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Brinker International, Inc.
®2006 Annual Report

Table of contents

  • Page 1
    Brinker International, Inc. ® 2006 Annual Report

  • Page 2
    ... The Border Mexican Grill & Cantina serves up authentic Mexican food and drink in a lively atmosphere that pays tribute to the cultures, customs, and flavors of Mexico.The brand offers an extensive menu of great-tasting classic and contemporary Mexican favorites including grilled steak, chicken and...

  • Page 3
    ..., Chili's Grill & Bar offers a vibrant atmosphere where family and friends can gather over a delicious meal. Since its inception in Dallas,Texas, in 1975, Chili's has grown to serve over 700,000 guests daily in more than 1,200 restaurants in 24 countries worldwide. Baby Back Ribs, Big Mouth Burgers...

  • Page 4
    ... THAT THE MARKET IS MORE MATURE, IT REQUIRES A SOPHISTICATED BUSINESS STRATEGY TO KEEP THE MOMENTUM GOING. As we announced in our 2005 annual report, we have been hard at work developing a clear MILESTONES: FISCAL YEAR 2006 At the corporate level, Brinker International marked a number of milestones...

  • Page 5
    ...'S GRILL & BAR® Big Mouth Burger® âž" Chili's opened a time our company has opened 100 company-owned restaurants for a particular brand in one year. And Chili's has plans to further accelerate its growth in Fiscal Year 2007 by opening 120-130 company-owned locations; 10-15 domestic franchised...

  • Page 6
    ...the Board, Chief Executive Officer, and President CHILI'S GRILL & BAR® Chicken & Shrimp Fajitas and 30-40 international franchised locations. Chili's has entered into an agreement that will bring the first Chili's restaurant to Montana - putting the chain on the map in all 50 states. Chili's Baby...

  • Page 7
    ...'S LETTER 2006 SELECTED FINANCIAL HIGHLIGHTS (amounts in thousands, except per share amounts) 2006 Revenues Operating costs and expenses: Cost of sales Restaurant expenses Depreciation and amortization General and administrative Restructure charges and other impairments Total operating costs and...

  • Page 8
    06

  • Page 9
    ...BUSINESS RESOLUTIONS: Accelerate the profitability and growth of our portfolio of brands. During Fiscal Year 2006, the purchasing group at Brinker International saved approximately $12 million by leveraging our buying power across multiple restaurant brands for better pricing and ease of management...

  • Page 10
    ... our brands more easily accessible in markets we already serve.We're ON THE BORDER MEXICAN GRILL & CANTINA® Margarita Selects setting an all-time On The Border record of $121,000 in one day. We're also pleased to announce that On The Border has signed its first international franchising deal...

  • Page 11
    ... outlets - and they're good at any domestic Chili's, Macaroni Grill, On The Border, or Maggiano's location.This year for the first time, we promoted gift cards for all four Brinker brands on a single newspaper insert. We also introduced new holiday and special-occasion designs to generate excitement...

  • Page 12
    ... ANNUAL REPORT. for its most loyal customers.This powerful insight enables the brand to effectively channel its resources toward those décor details, menu items, HERE ARE SOME EXAMPLES OF HOW THE BEHAVIORS HAVE SHAPED OUR DECISIONS IN RECENT MONTHS. Ensure everything you do adds value. Extensive...

  • Page 13
    ...of Macaroni Grill - without spending time, money, or effort on things that the core audience doesn't value. Deliver on your promises. The On The Border menu offers new and traditional dishes with a twist. On The Border leaders were determined to hit their financial goals even though the brand's top...

  • Page 14
    ... Rico team saw an opportunity to add a local favorite to the menu - Churrasco Steak.They added a Chili's twist to the dish, but were careful to keep the local flavor. Currently, Churrasco Steak is the top seller in Chili's Puerto Rico restaurants, providing high margins and exceptional customer...

  • Page 15
    ...growth. But in Fiscal Year 2006, Chili's had a very successful opening in this neighborhood, thanks in large part to a seasoned management team that accurately represents the diversity of the area. As Brinker continues to expand domestically and globally, valuing diversity in people and perspectives...

