At December 31, 2000, Outback Steakhouse, Inc. and Affiliates (the "Company")
had 508 domestic and 13 international Outback Steakhouse restaurants in which it
had a direct ownership interest ("Company owned" restaurants), 101 domestic and
32 international Outback Steakhouse restaurants operated by unaffiliated
franchisees, and two domestic and eight international Outback Steakhouse
restaurants operated by joint ventures in which the Company had a 45% ownership
interest ("Development Joint Venture"). The Company's restaurant system also
included 60 Company owned Carrabba's Italian Grills ("Carrabba's") and 21
Carrabba's operated by joint ventures in which the Company had a 45% ownership
interest. During 1999, the Company entered into agreements with Roy's
Restaurants ("Roy's") and Fleming's Prime Steakhouse and Wine Bar ("Fleming's")
to develop restaurants worldwide. At December 31, 2000, the Company operated
three Company owned and two joint venture Fleming's and one Company owned and
two joint venture Roy's. The system also included one Company owned Zazarac and
one Company owned Lee Roy Selmon's.
All of the Company owned restaurants are organized as partnerships in
which the Company is a general partner. The Company's ownership interests range
from 51% to 90%, and the minority interests are owned by the restaurant manager
and area operating partners. The results of operations of Company owned
restaurants are included in the consolidated operating results of the Company.
The portion of the income attributable to the minority interests of restaurant
managers and area operating partners is eliminated in the line item in the
Company's Consolidated Statements of Income entitled "Elimination of minority
partners' interest."
The Development Joint Venture restaurants are organized as general
partnerships in which the Company owns 50% of the partnership and its joint
venture partner owns 50%. The restaurant manager of each restaurant owned by a
Development Joint Venture purchases a 10% interest in the restaurant he or she
manages. The Company is responsible for 50% of the costs of new restaurants
operated as Development Joint Ventures and the Company's joint venture partner
is responsible for the other 50%. The income derived from restaurants operated
as Development Joint Ventures is presented in the line item "(Income) loss from
operations of unconsolidated affiliates" in the Company's Consolidated
Statements of Income.
The Company derives no direct income from the operations of franchised
restaurants other than initial franchise fees and royalties, which are included
in the Company's other revenues.
Net income and earnings per share amounts for 1999 and 1997
are depicted before and after the "Provision for impaired assets and
restaurant closings." See Note 16 of Notes to Consolidated Financial
Statements.
Net income and earnings per share amounts for 1998 are depicted before
and after the "Cumulative Effect of Change in Accounting Principle."
See Note 12 of Notes to Consolidated Financial Statements.
Note: All applicable per share data has been restated to reflect the retroactive
effect of a three-for-two stock split effective March 2, 1999. See Note 7 of
Notes to Consolidated Financial Statements.
Note: Amounts have been restated to reflect the merger discussed in Notes 1, 10
and 17 of Notes to Consolidated Financial Statement.
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The following table sets forth, for the periods indicated, (i) the percentages
which the items in the Company's Consolidated Statements of Income bear to total
revenues or restaurant sales, as indicated, and (ii) selected operating data:
Years Ended December 31,
2000 1999 1998
Statements of Income Data(1):
Revenues:
Restaurant sales 99.1% 99.2% 99.3%
Other revenues 0.9 0.8 0.7
Total revenues 100.0 100.0 100.0
Costs and expenses:
Cost of sales(2) 37.9 38.0 39.0
Labor and other related(2) 23.9 23.7 23.5
Other restaurant operating(2) 19.0 18.4 18.7
Depreciation and amortization 3.0 3.1 2.9
General and administrative 4.0 3.7 3.7
Provision for impaired assets and restaurant closings 0.3
Income from operations of unconsolidated affiliates(3) (0.1) (0.1)
Income from operations 13.1 13.5 12.8
Other income (expense), net (0.1) (0.2) (0.1)
Interest income (expense) 0.2 0.1 (0.1)
Income before elimination of minority partners' interest
and provision for income taxes 13.3 13.4 12.6
Elimination of minority partners' interest 1.8 1.8 1.6
Income before provision for income taxes 11.5 11.6 11.0
Pro forma provision for income taxes(4) 4.1 4.2 3.9
Pro forma income before cumulative effect of a change
