Brinker International

By George Kruglov

Brinker International Executive Summery

Brinker International is a company that operates, develops, and franchises Chili’s Grill and Bar, Romano’s Macaroni Grill, On the Border Mexican Grill and Cantina, Maggiano’s Little Italy, Corner Bakery, and Bowl Asian Kitchen, restaurant concepts. The company also has a 43% interest in Rockfish Seafood Grill restaurant chain. Brinker currently has 1403 restaurants in operation, and plans to increase its capacity by about 10% by opening about130 to 150 new restaurants in 2004. The company also is experiencing a two percent growth in same store sales. In the past two years the company has bought out a number of its substantial franchises, resulting in an increasing its share of company operated restaurants, which has served to increase its revenue from system wide sales. Recently Brinker’s EPS has fallen slightly below analysts’ expectations resulting in a prime buying opportunity. While in the short-term the operating and administrative costs have somewhat offset the double digit growth in revenue, we believe that management will be able to hold down cost and new concepts such as “TO GO” will result in even higher revenue growth in the near future. The company’s entry into smaller markets such as malls and airports should further increase their market share and boost future earnings.

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(NYSE: EAT) S&P MidCap 400 Industry: Restaurants Sub Industry: Casual Dining Restaurants

Share Information Eat has outperformed the S&P 500 for the majority of the Market Capitalization $3 Billion year and their recent price drop places the stock at a very Shares Outstanding $96.7 Million attractive price level. Monthly Trading Volume $28.8 Million Institutional Ownership 92.5% Developments Current Price  In fiscal 2003 closed one of the two Price (Data): $30.85 remaining PIZZAAHHH! restaurant 52 Week High (7/8/03): $37.21 locations and canceled all future 52 Week Low (2/24/03) $26.32 development of the concept  In fiscal 2003 (4th Q) entered into negotiations to sell all 16 of its Cozymel’s restaurants  Nov 2001 acquired 39 Chili’s restaurants S&P rates EAT out of a possible 5 stars. S&P downgraded from Sydran Group EAT from 4 stars on 09/08/03  July 2001 obtained 40% interest in Rockfish restaurant concept Opinion Analysts Included in Consensus  April 2001 acquired 40 Chili’s and 7 On Strong Buy 6 The Border restaurants from NE Buy 5 Restaurant Company Hold 9  Feb 2001 acquired 50% interest in Big Underperform - Bowl restaurant concept Sell -  Feb 2001 sold Wildfire restaurant concept Total 20 Strengths Weakness  Entering smaller markets, such as airports  Can be effected by the rising beef prices and regional malls  Inflation may increase operating expenses  Developing their “TO GO” program,  Restaurant business is very competitive making it which allows for takeout (9% of sales ‘03) difficult to adjust prices to match increasing operating  11% overall unit growth expenses  Should benefit from continues expansion,  Brinker is subject licensing and regulation by alcoholic and from the improving economy beverage, health, sanitation, and fire agencies, which can hinder new openings and continues operations

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Business Summery

Brinker operates, develops, and franchises Chili’s Grill and Bar, Romano’s Macaroni Grill, On the Border Mexican Grill and Cantina, Maggiano’s Little Italy, Corner Bakery, and Bowl Asian Kitchen, restaurant concepts. The Company also owns a 43% interest in the legal entities owning and developing Rockfish Seafood Grill. As of June 25, 2003, Brinker's system of Company-operated, jointly developed and franchised units included 1,402 restaurants located in 49 states, Washington, D.C., Australia, Bahrain, Canada, Egypt, Great Britain, Guatemala, Indonesia, Kuwait, Lebanon, Malaysia, Mexico, Oman, Peru, Philippines, Puerto Rico, Qatar, Saudi Arabia, South Korea, Taiwan, United Arab Emirates and Venezuela.

Chili's Grill & Bar

Chili's is a full-service restaurant featuring a casual atmosphere and a varied menu of chicken, beef and seafood entrees, steaks, hamburgers, ribs, fajitas, sandwiches, salads, appetizers and desserts, all of which are prepared fresh daily according to Chili's recipes. A full-service bar is available at each Chili's restaurant, with a variety of margaritas, including The Presidente Margarita, offered as the concept's specialty drink.

