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 September 30, 2002 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 (IRS Employer jurisdiction of Identification No.) incorporation or organization) 2202 NORTH WEST SHORE BOULEVARD, 5TH 33607 FLOOR, TAMPA, FLORIDA ---------------------------------------- ----------- (Address of principal executive offices) (Zip Code) (813) 282-1225 ------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of November 8, 2002, there were 75,786,254 shares of Common Stock, $.01 par value, outstanding. Page 1 of 45 OUTBACK STEAKHOUSE, INC. PART I: FINANCIAL INFORMATION Item 1. Financial Statements The accompanying unaudited consolidated financial statements have been prepared by Outback Steakhouse, Inc. and Affiliates (the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company, all adjustments (consisting only of normal recurring entries) necessary for the fair presentation of the Company's results of operations, financial position and cash flows for the periods presented have been included. Page 2 of 45 OUTBACK STEAKHOUSE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, unaudited) September 30, December 31, ASSETS 2002 2001 CURRENT ASSETS --------------- --------------- Cash and cash equivalents.................... $ 145,269 $115,928 Short term investments....................... 10,732 20,310 Inventories.................................. 24,723 38,775 Other current assets......................... 28,176 31,347 ------------- ----------- Total current assets......................... 208,900 206,360 PROPERTY, FIXTURES AND EQUIPMENT, NET.......... 878,786 813,065 INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES, NET 55,415 46,485 GOODWILL, NET.................................. 80,932 80,074 INTANGIBLE ASSETS, NET......................... 16,210 14,379 OTHER ASSETS................................... 73,322 77,385 ------------- ----------- $ 1,313,565 $ 1,237,748 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable............................. $ 48,014 $47,179 Sales taxes payable.......................... 13,712 13,096 Accrued expenses............................. 62,711 56,587 Unearned revenue............................. 11,026 60,135 Income taxes payable......................... 22,799 Current portion of long-term debt............ 16,820 12,763 ------------- ----------- Total current liabilities.................... 175,082 189,760 DEFERRED INCOME TAXES.......................... 36,361 22,878 LONG-TERM DEBT................................. 14,255 13,830 OTHER LONG-TERM LIABILITIES.................... 23,675 24,500 ------------- ----------- Total liabilities............................ 249,373 250,968 INTEREST OF MINORITY PARTNERS IN ------------- ----------- CONSOLIDATED PARTNERSHIPS.................... 39,072 44,936 ------------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $0.01 par value, 200,000 shares authorized; 78,750 and 78,554 shares issued; and 76,032 and 76,913 shares outstanding as of September 30, 2002 and December 31, 2001, respectively............ 788 786 Additional paid-in capital................... 234,817 220,648 Retained earnings............................ 872,140 762,414 ------------- ----------- 1,107,745 983,848 Less treasury stock, 2,718 and 1,641 shares as of September 30, 2002 and December 31, 2001, respectively, at cost..... (82,625) (42,004) ------------- ----------- Total stockholders' equity................... 1,025,120 941,844 ------------- ----------- $ 1,313,565 $ 1,237,748 ======== ======== See notes to unaudited consolidated financial statements. Page 3 of 45 OUTBACK STEAKHOUSE, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 REVENUES -------------- ------------ ------------- -------------- Restaurant sales.............................. $ 579,677 $ 524,360 $ 1,745,654 $ 1,575,323 Other revenues................................ 4,570 4,685 13,782 13,819 ----------- ----------- ----------- ----------- TOTAL REVENUES.............................. 584,247 529,045 1,759,436 1,589,142 COSTS AND EXPENSES: ----------- ----------- ----------- ----------- Cost of sales............................... 212,452 205,339 644,593 605,807 Labor & other related....................... 142,490 127,114 425,451 378,014 Other restaurant operating.................. 120,423 106,921 352,853 313,379 Depreciation & amortization................. 19,206 17,529 55,882 50,318 General & administrative.................... 21,656 18,835 64,992 58,575 Provision for impaired assets and restaurant closings................... 4,284 2,047 4,284 2,047 Contribution for "Dine Out for America"..... 7,000 7,000 Income from operations of unconsolidated affiliates............................ (1,359) (1,108) (4,460) (3,086) ----------- ----------- ----------- ----------- Total costs and expenses............... 519,152 483,677 1,543,595 1,412,054 ----------- ----------- ----------- ----------- INCOME FROM OPERATIONS......................... 65,095 45,368 215,841 177,088 OTHER INCOME (EXPENSE), NET.................... (1,412) (608) (2,299) (1,568) INTEREST INCOME (EXPENSE), NET................. 443 684 999 2,445 INCOME BEFORE ELIMINATION OF ----------- ----------- ----------- ----------- MINORITY PARTNERS' INTEREST AND INCOME TAXES............................ 64,126 45,444 214,541 177,965 ELIMINATION OF MINORITY PARTNERS' INTEREST.................................... 8,880 6,246 29,895 23,902 ----------- ----------- ----------- ----------- INCOME BEFORE PROVISION FOR INCOME TAXES....... 55,246 39,198 184,646 154,063 PROVISION FOR INCOME TAXES..................... 19,447 13,798 64,996 54,230 ----------- ---------- ----------- ----------- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE............ 35,799 25,400 119,650 99,833 CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (NET OF TAXES)......... (4,422) ----------- ---------- ----------- ----------- NET INCOME..................................... $ 35,799 $ 25,400 $ 115,228 $ 99,833 ======= ======= ======= ======= See notes to unaudited consolidated financial statements. Page 4 of 45 OUTBACK STEAKHOUSE, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands except per share data, unaudited, continued) Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 BASIC EARNINGS PER COMMON SHARE -------------- ------------ -------------- -------------- Income before cumulative effect of a change in accounting principle....... $ 0.47 $ 0.33 $ 1.55 $ 1.30 Cumulative effect of a change in accounting principle (net of taxes).... - - (0.06) - Net income.................................. $ 0.47 $ 0.33 $ 1.50 $ 1.30 BASIC WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING................... 76,771 76,786 77,040 76,622 DILUTED EARNINGS PER SHARE Income before cumulative effect of a change in accounting principle....... $ 0.46 $ 0.32 $ 1.50 $ 1.28 Cumulative effect of a change in accounting principle (net of taxes).... - - (0.06) - Net income.................................. $ 0.46 $ 0.32 $ 1.45 $ 1.28 DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING................... 78,576 78,524 79,673 78,182 See notes to unaudited consolidated financial statements. Page 5 of 45 OUTBACK STEAKHOUSE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, unaudited) Nine Months Ended September 30, 2002 2001 Cash flows from operating activities: -------- -------- Net income................................................. $ 115,228 $ 99,833 Adjustments to reconcile net income to cash provided by operating activities: Depreciation............................................. 53,936 45,528 Amortization............................................. 1,946 4,790 Provision for impaired assets and restaurant closings.... 4,284 2,047 Cumulative effect of a change in accounting principle.... 4,422 Minority partners' interest in consolidated partnerships' income..................... 29,895 23,902 Income from unconsolidated affiliates.................... (4,460) (3,086) Change in assets and liabilities: Decrease (increase) in inventories.................... 14,052 (3,845) Decrease (increase) in other current assets........... 3,171 (3,493) Decrease in goodwill, intangible assets and other assets........................................ 2,882 1,288 Increase in accounts payable, sales taxes payable, and accrued expenses........... 7,575 2,647 Decrease in unearned revenue.......................... (49,109) (45,231) Increase (decrease) in income taxes payable........... 29,970 (13,621) Increase in deferred income taxes..................... 13,483 1,122 Decrease in other long-term liabilities............... (825) (1,125) ----------- ----------- Net cash provided by operating activities............. 226,450 110,756 Cash flows used in investing activities: ----------- ----------- Purchase of investment securities........................ (257) Maturity of investment securities........................ 9,835 Capital expenditures..................................... (125,213) (143,645) Change in investments in and advances to unconsolidated affiliates............................. (4,470) (8,925) ----------- ----------- Net cash used in investing activities................. (120,105) (152,570) Cash flows from financing activities: ----------- ----------- Proceeds from issuance of long-term debt................. 5,305 16,758 Proceeds from minority partners' contributions........... 7,878 5,781 Distributions to minority partners....................... (42,365) (27,272) Repayments of long-term debt............................. (823) (9,575) Payments for purchase of treasury stock.................. (72,596) (23,313) Proceeds from reissuance of treasury stock............... 25,597 15,344 ----------- ----------- Net cash used in financing activities................. (77,004) (22,277) ----------- ----------- Net increase (decrease) in cash and cash equivalents....... 29,341 (64,091) Cash and cash equivalents at beginning of period........... 115,928 131,604 ----------- ----------- Cash and cash equivalents at end of period................. $ 145,269 $ 67,513 ======= ======= Supplemental disclosures of cash flow information: Cash paid for interest................................... $ 1,080 $ 582 Cash paid for income taxes............................... $ 14,001 $ 69,598 Supplemental disclosures of non-cash items: Assets/liabilities of businesses transferred under contractual arrangements............................... $ 22,000 Purchase of minority partners' interest.................. $ 7,876 4,161 See notes to unaudited consolidated financial statements. Page 6 of 45 OUTBACK STEAKHOUSE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared by Outback Steakhouse, Inc. (the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company, all adjustments (consisting only of normal recurring entries) necessary for the fair presentation of the Company's results of operations, financial position and cash flows for the periods presented have been included. Certain amounts shown in the 2001 consolidated financial statements have been reclassified to conform to the 2002 presentation. These reclassifications did not have an effect on total assets, total liabilities, stockholders' equity or net income. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. The December 31, 2001 consolidated balance sheet has been derived from the audited consolidated financial statements but does not include all of the disclosures required by generally accepted accounting principles. It is suggested that these financial statements be read in conjunction with the financial statements and financial notes thereto included in the Company's 2001 Annual Report to Stockholders. 2. Other Current Assets Other current assets consisted of the following (in thousands): September 30, December 31, 2002 2001 (unaudited) ------------- ------------ Deposits (including income tax deposits).. $ 2,324 $ 9,275 Accounts receivable....................... 8,050 7,710 Accounts receivable franchisees........... 3,024 3,560 Prepaid expenses.......................... 14,398 8,212 Other current assets...................... 380 2,590 ------------ -------------- $ 28,176 $ 31,347 ======= ========= Page 7 of 45 OUTBACK STEAKHOUSE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. Property, Fixtures and Equipment, Net Property, fixtures and equipment consisted of the following (in thousands): September 30, December 31, 2002 2001 (unaudited) ---------- ------------ Land.................................. $ 164,143 $ 158,314 Buildings & building improvements..... 435,923 382,793 Furniture & fixtures.................. 114,214 99,767 Equipment............................. 272,590 238,285 Leasehold improvements................ 198,631 185,623 Construction in progress.............. 30,077 35,464 Accumulated depreciation.............. (336,792) (287,181) ----------- ------------- $ 878,786 $ 813,065 ======= ======= 4. Goodwill and Other Intangible Assets, Net Goodwill and other intangible assets consisted of the following (in thousands): September 30, December 31, 2002 2001 (unaudited) -------------- -------------- Goodwill, net........................ $ 80,932 $ 80,074 Intangible assets, net (including liquor licenses)................... 16,210 14,379 ----------- ----------- $ 97,142 $ 94,453 ======= ======= "Intangible assets" included the following intangible assets subject to amortization (in thousands): September 30, December 31, 2002 2001 (unaudited) -------------- -------------- Non-compete/non-disclosure and related contractual agreements................. $ 13,039 $ 10,141 Accumulated amortization................. (6,202) (4,482) ----------- ----------- $ 6,837 $ 5,659 ======= ======= Aggregate amortization expense on the intangible assets subject to amortization was approximately $1,720,000 for the nine months ended September 30, 2002 and is estimated to be approximately $2,500,000 to $3,000,000 for each of the years ended December 31, 2002 through 2006. The net carrying amount of goodwill as of September 30, 2002 and December 31, 2001 was approximately $80,932,000 and $80,074,000, respectively. Page 8 of 45 OUTBACK STEAKHOUSE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. Other Assets Other assets consisted of the following (in thousands): September 30, December 31, 2002 2001 (unaudited) --------------- -------------- Other assets........................... $ 39,582 $ 42,885 Assets of business transferred under contractual arrangement.............. 13,565 15,500 Deferred license fee................... 20,175 19,000 ------------- ----------- $ 73,322 $ 77,385 ======= ======= 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 (referred to in some Company literature as Outback Sports). The licensing agreement transferred the right and license to use certain assets of these non-restaurant operations from the Company to the licensee. License fees payable over the term of the agreement total approximately $22,000,000 of which $20,175,000 is outstanding and is included in "Other Assets" in the Unaudited Consolidated Balance Sheet. In July 2002, the Company agreed to defer the July 31, 2002 scheduled payment of $1,125,000 and the November 30, 2002 scheduled payment of $375,000 for one year. During the third quarter of 2002, the licensee made a $325,000 payment towards the deferred amounts. The Company is currently negotiating with the licensee to alter the remaining payment schedule. The net book value of these assets is approximately $13,565,000 and has been reclassified from the line item entitled "Property, Fixtures and Equipment" to "Other Assets" in the Consolidated Balance Sheet. The corresponding long-term liability is included in the line item entitled "Other Long Term Liabilities" in the Consolidated Balance Sheet. The Company has deferred the gain associated with the transaction until such time as the amounts due under the licensing agreement are realized and has continued depreciating the assets. See Note 8 of Notes to Unaudited Consolidated Financial Statements. Page 9 of 45 OUTBACK STEAKHOUSE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. Other Assets (continued) Other Assets includes approximately $5,563,000 in principal and accrued interest on loans made to Fleming's Prime Steakhouse II, LLC ("FPSH II"), the operator of three unaffiliated Fleming's Prime Steakhouses, which the Company has agreed to purchase. The value of these restaurants approximates the Company's carrying value of the loan as of September 30, 2002. The Company and FPSH II have agreed that the conveyance of the restaurants to the Company will satisfy the outstanding balance. Other Assets also includes approximately $8,609,000 in loans to its operating partner in the Outback/Fleming's, LLC for its partner's share of capital to build new restaurants required beyond the initial $13,000,000 contributed by the Company. The Company expects to continue to make advances to its operating partner for the construction of new restaurants. The carrying value of the loan is exceeded by the value of the partners' interest in the partnership. 6. Long-term Debt Long-term debt consisted of the following (in thousands): September 30, December 31, 2002 2001 (unaudited) -------------- -------------- Revolving line of credit, interest at 2.39% and 3.67% at September 30, 2002 and December 31, 2001, respectively ................................ $10,000 $10,000 Other notes payable, uncollateralized, interest rates ranging from 3.55% to 6.75% at September 30, 2002 and 4.40% to 7.50% at December 31, 2001............................... 21,075 16,593 ------------ ---------- 31,075 26,593 Less current portion................................. 16,820 12,763 ------------ ---------- Long-term debt....................................... $14,255 $13,830 ======= ====== LONG-TERM DEBT The Company has an uncollateralized revolving line of credit that permits borrowing up to a maximum of $125,000,000 at 57.5 basis points over the 30, 60, 90 or 180 day London Interbank Offered Rate ("LIBOR") (1.71% to 1.82% at September 30, 2002 and 1.87% to 1.98% at December 31, 2001). At September 30, 2002 and December 31, 2001 the unused portion of the revolving line of credit was $115,000,000. The line includes a credit facility fee of 17.5 basis points and matures in December 2004. Page 10 of 45 OUTBACK STEAKHOUSE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. Long-term Debt (continued) The Company has a $15,000,000 uncollateralized line of credit bearing interest at rates ranging from 57.5 to 95.0 basis points over LIBOR. Approximately $3,850,000 and $4,350,000 of the line of credit was committed for the issuance of letters of credit at September 30, 2002 and December 31, 2001, respectively. The remaining $11,150,000 at September 30, 2002 is available to the company. The Company has notes payable with banks bearing interest at rates ranging from 6.5% to 6.75% to support the Company's Korean operations. As of September 30, 2002 and December 31, 2001, the outstanding balance was approximately $15,480,000 and $12,194,000, respectively. The notes mature at dates ranging from January 2003 to August 2003. DEBT GUARANTEES The Company is the guarantor of two uncollateralized lines of credit that permit borrowing of up to $20,000,000 for its franchisee operating Outback Steakhouses in Japan. At September 30, 2002 and December 31, 2001 the borrowings totaled approximately $15,167,000 and $8,215,000, respectively. (See further discussion in "Liquidity and Capital Resources" in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations".) The Company is the guarantor of an uncollateralized line of credit which permits borrowing of up to $35,000,000, maturing in December 2004, for its franchisee operating Outback Steakhouses in California. At September 30, 2002 and December 31, 2001, the outstanding balance was approximately $28,533,000 and $26,354,000, respectively. The Company is the guarantor of an uncollateralized line of credit which permits borrowing of up to a maximum of $24,500,000, maturing in December 2004, for its joint venture partner in the development of Roy's restaurants. At September 30, 2002 and December 31, 2001, the outstanding balance was approximately $19,691,000 and $19,427,000, respectively. The Company is the guarantor of bank loans made to certain franchisees operating Outback Steakhouse restaurants. At September 30, 2002 and December 31, 2001, the outstanding balance on these loans was approximately $233,000 and $437,000, respectively. The Company is the guarantor of up to approximately $9,445,000 of a $68,000,000 note for Kentucky Speedway in which the Company has a 22.22% equity interest and at which the Company operates catering and concession facilities. At September 30, 2002 and December 31, 2001, the outstanding balance on the note was approximately $68,000,000. Page 11 of 45 OUTBACK STEAKHOUSE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. Long-term Debt (continued) DEBT AND DEBT GUARANTEE SUMMARY The Company's contractual debt obligations and debt guarantees as of September 30, 2002 are summarized in the table below (in thousands): Current Long-term Total Portion Portion ------------- ------------ --------------- Debt........................... $ 31,075 $ 16,820 $ 14,255 Debt guarantees................ $ 89,178 $ 20,233 $ 68,945 Amount outstanding under debt guarantees................... $ 73,069 $ 15,400 $ 57,669 See "Liquidity and Capital Resources" in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations." 7. Accrued Expenses Accrued expenses consisted of the following (in thousands): September 30, December 31, 2002 2001 (unaudited) -------------- -------------- Accrued payroll and other compensation... $ 20,597 $ 19,207 Accrued insurance........................ 15,392 13,206 Accrued property taxes................... 9,843 6,970 Other accrued expenses................... 