in accounting principle(4) 7.4 7.4 7.1
Cumulative effect of a change in accounting principle
(net of income taxes) (0.3)
Pro forma net income(4) 7.4% 7.4% 6.8%
System-wide restaurant sales (millions of dollars):
Outback Steakhouses
Company owned - domestic and international $ 1,698 $ 1,492 $ 1,274
Domestic franchised and joint venture 318 267 200
International franchised and joint venture 75 60 48
2,091 1,819 1,522
Carrabba's Italian Grills
Company owned 169 138 119
Joint venture 48 32 27
217 170 146
Other
Company owned 18 3
Joint venture 3
21 3
System-wide total $ 2,329 $ 1,992 $ 1,668
Number of restaurants (at end of period):
Outback Steakhouses
Company owned - domestic and international 521 478 436
Domestic franchised and joint venture 103 96 81
International franchised and joint venture 40 37 23
664 611 540
Carrabba's Italian Grills
Company owned 60 56 52
Joint venture 21 16 12
81 72 64
Fleming's Prime Steakhouse and Wine Bars
Company owned 3 3
Joint venture 2
5 3
Roy's
Company owned 1
Joint venture 2
3
Zazarac
Company owned 1
Lee Roy Selmon's
Company owned 1
System-wide total 755 686 604
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(1) Amounts for 1999 and 1998 have been restated to reflect the merger discussed
in Notes 1, 10 and 17 of Notes to Consolidated Financial Statements. (2) As a
percentage of restaurant sales. (3) Percentage for 1998 is less than 1/10th of
one percent of total revenues. (4) Amounts for 1999 and 1998 are pro forma. See
Note 17 of Notes to Consolidated Financial Statements.
FISCAL YEARS 2000, 1999 AND 1998 |
On November 30, 1999, the Company completed a merger with its New England
franchisee ("Tedesco") pursuant to an Agreement and Plan of Reorganization. The
merger was accounted for using the pooling of interests method of accounting,
and accordingly, all historical financial information has been restated to
reflect the merger.
Revenues. Total revenues increased by 15.8% in 2000 as compared with
1999, and by 17.4% in 1999 as compared with 1998. The increases in 2000 and 1999
were primarily attributable to the opening of new restaurants, increased same
store customer counts and menu price increases. Outback Steakhouse and
Carrabba's are not considered separate reportable segments for purposes of SFAS
No. 131, however differences in certain operating ratios are discussed in this
section in order to enhance the Financial Statement users' understanding of the
Company's results of operations and its changes in financial condition. The
following table sets forth additional information regarding year-to-year changes
in revenues:
2000 1999 1998
Average unit volumes:
Outback Steakhouse $ 3,409,000 $ 3,278,000 $ 3,156,000
Carrabba's 2,909,000 2,615,000 2,368,000
Operating weeks:
Outback Steakhouse 25,632 23,602 20,801
Carrabba's 3,031 2,777 2,579
Per person average checks:
Outback Steakhouse $ 17.87 $ 17.52 $ 17.10
Carrabba's 19.46 18.71 17.47
Year to year same store percentage change:
Sales:
Outback Steakhouse 5.8% 5.2% 5.2%
Carrabba's 11.8% 8.4% 8.8%
Customer counts:
Outback Steakhouse 2.7% 2.7% 3.0%
Carrabba's 6.1% 1.9% 4.3%
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Costs and expenses. Cost of sales, consisting of food and beverage
costs, decreased by 0.1% of restaurant sales to 37.9% in 2000 as compared with
38.0% in 1999. The decrease was attributable to menu price increases and
favorable commodity price variances in produce and dairy products, particularly
butter, which was partially offset by unfavorable commodity cost variances for
beef. Cost of sales decreased by 1.0% of restaurant sales to 38.0% in 1999 as
compared with 39.0% in 1998. The decrease was attributable to commodity cost
decreases in beef, produce, and dairy products, particularly butter, and higher
menu prices.
Labor and other related expenses include all direct and indirect labor
costs incurred in operations. Labor and other related expenses increased as a
percentage of restaurant sales by 0.2% to 23.9% in 2000 as compared with 23.7%
in 1999. The increase resulted from higher hourly wage rates caused by the
competitive labor market and the additional staff required to facilitate Outback
Steakhouse's "Take-away" initiative, partially offset by increased sales
leverage due to higher average unit volumes and higher comparable store sales.
Labor and other related expenses increased as a percentage of restaurant sales
by 0.2% to 23.7% in 1999 as compared with 23.5% in 1998. The increase resulted
from higher hourly wage rates for kitchen staff resulting from a competitive
labor market, partially offset by higher comparable store revenues.
