financial statements and related notes, which have been prepared in conformity with U. S. generally accepted accounting principles and include amounts based upon our estimate and judgments, as required. The consolidated financial statements have been audited and reported on by our independent registered public accounting firm, KPMG LLP, who were given free access to all financial records and related data, including minutes of the meetings of the Board of Directors and Committees of the Board. We believe that the representations made to the independent auditors were valid and appropriate.

        We maintain a system of internal controls over financial reporting designed to provide reasonable assurance of the reliability of the consolidated financial statements. Our internal audit function monitors and reports on the adequacy of the compliance with the internal control system and appropriate actions are taken to address significant control deficiencies and other opportunities for improving the system as they are identified. The Audit Committee of the Board of Directors, which is comprised solely of outside directors, provides oversight to the financial reporting process through periodic meetings with our independent auditors, internal auditors, and management. Both our independent auditors and internal auditors have free access to the Audit Committee. Although no cost-effective internal control system will preclude all errors and irregularities, we believe our controls as of and for the year ended June 24, 2009 provide reasonable assurance that the consolidated financial statements are reliable.


MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

        Management is responsible for establishing and maintaining adequate internal control over financial reporting. We have assessed the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we concluded that our internal control over financial reporting was effective as of June 24, 2009.

        Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

        The effectiveness of our internal control over financial reporting as of June 24, 2009 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in its attestation report which is included herein.

/s/ DOUGLAS H. BROOKS

DOUGLAS H. BROOKS
President and Chief Executive Officer

/s/ CHARLES M. SONSTEBY

CHARLES M. SONSTEBY
Executive Vice President and Chief Financial Officer

F-37




QuickLinks

BRINKER INTERNATIONAL, INC. SELECTED FINANCIAL DATA (In thousands, except per share amounts and number of restaurants)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BRINKER INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts)
BRINKER INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts)
BRINKER INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands)
BRINKER INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
BRINKER INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
MANAGEMENT'S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
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