Form 10-Q 6.30.05

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
  
[X]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2005
 
or
[ ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from ______ to ______

Commission File Number: 1-15935


OUTBACK STEAKHOUSE, INC.
(Exact name of registrant as specified in its charter)



 
DELAWARE
59-3061413
  
 
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
  
       

2202 North West Shore Boulevard, Suite 500, Tampa, Florida 33607
(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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES x NO o

As of August 5, 2005, the registrant had outstanding 74,618,102 shares of Common Stock, $.01 par value.

 
 


 
OUTBACK STEAKHOUSE, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended June 30, 2005

TABLE OF CONTENTS


 
PART I — FINANCIAL INFORMATION
 
            
 
Page No.
Item 1.
Consolidated Financial Statements:
 
                   
            
 3
 
 
 4
 
 
 5
 
 
 7
 
Item 2.
 22
 
Item 3.
 46
 
Item 4.
 47
 
 
PART II — OTHER INFORMATION
  
Item 1.
 48
 
Item 2.
 49
 
Item 4.
 50
 
Item 6.
 51
 
 
 53

 

PART I: FINANCIAL INFORMATION

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

Outback Steakhouse, Inc.
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)

   
JUNE 30,
  
DECEMBER 31,
  
   
2005
  
2004
  
   
(UNAUDITED)
  
 
  
ASSETS
             
Current Assets
              
Cash and cash equivalents 
  
$
68,103
  
$
87,977
  
Short-term investments
    
1,772
   
1,425
 
Inventories 
    
57,947
   
63,448
 
Deferred income tax asset
   
15,615
   
12,969
 
Other current assets 
    
52,653
   
53,068
 
Total current assets 
    
196,090
   
218,887
 
Property, fixtures and equipment, net
    
1,306,093
   
1,235,151
 
Investments in and advances to unconsolidated affiliates, net
    
18,127
   
16,254
 
Deferred income tax asset
   
24,217
   
6,660
 
Goodwill
    
111,843
   
107,719
 
Intangible assets, net
    
20,989
   
21,683
 
Other assets
    
106,756
   
71,438
 
Notes receivable collateral for franchisee guarantee
    
30,178
   
30,239
 
   
$
1,814,293
  
$
1,708,031
  
LIABILITIES AND STOCKHOLDERS' EQUITY
              
Current Liabilities
              
Accounts payable 
  
$
76,123
  
$
74,162
  
Sales taxes payable 
    
20,083
   
26,735
 
Accrued expenses 
    
128,085
   
97,124
 
Current portion of partner deposit and accrued buyout liability
    
17,673
   
13,561
 
Unearned revenue 
    
31,213
   
100,895
 
Income taxes payable 
    
6,366
   
87
 
Current portion of long-term debt 
    
55,926
   
54,626
 
Total current liabilities 
    
335,469
   
367,190
 
Partner deposit and accrued buyout liability
    
66,528
   
63,102
 
Deferred rent
    
48,665
   
44,075
 
Long-term debt
    
84,888
   
59,900
 
Guaranteed debt of franchisee
    
30,283
   
30,343
 
Other long-term liabilities
    
43,925
   
6,114
 
Total liabilities 
    
609,758
   
570,724
 
Commitments and contingencies
              
Interest of minority partners in consolidated partnerships
    
47,878
   
48,905
 
Stockholders' Equity
              
Common stock, $0.01 par value, 200,000 shares authorized; 78,750 and 78,750 shares issued;
              
74,456 and 73,767 shares outstanding as of June 30, 2005 and December 31, 2004, respectively
    
788
   
788
 
Additional paid-in capital 
    
281,928
   
271,109
 
Retained earnings 
    
1,084,627
   
1,025,447
 
Accumulated other comprehensive loss 
    
(985
)
  
(2,118
)
Unearned compensation related to outstanding restricted stock
    
(20,297
)
  
-
 
     
1,346,061
   
1,295,226
 
Less treasury stock, 4,294 and 4,983 shares at June 30, 2005 and December 31, 2004, respectively, at cost
    
(189,404
)
  
(206,824
)
Total stockholders’ equity
   
1,156,657
   
1,088,402
 
   
$
1,814,293
  
$
1,708,031
  
 
See notes to unaudited consolidated financial statements.


Outback Steakhouse, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA, UNAUDITED)
 
   
THREE MONTHS ENDED
 
SIX MONTHS ENDED
 
   
JUNE 30,
 
JUNE 30,
 
   
2005
  
2004
  
2005
  
2004
  
   
 
  
(restated)
  
 
  
(restated)
  
Revenues
                          
Restaurant sales 
  
$
910,120
  
$
800,260
  
$
1,800,161
  
$
1,589,473
  
Other revenues 
    
5,669
   
4,500
   
10,750
   
9,011
 
Total revenues
    
915,789
   
804,760
   
1,810,911
   
1,598,484
 
Costs and expenses
                          
Cost of sales 
    
331,936
   
302,029
   
657,106
   
594,466
 
Labor and other related 
    
219,647
   
191,598
   
431,851
   
379,492
 
Other restaurant operating 
    
191,571
   
163,060
   
370,453
   
320,865
 
Distribution expense to employee partners, excluding stock expense
    
23,550
   
19,259
   
46,037
   
37,782
 
Employee partner stock buyout expense
    
2,213
   
2,318
   
4,475
   
4,397
 
Depreciation and amortization
    
30,892
   
24,845
   
60,342
   
49,322
 
General and administrative 
    
41,926
   
32,809
   
82,051
   
65,056
 
Provision for impaired assets and restaurant closings
    
7,679
   
-
   
8,455
   
-
 
Income from operations of unconsolidated affiliates 
    
4
   
(407
)
  
101
   
(660
)
Total costs and expenses 
    
849,418
   
735,511
   
1,660,871
   
1,450,720
 
Income from operations
    
66,371
   
69,249
   
150,040
   
147,764
 
Other income (expense), net
    
(89
)
  
(216
)
  
(1,023
)
  
(1,089
)
Interest income
    
450
   
278
   
818
   
610
 
Interest expense
    
(1,513
)
  
(694
)
  
(2,671
)
  
(1,399
)
Income before elimination of minority partners'
                          
interest and income taxes
    
65,219
   
68,617
   
147,164
   
145,886
 
Elimination of minority partners' interest
    
2,962
   
2,674
   
6,390
   
6,842
 
Income before provision for income taxes
    
62,257
   
65,943
   
140,774
   
139,044
 
Provision for income taxes
    
21,852
   
22,632
   
49,411
   
47,902
 
Net income
  
$
40,405
  
$
43,311
  
$
91,363
  
$
91,142
  
                           
                           
Basic earnings per common share
  
$
0.55
  
$
0.58
  
$
1.24
  
$
1.23
  
Basic weighted average number of shares outstanding
    
74,001
   
74,289
   
73,901
   
74,388
 
                           
Diluted earnings per common share
  
$
0.53
  
$
0.56
  
$
1.19
  
$
1.17
  
Diluted weighted average number of shares outstanding
    
76,925
   
77,983
   
76,965
   
78,204
 
                           
Cash dividends per common share
  
$
0.13
  
$
0.13
  
$
0.26
  
$
0.26
  
 
See notes to unaudited consolidated financial statements.
 
 
Outback Steakhouse, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
 
   
SIX MONTHS ENDED
  
   
JUNE 30,
  
   
2005
  
2004
  
   
 
  
(restated)
  
Cash flows from operating activities:
              
Net income
 
$
91,363
  
$
91,142
  
Adjustments to reconcile net income to cash provided by operating activities:
              
Depreciation and amortization
    
60,342
   
49,322
 
Provision for impaired assets and restaurant closings
    
8,455
   
-
 
Restricted stock expense
    
845
   
-
 
Employee partner stock buyout expense
    
4,475
   
4,397
 
Minority partners’ interest in consolidated partnerships’ income
   
6,390
   
6,842
 
Income from operations of unconsolidated affiliates
   
101
   
(660
)
Change in deferred income taxes
   
(20,203
)
  
(2,951
)
Loss on disposal of property, fixtures and equipment
   
2,280
   
1,968
 
Change in assets and liabilities, net of effects of acquisitions and FIN 46 consolidations:
              
Decrease in inventories
   
5,501
   
15,468
 
Increase in other current assets
   
(993
)
  
(16,110
)
Increase in goodwill, intangibles and other assets
    
(4,035
)
  
(3,132
)
Increase in accounts payable, sales taxes payable and accrued expenses
   
26,291
   
15,593
 
Increase in partner deposit and accrued buyout liability
    
4,962
   
2,918
 
Decrease in long-term liability
    
(1,189
)
  
-
 
Increase in deferred rent
    
4,590
   
2,910
 
Decrease in unearned revenue
   
(69,682
)
  
(58,191
)
Increase in income taxes payable
   
17,098
   
10,174
 
Net cash provided by operating activities
   
136,591
   
119,690
 
Cash flows used in investing activities:
              
Purchase of investment securities
   
(1,591
)
  
(55,311
)
Maturities and sales of investment securities
    
1,244
   
62,153
 
Cash paid for acquisition of business, net of cash acquired
    
(5,200
)
  
(3,738
)
Capital expenditures
   
(135,493
)
  
(114,476
)
Proceeds from the sale of property, fixtures and equipment
    
2,719
   
2,426
 
Increase in cash from adoption of FIN 46
    
-
   
1,080
 
Payments from unconsolidated affiliates
   
71
   
110
 
Investments in and advances to unconsolidated affiliates
   
(337
)
  
(350
)
Net cash used in investing activities
   
(138,587
)
  
(108,106
)
 
(CONTINUED…)


Outback Steakhouse, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
 
   
SIX MONTHS ENDED
  
   
JUNE 30,
  
   
2005
  
2004
  
   
 
  
(restated)
  
Cash flows used in financing activities:
              
Proceeds from issuance of long-term debt
   
59,530
   
17,123
 
Proceeds from minority partners' contributions
   
3,169
   
2,459
 
Distributions to minority partners
   
(8,919
)
  
(8,061
)
Repayments of long-term debt
   
(33,242
)
  
(10,378
)
Dividends paid
   
(19,289
)
  
(19,330
)
Payments for purchase of treasury stock
   
(50,526
)
  
(63,172
)
Proceeds from reissuance of treasury stock
    
31,399
   
27,105
 
Net cash used in financing activities
   
(17,878
)
  
(54,254
)
Net decrease in cash and cash equivalents
   
(19,874
)
  
(42,670
)
Cash and cash equivalents at the beginning of the period
    
87,977
   
102,892
 
Cash and cash equivalents at the end of the period
  
$
68,103
  
$
60,222
  
Supplemental disclosures of cash flow information:
              
Cash paid for interest
 
$
2,636
  
$
1,202
  
Cash paid for income taxes
   
52,633
   
45,464
 
Supplemental disclosures of non-cash items:
              
Purchase of minority and employee partners' interests in cash flows of their restaurants
  
$
2,489
  
$
-
  
Litigation liability and insurance receivable
  
 
39,000
  
 
-
  
Debt assumed under FIN 46R
    
-
   
28,743
 
Issuance of restricted stock
    
21,142
   
-
 
 
See notes to unaudited consolidated financial statements.


Outback Steakhouse, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Basis of Presentation and Restatement of Previously Issued Consolidated Financial Statements

This Note should be read in conjunction with Note 1, “Summary of Significant Accounting Policies” under Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of the Annual Report on Form 10-K (“2004 10-K”) of Outback Steakhouse, Inc. (the “Company”).

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). 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. These financial statements should be read in conjunction with the financial statements and financial notes thereto included in the Company's 2004 10-K.

The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

Restatement of Previously Issued Consolidated Financial Statements

The Company began a review of its lease accounting policies following announcements beginning in December 2004 that several restaurant companies were revising their accounting practices for leases. Upon completion of its review, the Company changed its lease accounting in 2004 and has restated certain historical financial information for prior periods to correct errors in its lease accounting policies.

Changes to the Company’s lease accounting policies include adjusting lease terms, as defined in Statement of Financial Accounting Standards (“SFAS”) No. 13, “Accounting for Leases,” as amended, to include option renewals that are reasonably assured of being exercised, including the straight-line effect over the lease term of escalating rents during the option periods and recognizing the effect of pre-opening “rent holidays” over the related lease terms.

The Company restated its consolidated balance sheet at December 31, 2003, and the consolidated statements of income, stockholders' equity and cash flows for the years ended December 31, 2003 and 2002. The Company also restated the quarterly financial information for fiscal 2003 and the first three quarters of fiscal 2004. The impact of the restatement on periods prior to 2002 has been reflected as an adjustment to retained earnings of $15,240,000 as of December 31, 2001 in the Consolidated Statements of Stockholders' Equity included in the Company’s 2004 10-K.

The Company did not amend its previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the restatement, and the financial statements and related financial information contained in those reports should no longer be relied upon.

The Consolidated Financial Statements as of and for the three and six months ended June 30, 2004 included in this Form 10-Q have been restated to reflect the adjustments described above. The effects of the Company’s restatement on previously reported Consolidated Financial Statements as of and for the three and six months ended June 30, 2004 are summarized below.


Outback Steakhouse, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Basis of Presentation and Restatement of Previously Issued Consolidated Financial Statements (continued)

The following table reflects the effect of the restatement on the Consolidated Statements of Income (in thousands):
 
   
THREE MONTHS ENDED JUNE 30,
 
SIX MONTHS ENDED JUNE 30,
 
   
2004
  
2004
  
2004
  
2004
  
   
as previously reported
 
as restated
  
as previously reported
 
as restated
  
Selected Statement of Income Data:
                          
Other restaurant operating (1)
  
$
161,525
  
$
163,060
  
$
317,889
  
$
320,865
  
Total costs and expenses 
    
733,976
   
735,511
   
1,447,744
   
1,450,720
 
Income from operations
    
70,784
   
69,249
   
150,740
   
147,764
 
Income before elimination of minority partners'
                          
interest and income taxes
    
70,152
   
68,617
   
148,862
   
145,886
 
Elimination of minority partners' interest
    
2,918
   
2,674
   
7,315
   
6,842
 
Income before provision for income taxes
    
67,234
   
65,943
   
141,547
   
139,044
 
Provision for income taxes
    
23,135
   
22,632
   
49,117
   
47,902
 
Net income
    
44,099
   
43,311
   
92,430
   
91,142
 
Basic earnings per common share
  
$
0.59
  
$
0.58
  
$
1.24
  
$
1.23
  
Diluted earnings per common share
  
$
0.57
  
$
0.56
  
$
1.18
  
$
1.17
  
____________
(1)
The “as previously reported” amounts have been adjusted for the reclassification discussed in this Note 1 of Notes to Unaudited Consolidated Financial Statements.

