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, 1999 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 6, 1999, there
were 75,255,047 shares of Common Stock, $.01 par value outstanding.
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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.
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OUTBACK STEAKHOUSE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
1999 1998
----------- ------------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents.............. $ 76,166 $ 83,594
Inventories............................ 15,852 19,306
Other current assets................... 23,209 19,152
-------- --------
Total current assets.............. 115,227 122,052
PROPERTY, FIXTURES AND EQUIPMENT, NET.... 552,314 526,833
ASSETS HELD FOR DISPOSAL................. 2,713 3,385
INVESTMENTS IN AND ADVANCES TO
UNCONSOLIDATED AFFILIATES.............. 15,281 9,229
DEFERRED INCOME TAXES.................... 1,600 3,265
OTHER ASSETS............................. 41,282 40,447
-------- --------
$728,417 $705,211
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable....................... $ 26,605 $ 36,718
Sales taxes payable.................... 9,062 8,497
Accrued expenses....................... 35,342 30,009
Unearned revenue....................... 12,160 32,620
Income taxes payable................... 3,019
Current portion of long-term debt...... 1,338 967
-------- --------
Total current liabilities......... 87,526 108,811
LONG-TERM DEBT........................... 844 37,475
OTHER LONG TERM LIABILITIES.............. 4,000 4,000
-------- --------
Total liabilities.................... 92,370 150,286
-------- --------
INTEREST OF MINORITY PARTNERS IN
CONSOLIDATED PARTNERSHIPS.............. 7,390 9,879
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 200,000
shares authorized, 75,146 and 74,821
shares issued; and 75,146 and 73,962
outstanding as of June 30, 1999 and
December 31,1998, respectively....... 751 748
Additional paid-in capital............. 191,119 176,584
Retained earnings...................... 436,787 378,539
-------- --------
628,657 555,871
Less treasury stock, 859 shares at
December 31, 1998, at cost........... (10,825)
-------- --------
Total stockholders' equity........... 628,657 545,046
-------- --------
$728,417 $705,211
======== ========
See notes to unaudited consolidated financial statements.
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OUTBACK STEAKHOUSE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data, unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
REVENUES
Restaurant sales........ $398,372 $339,165 $773,285 $660,285
Other revenues.......... 3,433 2,838 6,685 5,722
-------- -------- -------- --------
TOTAL REVENUES.......... 401,805 342,003 779,970 666,007
-------- -------- -------- --------
COSTS AND EXPENSES
Cost of sales......... 150,787 131,969 294,762 257,152
Labor & other
related.............. 93,521 79,226 181,891 154,331
Other restaurant
operating............ 84,443 72,863 164,709 142,934
General & administrative 16,027 13,244 30,402 25,885
Income from operations of
unconsolidated affiliates. (342) (181) (577) (293)
-------- -------- -------- --------
344,436 297,121 671,187 580,009
-------- -------- -------- --------
INCOME FROM OPERATIONS.. 57,369 44,882 108,783 85,998
OTHER INCOME (EXPENSE), NET (901) (125) (1,404) (125)
INTEREST INCOME (EXPENSE) 282 (218) 530 (924)
-------- -------- -------- --------
INCOME BEFORE ELIMINATION OF
MINORITY PARTNERS' INTEREST
AND INCOME TAXES...... 56,750 44,539 107,909 84,949
ELIMINATION OF MINORITY
PARTNERS' INTEREST.... 8,093 6,133 15,227 11,874
-------- -------- -------- --------
INCOME BEFORE PROVISION
FOR INCOME TAXES...... 48,657 38,406 92,682 73,075
PROVISION FOR INCOME TAXES 17,760 13,749 33,829 26,161
-------- -------- -------- --------
INCOME BEFORE CUMULATIVE
EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE.. 30,897 24,657 58,853 46,914
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE
(NET OF TAXES)........ (4,880)
-------- -------- -------- --------
NET INCOME.............. $ 30,897 $ 24,657 $ 58,853 $ 42,034
======== ======== ======== ========
See notes to unaudited consolidated financial statements.
