<TABLE>
<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:
March 31, 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 May 7, 1999, there
were 74,920,294 shares of Common Stock, $.01 par value outstanding.
1
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying unaudited consolidated financial statements have been
prepared by Outback Steakhouse, Inc. and Affiliates (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.
The Consolidated Statement of Income for the three months ending
March 31, 1998 has been restated to reflect the adoption of Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities" which
requires that preopening and other start-up costs be expensed as incurred
rather than capitalized. The cumulative effect of the change in accounting
principle, which was approximately $4,880,000 net of income taxes, was
recorded as a one-time charge in the Company's Financial Statements.
2
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OUTBACK STEAKHOUSE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) March 31, December 31,
1999 1998
ASSETS (unaudited)
CURRENT ASSETS --------- -----------
Cash and cash equivalents.............. $ 59,392 $ 83,594
Inventories............................ 16,688 19,306
Other current assets................... 19,648 19,152
-------- --------
Total current assets................ 95,728 122,052
PROPERTY, FIXTURES AND EQUIPMENT, NET.... 532,955 526,833
ASSETS HELD FOR DISPOSAL................. 3,385 3,385
INVESTMENTS IN AND ADVANCES TO
UNCONSOLIDATED AFFILIATES, NET........ 14,536 9,229
DEFERRED INCOME TAXES.................... 1,867 3,265
OTHER ASSETS............................. 41,187 40,447
-------- --------
$689,658 $705,211
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable....................... $ 23,353 $ 36,718
Sales taxes payable.................... 8,654 8,497
Accrued expenses....................... 35,487 30,009
Unearned revenue....................... 11,609 32,620
Income taxes payable................... 8,242
Current portion of long-term debt...... 851 967
-------- --------
Total current liabilities........... 88,196 108,811
LONG-TERM DEBT............................ 1,596 37,475
OTHER LONG-TERM LIABILITIES 4,000 4,000
-------- --------
Total liabilities................... 93,792 150,286
INTEREST OF MINORITY PARTNERS IN -------- --------
CONSOLIDATED PARTNERSHIPS............. 7,958 9,879
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 200,000
shares authorized; 74,821 shares issued;
and 74,749 and 73,962 outstanding as of
March 31, 1999 and December 31, 1998,
respectively.......................... 748 748
Additional paid-in capital............. 182,184 176,584
Retained earnings...................... 405,890 378,539
-------- --------
588,822 555,871
Less treasury stock, 72 and 859 shares at
March 31, 1999 and December 31, 1998,
respectively, at cost................. (914) (10,825)
-------- --------
Total stockholders' equity........... 587,908 545,046
-------- --------
$689,658 $705,211
======== ========
See notes to unaudited consolidated financial statements.
3
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OUTBACK STEAKHOUSE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data, unaudited)
Three Months Ended
March 31,
----------------------
1999 1998
-------- --------
REVENUES
Restaurant sales................. $374,913 $321,120
Other revenues................... 4,429 2,884
-------- --------
TOTAL REVENUES.................... $379,342 $324,004
COSTS AND EXPENSES: -------- --------
Cost of sales.................... 143,975 125,183
Labor and other related.......... 88,370 75,105
Other operating.................. 81,718 70,071
General & administrative......... 14,603 12,641
Income from operations of
unconsolidated affiliates....... (235) (112)
-------- --------
328,431 282,888
-------- --------
INCOME FROM OPERATIONS 50,911 41,116
INTEREST INCOME (EXPENSE)......... 248 (706)
INCOME BEFORE ELIMINATION OF MINORITY ------ --------
PARTNERS'INTEREST AND INCOME TAXES
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 51,159 40,410
ELIMINATION OF MINORITY
PARTNERS'INTEREST................ 7,134 5,741
INCOME BEFORE PROVISION -------- --------
FOR INCOME TAXES................. 44,025 34,669
PROVISION FOR INCOME TAXES ....... 16,069 12,411
-------- --------
INCOME BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE. 27,956 22,258
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (NET
OF INCOME TAXES) ................ (4,880)
-------- --------
NET INCOME ....................... $ 27,956 $ 17,378
======== ========
See notes to unaudited consolidated financial statements.