The following table reflects the effect of the restatement on the Consolidated Balance Sheet (in thousands):

   
JUNE 30,
 
   
2004
  
2004
  
   
as previously reported
 
as restated
  
Selected Balance Sheet Data:
              
Investments in and advances to unconsolidated affiliates, net
  
$
16,186
  
$
15,517
  
Total assets
    
1,546,162
   
1,545,493
 
Deferred rent
    
2,051
   
40,364
 
Deferred income tax liability
    
13,165
   
(1,114
)
Total liabilities
    
390,816
   
414,850
 
Interest of minority partners in consolidated partnerships
    
79,903
   
77,533
 
Retained earnings
    
999,337
   
977,004
 
Total stockholders' equity
    
1,075,443
   
1,053,110
 
Total liabilities and stockholders' equity
    
1,546,162
   
1,545,493
 
 

Outback Steakhouse, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Basis of Presentation and Restatement of Previously Issued Consolidated Financial Statements (continued)

The following table reflects the effect of the restatement on the Consolidated Statement of Cash Flows (in thousands):
 
   
SIX MONTHS ENDED JUNE 30,
 
   
2004
  
2004
  
   
as previously reported
 
as restated
  
Selected Cash Flow Data:
              
Net income
  
$
92,430
  
$
91,142
  
Minority partners’ interest in consolidated partnerships’ income
   
7,315
   
6,842
 
Change in deferred income taxes
    
(1,736
)
  
(2,951
)
Increase in deferred rent
    
-
   
2,910
 
 
Reclassification

Certain prior year amounts shown in the accompanying Consolidated Financial Statements have been reclassified to conform to the 2005 presentation. These classifications relate to complimentary and employee meals which had previously been included in revenues, with a corresponding offset in operating expenses in each period affected. In the current presentation, no revenue or expense is recorded for these transactions. For the three and six months ended June 30, 2004, this reclassification totaled $22,605,000 and $44,984,000, respectively. In addition, certain management training and supervision costs have been reclassified from other restaurant operating expense to general and administrative expense. For the three and six months ended June 30, 2004, this reclassification totaled $2,115,000 and $3,967,000, respectively. These reclassifications had no effect on total assets, total liabilities, stockholders’ equity or net income.

 

Outback Steakhouse, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

2. Stock-Based Compensation

The Company accounts for its stock-based employee compensation under the intrinsic value method. No stock-based employee compensation cost is reflected in net income to the extent options granted had an exercise price equal to or exceeding the fair market value of the underlying common stock on the date of grant. SFAS No. 123R, “Share-Based Payment” will be adopted January 1, 2006. See Note 13 of Notes to Unaudited Consolidated Financial Statements. The following table provides pro forma net income and earnings per share amounts using the fair value based method of SFAS No. 123, “Accounting for Stock-Based Compensation” (in thousands, except per share data):
 
   
THREE MONTHS ENDED
  
SIX MONTHS ENDED
  
   
JUNE 30,
  
JUNE 30,
  
   
2005
  
2004
  
2005
  
2004
  
   
 
  
(restated)
  
 
  
(restated)
  
Net income
 
$
40,405
  
$
43,311
  
$
91,363
  
$
91,142
  
Stock-based employee compensation expense included in
                          
net income, net of related taxes
    
2,117
   
1,414
   
3,497
   
2,686
 
Total stock-based employee compensation expense determined
                          
under fair value based method, net of related taxes
    
(5,841
)
  
(4,959
)
  
(10,973
)
  
(9,380
)
Pro forma net income
 
$
36,681
  
$
39,766
  
$
83,887
  
$
84,448
  
Earnings per common share:
                          
Basic
 
$
0.55
  
$
0.58
  
$
1.24
  
$
1.23
  
Basic - pro forma
 
$
0.50
  
$
0.54
  
$
1.14
  
$
1.14
  
                           
Diluted
 
$
0.53
  
$
0.56
  
$
1.19
  
$
1.17
  
Diluted - pro forma
 
$
0.48
  
$
0.52
  
$
1.11
  
$
1.10
  
 
The preceding pro forma results were calculated with the use of the Black-Scholes option pricing model. The following assumptions were used for the three months ended June 30, 2005 and 2004, respectively: (1) risk-free interest rates of 4.1% and 3.8%; (2) dividend yield of 1.24% and 1.25%; (3) expected lives of 6.3 and 5.0 years; and (4) volatility of 28.9% and 30.2%. The following assumptions were used for the six months ended June 30, 2005 and 2004, respectively: (1) risk-free interest rates of 4.2% and 3.3%; (2) dividend yield of 1.24% and 1.26%; (3) expected lives of 6.3 and 5.0 years; and (4) volatility of 29.0% and 30.3%. Results may vary depending on the assumptions applied within the model. Compensation expense recognized in providing pro forma disclosures may not be representative of the effects on net income for future years or under SFAS No. 123R, when adopted.

On April 27, 2005, the Company’s Board of Directors approved a grant of restricted common stock to the Company’s Chief Executive Officer under the Amended and Restated Stock Option Plan. Under the terms of the grant, 300,000 shares of restricted common stock were issued and will vest as follows: on December 31, 2009, 90,000 shares, plus an additional 30,000 shares if the market capitalization of the Company exceeds $6,060,000,000; on December 31, 2011, 90,000 shares, plus an additional 30,000 shares if the market capitalization of the Company exceeds $8,060,000,000; and on December 31, 2014, the balance of all remaining unvested shares.

On June 13, 2005, the Company granted 50,000 shares of its restricted common stock to the Senior Vice President of Real Estate and Development as an inducement grant in connection with his hiring. These shares were not issued under any existing stock plan of the Company. Under the terms of the grant, the 50,000 shares of restricted stock will vest as follows: on June 13, 2008, 10,000 shares; on June 13, 2010, 10,000 shares; on June 13, 2012, 15,000 shares; and on June 13, 2015, the balance of all remaining unvested shares.
 

Outback Steakhouse, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

3. Other Current Assets

Other current assets consisted of the following (in thousands):
   
JUNE 30,
  
DECEMBER 31,
  
   
2005
  
2004
  
   
(UNAUDITED)
  
 
  
Prepaid expenses 
  
$
19,256
  
$
23,020
  
Accounts receivable 
    
24,212
   
19,473
 
Accounts receivable - franchisees 
    
1,519
   
2,228
 
Assets held for sale
    
3,410
   
4,810
 
Deposits
    
3,070
   
2,537
 
Other current assets 
    
1,186
   
1,000
 
   
$
52,653
  
$
53,068
  

4. Property, Fixtures and Equipment, Net

Property, fixtures and equipment, net, consisted of the following (in thousands):

   
JUNE 30,
  
DECEMBER 31,
  
   
2005
 
2004
 
   
(UNAUDITED)
  
 
  
Land 
  
$
197,310
  
$
196,137
  
Buildings & building improvements 
    
644,969
   
603,856
 
Furniture & fixtures 
    
204,614
   
184,949
 
Equipment 
    
464,815
   
425,197
 
Leasehold improvements 
    
318,003
   
305,618
 
Construction in progress 
    
63,050
   
52,373
 
Accumulated depreciation 
    
(586,668
)
  
(532,979
)
   
$
1,306,093
  
$
1,235,151
  

During the six months ended June 30, 2005, the Company recorded a provision for a restaurant closing of approximately $776,000 for an Outback Steakhouse in Tennessee and a provision for a partial impairment of approximately $98,000 for a Bonefish Grill in Washington.
 

Outback Steakhouse, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

4. Property, Fixtures and Equipment, Net (Continued)
 
On August 3, 2004, the Company was approved by the United States Bankruptcy Court for the District of Delaware as the successful bidder at an auction of designation rights for 76 properties of Chi-Chi’s, Inc. and its affiliates. The Company’s objective in acquiring these rights is to have access to restaurant sites for conversion to one of its concepts under its current expansion plans. The original 76 properties included 23 locations with owned land and building, 15 sale-leaseback properties with reversion rights and purchase options, 23 ground leases and 15 leases. The properties include any real property, furniture, fixtures and equipment and liquor licenses. The designation rights allow the Company to transfer properties to itself, to transfer properties to others or to require Chi-Chi’s to retain properties. The right to designate properties will expire on September 20, 2005. The purchase price for the designation rights was $42,500,000. The Company is responsible for paying the carrying costs on each of the properties from the closing date until the date the property is designated for transfer.

In October 2004, the Company received $1,100,000 from Chi-Chi’s when it exercised the right to exclude one property from the designation rights listing. Additionally, in October 2004, the Company completed an assignment of designation rights to a third party on 25 properties in exchange for $9,975,000. Both transactions reduced the total purchase price of the remaining properties. The Company required Chi-Chi’s to retain 18 properties, leaving 32 properties to which the Company had rights as of June 30, 2005. In July 2005, the Company executed its option on the 10 remaining sale-leaseback properties with reversion rights and purchase options for approximately $1,400,000. Thus, the remaining properties include 22 properties with owned land and building, eight ground leases and two leases. As of June 30, 2005, the Company had not designated 15 of these properties.
 

Outback Steakhouse, Inc. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

5. Goodwill and Intangible Assets, Net

The change in the carrying amount of goodwill for the six months ended June 30, 2005 is as follows (in thousands):

December 31, 2004
  
$
107,719
  
Acquisition (see Note 11 of Notes to Unaudited Consolidated Financial Statements)
   
4,124
 
June 30, 2005
  
$
111,843
  

Intangible assets, net, consisted of the following (in thousands):
   
WEIGHTED AVERAGE
  
JUNE 30,
  
DECEMBER 31,
  
   
AMORTIZATION
  
2005
  
2004
  
   
PERIOD (YEARS)
  
(UNAUDITED)
  
 
  
Trademarks (gross)
    
21
 
$
12,344
  
$
12,344
  
Less: accumulated amortization
          
(603
)
  
(295
)
Net trademarks
          
11,741
   
12,049
 
Trade dress (gross)
    
11
   
6,777
   
6,777
 
Less: accumulated amortization
          
(646
)
  
(320
)
Net trade dress
          
6,131
   
6,457
 
Favorable leases (gross, lives ranging from 2 to 24 years)
    
20
   
3,224
   
3,224
 
Less: accumulated amortization
          
(107
)
  
(47
)
Net favorable leases
          
3,117
   
3,177
 
Intangible assets, less total accumulated amortization of $1,356 and
                    
$662 at June 30, 2005 and December 31, 2004, respectively
    
18
  
$
20,989
  
$
21,683
  

The aggregate amortization expense related to these intangible assets was $694,000 for the six months ended June 30, 2005. Annual amortization expense related to these intangible assets for the next five years is anticipated to be approximately $1,500,000.


Outback Steakhouse, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

6. Other Assets

Other assets consisted of the following (in thousands):
 
   
JUNE 30,
  
DECEMBER 31,
  
   
2005
  
2004
  
   
(UNAUDITED)
  
 
  
Other assets 
  
$
49,780
  
$
47,089
  
Insurance receivable
    
39,000
   
-
 
Liquor licenses, net of accumulated amortization of $4,643 and $4,291 at June 30, 2005
              
and December 31, 2004, respectively
    
15,567
   
13,699
 
Deferred license fee, net of valuation provision of approximately $0 and $3,000 at
              
June 30, 2005 and December 31, 2004, respectively.
    
2,409
   
10,650
 
   
$
106,756
  
$
71,438
  
 
In January 2001, the Company entered into a ten-year licensing agreement with an entity owned by minority interest owners of certain non-restaurant operations. The licensing agreement transferred the right and license to use certain assets of these non-restaurant operations. As of July 19, 2005, the Company began renegotiating the terms of this licensing agreement, and as a result, the Company assessed the recoverability of the carrying value of the associated deferred license fee and determined that an impairment charge was necessary. Thus, a $7,581,000 pretax charge has been recorded against the deferred license fee to reflect management’s best estimate of its current net realizable value as of June 30, 2005. The Company expects that negotiation of the deferred license fee will be finalized during the third quarter. See Notes 9 and 14 of Notes to Unaudited Consolidated Financial Statements related to Other assets - insurance receivable.
 
7. Accrued Expenses

Accrued expenses consisted of the following (in thousands):

   
JUNE 30,
  
DECEMBER 31,
  
   
2005
  
2004
  
   
(UNAUDITED)
  
 
  
Accrued payroll and other compensation 
  
$
47,566
  
$
38,552
  
Accrued insurance 
    
27,030
   
21,818
 
Accrued property taxes 
    
12,500
   
9,068
 
Other accrued expenses 
    
40,989
   
27,686
 
   
$
128,085
  
$
97,124
  

Remaining accrued restaurant closing expenses of less than $100,000 were included in other accrued expenses as of June 30, 2005 and December 31, 2004, related to restaurant closing provisions.
 

Outback Steakhouse, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

8. Debt

Long-term debt consisted of the following (in thousands):

   
JUNE 30,
  
DECEMBER 31,
  
   
2005
  
2004
  
   
(UNAUDITED)
  
 
  
Revolving lines of credit, uncollateralized, interest rates ranging from 3.36% to 4.02% at
              
June 30, 2005 and 2.89% to 3.05% at December 31, 2004, respectively
  
$
74,000
  
$
55,000
  
Outback Korea notes payable, interest rates ranging from 5.45% to 7.00% at
              
June 30, 2005 and December 31, 2004
    
36,462
   
27,717
 
Outback Japan notes payable, uncollateralized, interest rates at 0.85% at
              
June 30, 2005 and ranging from 0.95% to 0.96% at December 31, 2004
    
5,505
   
5,769
 
Outback Japan revolving lines of credit, interest rates ranging from 0.68% to 0.76% at
              
June 30, 2005 and 0.68% to 0.77% at December 31, 2004
    
17,340
   
18,895
 
Other notes payable, uncollateralized, interest rates ranging from
              
2.07% to 7.00% at June 30, 2005 and December 31, 2004
    
7,507
   
7,145
 
Guaranteed debt of franchisee
    
30,283
   
30,343
 
     
171,097
   
144,869
 
Less current portion 
    
55,926
   
54,626
 
Less guaranteed debt of franchisee
    
30,283
   
30,343
 
Long-term debt of Outback Steakhouse, Inc.
  
$
84,888
  
$
59,900
  

Effective April 27, 2004, the Company replaced a $125,000,000 revolving credit facility that was scheduled to mature in December 2004, with a new uncollateralized three-year $150,000,000 revolving bank credit facility that matures in June 2007. The revolving line of credit permits borrowing at interest rates ranging from 50 to 90 basis points over the 30, 60, 90 or 180-day London Interbank Offered Rate (LIBOR) (ranging from 3.33% to 3.66% at June 30, 2005 and ranging from 2.42% to 2.78% at December 31, 2004). At June 30, 2005, the unused portion of the revolving line of credit was $76,000,000.

The credit agreement contains certain restrictions and conditions as defined in the agreement that require the Company to maintain consolidated net worth equal to or greater than consolidated total debt and to maintain a ratio of total consolidated debt to EBITDAR (earnings before interest, taxes, depreciation, amortization and rent) equal to or less than 3.0 to 1.0. At June 30, 2005, the Company was in compliance with these debt covenants.

The Company also replaced a $15,000,000 line of credit that was scheduled to mature in December 2004 with a new $20,000,000 uncollateralized line of credit. On April 28, 2005, the Company amended this $20,000,000 line of credit to a maximum borrowing of $30,000,000. This line of credit matures in June 2007 and permits borrowing at interest rates ranging from 50 to 90 basis points over LIBOR for loan draws and 65 to 112.5 basis points over LIBOR for letter of credit advances. The credit agreement contains certain restrictions and conditions as defined in the agreement. At June 30, 2005 and December 31, 2004, $20,072,000 and $11,782,000, respectively, of the line of credit was committed for the issuance of letters of credit as required by insurance companies that underwrite the Company’s workers’ compensation insurance and also, where required, for construction of new restaurants.


Outback Steakhouse, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

8. Debt (continued)

As of June 30, 2005, the Company had approximately $7,507,000 of notes payable at interest rates ranging from 2.07% to 7.00%. These notes have been primarily issued for buyouts of general manager interests in the cash flows of their restaurants and generally are payable over five years.

The Company has notes payable with banks bearing interest at rates ranging from 5.45% to 7.00% to finance development of the Company’s restaurants in Korea. The notes are denominated and payable in Korean won and mature at dates ranging from July 2005 to January 2007. As of June 30, 2005 and December 31, 2004, the outstanding balance was approximately $36,462,000 and $27,717,000, respectively. Certain of the notes payable are collateralized by lease and other deposits. At June 30, 2005 and December 31, 2004, collateralized notes totaled approximately $31,346,000 and $25,346,000, respectively.