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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,
1999 1998 1999 1998
-------- -------- -------- --------
BASIC EARNINGS PER SHARE
Income before cumulative
effect of a change in
accounting principle. $ 0.41 $ 0.34 $ 0.79 $ 0.64
Cumulative effect of change
in accounting principle
(net of taxes)....... (0.07)
-------- -------- -------- --------
Net income.............. $ 0.41 $ 0.34 $ 0.79 $ 0.57
======== ======== ======== ========
BASIC WEIGHTED SHARES
OUTSTANDING........... 74,953 73,538 74,609 73,257
======== ======== ======== ========
DILUTED EARNINGS PER SHARE
Income before cumulative
effect of a change in
accounting principle. $ 0.40 $ 0.33 $ 0.76 $ 0.62
Cumulative effect of change
in accounting principle
(net of taxes)....... (0.06)
-------- -------- -------- --------
Net income.............. $ 0.40 $ 0.33 $ 0.76 $ 0.56
======== ======== ======== ========
DILUTED WEIGHTED SHARES
OUTSTANDING........... 77,539 75,635 76,991 75,221
======== ======== ======== ========
See notes to unaudited consolidated financial statements.
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OUTBACK STEAKHOUSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited) Six Months Ended June 30,
1999 1998
Cash flows from operating activities: -------- --------
Net income.................................. $ 58,853 $ 42,034
Cumulative effect of change in accounting
principle 4,880
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation.............................. 20,804 18,540
Amortization.............................. 1,267 798
Minority partners' interest in
consolidated partnerships' income........ 15,227 11,874
Income from unconsolidated affiliates..... (577) (293)
Change in assets and liabilities:
Decrease in inventories.................. 3,454 2,120
(Increase) decrease in other current assets (4,057) 970
Decrease(increase) in deferred income taxes 1,665 (2,072)
Decrease in other assets.................. 409 566
(Decrease) increase in accounts payable,
sales taxes payable, and accrued expenses (4,215) 6,672
Increase in income taxes payable.......... 3,019 1,072
Decrease in unearned revenue.............. (20,460) (19,038)
-------- --------
Net cash provided by operating activities 75,389 68,123
Cash flows used in investing activities: -------- --------
Capital expenditures....................... (45,613) (38,983)
Payments from unconsolidated affiliates.... 64 2,648
Distributions to unconsolidated affiliates. (594) (391)
Investments in and advances to unconsolidated
affiliates................................ (4,945) (679)
-------- --------
Net cash used in investing activities.... (51,088) (37,405)
Cash flows from financing activities: -------- --------
Proceeds from exercises of stock options... 11,069 13,782
Proceeds from minority partners' contributions 550 475
Distributions to minority partners
and shareholders.......................... (18,266) (13,287)
Repayments of long-term debt............... (36,260) (39,265)
Proceeds from reissuance of treasury stock. 11,178
Net cash used in financing -------- --------
activities............................. (31,729) (38,295)
-------- --------
Net decrease in cash and cash equivalents... (7,428) (7,577)
Cash and cash equivalents at beginning
of period................................ 83,594 39,817
-------- --------
Cash and cash equivalents at end of period.. $ 76,166 $ 32,240
======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest................... $ 470 $ 1,692
Cash paid for income taxes............... 21,089 21,227
Supplemental disclosures of non-cash items:
Purchase of minority partners' interest
(see note 7)............................. 2,511 $ 3,006
See notes to unaudited consolidated financial statements.
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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.
Certain amounts shown in the 1998 consolidated financial statements have
been reclassified to conform to the 1999 presentation. These
reclassifications did not have an effect on total assets, total liabilities,
stockholders' equity or net income.
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year.
The December 31, 1998 Balance Sheet has been derived from the audited
Financial Statements but does not include all of the disclosures required by
generally accepted accounting principles. It is suggested that these
Financial Statements should be read in conjunction with the Financial
Statements and Financial Notes thereto included in the Company's 1998 Annual
Report.
All applicable share and per share data have been restated to reflect the
retroactive effect of a three-for-two stock split effective on March 2, 1999.