16,879 17,204 ----------- ----------- $ 62,711 $ 56,587 ======= ======= Page 12 of 45 OUTBACK STEAKHOUSE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8. Other Long Term Liabilities Other long term liabilities consisted of the following (in thousands): September 30, December 31, 2002 2001 (unaudited) ---------------- ---------------- Accrued insurance........................ $ 4,000 $ 4,000 Other deferred liability................. 19,675 20,500 --------- ----------- $ 23,675 $ 24,500 ======= ======= 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. License fees payable over the term of the agreement total approximately $22,000,000 of which $20,175,000 is outstanding. The Company has deferred the gain associated with the transaction until such time as the amounts due under the licensing agreement are realized. The corresponding long-term asset is included in the line item entitled "Other Assets." See Note 5 of Notes to Unaudited Consolidated Financial Statements. 9. Business Combinations In June 2002, the Company issued approximately 34,000 shares of Common Stock to one area operating partner to acquire its interest in nine Outback Steakhouses in Ohio and Pennsylvania. The acquisition was accounted for by the purchase method, and the related goodwill is included in the line item entitled "Goodwill, Net" in the Company's Unaudited Consolidated Balance Sheets. In April 2002, the Company exercised its option to convert its $5,300,000 preferred stock investment in its Hong Kong franchisee into ownership of three Outback Steakhouse restaurants formerly operated as franchises. The acquisition was accounted for by the purchase method. As part of the Company's realignment of its international operations, the Company issued approximately 194,000 shares of Common Stock in May 2002 to purchase the 20% interest in Outback Steakhouse International LP ("International") that it did not previously own. The acquisition was accounted for by the purchase method and the related goodwill is included in the line item entitled "Goodwill, Net" in the Company's Unaudited Consolidated Balance Sheets. See discussion in "Liquidity and Capital Resources" in Item 2, "Managements Discussion and Analysis of Financial Condition and Results of Operations". Approximately 50% of International's restaurants in which the Company has a direct investment are owned through a Cayman Island corporation. Page 13 of 45 OUTBACK STEAKHOUSE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 10. Recently Issued Financial Accounting Standards "Business Combinations" and "Goodwill and Other Intangible Assets" On June 30, 2001, the Financial Accounting Standards Board ("FASB") finalized Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting. With the adoption of SFAS No. 142 effective January 1, 2002, goodwill is no longer subject to amortization. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value-based test. Under the new rules, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged regardless of the acquirer's intent to do so. These intangible assets will be required to be amortized over their useful lives. In connection with the adoption of SFAS No. 142, the Company completed the transitional impairment testing of goodwill during the six months ended June 30, 2002. The adoption has been made effective as of the beginning of the Company's current fiscal year. The transitional impairment testing resulted in an initial goodwill impairment charge of approximately $4,422,000, net of taxes of approximately $2,199,000, during the six month period ended June 30, 2002. In accordance with SFAS No. 142, the initial impairment charge was recorded as a cumulative effect of a change in accounting principle in the Company's Consolidated Statements of Income for the six month period ended June 30, 2002. Page 14 of 45 OUTBACK STEAKHOUSE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 10. Recently Issued Financial Accounting Standards (continued) "Business Combinations" and "Goodwill and Other Intangible Assets" The following table represents net income and earnings per share for prior periods had SFAS No. 142 been in effect for those periods (in thousands except per share data, unaudited): Three months ended September 30, Nine months ended September 30, 2002 2001 2002 2001 -------------- -------------- -------------- -------------- Reported income before cumulative effect of a change in accounting principle............... $ 35,799 $ 25,400 $ 119,650 $ 99,833 Add back: Goodwill amortization, net of taxes..... - 1,001 - 2,955 Adjusted income before cumulative effect of ----------- ----------- ----------- ----------- a change in accounting principle................ 35,799 26,401 119,650 102,788 Cumulative effect of a change in accounting principle (net of taxes) ....................... - - (4,422) - ----------- ----------- ----------- ----------- Adjusted net income .............................. $ 35,799 $ 26,401 $ 115,228 $ 102,788 ======= ======= ======= ======= BASIC EARNINGS PER SHARE Reported income before cumulative effect of a change in accounting principle............... $ 0.47 $ 0.33 $ 1.55 $ 1.30 Add back: Goodwill amortization, net of taxes..... - 0.01 - 0.04 Adjusted income before cumulative effect of a change in accounting principle................ 0.47 0.34 1.55 1.34 Cumulative effect of a change in accounting principle (net of taxes) ....................... - - (0.06) - Adjusted net income............................... $ 0.47 $ 0.34 $ 1.50 $ 1.34 DILUTED EARNINGS PER SHARE Reported income before cumulative effect of a change in accounting principle............... $ 0.46 $ 0.32 $ 1.50 $ 1.28 Add back: Goodwill amortization, net of taxes..... - 0.01 - 0.04 Adjusted income before cumulative effect of a change in accounting principle................ 0.46 0.33 1.50 1.31 Cumulative effect of a change in accounting principle (net of taxes) ....................... - - (0.06) - Adjusted net income............................... $ 0.46 $ 0.33 $ 1.45 $ 1.31 Page 15 of 45 OUTBACK STEAKHOUSE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 10. Recently Issued Financial Accounting Standards (continued) "Accounting for the Impairment or Disposal of Long-Lived Assets" In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," was issued, replacing SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and portions of APB Opinion 30 "Reporting the Results of Operations." SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of and changes the criteria that would have to be met to classify an asset as held- for-sale. SFAS No. 144 retains the requirement of APB Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. SFAS No. 144 is effective January 1, 2002 and was adopted by the Company as of that date. The adoption of SFAS No. 144 did not have a material impact on the Company's financial condition or results of operations in the nine months ended September 30, 2002. "Accounting for Exit or Disposal Activities" In June 2002, the FASB voted in favor of issuing SFAS No. 146 "Accounting for Exit or Disposal Activities". SFAS No. 146 addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force (EITF) has set forth in EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". The scope of SFAS No. 146 also includes (1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred- compensation contract. SFAS No. 146 is effective January 1, 2003. 11. Subsequent Event On October 23, 2002, the Company announced that its Board of Directors declared the Company's first quarterly dividend of $0.12 per share of the Company's common stock. The dividend is payable December 6, 2002 to shareholders of record as of November 22, 2002. Page 16 of 45 OUTBACK STEAKHOUSE, INC. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations (unaudited) The following table sets forth, for the periods indicated, (i) the percentages which the items in the Company's Unaudited Consolidated Statements of Income bear to total revenues, or restaurant sales as indicated, and (ii) selected operating data: Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 REVENUES ------ ----- ------- ------ Restaurant sales.......................... 99.2% 99.1% 99.2% 99.1% Other revenues............................ 0.8 0.9 0.8 0.9 ------- ------ ------- ------- TOTAL REVENUES............................ 100.0 100.0 100.0 100.0 COSTS AND EXPENSES: ------- ------ ------- ------- Cost of sales (1) ...................... 36.7 39.2 36.9 38.5 Labor & other related (1) .............. 24.6 24.2 24.4 24.0 Other restaurant operating (1) ......... 20.8 20.4 20.2 19.9 Depreciation & amortization............. 3.3 3.3 3.2 3.2 General & administrative................ 3.7 3.6 3.7 3.7 Provision for impaired assets and restaurant closings................ 0.7 0.4 0.2 0.1 Contribution for "Dine Out for America". 1.3 0.4 Income from operations of unconsolidated affiliates............. (0.2) (0.2) (0.3) (0.2) Total costs and expenses............ 88.9 91.4 87.7 88.9 INCOME FROM OPERATIONS.................... 11.1 8.6 12.3 11.1 OTHER INCOME (EXPENSE), NET............... (0.2) (0.1) (0.1) (0.1) INTEREST INCOME (EXPENSE), NET............ 0.1 0.1 0.1 0.2 INCOME BEFORE ELIMINATION OF MINORITY PARTNERS' INTEREST AND INCOME TAXES........................ 11.0 8.6 12.2 11.2 ELIMINATION OF MINORITY PARTNERS' INTEREST................................ 1.5 1.2 1.7 1.5 INCOME BEFORE PROVISION FOR INCOME TAXES............................ 9.5 7.4 10.5 9.7 PROVISION FOR INCOME TAXES ............... 3.3 2.6 3.7 3.4 INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE........ 6.1 4.8 6.8 6.3 CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (NET OF TAXES) .... (0.3) NET INCOME ............................... 6.1% 4.8% 6.5% 6.3% (1) As a percentage of restaurant sales. Page 17 of 45 OUTBACK STEAKHOUSE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations (continued) Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 System-wide sales (millions of dollars): ------ ------ ------ ------ Outback Steakhouse restaurants Company owned.............................. $494 $461 $1,483 $1,390 Domestic franchised and development joint venture............................ 94 91 284 272 International franchised and development joint venture............................ 23 21 68 61 ------ ------ ------ ------ Total...................................... 611 573 1,835 1,723 ------ ------ ------ ------ Carrabba's Italian Grills Company owned.............................. 60 51 184 149 Development joint venture.................. 23 18 68 52 ------ ------ ------ ------ Total...................................... 83 69 252 201 ------ ------ ------ ------ Other restaurants Company owned.............................. 26 12 79 36 Franchised and development joint venture... 3 1 8 1 ------ ------ ------ ------ Total...................................... 29 13 87 37 ------ ------ ------ ------ System-wide total............................ $723 $655 $2,174 $1,961 ====== ====== ====== ====== Page 18 of 45 OUTBACK STEAKHOUSE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations (continued) September 30, 2002 2001 Number of restaurants (at end of the period): --------- --------- Outback Steakhouses Company owned.............................. 600 556 Domestic franchised and development joint venture.................................. 118 111 International franchised and development joint venture............................ 53 47 --- --- Total...................................... 771 714 --- --- Carrabba's Italian Grills Company owned.............................. 86 70 Development joint venture.................. 29 24 --- --- Total...................................... 115 94 Fleming's Prime Steakhouse and Wine Bars --- --- Company owned.............................. 14 7 Roy's --- --- Company owned.............................. 12 8 Franchised and development joint venture... 2 1 --- --- Total...................................... 14 9 Lee Roy Selmon's --- --- Company owned.............................. 1 1 Bonefish Grills --- --- Company owned.............................. 7 - Franchised and development joint venture... 2 - --- --- Total...................................... 9 - Cheeseburger in Paradise --- --- Company owned.............................. 1 - --- --- System-wide total............................ 925 825 === === Page 19 of 45 OUTBACK STEAKHOUSE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three months ended September 30, 2002 and 2001 (unaudited) Revenues. Restaurant sales increased by 10.5% to $579,677,000 during the third quarter of 2002 as compared with $524,360,000 in the same period in 2001. The increase was primarily attributable to the opening of new restaurants after September 30, 2001. The following table includes additional activities that influenced the changes in restaurant sales at domestic Company owned restaurants for the three months ended September 30, 2002 and 2001. Three Months Ended September 30, 2002 2001 Average unit volumes(weekly) for -------------- ---------------- restaurants opened for one year or more: Outback Steakhouses.................. $ 64,253 $ 64,684 Carrabba's Italian Grills............ $ 56,831 $ 56,665 Average unit volumes(weekly) for restaurants opened for less than one year: Outback Steakhouses.................. $ 55,829 $ 56,984 Carrabba's Italian Grills............ $ 57,854 $ 65,192 Operating weeks Outback Steakhouses.................. 7,365 6,913 Carrabba's Italian Grills............ 1,059 891 Menu price increases Outback Steakhouses.................. 2.1% 2.7% Carrabba's Italian Grills............ 1.4% 4.6% Year to year percentage change: Same-store sales (stores open 18 months or more): Outback Steakhouses.................. 0.0% (2.3%) Carrabba's Italian Grills............ (0.3%) 3.6% Other revenues, consisting primarily of initial franchise fees and royalties, decreased by $115,000 to $4,570,000 during the third quarter of 2002 as compared with $4,685,000 in the same period in 2001. The decrease was attributable to lower initial franchise fees from international franchise operations partially offset by higher royalties from additional stores operated as franchises during the third quarter of 2002 compared with the same period in 2001. The decrease was also attributable to the Company's decision to allow international franchisees in certain markets, including Costa Rica, the Dominican Republic, Indonesia, Mexico, Malaysia, Singapore, Thailand, the United Kingdom and Venezuela to spend the royalties due to the Company on additional advertising to increase brand awareness and penetration in new markets. Costs and expenses. Costs of sales, consisting of food and beverage costs, as a percentage of restaurant sales, decreased in the third quarter of 2002 to 36.7% of restaurant sales as compared with 39.2% in the same period in 2001. The decrease was attributable to commodity cost decreases for beef, ribs, dairy and shrimp and seafood, partially offset by higher produce costs. The decrease was also attributable to higher menu prices at both Outback Steakhouse and Carrabba's Italian Grills and a shift in the proportion of sales and cost of sales associated with non Outback Steakhouse restaurants which operate at lower cost of goods sold levels than Outback Steakhouse. Page 20 of 45 OUTBACK STEAKHOUSE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three months ended September 30, 2002 and 2001 (continued) Labor and other related expenses include all direct and indirect labor costs incurred in restaurant operations. Labor expenses increased as a percentage of restaurant sales by 0.4% to 24.6% in the third quarter of 2002 as compared with 24.2% in the same period in 2001. The increase resulted from higher employee health insurance costs, higher hourly employee bonuses, lower average unit volumes at Outback Steakhouse and Carrabba's Italian Grill and an increase in the proportion of new restaurant formats (Fleming's, Roy's and Selmon's) and international Outback Steakhouses which have higher average labor costs than domestic Outback Steakhouses and Carrabba's Italian Grills. Other restaurant operating expenses include all other unit-level operating costs, the major components of which are operating supplies, rent, repairs and maintenance, advertising expenses, utilities, pre-opening costs and other occupancy costs. A substantial portion of these expenses are fixed or indirectly variable. These costs increased by 0.4% of restaurant sales to 20.8% in the third quarter of 2002, as compared with 20.4% in the same period in 2001. The increase was attributable to increased advertising expense and to lower average unit volumes at Outback Steakhouse and Carrabba's Italian Grill. The increase was also attributable to 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. The increase was partially offset by lower preopening costs as a percentage of restaurant sales in the third quarter of 2002 compared with the third quarter of 2001. Depreciation and amortization costs were 3.3% of total revenues in the third quarter of both 2002 and 2001. The impact of reduced amortization expense due to the adoption of SFAS No. 142 "Goodwill and Other Intangible Assets" was offset by higher depreciation costs. The increase in depreciation costs resulted primarily from additional depreciation related to new unit development and to higher depreciation costs for the new restaurant formats which have higher average construction costs than Outback Steakhouse and Carrabba's Italian Grills. Slightly lower average unit volumes at Outback Steakhouse also contributed to depreciation costs increasing as a percentage of restaurant sales. General and administrative costs increased by $2,821,000 to $21,656,000 in the third quarter of 2002 compared with $18,835,000 during the same period in 2001. 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 and Bonefish Grills as well as costs associated with the development of new restaurant formats. Page 21 of 45 OUTBACK STEAKHOUSE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three months ended September 30, 2002 and 2001 (continued) Provision for impaired assets and restaurant closings. In accordance with SFAS No. 144, in the third quarter of 2002 the Company recorded a pretax charge to earnings of $4,284,000 which is primarily related to the closing of one Roy's restaurant during the quarter and to the write-down of the carrying value of three Outback Steakhouses and one Carrabba's Italian Grill. (Refer to Impairment of Long-lived Assets measurement discussion in the Critical Accounting Policies section of Management's Discussion and Analysis of Financial Condition and Results of Operations). In the third quarter of 2001, the Company recorded a pretax charge to earnings of $2,047,000 which is primarily related to the costs associated with the closing of the Company's two Zazarac restaurants. Contribution for "Dine Out for America". This line item represents the Company's commitment, announced on September 26, 2001, to contribute 100% of its sales proceeds from Thursday October 11, 2001 to the victims and families of the victims of the terrorist attacks of September 11, 2001. The Company's sales on October 11, 2001 for the "Dine Out for America" fund raising event totaled approximately $7,000,000 and accordingly the Company has recorded a pretax charge to earnings of $7,000,000 during three months ended September 30, 2001. Income from operations of unconsolidated affiliates represents the Company's portion of the income from restaurants operated as development joint ventures. Income from the development joint ventures was $1,359,000 during the third quarter of 2002 as compared with income of $1,108,000 during the same period in 2001. This increase was attributable to additional stores operating as development joint ventures in the third quarter of 2002 and to an improvement in the operating results of these restaurants similar to that seen in the operating results of Company owned restaurants during the third quarter of 2002. Income from operations. As a result of the increase in revenues, the changes in the relationship between revenues and expenses discussed above and the opening of new restaurants, income from operations increased by $19,727,000 to $65,095,000 in the third quarter of 2002 as compared with $45,368,000 in the same period in 2001. Other income (expense), net. Other income (expense) includes the net of revenues and expenses from non-restaurant operations. Net other expense was $1,412,000 during the third quarter of 2002 as compared with net other expense of $608,000 in the same period in 2001. The increase in net other expense was the result of a decrease of approximately $880,000 in the cash surrender value of certain life insurance policies during the third quarter of 2002. The insurance policies are in place on the lives of certain executives to fund buy/sell agreements with the executives' estates. The agreements provide for the Company to use the life insurance proceeds to buy shares of the Company's stock at the current market price from the executives' estate for estate tax payment purposes while maintaining share price stability. The increase in net other expense is also attributable to the Company's portion of the losses associated with the operation of Kentucky Speedway in which the Company has a 22.22% equity interest and at which the Company operates catering and concession facilities. Page 22 of 45 OUTBACK STEAKHOUSE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three months ended September 30, 2002 and 2001 (continued) Interest income (expense), net. Interest income, net, was $443,000 during the third quarter of 2002 as compared with interest income, net, of $684,000 in the same period in 2001. The decrease in interest income resulted from lower interest rates on short term investments during the third quarter of 2002 compared with the same period in 2001 offset by increased