Chili's restaurants feature table service designed to minimize customer waiting time and facilitate table turnover, with an average turnover time per table of approximately 45 minutes. Service personnel are dressed casually in jeans, knit shirts, t-shirts and aprons to reinforce the casual, informal environment. The decor of a Chili's restaurant consists of booth seating, tile-top tables, hanging plants and wood and brick walls covered with memorabilia.

Romano's Macaroni Grill

Macaroni Grill is a casual Italian restaurant full of the sights, sounds and aromas of a traditional Tuscan kitchen. Enjoyed for any occasion, guests enjoy their favorite Italian dishes along with special signature pastas, grilled features, seafood, salads and pizza, all prepared by talented chefs in open kitchens. The restaurant has wood burning ovens, festive string lights, fresh flowers, broad selection of wine and display cooking. Guests are met with a welcome at the door and enjoy warm service. In addition, guests enjoy the convenience of Macaroni Grill's Curbside To Go service, where chef-prepared meals are delivered right to their cars for them to share at home with friends and family.

Maggiano's Little Italy

Maggiano's restaurants are classic re-creations of dinner houses found in New York's Little Italy in the 1940s. Each of the Maggiano's restaurants is a casual, full-service Italian restaurant with a family-style menu, as well as a full lunch and dinner menu offering southern Italian appetizers, homemade bread, pasta, chicken, seafood, veal and prime steaks, as well as a full range of alcoholic beverages. Most Maggiano's restaurants also feature extensive banquet facilities.

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On The Border Mexican Grill & Cantina

On The Border restaurants are full-service, casual Mexican restaurants featuring mesquite-grilled favorites and traditional Tex-Mex appetizers, entrees and desserts served in generous portions at modest prices. On The Border restaurants feature a full-service bar, an outdoor patio, booth and table seating in the dining room and a colorful, festive atmosphere. On The Border restaurants also offer enthusiastic table service to facilitate table turnover while simultaneously providing customers with a satisfying casual dining experience. Additionally, On The Border offers To Go service intended to fill the need for speed and convenience while offering a take-out experience. On The Border also offers catering service from simple drop-off delivery to full-service event planning.

Corner Bakery Cafe

Corner Bakery is a retail bakery cafe serving breakfast, lunch and dinner in the emerging quick-casual dining segment. Corner Bakery is committed to providing a variety of menu selections. Featured in the cafes are specialty sandwiches, fresh salads, hot soups, panini and pastas. Most bakeries having both indoor and outdoor seating. Savory foods, breads and sweets are created seasonally. Corner Bakery catering offers a wide range of gift baskets, breakfast and sandwich trays and lunch boxes for any size meeting or social event.

Big Bowl Asian Kitchen

Big Bowl features contemporary Asian cuisine prepared with fresh ingredients in a casual atmosphere. Big Bowl is distinguished by its menu that features four kinds of fresh noodles, chicken pot stickers and dumplings, hand-rolled summer rolls, seasonal stir-fry dishes featuring local produce, wok-seared fish and signature beverages, such as homemade ginger soda and tropical cocktails. Garlic, ginger and lemon grass are chopped daily, lemon juice is hand squeezed and peanut sauce is prepared with fresh peanuts. Big Bowl's flavorful broths, curry pastes, dip sauces and condiments are made from scratch. Its interactive stir-fry bar allows the guests to help themselves to a farmers' market array of vegetables to be wok-cooked with their own choice of sauces and meats with noodles or rice.

Rockfish offers fresh, flavorful seafood dishes served in a lively environment. Reminiscent of a fly-fishing camp, the Rockfish decor features piney wood tables, river rock fireplaces and an open kitchen with chefs preparing the catch of the day. The restaurant serves a wide variety of reasonably priced seafood ranging from salmon and trout to catfish, shrimp and crab. Daily chalkboard specials feature various items including when in-season and Copper River Salmon.

The restaurant industry is a very competitive industry, and some of Brinker’s competition consists of Darden Restaurants, Inc. (DRI), Mitchells & Bulters (MLB), Outback Steakhouse, Inc.(OSI), and Applebee’s International, Inc. (APPB).