2. Other Current Assets
Other current assets consisted of the following (in thousands):
June 30, December 31,
1999 1998
-------- ---------
Deposits (including income tax deposits) $ 3,864 $ 1,395
Accounts receivable............... 9,120 9,273
Prepaid expenses.................. 9,403 6,532
Other current assets.............. 822 1,952
-------- ---------
$ 23,209 $ 19,152
======== =========
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OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Property, Fixtures and Equipment, Net. Property, fixtures and
equipment consisted of the following (in thousands):
June 30, December 31,
1999 1998
-------- ---------
Land.............................. $ 117,525 $ 111,961
Buildings and building improvements 269,222 249,486
Furniture and fixtures............ 63,912 59,080
Equipment......................... 143,275 134,309
Leasehold improvements............ 96,501 94,736
Construction in progress.......... 12,892 7,470
Accumulated depreciation.......... (151,013) (130,209)
-------- ---------
$ 552,314 $ 526,833
======== =========
4. Other Assets
Other assets consisted of the following (in thousands):
June 30, December 31,
1999 1998
-------- ---------
Intangible assets (including liquor licenses) $ 32,197 29,900
Other assets...................... 9,085 10,547
-------- ---------
$ 41,282 $ 40,447
======== =========
5. Long-term Debt
Long-term debt consisted of the following (in thousands):
June 30, December 31,
1999 1998
-------- ---------
Notes payable to banks collateralized by
property, fixtures and equipment, interest
at rates ranging from 8.825% to 9.90%....... $ 762 $ 888
Note payable to corporation, collateralized
by real estate, interest at 9.0%........... 170 229
Other notes payable, uncollateralized, interest at
rates ranging from 5.36% to 7.99%.......... 1,250 1,642
Revolving line of credit, interest rates
ranging from 5.42% to 5.96% at June 30, 1999
(see below) .............................. 35,683
-------- ---------
2,182 38,442
Less current portion 1,338 967
-------- ---------
Long-term debt $ 844 $37,475
======== =========
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OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company has an uncollateralized 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") (4.92% to 5.46% at June 30, 1999). At June 30, 1999 the unused
portion of the revolving line of credit was $125,000,000. The line matures in
August 2000.
The Company has a $7,500,000 uncollateralized line of credit bearing
interest at rates ranging from 50 to 75 basis points over LIBOR.
Approximately $4,951,000 of the line of credit is committed for the issuance
of letters of credit, $1,448,000 of which is to collateralize loans made by
the bank to certain franchisees.
The Company is the guarantor of an uncollateralized 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, 1999 the balance was
approximately $16,120,000.
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,
1999 1998
-------- ---------
Accrued payroll................... $ 12,082 $10,998
Accrued advertising............... 2,953 2,827
Accrued rent...................... 1,488 1,443
Accrued insurance................. 8,983 6,284
Accrued ESOP contribution......... 1,624 964
Accrued property taxes............ 5,493 4,376
Other accrued expenses............ 2,719 3,117
-------- --------
$ 35,342 $ 30,009
======== ========
7. Business Combinations
On February 11, 1999 and May 27, 1999, the Company issued a total of
102,500 shares of Common Stock to two area operating partners for all of
their outstanding interest in 16 Outback Steakhouses. The mergers have 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.
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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,
---------------- ----------------
1999 1998 1999 1998
REVENUES ------ ------ ------ ------
Restaurant sales 99.1% 99.2% 99.1% 99.1%
Other revenues 0.9 0.8 0.9 0.9
------ ------ ------ ------
TOTAL REVENUES 100.0 100.0 100.0 100.0
COSTS AND EXPENSES:
Cost of sales (1) 37.9 38.9 38.1 38.9
Labor & other related (1) 23.5 23.4 23.5 23.4
Other restaurant operating (1) 21.2 21.5 21.3 21.6
General & administrative 4.0 3.9 3.9 3.9
(Income) loss from operations of
unconsolidated affiliates (0.1) (0.1) (0.1)
Total costs and expenses 85.7 86.9 86.1 87.1
------ ------ ------ ------
INCOME FROM OPERATIONS 14.3 13.1 13.9 12.9
OTHER INCOME (EXPENSE), NET (0.2) (0.2)
INTEREST INCOME (EXPENSE) (0.1) 0.1 (0.1)
------ ------ ------ ------
INCOME BEFORE ELIMINATION OF
MINORITY PARTNERS' INTEREST
AND INCOME TAXES 14.1 13.0 13.8 12.7
ELIMINATION OF MINORITY PARTNERS'
INTEREST 2.0 1.8 2.0 1.8
------ ------ ------ ------
INCOME BEFORE PROVISION FOR
INCOME TAXES 12.1 11.2 11.8 10.9
PROVISION FOR INCOME TAXES 4.4 4.0 4.3 3.9
------ ------ ------ ------
INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE 7.7 7.2 7.5 7.0
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (NET OF TAXES) 0.7
------ ------ ------ ------
NET INCOME 7.7% 7.2% 7.5% 6.3%
====== ====== ====== ======
(1) As a percentage of restaurant sales.