Other operating expenses include all other unit-level operating costs,
the major components of which are operating supplies, rent, repairs and
maintenance, advertising, utilities, preopening expenses and other occupancy
costs. A substantial portion of these expenses are fixed or indirectly variable.
Other operating expenses as a percentage of restaurant sales increased by 0.6%
to 19.0% in 2000 as compared with 18.4% in 1999. The increase resulted primarily
from higher preopening costs associated with the new restaurant formats, higher
advertising spending related to Outback Steakhouse's national cable and
broadcast programs and higher utilities costs, particularly natural gas. The
increase was partially offset by increased sales leverage due to higher average
unit volumes for both Outback Steakhouse and Carrabba's Italian Grills, which
reduces the fixed and indirectly variable costs as a percentage of restaurant
sales. Other operating expenses as a percentage of restaurant sales decreased by
0.3%, to 18.4% in 1999, as compared with 18.7% in 1998. The decrease resulted
from higher average unit volumes for both Outback Steakhouse and Carrabba's
during the year which reduces the fixed and indirectly variable costs as a
percentage of restaurant sales.
Depreciation and amortization costs decreased by 0.1% of total revenues
to 3.0% in 2000, as compared with 3.1% in 1999. The decrease is due primarily to
increased sales leverage and a declining depreciable asset base for older units,
partially offset by higher depreciation related to new unit construction for
Outback, Carrabba's and new restaurant formats, "Take-away" room additions, and
additional amortization of goodwill related to the purchase of Fleming's, Roy's
and Outback Steakhouses in Korea. Depreciation and amortization costs increased
as a percentage of total revenues to 3.1% in 1999, as compared with 2.9% in
1998. The increase resulted primarily from depreciation related to new unit
development and "Take-away" room additions, partially offset by higher sales
leverage due to higher average unit volumes and higher comparable store revenue.
General and administrative expenses increased by $14,237,000 to
$75,410,000 in 2000 as compared with $61,173,000 in 1999. The increase resulted
from higher overall administrative costs associated with operating additional
Outback Steakhouses, Carrabba's, Fleming's and Roy's as well as costs associated
with the development of other new restaurant formats and other affiliated
businesses. General and administrative expenses increased by $9,314,000 to
$61,173,000 in 1999 as compared with $51,859,000 in 1998. The increase resulted
from an increase in salary expenses related to higher restaurant management
training costs, an increase in overall administrative costs associated with
operating additional Outback Steakhouses and costs associated with the
development of new restaurant formats and other affiliated businesses.
Provision for impaired assets and restaurant closings. In the fourth
quarter of 1999, the Company recorded a pre-tax charge to earnings of $5,493,000
which includes approximately $3,617,000 for the provision of impaired assets and
$1,876,000 related to restaurant closings, severance and other costs. The
provision primarily related to Carrabba's restaurant properties and assets of
ancillary businesses. (See Note 16 of Notes to Consolidated Financial
Statements). The Company intends to continue developing the Carrabba's concept
in markets where it has demonstrated success. See "Liquidity and Capital
Resources" for a discussion of the Company's expansion strategy.
(Income) loss from operations of unconsolidated affiliates. (Income)
loss from operations of unconsolidated affiliates represents the Company's
portion of net income or loss from Carrabba's and Outback Steakhouses operated
as Development Joint Ventures. Income from Development Joint Ventures was
$2,457,000 in 2000 compared with income of $1,089,000 in 1999 and $514,000 in
1998. These increases were primarily attributable to the increases in average
unit volumes and improved operating margins at Carrabba's joint venture
restaurants and to the increase in the number of Outback Steakhouses and
Carrabba's Italian Grills operating as Development Joint Ventures.
Income from operations. As a result of the increase in revenues, the
changes in the relationship between revenues and expenses discussed above, the
opening of new restaurants, and the provision for impaired assets and restaurant
closings in 1999, income from operations increased by $27,684,000 to
$250,327,000 in 2000 as compared with $222,643,000 in 1999 and increased by
$42,936,000 to $222,643,000 in 1999, as compared with $179,707,000 in 1998.
Other income (expense), net. Other income (expense) represents the net
of income and expenses from non-restaurant operations. Net other expense was
$2,058,000 in 2000 compared with net other expense of $3,042,000 in 1999. The
decrease in the net expense resulted from increased revenues and improvement in
margins associated with non-restaurant operations during 2000. Net other
expenses increased to $3,042,000 in 1999 compared with $1,870,000 in 1998. The
increase in the net other expense is related primarily to increases in
administrative, promotional and development costs associated with the growth of
the non-restaurant businesses.
