<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: Commission File Number:
June 30, 1998 0-19334
- ------------------- ------------------------
OUTBACK STEAKHOUSE, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 59-3061413
- ------------------------------- ----------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
550 North Reo Street, Suite 200
Tampa, FL 33609
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(813) 282-1225
---------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
------ -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of August 7, 1998, there
were 49,155,774 shares of Common Stock, $.01 par value outstanding.
1 of 19<PAGE>
OUTBACK STEAKHOUSE, INC.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying unaudited consolidated financial statements have been
prepared by Outback Steakhouse, Inc. (the "Company") pursuant to the rules
and regulations of the Securities and Exchange Commission. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of the Company, all adjustments (consisting only of normal recurring
entries) necessary for the fair presentation of the Company's results of
operations, financial position and cash flows for the periods presented have
been included.
2 of 19<PAGE>
OUTBACK STEAKHOUSE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
1998 1997
----------- ------------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents.............. $ 32,240 $ 39,817
Inventories............................ 18,074 20,196
Assets held for disposal............... 4,661 4,681
Other current assets................... 14,587 15,557
-------- --------
Total current assets.............. 69,562 80,251
PROPERTY, FIXTURES AND EQUIPMENT, NET.... 479,532 459,069
INVESTMENTS IN AND ADVANCES TO
UNCONSOLIDATED AFFILIATES.............. 6,400 7,685
DEFERRED INCOME TAXES.................... 10,215 8,143
OTHER ASSETS............................. 34,396 37,632
-------- --------
$600,105 $592,780
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable....................... $ 23,359 $ 23,726
Sales taxes payable.................... 7,645 7,252
Accrued expenses....................... 30,657 24,011
Unearned revenue....................... 6,048 25,086
Income taxes payable................... 1,072
Current portion of long-term debt...... 768 715
-------- --------
Total current liabilities......... 69,549 80,790
LONG-TERM DEBT........................... 28,958 68,276
OTHER LONG TERM LIABILITIES.............. 4,500 4,500
-------- --------
Total liabilities.................... 103,007 153,566
-------- --------
INTEREST OF MINORITY PARTNERS IN
CONSOLIDATED PARTNERSHIPS.............. 5,144 4,497
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 200,000
shares authorized, 49,826 and 49,250
shares issued; and 49,090 and 48,514
outstanding as of June 30, 1998 and
December 31,1997, respectively 498 492
Additional paid-in capital............. 171,852 156,655
Retained earnings...................... 333,504 291,470
-------- --------
505,854 448,617
Less treasury stock, 736 shares, at cost (13,900) (13,900)
-------- --------
Total stockholders' equity........... 491,954 434,717
-------- --------
$600,105 $592,780
======== ========
See notes to unaudited consolidated financial statements.
3 of 19<PAGE>
OUTBACK STEAKHOUSE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data, unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
REVENUES
Restaurant sales........ $339,165 $285,539 $660,285 $554,363
Other revenues.......... 3,114 2,190 5,998 4,403
-------- -------- -------- --------
TOTAL REVENUES.......... 342,279 287,729 666,283 558,766
-------- -------- -------- --------
COSTS AND EXPENSES
Cost of sales......... 131,969 109,731 257,152 213,551
Labor & other
related.............. 79,226 67,288 154,331 131,562
Other restaurant
operating............ 72,863 63,663 142,934 123,721
General & administrative 13,645 10,954 26,286 21,246
(Income) loss from
operations of uncon-
solidated affiliates. (181) 209 (293) 414
-------- -------- -------- --------
297,522 251,845 580,410 490,494
-------- -------- -------- --------
INCOME FROM OPERATIONS.. 44,757 35,884 85,873 68,272
INTEREST EXPENSE........ (218) (444) (924) (881)
-------- -------- -------- --------
INCOME BEFORE ELIMINATION OF
MINORITY PARTNERS' INTEREST
AND INCOME TAXES...... 44,539 35,440 84,949 67,391
ELIMINATION OF MINORITY
PARTNERS' INTEREST.... 6,133 5,087 11,874 9,969
-------- -------- -------- --------
INCOME BEFORE PROVISION
FOR INCOME TAXES...... 38,406 30,353 73,075 57,422
PROVISION FOR INCOME
TAXES................. 13,749 11,079 26,161 20,959
-------- -------- -------- --------
INCOME BEFORE CUMULATIVE
EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE 24,657 19,274 46,914 36,463
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE
(NET OF TAXES) 4,880
-------- -------- -------- --------
NET INCOME.............. $ 24,657 $ 19,274 $ 42,034 $ 36,463
======== ======== ======== ========
See notes to unaudited consolidated financial statements.