  • Page 16
    14

  • Page 17
    ... IT COMES TO BRINKER INTERNATIONAL'S NEW BUSINESS STRATEGY, OUR DESTINATION IS play well together - are now tied to our employee performance reviews.They're also the basis for Brinker's STAR Awards, a peer award that goes to employees at the corporate office who best exemplify these six important...

  • Page 18
    ... And a huge selection of both traditional and unexpected menu options.The specials at Maggiano's not only keep things new and interesting for regular customers, but they also give our executive chefs an opportunity to shine. As Brinker International continues to strengthen the cult status of each of...

  • Page 19
    ... redistribution center; G.E.T. Enterprises, Inc., an Asian-American, woman-owned smallwares provider; and Red Chamber Company, an AsianAmerican-owned shrimp supplier. In 2006, Brinker International was listed among FORTUNE magazine's Top 50 Employers for Minorities. The company was also named one...

  • Page 20
    ..., which recently named Macaroni Grill President Jean Birch to its board of directors and attracted more than 120 Brinker home office and field employees to its annual leadership conference. Our diversity and inclusion initiatives 18 COMMUNITY SERVICE We value our neighbors and communities It takes...

  • Page 21
    ...employees get back on their feet after the tragedy. On October 5, Brinker International joined 15,000 other restaurants in Dine for America to raise money to assist the American Red Cross and the group's Gulf Coast Relief Fund. Our Brinker restaurants raised more than $300,000 on that day in support...

  • Page 22
    ... Arts, UT Southwestern Medical Center, and many more. Our corporate contributions are just the beginning of our community service work. Each of our brands has also made its own contributions to charitable causes. Chili's Grill & Bar St. Jude Children's Research Hospital®.Throughout the month of...

  • Page 23
    ... the first time, guests could also purchase a special limited-edition Maggiano's/Make-A-Wish Gift card, with $1 from each purchase benefiting the foundation. 21 Dallas-area On The Border restaurants raised a total of $150,000 for charity through the On The Border Annual The family of Kenny Dennis...

  • Page 24
    ... Executive Officer and President Brinker International, Inc. Ron Kirk Partner Vinson & Elkins LLP Rosendo G. Parra Senior Vice President Home and Small Business Group Dell Inc. George R. Mrkonic Dr. Robert M. Gates President Texas A&M University Retired President and Vice Chairman Borders Group...

  • Page 25
    ... SHAREHOLDER INFORMATION Executive Offices Brinker International, Inc. 6820 LBJ Freeway Dallas, TX 75240 NYSE Symbol: EAT CEO/CFO Certifications On November 14, 2005, the Company submitted its annual Section 303A CEO Certification to the New York Stock Exchange. The Company also filed the CEO and...

  • Page 26
    SENIOR MANAGEMENT TEAM OF BRINKER INTERNATIONAL, INC. 1. Doug Brooks 2. Roger Thomson 3. Krista Gibson 4. George Michel 5. Wyman Roberts 6. Valerie Davisson 7. John Reale 8. Todd Diener 9. Jean Birch 10. Becky Johnson 11. Mike Webberman 12. Mike Dzura 13. Dennis Weese 14. ...

  • Page 27
    ... File No. 1-10275 BRINKER INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 75-1914582 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 6820 LBJ Freeway, Dallas, Texas 75240 (Address of principal executive offices...

  • Page 28
    ..., steaks, fajitas, sandwiches, salads, appetizers, desserts, and our legendary Big Mouth Burgers and Baby Back Ribs. All of our menu items are prepared fresh daily according to special Chili's recipes. At most of our Chili's restaurants we have a full-service Margarita Bar serving alcohol, with...

  • Page 29
    ...average annual sales volume per Macaroni Grill restaurant was $3.3 million for this year. Maggiano's Little Italy Maggiano's is a classic Italian-American restaurant in the style of New York's Little Italy in the 1940s. Our Maggiano's restaurants are casual, full-service restaurants featuring family...