4
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OUTBACK STEAKHOUSE, INC.
CONSOLIDATED STATEMENTS OF INCOME (continued)
(in thousands, except per share data, unaudited)
<S> <C> <C>
BASIC EARNINGS PER COMMON SHARE
Income before cumulative effect of
a change in accounting principle
(net of income taxes) .......... $ 0.38 $ 0.31
Cumulative effect of change in
accounting principle (net
of income taxes)................ (0.07)
-------- --------
Net income....................... $ 0.38 $ 0.24
======== ========
Basic weighted average number of
common shares outstanding....... 74,254 72,974
======== ========
DILUTED EARNINGS PER COMMON SHARE
Income before cumulative effect of
a change in accounting principle
(net of income taxes) .......... $ 0.37 $ 0.30
Cumulative effect of change in
accounting principle (net
of income taxes)................ (0.07)
-------- -------
Net income....................... $ 0.37 $ 0.23
======== =======
Diluted weighted average number of
common shares outstanding....... 76,430 74,804
======== ========
See notes to unaudited consolidated financial statements.
5
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OUTBACK STEAKHOUSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Three Months Ended
March 31,
1999 1998
Cash flows from operating activities: ---------- --------
Net income.................................. $ 27,956 $ 17,378
Cumulative effect of change in accounting
principle................................ 4,880
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation.............................. 10,180 9,165
Amortization.............................. 555 708
Minority partners' interest in
consolidated partnerships' income........ 7,134 5,741
Income from unconsolidated affiliates.... (235) (112)
Change in assets and liabilities:
Decrease in inventories................... 2,618 7
(Increase) decrease in other current assets (496) 2,848
Decrease in deferred income tax asset..... 1,398 250
Increase in other assets.................. (1,295) (1,913)
(Decrease) increase in accounts payable,
sales taxes payable, and accrued expenses (7,730) 6,294
Increase in income taxes payable.......... 8,242 12,161
Decrease in unearned revenue.............. (21,011) (16,521)
------- -------
Net cash provided by operating activities. 27,316 40,886
Cash flows used in investing activities: ------- -------
Capital expenditures....................... (16,302) (19,833)
Payments from unconsolidated affiliates.... 54 928
Distributions to unconsolidated affiliates. (531) (198)
Investments in and advances to
unconsolidated affiliates................. (4,595) (332)
------- -------
Net cash used in investing activities...... (21,374) (19,435)
------- -------
Cash flows provided by (used in) financing activities:
Adjustments from stock transactions........ 4,995 5,556
Proceeds from minority partners'
contributions............................. 275 150
Distributions to minority partners
and shareholders.......................... (9,330) (6,368)
Repayments of long-term debt............... (35,995) (24,570)
Proceeds from reissuance of treasury stock 9,911
------- -------
Net cash used in financing activities...... (30,144) (25,232)
------- -------
Net decrease in cash and cash equivalents.. (24,202) (3,781)
Cash and cash equivalents at beginning
of period................................. 83,594 39,817
------- -------
Cash and cash equivalents at end of period. $ 59,392 $ 36,036
======== ========
See notes to unaudited consolidated financial statements.
6
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OUTBACK STEAKHOUSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Three Months Ended
March 31,
-------------------
1999 1998
-------- ---------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest.................. $ 417 $ 902
Cash paid for income taxes.............. 696 1,787
See notes to unaudited consolidated financial statements.
7
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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 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.
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 diclosures required by
generally accepted accounting principles. It is suggested that these
financial statements be read in conjunction with the financial statements
and financial notes thereto included in the Company's 1998 Annual Report.