4 of 19<PAGE>
OUTBACK STEAKHOUSE, INC.
CONSOLIDATED STATEMENTS OF INCOME (continued)
(in thousands except per share data, unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
BASIC EARNINGS PER SHARE
Income before cumulative
effect of a change in
accounting principle. $ 0.50 $ 0.41 $ 0.96 $ 0.76
Cumulative effect of change
in accounting principle
(net of taxes)....... 0.10
-------- -------- -------- --------
Net income.............. $ 0.50 $ 0.41 $ 0.86 $ 0.76
======== ======== ======== ========
BASIC WEIGHTED SHARES
OUTSTANDING........... 49,025 47,410 48,838 47,715
======== ======== ======== ========
DILUTED EARNINGS PER SHARE
Income before cumulative
effect of a change in
accounting principle. $ 0.49 $ 0.40 $ 0.94 $ 0.76
Cumulative effect of change
in accounting principle
(net of taxes)....... 0.10
-------- -------- -------- --------
Net income.............. $ 0.49 $ 0.40 $ 0.84 $ 0.76
======== ======== ======== ========
DILUTED WEIGHTED SHARES
OUTSTANDING........... 50,423 47,976 50,147 48,240
======== ======== ======== ========
See notes to unaudited consolidated financial statements.
5 of 19<PAGE>
OUTBACK STEAKHOUSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited) Six Months Ended June 30,
1998 1997
Cash flows from operating activities: -------- --------
Net income.................................. $ 42,034 $ 36,463
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation.............................. 18,540 14,820
Amortization.............................. 798 7,358
Cumulative effect of accounting change.... 4,880
Minority partners' interest in
consolidated partnerships' income........ 11,874 9,969
(Income) loss from unconsolidated affiliates (293) 414
Change in assets and liabilities:
Decrease (increase) in inventories........ 2,120 (660)
Decrease (increase) in other current assets 970 (831)
(Increase) decrease in deferred income taxes (2,072) 179
Decrease (increase) in other assets....... 566 (5,424)
Increase (decrease) in accounts payable,
sales taxes payable, and accrued expenses 6,672 (7,434)
Increase in income taxes payable.......... 1,072
Decrease in unearned revenue.............. (19,038) (11,482)
Increase in other long term liabilities... 1,800
-------- --------
Net cash provided by operating activities 68,123 45,172
Cash flows used in investing activities: -------- --------
Capital expenditures....................... (38,983) (58,202)
Payments from unconsolidated affiliates.... 2,648 2,811
Distributions to unconsolidated affiliates. (391) (181)
Investments in and advances to unconsolidated
affiliates................................ (679) (703)
-------- --------
Net cash used in investing activities.... (37,405) (56,275)
Cash flows from financing activities: -------- --------
Proceeds from exercises of stock options... 13,782 1,396
Proceeds from issuance of long-term debt... 28,189
Proceeds from minority partners' contributions 475 750
Distributions to minority partners
and shareholders.......................... (13,287) (10,860)
Repayments of long-term debt............... (39,265) (384)
Purchases of treasury stock................ (13,900)
Net cash (used in) provided by financing -------- --------
activities............................. (38,295) 5,191
-------- --------
Net decrease in cash and cash equivalents... (7,577) (5,912)
Cash and cash equivalents at beginning
of period................................ 39,817 15,661
-------- --------
Cash and cash equivalents at end of period.. $ 32,240 $ 9,749
======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest................... $ 1,692 $ 1,256
Cash paid for income taxes............... 21,227 17,691
Supplemental disclosures of non-cash items:
Purchase of minority partners interest
(see note 8)............................. $ 3,006
See notes to unaudited consolidated financial statements.
6 of 19<PAGE>
OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared by the Outback Steakhouse, Inc. (the "Company") pursuant to the rules
and regulations of the Securities and Exchange Commission. Accordingly, they
do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of the Company, all adjustments (consisting only of normal recurring
entries) necessary for the fair presentation of the Company's results of
operations, financial position and cash flows for the periods presented have
been included.