The Company has notes payable with banks to finance the development of the Company’s restaurants in Japan (“Outback Japan”). The notes are payable to banks, collateralized by lease deposits of approximately $3,300,000 and $3,600,000 at June 30, 2005 and December 31, 2004, respectively, and letters of credit and bear interest at 0.85% and at rates ranging from 0.95% to 0.96% at June 30, 2005 and December 31, 2004, respectively. The notes are denominated and payable in Japanese yen, with outstanding balances as of June 30, 2005 maturing in September 2005. As of June 30, 2005 and December 31, 2004, outstanding balances totaled approximately $5,505,000 and $5,769,000, respectively.

In October 2003, Outback Japan established a revolving line of credit to finance the development of new restaurants in Japan and refinance certain notes payable. The line permits borrowing up to a maximum of $10,000,000 with interest rates ranging from 70.0 to 107.5 basis points over LIBOR. The line originally matured in December 2004, but was amended in April 2004 with a new maturity date in June 2007. As of June 30, 2005 and December 31, 2004, the Company had borrowed approximately $9,790,000 and $10,260,000, respectively, on the line of credit at an average interest rate of 0.69%, with draws as of June 30, 2005 maturing from August 2005 to June 2006. The revolving line of credit contains certain restrictions and conditions as defined in the agreement. As of June 30, 2005, the Company was in compliance with all of the debt covenants.

In February 2004, Outback Japan established an additional revolving line of credit to finance the development of new restaurants in Japan and to refinance certain notes payable. The line permits borrowing up to a maximum of $10,000,000 with interest of LIBOR divided by a percentage equal to 1.00 minus the Eurocurrency Reserve Percentage. The line matures in December 2006. As of June 30, 2005 and December 31, 2004, the Company had borrowed approximately $7,550,000 and $8,635,000, respectively, on the line of credit at an average interest rate of 0.76%, with draws as of June 30, 2005 maturing from July 2005 to September 2005. The revolving line of credit contains certain restrictions and conditions as defined in the agreement. As of June 30, 2005, the Company was in compliance with all of the debt covenants.
 
The Company is the guarantor of an uncollateralized line of credit that permits borrowing of up to $35,000,000 for a limited liability company, T-Bird Nevada, LLC (“T-Bird”), owned by its California franchisee. This line of credit bears interest at rates ranging from 50 to 90 basis points over LIBOR and matures in December 2008. The Company was required to consolidate T-Bird effective January 1, 2004 upon adoption of FIN 46R. At June 30, 2005 and December 31, 2004, the outstanding balance on the line of credit was approximately $30,283,000 and $30,343,000, respectively, and is included in the Company’s Consolidated Balance Sheets as long-term debt. T-Bird uses proceeds from the line of credit for the purchase of real estate and construction of buildings to be opened as Outback Steakhouse restaurants and leased to the Company’s franchisees. According to the terms of the line of credit, T-Bird may borrow, repay, re-borrow or prepay advances at any time before the termination date of the agreement.

Outback Steakhouse, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

8. Debt (continued)

If a default under the line of credit were to occur requiring the Company to perform under the guarantee obligation, the Company has the right to call into default all of its franchise agreements in California and exercise any rights and remedies under those agreements as well as the right to recourse under loans T-Bird has made to individual corporations in California which own the land and/or building which is leased to those franchise locations. Events of default are defined in the line of credit agreement and include the Company’s covenant commitments under existing lines of credit. The Company is not the primary obligor on the line of credit and it is not aware of any non-compliance with the underlying terms of the line of credit agreement that would result in it having to perform in accordance with the terms of the guarantee. The Company also guarantees additional term loans associated with the owner of T-Bird, which are not consolidated, and which had outstanding balances of approximately $64,000 and $176,000 as of June 30, 2005 and December 31, 2004, respectively.
 
DEBT GUARANTEES

The Company is the guarantor of an uncollateralized line of credit that permits borrowing of up to a maximum of $24,500,000 for its joint venture partner, RY-8, Inc. (“RY-8”), in the development of Roy's restaurants. The line of credit originally expired in December 2004 and was renewed with a new termination date of June 30, 2007. According to the terms of the credit agreement, RY-8 may borrow, repay, re-borrow or prepay advances at any time before the termination date of the agreement. On the termination date of the agreement, the entire outstanding principal amount of the loan then outstanding and any accrued interest is due. At June 30, 2005 and December 31, 2004, the outstanding balance on the line of credit was approximately $22,391,000 and $21,987,000, respectively.

RY-8’s obligations under the line of credit are unconditionally guaranteed by the Company and Roy’s Holdings, Inc, (“RHI”). If an event of default occurs (as defined in the agreement, and including the Company’s covenant commitments under existing lines of credit), then the total outstanding balance, including any accrued interest, is immediately due from the guarantors.

If an event of default occurs and RY-8 is unable to pay the outstanding balance owed, the Company would, as guarantor, be liable for this balance. However, in conjunction with the credit agreement, RY-8 and RHI have entered into an Indemnity Agreement and a Pledge of Interest and Security Agreement in favor of the Company. These agreements provide that if the Company is required to perform its obligation as guarantor pursuant to the credit agreement, then RY-8 and RHI will indemnify OSI against all losses, claims, damages or liabilities which arise out of or are based upon its guarantee of the credit agreement. RY-8’s and RHI’s obligations under these agreements are collateralized by a first priority lien upon and a continuing security interest in any and all of RY-8’s interests in the joint venture.

As a result of the Company’s recourse provisions and collateral, the estimated fair value of the guarantee to be recorded is immaterial to its financial condition and financial statements.

The Company is the guarantor of up to $9,445,000 of a $68,000,000 note for an unconsolidated affiliate, Kentucky Speedway, in which the Company has a 22.22% equity interest and for which the Company operates catering and concession facilities. Payments on this note began in December 2003 with final maturity in December 2022. However, the existing note has a put feature that allows the lender to require full payment of the note as of December 31, 2005. If Kentucky Speedway is unable to make its payment on the note, the Company would be responsible for its guarantee at that time. At June 30, 2005 and December 31, 2004, the outstanding balance and the Company’s guarantee on the note were approximately $65,000,000 and $9,445,000, respectively. This guarantee has not been modified since the effective date of FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” and is thus not subject to the recognition or measurement requirements of FIN 45.
 

Outback Steakhouse, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

8. Debt (continued)

DEBT GUARANTEES (continued)

The Company’s contractual unconsolidated debt guarantees as of June 30, 2005 are summarized in the table below (in thousands):

       
CURRENT
  
LONG-TERM
  
   
TOTAL
  
PORTION
  
PORTION
  
Debt guarantees
  
$
34,009
  
$
9,455
  
$
24,554
  
Amount outstanding under debt guarantees
   
31,900
   
9,455
   
22,445
 

9. Other Long-term Liabilities

Other long-term liabilities consisted of the following (in thousands):
 
   
JUNE 30,
  
DECEMBER 31,
  
   
2005
  
2004
  
   
(UNAUDITED)
  
 
  
Litigation
  
$
39,000
  
$
-
  
Accrued insurance 
    
4,000
   
4,000
 
Other deferred liability 
    
925
   
2,114
 
   
$
43,925
  
$
6,114
  
 
See Notes 6 and 14 of Notes to Unaudited Consolidated Financial Statements related to Other long-term liabilities - litigation.

10. Foreign Currency Translation and Comprehensive Income

For all significant non-U.S. operations, the functional currency is the local currency. Assets and liabilities of those operations are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rates for the reporting period. Translation gains and losses are reported as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity.

Comprehensive income includes net income and foreign currency translation adjustments. Total comprehensive income for the three months ended June 30, 2005 and 2004 was $40,815,000 and $42,981,000, respectively, which included the effect of gains and (losses) from translation adjustments of approximately $410,000 and ($330,000), respectively. Total comprehensive income for the six months ended June 30, 2005 and 2004 was $92,496,000 and $90,750,000, respectively, which included the effect of gains and (losses) from translation adjustments of approximately $1,133,000 and ($392,000), respectively.
 

Outback Steakhouse, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

11. Business Combinations

On January 1, 2005, the Company acquired the 50% minority ownership interests of its partner in four Carrabba's restaurants in Ohio for approximately $5,200,000 in cash and the assumption of the employee partner buyout liability for these stores of approximately $590,000. The Company completed this acquisition because it believes the additional cash flows provided from 100% ownership of these restaurants will meet its internally required rate of return and provide additional shareholder value. No minority interest for these stores has been reflected in the Consolidated Financial Statements since that date. The Company recorded goodwill of approximately $4,100,000 associated with this transaction, all of which is expected to be deductible for income tax purposes. See Note 15 of Notes to Unaudited Consolidated Financial Statements.

On an unaudited pro forma basis, the effect of this acquisition was not significant to the Company’s results of operations.

12. Earnings Per Share

The following table represents the computation of basic and diluted earnings per common share as required by SFAS No. 128, “Earnings Per Share” (in thousands, except per share data):
 
   
THREE MONTHS ENDED
  
SIX MONTHS ENDED
  
   
JUNE 30,
  
JUNE 30,
  
 
  
2005
  
2004
  
2005
  
2004
  
   
 
  
(restated)
  
 
  
(restated)
  
Net income
 
$
40,405
  
$
43,311
  
$
91,363
  
$
91,142
  
Basic weighted average number of common shares outstanding
   
74,001
   
74,289
   
73,901
   
74,388
 
Basic earnings per common share
 
$
0.55
  
$
0.58
  
$
1.24
  
$
1.23
  
Effect of dilutive stock options
   
2,924
   
3,694
   
3,064
   
3,816
 
Diluted weighted average number of common shares outstanding
   
76,925
   
77,983
   
76,965
   
78,204
 
Diluted earnings per common share
 
$
0.53
  
$
0.56
  
$
1.19
  
$
1.17
  
 
Diluted earnings per common share excludes antidilutive stock options of approximately 1,608,000 and 611,000 for the three months ended June 30, 2005 and 2004, respectively, and approximately 518,000 and 424,000 for the six months ended June 30, 2005 and 2004, respectively.

13. Recently Issued Financial Accounting Standards

“Share-Based Payment”

In December 2004, the FASB issued SFAS No. 123 (Revised), “Share-Based Payment,” a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123R requires the fair value measurement of all stock-based payments to employees, including grants of employee stock options, and recognition of those expenses in the statement of operations. SFAS No. 123R is effective at the beginning of the next fiscal year after June 15, 2005. The Company will continue to account for stock-based compensation using the intrinsic value method until adoption of SFAS No. 123R on January 1, 2006. Historically, the compensation expense recognized related to stock options under this method has been minimal. As a result, adoption of the provisions of SFAS No. 123R is expected to have a significant impact to reported net income and earnings per share. The Company has not yet determined the method of adoption or the effect of adopting SFAS No. 123R and has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123.
 

Outback Steakhouse, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

13. Recently Issued Financial Accounting Standards (Continued)

“Accounting Changes and Error Corrections”

On June 1, 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which will require entities that voluntarily make a change in accounting principle to apply that change retrospectively to prior periods’ financial statements, unless this would be impracticable. SFAS No. 154 supersedes Accounting Principles Board Opinion No. 20, “Accounting Changes” (“APB 20”), which previously required that most voluntary changes in accounting principle be recognized by including in the current period’s net income the cumulative effect of changing to the new accounting principle. SFAS 154 also makes a distinction between “retrospective application” of an accounting principle and the “restatement” of financial statements to reflect the correction of an error.

Another significant change in practice under SFAS No. 154 will be that if an entity changes its method of depreciation, amortization, or depletion for long-lived, non-financial assets, the change must be accounted for as a change in accounting estimate. Under APB 20, such a change would have been reported as a change in accounting principle. SFAS No. 154 applies to accounting changes and error corrections that are made in fiscal years beginning after December 15, 2005. The Company does not believe the adoption of SFAS No. 154 will have a material impact on its financial statements.

Proposed Accounting Pronouncement

“Accounting for Uncertain Tax Positions”

In July 2005, the FASB published an Exposure Draft of a proposed Interpretation, “Accounting for Uncertain Tax Positions.” The Exposure Draft seeks to reduce the significant diversity in practice associated with recognition and measurement in the accounting for income taxes. It would apply to all tax positions accounted for in accordance with SFAS 109, “Accounting for Income Taxes.” The Exposure Draft requires that a tax position meet a “probable recognition threshold” for the benefit of the uncertain tax position to be recognized in the financial statements and assumes that tax authorities will examine the uncertain tax position. The Exposure Draft contains guidance with respect to the measurement of the benefit that is recognized for an uncertain tax position, when that benefit should be derecognized, and other matters. This proposed Interpretation would clarify the accounting for uncertain tax positions in accordance with SFAS 109. This Interpretation, once approved, is expected to be effective as of the end of the first fiscal year ending after December 15, 2005. We are currently evaluating the impact this proposed Interpretation would have on our results of operations, which could result in a significant cumulative charge upon adoption.
 

Outback Steakhouse, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

14.  Commitments and Contingencies

In June 2003, in a civil case against the Company in Indiana state court alleging liability under the “dramshop” liquor liability statute, a jury returned a verdict in favor of the two plaintiffs who were injured by a drunk driver. The portion of the verdict against the Company was $39,000,000. The Company appealed the verdict to the Indiana Court of Appeals. On July 25, 2005, the Court of Appeals affirmed the verdict of the trial courts. The Company intends to petition the Court of Appeals for rehearing and if necessary to seek review by the Supreme Court of Indiana. The Company has insurance coverage related to this case provided by its primary carrier for $21,000,000 and by an excess insurance carrier for the balance of the verdict of approximately $19,000,000. The excess insurance carrier has filed a declaratory judgment suit claiming it was not notified of the case and is therefore not liable for its portion of the verdict. The Company does not believe the excess carrier’s case has any merit and is vigorously defending this case. Activity in this case has been held in abeyance pending the decision of the appellate court in the “dramshop” case. The Company has filed counter-claims against the excess carrier and cross-claims against the primary carrier and its third-party administrator. If the excess carrier’s suit were to succeed, the Company believes it would have rights against the primary carrier and its third party administrator to recover any amounts the Company may have to pay.

As a result of the affirmation verdict by the Court of Appeals, the Company has recorded the $39,000,000 verdict as a non-current liability in its Unaudited Consolidated Balance Sheet as well as a non-current receivable for the same amount which would be due from insurance carriers should this verdict prevail upon appeal.

15. Related Parties

On January 1, 2005, the Company acquired four joint venture Carrabba’s restaurants from limited partnerships in which two executive officers had ownership interests (see Note 11 of Notes to Unaudited Consolidated Financial Statements). These executive officers received approximately $141,000 and $202,000 as a result of their ownership interests in those joint venture restaurants.

16. Subsequent Events
 
On July 22, 2005, the Company’s wholly-owned subsidiary OS Tropical, Inc. and Cheeseburger Holding Company, LLC (an entity controlled by Jimmy Buffett) entered into certain agreements. Pursuant to these agreements, Cheeseburger Holding Company, LLC transferred to OS Tropical, Inc. its 50% interest in Cheeseburger in Paradise, LLC. OS Tropical, Inc. is now the sole owner of Cheeseburger in Paradise, LLC, the entity that owns and develops Cheeseburger in Paradise restaurants. In addition, the sublicense agreement between Cheeseburger Holding Company, LLC and Cheeseburger in Paradise, LLC was amended and restated to change the royalty paid by Cheeseburger in Paradise, LLC from 2.0% to 4.5% of net sales.
 