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Results of Operations (continued)
Three Months Ended Six Months Ended
June 30, June 30,
---------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
System-wide sales (millions of dollars):
Outback Steakhouse restaurants
Company owned - domestic and
international $ 363 $ 309 $ 704 $ 600
Domestic franchised and
joint venture 84 62 160 119
International franchised and
joint venture 14 12 27 23
------ ------ ------ ------
Total 461 383 891 742
------ ------ ------ ------
Carrabba's Italian Grills
Company owned 35 30 69 60
Joint venture 8 7 15 14
------ ------ ------ ------
Total 43 37 84 74
------ ------ ------ ------
System-wide total $ 504 $ 420 $ 975 $ 816
====== ====== ====== ======
June 30,
--------------
1999 1998
---- ----
Number of restaurants (at end
of the period):
Outback Steakhouses
Company owned - domestic and international 437 390
Domestic franchised and joint venture 103 76
International franchised and joint venture 25 20
--- ---
Total 565 486
--- ---
Carrabba's Italian Grills
Company owned 53 50
Joint venture 13 12
--- ---
Total 66 62
--- ---
System-wide total 631 548
=== ===
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Three months ended June 30, 1999 and 1998
Revenues. Total revenues increased by 17.5% to $401,805,000 during
the second quarter of 1999 as compared with $342,003,000 in the same period
in 1998. The increase was attributable to the opening of new restaurants
after June 30, 1998, menu price increases of 1.5% at Outback Steakhouse in
November 1998 and 2.0% at Carrabba's Italian Grills in October 1998, and per
store revenue increases during the quarter of 6.1% and 6.6% at Outback
Steakhouse and Carrabba's Italian Grills, respectively. The following table
depicts additional activities which influenced the period to period changes
in revenues:
Three Months Ended
June 30,
----------------
1999 1998
------ ------
Average unit volumes(weekly):
Outback Steakhouses.......... $ 64,731 $ 62,097
Carrabba's Italian Grills.... $ 50,731 $ 47,031
Per person check averages:
Outback Steakhouses.......... $ 17.45 $ 16.88
Carrabba's Italian Grills.... $ 18.47 $ 17.18
Year to year percentage change:
Same-store sales:
Outback Steakhouses.......... 6.1 % 4.9 %
Carrabba's Italian Grills.... 6.6 % 10.9 %
Same store customer counts:
Outback Steakhouses.......... 2.7 % 3.9 %
Carrabba's Italian Grills.... (0.4)% 3.7 %
Costs and expenses. Costs of sales, consisting of food and beverage
costs, as a percentage of restaurant sales, decreased in the second quarter
of 1999 to 37.9% of restaurant sales as compared with 38.9% in the same
period in 1998. The decrease was attributable to higher menu prices and
commodity cost decreases in beef, ribs, produce and dairy products,
particularly butter.
Labor and other related expenses increased as a percentage of
restaurant sales by 0.1% to 23.5% in the second quarter of 1999 as compared
with 23.4% in the same period in 1998. The increase resulted from higher
hourly wage rates for kitchen staff resulting from a competitive labor
market, partially offset by higher comparable store revenues.
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,
preopening expenses, and other occupancy costs. A substantial portion of
these expenses are fixed or indirectly variable. These costs decreased by
0.3% of restaurant sales to 21.2% in the second quarter of 1999, as compared
with 21.5% in the same period in 1998. The decrease resulted from higher
average unit volumes at Outback Steakhouses and Carrabba's Italian Grills
during the quarter, which reduces the fixed and indirectly variable costs as
a percentage of revenue.
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General and administrative costs increased by $2,783,000 to
$16,027,000 in the second quarter of 1999 compared with $13,244,000 during
the same period in 1998. This increase resulted from an increase in salary
expenses related to higher restaurant management training costs, an increase
in overall administrative costs associated with operating additional Outback
Steakhouses and additional costs associated with new concept development.
Income from operations of unconsolidated affiliates represents the
Company's portion of the income from Outback Steakhouses and Carrabba's
Italian Grills operated as development joint ventures. Income from the
development joint ventures was $342,000 during the second quarter of 1999 as
compared with a income of $181,000 during the same period in 1998. This
increase was attributable to additional stores operating as development joint
ventures in the second quarter of 1999 and to an increase in per store
revenues and improved operating margins.
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
$12,487,000, to $57,369,000, in the second quarter of 1999 as compared with
$44,882,000 in the same period in 1998.
