**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**March
      31, 2005**or[
      ]
    **Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934**For
      the transition period from ______ to ______
 
 Commission
File Number: 1-15935
 
 
 **OUTBACK
STEAKHOUSE, INC.**
 **(Exact
name of registrant as specified in its charter)**
 
 
 
 **DELAWARE**
    **59-3061413**(State
      or other jurisdiction of
      incorporation
      or organization)
    (I.R.S.
      Employer
      Identification
      No.)
 
 **2202
North West Shore Boulevard, Suite 500, Tampa, Florida
33607**
 (Address
of principal executive offices) (Zip Code)
 
 **(813)
282-1225**
 (Registrant's
telephone number, including area code)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 
 YES x NO o
 
 Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).
 
 YES x NO o
 
 As of May
2, 2005, the registrant had outstanding 73,901,846 shares of Common Stock, $.01
par value.
 
 
  Table of Contents
  
 
 **OUTBACK STEAKHOUSE, INC.**
 
 **INDEX
TO QUARTERLY REPORT ON FORM 10-Q**
 **For
the Quarterly Period Ended March 31, 2005**
 
 **TABLE
OF CONTENTS**
 
 
 **PART
      I — FINANCIAL INFORMATION****Page
      No****.**Item 1.
    Consolidated
      Financial Statements:Consolidated Balance Sheets — March 31, 2005 (Unaudited) and
      December 31, 2004
    3Consolidated Statements of Income (Unaudited) — For the Three
      Months Ended March 31, 2005 and 2004
    4Consolidated Statements of Cash Flows (Unaudited) — For the
      Three Months Ended March 31, 2005 and 2004
    5Notes to Consolidated Financial Statements
      (Unaudited)
    7Item 2.
    Management's Discussion and Analysis of Financial
      Condition and Results of Operations
    20Item 3.
    Quantitative and Qualitative Disclosures About Market
      Risk
    40Item 4.
    Controls and Procedures
    41**PART
      II****—****OTHER INFORMATION**
      ****Item 1.
    Legal Proceedings
    42Item
      2.
    Unregistered Sales of Equity Securities and Use of
      Proceeds
    43Item 6.
    Exhibits
    44
 Signature
    45
  2
 Table of Contents
  **PART I: FINANCIAL INFORMATION**
 
 **Item
1. CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Outback
Steakhouse, Inc.**
 **CONSOLIDATED
BALANCE SHEETS** **** **(IN
THOUSANDS)**
 
 **MARCH
      31,**
    
    **DECEMBER
      31,****2005**
    
    **2004****(UNAUDITED)**
    
    ****ASSETSCurrent
      AssetsCash
      and cash equivalents
    
    $
    103,361
    
    $
    87,977Short-term
      investments
    
    
    1,075
    
    
    1,425Inventories
    
    
    57,238
    
    
    63,448Deferred
      income tax asset
    
    
    15,722
    
    
    12,969Other
      current assets
    
    
    52,906
    
    
    53,068Total
      current assets
    
    
    230,302
    
    
    218,887Property,
      fixtures and equipment, net
    
    
    1,267,122
    
    
    1,235,151Investments
      in and advances to unconsolidated affiliates, net
    
    
    16,996
    
    
    16,254Deferred
      income tax asset
    
    
    13,313
    
    
    6,660Goodwill
    
    
    111,843
    
    
    107,719Intangible
      assets, net
    
    
    21,353
    
    
    21,683Other
      assets
    
    
    73,049
    
    
    71,438Notes
      receivable collateral for franchisee guarantee
    
    
    30,178
    
    
    30,239$
    1,764,156
    
    $
    1,708,031LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesAccounts
      payable
    
    $
    80,341
    
    $
    74,162Sales
      taxes payable
    
    
    29,409
    
    
    26,735Accrued
      expenses
    
    
    111,067
    
    
    97,124Current
      portion of partner deposit and accrued buyout liability
    
    
    13,054
    
    
    13,561Unearned
      revenue
    
    
    42,666
    
    
    100,895Income
      taxes payable
    
    
    28,518
    
    
    87Current
      portion of long-term debt
    
    
    55,953
    
    
    54,626Total
      current liabilities
    
    
    361,008
    
    
    367,190Partner
      deposit and accrued buyout liability
    
    
    68,456
    
    
    63,102Deferred
      rent
    
    
    46,643
    
    
    44,075Long-term
      debt
    
    
    76,657
    
    
    59,900Guaranteed
      debt of franchisee
    
    
    30,283
    
    
    30,343Other
      long-term liabilities
    
    
    6,114
    
    
    6,114Total
      liabilities
    
    
    589,161
    
    
    570,724Commitments
      and contingenciesInterest
      of minority partners in consolidated partnerships
    
    
    47,789
    
    
    48,905Stockholders'
      EquityCommon
      stock, $0.01 par value, 200,000 shares authorized; 78,750 and 78,750
      shares issued;73,815
      and 73,767 shares outstanding as of March 31, 2005 and December 31, 2004,
      respectively
    
    
    788
    
    
    788Additional
      paid-in capital
    
    
    275,231
    
    
    271,109Retained
      earnings
    
    
    1,061,688
    
    
    1,025,447Accumulated
      other comprehensive loss
    
    
    (1,395
    )
    
    (2,118
    )Unearned
      compensation related to outstanding restricted stock
    
    
    (1,234
    )
    
    -1,335,078
    
    
    1,295,226Less
      treasury stock, 4,935 and 4,983 shares at March 31, 2005 and December 31,
      2004, respectively, at cost
    
    
    (207,872
    )
    
    (206,824
    )Total
      stockholders’ equity
    
    
    1,127,206
    
    
    1,088,402$
    1,764,156
    
    $
    1,708,031
  See notes
to unaudited consolidated financial statements.
  3
 Table of Contents
  **Outback Steakhouse, Inc.**
 **CONSOLIDATED
STATEMENTS OF INCOME**
 **(IN
THOUSANDS, EXCEPT PER SHARE DATA, UNAUDITED)**
 
 **THREE
      MONTHS ENDED****MARCH
      31,****2005**
    
    **2004******
    
    **(restated)**RevenuesRestaurant
      sales
    
    $
    890,041
    
    $
    789,213Other
      revenues
    
    
    5,081
    
    
    4,511Total
      revenues
    
    
    895,122
    
    
    793,724Costs
      and expensesCost
      of sales
    
    
    325,170
    
    
    292,437Labor
      and other related
    
    
    212,204
    
    
    187,894Other
      restaurant operating
    
    
    178,882
    
    
    157,805Distribution
      expense to employee partners, excluding stock expense
    
    
    22,487
    
    
    18,523Employee
      partner stock buyout expense
    
    
    2,262
    
    
    2,079Depreciation
      and amortization
    
    
    29,450
    
    
    24,477General
      and administrative
    
    
    40,125
    
    
    32,247Provision
      for impaired assets and restaurant closings
    
    
    776
    
    
    -Income
      from operations of unconsolidated affiliates
    
    
    97
    
    
    (253
    )Total
      costs and expenses
    
    
    811,453
    
    
    715,209Income
      from operations
    
    
    83,669
    
    
    78,515Other
      income (expense), net
    
    
    (934
    )
    
    (873
    )Interest
      income
    
    
    368
    
    
    332Interest
      expense
    
    
    (1,158
    )
    
    (705
    )Income
      before elimination of minority partners'interest
      and income taxes
    
    
    81,945
    
    
    77,269Elimination
      of minority partners' interest
    
    
    3,428
    
    
    4,168Income
      before provision for income taxes
    
    
    78,517
    
    
    73,101Provision
      for income taxes
    
    
    27,559
    
    
    25,270Net
      income
    
    $
    50,958
    
    $
    47,831Basic
      earnings per common share
    
    $
    0.69
    
    $
    0.64Basic
      weighted average number of shares outstanding
    
    
    73,800
    
    
    74,487Diluted
      earnings per common share
    
    $
    0.66
    
    $
    0.61Diluted
      weighted average number of shares outstanding
    
    
    77,267
    
    
    78,499Cash
      dividends per common share
    
    $
    0.13
    
    $
    0.13
 
 See notes
to unaudited consolidated financial statements.
 