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year.
These financial Statements should be read in conjunction with the Financial
Statements and financial notes thereto included in the Company's 1997 Annual
Report.
2. Other Current Assets
Other current assets consisted of the following (in thousands):
June 30, December 31,
1998 1997
-------- ---------
Deposits (including income tax deposits) $ 1,466 $ 2,251
Accounts receivable............... 5,555 6,466
Prepaid expenses.................. 6,034 6,034
Other current assets.............. 1,532 806
-------- ---------
$ 14,587 $ 15,557
======== =========
3. Property, Fixtures and Equipment, Net
Property, fixtures and equipment consisted of the following (in thousands):
June 30, December 31,
1998 1997
-------- ---------
Land.............................. $103,424 $ 99,774
Buildings and building improvements 204,750 193,667
Furniture and fixtures............ 52,444 49,484
Equipment......................... 118,513 112,537
Leasehold improvements............ 93,157 87,624
Construction in progress.......... 18,569 8,768
Accumulated depreciation.......... (111,325) (92,785)
-------- ---------
$479,532 $ 459,069
======== =========
4. Other Assets
Other assets consisted of the following (in thousands):
June 30, December 31,
1998 1997
-------- ---------
Preopening costs, net............. $ 6,640
Intangible assets (including liquor
licenses)........................ $ 30,639 27,307
Other assets...................... 3,757 3,685
-------- ---------
$ 34,396 $ 37,632
======== =========
7 of 19<PAGE>
OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Long-term Debt
Long-term debt consisted of the following (in thousands):
June 30, December 31,
1998 1997
-------- ---------
Notes payable to banks collateralized by
property, fixtures and equipment, interest
at rates ranging from 8.83% to 9.90%....... $ 1,013 $ 1,127
Note payable to corporation, collaterized
by real estate, interest at 9.0%........... 302 344
Other notes payable, unsecured, interest at
rates ranging from 5.36% to 7.99%.......... 1,336 1,160
Revolving line of credit, interest rates
ranging from 6.16% to 6.19% at June 30, 1998
(see below) 27,075 66,360
-------- ---------
29,726 68,991
Less current portion 768 715
-------- ---------
Long-term debt $28,958 $68,276
======== =========
The Company has an unsecured revolving line of credit which permits
borrowing up to a maximum of $125,000,000 at rates ranging from 50 to 75
basis points over the 30,60, 90 or 180 day London Interbank Offered Rate
(LIBOR) (5.69% to 5.75% at June 30, 1998). At June 30, 1998 the unused portion
of the revolving line of credit was $97,925,000. The line matures in
August 2000.
The Company has a $7,500,000 unsecured line of credit bearing interest at
rates ranging from 50 to 75 basis points over LIBOR. Approximately $4,554,000
of the line of credit is committed for the issuance of letters of credit,
$697,000 of which is to secure loans made by the bank to certain franchisees.
The Company is the guarantor of an unsecured line of credit which permits
borrowing of up to a maximum of $25,000,000, maturing in March 2002, for one
of its franchise groups. At June 30, 1998 the balance was approximately
$6,270,000.
See "Liquidity and Capital Resources" in Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
6. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
June 30, December 31,
1998 1997
-------- ---------
Accrued payroll................... $ 7,600 $ 4,907
Accrued advertising............... 6,283 5,527
Accrued rent...................... 1,056 1,403
Accrued insurance................. 6,265 4,985
Accrued ESOP contribution......... 841 174
Accrued property taxes............ 4,853 3,921
Other accrued expenses............ 3,759 3,094
-------- --------
$ 30,657 $ 24,011
======== ========
8 of 19<PAGE>
OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Adoption of Statement of Position 98-5 , "Reporting on the Costs of
Start-up Activities".
The Company chose early adoption of a new accounting standard, Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities," which requires
that pre-opening and other start-up costs be expensed as incurred rather than
capitalized. The adoption has been made effective as of the beginning of the
Company's current fiscal year. As a result of the adoption the Company has
begun to report pre-opening costs as part of its store operating expenses which
in turn will result in lower future amortization expense. The cumulative effect
of the change in accounting, which totaled $4,880,000 net of taxes or $0.10 per
share diluted, was recorded as a one-time charge in the Company's year-to-date
results. The adoption of the requirements of this new Statement of Position did
not have a material effect on the income before cumulative effect of change in
accounting principle for the three months and six months ended June 30, 1998.