Other income (expense), net. Other income (expense) includes the
net of revenues and expenses from non-restaurant operations. Net other
expense was $901,000 during the second quarter of 1999 as compared with net
expense of $125,000 in the same period in 1998. The increase in the net
expense resulted from increased operating costs associated with the
development and growth of non-restaurant operations.
Interest income (expense). Interest income was $282,000 during the
second quarter of 1999 as compared with interest expense of $218,000 in the
same period in 1998. The period to period change in interest income (expense)
resulted from changes in borrowing needs and the use of excess cash flow from
operations to pay down the balance on the line of credit.
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 2.0% and 1.8% during the
quarters ended June 30, 1999 and 1998, respectively. The increase in this
ratio reflected the increase in overall restaurant operating margins.
13 of 24
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 36.5% and 35.8% during the second quarters of 1999 and 1998,
respectively. The increase in the effective rate resulted from the decrease
in FICA tip credits the Company was able to utilize in the current period.
Net income and earnings per common share. Net income for the second
quarter of 1999 was $30,897,000 as compared with net income of $24,657,000 in
the same period in 1998. Basic earnings per share increased to $0.41 per
share during the second quarter of 1999 as compared with basic earnings per
share of $0.34 for the same period in 1998. Basic weighted shares
outstanding increased by approximately 1,415,000 shares from 73,538,000
shares at June 30, 1998 to 74,953,000 at June 30, 1999. The increase was
primarily due to the issuance of shares for stock option exercises. Diluted
earnings per share increased to $0.40 per share during the second quarter of
1999 as compared with diluted earnings per share of $0.33 for the same period
in 1998. Diluted weighted shares outstanding increase by approximately
1,904,000 shares from 75,635,000 shares at June 30, 1998 to 77,539,000 shares
at June 30, 1999. The increase was primarily due to the issuance of shares
for stock option exercises and increased dilutive effect of outstanding stock
options because of higher average stock prices over the period.
14 of 24
Six months ended June 30, 1999 and 1998
Revenues. Total revenues increased by 17.1% to $779,970,000 during
the first half of 1999 as compared with $666,007,000 in the same period in
1998. The increase was attributable to the opening of new restaurants after
June 30, 1998, menu price increases of 1.5% at Outback Steakhouse in November
1998 and 2.0% at Carrabba's Italian Grills in October 1998, and per store
revenue increases during the first half of 1999 of 5.8% and 6.0% for Outback
Steakhouse and Carrabba's Italian Grills, respectively. The following table
depicts additional activities which influenced the period to period changes
in revenues:
Six Months Ended
June 30,
----------------
1999 1998
------ ------
Average unit volumes(weekly):
Outback Steakhouses.......... $ 64,133 $ 61,682
Carrabba's Italian Grills.... $ 50,301 $ 47,291
Per person check averages:
Outback Steakhouses.......... $ 17.60 $ 17.01
Carrabba's Italian Grills.... $ 18.49 $ 17.20
Year to year percentage change:
Same-store sales:
Outback Steakhouses.......... 5.8 % 4.7 %
Carrabba's Italian Grills.... 6.0 % 13.3 %
Same store customer counts:
Outback Steakhouses.......... 2.4 % 3.2 %
Carrabba's Italian Grills.... (1.8)% 5.5 %
Costs and expenses. Cost of sales as a percentage of restaurant
sales, decreased by 0.8% to 38.1% in the first half of 1999 as compared with
38.9% in the same period in 1998. The decrease was attributable to higher
menu prices and commodity cost decreases in beef, produce and dairy products,
particularly butter, and partially offset by an increase in potato and onion
costs.
Labor and other related expenses increased as a percentage of
restaurant sales by 0.1% to 23.5% in the first half of 1999 as compared with
23.4% in the same period in 1998. The increase resulted from higher hourly
wage rates for kitchen staff resulting from a competitive labor market,
partially offset by higher comparable store revenues.
Other restaurant operating expenses decreased by 0.3% of restaurant
sales to 21.3% in the first half of 1999 as compared with 21.6% in the same
period in 1998. The decrease resulted from higher average unit volumes 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.
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General and administrative costs increased by $4,517,000 to
$30,402,000 during the first half of 1999 as compared to with $25,885,000
during the same period in 1998. This increase resulted from an increase in
salary expenses related to higher restaurant management training costs, an
increase in overall administrative costs associated with operating additional
Outback Steakhouses and additional costs associated with new concept
development.