On August 1, 2005, two executive officers of the Company assigned to the Company their interests in certain restaurants operated by subsidiaries or affiliates of the Company. The first contributed an aggregate amount of approximately $317,000 in 17 restaurants operating as either Carrabba's Italian Grills or Bonefish Grills. The officer agreed to assign his interests in the 17 restaurants to the Company for an aggregate purchase price of approximately $286,000. The second contributed an aggregate amount of approximately $246,000 in 25 restaurants operating as Outback Steakhouses, Carrabba's Italian Grills or Bonefish Grills. The officer agreed to assign his interests in the 25 restaurants to the Company for an aggregate purchase price of approximately $268,000.
 

Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

Management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the Unaudited Consolidated Financial Statements and the related Notes. Comparisons to reported amounts for 2004 are based upon restated results as discussed in Note 1 of the Notes to Unaudited Consolidated Financial Statements.

Overview

We are one of the largest casual dining restaurant companies in the world, with eight restaurant concepts, over 1,200 system-wide restaurants and 2004 annual revenues for Company-owned stores exceeding $3.2 billion. We operate in all 50 states and in 21 countries internationally, predominantly through Company-owned stores, but we also operate under a variety of partnerships and franchises. Our primary focus as a company of restaurants is to provide a quality product together with quality service across all of our brands. This goal entails offering consumers of different demographic backgrounds an array of dining alternatives suited for differing needs. Our sales are primarily generated through a diverse customer base, which includes people eating in our restaurants as regular users who return for meals several times a week or on special occasions such as birthday parties, private events and for business entertainment. Secondarily, we generate revenues through sales of franchises and ongoing royalties as well as the sale and redemption of gift certificates.

The restaurant industry is a highly competitive and fragmented business, which is subject to sensitivity from changes in the economy, trends in lifestyles, seasonality (customer spending patterns at restaurants are generally highest in the first quarter of the year and lowest in the third quarter of the year) and fluctuating costs. Operating margins for restaurants are susceptible to fluctuations in prices of commodities, which include among other things, beef, chicken, seafood, butter, cheese, produce and other necessities to operate a store such as natural gas or other energy supplies. Additionally, the restaurant industry is characterized by a high initial capital investment, coupled with high labor costs. The combination of these factors underscores our initiatives to drive increased sales at existing stores in order to raise margins and profits, because the incremental sales contribution to profits from every additional dollar of sales above the minimum costs required to open, staff and operate a store is very high. We are not a company focused on growth in the number of restaurants just to generate additional sales. Our expansion and operation strategies are to balance investment costs and the economic factors of operation, in order to generate reasonable, sustainable margins and achieve acceptable returns on investment from our restaurant concepts.

Promotion of our Outback Steakhouse and Carrabba's Italian Grill restaurants is assisted by the use of national and spot television and radio media, which we have also begun to use in certain markets for our Bonefish Grill brand. We advertise on television in spot markets when our brands achieve sufficient penetration to make a meaningful broadcast schedule affordable. We rely on word-of-mouth customer experience, grassroots marketing in local venues, direct mail and national print media to support broadcast media and as the primary campaigns for our upscale casual and newer brands. We generally do not attempt to lure customers with discounts, as is common to many restaurants in the casual dining industry. Our advertising dollars are targeted to promote and maintain brand image and develop consumer awareness. We strive to drive sales through excellence in execution rather than through discounting and other short-lived marketing efforts. Our marketing strategy of encouraging customers to visit frequently and also recommending our restaurants to others complements what we believe are the fundamental elements of success: convenient sites, service-oriented employees and flawless execution in a well-managed restaurant.


Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview (continued)

Key factors that can be used in evaluating and understanding our restaurants and assessing our business include the following:

-
Average unit volumes - a per store calculated average sales amount, which helps us gauge the changes in consumer traffic, pricing and development of the brand;
-
Operating margins - store revenues after deduction of the main store-level operating costs (including cost of sales, restaurant operating expenses and labor and related costs);
-
System-wide sales - a total sales volume for all Company-owned, franchise and unconsolidated joint venture stores, regardless of ownership to interpret the health of our brands; and
-
Same-store or comparable sales - a year-over-year comparison of sales volumes for stores that are open in both years in order to remove the impact of new openings in comparing the operations of existing stores.

Our consolidated operating results are affected by the growth of our newer brands. As we continue to develop and expand new restaurant concepts at different rates, our cost of sales, labor costs, restaurant operating expenses and income from operations change from the mix of brands in our portfolio with slightly different operating characteristics. Labor and related expenses are higher at our new format stores than have typically been experienced at Outback Steakhouses. However, cost of sales at those stores is lower than those at Outback. These trends are expected to continue with our planned development of stores in 2005.

Our industry’s challenges and risks include, but are not limited to, the potential for further government regulation, the availability of qualified employees, consumer perceptions regarding food safety and/or the health benefits of certain types of food, including attitudes about alcohol consumption, economic conditions and commodity pricing. Additionally, our planned development schedule is subject to risk because of rising real estate and construction costs, and our results are affected by consumer tolerance of price increases. We have provided information in our Outlook section that outlines our current beliefs regarding the anticipated changes to our operations resulting from increased beef prices and other commodity costs, continued pre-opening expenses from the development of new restaurants and our expansion strategy, among other factors that may affect our results in the remainder of 2005.
 
 
 
Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

The following tables set forth, for the periods indicated, (i) percentages that items in our Unaudited 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,
  
   
2005
  
2004
  
2005
  
2004
  
   
 
  
(restated)
  
 
  
(restated)
  
Revenues
                          
Restaurant sales 
    
99.4
%
  
99.4
%
  
99.4
%
  
99.4
%
Other revenues 
    
0.6
   
0.6
   
0.6
   
0.6
 
Total revenues
    
100.0
   
100.0
   
100.0
   
100.0
 
Costs and expenses
                          
Cost of sales (1) 
    
36.5
   
37.7
   
36.5
   
37.4
 
Labor and other related (1) 
    
24.1
   
23.9
   
24.0
   
23.9
 
Other restaurant operating (1) 
    
21.0
   
20.4
   
20.6
   
20.2
 
Distribution expense to employee partners, excluding
                          
stock expense (1)
    
2.6
   
2.4
   
2.6
   
2.4
 
Employee partner stock buyout expense (1)
    
0.2
   
0.3
   
0.2
   
0.3
 
Depreciation and amortization
    
3.4
   
3.1
   
3.3
   
3.1
 
General and administrative 
    
4.6
   
4.1
   
4.5
   
4.1
 
Provision for impaired assets and restaurant closings
    
0.8
   
-
   
0.5
   
-
 
Income from operations of unconsolidated affiliates 
    
*
   
(0.1
)
  
*
   
(*
)
Total costs and expenses 
    
92.8
   
91.4
   
91.7
   
90.8
 
Income from operations
    
7.2
   
8.6
   
8.3
   
9.2
 
Other income (expense), net
    
(*
)
  
(*
)
  
(0.1
)
  
(0.1
)
Interest income
    
*
   
*
   
*
   
0.1
 
Interest expense
    
(0.1
)
  
(0.1
)
  
(0.1
)
  
(0.1
)
Income before elimination of minority partners' interest and
                          
income taxes
    
7.1
   
8.5
   
8.1
   
9.1
 
Elimination of minority partners' interest
    
0.3
   
0.3
   
0.4
   
0.4
 
Income before provision for income taxes
    
6.8
   
8.2
   
7.7
   
8.7
 
Provision for income taxes
    
2.4
   
2.8
   
2.7
   
3.0
 
Net income
    
4.4
%
  
5.4
%
  
5.0
%
  
5.7
%
__________________
(1)
As a percentage of restaurant sales.
*
Less than 1/10 of one percent of total revenues.
 
Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations (continued)

System-wide sales grew by 13.1% for the quarter ended June 30, 2005. System-wide sales is a non-GAAP financial measure that includes sales of all restaurants operating under our brand names, whether we own them or not. The two components of system-wide sales, including those of Outback Steakhouse, Inc. and those of franchisees and unconsolidated development joint ventures, are provided in the two tables below:

   
THREE MONTHS ENDED
  
SIX MONTHS ENDED
  
   
JUNE 30,
  
JUNE 30,
  
   
2005
  
2004
  
2005
  
2004
  
OUTBACK STEAKHOUSE, INC. RESTAURANT SALES (in millions):
                          
Outback Steakhouses
                          
Domestic
  
$
574
  
$
561
  
$
1,148
  
$
1,120
  
International
    
63
   
39
   
121
   
73
 
Total 
    
637
   
600
   
1,269
   
1,193
 
Carrabba's Italian Grills
    
147
   
122
   
285
   
241
 
Other restaurants
    
126
   
78
   
246
   
155
 
Total Company-owned restaurant sales
  
$
910
  
$
800
  
$
1,800
  
$
1,589
  

The following information presents sales for franchised and unconsolidated development joint venture restaurants. These are restaurants that are not owned by us and from which we only receive a franchise royalty or a portion of their total income. Our management believes that franchise and unconsolidated development joint venture sales information is useful in analyzing our revenues because franchisees and affiliates pay service fees and/or royalties that generally are based on a percent of sales. Our management also uses this information to make decisions about future plans for the development of additional restaurants and new concepts as well as evaluation of current operations.

These sales do not represent sales of Outback Steakhouse, Inc., and are presented only as an indicator of changes in the restaurant system, which we believe is important information regarding the health of our restaurant brands.

   
THREE MONTHS ENDED
  
SIX MONTHS ENDED
  
   
JUNE 30,
  
JUNE 30,
  
   
2005
  
2004
  
2005
  
2004
  
FRANCHISE AND DEVELOPMENT JOINT VENTURE SALES (in millions) (1):
                          
Outback Steakhouses
                          
Domestic
  
$
93
  
$
88
  
$
182
  
$
174
  
International
    
27
   
22
   
56
   
44
 
Total 
    
120
   
110
   
238
   
218
 
Other restaurants
    
3
   
3
   
6
   
6
 
Total franchise and development joint venture sales (1)
  
$
123
  
$
113
  
$
244
  
$
224
  
Income from franchise and development joint ventures (2)
  
$
5
  
$
4
  
$
9
  
$
8
  
__________________
(1)
Franchise and development joint venture sales are not included in our Company revenues as reported in our Consolidated Statements of Income.
(2)
Represents the franchise royalty and portion of total income included in our Consolidated Statements of Income in the line items Other revenues or Income from operations of unconsolidated affiliates.

Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations (continued)

   
JUNE 30,
  
   
2005
  
2004
  
Number of restaurants (at end of the period):
             
Outback Steakhouses
              
Company-owned - domestic
    
656
   
637
 
Company-owned - international
    
82
   
63
 
Franchised and development joint venture - domestic
    
104
   
100
 
Franchised and development joint venture - international
   
55
   
52
 
Total 
    
897
   
852
 
Carrabba's Italian Grills
             
Company-owned
   
184
   
159
 
Bonefish Grills
             
Company-owned
   
72
   
39
 
Franchised
    
4
   
4
 
Total
    
76
   
43
 
Fleming’s Prime Steakhouse and Wine Bars
              
Company-owned
   
32
   
24
 
Roy’s
              
Company-owned
   
19
   
18
 
Cheeseburger in Paradise
              
Company-owned
   
17
   
5
 
Paul Lee's Chinese Kitchens
              
Company-owned
    
3
   
-
 
Lee Roy Selmon’s
             
Company-owned
   
2
   
2
 
System-wide total 
    
1,230
   
1,103
 


Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Three months ended June 30, 2005 and 2004

REVENUES

Restaurant sales. Restaurant sales increased by 13.7% to $910,120,000 during the second quarter of 2005 compared with $800,260,000 in the same period in 2004. The increase in restaurant sales was primarily attributable to additional revenues of approximately $84,903,000 from the opening of new restaurants after June 30, 2004, as well as increases in sales at existing restaurants. The following table includes additional information about changes in restaurant sales at domestic Company-owned restaurants for the three months ended June 30, 2005 and 2004:

   
THREE MONTHS ENDED
  
   
JUNE 30,
  
   
2005
  
2004
  
Average unit volumes (weekly) for restaurants opened for one year or more:
              
Outback Steakhouses 
  
$
67,814
  
$
68,639
  
Carrabba's Italian Grills 
    
64,919
    
60,581
  
Fleming's Prime Steakhouse and Wine Bars
    
91,201
    
87,667
  
Roy's
    
72,166
    
68,475
  
Bonefish Grills
    
61,632
    
62,470
  
Average unit volumes (weekly) for restaurants opened for less than one year:
             
Outback Steakhouses 
  
$
57,428
  
$
59,000
  
Carrabba's Italian Grills 
    
56,026
    
59,369
  
Fleming's Prime Steakhouse and Wine Bars
    
71,000
    
65,351
  
Roy's
    
118,659
  (1)  
66,365
  
Bonefish Grills
    
61,289
    
58,813
  
Operating weeks:
              
Outback Steakhouses 
    
8,508
    
8,218
  
Carrabba's Italian Grills 
    
2,316
    
2,021
  
Fleming's Prime Steakhouse and Wine Bars
    
416
    
303
  
Roy's
    
247
    
234
  
Bonefish Grills
    
911
    
502
  
Year to year percentage change:
              
Menu price increases (2):
              
Outback Steakhouses 
    
4.7
%
  
2.0
%
Carrabba's Italian Grills 
    
2.8
%
  
1.5
%
Bonefish Grills
    
3.0
%
  
2.9
%
Same-store sales (stores open 18 months or more):
              
Outback Steakhouses 
    
-0.9
%
  
2.2
%
Carrabba's Italian Grills 
    
8.3
%
  
1.6
%
Fleming's Prime Steakhouse and Wine Bars
    
13.2
%
  
15.4
%
Roy's
    
5.8
%
  
11.7
%
Bonefish Grills
    
2.9
%
  
7.2
%
__________________
(1)
Represents one restaurant.
(2)
Reflects nominal amounts of menu price changes, prior to any change in product mix because of price increases, and may not reflect amounts effectively paid by the customer. Menu price increases are not provided for Fleming's and Roy's as a significant portion of their sales come from specials, which fluctuate daily.

Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Three months ended June 30, 2005 and 2004 (continued)

Other revenues.Other revenues, consisting primarily of initial franchise fees and royalties, increased by $1,169,000 to $5,669,000 in the second quarter of 2005 as compared with $4,500,000 in 2004. This increase primarily resulted from higher initial franchise fees and royalties from additional stores opened and operated as franchises during the second quarter of 2005 compared with the same period in 2004 and increased international royalties.

COSTS AND EXPENSES

Cost of sales. Cost of sales, consisting of food and beverage costs, decreased 1.2% to 36.5% as a percentage of restaurant sales in the second quarter of 2005 compared with the same period in 2004. Decreases in cost of sales were attributable to an increase in the proportion of consolidated sales associated with our non-Outback Steakhouse restaurants that have lower cost of goods sold ratios than Outback Steakhouses. In addition, menu price increases reduced cost of sales as a percentage of restaurant sales and increases in commodity costs for beef and pork during the period were partially offset by decreases in dairy and produce costs, particularly butter, onions and potatoes.

Labor and other related expenses. Labor and other related expenses include all direct and indirect labor costs incurred in operations, except for distribution expense to employee partners and employee partner stock buyout expense, described below. Labor and other related expenses increased 0.2% as a percentage of restaurant sales to 24.1% in the second quarter of 2005 compared with the same period in 2004. The lower average unit volumes at domestic Outback Steakhouses, a minimum wage increase in New York, Illinois and Florida and increases in the proportion of new restaurant formats, which have higher average labor costs than domestic Outback Steakhouses and Carrabba's Italian Grills, caused this increase in labor and other related expenses as a percentage of restaurant sales.