8. Business Combinations
In April 1998, the Company issued approximately 46,000 shares of Common
Stock to one area operating partner for all the outstanding interest in 17
Outback Steakhouses. The merger has been accounted for by the purchase method
and the related goodwill is included in the line item entitled "Other Assets"
in the Company's Consolidated Balance Sheets.
9 of 19<PAGE>
OUTBACK STEAKHOUSE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth, for the periods indicated, (i) the
percentages which the items in the Company's Consolidated Statements of
Income bear to total revenues, or restaurant sales as indicated, and (ii)
selected operating data:
Three Months Ended Six Months Ended
June 30, June 30,
---------------- ----------------
1998 1997 1998 1997
REVENUES ------ ------ ------ ------
Restaurant sales 99.1% 99.2% 99.1% 99.2%
Other revenues 0.9 0.8 0.9 0.8
------ ------ ------ ------
TOTAL REVENUES 100.0 100.0 100.0 100.0
COSTS AND EXPENSES:
Cost of sales (1) 38.9 38.4 38.9 38.5
Labor & other related (1) 23.4 23.6 23.4 23.7
Other restaurant operating (1) 21.5 22.3 21.6 22.3
General & administrative 4.0 3.8 3.9 3.8
(Income) loss from operations of
unconsolidated affiliates (0.1) 0.1 0.1
Total costs and expenses 86.9 87.5 87.1 87.8
------ ------ ------ ------
INCOME FROM OPERATIONS 13.1 12.5 12.9 12.2
INTEREST EXPENSE, NET (0.1) (0.2) (0.2) (0.2)
------ ------ ------ ------
INCOME BEFORE ELIMINATION OF
MINORITY PARTNERS' INTEREST
AND INCOME TAXES 13.0 12.3 12.7 12.0
ELIMINATION OF MINORITY PARTNERS'
INTEREST 1.8 1.7 1.8 1.8
------ ------ ------ ------
INCOME BEFORE PROVISION FOR
INCOME TAXES 11.2 10.6 10.9 10.2
PROVISION FOR INCOME TAXES 4.0 3.9 3.9 3.7
------ ------ ------ ------
INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE 7.2 6.7 7.0 6.5
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (NET OF TAXES) 0.7
------ ------ ------ ------
NET INCOME 7.2% 6.7% 6.3% 6.5%
====== ====== ====== ======
(1) As a percentage of restaurant sales.
10 of 19<PAGE>
Results of Operations (continued)
System-wide sales (millions of dollars):
Outback Steakhouses restaurants
Company owned $309.0 $261.4 $600.0 $509.2
Domestic franchised 61.7 44.1 118.6 85.1
International franchised 11.8 3.8 23.0 5.4
------ ------ ------ ------
Total 382.5 309.3 741.6 599.7
------ ------ ------ ------
Carrabba's Italian Grills
Company owned restaurants 30.1 24.1 60.2 45.2
Joint venture restaurants 7.2 6.4 13.9 12.0
------ ------ ------ ------
Total 37.3 30.5 74.1 57.2
------ ------ ------ ------
System-wide total $419.8 $339.8 $815.7 $656.9
====== ====== ====== ======
June 30,
--------------
1998 1997
---- ----
Number of restaurants (at end
of the period):
Outback Steakhouses
Company owned restaurants 390 339
Domestic franchised restaurants 76 59
International franchised restaurants 20 7
--- ---
Total 486 405
--- ---
Carrabba's Italian Grills
Company owned restaurants 50 45
Joint venture restaurants 12 13
--- ---
Total 62 58
--- ---
System-wide total 548 463
=== ===
11 of 19<PAGE>
Three months ended June 30, 1998 and 1997
Revenues. Total revenues increased by 19.0% to $342,279,000 during
the second quarter of 1998 as compared with $287,729,000 in the same period
in 1997. The increase was attributable to the opening of new restaurants
after June 30, 1997, a 1.0% menu price increase in September 1997, at Outback
Steakhouse, a 5.0% menu price increase in December 1997 at Carrabba's
Italian Grills, and comparable store revenue increases during the quarter of
4.5% and 11.5% at Outback Steakhouse and Carrabba's Italian Grills,
respectively.