  4
 Table of Contents
  
 **Outback Steakhouse, Inc.**
 **CONSOLIDATED
STATEMENTS OF CASH FLOWS**
 **(IN
THOUSANDS, UNAUDITED)**
 
 **THREE
      MONTHS ENDED****MARCH
      31,****2005**
    
    **2004******
    
    **(restated)**Cash
      flows from operating activities:Net
      income
    
    $
    50,958
    
    $
    47,831Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
      and amortization
    
    
    29,450
    
    
    24,477Provision
      for impaired assets and restaurant closings
    
    
    776
    
    
    -Restricted
      stock expense
    
    
    15
    
    
    -Employee
      partner stock buyout expense
    
    
    2,262
    
    
    2,079Minority
      partners’ interest in consolidated partnerships’ income
    
    
    3,428
    
    
    4,168Income
      from operations of unconsolidated affiliates
    
    
    97
    
    
    (253
    )Change
      in deferred income taxes
    
    
    (9,406
    )
    
    1,636Loss
      on disposal of property, fixtures and equipment
    
    
    1,783
    
    
    900Change
      in assets and liabilities, net of effects of acquisitions and FIN 46
      consolidations:Decrease
      in inventories
    
    
    6,210
    
    
    5,218Increase
      in other current assets
    
    
    (1,246
    )
    
    (3,992
    )Increase
      in other assets
    
    
    (1,695
    )
    
    (2,578
    )Increase
      in accounts payable, sales taxes payable and accrued expenses
    
    
    22,807
    
    
    14,266Increase
      in partner deposit and accrued buyout liability
    
    
    2,631
    
    
    2,071Increase
      in deferred rent
    
    
    2,568
    
    
    1,441Decrease
      in unearned revenue
    
    
    (58,229
    )
    
    (50,776
    )Increase
      in income taxes payable
    
    
    32,554
    
    
    23,256Net
      cash provided by operating activities
    
    
    84,963
    
    
    69,744Cash
      flows used in investing activities:Purchase
      of investment securities
    
    
    -
    
    
    (45,190
    )Maturities
      and sales of investment securities
    
    
    350
    
    
    46,113Cash
      paid for acquisition of business, net of cash acquired
    
    
    (5,200
    )
    
    -Capital
      expenditures
    
    
    (64,796
    )
    
    (57,838
    )Proceeds
      from the sale of property, fixtures and equipment
    
    
    2,638
    
    
    2,377Increase
      in cash from adoption of FIN 46
    
    
    -
    
    
    1,080Payments
      from unconsolidated affiliates
    
    
    71
    
    
    70Distributions
      to unconsolidated affiliates
    
    
    (115
    )
    
    -Investments
      in and advances to unconsolidated affiliates
    
    
    (72
    )
    
    (186
    )Net
      cash used in investing activities
    
    
    (67,124
    )
    
    (53,574
    )
 
 (CONTINUED...)
  5
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **CONSOLIDATED
STATEMENTS OF CASH FLOWS**
 **(IN
THOUSANDS, UNAUDITED)**
 
 **THREE
      MONTHS ENDED****MARCH
      31,****2005**
    
    **2004******
    
    **(restated)**Cash
      flows used in financing activities:Proceeds
      from issuance of long-term debt
    
    
    29,869
    
    
    4,107Proceeds
      from minority partners' contributions
    
    
    1,130
    
    
    393Distributions
      to minority partners
    
    
    (4,007
    )
    
    (7,788
    )Repayments
      of long-term debt
    
    
    (11,785
    )
    
    (218
    )Dividends
      paid
    
    
    (9,601
    )
    
    (9,684
    )Payments
      for purchase of treasury stock
    
    
    (17,868
    )
    
    (36,608
    )Proceeds
      from reissuance of treasury stock
    
    
    9,807
    
    
    23,040Net
      cash used in financing activities
    
    
    (2,455
    )
    
    (26,758
    )Net
      increase (decrease) in cash and cash equivalents
    
    
    15,384
    
    
    (10,588
    )Cash
      and cash equivalents at the beginning of the period
    
    
    87,977
    
    
    102,892Cash
      and cash equivalents at the end of the period
    
    $
    103,361
    
    $
    92,304Supplemental
      disclosures of cash flow information:Cash
      paid for interest
    
    $
    1,071
    
    $
    593Cash
      paid for income taxes
    
    
    2,833
    
    
    3,166Supplemental
      disclosures of non-cash items:Purchase
      of minority and employee partners' interests in cash flows of their
      restaurants
    
    $
    636
    
    $
    -Debt
      assumed under FIN 46R
    
    
    -
    
    
    28,743
 
 See notes
to unaudited consolidated financial statements.
  6
 Table of Contents
  **Outback Steakhouse, Inc.**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 1.  Basis of
Presentation and Restatement of Previously Issued Consolidated Financial
Statements
 
 This Note
should be read in conjunction with Note 1, “Summary of Significant Accounting
Policies” under Notes to Consolidated Financial Statements included in Item 8,
“Financial Statements and Supplementary Data” of the Annual Report on Form 10-K
(“2004 10-K”) of Outback Steakhouse, Inc. (the “Company”).
 
 Basis of
Presentation
 
 The
accompanying unaudited consolidated financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”). Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company, all adjustments (consisting
only of normal recurring entries) necessary for the fair presentation of the
Company's results of operations, financial position and cash flows for the
periods presented have been included. These financial statements should be read
in conjunction with the financial statements and financial notes thereto
included in the Company's 2004 10-K.
 
 The
results of operations for interim periods are not necessarily indicative of the
results to be expected for the full year.
 
 Restatement
of Previously Issued Consolidated Financial Statements
 
 The
Company began a review of its lease accounting policies following announcements
beginning in December 2004 that several restaurant companies were revising their
accounting practices for leases. Upon completion of its review, the Company
changed its lease accounting in 2004 and has restated certain historical
financial information for prior periods to correct errors in its lease
accounting policies.
 
 Changes
to the Company’s lease accounting policies include adjusting lease terms, as
defined in Statement
of Financial Accounting Standards (“SFAS”) No. 13,
“Accounting for Leases,” as amended, to include option renewals that are
reasonably assured of being exercised, including the straight-line effect over
the lease term of escalating rents during the option periods and recognizing the
effect of pre-opening “rent holidays” over the related lease terms.
 
 The
Company restated its consolidated balance sheet at December 31, 2003, and the
consolidated statements of income, stockholders' equity and cash flows for the
years ended December 31, 2003 and 2002. The Company also restated the quarterly
financial information for fiscal 2003 and the first three quarters of fiscal
2004. The impact of the restatement on periods prior to 2002 has been reflected
as an adjustment to retained earnings of $15,240,000 as of December 31, 2001 in
the Consolidated Statements of Stockholders' Equity included in the Company’s
2004 10-K.
 
 The
Company did not amend its previously filed Annual Reports on Form 10-K or
Quarterly Reports on Form 10-Q for the restatement, and the financial statements
and related financial information contained in those reports should no longer be
relied upon.
 
 The
Consolidated Financial Statements as of and for the quarter ended March 31, 2004
included in this Form 10-Q have been restated to reflect the adjustments
described above. The effects of the Company’s restatement on previously reported
Consolidated Financial Statements as of and for the quarter ended March 31, 2004
are summarized below.
  7
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 1.  Basis of
Presentation and Restatement of Previously Issued Consolidated Financial
Statements (continued)
 
 The
following table reflects the effect of the restatement on the Consolidated
Statement of Income (in thousands):
 
 **QUARTER
      ENDED MARCH 31,****2004**
    
    **2004****as
      previously reported**
    
    **as
      restated**Selected
      Statement of Income Data:Other
      restaurant operating (1)
    
    $
    156,364
    
    $
    157,805Total
      costs and expenses
    
    
    713,768
    
    
    715,209Income
      from operations
    
    
    79,956
    
    
    78,515Income
      before elimination of minority partners'interest
      and income taxes
    
    
    78,710
    
    
    77,269Elimination
      of minority partners' interest
    
    
    4,397
    
    
    4,168Income
      before provision for income taxes
    
    
    74,313
    
    
    73,101Provision
      for income taxes
    
    
    25,982
    
    
    25,270Net
      income
    
    
    48,331
    
    
    47,831Basic
      earnings per common share
    
    $
    0.65
    
    $
    0.64Diluted
      earnings per common share
    
    $
    0.62
    
    $
    0.61
 ____________
 (1)
    The
      “as previously reported” amounts have been adjusted for the
      reclassification discussed in this Note 1 of Notes to Unaudited
      Consolidated Financial Statements.
 