Other restaurant operating expenses. Other restaurant operating expenses include certain unit-level operating costs such as operating supplies, rent, repair and maintenance, advertising expenses, utilities, pre-opening costs and other occupancy costs. Substantial portions of these expenses are fixed or indirectly variable. These costs increased 0.6% to 21.0% as a percentage of restaurant sales in the second quarter of 2005 compared with the same period in 2004. This increase resulted from an increase in the proportion of new format restaurants and international Outback Steakhouses in operation, which have higher average restaurant operating expenses as a percentage of restaurant sales than domestic Outback Steakhouses and Carrabba's Italian Grills, as well as higher utility costs and increases in the rates we are charged by credit card companies. In addition, compared to 2004, Carrabba’s accelerated the timing of its advertising spending to the second quarter of 2005 as opposed to later in the year.

Distribution expense to employee partners, excluding stock expense. Distribution expense to employee partners, excluding stock expense, includes distributions to managing partners and area operating partners of their percentage of restaurant cash flows pursuant to their interest agreements, and cash buyouts of managing partners’ rights in the cash flows of their restaurants. These costs increased 0.2% as a percentage of restaurant sales to 2.6% in the second quarter of 2005 compared with the same period in 2004. The increase was primarily attributable to higher cash buyouts recorded for ten Outback Steakhouse managing partners during the second quarter of 2005.

Employee partner stock buyout expense. Employee partner stock buyout expense includes non-cash expenses recorded for the accrual of future buyouts of area operating partners’ rights to the cash flows of their restaurants. Upon buyout, area operating partners generally receive common stock in exchange for their rights in the cash flows of a restaurant. Employee partner stock buyout expense decreased 0.1% as a percentage of restaurant sales to 0.2% of restaurant sales for the second quarter of 2005 compared with the same period in 2004. Decreases in expense due to buyouts of existing restaurants were partially offset by new restaurants opened by area operating partners.
 

Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Three months ended June 30, 2005 and 2004 (continued)

Depreciation and amortization. Depreciation and amortization costs increased 0.3% as a percentage of total revenues to 3.4% in the second quarter of 2005 compared to the same period in 2004. Increased depreciation expense as a percentage of total revenues resulted from lower average unit volumes at domestic Outback Steakhouses during the quarter, the continued rollout of a new point of sale system to our Outback Steakhouse restaurants, remodeling of restaurants and higher depreciation costs for certain of our new restaurant formats, which have higher average construction costs than an Outback Steakhouse.

General and administrative. General and administrative costs increased by $9,117,000 to $41,926,000 in the second quarter of 2005 compared with $32,809,000 during the same period in 2004.  This increase resulted from an increase in overall administrative costs associated with operating additional domestic and international Outback Steakhouses, Carrabba’s Italian Grills, Fleming’s Prime Steakhouses, Roy’s, Bonefish Grills and Cheeseburger in Paradise restaurants. Additionally, the increase resulted from approximately $570,000 of compensation expense recognized for restricted stock benefits for certain members of senior management, approximately $1,200,000 of carrying costs associated with the acquisition of designation rights from Chi-Chi’s in 2004, legal fees and settlements, additional expenditures to support Korean operations and an increase in spending on technology projects. These increases were partially offset by the reduction in consulting fees paid for supply chain management projects in 2004 that did not recur in 2005.

Provision for impaired assets and restaurant closing. A provision of approximately $98,000 was recorded during the second quarter of 2005 for the partial impairment of one Company-owned Bonefish Grill restaurant in Washington. Also, an impairment charge of $7,581,000 was recorded against the deferred license fee receivable associated with certain non-restaurant operations to reflect management’s best estimate of its current net realizable value as of June 30, 2005.
 
Income from operations of unconsolidated affiliates. Income from operations of unconsolidated affiliates represents our portion of net income from restaurants operated as development joint ventures. Income from development joint ventures decreased by $411,000 to a loss of $4,000 during the second quarter of 2005 compared with income of $407,000 during the same period in 2004.  This decrease was attributable primarily to a write-down of approximately $574,000 of an Outback Steakhouse operated as a joint venture in Pennsylvania. Operating performance issues and our inability to obtain more favorable lease terms resulted in a decision not to extend the lease for this restaurant past the initial term.

Income from operations. As a result of the increase in revenues, provisions for impaired assets, the opening of new restaurants and the changes in the relationships between revenues and expenses discussed above, income from operations decreased by $2,878,000 to $66,371,000 in the second quarter of 2005 compared with $69,249,000 in the same period in 2004.

Interest income. Interest income was $450,000 during the second quarter of 2005 compared with $278,000 in the same period in 2004. Interest income increased due to higher interest rates on short-term investment balances during the second quarter of 2005 compared with the same period in 2004. Interest income for the quarters ended June 30, 2005 and 2004 included interest of approximately $255,000 and $122,000, respectively, from notes receivable held by a limited liability company owned by our California franchisee.

Interest expense. Interest expense was $1,513,000 during the second quarter of 2005 compared with $694,000 in the same period in 2004. The increase in interest expense was due to higher average debt balances and higher interest rates during the second quarter of 2005 compared with the second quarter of 2004. Interest expense for the quarters ended June 30, 2005 and 2004 included approximately $255,000 and $122,000, respectively, of expense from outstanding borrowings on the line of credit held by a limited liability company owned by our California franchisee.


Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Three months ended June 30, 2005 and 2004 (continued)

Elimination of minority partners' interest. This line item represents the portion of income or loss from operations included in consolidated operating results attributable to our partners’ ownership interests. As a percentage of revenues, minority partners’ income remained flat at 0.3% during the quarters ended June 30, 2005 and 2004, respectively.

Provision for income taxes. The provision for income taxes in the second quarter of both 2005 and 2004 reflects expected income taxes due at federal statutory rates and state income tax rates, net of the federal benefit. The effective income tax rate was 35.1% during the second quarter of 2005 and 34.3% during the second quarter of 2004. The increase in the rate resulted from non-deductibility of certain management compensation during the second quarter of 2005. Approximately 21% of our international restaurants in which we have a direct investment are owned through a Cayman Island corporation. 

Net income and earnings per share. Net income for the second quarter of 2005 was $40,405,000 compared with $43,311,000 in the same period in 2004. Basic earnings per share decreased to $0.55 during the second quarter of 2005 compared with $0.58 for the same period in 2004 as a result of the decrease in net income and a decrease in basic weighted average shares outstanding of approximately 288,000 shares. The decrease in basic weighted average shares outstanding for the quarter ended June 30, 2005 compared with June 30, 2004 was primarily due to common stock repurchases, partially offset by the issuance of shares under stock option plans. Diluted earnings per share decreased to $0.53 during the second quarter of 2005 compared with $0.56 for the same period in 2004 as a result of the decrease in net income and the decrease in diluted weighted average shares outstanding of approximately 1,058,000 shares. The decrease in diluted weighted average shares outstanding for the quarter ended June 30, 2005 compared with June 30, 2004 was primarily due to common stock repurchases, partially offset by the issuance of shares under stock option plans.
 
Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Six months ended June 30, 2005 and 2004

REVENUES

Restaurant sales. Restaurant sales increased by 13.3% to $1,800,161,000 during the first half of 2005 compared with $1,589,473,000 in the same period in 2004. The increase in restaurant sales was primarily attributable to additional revenues of approximately $148,863,000 from the opening of new restaurants after June 30, 2004, as well as increases in sales at existing restaurants. The following table includes additional information about changes in restaurant sales at domestic Company-owned restaurants for the six months ended June 30, 2005 and 2004:

   
SIX MONTHS ENDED
  
   
JUNE 30,
  
   
2005
  
2004
  
Average unit volumes (weekly) for restaurants opened for one year or more:
              
Outback Steakhouses 
  
$
68,377
  
$
68,664
  
Carrabba's Italian Grills 
    
64,603
    
61,064
  
Fleming's Prime Steakhouse and Wine Bars
    
94,607
    
91,967
  
Roy's
    
74,236
    
71,130
  
Bonefish Grills
    
64,330
    
66,687
  
Average unit volumes (weekly) for restaurants opened for less than one year:
             
Outback Steakhouses 
  
$
58,052
  
$
63,470
  
Carrabba's Italian Grills 
    
55,058
    
59,438
  
Fleming's Prime Steakhouse and Wine Bars
    
75,298
    
64,093
  
Roy's
    
113,288
  (1)  
69,224
  
Bonefish Grills
    
60,053
    
59,961
  
Operating weeks:
              
Outback Steakhouses 
    
16,889
    
16,361
  
Carrabba's Italian Grills 
    
4,523
    
3,960
  
Fleming's Prime Steakhouse and Wine Bars
    
822
    
589
  
Roy's
    
487
    
468
  
Bonefish Grills
    
1,716
    
962
  
Year to year percentage change:
              
Menu price increases (2):
              
Outback Steakhouses 
    
4.4
%
  
2.3
%
Carrabba's Italian Grills 
    
2.5
%
  
1.4
%
Bonefish Grills
    
2.7
%
  
2.3
%
Same-store sales (stores open 18 months or more):
              
Outback Steakhouses 
    
-0.7
%
  
4.4
%
Carrabba's Italian Grills 
    
6.3
%
  
3.4
%
Fleming's Prime Steakhouse and Wine Bars
    
11.8
%
  
17.4
%
Roy's
    
4.6
%
  
14.7
%
Bonefish Grills
    
1.7
%
  
11.5
%
__________________
(1)
Represents one restaurant.
(2)
Reflects nominal amounts of menu price changes, prior to any change in product mix because of price increases, and may not reflect amounts effectively paid by the customer. Menu price increases are not provided for Fleming's and Roy's as a significant portion of their sales come from specials, which fluctuate daily.

Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Six months ended June 30, 2005 and 2004 (continued)

Other revenues. Other revenues, consisting primarily of initial franchise fees and royalties, increased by $1,739,000 to $10,750,000 in the first half of 2005 as compared with $9,011,000 in 2004. This increase primarily resulted from higher initial franchise fees and royalties from additional stores opened and operated as franchises during the first six months of 2005 compared with the same period in 2004.

COSTS AND EXPENSES

Cost of sales. Cost of sales, consisting of food and beverage costs, decreased 0.9% to 36.5% as a percentage of restaurant sales in the first half of 2005 compared with the same period in 2004. Decreases in cost of sales were attributable to an increase in the proportion of consolidated sales associated with our non-Outback Steakhouse restaurants that have lower cost of goods sold ratios than Outback Steakhouses. In addition, menu price increases reduced cost of sales as a percentage of restaurant sales and increases in commodity costs for beef and pork during the period were partially offset by decreases in certain dairy and produce costs, particularly butter, onions and potatoes.

Labor and other related expenses. Labor and other related expenses include all direct and indirect labor costs incurred in operations, except for distribution expense to employee partners and employee partner stock buyout expense, described below. Labor and other related expenses increased 0.1% as a percentage of restaurant sales to 24.0% in the first half of 2005 compared with the same period in 2004. The increase was attributable to lower average unit volumes at domestic Outback Steakhouses, a minimum wage increase in New York, Illinois and Florida and increases in the proportion of new restaurant formats, which have higher average labor costs than domestic Outback Steakhouses and Carrabba's Italian Grills.
 
Other restaurant operating expenses. Other restaurant operating expenses include certain unit-level operating costs such as operating supplies, rent, repair and maintenance, advertising expenses, utilities, pre-opening costs and other occupancy costs. Substantial portions of these expenses are fixed or indirectly variable. These costs increased 0.4% to 20.6% as a percentage of restaurant sales in the first half of 2005 compared with the same period in 2004. This increase resulted from an increase in the proportion of new format restaurants and international Outback Steakhouses in operation, which have higher average restaurant operating expenses as a percentage of restaurant sales than domestic Outback Steakhouses and Carrabba's Italian Grills, as well as higher utility costs and increases in the rates we are charged by credit card companies. These increases were offset by a reduction in advertising expense.
 
Distribution expense to employee partners, excluding stock expense. Distribution expense to employee partners, excluding stock expense, includes distributions to managing partners and area operating partners of their percentage of restaurant cash flows pursuant to their interest agreements, and cash buyouts of managing partners’ rights in the cash flows of their restaurants. These costs increased 0.2% as a percentage of restaurant sales to 2.6% in the first half of 2005 compared with the same period in 2004. The increase was primarily attributable to higher restaurant operating margins, particularly at international Outback Steakhouses, and to higher cash buyouts recorded for ten Outback Steakhouse managing partners during the second quarter of 2005.

Employee partner stock buyout expense. Employee partner stock buyout expense includes non-cash expenses recorded for the accrual of future buyouts of area operating partners’ rights to the cash flows of their restaurants. Upon buyout, area operating partners generally receive common stock in exchange for their rights in the cash flows of a restaurant. Employee partner stock buyout expense decreased 0.1% as a percentage of restaurant sales to 0.2% of restaurant sales for the first half of 2005 compared with the same period in 2004. Decreases in expense due to buyouts of existing restaurants were partially offset by new restaurants opened by area operating partners.


Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Six months ended June 30, 2005 and 2004 (continued)

Depreciation and amortization. Depreciation and amortization costs increased 0.2% as a percentage of total revenues to 3.3% in the first half of 2005 compared to the same period in 2004. Increased depreciation expense as a percentage of total revenues resulted from lower average unit volumes at domestic Outback Steakhouses during the quarter, the continued rollout of a new point of sale system to our Outback Steakhouse restaurants, remodeling of restaurants and higher depreciation costs for certain of our new restaurant formats, which have higher average construction costs than an Outback Steakhouse.

General and administrative. General and administrative costs increased by $16,995,000 to $82,051,000 in the first half of 2005 compared with $65,056,000 during the same period in 2004. This increase resulted from an increase in overall administrative costs associated with operating additional domestic and international Outback Steakhouses, Carrabba’s Italian Grills, Fleming’s Prime Steakhouses, Roy’s, Bonefish Grills and Cheeseburger in Paradise restaurants. Additionally, the increase resulted from approximately $2,100,000 in compensation expense recognized in the first quarter of 2005 associated with our new Chief Executive Officer, approximately $570,000 of compensation expense for restricted stock benefits for certain members of senior management, carrying costs of approximately $2,200,000 associated with the acquisition of designation rights from Chi-Chi’s in 2004, legal fees and settlements, additional expenditures to support Korean operations and an increase in spending on technology projects. These increases were partially offset by the reduction in consulting fees paid for supply chain management projects in 2004 that did not recur in 2005.

Provision for impaired assets and restaurant closing. A provision of approximately $776,000 was recorded during the first quarter of 2005 for the closing of one Company-owned Outback Steakhouse restaurant in Tennessee, and a provision of $98,000 was recorded during the second quarter of 2005 for the partial impairment of one Company-owned Bonefish Grill restaurant in Washington. Also, an impairment charge of $7,581,000 was recorded against the deferred license fee receivable associated with certain non-restaurant operations to reflect management’s best estimate of its current net realizable value as of June 30, 2005.
 
Income from operations of unconsolidated affiliates. Income from operations of unconsolidated affiliates represents our portion of net income from restaurants operated as development joint ventures. Income from development joint ventures decreased by $761,000 to a loss of $101,000 during the first half of 2005 compared with income of $660,000 during the same period in 2004.  This decrease was attributable primarily to a write-down of approximately $574,000 of an Outback Steakhouse operated as a joint venture in Pennsylvania. Operating performance issues and our inability to obtain more favorable lease terms resulted in a decision not to extend the lease for this restaurant past the initial term.  Additionally, this decrease was attributable to the adoption of a buyout program for managing and area operating partners in certain Outback Steakhouses in our joint venture in Brazil.

Income from operations. As a result of the increase in revenues, provisions for impaired assets, the opening of new restaurants and the changes in the relationships between revenues and expenses discussed above, income from operations increased by $2,276,000 to $150,040,000 in the first half of 2005 compared with $147,764,000 in the same period in 2004.