Costs and expenses. Costs of restaurant sales, consisting of food
and beverage costs, increased in the second quarter of 1998 to 38.9% of
restaurant sales as compared with 38.4% in the same period in 1997. The
increase was attributable to commodity cost increases in dairy products,
particularly butter, shrimp and produce, partially offset by a slight decrease
in meat prices and higher menu prices.
Labor and other related expenses decreased as a percentage of
restaurant sales by 0.2% to 23.4% in the second quarter of 1998 as compared
with 23.6% in the same period in 1997. The decrease resulted from higher
comparable store revenues at Outback Steakhouse and Carrabba's Italian Grills
during the quarter, partially offset by higher hourly wage rates resulting from
a competitive labor market and the effect of the increase in the Federal
minimum wage.
Other restaurant operating expenses include all other unit-level
operating costs, the major components of which are operating supplies, rent,
repairs and maintenance, advertising expenses, utilities, depreciation and
amortization and other occupancy costs. A substantial portion of these expenses
are fixed or indirectly variable. These costs decreased by 0.8% of restaurant
sales to 21.5% in the second quarter of 1998, as compared with 22.3% in the
same period in 1997. The decrease resulted from higher comparable store
revenues at Outback Steakhouses and Carrabba's Italian Grills during the
quarter, which reduces the fixed and indirectly variable costs as a percentage
of revenue.
General and administrative costs increased by $2,691,000 to $13,645,000
in the second quarter of 1998 compared with $10,954,000 during the same period
in 1997. This increase resulted from additional staffs employed to manage
Outback Steakhouse's international franchising operations, lower international
franchise revenue growth, an increase in salary expenses related to higher
restaurant management trainings costs, and an increase in overall
administrative costs associated with operating additional Outback Steakhouses.
(Income)loss from operations of unconsolidated affiliates represents
the Company's portion of the income or loss from the Carrabba's Italian Grills
operated as development joint ventures. Income from the development joint
ventures was $181,000 during the second quarter of 1998 as compared with a loss
of $209,000 during the same period in 1997. This increase was attributable to
an increase in comparable store revenues and improved operating margins at
Carrabba's joint venture restaurants.
Income from operations. As a result of the increase in revenues,
the changes in the relationship between revenues and expenses discussed above
and the opening of new restaurants, income from operations increased by
$8,873,000, to $44,757,000, in the second quarter of 1998 as compared with
$35,884,000 in the same period in 1997.
12 of 19<PAGE>
Interest expense. Interest expense was $218,000 during the second
quarter of 1998 as compared with interest expense of $444,000 in the same
period in 1997. The decrease in interest expense resulted from a lower average
line of credit balance during the second quarter of 1998 as compared with the
same period in 1997.
Elimination of minority partners' interests. The costs included in
this line item represent the portion of income from operations included in
consolidated operating results attributable to the ownership interests of
restaurant managers and area operating partners in Company owned restaurants.
As a percentage of revenues, these costs were 1.8% and 1.7% during the
quarters ended June 30, 1998 and 1997, respectively. The increase in this
ratio reflected the increase in overall operating margins.
Provision for income taxes. The provision for income taxes in both
quarters reflected expected income taxes due at federal statutory rates and
state income tax rates, net of the federal benefit. The effective income tax
rates were 35.8% and 36.5% during the second quarters of 1998 and 1997,
respectively.
Net income and earnings per common share. Net income for the second
quarter of 1998 was $24,657,000 as compared with net income of $19,274,000 in
the same period in 1997. Basic earnings per share increased to $0.50 per share
during the second quarter of 1998 as compared with basic earnings per share of
$0.41 for the same period in 1997. Basic weighted shares outstanding
increased by approximately 376,000 shares from 48,649,000 shares at March 31,
1998 to 49,025,000 at June 30, 1998. The increase was primarily due to the
issuance of shares for stock option exercises. Diluted earnings per share
increased to $0.49 per share during the second quarter of 1998 as compared
with diluted earnings per share of $0.40 for the same period in 1997. Diluted
weighted shares outstanding increase by approximately 554,000 shares from
49,869,000 shares at March 31, 1998 to 50,423,000 shares at June 30, 1998.
The increase was due to the issuance of shares for stock option exercises
and increased dilutive effect of stock options because of a higher average
stock price during the quarter.