Interest income (expense). Interest income was $4,617,000 in 2000 as
compared with interest income of $1,416,000 in 1999 and interest expense of
$1,357,000 in 1998. The year-to-year changes in interest income and interest
expense resulted from higher cash balances and higher short term interest rates
in 2000, changes in borrowing needs as funds were expended to finance the
construction of new restaurants, fluctuations in interest rates on the Company's
lines of credit and the use of excess cash flow from operations to pay down the
balance on the lines of credit in 1999. (See Note 5 of Notes to Consolidated
Financial Statements.)
Elimination of minority partners' interest. This item represents the
portion of income or loss from operations included in consolidated operating
results attributable to the ownership interests of restaurant managers and area
operating partners in Company owned restaurants. As a percentage of revenues,
these amounts were 1.8%, 1.8% and 1.6%, in 2000, 1999 and 1998, respectively.
The ratio for 2000 remained the same as the 1999 ratio. The 2000 ratio reflected
an increase in overall restaurant operating margins offset by the decreases in
minority partners' ownership interests resulting from the purchase of minority
interests in the Company's Arizona, New Mexico, Northern New Jersey, New York
Metropolitan area, North Texas and Virginia markets in 2000. The increase in
this ratio from 1998 to 1999 reflected the increase in overall restaurant
operating margins partially offset by the decreases in minority partners'
ownership interests resulting from the purchase of minority interest in the
Company's Colorado, West Florida and Georgia markets in 1999. (See Note 10 of
Notes to Consolidated Financial Statements).
Pro forma provision for income taxes. The provision for income taxes,
in all three years presented reflected expected income taxes at the federal
statutory rate and state income tax rates, net of the federal benefit. The pro
forma provision for 1999 and 1998 includes earnings attributable to Tedesco
which had previously elected to be taxed under Subchapter S of the Internal
Revenue Code (See Note 8 of the Notes to Consolidated Financial Statements). The
effective tax rate was 35.6% in 2000, and the pro forma effective tax rate was
36.0% in 1999 and 35.5% in 1998. The changes in the pro forma effective rates
resulted from the increase or decrease in the FICA tip credit the Company was
able to utilize in the respective years.
Cumulative effect of a change in accounting principle (net of income
taxes). The cumulative effect of a change in accounting principle is the result
of the Company's adoption of Statement of Position 98-5, "Reporting on the Costs
of Start-up Activities." The cumulative effect of the change (net of income
taxes), for 1998 was approximately $4,880,000. Basic and diluted earnings per
share were both reduced by $0.06 during 1998 due to the impact of the change.
Pro forma net income and earnings per common share. Net income for 2000
was $141,130,000, an increase of 15.3% over pro forma net income of $122,398,000
in 1999. Pro forma net income for 1999 was $122,398,000, an increase of 29.3%
over pro forma net income of $94,683,000 in 1998. Diluted earnings per common
share increased to $1.78 for 2000 from proforma diluted earnings per common
share of $1.55 in 1999. Pro forma diluted earnings per common share increased to
$1.55 for 1999 from $1.22 in 1998, an increase of 27.0%.
Liquidity and Capital Resources
The following table presents a summary of the Company's cash flows for the last
three fiscal years (in thousands):
2000 1999 1998
Net cash provided by operating activities $ 239,546 $ 191,981 $ 187,472
Net cash used in investing activities (145,819) (127,019) (109,178)
Net cash used in financing activities (54,746) (56,374) (34,418)
Net increase in cash $ 38,981 $ 8,588 $ 43,876
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The Company requires capital principally for the development of Company
owned and Development Joint Venture restaurants. Capital expenditures totalled
approximately $139,893,000, $116,065,000 and $108,148,000 in 2000, 1999 and
1998, 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. As of
December 31, 2000, there were approximately 243 restaurants developed on land
which was owned by the Company. (See Note 9 of Notes to Consolidated Financial
Statements.)
During 1999, the Company formed joint ventures to develop Outback
Steakhouses in Brazil and the Philippines. The Company purchased four Outback
Steakhouses in Korea in the first quarter of 2000 and will develop future
company owned Outback Steakhouses in Korea. During 1999, the Company also
entered into agreements to develop and operate Roy's restaurants and Fleming's
Prime Steakhouse and Wine Bars. 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 of which approximately $6,048,000
has been expended as of December 31, 2000.