Income from operations of unconsolidated affiliates represents the
Company's portion of the income or loss from Outback Steakhouses and
Carrabba's Italian Grills operated as development joint ventures. Income
from the joint ventures was $577,000 in the first six months of 1999 as
compared with income of $293,000 in the same period in 1998. This increase
was attributable to additional stores operating as development joint ventures
in the first half of 1999 and to an increase in per store revenues and
improved operating margins.
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
$22,785,000, to $108,783,000 in the first half of 1999 as compared with
$85,998,000 in the same period in 1998.
Other income (expense), net. Other income (expense) includes the net
of revenues and expenses from non-restaurant operations. Net other expense
was $1,404,000 during the first six months of 1999 as compared with net
expense of $125,000 in the same period in 1998. The increase in the net
expense resulted from increased operating costs associated with the
development and growth of non-restaurant operations.
Interest income (expense). Interest income was $530,000 during the
first six months of 1999 as compared with interest expense of $924,000 in the
same period in 1998. The period to period change in interest income (expense)
resulted from changes in borrowing needs and the use of excess cash flow from
operations to pay down the balance on the line of credit.
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 2.0% and 1.8% during the six months
ended June 30, 1999 and 1998, respectively. The increase in this ratio
reflected the increase in overall restaurant operating margins.
16 of 24
Provision for income taxes. The provision for income taxes in the
first half of both 1999 and 1998 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 36.5% and 35.8% during the
second quarters of 1999 and 1998, respectively. The increase in the
effective rate resulted from the decrease in FICA tip credits the Company was
able to utilize in the first half of 1999.
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 1999 was $58,853,000 as compared with $46,914,000 in the
same period in 1998. Basic earnings per share on income before cumulative
effect of a change in accounting principle increased to $0.79 during the
first half of 1999 as compared with $0.64 for the same period in 1998.
Diluted earnings per share on income before the cumulative effect of a change
in accounting principle increased to $0.76 during the first half of 1999 as
compared with $0.62 for the same period in 1998.
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. Basic and diluted earnings per share for the first half of
1998 were reduced by $0.07 and $0.06, respectively, 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 1999 was $58,853,000 as compared with net income of $42,034,000 in
the same period in 1998. Basic earnings per share increased to $0.79 during
the first half of 1999 as compared with $0.57 in the same period in 1998.
Diluted earnings per share increased to $0.76 during the first half of 1999
as compared with $0.56 in the same period in 1998.
17 of 24
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,
1998 1999 1998
--------- ---------- ----------
Net cash provided by
operating activities $ 178,757 $ 75,389 $ 68,123
Net cash used in investing
activities (104,922) (51,088) (37,405)
Net cash used in
financing activities (30,058) (31,729) (38,295)
--------- ---------- ----------
Net increase (decrease) in
cash and cash equivalents $ 43,777 $ (7,428) $ (7,577)
========= ======== ========
The Company requires capital principally for the development of new
Company owned and joint venture restaurants. Capital expenditures totaled
approximately $103,892,000 for year ended December 31, 1998 and $45,613,000
and $38,983,000 during the first six months of 1999 and 1998, 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.
At June 30, 1999, the Company had two uncollateralized lines of credit
totaling $132,500,000. Approximately $4,951,000 is committed for the
issuance of letters of credit, some of which are to collateralize loans made
by the bank to certain franchisees. The Company expects that its capital
requirements through the end of 1999 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 uncollateralized 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 $16,120,000. See Note 5 of
Notes to Unaudited Consolidated Financial Statements.
18 of 24
<PAGE>
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 information technology
("IT") systems and non-IT systems for the Year 2000. The project includes
identification and assessment of software, hardware and equipment that could
potentially be affected by the Year 2000 issue, remedial action and further
testing procedures. The Company believes that the majority of its operations
are Year 2000 compliant and currently estimates the total cost of its Year
2000 project will be approximately $600,000. The Company's aggregate cost
estimate does not include time and costs that may be incurred by the Company
as a result of the failure of any third parties, including suppliers, to
become Year 2000 ready or costs to implement any contingency plans.
The Company's most significant third-party business partners consist
of restaurant food and supplies vendors who serve the Company. An inventory
of significant third-party partners has been completed and letters mailed
requesting information regarding each party's Year 2000 compliance status.