Interest income. Interest income was $818,000 during the first half of 2005 compared with $610,000 in the same period in 2004. Interest income increased due to higher interest rates on short-term investment balances during the first half of 2005 compared with the same period in 2004. Interest income for the six months ended June 30, 2005 and 2004 included interest of approximately $500,000 and $240,000, respectively, from notes receivable held by a limited liability company owned by our California franchisee.

Interest expense. Interest expense was $2,671,000 during the first half of 2005 compared with $1,399,000 in the same period in 2004. The increase in interest expense was due to higher average debt balances and higher interest rates during the first half of 2005 compared with the same period in 2004. Interest expense for the six months ended June 30, 2005 and 2004 included approximately $500,000 and $240,000, respectively, of expense from outstanding borrowings on the line of credit held by a limited liability company owned by our California franchisee.


Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Six months ended June 30, 2005 and 2004 (continued)

Elimination of minority partners' interest. This line item represents the portion of income or loss from operations included in consolidated operating results attributable to our partners’ ownership interests. As a percentage of revenues, minority partners’ income was flat at 0.4% during the six months ended June 30, 2005 and 2004, respectively.

Provision for income taxes. The provision for income taxes in the first half of both 2005 and 2004 reflects expected income taxes due at federal statutory rates and state income tax rates, net of the federal benefit. The effective income tax rate was 35.1% during the first half of 2005 and 34.5% during the first half of 2004. The increase in the rate resulted from non-deductibility of certain management compensation during the first half of 2005. Approximately 21% of our international restaurants in which we have a direct investment are owned through a Cayman Island corporation. 

Net income and earnings per share. Net income for the first half of 2005 was $91,363,000 compared with $91,142,000 in the same period in 2004. Basic earnings per share increased to $1.24 during the first half of 2005 compared with $1.23 for the same period in 2004 as a result of the increase in net income, partially offset by a decrease in basic weighted average shares outstanding of approximately 487,000 shares. The decrease in basic weighted average shares outstanding for the six months ended June 30, 2005 compared with June 30, 2004 was primarily due to common stock repurchases, partially offset by the issuance of shares under stock option plans. Diluted earnings per share increased to $1.19 during the first half of 2005 compared with $1.17 for the same period in 2004 as a result of the increase in net income, partially offset by a decrease in diluted weighted average shares outstanding of approximately 1,239,000 shares. The decrease in diluted weighted average shares outstanding for the six months ended June 30, 2005 compared with June 30, 2004 was primarily due to common stock repurchases, partially offset by the issuance of shares under stock option plans.

Liquidity and Capital Resources

The following table presents a summary of our cash flows from operating, investing and financing activities for the periods indicated (in thousands):
 
   
SIX MONTHS ENDED
  
   
JUNE 30,
  
   
2005
  
2004
  
Net cash provided by operating activities 
  
$
136,591
  
$
119,690
  
Net cash used in investing activities 
    
(138,587
)
  
(108,106
)
Net cash used in financing activities 
    
(17,878
)
  
(54,254
)
Net decrease in cash and cash equivalents 
  
$
(19,874
)
$
(42,670
)
 
We require capital principally for the development of new restaurants, remodeling older restaurants and investments in technology, and on occasion also use capital for acquisitions of franchisees and joint venture partners. We also require capital to pay dividends to common stockholders (refer to additional discussion in the Dividends section of Management’s Discussion and Analysis of Financial Condition and Results of Operations). We also utilize capital to repurchase our common stock as part of an ongoing share repurchase program. Capital expenditures totaled approximately $254,871,000 for the year ended December 31, 2004 and approximately $135,493,000 and $114,476,000 during the first six months of 2005 and 2004, respectively. We either lease our restaurants under operating leases for periods ranging from five to 30 years (including renewal periods) or build free-standing restaurants where it is cost effective.


Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources (continued)

If demand for our products and services were to decrease as a result of increased competition, changing consumer tastes, changes in local, regional, national and international economic conditions or changes in the level of consumer acceptance of our restaurant brands, our restaurant sales could decline significantly. The following table sets forth approximate amounts by which cash provided by operating activities may decline in the event of a decline in restaurant sales of 5%, 10% and 15% compared with total revenues for the year ended December 31, 2004 (in thousands):

   
5%
  
10%
  
15%
  
Decrease in restaurant sales
  
$
(159,165
)
$
(318,330
)
$
(477,495
)
Decrease in cash provided by operating activities
    
(30,003
)
  
(60,005
)
  
(90,008
)

The estimates above are based on the assumption that cash provided by operating activities decreases approximately $0.29 for every $1.00 decrease in restaurant sales. These numbers are estimates only and do not consider other measures we could implement were such decreases in revenue to occur.

We have formed joint ventures to develop Outback Steakhouses in Brazil and the Philippines. We are also developing Company-owned restaurants internationally in Puerto Rico, Korea, Hong Kong and Japan.

During September 2003, we formed a limited liability company to develop Paul Lee’s Chinese Kitchen (“Paul Lee’s”) restaurants, which is included in our Consolidated Financial Statements. Under the terms of the agreement, we committed to the first $10,000,000 of future development costs to open the first five restaurants, all of which had been expended as of March 31, 2005. Additionally, we are subject to a purchase or sale option if for eighteen consecutive months there is no restaurant development, whereby our partner may purchase our interest in the LLC for five times the restaurant cash flows for the immediately preceding twelve months.
 
On August 3, 2004, we were approved by the United States Bankruptcy Court for the District of Delaware as the successful bidder at an auction of designation rights for 76 properties of Chi-Chi’s, Inc. and its affiliates. Our objective in acquiring these rights is to have access to restaurant sites for conversion to one of our own concepts under our current expansion plans. The original 76 properties included 23 locations with owned land and building, 15 sale-leaseback properties with reversion rights and purchase options, 23 ground leases and 15 leases. The properties include any real property, furniture, fixtures and equipment and liquor licenses. The designation rights allow us to transfer properties to ourselves, to transfer properties to others or to require Chi-Chi’s to retain properties. The right to designate properties will expire on September 20, 2005. The purchase price for the designation rights was $42,500,000. We are responsible for paying the carrying costs on each of the properties from the closing date until the date the property is designated for transfer.

In October 2004, we received $1,100,000 from Chi-Chi’s when it exercised the right to exclude one property from the designation rights listing, which reduced our total purchase price for the remaining 75 properties. Additionally, in October 2004, we completed an assignment to a third party of our designation rights for 25 properties in exchange for $9,975,000. The third party will pay the carrying costs on these properties from the closing date until the property is designated for transfer. We required Chi-Chi’s to retain 18 properties, leaving 32 properties to which we had rights as of June 30, 2005. In July 2005, we executed our option on the 10 remaining sale-leaseback properties with reversion rights and purchase options for approximately $1,400,000. Thus, the remaining properties include 22 properties with owned land and building, eight ground leases and two leases. As of June 30, 2005, we have not designated 15 of these properties.
 

Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources (continued)

CREDIT FACILITIES

Effective April 27, 2004, we replaced a $125,000,000 revolving credit facility that was scheduled to mature in December 2004, with a new uncollateralized three-year $150,000,000 revolving bank credit facility that matures in June 2007. The revolving line of credit permits borrowing at interest rates ranging from 50 to 90 basis points over the 30, 60, 90 or 180-day LIBOR (ranging from 3.33% to 3.66% at June 30, 2005). At June 30, 2005, the unused portion of the line of credit was $76,000,000.

The credit agreement contains certain restrictions and conditions as defined in the agreement that require us to maintain consolidated net worth equal to or greater than consolidated total debt and to maintain a ratio of total consolidated debt to EBITDAR (earnings before interest, taxes, depreciation, amortization and rent) equal to or less than 3.0 to 1.0. At June 30, 2005, we were in compliance with these debt covenants.

We also replaced a $15,000,000 line of credit that was scheduled to mature in December 2004, with a new $20,000,000 uncollateralized line of credit. On April 28, 2005, we amended this $20,000,000 line of credit to a maximum borrowing of $30,000,000. The new line of credit matures in June 2007 and permits borrowing at interest rates ranging from 50 to 90 basis points over LIBOR for loan draws and 65 to 112.5 basis points over LIBOR for letter of credit advances. The credit agreement contains certain restrictions and conditions as defined in the agreement. At June 30, 2005 and December 31, 2004, $20,072,000 and $11,782,000, respectively, of the line of credit was committed for the issuance of letter of credit advances as required by insurance companies that underwrite our workers’ compensation insurance and also, where required, for construction of new restaurants.

As of June 30, 2005, we had approximately $7,507,000 of notes payable at interest rates ranging from 2.07% to 7.00%. These notes have been primarily issued for buyouts of general manager interests in the cash flows of their restaurants and generally are payable over five years.

We have notes payable with banks bearing interest at rates ranging from 5.45% to 7.00% to finance development of our restaurants in Korea. The notes are denominated and payable in Korean won and mature at dates ranging from July 2005 to January 2007. As of June 30, 2005 and December 31, 2004, the outstanding balance was approximately $36,462,000 and $27,717,000, respectively. Certain of the notes payable are collateralized by lease and other deposits. At June 30, 2005 and December 31, 2004, collateralized notes totaled approximately $31,346,000 and $25,346,000, respectively.

We have notes payable with banks to finance the development of our restaurants in Japan (“Outback Japan”). The notes are payable to banks, collateralized by lease deposits of approximately $3,300,000 and $3,600,000 at June 30, 2005 and December 31, 2004, respectively, and letters of credit and bear interest at 0.85% and at rates ranging from 0.95% to 0.96% at June 30, 2005 and December 31, 2004, respectively. The notes are denominated and payable in Japanese yen, with outstanding balances as of June 30, 2005 maturing in September 2005. As of June 30, 2005 and December 31, 2004, outstanding balances totaled approximately $5,505,000 and $5,769,000, respectively.
 


Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources (continued)

CREDIT FACILITIES (continued)

In October 2003, Outback Japan established a revolving line of credit to finance the development of new restaurants in Japan and refinance certain notes payable. The line permits borrowing up to a maximum of $10,000,000 with interest rates ranging from 70.0 to 107.5 basis points over LIBOR. The line originally matured in December 2004, but was amended in April 2004 with a new maturity date in June 2007. As of June 30, 2005 and December 31, 2004, Outback Japan had borrowed approximately $9,790,000 and $10,260,000, respectively, on the line of credit at an average interest rate of 0.69%, with draws as of June 30, 2005 maturing from August 2005 to June 2006. The revolving line of credit contains certain restrictions and conditions as defined in the agreement. As of June 30, 2005, we were in compliance with all of the debt covenants.

In February 2004, Outback Japan established an additional revolving line of credit to finance the development of new restaurants in Japan and to refinance certain notes payable. The line permits borrowing up to a maximum of $10,000,000 with interest of LIBOR divided by a percentage equal to 1.00 minus the Eurocurrency Reserve Percentage. The line matures in December 2006. As of June 30, 2005 and December 31, 2004, Outback Japan had borrowed approximately $7,550,000 and $8,635,000, respectively, on the line of credit at an average interest rate of 0.76%, with draws as of June 30, 2005 maturing from July 2005 to September 2005. The revolving line of credit contains certain restrictions and conditions as defined in the agreement. As of June 30, 2005, we were in compliance with all of the debt covenants.
 
We are the guarantor of an uncollateralized line of credit that permits borrowing of up to $35,000,000 for a limited liability company, T-Bird Nevada, LLC (“T-Bird”), owned by a California franchisee. This line of credit bears interest at rates ranging from 50 to 90 basis points over LIBOR and matures in December 2008. We were required to consolidate T-Bird effective January 1, 2004 upon adoption of FIN 46R. At June 30, 2005 and December 31, 2004, the outstanding balance on the line of credit was approximately $30,283,000 and $30,343,000, respectively, and is included in our Consolidated Balance Sheets as long-term debt. T-Bird uses proceeds from the line of credit for the purchase of real estate and construction of buildings to be operated as Outback Steakhouse restaurants and leased to our franchisees. According to the terms of the line of credit, T-Bird may borrow, repay, re-borrow or prepay advances at any time before the termination date of the agreement.
 
If a default under the line of credit were to occur requiring us to perform under the guarantee obligation, we have the right to call into default all of our franchisees in California and exercise any rights and remedies under those agreements as well as the right to recourse under loans T-Bird has made to individual corporations in California which own the land and/or building which is leased to those franchise locations. Events of default are defined in the line of credit agreement and include our covenant commitments under existing lines of credit. We are not the primary obligor on the line of credit and we are not aware of any non-compliance with the underlying terms of the line of credit agreement that would result in us having to perform in accordance with the terms of the guarantee. We also guarantee additional term loans associated with the owner of T-Bird, which are not consolidated, and which had outstanding balances of approximately $64,000 as of June 30, 2005.

We expect that our capital requirements through the end of 2005 will be met by cash flows from operations and, to the extent needed, advances on our lines of credit.


Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources (continued)

Our primary source of credit is our uncollateralized revolving line of credit that permits borrowing up to $150,000,000. Based upon provisions of the line of credit agreement and operating data and outstanding borrowings as of and through June 30, 2005, the margin over LIBOR rates charged to us on future amounts drawn under the line would not be affected unless: (i) outstanding debt balances increased by more than $85,000,000; or (ii) earnings before interest, taxes, depreciation, amortization and rent decreased more than 10%. In addition, based upon provisions of the line of credit agreement, availability of funds under the uncollateralized revolving line of credit would not be affected unless: (i) outstanding debt balances increased by more than $388,000,000; (ii) earnings before interest, taxes, depreciation, amortization and rent decreased more than 40%; or (iii) our net worth decreased approximately 33%.

DEBT GUARANTEES

We are the guarantor of an uncollateralized line of credit that permits borrowing of up to a maximum of $24,500,000 for our joint venture partner, RY-8, Inc. (“RY-8”), in the development of Roy's restaurants. The line of credit originally expired in December 2004 and was renewed with a new termination date of June 30, 2007. According to the terms of the credit agreement, RY-8 may borrow, repay, re-borrow or prepay advances at any time before the termination date of the agreement. On the termination date of the agreement, the entire outstanding principal amount of the loan then outstanding and any accrued interest is due. At June 30, 2005, the outstanding balance on the line of credit was approximately $22,391,000.

RY-8’s obligations under the line of credit are unconditionally guaranteed by us and Roy’s Holdings, Inc. (“RHI”). If an event of default occurs (as defined in the agreement, and including our covenant commitments under existing lines of credit), then the total outstanding balance, including any accrued interest, is immediately due from the guarantors.

If an event of default occurs and RY-8 is unable to pay the outstanding balance owed, we would, as guarantor, be liable for this balance. However, in conjunction with the credit agreement, RY-8 and RHI have entered into an Indemnity Agreement and a Pledge of Interest and Security Agreement in favor of Outback Steakhouse, Inc. These agreements provide that if we are required to perform our obligation as guarantor pursuant to the credit agreement, then RY-8 and RHI will indemnify us against all losses, claims, damages or liabilities which arise out of or are based upon our guarantee of the credit agreement. RY-8’s and RHI’s obligations under these agreements are collateralized by a first priority lien upon and a continuing security interest in any and all of RY-8’s interests in the joint venture.

We are the guarantor of up to $9,445,000 of a $68,000,000 note for an unconsolidated affiliate, Kentucky Speedway, in which we have a 22.22% equity interest and for which we operate catering and concession facilities. At June 30, 2005, the outstanding balance on the note and our guarantee on the note were approximately $65,000,000 and $9,445,000, respectively. The existing note has a put feature that allows the lender to require full payment of the note as of December 31, 2005. If Kentucky Speedway is unable to make its payment on the note, the Company would be responsible for its guarantee at that time. Our investment is included in the line item entitled “Investments In and Advances to Unconsolidated Affiliates, Net.” This affiliate has not yet reached its operating break-even point. Accordingly, we have made six additional working capital contributions totaling $3,111,000 since 2001, including a contribution of approximately $867,000 in July 2005. We did not make any contributions during the first and second quarters of 2005 and $800,000 was paid in 2004. We will be required to make another contribution of approximately $526,000 in September 2005. In addition, based on current operating performance, we anticipate making additional contributions in 2006 of approximately $1,500,000 to $2,000,000.  This affiliate is expected to incur further operating losses at least through 2006.
 