 The
following table reflects the effect of the restatement on the Consolidated
Balance Sheet (in thousands):
 
 **MARCH
      31,****2004**
    
    **2004****as
      previously reported**
    
    **as
      restated**Selected
      Balance Sheet Data:Investments
      in and advances to unconsolidated affiliates, net
    
    $
    15,985
    
    $
    15,316Total
      assets
    
    
    1,539,879
    
    
    1,539,210Deferred
      rent
    
    
    2,093
    
    
    38,872Deferred
      income tax liability
    
    
    17,403
    
    
    3,628Total
      liabilities
    
    
    413,786
    
    
    436,790Interest
      of minority partners in consolidated partnerships
    
    
    64,053
    
    
    61,926Retained
      earnings
    
    
    966,539
    
    
    944,993Total
      stockholders' equity
    
    
    1,062,040
    
    
    1,040,494Total
      liabilities and stockholders' equity
    
    
    1,539,879
    
    
    1,539,210
 
  8
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 1.  Basis of
Presentation and Restatement of Previously Issued Consolidated Financial
Statements (continued)
 
 The
following table reflects the effect of the restatement on the Consolidated
Statement of Cash Flows (in thousands):
 
 **QUARTER
      ENDED MARCH 31,****2004**
    
    **2004****as
      previously reported**
    
    **as
      restated**Selected
      Cash Flow Data:Net
      income
    
    $
    48,331
    
    $
    47,831Minority
      partners’ interest in consolidated partnerships’ income
    
    
    4,397
    
    
    4,168Change
      in deferred income taxes
    
    
    2,348
    
    
    1,636Increase
      in deferred rent
    
    
    -
    
    
    1,441
 
 Reclassification
 
 Certain
prior year amounts shown in the accompanying Consolidated Financial Statements
have been reclassified to conform to the 2005 presentation. These
classifications relate to complimentary and employee meals which had previously
been included in revenues, with a corresponding offset in operating expenses in
each period affected. In the current presentation, no revenue or expense is
recorded for these transactions. For the quarter ended March 31, 2004, this
reclassification totaled $22,379,000. In addition, certain management training
and supervision costs have been reclassified from other restaurant operating
expense to general and administrative expense. For the quarter ended March 31,
2004, this reclassification totaled $1,852,000. These reclassifications had no
effect on total assets, total liabilities, stockholders’ equity or net
income.
 
  9
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 2.  Stock-Based
Compensation
 
 The
Company accounts for its stock-based employee compensation under the intrinsic
value method. No stock-based employee compensation cost is reflected in net
income to the extent options granted had an exercise price equal to or exceeding
the fair market value of the underlying common stock on the date of grant. SFAS
No. 123R, “Share-Based Payment” will be adopted January 1, 2006. The following
table provides pro forma net income and earnings per share amounts using the
fair value based method of SFAS No. 123, “Accounting for Stock-Based
Compensation” (in thousands, except per share data):
 
 **THREE
      MONTHS ENDED****MARCH
      31,****2005**
    
    **2004******
    
    **(restated)**Net
      income
    
    $
    50,958
    
    $
    47,831Stock-based
      employee compensation expense included in net income,net
      of related taxes
    
    
    1,380
    
    
    1,272Total
      stock-based employee compensation expense determinedunder
      fair value based method, net of related taxes
    
    
    (5,132
    )
    
    (4,421
    )Pro
      forma net income
    
    $
    47,206
    
    $
    44,682Earnings
      per common share:Basic
    
    $
    0.69
    
    $
    0.64Basic
      - pro forma
    
    $
    0.64
    
    $
    0.60Diluted
    
    $
    0.66
    
    $
    0.61Diluted
      - pro forma
    
    $
    0.62
    
    $
    0.58
 
 The
preceding pro forma results were calculated with the use of the Black-Scholes
option pricing model. The following assumptions were used for the quarters ended
March 31, 2005 and 2004, respectively: (1) risk-free interest rates of 4.29% and
2.80%; (2) dividend yield of 1.24% and 1.27%; (3) expected lives of 6.3 years,
and 5.0 years; and (4) volatility of 29.1% and 30.4%. Results may vary depending
on the assumptions applied within the model. Compensation expense recognized in
providing pro forma disclosures may not be representative of the effects on net
income for future years or under SFAS No. 123R, when adopted.
 
 3.  Other
Current Assets
 
 Other
current assets consisted of the following (in thousands):
 **MARCH
      31,**
    
    **DECEMBER
      31,****2005**
    
    **2004****(UNAUDITED)**
    
    ****Prepaid
      expenses
    
    $
    26,390
    
    $
    23,020Accounts
      receivable
    
    
    16,894
    
    
    19,473Accounts
      receivable - franchisees
    
    
    1,212
    
    
    2,228Assets
      held for sale
    
    
    3,410
    
    
    4,810Deposits
    
    
    2,783
    
    
    2,537Other
      current assets
    
    
    2,217
    
    
    1,000$
    52,906
    
    $
    53,068
 
  10
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 4.  Property,
Fixtures and Equipment, Net
 
 Property,
fixtures and equipment, net, consisted of the following (in
thousands):
 
 **MARCH
      31,**
    
    **DECEMBER
      31,****2005**
    
    **2004****(UNAUDITED)**
    
    ****Land
    
    $
    196,999
    
    $
    196,137Buildings
      & building improvements
    
    
    627,591
    
    
    603,856Furniture
      & fixtures
    
    
    195,986
    
    
    184,949Equipment
    
    
    446,826
    
    
    425,197Leasehold
      improvements
    
    
    312,189
    
    
    305,618Construction
      in progress
    
    
    48,176
    
    
    52,373Accumulated
      depreciation
    
    
    (560,645
    )
    
    (532,979
    )$
    1,267,122
    
    $
    1,235,151
 
 During
the three months ended March 31, 2005, the Company recorded a provision for a
restaurant closing of approximately $776,000 for an Outback Steakhouse in
Tennessee.
 
 On August
3, 2004, the Company was approved by the United States Bankruptcy Court for the
District of Delaware as the successful bidder at an auction of designation
rights for 76 properties of Chi-Chi’s, Inc. and its affiliates. The Company’s
objective in acquiring these rights is to have access to restaurant sites for
conversion to one of its concepts under its current expansion plans. The
original 76 properties included 23 locations with owned land and building, 15
sale-leaseback properties with reversion rights and purchase options, 23 ground
leases and 15 leases. The properties include any real property, furniture,
fixtures and equipment and liquor licenses. The designation rights allow the
Company to transfer properties to itself, to transfer properties to others or to
require Chi-Chi’s to retain properties. The right to designate properties will
expire one year from the date of closing, which occurred September 20, 2004. The
purchase price for the designation rights was $42,500,000. The Company is
responsible for paying the carrying costs on each of the properties from the
closing date until the date the property is designated for
transfer.
 
 Prior to
September 30, 2004, Chi-Chi’s exercised a right to exclude one property from the
designation rights listing, for which the Company received a $1,100,000 payment
in October 2004. Additionally, in October 2004, the Company completed an
assignment of designation rights to a third party on 25 properties in exchange
for $9,975,000. Both transactions reduced the total purchase price of the
remaining properties. In November 2004, the Company required Chi-Chi’s to retain
15 properties, leaving 35 properties to which the Company had rights as of
December 31, 2004. The remaining properties include 14 properties with owned
land and building, 10 sale-leaseback properties with reversion rights and
purchase options, nine ground leases and two leases.
  11
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 5.  Goodwill
and Intangible Assets, Net
 
 The
change in the carrying amount of goodwill for the three months ended March 31,
200 5 is as
follows (in thousands):
 
 December
      31, 2004
    
    $
    107,719Acquisition
      (see Note 11 of Notes to Unaudited Consolidated Financial Statements)
    
    
    4,124March
      31, 2005
    
    $
    111,843
 
 Intangible
assets, net, consisted of the following (in thousands):
 
 **WEIGHTED****AVERAGE**
    
    **MARCH
      31,**
    
    **DECEMBER
      31,****AMORTIZATION**
    
    **2005**
    
    **2004****PERIOD
      (YEARS)**
    
    **(UNAUDITED)**
    
    ****Trademarks
      (gross)
    
    
    21
    
    $
    12,344
    
    $
    12,344Less:
      accumulated amortization
    
    
    
    
    
    (449
    )
    
    (295
    )Net
      trademarks
    
    
    
    
    
    11,895
    
    
    12,049Trade
      dress (gross)
    
    
    11
    
    
    6,777
    
    
    6,777Less:
      accumulated amortization
    
    
    
    
    
    (482
    )
    
    (320
    )Net
      trade dress
    
    
    
    
    
    6,295
    
    
    6,457Favorable
      leases (gross, lives ranging from 2 to 24 years)
    
    
    20
    
    
    3,224
    
    
    3,224Less:
      accumulated amortization
    
    
    
    
    
    (61
    )
    
    (47
    )Net
      favorable leases
    
    
    
    
    
    3,163
    
    
    3,177Intangible
      assets, less total accumulated amortization of $992 and$662
      at March 31, 2005 and December 31, 2004, respectively
    
    
    18
    
    $
    21,353
    
    $
    21,683
 
 The
aggregate amortization expense related to these intangible assets was $330,000
for the three months ended March 31, 2005.  Annual amortization expense
related to these intangible assets for the next five years is anticipated to be
approximately $1,500,000.
 