2. Other Current Assets
Other current assets consisted of the following (in thousands):
March 31, December 31,
1999 1998
----------- -----------
Deposits (including income tax deposits) $ 2,303 $ 1,395
Accounts receivable................ 8,450 9,273
Prepaid expenses................... 8,063 6,532
Other current assets............... 832 1,952
-------- --------
$ 19,648 $ 19,152
======== ========
3. Property, Fixtures and Equipment
Property, fixtures and equipment consisted of the following (in
thousands):
March 31, December 31,
1999 1998
------------ -----------
Land.............................. $114,782 $111,961
Buildings & building improvements. 253,215 249,486
Furniture & fixtures.............. 61,672 59,080
Equipment......................... 136,607 134,309
Leasehold improvements............ 97,280 94,736
Construction in progress.......... 9,788 7,470
Accumulated depreciation.......... (140,389) (130,209)
-------- --------
$532,955 $526,833
======== ========
8<PAGE>
4. Other Assets
Other assets consisted of the following (in thousands):
March 31, December 31,
1999 1998
----------- -----------
Intangible assets, net(including liquor
licenses)...................... $ 32,043 $ 29,900
Other assets...................... 9,144 10,547
-------- -------
$ 41,187 $ 40,447
======== ========
5. Long-term Debt
Long-term debt consisted of the following (in thousands):
March 31, December 31,
1999 1998
---------- ------------
Notes payable to banks, collateralized
by various items including stock,
investment securities, property fixtures
and equipment, interest at rates ranging
from 8.825% to 9.9% at March 31, 1998... $ 826 $ 888
Note payable to corporation, collateralized
by real estate, interest at 9.0%. ....... 200 229
Other notes payable, uncollateralized, interest
rates ranging from 5.36% to 7.99%. ...... 1,421 1,642
Revolving line of credit interest ranging
from 5.56% to 5.57% at December 31, 1998
(see below).............................. 35,683
------ ------
2,447 38,442
Less current portion 851 967
------ ------
Long-term debt $ 1,596 $37,475
======= =======
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 120 day London Interbank Offered
Rate ("LIBOR") (4.94% to 5.05% at March 31, 1999 and 5.06% to 5.07% at
December 31, 1998). At March 31, 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 $5,901,000 of the line of credit is committed for the
issuance of letters of credit, at March 31, 1999; $1,644,000 of which is to
collateralize loans made by the bank to certain franchisees.
The Company is the guarantor on an uncollateralized line of credit which
permits borrowing of up to $25,000,000, maturing in March 2002, for one
of its franchisees. At March 31, 1999 the balance on the line of credit
was $15,220,000.
9
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6. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
March 31, December 31,
1999 1998
--------- -----------
Accrued payroll................... $ 8,949 $10,998
Accrued advertising............... 8,174 2,827
Accrued rent...................... 1,372 1,443
Accrued insurance................. 9,078 6,284
Accrued ESOP contribution......... 1,295 964
Accrued property taxes............ 4,261 4,376
Other accrued expenses............ 2,358 3,117
------- -------
$ 35,487 $30,009
======= =======
10
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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
March 31,
------------------
1999 1998
------- --------
REVENUES:
Restaurant sales....................... 98.8% 99.1%
Other revenues......................... 1.2 0.9
----- -----
TOTAL REVENUES.......................... 100.0 100.0
COSTS AND EXPENSES: ----- -----
Cost of sales (1)...................... 38.4 39.0
Labor and other related (1)............ 23.6 23.4
Other operating........................ 21.5 21.6
General & administrative............... 3.8 3.9
Income from operations of
unconsolidated affiliates............. (0.1)
Total costs and expenses........... 86.6 87.3
----- -----
INCOME FROM OPERATIONS.................. 13.4 12.7
INTEREST INCOME(EXPENSE)................ 0.1 (0.2)
INCOME BEFORE ELIMINATION OF ----- -----
MINORITY PARTNERS' INTEREST AND INCOME
TAXES AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE.................. 13.5 12.5
ELIMINATION OF MINORITY PARTNERS'
INTEREST.............................. 1.9 1.8
----- -----
INCOME BEFORE PROVISION FOR INCOME TAXES 11.6 10.7
PROVISION FOR INCOME TAXES.............. 4.2 3.8
----- -----
INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE........ 7.4 6.9
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (NET OF INCOME TAXES) ....... 1.5
----- -----
NET INCOME.............................. 7.4% 5.4%
===== =====
(1) As a percentage of restaurant sales.