interest expense due to higher average debt balances on borrowings used to support Outback Steakhouse's international operations during the third quarter of 2002 compared with the third quarter of 2001. Elimination of minority partners' interests. The allocation of minority partners' income included in this line item represents the portion of income from operations included in consolidated operating results attributable to the ownership interests of restaurant managers and area operating partners in Company owned restaurants and the ownership interests in certain other restaurants in which the Company has a controlling interest. As a percentage of revenues, these allocations were 1.5% and 1.2% during the quarters ended September 30, 2002 and 2001, respectively. The increase in the ratio is the result of an increase in overall restaurant operating margins and improvement in the performance of new format restaurants which have a higher percentage of minority interest than the Company's older formats. Provision for income taxes. The provision for income taxes in the third quarter of both 2002 and 2001 reflected the expected income taxes due at federal statutory rates and state income tax rates, net of the federal benefit. The effective income tax rate was 35.2% during the third quarter of 2002 and 2001. Approximately 50% of the Company's international restaurants in which the Company has a direct investment are owned through a Cayman Island corporation. Net income and earnings per share. Net income for the third quarter of 2002 was $35,799,000 as compared with $25,400,000 in the same period in 2001. Basic earnings per share increased to $0.47 during the third quarter of 2002 as compared with $0.33 for the same period in 2001. Diluted earnings per share increased to $0.46 during the third quarter of 2002 as compared with $0.32 for the same period in 2001. Page 23 of 45 OUTBACK STEAKHOUSE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Nine months ended September 30, 2002 and 2001 (unaudited) Revenues. Restaurant sales increased by 10.8% to $1,745,654,000 during the first nine months of 2002 as compared with $1,575,323,000 in the same period in 2001. The increase in restaurant sales was primarily attributable to the opening of new restaurants after September 30, 2001. The following table includes additional activities that influenced the changes in restaurant sales at domestic Company owned restaurants for the nine months ended September 30, 2002 and 2001. Nine Months Ended September 30, 2002 2001 Average unit volumes(weekly) for ------------- ---------------- restaurants opened for one year or more: Outback Steakhouses.................... $ 66,024 $ 66,830 Carrabba's Italian Grills.............. $ 60,733 $ 60,218 Average unit volumes(weekly) for restaurants opened for less than one year: Outback Steakhouses.................... $ 57,804 $ 61,248 Carrabba's Italian Grills.............. $ 62,167 $ 65,551 Operating weeks Outback Steakhouses.................... 21,602 20,241 Carrabba's Italian Grills.............. 3,031 2,473 Menu price increases Outback Steakhouses.................... 1.3% 2.9% Carrabba's Italian Grills.............. 0.9% 4.8% Year to year percentage change: Same-store sales (stores open 18 months or more): Outback Steakhouses.................... (0.5%) 0.7% Carrabba's Italian Grills.............. 1.4% 6.9% Other revenues, consisting of initial franchise fees and royalties, decreased by $37,000 to $13,782,000 during the first nine months of 2002 as compared with $13,819,000 in the same period in 2001. The decrease was attributable to lower initial franchise fees from international franchise operations partially offset by higher royalties from additional stores operated as franchises during the first nine months of 2002 compared with the same period in 2001. The decrease was also attributable to the Company's decision to allow international franchisees in certain markets, including Costa Rica, the Dominican Republic, Indonesia, Mexico, Malaysia, Singapore, Thailand, the United Kingdom and Venezuela to spend the royalties due to the Company on additional advertising to increase brand awareness and penetration in new markets. Page 24 of 45 OUTBACK STEAKHOUSE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Nine months ended September 30, 2002 and 2001 (continued) Costs and expenses. Cost of sales as a percentage of restaurant sales, decreased by 1.6% to 36.9% in the first nine months of 2002 as compared with 38.5% in the same period in 2001. The decrease was attributable to commodity cost decreases for beef, ribs, butter and seafood partially offset by higher produce costs. The decrease was also attributable to higher menu prices at both Outback Steakhouse and Carrabba's Italian Grills and a shift in the proportion of sales and cost of sales associated with the Company's non Outback Steakhouse restaurants which operate at lower cost of goods sold levels than Outback Steakhouse. Labor and other related expenses increased as a percentage of restaurant sales by 0.4% to 24.4% in the first nine months of 2002 as compared with 24.0% in the same period in 2001. The increase resulted from higher employee health insurance costs, higher hourly employee bonuses, lower average unit volumes at Outback Steakhouse and an increase in the proportion of new restaurant formats and international Outback Steakhouses which have higher average labor costs than domestic Outback Steakhouses and Carrabba's Italian Grills. Other restaurant operating expenses increased by 0.3% of restaurant sales to 20.2% in the first nine months of 2002 as compared with 19.9% in the same period in 2001. The increase was attributable to higher insurance costs, lower average unit volumes for Outback Steakhouse and 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. The increase was partially offset by lower restaurant preopening costs, lower natural gas costs and higher average unit volumes for Carrabba's Italian Grills, which reduced the fixed and indirectly variable costs as a percentage of restaurant sales. Depreciation and amortization costs were 3.2% of total revenues in the first nine months of 2002 and 2001. The impact of reduced amortization expense due to the adoption of SFAS No. 142 "Goodwill and Other Intangible Assets" was offset by higher depreciation costs. The increase in depreciation costs resulted primarily from additional depreciation related to new unit development and to higher depreciation costs for new restaurant formats which have higher average construction costs than Outback Steakhouse and Carrabba's Italian Grills. Slightly lower average unit volumes at Outback Steakhouse also contributed to depreciation costs increasing as a percentage of restaurant sales. General and administrative costs increased by $6,417,000 to $64,992,000 during the first nine months of 2002 as compared to with $58,575,000 during the same period in 2001. 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 and Bonefish Grills as well as costs associated with the development of new restaurant formats. Page 25 of 45 OUTBACK STEAKHOUSE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Nine months ended September 30, 2002 and 2001 (continued) Provision for impaired assets and restaurant closings. In accordance with SFAS No. 144, in the third quarter of 2002 the Company recorded a pretax charge to earnings of $4,284,000 which is primarily related to the closing of one Roy's restaurant during the quarter and to the write-down of the carrying value of three Outback Steakhouses and one Carrabba's Italian Grill. (Refer to Impairment of Long-lived Assets measurement discussion in the Critical Accounting Policies section of Management's Discussion and Analysis of Financial Condition and Results of Operations). In the third quarter of 2001, the Company recorded a pretax charge to earnings of $2,047,000 which is primarily related to the costs associated with the closing of the Company's two Zazarac restaurants. Contribution for "Dine Out for America". This line item represents the Company's commitment, announced on September 26, 2001, to contribute 100% of its sales proceeds from Thursday October 11, 2001 to the victims and families of the victims of the terrorist attacks of September 11, 2001. The Company's sales on October 11, 2001 for the "Dine Out for America" fund raising event totaled approximately $7,000,000 and accordingly the Company has recorded a pretax charge to earnings of $7,000,000 during three months ended September 30, 2001. Income from operations of unconsolidated affiliates was $4,460,000 in the first nine months of 2002 as compared with income of $3,086,000 in the same period in 2001. This increase was attributable to additional stores operating as development joint ventures in the first nine months of 2002 and to an improvement in the operating results of these restaurants similar to that seen in the operating results of Company owned restaurants during the first nine months of 2002. Income from operations. As a result of the increase in revenues, the changes in the relationship between revenues and expenses discussed above and the opening of new restaurants, income from operations increased by $38,753,000, to $215,841,000 in the first nine months of 2002 as compared with $177,088,000 in the same period in 2001. Other income (expense), net. Other income (expense) includes the net of revenues and expenses from non-restaurant operations. Net other expense was $2,299,000 during the first nine months of 2002 as compared with net other expense of $1,568,000 in the same period in 2001. The increase in the net expense partially resulted from a decrease of approximately $1,757,000 in the cash surrender values of certain life insurance policies during the nine months ended September 30, 2002. The increase in net expense is also attributable to the Company's portion of increased losses associated with the operation of Kentucky Speedway, partially offset by a gain of approximately $500,000 on the sale of an airplane during the first nine months of 2002 compared with the first nine months of 2001. Page 26 of 45 OUTBACK STEAKHOUSE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Nine months ended September 30, 2002 and 2001 (continued) Interest income (expense), net. Interest income, net was $999,000 during the first nine months of 2002 as compared with interest income, net of $2,445,000 in the same period in 2001. The decrease in interest income resulted from lower interest rates on short term investments during the first nine months of 2002 compared with the same period in 2001 offset by increased interest expense due to higher average debt balances on borrowings used to support Outback Steakhouses international operations during the first nine months of 2002 compared with the same period in 2001. Elimination of minority interests. As a percentage of revenues, these allocations were 1.7% and 1.5% during the nine months