The Company has three uncollateralized lines of credit totalling
$147,500,000. Approximately $3,880,000 is committed for the issuance of letters
of credit, some of which are to collateralize loans made by the bank to certain
franchisees. As of December 31, 2000, the Company had drawn $10,000,000 on the
line of credit to finance the development of new restaurants. The Company
expects that its capital requirements through the next twelve months will be met
by cash flow from operations and, to the extent needed, advances on its line of
credit. (See Note 5 of Notes to Consolidated Financial Statements.)
The Company has a $10,000,000 uncollateralized line of credit to
support the Company's international operations bearing interest at rates 75
basis points above the three months CD rate. At December 31, 2000, the
outstanding balance was approximately $4,323,000.
The Company is the guarantor of an uncollateralized line of credit that
permits borrowing of up to $25,000,000 for one of its franchisees. At December
31, 2000, the borrowings totalled approximately $22,470,000. Subsequent to
December 31, 2000, the guarantee was increased to $35,000,000. (See Note 5 of
Notes to Consolidated Financial Statements.)
The Company is the guarantor of approximately $9,445,000 of a
$68,000,000 note for an unconsolidated affiliate in which the Company has an
22.22% equity interest. At December 31, 2000, the outstanding balance was
approximately $65,000,000. (See Note 5 of Notes to Consolidated Financial
Statements.)
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. The Company will
fund the repurchase program with available cash and bank credit facilities. For
the year ended December 31, 2000, the Company had repurchased 1,980,000 shares
of its Common Stock for approximately $48,615,000 as part of the authorized
repurchase program.
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 belief concerning future events and may be
identified by words such as "believes," "anticipates," "expects," "plans,"
"should" 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 the forward-looking
statements in the section entitled "Cautionary Statement" on page eight. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for the full year.
Future Operating Results
2001 Revenue. The Company plans to grow revenues in 2001 by opening additional
restaurants and increasing average unit volumes. The Company's expansion plans
are summarized in this section. The Company is basing its financial and
operating plans on average unit volume growth of approximately 2 to 3% for
Outback Steakhouse during 2001. The Company anticipates that of the 2 to 3%
increase in average unit volumes, approximately 1 to 2% will be attributable to
price increases. The Company is basing its financial and operating plans on
average unit volume growth of approximately 4 to 6% for Carrabba's Italian
Grills during 2001. The Company anticipates that the average unit volume
increase will be comprised of price increases totaling approximately 3 to 4% and
customer count increases of approximately 1 to 2%. Currently, the Company does
not have any specific plans for broad based programs to increase customer
counts.
2001 Cost of Revenue. During the first five months of 2000, the Company
had favorable beef supply contracts. Upon expiration of these contracts, the
Company's beef costs increased by approximately 12 to 15%, which resulted in an
increase in costs of goods sold of approximately 0.8% of sales. The Company has
finalized new beef supply contracts with its suppliers. Based on the new
contracts, the Company expects its costs of goods sold to increase as a
percentage of sales in 2001 as compared with 2000. Although the total increase
is subject to several factors, based upon conditions that currently exist, the
Company's financial and operating plan is based upon an increase in cost of
revenue of 0.4 to 0.6% of sales for the full year.
2001 Labor Costs. During the last few years, the Company has
experienced significant wage rate pressure resulting from a tight labor market.
Based upon labor market conditions that exist today the Company expects this
trend to continue in 2001. In addition, the Company has been notified by its
advisors to expect an increase in the mandated minimum hourly wage rate of $0.50
in 2001. Although substantially all of its employees earn more than the mandated
minimum wage rate, certain states in which the Company operates do not recognize
the federal tip credit for computing compliance with the mandated minimum wage.
Accordingly, the Company anticipates an increase in wages paid to tipped
employees working in those states. As a result, the Company's financial and
operating plan is based upon labor costs increasing by 0.1 to 0.2% of sales in
2001 to the extent the company's can achieve its average unit volume increase
objectives.