  • Page 30
    ...of our restaurant brands. We continue to pursue development in countries outside of the United States through Company- and franchise-operated restaurants. The restaurant site selection process is critical to our long-term success and we devote significant effort to the investigation of new locations...

  • Page 31
    ... (paying for any owned items from our own funds). The following table illustrates the approximate average capital investment for a typical unit in our restaurant brands based on restaurants opened in fiscal 2006: Chili's Macaroni Grill Maggiano's On The Border Land(1)...Building ...Furniture...

  • Page 32
    ...restaurant operators and proven financial ability to support and develop multi-unit, as well as in some instances multi-brands, operations. Jointly-Developed Operations From time to time, we enter into agreements for research and development activities related to the testing of new restaurant brands...

  • Page 33
    ... management training process for managers and supervisors, and training teams consisting of groups of employees experienced in all facets of restaurant operations that train employees to open new restaurants. The training teams typically begin on-site training at a new restaurant seven to ten days...

  • Page 34
    ... about future events or outcomes. Risks Related to Our Business Competition may adversely affect our operations and financial results. The restaurant business is highly competitive as to price, service, restaurant location, nutritional and dietary trends and food quality, and is often affected by...

  • Page 35
    ... by higher minimum wage standards, which may increase the price of goods and services they supply to us. Inflation may increase our operating expenses. We have not experienced a significant overall impact from inflation. Inflation can cause increased food, labor and benefits costs and can increase...

  • Page 36
    ...depend heavily on the Chili's brand for a majority of our revenues, unfavorable publicity relating to one or more Chili's restaurants could have a material adverse effect on the Chili's brand, and consequently on our business, financial condition and results of operations. Identification of material...

  • Page 37
    ......Maggiano's ...On The Border: Company-operated ...Franchise ...Total...Table 2: Domestic vs. foreign locations (by brand) as of June 28, 2006: Domestic (No. of States) Foreign (No. of countries) 908 292 222 19 37 123 21 1,622 Chili's ...Macaroni Grill ...Maggiano's ...On The Border ...Restaurant...

  • Page 38
    ... Island and Texas for use as regional operation or real estate/construction offices. The size of these office leases range from approximately 150 square feet to approximately 4,000 square feet. Item 3. LEGAL PROCEEDINGS. Certain current and former hourly restaurant employees filed a lawsuit against...

  • Page 39
    ... for our shareholders for the first time. We have set forth the dividends paid for the fiscal year in the following table: Dividend Per Share of Common Stock Declaration Date Record Date Payment Date $0.10 $0.10 $0.10 September 15, 2005 February 2, 2006 June 7, 2006 November 22, 2005 March 15...

  • Page 40
    ...our publicly announced share repurchase program. If you would like information about this program, you should read the section entitled "Liquidity and Capital Resources" contained within "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2006 Annual Report...

  • Page 41
    ..., you should read the sections entitled "Election of Directors-Information About Nominees", "Governance Of The Company", "Executive Officers", and "Section 16(a) Beneficial Ownership Reporting Compliance" in our Proxy Statement to be dated on or about September 8, 2006, for the annual meeting of...

  • Page 42
    .... Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. If you would like information about principal accountant fees and services, you should read the section entitled "Ratification of Independent Auditors" in our Proxy Statement to be dated on or about September 8, 2006, for the annual meeting...

  • Page 43
    ... has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BRINKER INTERNATIONAL, INC., a Delaware corporation By: /s/ CHARLES M. SONSTEBY Charles M. Sonsteby, Executive Vice President and Chief Financial Officer Dated: August 23, 2006 Pursuant to the...

  • Page 44
    ......Reports of Independent Registered Public Accounting Firm ...Management's Responsibility for Consolidated Financial Statements ...Management's Report on Internal Control over Financial Reporting... F-1 F-2 F-8 F-9 F-10 F-11 F-12 F-27 F-29 F-29 All schedules are omitted as the required information...

  • Page 45
    ...M. Sonsteby, Executive Vice President and Chief Financial Officer of the Registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(10) Proxy Statement of Registrant.(11) Filed as an exhibit to annual report on Form 10-K for year ended June...