  12
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 6.  Other
Assets
 
 Other
assets consisted of the following (in thousands):
 
 **MARCH
      31,**
    
    **DECEMBER
      31,****2005**
    
    **2004****(UNAUDITED)**
    
    ****Other
      assets
    
    $
    48,785
    
    $
    47,089Liquor
      licenses, net of accumulated amortization of $4,463 and $4,291 at March
      31, 2005and
      December 31, 2004, respectively
    
    
    13,864
    
    
    13,699Deferred
      license fee, net of valuation provision of approximately $3,250 and
      $3,000at
      March 31, 2005 and December 31, 2004, respectively
    
    
    10,400
    
    
    10,650$
    73,049
    
    $
    71,438
 
 In
January 2001, the Company entered into a ten-year licensing agreement with an
entity owned by minority interest owners of certain non-restaurant operations.
The licensing agreement transferred the right and license to use certain assets
of these non-restaurant operations. The Company has deferred recognition of a
gain of $1,189,000 associated with the transaction until such time as the fees
due under the licensing agreement are realized.  See Note 9 of Notes to
Unaudited Consolidated Financial Statements.
 
 7.  Accrued
Expenses
 
 Accrued
expenses consisted of the following (in thousands):
 
 **MARCH
      31,**
    
    **DECEMBER
      31,****2005**
    
    **2004****(UNAUDITED)**
    
    ****Accrued
      payroll and other compensation
    
    $
    40,270
    
    $
    38,552Accrued
      insurance
    
    
    24,791
    
    
    21,818Accrued
      property taxes
    
    
    9,658
    
    
    9,068Other
      accrued expenses
    
    
    36,348
    
    
    27,686$
    111,067
    
    $
    97,124
 
 Remaining
accrued restaurant closing expenses of less than $100,000 were included in other
accrued expenses as of March 31, 2005 and December 31, 2004, related to
restaurant closing provisions.
 
  13
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 8.  Debt
 
 Long-term
debt consisted of the following (in thousands):
 
 **MARCH
      31,**
    
    **DECEMBER
      31,****2005**
    
    **2004****(UNAUDITED)**
    
    ****Revolving
      lines of credit, uncollateralized, interest rates ranging from 2.89% to
      3.48% atMarch
      31, 2005 and 2.89% to 3.05% at December 31, 2004,
    respectively
    
    $
    69,000
    
    $
    55,000Outback
      Korea notes payable, interest rates ranging from 5.45% to 7.00%
      atMarch
      31, 2005 and December 31, 2004
    
    
    32,157
    
    
    27,717Outback
      Japan notes payable, uncollateralized, interest rates at 0.85%
      atMarch
      31, 2005 and ranging from 0.95% to 0.96% at December 31,
    2004
    
    
    5,714
    
    
    5,769Outback
      Japan revolving lines of credit, interest rates ranging from 0.68% to
      0.77%at
      March 31, 2005 and December 31, 2004
    
    
    18,715
    
    
    18,895Other
      notes payable, uncollateralized, interest rates ranging
    from2.07%
      to 7.00% at March 31, 2005 and December 31, 2004
    
    
    7,024
    
    
    7,145Guaranteed
      debt of franchisee
    
    
    30,283
    
    
    30,343162,893
    
    
    144,869Less
      current portion
    
    
    55,953
    
    
    54,626Less
      guaranteed debt of franchisee
    
    
    30,283
    
    
    30,343Long-term
      debtof
      Outback Steakhouse, Inc.
    
    $
    76,657
    
    $
    59,900
 
 Effective
April 27, 2004, the Company replaced a $125,000,000 revolving credit facility
that was scheduled to mature in December 2004, with a new uncollateralized
three-year $150,000,000 revolving bank credit facility that matures in June
2007. The revolving line of credit permits borrowing at interest rates ranging
from 50 to 90 basis points over the 30, 60, 90 or 180-day London Interbank
Offered Rate (LIBOR) (ranging from 2.85% to 3.38% at March 31, 2005 and ranging
from 2.42% to 2.78% at December 31, 2004). At March 31, 2005, the unused portion
of the revolving line of credit was $81,000,000.
 
 The
credit agreement contains certain restrictions and conditions as defined in the
agreement that require the Company to maintain consolidated net worth equal to
or greater than consolidated total debt and to maintain a ratio of total
consolidated debt to EBITDAR (earnings before interest, taxes, depreciation,
amortization and rent) equal to or less than 3.0 to 1.0. At March 31, 2005, the
Company was in compliance with these debt covenants.
 
 The
Company also replaced a $15,000,000 line of credit that was scheduled to mature
in December 2004, with a new $ 20,000,000
uncollateralized line of credit. The new line of credit matures in June 2007 and
permits borrowing at interest rates ranging from 50 to 90 basis points over
LIBOR for loan draws and 65 to 112.5 basis points over LIBOR for letter of
credit advances. The credit agreement contains certain restrictions and
conditions as defined in the agreement. At March 31, 2005 and December 31, 2004,
$20,000,000 and $11,782,000, respectively, of the line of credit was committed
for the issuance of letters of credit as required by insurance companies that
underwrite the Company’s workers’ compensation insurance and also where required
for construction of new restaurants. On April 28, 2005, this line of credit was
amended to a maximum borrowing of $30,000,000.  See Note 16 of Notes to
Unaudited Consolidated Financial Statements.
  14
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 8.  Debt
(continued)
 
 As of
March 31, 2005, the Company had approximately $7,024,000 of notes payable at
interest rates ranging from 2.07% to 7.00%. These notes have been primarily
issued for buyouts of general manager interests in the cash flows of their
restaurants and generally are payable over five years.
 
 The
Company has notes payable with banks bearing interest at rates ranging from
5.45% to 7.00% to finance development of the Company’s restaurants in Korea. The
notes are denominated and payable in Korean won and mature at dates ranging from
June 2005 to January 2007. As of March 31, 2005 and December 31, 2004, the
outstanding balance was approximately $32,157,000 and $27,717,000, respectively.
Certain of the notes payable are collateralized by lease and other deposits. At
March 31, 2005 and December 31, 2004, collateralized notes totaled approximately
$29,581,000 and $25,346,000, respectively.
 
 The
Company has notes payable with banks to finance the development of the Company’s
restaurants in Japan (“Outback Japan”). The notes are payable to banks,
collateralized by lease deposits of approximately $3,400,000 and $3,600,000 at
March 31, 2005 and December 31, 2004, respectively, and letters of credit and
bear interest at 0.85% and at rates ranging from 0.95% to 0.96% at March 31,
2005 and December 31, 2004, respectively. The notes are denominated and payable
in Japanese yen, with outstanding balances as of March 31, 2005 maturing in
September 2005. As of March 31, 2005 and December 31, 2004, outstanding balances
totaled approximately $5,714,000 and $5,769,000, respectively.
 
 In
October 2003, Outback Japan established a revolving line of credit to finance
the development of new restaurants in Japan and refinance certain notes payable.
The line permits borrowing up to a maximum of $10,000,000
with interest rates ranging from 70.0 to 107.5 basis points over LIBOR. The line
originally matured in December 2004, but was amended in April 2004 with a new
maturity date in June 2007. As of March 31, 2005 and December 31, 2004, the
Company had borrowed approximately $10,163,000 and $10,260,000, respectively, on
the line of credit
at an average interest rate of 0.69%, with draws as of March 31, 2005 maturing
from June to August 2005. The revolving line of credit contains certain
restrictions and conditions as defined in the agreement. As of March 31, 2005,
the Company was in compliance with all of the debt covenants.
 
 In
February 2004, Outback Japan established an additional revolving line of credit
to finance the development of new restaurants in Japan and refinance certain
notes payable. The line permits borrowing up to a maximum of $10,000,000 with
interest of LIBOR divided by a percentage equal to 1.00 minus the Eurocurrency
Reserve Percentage. The line matures in December 2006. As of March 31, 2005 and
December 31, 2004, the Company had borrowed approximately $8,552,000 and
$8,635,000, respectively, on the line of credit at an average interest rate of
0.76%, with draws as of March 31, 2005 maturing from April to September 2005.
The revolving line of credit contains certain restrictions and conditions as
defined in the agreement. As of March 31, 2005, the Company was in compliance
with all of the debt covenants.
 