We are not aware of any non-compliance with the underlying terms of the borrowing agreements for which we provide a guarantee that would result in us having to perform in accordance with the terms of the guarantee.


Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources (continued)

SHARE REPURCHASE

On July 26, 2000, our Board of Directors authorized the repurchase of up to 4,000,000 shares of our common stock, with the timing, price, quantity and manner of the purchases to be made at the discretion of management, depending upon market conditions. In addition, the Board of Directors also authorized the repurchase of shares on a regular basis to offset shares issued as a result of stock option exercises. On July 23, 2003, our Board of Directors extended both the repurchase authorization for an additional 2,500,000 shares of our common stock, and the authorization to offset shares issued as a result of stock option exercises. We will fund the repurchase program with available cash and bank credit facilities. During the period from the authorization date through June 30, 2005, approximately 7,874,000 shares of our common stock have been issued as the result of stock option exercises. As of June 30, 2005, under these authorizations we have repurchased approximately 12,966,000 shares of our common stock for approximately $450,784,000.

DIVIDENDS

Our Board of Directors authorized the following dividends during 2004 and 2005:

Declaration
  
Record
  
Payable
  
  
Amount per Share
Date
  
Date
  
Date
  
  
of Common Stock
January 28, 2004
  
February 20, 2004
  
March 5, 2004
  
  
          $
0.13
April 21, 2004
  
May 21, 2004
  
June 4, 2004
    
          
0.13
July 21, 2004
  
August 20, 2004
  
September 3, 2004
  
    
0.13
October 27, 2004
  
November 19, 2004
  
December 3, 2004
      
0.13
January 26, 2005
  
February 18, 2005
  
March 4, 2005
  
  
          
0.13
April 27, 2005
  
May 20, 2005
  
June 3, 2005
    
          
0.13
July 27, 2005
  
August 19, 2005
  
September 2, 2005
      
0.13

At the current dividend rate, the annual dividend payment is expected to be between $38,000,000 and $40,000,000 depending on the shares outstanding during the respective quarters. We intend to pay dividends with cash flow from operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our Unaudited Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities during the reporting period. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in Note 1 of Notes to Consolidated Financial Statements included in our 2004 10-K. We consider the following policies to be the most critical in understanding the judgments that are involved in preparing our financial statements.
 
Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES (continued)

Property, Fixtures and Equipment

Property, fixtures and equipment are stated at cost, net of accumulated depreciation. At the time property, fixtures and equipment are retired, or otherwise disposed of, the asset and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in earnings. We expense repair and maintenance costs incurred to maintain the appearance and functionality of the restaurant that do not extend the useful life of any restaurant asset or are less than $1,000. Improvements to leased properties are depreciated over the shorter of their useful life or the lease term, which includes cancelable renewal periods where failure to exercise such options would result in an economic penalty. Depreciation is computed on the straight-line method over the following estimated useful lives:

 
Buildings and building improvements
  
20 to 31.5 years
  
Equipment
  
2 to 15 years
  
 
Furniture and fixtures
  
7 years
  
Leasehold improvements
  
5 to 20 years
  

Our accounting policies regarding property, fixtures and equipment include certain management judgments and projections regarding the estimated useful lives of these assets.  These estimates, judgments and projections may produce materially different amounts of depreciation expense than would be reported if different assumptions were used.

Operating Leases

Rent expense for our operating leases, which generally have escalating rentals over the term of the lease, is recorded on a straight-line basis over the initial lease term and those renewal periods that are reasonably assured. The initial lease term includes the “build-out” period of our leases, where no rent payments are typically due under the terms of the lease. The difference between rent expense and rent paid is recorded as deferred rent and is included in the Consolidated Balance Sheets.

Goodwill

Goodwill represents the residual purchase price after allocation of the purchase price of assets acquired. On an annual basis, we review the recoverability of goodwill based primarily upon an analysis of discounted cash flows of the related investment asset as compared to the carrying value or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Generally, we perform our annual assessment for impairment during the third quarter of the fiscal year, unless facts and circumstances require differently.

Impairment of Long-Lived Assets

We assess the potential impairment of identifiable intangibles, long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Recoverability of assets is measured by comparing the carrying value of the asset to the future cash flows expected to be generated by the asset. In evaluating long-lived restaurant assets for impairment, we consider a number of factors such as:

 
a)
  
Restaurant sales and cash flow trends;
 
b)
  
Local competition;
 
c)
  
Changing demographic profiles;
 
d)
  
Local economic conditions;
 
e)
  
New laws and government regulations that adversely affect sales and profits; and
 
f)
  
The ability to recruit and train skilled restaurant employees.

Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES (continued)

Impairment of Long-Lived Assets (continued)

If the aforementioned factors indicate that we should review the carrying value of the restaurant’s long-lived assets, we perform an impairment analysis. Identifiable cash flows that are largely independent of other assets and liabilities typically exist for land and buildings and for combined fixtures, equipment and improvements for each restaurant. If the total future cash flows are less than the carrying amount of the asset, the carrying amount is written down to the estimated fair value, and a loss resulting from value impairment is recognized by a charge to earnings.

Judgments and estimates made by us related to the expected useful lives of long-lived assets are affected by factors such as changes in economic conditions and changes in operating performance. As we assess the ongoing expected cash flows and carrying amounts of our long-lived assets, these factors could cause us to realize a material impairment charge.

Insurance Reserves

We self-insure a significant portion of expected losses under our workers’ compensation, general liability, health and property insurance programs. We purchase insurance for individual claims that exceed the amounts listed in the following table:

   
2005
  
Workers' Compensation
  
$
1,000,000
  
General Liability (1)
    
1,500,000
 
Health (2)
    
300,000
 
Property Coverage
    
5,000,000
 
____________
(1)
For claims arising from liquor liability, there is an additional $1,000,000 deductible until a $2,000,000 aggregate has been met. At that time, any claims arising from liquor liability revert to the general liability deductible.
(2)
We are self-insured for annual aggregate health insurance claims that exceed 113% of estimates provided by our third party administrator and insurance company.

We record a liability for all unresolved claims and for an estimate of incurred but not reported claims at the anticipated cost to us based on estimates provided by a third party administrator and insurance company. Our accounting policies regarding insurance reserves include certain actuarial assumptions and management judgments regarding economic conditions, the frequency and severity of claims and claim development history and settlement practices. Unanticipated changes in these factors may produce materially different amounts of expense that would be reported under these programs.

Revenue Recognition

We record revenues for normal recurring sales upon the performance of services. Revenues from the sales of franchises are recognized as income when we have substantially performed all of our material obligations under the franchise agreement. Continuing royalties, which are a percentage of net sales of franchised restaurants, are accrued as income when earned. These revenues are included in the line “Other revenues” in the Consolidated Statements of Income.

Unearned revenues primarily represent our liability for gift certificates that have been sold but not yet redeemed and are recorded at the anticipated redemption value. When the gift certificates are redeemed, we recognize restaurant sales and reduce the related deferred liability.


Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES (continued)

Employee Partner Stock Buyout Expense

Area operating partners are required to purchase a 4% to 9% interest in the restaurants they develop for an initial investment of $50,000. This interest gives the area operating partner the right to receive a percentage of his or her restaurants' annual cash flows for the duration of the agreement. Under the terms of these partners' employment agreements, we have the option to purchase their interest after a five-year period under the conditions of the agreement. We estimate future purchases of area operating partners' interests using current information on restaurant performance to calculate and record an accrued buyout liability in the line item “Partner deposit and accrued buyout liability” in the Consolidated Balance Sheets. When partner buyouts occur, they are completed primarily through issuance of our common stock to the partner equivalent to the fair value of their interest. In the period we complete the buyout, an adjustment is recorded to recognize any remaining expense associated with the purchase and reduce the related accrued buyout liability.

Principles of Consolidation

The Consolidated Financial Statements include the accounts and operations of Outback Steakhouse, Inc. and our affiliated partnerships in which we are a general partner and own a controlling financial interest. We consolidate variable interest entities in which we absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. We consolidate a limited liability company affiliated with our California franchisees that holds a line of credit that we guarantee. The consolidated financial statements also include the accounts and operations of our Roy’s consolidated venture in which we have a less than majority ownership. We consolidate this venture because we control the executive committee (which functions as a board of directors) through representation on the board by related parties and we are able to direct or cause the direction of management and operations on a day-to-day basis. Additionally, the majority of capital contributions made by our partner in the consolidated venture have been funded by loans to the partner from a third party where we are required to be a guarantor of the debt, which provides us control through our collateral interest in the joint venture partner’s membership interest. As a result of our controlling financial interest in this venture, it is included in our consolidated financial statements. The portion of income or loss attributable to the minority interests, not to exceed the minority interest’s equity in the subsidiary, is eliminated in the line item in our Consolidated Statements of Income entitled “Elimination of minority partners’ interest.” All material intercompany balances and transactions have been eliminated.

Recently Issued Financial Accounting Standards

In December 2004, the FASB issued SFAS No. 123 (Revised), “Share-Based Payment,” a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123R requires the fair value measurement of all stock-based payments to employees, including grants of employee stock options, and recognition of those expenses in the statement of operations. SFAS No. 123R is effective at the beginning of the next fiscal year after June 15, 2005. We will continue to account for stock-based compensation using the intrinsic value method until adoption of SFAS No. 123R on January 1, 2006. Historically, the compensation expense recognized related to stock options under this method has been minimal. As a result, adoption of the provisions of SFAS No. 123R is expected to have a significant impact to reported net income and earnings per share. We have not yet determined the method of adoption or the effect of adopting SFAS No. 123R and have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123.


Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OUTLOOK

The following discussion of our future operating results and expansion strategy and other statements in this report that are not historical statements constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements represent our expectations or beliefs concerning future events and may be identified by words such as “believes,”  “anticipates,”  “expects,”  “plans,”  “should,”  “estimates” and similar expressions. Our forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those stated or implied in the forward-looking statement. We have endeavored to identify the most significant factors that could cause actual results to differ materially from those stated or implied in the forward-looking statements in the section entitled “Cautionary Statement” below. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

In the Outlook portion of Management’s Discussion and Analysis of Financial Condition and Results of Operation in our 2004 10-K, we provided information on the outlook for our businesses in 2005 and factors that may affect our financial results for the year. The remaining paragraphs in this Outlook section update the information provided in the Form referenced above and we recommend that this section be read in conjunction with our 2004 10-K.

Future Operating Results

Our revenues and financial results in the remainder of 2005 could vary significantly depending upon consumer and business spending trends.

2005 Revenue. During the three-month period ended June 30, 2005, compared with the same period a year ago, average unit volumes decreased by 1.3% for domestic Company-owned Outback Steakhouses and increased by 5.5% for domestic Company-owned Carrabba’s Italian Grills.  For the full year of 2005, average unit volumes for Outback Steakhouses are anticipated to be approximately 1.5% to 2.0% higher than 2004, predominantly resulting from increased menu prices and projected traffic levels similar to those experienced in 2004. This revised estimate is a decrease from the 3.0% estimate provided at the end of the first quarter. Average unit volumes for Carrabba's Italian Grills for the year are expected to be approximately 4.0% to 4.5% higher than 2004, which is an increase from our first quarter estimate of 4.0%.

During the quarter ended June 30, 2005, compared with the same period in 2004, average unit volumes for Fleming's Prime Steakhouse and Wine Bar increased 4.0%, Roy’s increased 9.3% and Bonefish Grills’ average unit volumes increased 1.6%. We are not adjusting our previous estimates on average unit volumes for Fleming’s. We are increasing our estimate of Roy’s average unit volumes to be approximately 7.0% to 8.0% for the year from our 4.0% estimate at the end of the first quarter based upon the performance Roy’s has had year-to-date. We continue to estimate average unit volumes for Bonefish Grill to be flat for the year based on our most recent sales trends.

2005 Cost of Sales. As a result of more favorable commodity prices, particularly produce such as potatoes and onions, we now expect cost of goods sold as a percentage of restaurant sales to decrease approximately 70 to 80 basis points for 2005 from 2004 amounts.

2005 Labor and Other Related Expenses. As a result of lowering the domestic Outback Steakhouse average unit volume gain expectations, we expect labor costs to be approximately 10 basis points higher in 2005 than in 2004.

2005 Restaurant Operating Expenses. Due to higher utility costs, lower domestic Outback Steakhouse average unit volumes and increases in fees charged by credit card companies experienced during the first half of 2005, we now expect restaurant operating expenses to be approximately 30 to 40 basis points higher for the year.
 

Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OUTLOOK (continued)

2005 Distribution Expense to Employee Partners. Distribution expense to employee partners is affected by the number of cash buyouts of managing partners’ interests in their restaurants, average unit volumes, ownership percentage levels of our employee partners and operating margins across the consolidated brands. We expect distribution expense as a percentage of restaurant sales to decrease 10 basis points for the year.

2005 Depreciation and Amortization. Due to lower expected average unit volumes from domestic Outback Steakhouses and acceleration of some remodeling in those restaurants, we now expect depreciation and amortization to increase 10 to 20 basis points for the year.

2005 General and Administrative Costs. As a result of the lower domestic Outback Steakhouse average unit volumes during the first six months of 2005 and increased compensation expense from the issuance of restricted shares, we expect general and administrative costs to be approximately 10 to 20 basis points higher than the prior year.

We are now planning for the remainder of 2005 for all other expense ratio variances to be comparable to those estimated in the 2004 10-K Outlook section.

Expansion Strategy

Our goal is to add new restaurants to the system during the remainder of 2005. The following table presents a summary of the expected restaurant openings during:

 
Second Half
  
Full Year
 
2005
  
2005
Outback Steakhouses - Domestic
              
Company-owned
21
to
23
  
27
to
29
Franchised 
3
to
4
  
3
to
4
Outback Steakhouses - International
              
Company-owned
4
to
5
  
18
to
19
Franchised 
1
to
2
  
2
to
3
Carrabba’s Italian Grills
              
Company-owned
12
to
17
  
28
to
33
Bonefish Grills
              
Company-owned
22
to
27
  
35
to
40
Fleming’s Prime Steakhouse and Wine Bars
              
Company-owned
8
to
10
  
9
to
11
Cheeseburger in Paradise
              
Company-owned
10
to
12
  
17
to
19
Roy’s
              
Company-owned
 
1
      
2
  
Paul Lee's Chinese Kitchen
              
Company-owned
 
1
      
2
  
Lee Roy Selmon’s
              
Company-owned
 
2
      
2
  
 

Outback Steakhouse, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement

As noted above, our actual results could differ materially from those stated or implied in the forward-looking statements included in the discussion of future operating results and expansion strategy and elsewhere in this report as a result, among other things, of the following:

(i)
  
The restaurant industry is a highly competitive industry with many well-established competitors;
     
(ii)
  
Our results can be impacted by changes in consumer tastes and the level of consumer acceptance of our restaurant concepts (including consumer tolerance of price increases); local, regional, national and international economic conditions; the seasonality of our business; demographic trends; traffic patterns; change in consumer dietary habits; employee availability; the cost of advertising and media; government actions and policies; inflation; and increases in various costs, including construction and real estate costs;
     
(iii)
  
Our results can be affected by consumer perception of food safety;
     
(iv)
  
Our ability to expand is dependent upon various factors such as the availability of attractive sites for new restaurants; ability to obtain appropriate real estate sites at acceptable prices; ability to obtain all required governmental permits including zoning approvals and liquor licenses on a timely basis; impact of government moratoriums or approval processes, which could result in significant delays; ability to obtain all necessary contractors and subcontractors; union activities such as picketing and hand billing that could delay construction; the ability to generate or borrow funds; the ability to negotiate suitable lease terms; and the ability to recruit and train skilled management and restaurant employees;
     
(v)
  
Price and availability of commodities, including but not limited to, such items as beef, chicken, shrimp, pork, seafood, dairy, potatoes, onions and energy supplies, which are subject to fluctuation and could increase or decrease more than we expect; and/or
     
(vi)
  
Weather and acts of God could result in construction delays and also adversely affect the results of one or more restaurants for an indeterminate amount of time.
 