ended September 30, 2002 and 2001, respectively. The increase in the ratio is the result of an increase in overall restaurant operations margins and improvement in the performance of new format restaurants. Provision for income taxes. The provision for income taxes in the first nine months of both 2002 and 2001 reflected the expected income taxes due at federal statutory rates and state income tax rates, net of the federal benefit. The effective income tax rate was 35.2% during the first nine months of 2002 and 2001. Approximately 50% of the Company's international restaurants in which the Company has a direct investment are owned through a Cayman Island corporation. Cumulative effect of a change in accounting principle. The cumulative effect of a change in accounting principle represents the effect of the adoption of the transitional impairment provision of SFAS No. 142, "Goodwill and Other Intangible Assets". The adoption has been made effective as of the beginning of the Company's current fiscal year. The cumulative effect of the change in accounting principle was approximately $4,422,000, net of taxes of approximately $2,199,000, during the nine month period ended September 30, 2002. Basic and diluted earnings per share were both reduced by $0.06 due to the impact of the change in accounting principle. Net income and earnings per common share. Net income for the first nine months of 2002 was $115,228,000 as compared with pro forma net income of $99,833,000 in the same period in 2001. Basic earnings per share increased to $1.50 during the first nine months of 2002, as compared with $1.30 in the same period in 2001. Diluted earnings per share increased to $1.45 during the first nine months of 2002, as compared with $1.28 in the same period in 2001. Page 27 of 45 OUTBACK STEAKHOUSE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources The following table presents a summary of the Company's cash flows from operating, investing and financing activities for the periods indicated (in thousands). Year Ended Nine Months Ended December 31, September 30, September 30, 2001 2002 2001 ------------- ------------- ------------ Net cash provided by operating activities..................... $ 228,821 $ 226,450 $ 110,756 Net cash used in investing activities..................... (233,662) (120,105) (152,570) Net cash used in financing activities..................... (10,835) (77,004) (22,277) ---------- ----------- --------- Net (decrease) increase in cash and cash equivalents..... $ (15,676) $ 29,341 $ (64,091) ======== ======== ======== The Company requires capital principally for the development of new restaurants, remodeling of older restaurants and investment in technology. The Company also requires capital to pay dividends to common stockholders (refer to additional discussion in the Dividend section of Management's Discussion and Analysis of Financial Condition and Results of Operation). Capital expenditures totaled approximately $201,039,000 for year ended December 31, 2001 and approximately $125,213,000 and $143,645,000 during the first nine months of 2002 and 2001, respectively. The Company either leases its restaurants under operating leases for periods ranging from five to thirty years (including renewal periods) or purchases free standing restaurants where it is cost effective. During 2001, the Company entered into an agreement with the founders of Bonefish Grill ("Bonefish") to develop and operate Bonefish restaurants. Under the terms of the Bonefish agreement, the Company purchased the Bonefish restaurant operating system for approximately $1,500,000. In addition, the interest in the three existing Bonefish Grills was contributed to a partnership formed between the Bonefish founders and the Company, and, in exchange, the Company committed to the first $7,500,000 of future development costs of which approximately $3,909,000 has been expended as of September 30, 2002. The Company entered into an agreement to develop and operate Fleming's Prime Steakhouse and Wine Bars ("Fleming's"). Under the terms of the Fleming's agreement, the Company purchased three existing Fleming's for $12,000,000 and committed to the first $13,000,000 of future development costs, all of which had been invested as of December 31, 2001. During 1999, the Company entered into an agreement to develop and operate Roy's Restaurants. Under the terms of the Roy's agreement, the Company paid a consulting fee of approximately $1,800,000 to Roy Yamuguchi, founder of Roy's. Refer to the Debt Guarantees section of Management's Discussion and Analysis of Financial Condition and Results of Operation. Page 28 of 45 OUTBACK STEAKHOUSE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources (continued) The Company has formed joint ventures to develop Outback Steakhouses in Brazil and the Philippines. During the second quarter of 2001, the Company purchased three Outback Steakhouses in Puerto Rico which had been previously operated as franchises and will also develop future Company owned Outback Steakhouses in Puerto Rico. The Company is also developing Company owned restaurants internationally in Korea and Hong Kong. In connection with the realignment of the Company's international operations, the Company expects to merge the interests of its franchisee operating restaurants in Japan into a new Japanese corporation which will be majority owned by the Company and which will have responsibility for the future development of Outback Steakhouse restaurants in Japan. As part of the realignment, the Company expects to become directly liable for the debt which it now guarantees, which totaled approximately $15,167,000, with a potential maximum of $20,000,000, as of September 30, 2002, referred to above and in Note 5 of Notes to Unaudited Consolidated Financial Statements. As part of this transaction, the Company also expects to invest approximately $2,000,000 in equity in addition to the assumption of the bank debt. LONG TERM DEBT At September 30, 2002, the Company had two uncollateralized lines of credit totaling $140,000,000. Approximately $3,850,000 is committed for the issuance of letters of credit required by insurance companies that underwrite the Company's workers compensation insurance. As of September 30, 2002, the Company had borrowed $10,000,000 on the line of credit to finance the development of new restaurants. The Company expects that its capital requirements through the end of 2002 will be met by cash flows from operations and, to the extent needed, advances on its line of credit. The revolving line of credit contains certain restrictions and conditions as defined in the agreement which requires the Company to maintain net worth of $563,515,000 as of September 30, 2002, a fixed charge coverage ratio of 3.5 to 1.0, and a maximum total debt to EBITDA ratio of 2.0 to 1.0. At September 30, 2002, the Company was in compliance with all of the above debt covenants. See Note 5 of Notes to Unaudited Consolidated Financial Statements. The Company has notes payable with banks bearing interest at rates ranging from 6.5% to 6.75% to support the Company's Korean operations. As of September 30, 2002, the outstanding balance was approximately $15,480,000. DEBT GUARANTEES The Company is the guarantor of two uncollateralized lines of credit that permit borrowing of up to $20,000,000 for its franchisee operating Outback Steakhouses in Japan. At September 30, 2002 the borrowings totaled approximately $15,167,000. Page 29 of 45 OUTBACK STEAKHOUSE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources (continued) The Company is the guarantor of an uncollateralized line of credit that permits borrowing of up to $35,000,000 for its franchisee operating Outback Steakhouses in California. At September 30, 2002 the balance on the line of credit was approximately $28,533,000. 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 in the development of Roy's restaurants. At September 30, 2002, the outstanding balance was approximately $19,691,000. The Company is the guarantor of bank loans made to certain franchisees operating Outback Steakhouses. At September 30, 2002, the outstanding balance on the loans was approximately $233,000. The Company is the guarantor of up to approximately $9,445,000 of a $68,000,000 note for Kentucky Speedway ("Speedway") in which the Company has a 22.2% equity interest and at which the Company operates catering and concession facilities. At September 30, 2002 the outstanding balance on the note was approximately $68,000,000. The Company's investment is included in the line item entitled "Investments In and Advances to Unconsolidated Affiliates". Speedway has not yet reached its operating break-even point. Accordingly, the Company has made two additional working capital contributions, $667,000 in December 2001 and $444,000 in July 2002, in addition to its original investment. The Company anticipates that it may need to make additional contributions for its pro rata portion of future losses, if any. The Company is not aware of any non-compliance with the underlying terms of the borrowing agreements for which it provides a guarantee that would result in the Company having to perform in accordance with the terms of the guarantee. DEBT AND DEBT GUARANTEE SUMMARY The Company's contractual debt obligations, debt guarantees and commitments as of September 30, 2002 are summarized in the table below (in thousands): Current Long-term Total Portion Portion --------- ----------- ------------ Debt....................... $31,075 $ 16,820 $ 14,255 Debt guarantees............ $89,178 $ 20,233 $ 68,945 Amount outstanding under debt guarantees.......... $73,069 $ 15,400 $ 57,669 Commitments................ $ 3,591 $ 3,591 Page 30 of 45 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, the Company's Board of Directors authorized a program to repurchase up to 4,000,000 shares of the Company's Common Stock. The timing, price, quantity and manner of the purchases will be made at the discretion of management and will depend upon market conditions. In addition, the Board of Directors also authorized a program to repurchase shares on a regular basis to offset shares issued as a result of stock option exercises. During the period from the program authorization date through September 30, 2002, approximately 2,825,000 shares of the Company's Common stock have been issued as the result of stock option exercises. The Company will fund the repurchase program with available cash and bank credit facilities. As of September 30, 2002, under these authorizations the Company has repurchased approximately 5,543,000 shares of its Common Stock for approximately $152,461,000. Subsequent to September 30, 2002, the Company has repurchased approximately 337,000 shares of its Common Stock for approximately $9,053,000. DIVIDEND On October 23, 2002, the Company's Board of Directors declared a quarterly dividend of $0.12 for each share of the Company's common stock. The dividend is payable December 6, 2002 to shareholders of record as of November 22, 2002. At the current dividend rate, the annual dividend payment is expected to be between $35,000,000 and $40,000,000 depending on the shares outstanding during the respective quarters. The Company intends to pay the dividend with cash flow from operations. OTHER See Notes 5 and 8 of Notes to Unaudited Consolidated Financial Statements for discussion of the Company's $22,000,000 licensing agreement for use of the assets of some of its non-restaurant operations. Page 31 of 45 OUTBACK STEAKHOUSE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's 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 the Company 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 (see Note 1 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K). The Company bases its 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. The Company's significant accounting policies are described in Note 1 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K. The Company considers the following policies to be the most critical in understanding the judgments that are involved in preparing its financial statements. Property, Fixtures and Equipment Property, fixtures and equipment are recorded at cost. Depreciation is computed on the straight-line basis over the following estimated useful lives: Buildings and building improvements... 20 to 31.5 years Furniture and fixtures................ 7 years Equipment............................. 2 to 15 years Leasehold improvements................ 5 to 20 years The Company's accounting policies regarding property, fixtures and equipment include certain management judgments and projections regarding the estimated useful lives of these assets and what constitutes increasing the value and useful life of existing assets. These estimates, judgments and projections may produce materially different amounts of depreciation expense than would be reported if different assumptions were used. Page 32 of 45 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 The Company assesses 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. 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 the Company 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 the Company assesses the ongoing expected cash flows and carrying amounts of its long-lived assets, these factors could cause the Company to realize a material impairment charge. Insurance Reserves The Company self-insures a significant portion of expected losses under its workers compensation, general liability, health and property insurance programs. The Company purchases insurance for individual claims that exceed the amounts listed in the following table: Workers Compensation.......... $ 250,000 General Liability............. $ 500,000 Health........................ $ 230,000 Property damage............... $ 5,000,000 The Company records a liability for all unresolved claims and for an estimate of incurred but not reported claims at the anticipated cost to the Company based on estimates provided by a third party administrator and insurance company. The Company's 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. Page 33 of 45 OUTBACK STEAKHOUSE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES AND ESTIMATES (continued) Revenue Recognition The Company records revenues for normal recurring sales upon the performance of services. Revenues from the sales of franchises are recognized as income when the Company has substantially performed all of its material obligations under the franchise agreement. Continuing royalties, which are a percentage of net sales of franchised restaurants, are accrued as income when earned. Unearned revenues primarily represent the Company's liability for gift certificates which have been sold but not yet redeemed and are recorded at the anticipated redemption value. When the gift certificates are redeemed, the Company recognizes restaurant sales and reduces the related deferred liability. Principles of Consolidation The consolidated financial statements include the accounts and operations of the Company and affiliated partnerships in which the Company is a general partner and owns a controlling interest. All material balances and transactions have been eliminated. The unconsolidated affiliates are accounted for using the equity method. OUTLOOK The following discussion of the Company's 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 the Company's expectations or beliefs concerning future events and may be identified by words such as "believes," "anticipates," "expects," "plans," "should," "estimates" and similar expressions. The Company's 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 forward-looking statements in the section entitled "Cautionary Statement" below. The results of operations for the 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 Operations in its Annual Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 2001, the Company provided information regarding the outlook for its businesses in 2002 and factors that may affect the Company's financial results for that year. Page 34 of 45 OUTBACK STEAKHOUSE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OUTLOOK (continued) In the Outlook portion of Management's Discussion and Analysis of Financial Condition and Results of Operations in its Quarterly Report to the Securities and Exchange Commission on Form 10-Q for the quarter ended March 31, 2002, the Company reported that average unit volumes for its Outback Steakhouse restaurants ("Outback") had decreased by approximately 2.1% during the quarter as compared with the same quarter a year ago and that to the extent to which average unit volume trends remained weaker than expected, the Company's revenues and operating results for the remainder of 2002 may be affected. In the Outlook portion of Management's Discussion and Analysis of Financial Condition and Results of Operations in its Quarterly Report to the Securities and Exchange Commission on Form 10-Q for the quarter ended June 30, 2002, the Company reported that average unit volumes for its Outback Steakhouse restaurants ("Outback") had decreased by approximately 1.6% and that average unit volumes for Carrabba's Italian Grills ("Carrabba's) increased by 2.4% during the quarter as compared with the same quarter a year ago and that to the extent to which average unit volume trends remained weaker than expected, the Company's revenues and operating results for the remainder of 2002 may be affected. The remaining paragraphs in this Outlook section update the information provided in the two Forms referenced above and the Company recommends that this section be read in conjunction with those Outlook sections. During the three month period ended September 30, 2002, as compared with the same period a year ago, average unit volumes for Outback declined by approximately 0.9% and average unit volumes for Carrabba's Italian Grills ("Carrabba's") decreased by approximately 1.3%. Results for both formats were below those anticipated in the Company's comments in Form 10-K referenced above. In an attempt to reverse the negative trend at Outback, a price increase of approximately 1.8% was implemented in mid May 2002 and the Company increased its planned 2002 television advertising expenditures by $5.4 million. The additional advertising began in September. Although the effect of these plans cannot be accurately forecast, the Company set a goal of achieving positive average unit volume gains at Outback for the second half of 2002 of one to two percent. As a result of the decline in average unit volumes for Carrabba's, the Company is now anticipating gains of only one to two percent for the last quarter of 2002. To the extent to which these goals are not met and negative sales trends continue, the Company's revenues and operating results for the full year may fall short of its original objectives. During the quarter ended September 30, 2002, the Company benefited from lower than expected commodity costs for baby back ribs, shrimp, fresh fish and dairy products. As a result of lower commodity costs and the effect of the price increase discussed above, the Company now expects cost of goods sold as a percentage of restaurant sales for the full year to be 90 to 110 basis points better than originally expected and 50 to 60 basis points better than the amount expected as stated in Form 10-Q for the quarter ended June 30, 2002. Page 35 of 45 OUTBACK STEAKHOUSE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OUTLOOK(continued) Because of lower than planned average unit volumes, through the first three quarters of the year labor costs as a percentage of restaurant sales were 10 to 20 basis points higher than expected. If the steps taken to grow average unit volumes in Outback are successful, labor cost ratios for the last quarter of 2002 should be more in line with the guidance given in Form 10-K referenced above. If the Company's steps do not achieve their targeted objectives, labor cost ratios for the full year will be higher than originally planned. The Company has not received the benefit it originally expected from a decline in natural gas costs. Accordingly, the Company is now planning for restaurant operating expenses as a percentage of restaurant sales for the last quarter of the year to be 20 to 30 basis points higher than originally expected. The Company is now planning for the last quarter of 2002 for all other expense ratio variances to be comparable to those experienced in and reported for the first three quarters of 2002. Future Operating Results. As of the date of this report substantial uncertainty exists as to the strength of consumer spending as a result of the economic downturn. The Company's revenue growth expectations summarized in the following paragraph assume that current spending trends do not worsen in the fourth quarter of 2002 or fiscal 2003. The Company's revenues and financial results in 2003 could vary significantly depending upon consumer and business spending trends. 