 The
Company is the guarantor of an uncollateralized line of credit that permits
borrowing of up to $35,000,000 for a limited liability company, T-Bird Nevada,
LLC (“T-Bird”), owned by its California franchisee. This line of credit was
scheduled to mature in December 2004 but was replaced in January 2005 by an
amended agreement with a new maturity date in December 2008. The Company was
required to consolidate T-Bird effective January 1, 2004 upon adoption of FIN
46R. At March 31, 2005 and December 31, 2004, the outstanding balance on the
line of credit was approximately $30,283,000 and $30,343,000, respectively, and
is included in the Company’s Consolidated Balance Sheets as long-term debt. The
line of credit bears interest at rates ranging from 50 to 90 basis points over
LIBOR.
 
 T-Bird
uses proceeds from the line of credit for the purchase of real estate and
construction of buildings to be opened as Outback Steakhouse restaurants and
leased to the Company’s franchisees. According to the terms of the line of
credit, T-Bird may borrow, repay, re-borrow or prepay advances at any time
before the termination date of the agreement. The line of credit matures on
December 31, 2008, at which time the entire outstanding principal amount of the
loan and any accrued interest is due.
 
  15
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 8.  Debt
(continued)
 
 If a
default under the line of credit were to occur requiring the Company to perform
under the guarantee obligation, it has the right to call into default all of its
franchisees in California and exercise any rights and remedies under those
agreements as well as the right to recourse under loans T-Bird has made to
individual corporations in California which own the land and/or building which
is leased to those franchise locations. Events of default are defined in the
line of credit agreement and include the Company’s covenant commitments under
existing lines of credit. The Company is not the primary obligor on the line of
credit and it is not aware of any non-compliance with the underlying terms of
the line of credit agreement that would result in it having to perform in
accordance with the terms of the guarantee. The Company also guarantees
additional term loans associated with the owner of T-Bird, which are not
consolidated, and which had outstanding balances of approximately $118,000 and
$176,000 as of March 31, 2005 and December 31, 2004, respectively.
 
 DEBT
GUARANTEES
 
 The
Company is the guarantor of an uncollateralized line of credit that permits
borrowing of up to a maximum of $24,500,000 for its joint venture partner, RY-8,
Inc. (“RY-8”), in the development of Roy's restaurants. The line of credit
originally expired in December 2004 and was renewed with a new termination date
of June 30, 2007. According to the terms of the credit agreement, RY-8 may
borrow, repay, re-borrow, or prepay advances at any time before the termination
date of the agreement. On the termination date of the agreement, the entire
outstanding principal amount of the loan then outstanding and any accrued
interest is due. At March 31, 2005 and December 31, 2004, the outstanding
balance on the line of credit was approximately $22,173,000 and $21,987,000,
respectively.
 
 RY-8’s
obligations under the line of credit are unconditionally guaranteed by the
Company and Roy’s Holdings, Inc, (“RHI”). If an event of default occurs (as
defined in the agreement, and including the Company’s covenant commitments under
existing lines of credit), then the total outstanding balance, including any
accrued interest, is immediately due from the guarantors.
 
 If an
event of default occurs and RY-8 is unable to pay the outstanding balance owed,
the Company would, as guarantor, be liable for this balance. However, in
conjunction with the credit agreement, RY-8 and RHI have entered into an
Indemnity Agreement and a Pledge of Interest and Security Agreement in favor of
the Company. These agreements provide that if the Company is required to perform
its obligation as guarantor pursuant to the credit agreement, then RY-8 and RHI
will indemnify OSI against all losses, claims, damages or liabilities which
arise out of or are based upon its guarantee of the credit agreement. RY-8’s and
RHI’s obligations under these agreements are collateralized by a first priority
lien upon and a continuing security interest in any and all of RY-8’s interests
in the joint venture.
 
 As a
result of the Company’s recourse provisions and collateral, the estimated fair
value of the guarantee to be recorded is immaterial to its financial condition
and financial statements.
 
 The
Company is the guarantor of up to $9,445,000 of a $68,000,000 note for an
unconsolidated affiliate, Kentucky Speedway, in which the Company has a 22.22%
equity interest and for which the Company operates catering and concession
facilities. Payments on this note began in December 2003 with final maturity in
December 2022. At March 31, 2005 and December 31, 2004, the outstanding balance
and the Company’s guarantee on the note were approximately $65,000,000 and
$9,445,000, respectively. This guarantee has not been modified since the
effective date of FIN 45, “Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others” and is
thus not subject to the recognition or measurement requirements of FIN
45.
 
  16
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 8.  Debt
(continued)
 
 DEBT
GUARANTEES (continued)
 
 The
Company’s contractual unconsolidated debt guarantees as of March 31, 2005 are
summarized in the table below (in thousands):
 
 **CURRENT**
    
    **LONG-TERM****TOTAL**
    
    **PORTION**
    
    **PORTION**Debtguarantees
    
    $
    34,063
    
    $
    25
    
    $
    34,038Amount
      outstanding under debt guarantees
    
    
    31,736
    
    
    25
    
    
    31,711
 
 9.  Other
Long-term Liabilities
 
 Other
long-term liabilities consisted of the following (in thousands):
  **MARCH
      31,**
    
    **DECEMBER
      31,****2005**
    
    **2004****(UNAUDITED)**
    
    ****Accrued
      insurance
    
    $
    4,000
    
    $
    4,000Other
      deferred liability
    
    
    2,114
    
    
    2,114$
    6,114
    
    $
    6,114
 
 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. The Company has deferred the gain associated
with the transaction until such time as the amounts due under the licensing
agreement are realized.  See Note 6 of Notes to Unaudited Consolidated
Financial Statements.
 
 10.  Foreign
Currency Translation and Comprehensive Income
 
 For all
significant non-U.S. operations, the functional currency is the local currency.
Assets and liabilities of those operations are translated into U.S. dollars
using the exchange rates in effect at the balance sheet date. Results of
operations are translated using the average exchange rates for the reporting
period. Translation gains and losses are reported as a separate component of
accumulated other comprehensive income (loss) in stockholders’ equity.
 
 Comprehensive
income includes net income and foreign currency translation adjustments. Total
comprehensive income for the three months ended March 31, 2005 and 2004 was
$51,681,000 and $48,269,000, respectively, which included the effect of gains
and losses from translation adjustments of approximately $723,000 and
$62,000 during the quarters.
 
 
  17
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 11.  Business
Combinations
 
 On
January 1, 2005, the Company acquired the 50% minority ownership interests of
its partner in four Carrabba's restaurants in Ohio for approximately $5,200,000
in cash and the assumption of the employee partner buyout liability for these
stores of approximately $590,000. The Company completed this acquisition because
it believes the additional cash flows provided from 100% ownership of these
restaurants will meet its internally required rate of return and provide
additional shareholder value. No minority interest for these stores has been
reflected in the Consolidated Financial Statements since that date. The Company
recorded goodwill of approximately $4,100,000 associated with this transaction,
all of which is expected to be deductible for income tax purposes.  See
Note 15 of Notes to Unaudited Consolidated Financial Statements.
 
 On an
unaudited pro forma basis, the effect of this acquisition was not significant to
the Company’s results of operations.
 
 12.  Earnings
Per Share
 
 The
following table represents the computation of basic and diluted earnings per
common share as required by SFAS No. 128, “Earnings Per Share” (in thousands,
except per share data):
 
 **THREE
      MONTHS ENDED****MARCH
      31,******
    
    **2005**
    
    **2004******
    
    **(restated)**Net
      income
    
    $
    50,958
    
    $
    47,831Basic
      weighted average number of common shares outstanding
    
    
    73,800
    
    
    74,487Basic
      earnings per common share
    
    $
    0.69
    
    $
    0.64Effect
      of dilutive stock options
    
    
    3,467
    
    
    4,012Diluted
      weighted average number of common shares outstanding
    
    
    77,267
    
    
    78,499Diluted
      earnings per common share
    
    $
    0.66
    
    $
    0.61
 
 Diluted
earnings per common share excludes approximately 480,000 antidilutive stock
options for the first quarter of 2005. There were no antidilutive options for
the first quarter of 2004.
 