Outback Steakhouse, Inc.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in interest rates on debt, changes in foreign currency exchange rates and changes in commodity prices.

Our exposure to interest rate fluctuations is limited to our outstanding bank debt. At June 30, 2005, outstanding borrowings under our revolving lines of credit bear interest at 50 to 90 basis points over the 30, 60, 90 or 180-day London Interbank Offered Rate. The weighted average effective interest rate on the $74,000,000 outstanding balance under these lines at June 30, 2005 was 3.77%. At June 30, 2005, outstanding borrowings under our Japanese lines of credit bear interest at either 70.0 to 107.5 basis points over LIBOR or LIBOR divided by a percentage equal to 1.00 minus the Eurocurrency Reserve Percentage. The weighted average effective interest rate on the approximately $17,340,000 outstanding balance at June 30, 2005 was 0.72%. Notes payable of approximately $5,505,000 to Japanese banks bear interest at 0.85%. Notes payable of approximately $36,462,000 to Korean banks bear interest at rates ranging from 5.45% to 7.00% at June 30, 2005.

At June 30, 2005 and December 31, 2004, our total debt, including consolidated guaranteed debt, was approximately $171,097,000 and $144,869,000, respectively. Should interest rates based on our average borrowings of approximately $158,000,000 through June 30, 2005 increase by one percentage point, our estimated annual interest expense would increase by approximately $1,580,000 over amounts reported for the year ended December 31, 2004.

Our exposure to foreign currency exchange fluctuations relates primarily to our direct investment in restaurants in Korea, Hong Kong, Japan, the Philippines and Brazil, our outstanding debt to Japanese and Korean banks of approximately $22,845,000 and $36,462,000, respectively, at June 30, 2005 and to our royalties from international franchisees. We do not use financial instruments to hedge foreign currency exchange rate changes. Our investments in these countries totaled approximately $25,746,000 and $24,346,000 as of June 30, 2005 and December 31, 2004, respectively.

Many of the ingredients used in the products sold in our restaurants are commodities that are subject to unpredictable price volatility.  Although we attempt to minimize the effect of price volatility by negotiating fixed price contracts for the supply of key ingredients, there are no established fixed price markets for certain commodities such as produce and wild fish, and we are subject to prevailing market conditions when purchasing those types of commodities. Other commodities are purchased based upon negotiated price ranges established with vendors with reference to the fluctuating market prices. The related agreements may contain contractual features that limit the price paid by establishing certain price floors and caps. We do not use financial instruments to hedge commodity prices because these purchase arrangements help control the ultimate cost paid.  Extreme changes in commodity prices and/or long-term changes could affect our financial results adversely, although any changes in commodity prices would affect our competitors at about the same time as us.  We expect that in most cases increased commodity prices could be passed through to our consumers via increases in menu prices.  However, if there is a time lag between the increasing commodity prices and our ability to increase menu prices or, if we believe the commodity price increase to be short in duration and we choose not to pass on the cost increases, our short-term financial results could be negatively affected. Additionally, from time to time, competitive circumstances could limit menu price flexibility, and in those cases margins would be negatively impacted by increased commodity prices.  

In addition to the market risks identified above and to the risks discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we are subject to business risk as our beef supply is highly dependent upon four vendors. We currently purchase approximately 75% of our beef from the two largest beef suppliers in the country. If these vendors were unable to fulfill their obligations under their contracts, we would encounter supply shortages and incur higher costs to secure adequate supplies.

This market risk discussion contains forward-looking statements. Actual results may differ materially from the discussion based upon general market conditions and changes in domestic and global financial markets.
 

Outback Steakhouse, Inc.
CONTROLS AND PROCEDURES

Item 4. CONTROLS AND PROCEDURES 

Evaluation of Disclosure Controls and Procedures

We have established and maintain disclosure controls and procedures that are designed to ensure that material information relating to the Company and our subsidiaries required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Interim Principal Financial and Accounting Officer, as appropriate to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Principal Financial and Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Interim Principal Financial and Accounting Officer concluded that our disclosure controls and procedures were effective as of the date of such evaluation.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during our most recent quarter ended June 30, 2005 that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.

 
 
Outback Steakhouse, Inc.
PART II: OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to legal proceedings, claims and liabilities, such as liquor liability, sexual harassment and slip and fall cases, etc., which arise in the ordinary course of business and are generally covered by insurance. In the opinion of management, the amount of the ultimate liability with respect to those actions will not have a materially adverse impact on our financial position or results of operations and cash flows.

We filed a report on Form 8-K with the Securities and Exchange Commission dated June 27, 2003 regarding the jury verdict in a civil suit against us. On June 26, 2003, in a civil case against us in the Delaware Circuit Court, County of Delaware, State of Indiana, titled David D. Markley and Lisa K. Markley, Plaintiffs, vs. Outback Steakhouse of Florida, Inc., et. al, Defendants, alleging liability under the “dramshop” liquor liability statute, a jury returned a verdict in favor of the two plaintiffs who were injured by a drunk driver. The portion of the verdict against us was $39,000,000. We appealed the verdict to the Indiana Court of Appeals. On July 25, 2005, the Court of Appeals affirmed the verdict of the trial courts. We intend to petition the Court of Appeals for rehearing and, if necessary, to seek review by the Supreme Court of Indiana. We have insurance coverage related to this case provided by our primary carrier for $21,000,000 and by an excess insurance carrier for the balance of the verdict of approximately $19,000,000. The excess insurance carrier, Fireman's Fund Insurance Company, has filed a declaratory judgment suit in the U.S. District Court, Southern District of Indiana claiming it was not notified of the case and is therefore not liable for its portion of the verdict. We do not believe the excess carrier’s case has any merit and we are vigorously defending this case. Activity in this case has been held in abeyance pending the decision of the appellate court in the “dramshop” case. We have filed counter-claims against the excess carrier and cross-claims against the primary carrier and our third-party administrator. If the excess carrier’s suit were to succeed, we believe we would have rights against the primary carrier and our third party administrator to recover any amounts we may have to pay.

 

Outback Steakhouse, Inc.
PART II: OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
(a) Following is information relating to the shares of common stock issued by us in transactions not registered under the Securities Act of 1933:
 
During the quarter ended June 30, 2005, we issued approximately 40,200 shares of our common stock at $46.05 per share to five of our area operating partners for their interests in three Outback Steakhouses and 15 Carrabba’s Italian Grills. The aggregate value of shares issued was approximately $1,853,000. This issuance of securities was exempt from the registration requirements of the Securities Act of 1933 in reliance on Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering.

On June 13, 2005, we granted 50,000 shares of our restricted common stock to the Senior Vice President of Real Estate and Development as an inducement grant in connection with his hiring. These shares were not issued under any existing stock plan. The aggregate value of shares issued was approximately $2,255,000. Under the terms of the grant, the 50,000 shares of restricted stock will vest as follows: on June 13, 2008, 10,000 shares; on June 13, 2010, 10,000 shares; on June 13, 2012, 15,000 shares; and on June 13, 2015, the balance of all remaining unvested shares. This issuance of securities was exempt from the registration requirements of the Securities Act of 1933 in reliance on Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering.

(c) Issuer Purchases of Equity Securities

The following table includes information with respect to purchases of our common stock made by us during the quarter ended June 30, 2005:

Period
  
(a)
Total number of shares purchased (1)
  
Average price paid
per share
  
(c)
Total number of shares purchased as part of publicly announced programs (1)
  
(d)
Maximum number of shares that may yet be purchased under the programs (2)
  
Month #1
                          
(April 1 to April 30)
    
175,000
 
$
44.67
    
175,000
   
1,355,000
 
Month #2
                          
(May 1 to May 31)
    
350,000
   
41.91
   
350,000
   
1,464,000
 
Month #3
                          
(June 1 to June 30)
    
225,000
   
45.20
   
225,000
   
1,408,000
 
Total
    
750,000
         
750,000
   
1,408,000
 
____________
(1)
No shares were repurchased other than through our publicly announced repurchase programs and authorizations during the second quarter ended June 30, 2005.
(2)
On July 26, 2000, our Board of Directors authorized the repurchase of up to 4,000,000 shares of our common stock, with the timing, price, quantity and manner of the purchases to be made at the discretion of management, depending upon market conditions. In addition, the Board of Directors also authorized the repurchase of shares on a regular basis to offset shares issued as a result of stock option exercises. On July 23, 2003, our Board of Directors extended both the repurchase authorization for an additional 2,500,000 shares of our common stock, and the authorization to offset shares issued as a result of stock option exercises. During the period from the authorization date through June 30, 2005, approximately 7,874,000 shares of our common stock have been issued as the result of stock option exercises. As of June 30, 2005, under these authorizations we have repurchased approximately 12,966,000 shares of our common stock for approximately $450,784,000.
 

Outback Steakhouse, Inc.
PART II: OTHER INFORMATION
 
Item 4. Submission of Matters to a Vote of Security Holders

The Company held its Annual Meeting of Stockholders on April 27, 2005. Two items were submitted for vote at the annual meeting. The results of the election are as follows:
 
1.
    
To elect four directors, three to serve for a term of three years and one to serve for a term of two years, and until his or her successor is duly elected and qualified. Abstentions and broker non-votes did not count for or against any nominee for director. The following continued to serve as directors as of the Annual Meeting: Chris T. Sullivan, John A. Brabson, Jr., Debbi Fields, Thomas A. James, and Lee Roy Selmon. On April 27, 2005, Robert S. Merritt resigned from the Board of Directors, and the Board voted unanimously to appoint A. William Allen, III, Chief Executive Officer of the Company, as a director to fill the vacancy created by Mr. Merritt’s resignation. Mr. Allen shall serve as a director of the Company until the next Annual Meeting of Shareholders of the Company, April 26, 2006, or until his earlier resignation or removal. The results for the election of the directors are as follows:

                    
Name of Nominee/Director
 
Votes For
 
Votes Withheld
 
                    
Robert D. Basham
 
67,572,811
 
1,930,801
  
                    
W. R. “Max” Carey, Jr.
 
67,464,779
 
2,038,833
  
 
Toby S. Wilt
  
65,453,137
  
4,050,475
  
 
General (Ret) Tommy Franks
  
68,017,987
  
1,485,645
  

2.
    
A Company proposal to approve an amendment and restatement of the Company’s Managing Partner Stock Plan (the “Plan”). The amendment allows for the grant of shares of restricted common stock under the Plan, but does not increase the number of shares under the Plan. Abstentions had the effect of a vote against the amendment, and broker non-votes were not counted for or against the amendment. The results for the approval of the amendment are as follows:
 
                    
Votes For
 
Votes Against
 
Votes Abstained
 
 
36,202,474
 
26,111,047
 
696,399
 

 

Outback Steakhouse, Inc.
PART II: OTHER INFORMATION

Item 6. Exhibits
 
Number
  
Description
     
10.01*
  
Employment Agreement effective March 8, 2005 by and among A. William Allen, III, OS Restaurant Services, Inc., and Outback Steakhouse, Inc. (included as an exhibit to Registrant’s Current Report on Form 8-K/A filed May 18, 2005 and incorporated herein by reference)
   
                                                                                                                                     
10.02*
  
Amendment to Officer Employment Agreement entered into by and among OS Restaurant Services, Inc., Outback Steakhouse, Inc. and Paul E. Avery effective for all purposes as of March 8, 2005 (filed herewith)
     
10.03*
  
Restricted Stock Agreement effective April 27, 2005 by and between OS Restaurant Services, Inc., Outback Steakhouse, Inc., and A. William Allen, III (included as an exhibit to Registrant’s Current Report on Form 8-K/A filed May 18, 2005 and incorporated herein by reference)
   
                                                                                                                                     
10.04*
  
Restricted Stock Agreement effective April 27, 2005 by and between Outback Steakhouse, Inc. and General (Ret) Tommy R. Franks (included as an exhibit to Registrant’s Current Report on Form 8-K filed May 26, 2005 and incorporated herein by reference)
     
10.05*
  
Summary of Consulting Arrangement between Robert S. Merritt and Outback Steakhouse, Inc. (filed herewith)
     
10.06
  
Restricted Stock Agreement, Partner Form (filed herewith)
     
10.07
  
Restricted Stock Agreement, Director Form (filed herewith)
     
10.08
  
Restricted Stock Agreement, Officer Form (filed herewith)
     
10.09
  
Restricted Stock Agreement, Officer Inducement Form (filed herewith)
     
10.10
  
First Amendment to Lease Agreement made as of June 14, 1999 between Crescent Resources, Inc. and Outback Steakhouse, Inc. (filed herewith)
     
10.11
  
Second Amendment to Lease dated as of October 19, 2001 by and between Crescent Brookdale Associates, LLC and Outback Steakhouse, Inc. (filed herewith)
     
10.12
  
Third Amendment to Lease Agreement made as of December 31, 2003 by and between Crescent Brookdale Associates, LLC and Outback Steakhouse, Inc. (filed herewith)
     
10.13
  
Fourth Amendment to Lease Agreement made as of March 17, 2005 by and between Crescent Brookdale Associates, LLC and Outback Steakhouse, Inc. (filed herewith)
     
10.14
  
Fifth Amendment to Lease Agreement made as of June 23, 2005 by and between Crescent Brookdale Associates, LLC and Outback Steakhouse, Inc. (filed herewith)
     
10.15*
  
Restricted Stock Agreement by and between Outback Steakhouse, Inc. and Richard Renninger effective on the date of commencement of Grantee’s employment with the Company (filed herewith)
     
10.16
  
Amended and Restated Sublicense Agreement dated as of July 22, 2005 and effective as of January 1, 2005 by and between Cheeseburger Holding Company, LLC and Cheeseburger in Paradise, LLC (filed herewith)
     
10.17
  
Action by Unanimous Written Consent of the Members of OS/PLCK, LLC executed August 8, 2005 to be effective as of July 21, 2005 (filed herewith)
     
10.18
  
Action by Unanimous Written Consent of the Members of Outback/Fleming’s, LLC executed August 8, 2005 to be effective as of July 21, 2005 (filed herewith)
 


Number
  
Description
     
31.1
  
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
                                                                                                                                    
31.2
  
Certification of Interim Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
                                                                                                                                    
32.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 20021
   
                                                                                                                                    
32.2
  
Certification of Interim Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 20021

* Management contract or compensatory plan or arrangement required to be filed as an exhibit.

1These certifications are not deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section. These certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates them by reference.

The registrant hereby undertakes to furnish supplementally a copy of any omitted schedule or other attachment to the Securities and Exchange Commission upon request.



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.



Date: August 9, 2005
                       
OUTBACK STEAKHOUSE, INC.
 
                           
 
 
 
By: /s/ A. William Allen, III                               
 
 
A. William Allen, III
Chief Executive Officer
(Principal Executive Officer)
     
     
   
By: /s/ Joseph W. Hartnett                               
   
Joseph W. Hartnett
Vice President - Corporate Accounting
(Interim Principal Financial and Accounting Officer)
     
     
 

 
53