11
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Results of Operations (continued)
Three Months Ended
March 31,
------------------
1999 1998
------- --------
System-wide sales (millions of dollars):
Outback Steakhouse restaurants
Company owned ........................ $ 341 $ 291
Domestic franchised and joint venture. 76 57
International franchised and joint venture 13 11
---- ----
Total............................... 430 359
---- ----
Carrabba's Italian Grills
Company owned ........................ 34 30
Joint venture ........................ 7 7
---- ----
Total............................... 41 37
---- ----
System-wide total....................... $ 471 $ 396
====== =====
Number of restaurants (at end
of the period):
Outback Steakhouse
Company owned ............................ 428 378
Domestic franchised and joint venture..... 98 75
International franchised and joint venture 24 17
--- ---
Total................................... 550 470
=== ===
Carrabba's Italian Grills
Company owned ............................ 53 49
Joint venture ............................ 12 12
--- ---
Total................................... 65 61
--- ---
System-wide total........................... 615 531
=== ===
12<PAGE>
Three months ended March 31, 1999 and 1998
Revenues. Total revenues increased by 17.1% to $379,342,000 during
the first quarter of 1999 as compared with $324,004,000 in the same period in
1998. The increase was attributable to the opening of new restaurants after
March 31, 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 5.7% and 5.5% 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
March 31,
----------------
1999 1998
------ ------
Average unit volumes(weekly):
Outback Steakhouses.......... $ 63,521 $ 61,263
Carrabba's Italian Grills.... $ 49,881 $ 47,292
Per person check averages:
Outback Steakhouses.......... $ 17.76 $ 17.15
Carrabba's Italian Grills.... $ 18.52 $ 17.23
Year to year percentage change:
Same-store sales:
Outback Steakhouses.......... 5.7% 4.4%
Carrabba's Italian Grills.... 5.5% 17.1%
Same store customer counts:
Outback Steakhouses.......... 2.1% 2.4%
Carrabba's Italian Grills.... (1.8)% 11.6%
Costs and expenses. Cost of restaurant sales as a percentage of
restaurant sales, consisting of food and beverage costs, decreased in the
first quarter of 1999, to 38.4% of restaurant sales as compared with 39.0%
in the same period in 1998. The decrease was attributable to higher menu
prices and commodity cost decreases in meat, liquor, beer and wine, partially
offset by an increase in potato and onion costs.
Labor and other related expenses include all direct and indirect
labor costs incurred in restaurant operations. Labor expenses increased in
the first quarter of 1999 to 23.6% of restaurant sales, as compared with
23.4% in the same period in 1998. The increase resulted from higher
hourly wage rates resulting from a competitive labor market and from
additional staffing to support the rollout of the "Take-away" program,
partially offset by higher comparable store revenues.
Other 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. As a percentage of revenues, these
costs decreased to 21.5% in the first quarter of 1999 as compared to 21.6% in
the same quarter of 1998. The decrease resulted from higher average unit
volumes at Outback Steakhouse and Carrabba's Italian Grills during the quarter.