 13.  Recently
Issued Financial Accounting Standards
 
 “Share-Based
Payment”
 
 In
December 2004, the FASB issued SFAS No. 123 (Revised), “Share-Based Payment,” a
revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No.
123R requires the fair value measurement of all stock-based payments to
employees, including grants of employee stock options, and recognition of those
expenses in the statement of operations. SFAS No. 123R is effective at the
beginning of the next fiscal year after June 15, 2005. The Company will continue
to account for stock-based compensation using the intrinsic value method until
adoption of SFAS No. 123R on January 1, 2006. Historically, the compensation
expense recognized related to stock options under this method has been minimal.
As a result, adoption of the provisions of SFAS No. 123R is expected to
have a significant impact to reported net income and earnings per share. The
Company has not yet determined the method of adoption or the effect of adopting
SFAS No. 123R and has not determined whether the adoption will result in amounts
that are similar to the current pro forma disclosures under SFAS No.
123.
 
 
  18
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 14.  Commitments
and Contingencies
 
 In June
2003, in a civil case against the Company in Indiana state court alleging
liability under the “dramshop” liquor liability statute, a jury returned a
verdict in favor of the two plaintiffs who were injured by a drunk driver. The
portion of the verdict against the Company was $39,000,000. The Company has
appealed the verdict. Oral argument has been made to the appellate court, and
the Company is awaiting the decision of the court. The Company has insurance
coverage related to this case provided by its primary carrier for $21,000,000
and by an excess insurance carrier for the balance of the verdict of
approximately $19,000,000. The excess insurance carrier has filed a declaratory
judgment suit claiming it was not notified of the case and is therefore not
liable for its portion of the verdict. The Company does not believe the excess
carrier’s case has any merit and is vigorously defending this case. Activity in
this case has been held in abeyance pending the decision of the appellate court
in the “dramshop” case. The Company has filed counter-claims against the excess
carrier and cross-claims against the primary carrier and its third-party
administrator. If the excess carrier’s suit were to succeed, the Company
believes it would have rights against the primary carrier and its third party
administrator to recover any amounts the Company may have to pay.
 
 15.  Related
Parties
 
 On
January 1, 2005, the Company acquired four joint venture Carrabba’s restaurants
from limited partnerships in which two executive officers had ownership
interests (see
Note 11 of Notes to Unaudited Consolidated Financial Statements).  These
executive officers will receive approximately $141,000 and $202,000 as a result
of their ownership interests in those joint venture restaurants.
 
 16.  Subsequent
Events
 
 On April
27, 2005, the Company’s Board of Directors approved a grant of restricted common
stock to the Company’s Chief Executive Officer under the Amended and Restated
Stock Option Plan. Under the terms of the grant, 300,000 shares of restricted
common stock were issued and will vest as follows: on December 31, 2009, 90,000
shares, plus an additional 30,000 shares if the market capitalization of the
Company exceeds $6,060,000,000; on December 31, 2011, 90,000 shares, plus an
additional 30,000 shares if the market capitalization of the Company exceeds
$8,060,000,000; and on December 31, 2014, the balance of all remaining unvested
shares.
 
 On April
28, 2005, the Company’s $20,000,000 uncollateralized line of credit was amended
to a maximum borrowing of $30,000,000. All other terms and conditions of the
line remain unchanged.
 
 
  19
 Table of Contents
  **Outback Steakhouse, Inc.**
 **MANAGEMENT'S
DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
CONDITION AND RESULTS OF OPERATIONS**
 
 **Item
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS**
 
 Management’s
discussion and analysis of financial condition and results of operations should
be read in conjunction with the Unaudited Consolidated Financial Statements and
the related Notes. Comparisons to reported amounts for 2004 are based upon
restated results as discussed in Note 1 of the Notes to Unaudited Consolidated
Financial Statements.
 
 **Overview**
 
 We are
one of the largest casual dining restaurant companies in the world, with eight
restaurant concepts, over 1,200 system-wide restaurants and 2004 annual revenues
for Company-owned stores exceeding $3.2 billion. We operate in all 50 states and
in 21 countries internationally, predominantly through Company-owned stores, but
we also operate under a variety of partnerships and franchises. Our primary
focus as a company of restaurants is to provide a quality product together with
quality service across all of our brands. This goal entails offering consumers
of different demographic backgrounds an array of dining alternatives suited for
differing needs. Our sales are primarily generated through a diverse customer
base, which includes people eating in our restaurants as regular users who
return for meals several times a week or on special occasions such as birthday
parties, private events and for business entertainment. Secondarily, we generate
revenues through sales of franchises and ongoing royalties as well as the sale
and redemption of gift certificates.
 
 The
restaurant industry is a highly competitive and fragmented business, which is
subject to sensitivity from changes in the economy, trends in lifestyles,
seasonality (customer spending patterns at restaurants are generally highest in
the first quarter of the year and lowest in the third quarter of the year) and
fluctuating costs. Operating margins for restaurants are susceptible to
fluctuations in prices of commodities, which include among other things, beef,
chicken, seafood, butter, cheese, produce and other necessities to operate a
store such as natural gas or other energy supplies. Additionally, the restaurant
industry is characterized by a high initial capital investment, coupled with
high labor costs. The combination of these factors underscores our initiatives
to drive increased sales at existing stores in order to raise margins and
profits, because the incremental sales contribution to profits from every
additional dollar of sales above the minimum costs required to open, staff and
operate a store is very high. We are not a company focused on growth in the
number of restaurants just to generate additional sales. Our expansion and
operation strategies are to balance investment costs and the economic factors of
operation, in order to generate reasonable, sustainable margins and achieve
acceptable returns on investment from our restaurant concepts.
 
 Promotion
of our Outback Steakhouse and Carrabba's Italian Grill restaurants is assisted
by the use of national and spot television and radio media, which we have also
begun to use in certain markets for our Bonefish Grill brand. We advertise on
television in spot markets when our brands achieve sufficient penetration to
make a meaningful broadcast schedule affordable. We rely on word-of-mouth
customer experience, grassroots marketing in local venues, direct mail and
national print media to support broadcast media and as the primary campaigns for
our upscale casual and newer brands. We do not attempt to lure customers with
discounts, as is common to many restaurants in the casual dining industry. Our
advertising dollars are targeted to promote and maintain brand image and develop
consumer awareness. We strive to drive sales through excellence in execution
rather than through discounting and other short-lived marketing efforts. Our
marketing strategy of encouraging customers to visit frequently and also
recommending our restaurants to others complements what we believe are the
fundamental elements of success: convenient sites, service-oriented employees
and flawless execution in a well-managed restaurant.
  20
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **MANAGEMENT'S
DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
CONDITION AND RESULTS OF OPERATIONS**
 
 **Overview
(continued)**
 
 Key
factors which can be used in evaluating and understanding our restaurants and
assessing our business include the following:
 
 -
    Average
      unit volumes - a per store calculated average sales amount, which helps us
      gauge the changes in consumer traffic, pricing and development of the
      brand;
 -
    Operating
      margins - store revenues after deduction of the main store-level operating
      costs (including cost of sales, restaurant operating expenses, and labor
      and related costs);
 -
    System-wide
      sales - a total sales volume for all Company-owned, franchise and
      unconsolidated joint venture stores, regardless of ownership to interpret
      the health of our brands; and
 -
    Same-store
      or comparable sales - a year-over-year comparison of sales volumes for
      stores that are open in both years in order to remove the impact of new
      openings in comparing the operations of existing
stores.
 
 Our
consolidated operating results are affected by the growth of our newer brands.
As we continue to develop and expand new restaurant concepts at different rates,
our cost of sales, labor costs, restaurant operating expenses and income from
operations change from the mix of brands in our portfolio with slightly
different operating characteristics. Labor and related expenses are higher at
our new format stores than have typically been experienced at Outback
Steakhouses. However, cost of sales at those stores is lower than those at
Outback. These trends are expected to continue with our planned development of
stores in 2005.
 
 Our
industry’s challenges and risks include, but are not limited to, the potential
for government regulation, the availability of employees, consumer perceptions
regarding food safety and/or the health benefits of certain types of food,
including attitudes about alcohol consumption, economic conditions and commodity
pricing. Additionally, our planned development schedule is subject to risk
because of rising real estate and construction costs, and our results are
affected by consumer tolerance of price increases. We have provided information
in our Outlook section that outlines our current beliefs regarding the
anticipated changes to our operations resulting from increased beef prices and
other commodity costs, continued pre-opening expenses from the development of
new restaurants and our expansion strategy, among other factors that may affect
our results in the remainder of 2005.
 