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Recent News

Chili's Opens on Okinawa Military Base Wednesday October 29, 1:07 pm ET

Kadena Air Base Chili's Is First Casual Restaurant on Any U.S. Air Force Installation KADENA AIR BASE, Japan, Oct. 29 /PRNewswire-FirstCall/ -- U.S. military personnel stationed on the island of Okinawa will no longer have to hold out for a stateside trip to satisfy their cravings for Baby Back Ribs and Big Mouth Burgers. Chili's Grill & Bar has opened for business on Kadena Air Base.

The location is the first Chili's to open anywhere in Japan -- Chili's 23rd country -- and is the first major U.S. casual dining brand to operate on any U.S. Air Force installation. The Kadena Air Base Services Squadron will operate the restaurant under a franchise agreement.

"We are very excited to open our doors to the more than 20,000 servicemen and women, family members and civilian employees who work and live on Kadena Air Base," said Wilson Craft, President of Chili's. "This is a particularly important opening for Chili's because it is another step in our growth strategy of expanding our brand into untapped markets and non-traditional locations."

Craft added that Chili's is planning a second base opening in mid-2004 at Ramstein Air Base, Germany, through Air Force Services Agency and is charting future opportunities for on-site operations with the U.S. armed forces. He also noted that Chili's has made significant strides in growing its presence at airports and in shopping malls, and has recently turned its attention to expansion onto college campuses.

"Recognizing a significant demand for a branded casual dining experience to serve our market, we began a search nearly six years ago to bring a major casual brand restaurant to the Air Force," said Frank Black, Chief of Air Force Clubs for Air Force Services Agency. "We selected Chili's from a short list of qualified concepts because of the strength of the brand, the diversity and popularity of the menu, as well as Chili's successful track record in supporting its global franchise partners.

The Kadena Air Base Chili's is approximately 5,500 square feet, has seating for 247 guests and employs more than 100 "ChiliHeads" from the surrounding Okinawa community.

Brinker International cuts full-year earnings view

NEW YORK, Oct 21 (Reuters) - Restaurant owner and operator Brinker International Inc. on Tuesday said it expects earnings for this fiscal year to fall below its previous forecast and Wall Street's view.

Chief Financial Officer Charles Sonsteby said during a conference call Brinker expects to earn $2.13 to $2.17 per share in fiscal 2004, down from its previous target of $2.19 to $2.23. Analysts, on average, expect the Dallas-based company, the parent of Chili's Grill & Bar and other restaurants, to earn $2.19 per share, according to Reuters Research, a unit of Reuters Group Plc.

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Earlier on Tuesday, Brinker forecast a profit for its current quarter below Wall Street estimates and Smith Barney cut its rating on Brinker's stock to "hold" from "buy." Brinker shares fell 15 percent to $28.60 on the New York Stock Exchange.

Brinker International Inc.'s Romano's Macaroni Grill and United Specialties, Inc. Team Up to Introduce New Line of Truffle Products 2003 Sep 24 7:33 AM Romano's Macaroni Grill, a member of Brinker International Inc.'s family restaurant chain, announced that it has entered into a purchase agreement with United Specialties Inc. to introduce a line of truffle pasta dishes exclusively featuring the Da Rosario brand of truffle oil. The focus of this relationship is to introduce up-market gourmet foods to the mass market.

Financial Data and Ratios

Revenue Key Revenue Points  Average menu prices increased 1.1% 4 and same store sales increased 2.3% 3.5 in 2003 3  Chili’s average revenue per meal is 2.5 about $11.15 2 Revenue ($Bil)  13.8% of Chili’s revenue comes from 1.5 alcoholic beverage sales 1 0.5  Romano’s Macaroni Grill’s average 0 revenue per meal is approximately 1999 2001 2003 $13.84.  12.8% of Romano’s revenue comes Revenue is expected to continue to grow at a pace of from alcoholic beverage sales about 11% per year. This growth is fueled by increase  Maggiano’s Little Italy average in same store sales, new restaurants, and steady revenue per meal in about $25.34 increase in Brinker’s share of its system wide sales.  21.8% of Maggiano’s revenue comes Since 2001 Brinker has increase its share of system from alcoholic beverage sale wide sales from 79.2% to 86.3%.  On The Border’s average revenue per meal is $13.40  21.2% of On The Border’s revenue comes from alcoholic beverage sale Free Cash Flow Unit Growth