Six months ended June 30, 1998 and 1997
Revenues. Total revenues increased by 19.2% to $666,283,000 during
the first half of 1998 as compared with $558,766,000 in the same period in
1997. The increase was attributable to the opening of new restaurants after
June 30, 1997, menu price increases in May and September of 1997 totaling
2.1% at Outback Steakhouse, a 5.0% menu price increase in December 1997,
at Carrabba's Italian Grills, and comparable store revenue increases during
the first half of 1998 of 4.4% and 12.0% for Outback Steakhouse and Carrabba's
Italian Grills, respectively.
Costs and expenses. Cost of restaurant sales increased by 0.4% to
38.9% in the first half of 1998 as compared with 38.5% in the same period in
1997. The increase was attributable to commodity cost increases in dairy
products, shrimp and produce, partially offset by a decrease in meat costs and
higher menu prices.
13 of 19<PAGE>
Labor and other related expenses decreased as a percentage of
restaurant sales by 0.3% to 23.4% in the first half of 1998 as compared with
23.7% in the same period in 1997. The decrease resulted from higher comparable
store revenues at Outback Steakhouse and Carrabba's Italian Grills during the
six months, partially offset by higher hourly wage rates resulting from a
competitive labor market and the effect of the increase in the federal minimum
wage.
Other restaurant operating expenses decreased by 0.7% of restaurant
sales to 21.6% in the first half of 1998 as compared with 22.3% in the same
period in 1997. The decrease resulted from higher comparable store revenues
for both Outback Steakhouse and Carrabba's Italian Grills during the six
months, which reduces the fixed and indirectly variable costs as a percentage
of revenue.
General and administrative costs increased by $5,040,000 to
$26,286,000 during the first half of 1998 as compared to with $21,246,000
during the same period in 1997. The increase resulted from additional staffs
employed to manage Outback Steakhouse's international franchising operations
and Carrabba's Italian Grills, an increase in salary expenses related to
higher restaurant management training costs, and an increase in overall
administrative costs associated with operating additional Outback Steakhouses.
(Income)loss from operations of unconsolidated affiliates
represents the Company's portion of the income or loss from the Carrabba's
Italian Grills operated as development joint ventures. Income from
unconsolidated affiliates was $293,000 in the first six months of 1998 as
compared with a loss of $414,000 in the same period in 1997. This increase was
attributable to the increases in comparable store revenues and improved
operating margins at Carrabba's joint venture restaurants.
Income from operations. As a result of the increase in revenues,
the changes in the relationship between revenues and expenses discussed above
and the opening of new restaurants, income from operations increased by
$17,601,000, to $85,873,000 in the first half of 1998 as compared with
$68,272,000 in the same period in 1997.
Interest expense. Interest expense was $924,000 during the
first half of 1998 as compared with interest expense of $881,000 in the
same period in 1997. The period to period changes in interest expense resulted
from changes in borrowings needs as funds were expended to finance the
construction of new restaurants, and a decrease in capitalized interest.
Elimination of minority interests. The costs included in this line
item represent the portion of income from operations included in consolidated
operating results attributable to the ownership interests of restaurant
managers and joint venture partners in Company owned restaurants. As a
percentage of revenues, these costs were 1.8% in both the six month periods
ended June 30, 1998 and 1997.
Provision for income taxes. The provision for income taxes in the
first half of both 1998 and 1997 reflected the expected income taxes due at
federal statutory rates and state income tax rates, net of the federal benefit.
The effective income tax rates were 35.8% and 36.5% for the six month periods
ended June 30, 1998 and 1997, respectively.
14 of 19<PAGE>
Income before cumulative effect of a change in accounting principle.
The income before cumulative effect of a change in accounting principle for the
first half of 1998 was $46,914,000 as compared with $36,463,000 in the same
period in 1997. Basic earnings per share on income before cumulative effect of
a change in accounting principle increased to $0.96 during the first half of
1998 as compared with $0.76 for the same period in 1997. Diluted earnings per
share on income before the cumulative effect of a change in accounting
principle increased to $0.94 during the first half of 1998 as compared with
$0.76 for the same period in 1997.