All responses received to date have indicated the vendor is now or will be
Year 2000 compliant prior to January 1, 2000. The Company is in the process
of developing contingency plans for completion by the end of the third
quarter of 1999 for any vendors that appear to have substantial Year 2000
operational risks. Such contingency plans may include a change of vendors to
minimize our risk. 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.
Management believes that the Company has an effective plan in place
to resolve the Year 2000 issue in a timely manner. However, due to the unique
nature of the problem and lack of historical experience, it is difficult to
predict with certainty what will happen after December 31, 1999. The Company
may encounter unanticipated third party failures or a failure to have
successfully concluded system remediation efforts. Any of these unforeseen
events may have a material adverse impact on the Company's results of
operations, financial condition or cash flows. Potential sources of risk
include the inability of principal suppliers to be Year 2000 ready, which
could result in delays in product deliveries from suppliers, and disruption
of the distribution channel, including transportation vendors. The amount of
any potential losses related to these occurrences cannot be reasonably
estimated at this time. The Company is in the process of developing a
contingency plan intended to mitigate the effects of problems experienced by
the Company or key vendors or service providers in the timely implementation
of Year 2000 programs. The Company expects to have the contingency plan
developed by the third quarter of 1999.
19 of 24
The most likely worst case scenario for the Company is that a
significant number of our restaurants will be temporarily unable to operate
due to public infrastructure failures and/or food supply problems. Some
restaurants may have problems for extended periods of time. The failure of
restaurants to operate would result in reduced revenues and cash flows for
the Company during the disruption period. Loss of restaurant sales would be
partially mitigated by reduced costs.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates
on debt and changes in commodity prices. The Company's exposure to interest
rate risk relates to its $125 million revolving line of credit with its bank.
Borrowings under the agreement bear interest at rates ranging from 50 to 75
basis points over the 30, 60, 90 or 180 London Interbank Offered Rate. At
June 30, 1999, the Company did not have an outstanding balance on the line of
credit. At December 31, 1998, there was $35,683,000 outstanding on the line
of credit. Many of the food products purchased by the Company and its
franchisees are affected by commodity pricing and are, therefore, subject to
unpredictable price volatility. Extreme changes in commodity prices and/or
long-term changes could affect the Company adversely. However, any changes in
commodity prices would also affect the Company's competitors at about the
same time as the Company. The Company expects that in most cases the Company
could pass increased commodity prices through to its consumers via increases
in menu prices. From time to time, competitive circumstances could limit menu
price flexibility, and in those cases margins would be negatively impacted by
increased commodity prices.
20 of 24
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 Section 27A 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.
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 obtain 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 obtain 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.
21 of 24
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 Thursday, April 22,
1999. The matters submitted for vote and the related election results are as
follows:
1. To elect Robert D Basham, W.R. Carey, Jr., Nancy Schneid,
and Toby S. Wilt 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
- --------------- --------- -------- -------- -------- ---------- --------
Robert D. Basham 42,098,157 85.0% 802,461 1.6% 0 0.0%
W.R. Carey,Jr. 42,077,053 84.9% 823,565 1.7% 0 0.0%
Nancy Schneid 42,040,190 84.9% 860,428 1.7% 0 0.0%
Toby S. Wilt 42,076,988 84.9% 823,630 1.7% 0 0.0%
Eligible 49,543,312
2. To vote on a proposal to amend the Company's Amended and Restated
Stock Option Plan to increase the number of shares of Common Stock for which
options may be granted from 15,000,000 to 22,500,000, and to change the
maximum number of shares of Common Stock for which options may be granted to
any one individual from 900,000 over the term of the plan to 900,000 per
year. The results of proxies voted are as follows:
% of
Eligible
-------
For 27,240,153 55.0%
Against 11,093,797 22.4%
Abstain 56,326 0.1%
---------- -----
Total 38,390,276 77.5%
========== =====
3. To transact such other business as may properly come before the
meeting. The results of proxies voted are as follows:
% of
Eligible
-------
For 26,008,544 52.5%
Against 11,222,593 22.7%
Abstain 5,669,481 11.4%
---------- -----
Total 42,900,618 86.6%
========== =====
22 of 24
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27A- Financial Data Schedules (for SEC use only)
27B- 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, 1999.
23 of 24
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, 1999 By: /s/ Robert S. Merritt
__________________ __________________________
Robert S. Merritt
Senior Vice President,
Finance (Principal Financial
and Accounting Officer)
24 of 24
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