50 Total Units Projected Openings 2003 Fiscal 2004 0 Company-Owned -50 Free Cash Units: Flow ($Mil) -100 Chili's 693 70-75 Macaroni Grill 194 21-23 -150 On The Border 114 4-5 1999 2001 2003 Maggiano's 25 3-4 Cozymel's 16 - Corner Bakery 85 5-8

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The decline in free cash flow in 01 and 02 was Big Bowl 18 2-3 primarily the result of restaurant purchases. Total 1,145 105-118

JV/Franchise Units: Chili's 207 20-24 Macaroni Grill 8 2-4 On The Border 19 0-1 Corner Bakery 3 - Rockfish 20 4-6 Total 257 26-35 The overall unit growth in 2004 is projected to be 9.5 to 11 %. EPS Growth Owners’ Equity

0.7 1200 0.6 1000 0.5 1st Qtr 800 0.4 2nd Qtr 600 Ow ners' 0.3 3rd Qtr 400 Equity ($Mil) 0.2 4th Qtr 0.1 200 0 0 1999 2001 2003 1999 2001 2003

Brinker has experienced steady earnings growth Shareholder equity has grown at an average of over the last 5 years, averaging 17.5% yearly 16% per year. growth.

Valuation Ratios Company Industry Sector S&P 500 P/E Ratio (TTM) 18.13* 28.34 26.78 25.04 P/E High - Last 5 Yrs. 27.00 34.72 47.63 47.92 P/E Low - Last 5 Yrs. 14.67 15.03 16.27 16.16 Beta 0.55 0.62 1.02 1.00 Price to Sales (TTM) 0.90* 1.85 2.63 3.30 Price to Book (MRQ) 2.64 4.08 3.77 4.29 Price to Tangible Book (MRQ) 3.15 4.02 6.26 7.21 Price to Cash Flow (TTM) 9.34 21.00 17.44 19.26 Price to Free Cash Flow (TTM) 24.94 40.44 42.95 31.31 % Owned Institutions 95.00 63.47 48.76 63.97 As the ratios show the company has is currently trading with a P/E ratio that is well below its industry. As the Price to Book ratio shows, the company is currently trading at only 2.64 times its book value, which is very low compared to its industry and the S&P. Brinker also trades at a lower multiple of sales than average for the Restaurant industry.

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Growth Rate Ratios Growth Rates(%) Company Industry Sector S&P 500 Sales (MRQ) vs Qtr. 1 Yr. Ago 12.54* 13.97 15.40 12.71 Sales (TTM) vs TTM 1 Yr. Ago 13.19* 13.12 13.59 10.58 Sales - 5 Yr. Growth Rate 15.85 10.88 18.79 9.74 EPS (MRQ) vs Qtr. 1 Yr. Ago -0.88* 13.72 11.92 24.46 EPS (TTM) vs TTM 1 Yr. Ago 7.40* -2.97 21.41 21.46 EPS - 5 Yr. Growth Rate 20.02 10.70 17.09 10.42 Capital Spending - 5 Yr. Growth Rate 16.03 7.17 12.45 6.01

One of the most attractive aspects of EAT is its impressive growth. Its growth clearly outpaces that of most of its competitors and the overall market. It is our belief that the company’s fast growth will continue in the upcoming years, both through gain of market share and restaurant unit growth.

Financial Condition Ratios Financial Strength Company Industry Sector S&P 500 Quick Ratio (MRQ) 0.22 0.61 0.89 1.27 Current Ratio (MRQ) 0.54 0.97 1.49 1.79 LT Debt to Equity (MRQ) 0.31 0.63 0.78 0.65 Total Debt to Equity (MRQ) 0.33 0.66 0.88 0.97 Interest Coverage (TTM) 21.42 8.78 7.17 12.97 Brinker is less leveraged than the average for the restaurant industry.

Management Effectiveness Management Effectiveness (%) Company Industry Sector S&P 500 Return On Assets (TTM) 8.96* 7.95 5.99 6.14 Return On Assets - 5 Yr. Avg. 9.69 8.67 5.64 7.21 Return On Investment (TTM) 10.73* 9.66 8.04 9.65 Return On Investment - 5 Yr. Avg. 11.78 10.86 8.10 11.69 Return On Equity (TTM) 15.80* 20.04 15.04 18.00 Return On Equity - 5 Yr. Avg. 15.96 15.03 14.82 20.10

Brinker’s superior ROI and ROE demonstrates that the company’s management is able to efficiently utilize the resources available to them. Their ROI and ROE fall well within our range of desired returns on Investment and Equity.