 
  21
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **MANAGEMENT'S
DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
CONDITION AND RESULTS OF OPERATIONS**
 
 **Results
of Operations**
 
 The
following tables set forth, for the periods indicated, (i) percentages that
items in our Unaudited Consolidated Statements of Income bear to total revenues
or restaurant sales, as indicated, and (ii) selected operating data:
 
 **THREE
      MONTHS ENDED****MARCH
      31,****2005**
    
    **2004******
    
    **(restated)**RevenuesRestaurant
      sales
    
    
    99.4
    %
    
    99.4
    %Other
      revenues
    
    
    0.6
    
    
    0.6Total
      revenues
    
    
    100.0
    
    
    100.0Costs
      and expensesCost
      of sales (1)
    
    
    36.5
    
    
    37.1Labor
      and other related (1)
    
    
    23.8
    
    
    23.8Other
      restaurant operating (1)
    
    
    20.1
    
    
    20.0Distribution
      expense to employee partners, excluding stock expense (1)
    
    
    2.5
    
    
    2.3Employee
      partner stock buyout expense (1)
    
    
    0.3
    
    
    0.3Depreciation
      and amortization
    
    
    3.3
    
    
    3.1General
      and administrative
    
    
    4.5
    
    
    4.1Provision
      for impaired assets and restaurant closings
    
    
    0.1
    
    
    -Income
      from operations of unconsolidated affiliates
    
    
    *
    
    
    (*
    )Total
      costs and expenses
    
    
    90.7
    
    
    90.1Income
      from operations
    
    
    9.3
    
    
    9.9Other
      income (expense), net
    
    
    (0.1
    )
    
    (0.1
    )Interest
      income
    
    
    *
    
    
    *Interest
      expense
    
    
    (0.1
    )
    
    (0.1
    )Income
      before elimination of minority partners' interest and income
      taxes
    
    
    9.1
    
    
    9.7Elimination
      of minority partners' interest
    
    
    0.3
    
    
    0.5Income
      before provision for income taxes
    
    
    8.8
    
    
    9.2Provision
      for income taxes
    
    
    3.1
    
    
    3.2Net
      income
    
    
    5.7
    %
    
    6.0
    %
 __________________
 (1)
    As a
      percentage of restaurant sales.
 *
    Less
      than 1/10 of one percent of total revenues.
 
 
  22
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **MANAGEMENT'S
DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
CONDITION AND RESULTS OF OPERATIONS**
 
 **Results
of Operations (continued)**
 
 System-wide
sales grew by 12.3% for the quarter ended March 31, 2005. System-wide sales is a
non-GAAP financial measure that includes sales of all restaurants operating
under our brand names, whether we own them or not. The two components of
system-wide sales, including those of Outback Steakhouse, Inc. and those of
franchisees and unconsolidated development joint ventures, are provided in the
two tables below:
 
 **THREE
      MONTHS ENDED****MARCH
      31,****2005**
    
    **2004**OUTBACK
      STEAKHOUSE, INC. RESTAURANT SALES (in millions):Outback
      SteakhousesDomestic
    
    $
    574
    
    $
    559International
    
    
    58
    
    
    34Total
    
    
    632
    
    
    593Carrabba's
      Italian Grills
    
    
    138
    
    
    119Other
      restaurants
    
    
    120
    
    
    77Total
      Company-owned restaurant sales
    
    $
    890
    
    $
    789
 
 The
following information presents sales for franchised and unconsolidated
development joint venture restaurants. These are restaurants that are not owned
by us and from which we only receive a franchise royalty or a portion of their
total income. Our management believes that franchise and unconsolidated
development joint venture sales information is useful in analyzing our revenues
because franchisees and affiliates pay service fees and/or royalties that
generally are based on a percent of sales. Our management also uses this
information to make decisions about future plans for the development of
additional restaurants and new concepts as well as evaluation of current
operations.
 
 These
sales do not represent sales of Outback Steakhouse, Inc., and are presented only
as an indicator of changes in the restaurant system, which we believe is
important information regarding the health of our restaurant
brands.
 
 **THREE
      MONTHS ENDED****MARCH
      31,****2005**
    
    **2004**FRANCHISE
      AND DEVELOPMENT JOINT VENTURE SALES (in millions) (1):Outback
      SteakhousesDomestic
    
    $
    89
    
    $
    86International
    
    
    29
    
    
    22Total
    
    
    118
    
    
    108Other
      restaurants
    
    
    3
    
    
    3Total
      franchise and development joint venture sales (1)
    
    $
    121
    
    $
    111Income
      from franchise and development joint ventures (2)
    
    $
    4
    
    $
    4
 __________________
 (1)
    Franchise
      and development joint venture sales are not included in our Company
      revenues as reported in our Consolidated Statements of
    Income.
 (2)
    Represents
      the franchise royalty and portion of total income included in our
      Consolidated Statements of Income in the line items Other revenues or
      Income from operations of unconsolidated
affiliates.
  23
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **MANAGEMENT'S
DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
CONDITION AND RESULTS OF OPERATIONS**
 
 **Results
of Operations (continued)**
 
 **MARCH
      31,****2005**
    
    **2004**Number
      of restaurants (at end of the period):Outback
      SteakhousesCompany-owned
      - domestic
    
    
    654
    
    
    629Company-owned
      - international
    
    
    75
    
    
    57Franchised
      and development joint venture-
      domestic
    
    
    104
    
    
    100Franchised
      and development joint venture-
      international
    
    
    55
    
    
    51Total
    
    
    888
    
    
    837Carrabba's
      Italian GrillsCompany-owned
    
    
    176
    
    
    154Bonefish
      GrillsCompany-owned
    
    
    68
    
    
    38Franchised
    
    
    4
    
    
    4Total
    
    
    72
    
    
    42Fleming’s
      Prime Steakhouse and Wine BarsCompany-owned
    
    
    32
    
    
    22Roy’sCompany-owned
    
    
    19
    
    
    18Lee
      Roy Selmon’sCompany-owned
    
    
    2
    
    
    2Cheeseburger
      in ParadiseCompany-owned
    
    
    14
    
    
    4Paul
      Lee's Chinese KitchensCompany-owned
    
    
    3
    
    
    -System-wide
      total
    
    
    1,206
    
    
    1,079
  24
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **MANAGEMENT'S
DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
CONDITION AND RESULTS OF OPERATIONS**
 
 **Three
months ended March 31, 2005 and 2004**
 
 REVENUES
 
 *Restaurant
sales.* Restaurant sales increased by 12.8% to $890,041,000 during the first quarter of
2005 compared with $789,213,000 in the same period in 2004. The increase in
restaurant sales was primarily attributable to additional revenues of
approximately $84,892,000 from the opening of new restaurants after March 31,
2004, as well as increases in sales at existing restaurants. The following table
includes additional information about changes in restaurant sales at domestic
Company-owned restaurants for the three months ended March 31, 2005 and
2004:
 **THREE
      MONTHS ENDED****MARCH
      31,****2005**
    
    **2004**Average
      unit volumes (weekly) for restaurants opened for one year or
      more:Outback
      Steakhouses
    
    $
    68,877
    
    $
    68,794Carrabba's
      Italian Grills
    
    
    63,963
    
    
    61,570Fleming's
      Prime Steakhouse and Wine Bars
    
    
    98,051
    
    
    96,266Roy's
    
    
    76,323
    
    
    74,115Bonefish
      Grills
    
    
    65,472
    
    
    69,755Average
      unit volumes (weekly) for restaurants opened for less than one year:Outback
      Steakhouses
    
    $
    58,794
    
    $
    62,956Carrabba's
      Italian Grills
    
    
    53,908
    
    
    59,557Fleming's
      Prime Steakhouse and Wine Bars
    
    
    79,842
    
    
    62,515Roy's
    
    
    104,885
    (1
    )
    68,973Bonefish
      Grills
    
    
    60,198
    
    
    61,357Operating
      weeks:Outback
      Steakhouses
    
    
    8,381
    
    
    8,143Carrabba's
      Italian Grills
    
    
    2,204
    
    
    1,937Fleming's
      Prime Steakhouse and Wine Bars
    
    
    406
    
    
    286Roy's
    
    
    240
    
    
    234Bonefish
      Grills
    
    
    805
    
    
    459Year
      to year percentage change:Menu
      price increases (2):Outback
      Steakhouses
    
    
    4.1
    %
    
    2.5
    %Carrabba's
      Italian Grills
    
    
    2.3
    %
    
    1.2
    %Bonefish
      Grills
    
    
    2.3
    %
    
    2.0
    %Same-store
      sales (stores open 18 months or more):Outback
      Steakhouses
    