13
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General and administrative costs increased by $1,962,000 to
$14,603,000 in the first quarter of 1999 as compared with $12,641,000 in the
same period in 1998. This increase resulted from an additional staffs employed
to manage Outback Steakhouse international franchising operations and
Carrabba's Italian Grills, 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 Outback
Steakhouse and Carrabba's Italian Grills operated as development joint
ventures. Income from development joint ventures was $235,000 in the first
quarter of 1999 as compared with income of $112,000 in the same period in
1998. This increase was attributable to additional stores operating as
development joint ventures in the first 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
$9,795,000 to $50,911,000, in the first quarter of 1999 as compared with
$41,116,000 in the same period in 1998.
Interest income (expense). Interest income was $248,000 during the
first quarter of 1999 as compared with interest expense of $706,000 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 allocation of
minority partners' interest income included in this line item represents
their 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 allocations were 1.9% and 1.8% during the quarter ended
March 31, 1999 and 1998, respectively. The increase in this ratio reflected
changes in overall restaurant 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
rate was 36.5% and 35.8% during the first quarters of 1999 and 1998,
respectively. The change in the effective rate resulted from the decrease
in FICA tip credit utilized in the respective periods.
Income before cumulative effect of a change in accounting principle. The
income before cumulative effect of a change in accounting principle for the
first three months of 1999 was $27,956,000 as compared with $22,258,000 in
the same period in 1998. Basic earnings per share on income before
cumulative effect of a change in accounting principle increased to $0.38
during the first three months of 1999 as compared with $0.31 for the same
period in 1998. Diluted earnings per share on income before the cumulative
effect of a change in accounting principle increased to $0.37 during the
first three months of 1999 as compared with $0.30 for the same period in 1998.
14
<PAGE>
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), was a charge of $4,880,000 and
is a restatement as of the beginning of 1998. Basic and diluted earnings per
share for the first quarter of 1998 were both reduced by $0.07 due to the
impact of the cumulative effect of the change in accounting principle.
Net income and earnings per share. Net income for the first quarter
of 1999 was $27,956,000 as compared with net income of $17,378,000 in the
same period in 1998. Basic earnings per share increased to $0.38
during the first quarter of 1999 as compared with basic earnings per share of
$0.24 for the same period in 1998. Diluted earnings per share increased to
$0.37 during the first quarter of 1999 as compared with diluted earnings per
share of $0.23 for the same period in 1998.
15
<PAGE>
Liquidity and Capital Resources
The following table presents a summary of the Company's cash flows
and capital expenditures for the periods indicated.
Year Ended Three Months Ended
December 31, March 31,
1998 1999 1998
Net cash provided by ----------- ----------- ---------
operating activities $178,757 $27,316 $40,886
Net cash used in investing
activities (104,922) (21,374) (19,435)
Net cash used in
financing activities (30,058) (30,144) (25,232)
Net increase(decrease) in cash -------- --------- --------
and cash equivalents $ 43,777 $(24,202) $( 3,781)
======== ========= ========
The Company requires capital principally for the development of new
Company owned and joint venture restaurants. Capital expenditures totaled
approximately $103,892,000 for the year ended December 31, 1998 and $16,302,000
and $19,833,000 during the first quarters 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. The Company anticipates that 80% to 90% of the Company owned
restaurants to be opened in 1999 will be free-standing units.
At March 31, 1999, the Company had two uncollateralized lines of credit
totaling $132,500,000. Approximately $5,901,000 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 March
31, 1999, the borrowings totaled approximately $15,220,000. See Note 5 of
Notes to Unaudited Consolidated Financial Statements.
16
<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 plans to complete this project by June 30, 1999. 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 initial 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 intends to develop contingency
plans by 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 cashflows. 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.
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.
17
<PAGE>
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
March 31, 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 expect 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.
18
<PAGE>
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.
19
<PAGE>
OUTBACK STEAKHOUSE, INC.
PART II: OTHER INFORMATION
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 March 31, 1999.
20
<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.
Date: May 14, 1999 By: /s/ Robert S. Merritt
Robert S. Merritt
Senior Vice President,
Finance (Principal Financial
and Accounting Officer)
21
<PAGE>
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