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Financial Models

1). P/E Model

Ave P/E ratio: 17 5 year EPS estimates: 3.25 Projected Future price: 17*3.25 =55.25 Current Price: $ 30.78 Price appreciation potential over the next 5 years: $24.47

2). CAPM – Model

Risk Free rate (T-Bill rate): 4.18% Expected Return on Market: 7.5 % Beta: 0.90 (CAPM= 4.18 + 0.90(7.5-4.18) = 7.168 %) Required rate of return is: 7.168 %

3). Value-Line Model Working Capital: $ 1494.1 Mil ROTC: 12 % Growth rate: 12 % Average P/E 17 Common Sh Outstanding: 92 Mil Current Stock Price: $30.78

1494.1(1.12)^10= 4640.45 4640.45/92 =50.43 50.43*.12=6.05 6.05*17=102.89 102.89/30.78=3.34 3.34^(1/10)=1.128

The calculated return on EAT at current price and with estimations is about 12.8 % annually. This is inline with our desired levels of return.

4).Valuepro.net

Intrinsic Value 32.64 Growth Rate 12% Risk Free Rate 4.18% WACC 6.51

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Institutional Selling Top Institutional Holders Shares Purchased 13.7 million % Shares Sold 10.6 million Shares Position Shs. Institution Name Held Value (000) Out. FIDELITY MGMT & 6,315,937 $227,500.05 6.51% Short Interest RESEARCH CO Shares % % AIM CAPITAL MGMT 4,570,070 $164,613.92 4.71% Month (Mil) Outs. Float Days (HOUSTON) MFS INVESTMENT 10/08/03 2.811 2.906 2.913 4.122 3,309,677 $119,214.57 3.41% 09/08/03 2.870 2.967 2.974 3.310 MGMT NORTHERN TRUST CO 2,863,322 $103,136.86 2.95% 08/08/03 2.780 2.874 2.881 2.198 (CHICAGO) 07/08/03 3.102 3.207 3.215 4.483 OPPENHEIMERFUNDS 2,822,300 $101,659.25 2.91% The shorts do not possess a high AMERICAN CENTURY 2,742,929 $98,800.30 2.83% percentage of EAT’s float, and their INVESTMENTS interest has somewhat declined in FRIESS ASSOCIATES 2,356,400 $84,877.53 2.43% October. AMERICAN EXPRESS 2,305,296 $83,036.76 2.38% FINANCIAL TRUSCO CAPITAL 2,201,763 $79,307.50 2.27% MGMT BANC ONE INVESTMENT 1,999,210 $72,011.54 2.06% ADVISORS BESSEMER GROUP 1,988,497 $71,625.66 2.05%

Officers & Board Members

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Executive Officers Board Of Directors Ronald A. McDougall Chairman of the Board and Ronald A. McDougall Chairman of the Board and Chief Executive Officer Chief Executive Officer Douglas H. Brooks President of Brinker International Todd E. Diener Chief Operating Officer Douglas H. Brooks President of Brinker Starlette B. Johnson Executive Vice President, International and Chief Strategic Officer Dan W. Cook III Senior Advisor MHT Charles M. Sonsteby Executive Vice President, Partners and Chief Financial Officer Robert M. Gates President of Texas A&M Roger F. Thomson Executive Vice President, University Chief Administrative Marvin J. Girouard Chairman and CEO of Pier Officer, General Counsel and 1 Imports, Inc. Secretary Ron Kirk Partner, Gardere Wynne Michael B. Webberman Executive Vice President - Sewell, LLP Concept Services George R. Mrkonic Former Vice Chairman and President of Borders Group, Inc. Erle Nye Chairman of the Board and Chief Executive Office of TXU Corp James E. Oesterreicher Chairman of the Board and Chief Executive Officer, J.C. Penney Company, Inc. (Retired) Cece Smith Managing General Partner, Phillips-Smith-Machens Venture Partners Roger T. Staubach Chairman and Chief Executive Officer, The Staubach Company

Recommendation

BUY: 250 shares Price: $30.72 (market price) Stop-Lose: $24.6