2003 Revenue. The Company plans to grow revenues in 2003 by opening additional restaurants and increasing comparable store sales and average unit volumes in all brands. The Company's expansion plans are summarized in this section. Based upon current economic conditions, the Company is currently planning for average unit volumes for Outback to increase by approximately 1% to 2% during 2003 compared with 2002. At present, the Company is not planning on any price increases during 2003 for Outback Steakhouse. However, the Company will reevaluate Outback menu pricing periodically and may change prices as economic and commodity conditions dictate. The Company is currently planning for average unit volumes for Carrabba's Italian Grills to increase by approximately 1% to 2% during 2003. The Company is not planning any price increases during 2003 for Carrabba's Italian Grills. However, the Company will reevaluate Carrabba's menu pricing periodically and may change prices as economic and commodity conditions dictate. The Company is also currently planning for average unit volumes to increase by approximately 3% to 4% for Fleming's Prime Steakhouse, 1% to 2% for Roy's and 1% to 2% for Bonefish Grill. Page 36 of 45 OUTBACK STEAKHOUSE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OUTLOOK(continued) 2003 Cost of Revenue. The Company is anticipating favorable pork rib pricing versus 2002 as it continues to use less expensive domestic ribs. The Company has also entered into contracts to secure its butter and cheese supplies for all of 2003 at a price that is slightly favorable to the average price in 2002. Cost of revenue is also expected to decrease in 2003 as new format restaurants are developed that have a lower cost of revenue as compared with Outback and Carrabba's. The Company expects the favorable commodities and brand mix to be partially offset by unfavorable potato and onion pricing. Although the total change in food cost is subject to several factors, such as the mix of new restaurants, commodity availability and usage, and price fluctuations in commodities which the Company does not have purchase contracts, the current expectation for the Company is for a decrease of approximately 0.1% to 0.3% of sales for the full year. 2003 Labor Costs. During the last few years, the Company has experienced significant wage pressure resulting from a tight labor market. The Company expects the upward wage pressure to continue during 2003 but at a lower rate than 2002. The Company expects that as more of the new format restaurants (Roy's, Fleming's and Selmon's) are opened, that labor costs as a percentage of restaurant sales will increase because the labor costs as a percentage of sales at the new restaurant formats run at a higher rate than at Outback and Carrabba's. In addition, higher employee health insurance cost will also continue the upward pressure on labor costs as a percentage of restaurant sales. As a result, the Company is currently planning for its labor costs to increase by 0.2% to 0.3% of restaurant sales. 2003 Restaurant Operating Expenses. The Company plans to increase its advertising expenditures as a percent of sales in both Outback Steakhouse and Carrabba's Italian Grill in 2003. In addition, costs incurred prior to the opening of new restaurants are expected to increase as a result of additional restaurant openings in 2003 versus 2002. These preopening expenses total approximately $150,000 for each Company owned and joint venture Outback Steakhouse, approximately $195,000 for each Carrabba's Italian Grill, approximately $125,000 for each Bonefish Grill and approximately $300,000 for each new Roy's and Fleming's Prime Steakhouse and Wine Bar. Restaurant operating expense ratios may vary materially from quarter to quarter depending on when units open. As a result of the additional advertising expenditures and increase in planned openings of new restaurants, restaurant operating expenses may increase in 2003 by 0.2% to 0.3% of restaurant sales. 2003 Depreciation and Amortization. The Company expects depreciation costs, which are directly affected by investment in fixed assets, to increase as it builds new restaurants, improves and remodels existing restaurants and invests in technology. The Company estimates that its capital expenditures for the development of new restaurants will be approximately $175,000,000 to $200,000,000 in 2003. Page 37 of 45 OUTBACK STEAKHOUSE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OUTLOOK(continued) 2003 General and Administrative Expenses. Based upon its current plan, the Company expects that total general and administrative costs will increase by approximately 12% to 13% in 2003 compared with 2002. Expansion Strategy. The Company's goal is to add new restaurants to the Outback system during the remainder of 2002. The following table presents a summary of the expected restaurant openings during the fourth quarter of 2002 and for the full year 2003: 4th Quarter Full Year Outback Steakhouses - Domestic 2002 2003 Company owned...................... 5 to 6 24 to 25 Franchised or development joint venture........................... 1 to 2 5 to 7 Outback Steakhouses - International Company owned...................... 1 to 2 8 to 10 Franchised or development joint venture........................... 1 3 to 5 Carrabba's Italian Grills Company owned...................... 7 to 8 22 to 25 Fleming's Prime Steakhouse and Wine Bars Company owned...................... 2 6 to 8 Roy's Company owned...................... - 2 to 3 Selmon's Company owned...................... - - Cheeseburger in Paradise Company owned...................... - - Bonefish Grill Company owned...................... 2 to 3 10 to 15 Franchised or development joint venture........................... 1 1 to 2 Page 38 of 45 OUTBACK STEAKHOUSE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement The foregoing Management's Discussion and Analysis of Financial Condition and Results of Operations contains various "forward-looking statements" within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward- looking statements represent the Company's expectations or beliefs concerning future events, including the following: any statements regarding future sales and gross profit percentages, any statements regarding the continuation of historical trends, and any statements regarding the sufficiency of the Company's cash balances and cash generated from operating and financing activities for the Company's future liquidity and capital resource needs. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "should," and similar expressions are intended to identify forward-looking statements. The Company's 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) The Company's results can be impacted by changes in consumer tastes and the level of consumer acceptance of the Company's restaurant concepts; local, regional and national economic conditions; the seasonality of the Company's business; demographic trends; traffic patterns; consumer perception of food safety; employee availability; the cost of advertising and media; government actions and policies; inflation; and increases in various costs; (iii)The Company's 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; (iv) Price and availability of commodities including, but not limited to, such items as beef, chicken, shrimp, pork, dairy, potatoes and onions and energy commodities are subject to fluctuation and could increase or decrease more than the Company expects; and/or (v) Weather and acts of God could result in construction delays and also adversely affect the results of one or more stores for an indeterminate amount of time. Page 39 of 45 OUTBACK STEAKHOUSE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates on debt, changes in foreign currency exchange rates and changes in commodity prices. The Company's exposure to interest rate risk relates to its $140,000,000 revolving lines of credit with its banks. Borrowings under the agreements bear interest at rates ranging from 57.5 to 95 basis points over the 30, 60, 90 or 180 London Interbank Offered Rate. At September 30, 2002 and December 31, 2001, the Company had a $10,000,000 outstanding balance on the lines of credit. The Company's exposure to foreign currency exchange risk relates primarily to its direct investment in restaurants in Korea, Hong Kong, the Philippines and Brazil and to its royalties from international franchisees in 21 countries. The Company does not use financial instruments to hedge foreign currency exchange rate changes. Many of the food products purchased by the Company and its franchisees are affected by commodity pricing and are, therefore, subject to unpredictable price volatility. These commodities are generally purchased based upon market prices established with vendors. The purchase arrangement may contain contractual features that limit the price paid by establishing certain floors and caps. The Company does not use financial instruments to hedge commodity prices because the Company's purchase arrangements help control the ultimate cost paid. Extreme changes in commodity prices and/or long-term changes could affect the Company adversely. However, any changes in commodity prices would affect the Company's competitors at about the same time as the Company. The Company expects that in most cases increased commodity prices could be passed through to its consumers via increases in menu prices. From time to time, competitive circumstances could limit menu price flexibility, and in those cases margins would be negatively impacted by increased commodity prices. 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. Page 40 of 45 OUTBACK STEAKHOUSE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 4. CONTROLS AND PROCEDURES The Company has established and maintains disclosure controls and procedures that are designed to ensure that material information relating to the Company and its subsidiaries required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Within the 90 days prior to the date of this quarterly report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the date of such evaluation. The Chief Executive Officer and Chief Financial Officer have also concluded that there were no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date that the Company completed its evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Page 41 of 45 OUTBACK STEAKHOUSE, INC. PART II: OTHER INFORMATION Item 1. Legal Proceedings The Company is 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 the Company's financial position or result of operations and cash flows. The Company filed a report on Form 8-K with the Securities and Exchange Commission dated February 14, 2002 regarding threatened litigation and there has been no change in the status. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits None (b) Reports on Form 8-K The Company filed reports on Form 8-K with the Securities and Exchange Commission dated August 14, 2002, October 23, 2002 and November 8, 2002. Page 42 of 45 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf of the undersigned thereunto duly authorized. OUTBACK STEAKHOUSE, INC. Date: November 14, 2002. (Registrant) By: /s/ Robert S. Merritt Robert S. Merritt Senior Vice President, Finance (Principal Financial and Accounting Officer) Page 43 of 45 CERTIFICATIONS I, Robert S. Merritt, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Outback Steakhouse, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002. /s/ Robert S. Merritt Robert S. Merritt, Principal Financial Officer Page 44 of 45 CERTIFICATIONS I, Chris T. Sullivan, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Outback Steakhouse, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002. /s/ Chris T. Sullivan Chris T. Sullivan, Principal Executive Officer Page 45 of 45