  • Page 46

  • Page 47
    ... outstanding ...Diluted weighted average shares outstanding ...Balance Sheet Data: Working capital (deficit)...Total assets ...Long-term obligations ...Shareholders' equity ...Dividends per share ...Number of Restaurants Open (End of Period): Company-operated ...Franchised/Joint venture ...Total...

  • Page 48
    ... consolidated financial statements. We intend to continue the expansion of our restaurant brands by opening units in strategically desirable markets. The restaurant site selection process is critical to our long-term success and we devote significant effort to the investigation of new locations...

  • Page 49
    ... increase in advertising. Restaurant expenses, as a percent of revenues, increased 1.1% in fiscal 2005. The increase was primarily due to the utility and vacation costs and the FICA tax assessment previously mentioned, increases in labor costs related to new product rollouts and service initiatives...

  • Page 50
    ... due to stock-based compensation related to incentive stock options. The increase in fiscal 2006 was partially offset by an income tax benefit totaling $8.1 million associated with the favorable settlement of certain IRS audits and a decrease in the effective tax rate for state income taxes. IMPACT...

  • Page 51
    ..., and the expiration of credit facilities as of June 28, 2006 are as follows: Payments Due by Period (in thousands) Less than 1-3 3-5 1 Year Years Years Total More than 5 Years Long-term debt(a)...Capital leases ...Operating leases ...Purchase obligations(b) ... $ 596,899 79,814 890,235 73,285...

  • Page 52
    ... 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 28, 2006 would be approximately $2.6 million. We may from time to time utilize interest rate swaps to manage overall borrowing costs and reduce...

  • Page 53
    .... 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...

  • Page 54
    BRINKER INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) 2006 Fiscal Years 2005 2004 Revenues ...Operating Costs and Expenses: Cost of sales ...Restaurant expenses...Depreciation and amortization ...General and administrative ...Restructure charges ...

  • Page 55
    ... INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) 2006 2005 ASSETS Current Assets: Cash and cash equivalents...Accounts receivable ...Inventories ...Prepaid expenses and other ...Deferred income taxes...Current assets of discontinued operations...

  • Page 56
    ...-In Capital $ 342,500 - - Accumulated Other Comprehensive Income $ 609 - 128 Balances at June 25, 2003 ...Net income ...Change in fair value of investments, net of tax ...Comprehensive income ...Purchases of treasury stock . . Issuances of common stock . . Tax benefit from stock options exercised...

  • Page 57
    ... by operating activities of continuing operations ...Cash Flows from Investing Activities: Payments for property and equipment ...Proceeds from sale of assets ...Payments for purchases of restaurants ...Proceeds from disposition of equity method investee ...Purchases of short-term investments...

  • Page 58
    ...2006 presentation. These reclassifications have no effect on our net income or financial position as previously reported. (b) 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...

  • Page 59
    ...cost (weighted average cost method) or market. (e) Property and Equipment Buildings and leasehold improvements are amortized using the straight-line method over the lesser of the life of the lease, including renewal options, or the estimated useful lives of the assets, which range from 4 to 20 years...

  • Page 60
    ... compensation cost was reflected in net income for grants of stock options prior to fiscal 2006 because we grant stock options with an exercise price equal to the market value of the stock on the date of grant. Effective June 30, 2005, we adopted SFAS No. 123 (Revised 2004), "Share-Based Payment...

  • Page 61
    ...life of stock options are based on historical experience. The riskfree rate is based on the yield of a five-year Treasury Note. Certain employees are eligible to receive performance shares, restricted stock and restricted stock units, while non-employee members of the Board of Directors are eligible...

  • Page 62
    (n) 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, ...

  • Page 63
    ... maximizing returns on investment. The sale of the brand was completed in February 2006. We have reported the results of operations of Corner Bakery as discontinued operations which consist of the following (in thousands): 2006 2005 2004 Revenues ...Income (loss) before income tax (expense) benefit...