2001 Restaurant Operating Expenses. Other than new format expenses, the
Company does not plan to take any actions that would result in material
fluctuations in other restaurant operating expense. However, it has been noted
in the national media that there has been and may continue to be a shortage of
natural gas in certain areas of the country. The Company currently spends
approximately 1/2 of 1% of restaurant sales for natural gas used in restaurant
operations. Accordingly, a material change in natural gas prices may affect the
Company's future restaurant operating expenses. Costs incurred prior to the
opening of new restaurants are included in restaurant operating expenses. These
preopening expenses total approximately $150,000 for each company owned and
joint venture Outback Steakhouse and Carrabba's Italian Grill, and $250,000 for
each Roy's and Fleming's Prime Steakhouse and Wine Bar. As a result of the
planned opening of new restaurants, and other factors discussed above, the
Company's financial and operating plan is based upon restaurant operating
expense increasing in 2001 by 0.1 to 0.2% of sales.
2001 Depreciation and Amortization. The Company expects depreciation
and amortization to increase as it invests in new restaurants. The Company
estimates that its capital expenditures for the development of new restaurants
will be approximately $160,000,000 to $170,000,000 in 2001. The Company also
estimates that it will spend approximately $25,000,000 in 2001 for maintenance
capital expenditures and systems development, which will also result in higher
depreciation expense.
2001 General and Administrative Expenses. Based upon its current plan,
the Company expects that total general and administrative costs will increase by
approximately 10 to 12% in 2001 compared with 2000.
Expansion Strategy. The Company's goal is to add new restaurants to the
system in each of 2001 and 2002. The following table presents a summary of the
expected restaurant openings for 2001 and 2002:
2001 2002
Outback Steakhouses - Domestic
Company owned 40 - 45 40 - 45
Franchised or joint venture 8 - 10 8 - 10
Outback Steakhouses - International
Company owned 4 - 5 4 - 5
Franchised or joint venture 18 - 20 18 - 20
Carrabba's Italian Grills
Company owned 6 - 8 6 - 8
Joint Venture 10 - 12 10 - 12
Fleming's Prime Steakhouse & Wine Bars
Joint Venture 5 - 6 5 - 6
Roy's
Joint venture 5 - 6 5 - 6
Zazarac
Company Owned 1 1
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The Company has also developed a new casual restaurant named Lee Roy
Selmon's that features "Southern Fare." We will look for opportunities to add
additional stores in 2002.
The Company has also entered into a partnership agreement with
entertainer Jimmy Buffett to develop a casual theme restaurant called
Cheeseburger in Paradise. The first unit should open in late 2001 or early 2002.
The Company estimates that its capital expenditures for the development
of new restaurants will be approximately $160,000,000 to $170,000,000 in each of
2001 and 2002 and intends to finance this development with cash flows from
operations and the revolving line of credit referred to above. The Company
anticipates that 75% to 85% of the Company owned restaurants to be opened in
2001 will be free-standing units.
Cautionary Statement
The Company's actual results could differ materially from those stated or
implied in the forward-looking statements included in the discussions 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 which 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
items such as beef, chicken, shrimp, pork, dairy, potatoes and onions
are subject to fluctuation and could increase or decrease more than the
Company expects; and/or
- (v)
- Weather and other 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.
Insurance
The Company retains direct liability for the first $250,000 of all individual
workers compensation claims, except for 1999, and general liability claims, and
$230,000 of all individual health insurance claims. Claims in excess of these
amounts are paid for by the respective insurance company. The Company records a
liability for all unresolved claims at the anticipated cost to the Company at
the end of the period based on the estimates provided by a third party
administrator and insurance company.
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from changes in interest rates on debt and
changes in commodity prices.
The Company's exposure to interest rate risk relates to its
$147,500,000 revolving lines of credit with its bank. Borrowings under the
agreement bear interest at rates ranging from 57.5 to 95 basis points over the
30, 60, 90, or 180 London Interbank Offered Rate. At December 31, 2000, the
Company had $10,000,000 outstanding on its lines of credit. At December 31,
1999, the Company did not have an outstanding balance on its lines of credit.
Many 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 price floors and
caps. The Company does not use financial instruments to hedge commodity prices
because these purchase arrangements help control the ultimate cost paid. Extreme
changes in commodity prices and/or longterm 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.
Impact of Inflation
The Company has not operated in a highly inflationary period and does not
believe that inflation has had a material effect on sales or expenses during the
last three years other than labor costs. The Company's restaurant operations are
subject to federal and state minimum wage laws governing such matters as working
conditions, overtime and tip credits. Significant numbers of the Company's food
service and preparation personnel are paid at rates related to the federal
minimum wage and, accordingly, increases in the minimum wage have increased the
Company's labor costs in the last two years. To the extent permitted by
competition, the Company has mitigated increased costs by increasing menu prices
and may continue to do so if deemed necessary in future years.
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