Cumulative effect of a change in accounting principle. The cumulative
effect of a change in accounting principle represents the effect of the
adoption of the new accounting principle, Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities". The cumulative effect of the
change in accounting principle (net of taxes), for the first half of 1998 was
$4,880,000. There was no effect of the adoption of the change in accounting
principle during the first half of 1997. Basic and diluted earnings per share
for the first half of 1998 were both reduced by $0.10 due to the impact of
the cumulative effect of the change in accounting principle.
Net income and earnings per common share. Net income for the first
half of 1998 was $42,034,000 as compared with net income of $36,463,000 in
the same period in 1997. Basic earnings per share increased to $0.86 during the
first half of 1998 as compared with $0.76 in the same period in 1997. Diluted
earnings per share increased to $0.84 during the first half of 1998 as compared
with $0.76 in the same period in 1997.
Liquidity and Capital Resources
The following table presents a summary of the Company's cash flows
from operating, investing and financing activities for the periods indicated
(in thousands).
Year Ended Six Months Ended
December 31, June 30, June 30,
1997 1998 1997
--------- ---------- ----------
Net cash provided by
operating activities $ 123,624 $ 68,123 $ 45,172
Net cash used in investing
activities (111,546) (37,405) (56,275)
Net cash provided by (used
in) financing activities 12,078 (38,295) 5,191
--------- ---------- ----------
Net increase (decrease) in
cash and cash equivalents $ 24,156 $ (7,577) $ (5,912)
========= ======== ========
The Company requires capital principally for the development of new
Company owned and joint venture restaurants. Capital expenditures totaled
approximately $115,213,000 for year ended December 31, 1997 and $38,983,000
and $58,202,000 during the first six months of 1998 and 1997, respectively.
The Company either leases its restaurants under operating leases for periods
ranging from five to twenty years or purchases land and buildings where it is
cost effective.
15 of 19<PAGE>
At June 30, 1998, the Company had two unsecured lines of credit
totaling $132,500,000. Approximately $4,554,000 is committed for the
issuance of letters of credit, some of which are to secure loans made by the
bank to certain franchisees, and $27,075,000 has been drawn by the Company to
finance capital expenditures. The Company expects that its capital requirements
through the end of 1998 will be met by cash flows from operations and advances
on its line of credit. See Note 5 of Notes to Unaudited Consolidated Financial
Statements.
The Company is the guarantor of an unsecured line of credit that permits
borrowing of up to $25,000,000 for one of its franchisees. At June 30,1998, the
borrowings totaled approximately $6,270,000. See Note 5 of Notes to Unaudited
Consolidated Financial Statements.
Year 2000 Issue
Many software applications and operational programs written in the past were
not designed to recognize calendar dates beginning in the Year 2000. The
failure of such applications or systems to properly recognize the dates
beginning in the Year 2000 could result in miscalculations or system failures
which could result in an adverse effect on the Company's operations.
The Company has instituted a Year 2000 task force which has initiated a
comprehensive project to prepare its computer systems and communication systems
for the Year 2000. The project includes identification and assessment of all
software, hardware and equipment that could potentially be affected by the Year
2000 issue and remedial action and further testing, if necessary. The Company
plans to complete this project by June 30, 1999. The Company believes that the
majority of its major systems are Year 2000 compliant and costs to transition
the remaining systems to Year 2000 compliance are not anticipated to have a
material effect on the Company's financial position or results of operations.
The Company is also contacting critical suppliers of products and services
to determine the extent to which the Company may be vulnerable to such parties
failure to resolve their own Year 2000 issues. Where practicable, the Company
will assess and attempt to mitigate its risks with respect to the failure of
these entities to be Year 2000 ready. The effect, if any, on the Company's
results of operations from the failure of such parties to be Year 2000 ready is
not reasonably estimable.
Recently Issued Financial Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires disclosures of comprehensive
income including per-share amounts in addition to the existing income
statements. Comprehensive income is defined as the change in equity during a
period from transactions and other events, excluding changes resulting from
investments by owners (e.g., supplemental stock offerings) and distributions
to owners (e.g., dividends). This Statement is effective for Financial
Statement periods beginning after December 15, 1997. As of June 30, 1998
there are no items requiring separate disclosure in accordance with this
statement.