  • Page 64
    ... estate brokers who examined comparable property sales values in the respective markets in which the restaurants operate. In addition, we made lease payments related to the closed stores totaling $1.7 million, $3.3 million, and $800,000 during fiscal 2006, 2005, and 2004, respectively, reducing the...

  • Page 65
    ... of 35% to income before provision for income taxes is as follows (in thousands): 2006 2005 2004 Income tax expense at statutory rate ...FICA tax credit...State income taxes, net of Federal benefit ...Goodwill impairment ...Stock-based compensation ...Other ... $106,889 $ 67,060 $ 82,273 (22,774...

  • Page 66
    ...): 2006 2005 Deferred income tax assets: Leasing transactions ...Stock-based compensation...Insurance reserves ...Restructuring charges and other impairments ...Employee benefit plans ...Other, net ...Total deferred income tax assets ...Deferred income tax liabilities: Depreciation and capitalized...

  • Page 67
    The mortgage loan obligations require monthly principal and interest payments, mature on various dates through March 2020, and bear interest at rates ranging from 9.00% to 10.75% per year. The obligations are collateralized by the underlying restaurant properties. In October 2001, we issued $431.7 ...

  • Page 68
    ... payments on capital and operating leases were as follows (in thousands): Fiscal Year Capital Leases Operating Leases 2007...2008...2009...2010...2011...Thereafter ...Total minimum lease payments ...Imputed interest (average rate of 7%) ...Present value of minimum lease payments ...Less current...

  • Page 69
    ...-term incentive plans 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. Transactions during fiscal 2006...

  • Page 70
    In October 2004, Congress enacted the American Jobs Creation Act of 2004 which added section 409A to the Internal Revenue Code and changed the tax rules governing non-qualified deferred compensation plans. After evaluating the new tax rules, effective January 1, 2005, we froze our existing non-...

  • Page 71
    .... 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...

  • Page 72
    ... Year 2006 Quarters Ended Dec. 28 March 29 Sept. 28 June 28 Revenues ...Income before provision for income taxes. . Income from continuing operations ...Basic earnings per share from continuing operations ...Diluted earnings per share from continuing operations ...Basic weighted average shares...

  • Page 73
    ...financial reporting. As discussed in Note 1 of the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" in fiscal year 2006. KPMG LLP Dallas, Texas...

  • Page 74
    ...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 28, 2006 and June 29, 2005, and the related consolidated statements of income, shareholders...

  • Page 75
    ...compliance with the policies and procedures may deteriorate. Our management's assessment of the effectiveness of our internal control over financial reporting as of June 28, 2006 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in its report which is included...

  • Page 76
    ...'S subsidiaries operate full-service restaurants in various locations throughout the United States under the names Chili's Grill & Bar, Romano's Macaroni Grill, On The Border Mexican Grill & Cantina, and Maggiano's Little Italy. BRINKER RESTAURANT CORPORATION, a Delaware corporation MAGGIANO'S, INC...

  • Page 77
    ... 28, 2006, management's assessment of the effectiveness of internal control over financial reporting as of June 28, 2006 and the effectiveness of internal control over financial reporting as of June 28, 2006, which reports appear in the Brinker International, Inc. 2006 Annual Report to Shareholders...

  • Page 78
    ...'s ability to record, process, summarize and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. b. Date: August 23, 2006 /s/ DOUGLAS H. BROOKS...

  • Page 79
    ... the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and Any fraud, whether or not material, that involves management or other employees who have...

  • Page 80
    ...the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 23, 2006 By: /s/ DOUGLAS H. BROOKS Name: Douglas H. Brooks Title: Chairman of the Board, President and Chief Executive Officer (Principal...

  • Page 81
    ... the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 23, 2006 By: /s/ CHARLES M. SONSTEBY Name: Charles M. Sonsteby Title: Executive Vice President and Chief Financial Officer (Principal...

  • Page 82

  • Page 83
    BRINKER INTERNATIONAL, INC. 6820 LBJ Freeway D a l l a s , Tex a s 7524 0 webs ite: w w w. br i n ker. com