16 of 19<PAGE>
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 requires disclosures of
certain information about operating segments and about products and services,
geographic areas in which the Company operates, and their major customers. This
Statement is effective for Financial Statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be presented. This Statement need not be applied to
interim periods in the initial year of its application, but comparative
information for interim periods in the initial year of application is to be
reported in Financial Statements for interim periods in the second year of
application.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 defines derivative
instruments and requires that these items be recognized as assets or
liabilities in the statement of financial position. This statement is
effective for fiscal years beginning after June 15, 1999. As of June 30, 1998
the Company does not have any derivative instruments.
Cautionary Statement
The foregoing Management's Discussion and Analysis of Financial Condition
and Results of Operations contains various "forward-looking statements' within
the meaning of Section27A of the Securities Exchange Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-
looking statements represent the Company's expectations or belief concerning
future events, including the following: any statements regarding future sales
and gross profits percentages, any statements regarding the continuation of
historical trends, and any statements regarding the sufficiency of the
Company's cash balances and cash generated from operating and financing
activities for the Company's cash balances and cash generated from operating
and financing activities for the Company's future liquidity and capital
resource needs. Without limiting the foregoing, the words "believes,"
"anticipates," "plans," "expects," and similar expressions are intended to
identify forward-looking statements. The Company cautions that these statements
are further qualified by important economic and competitive factors that could
cause actual results to differ materially from those in the forward-looking
statements including, without limitation, risks of the restaurant industry,
including a highly competitive industry with many well-established competitors
with greater financial and other resources than the Company, and the impact of
changes in consumer tastes, local, regional and national economic conditions,
demographic trends, traffic patterns, employee availability and cost increases.
In addition, the Company's ability to expand is dependent upon various factors,
such as the availability of attractive sites for new restaurants, the ability
to negotiate suitable lease terms, the ability to generate or borrow funds to
develop new restaurants and obtain various government permits and licenses and
the recruitment and training of skilled management and restaurant employees.
Accordingly, such forward-looking statements do not purport to be predictions
of future events or circumstances and may not be realized.
17 of 19<PAGE>
The Company notes that a variety of factors could cause the actual
results and experience to differ from the anticipated results referred to in
the previous paragraphs. The Company's forward looking statements regarding
its development schedule for new restaurant openings are subject to a number
of risk factors including:
(i) Ability to secure appropriate real estate sites at acceptable prices;
(ii) Ability to obtain all required governmental permits including zoning
approvals and liquor licenses on a timely basis;
(iii) Impact of government moratoriums or approval processes which could
result in significant delays;
(iv) Ability to secure all necessary contractors and sub-contractors;
(v) Union activities such as picketing and hand billing which could
delay construction;
(vi) Weather and acts of God beyond the Company's control resulting in
construction delays.
OUTBACK STEAKHOUSE, INC.
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held an Annual Meeting of Stockholders on Wednesday, April
15, 1998. The matters submitted for vote and the related election results
are as follows:
1. To elect Paul E. Avery, John A. Brabson, Jr., Charles H. Bridges,
J. Timothy Gannon, Lee Roy Selmon as directors of the Company, each
for a three year term. The results of proxies voted for the election
of the directors are as follows:
Name of Nominee Votes For % of Votes % of Exceptions % of
/Director Eligible Withheld Eligible Eligible
- --------------- --------- -------- -------- -------- ---------- --------
Paul E. Avery 43,553,356 89.0% 214,361 0.4% 0 0.0%
John A. Brabson,Jr. 43,554,217 89.0% 213,500 0.4% 0 0.0%
Charles H. Bridges 43,544,138 89.0% 223,579 0.4% 0 0.0%
J. Timothy Gannon 43,545,992 89.0% 223,579 0.4% 0 0.0%
Lee Roy Selmon 43,548,046 89.0% 223,579 0.4% 0 0.0%
Eligible 48,921,630
2. To transact such other business as may properly
come before the meeting. The results of proxies voted are as follows:
For 31,708,463 64.8%
Against 7,790,595 15.9%
Abstain 4,268,659 8.7%
---------- -----
Total 43,767,717 89.4%
========== =====
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27- Financial Data Schedules (for SEC use only)
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during
the quarter ended June 30, 1998.
18 of 19<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
OUTBACK STEAKHOUSE, INC.
________________________
(Registrant)
Date: August 13, 1998 By: /s/ Robert S. Merritt
__________________ __________________________
Robert S. Merritt
Senior Vice President,
Finance (Principal Financial
and Accounting Officer)
19 of 19<PAGE>
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