    
    -0.5
    %
    
    6.7
    %Carrabba's
      Italian Grills
    
    
    4.3
    %
    
    5.1
    %Fleming's
      Prime Steakhouse and Wine Bars
    
    
    10.7
    %
    
    19.0
    %Roy's
    
    
    3.4
    %
    
    17.7
    %Bonefish
      Grills
    
    
    0.3
    %
    
    13.4
    %
 __________________
 (1)
    Represents
      one restaurant.
 (2)
    Reflects
      nominal amounts of menu price changes, prior to any change in product mix
      because of price increases, and may not reflect amounts effectively paid
      by the customer. Menu price increases are not provided for Fleming's and
      Roy's as a significant portion of their sales come from specials, which
      fluctuate daily.
  25
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **MANAGEMENT'S
DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
CONDITION AND RESULTS OF OPERATIONS**
 
 **Three
months ended March 31, 2005 and 2004 (continued)**
 
 *Other
revenues.* Other
revenues, consisting primarily of initial franchise fees and royalties,
increased by $570,000 to $5,081,000 in the first quarter of 2005 as compared
with $4,511,000 in 2004. This
increase primarily resulted from higher initial franchise fees and royalties
from additional stores opened and operated as franchises during the first three
months of 2005 compared with the same period in 2004.
 
 COSTS
AND EXPENSES
 
 *Cost
of sales.* Cost of
sales, consisting of food and beverage costs, decreased 0.6% to 36.5% as a
percentage of restaurant sales in the first quarter of 2005 compared with the
same period in 2004. Decreases in cost of sales were attributable to an increase
in the proportion of consolidated sales associated with our non-Outback
Steakhouse restaurants that have lower cost of goods sold ratios than Outback
Steakhouses. In addition, menu price increases reduced cost of sales as a
percentage of restaurant sales and increases in commodity costs for beef and
pork during the period were partially offset by decreases in certain produce
costs, particularly potatoes.
 
 *Labor
and other related expenses* . Labor
and other related expenses include all direct and indirect labor costs incurred
in operations, except for distribution expense to employee partners and employee
partner stock buyout expense, described below. Labor and other related expenses
were flat as a percentage of restaurant sales at 23.8% in the first quarter of
2005 compared with the same period in 2004. Increases in the proportion of new
restaurant formats, which have higher average labor costs than domestic Outback
Steakhouses and Carrabba's Italian Grills, were offset by increased productivity
and menu price increases in the Outback Steakhouse brand.
 
 *Other
restaurant operating expenses* . Other
restaurant operating expenses include certain unit-level operating costs such as
operating supplies, rent, repair and maintenance, advertising expenses,
utilities, pre-opening costs and other occupancy costs. Substantial portions of
these expenses are fixed or indirectly variable. These costs increased 0.1% to
20.1% as a percentage of restaurant sales in the first quarter of 2005 compared
with the same period in 2004. This
increase resulted from an increase in the proportion of new format restaurants
and international Outback Steakhouses in operation, which have higher average
restaurant operating expenses as a percentage of restaurant sales than domestic
Outback Steakhouses and Carrabba's Italian Grills, as well as higher utility
costs and increases in the rates we are charged by credit card companies. These
increases were partially offset by decreased advertising expense in the Outback
Steakhouse brand during the first quarter of 2005.
 
 *Distribution
expense to employee partners, excluding stock expense.* Distribution
expense to employee partners, excluding stock expense, includes distributions to
managing partners and area operating partners of their percentage of restaurant
cash flows pursuant to their interest agreements, and cash buyouts of managing
partners’ rights in the cash flows of their restaurants. These costs increased
0.2% as a percentage of restaurant sales to 2.5% in the first quarter of 2005
compared with the same period in 2004. The increase was primarily attributable
to higher restaurant operating margins, particularly at international Outback
Steakhouses.
 
 *Employee
partner stock buyout expense.* Employee
partner stock buyout expense includes non-cash expenses recorded for the accrual
of future buyouts of area operating partners’ rights to the cash flows of their
restaurants. Upon buyout, area operating partners generally receive common stock
in exchange for their rights in the cash flows of a restaurant. Employee partner
stock buyout expense was flat as a
percentage of restaurant sales at 0.3% of
restaurant sales for the first quarter of 2005 compared with the same period in
2004. Increases in expense due to new restaurants opened by area operating
partners and increased overall restaurant operating margins across the
consolidated brands were offset by buyouts of existing restaurants.
 
  26
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **MANAGEMENT'S
DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
CONDITION AND RESULTS OF OPERATIONS**
 
 **Three
months ended March 31, 2005 and 2004 (continued)**
 
 *Depreciation
and amortization* .
Depreciation and amortization costs increased 0.2% as a percentage of total
revenues to 3.3% in the first quarter of 2005 compared to the same period in
2004. Increased depreciation expense as a percentage of total revenues resulted
from lower average unit volumes at Outback Steakhouses during the quarter, the
continued rollout of a new point of sale system to our Outback Steakhouse
restaurants, and higher depreciation costs for certain of our new restaurant
formats, which have higher average construction costs than an Outback
Steakhouse.
 
 *General
and administrative* . General
and administrative costs increased by $7,878,000 to $40,125,000 in the first
quarter of 2005 compared with $32,247,000 during the same period in
2004. This
increase resulted from approximately $2,100,000 in compensation expense
recognized in the first quarter of 2005 associated with our new Chief Executive
Officer, approximately $1,000,000 in carrying costs associated with the
acquisition of designation rights from Chi-Chi’s in 2004, an increase in costs
for the quarter resulting from the timing of our annual managing partner
conference, and an increase in overall administrative costs associated with
operating additional domestic and international restaurants. These increases
were partially offset by the reduction in consulting fees paid for supply chain
management projects in 2004 that did not recur in 2005.
 
 *Provision
for impaired assets and restaurant closing.* A
provision of approximately $776,000 was recorded during the first quarter of
2005 for the closing of one Company-owned Outback Steakhouse restaurant in
Tennessee.
 
 *Income
from operations of unconsolidated affiliates* . Income
from operations of unconsolidated affiliates represents our portion of net
income from restaurants operated as development joint ventures. Income from
development joint ventures decreased by $350,000 to a loss of $97,000 during the
first quarter of 2005 compared with income of $253,000 during the same period in
2004. This decrease was attributable to the adoption of a buyout program for
managing and area operating partners in certain Outback Steakhouses in our joint
venture in Brazil.
 
 *Income
from operations* . As a
result of the increase in revenues, the opening of new restaurants and the
changes in the relationships between revenues and expenses discussed above,
income from operations increased by $5,154,000 to $83,669,000 in the first
quarter of 2005 compared with $78,515,000 in the same period in
2004.
 
 *Other
income (expense), net* . Other
income (expense) represents the net of revenues and expenses from non-restaurant
operations. Net other expense was $934,000 during the first quarter of 2005
compared with $873,000 in the same period in 2004.  Losses in
the cash surrender value of certain life insurance policies of approximately
$250,000 were offset by a gain from the sale of a non-operating asset in the
first quarter of 2005, resulting in no significant change in other expense
compared with the same period in 2004.
 
 *Interest
income* .
Interest income was $368,000 during the first quarter of 2005 compared with
$332,000 in the same period in 2004. Interest
income increased due to higher interest rates on short-term investment balances
during the first quarter of 2005 compared with the same period in 2004. Interest
income in our Consolidated Statements of Income for the quarters ended March 31,
2005 and 2004 included interest of approximately $245,000 and $118,000,
respectively, from notes receivable held by a limited liability company owned by
our California franchisee.
 
 *Interest
expense* .
Interest expense was $1,158,000 during the first quarter of 2005 compared with
$705,000 in the same period in 2004. The
increase in interest expense was due to higher average debt balances and higher
interest rates during the first quarter of 2005 compared with the first quarter
of 2004. Interest
expense in our Consolidated Statements of Income for the quarters ended March
31, 2005 and 2004 included approximately $245,000 and $118,000, respectively, of
expense from outstanding borrowings on the line of credit held by a limited
liability company owned by our California franchisee.
  27
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **MANAGEMENT'S
DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
CONDITION AND RESULTS OF OPERATIONS**
 
 **Three
months ended March 31, 2005 and 2004 (continued)**
 
 *Elimination
of minority partners' interest* . This
line item represents the portion of income or loss from operations included in
consolidated operating results attributable to our partners’ ownership
interests. As a percentage of revenues, minority partners’ income was 0.3%
and 0.5% during
the quarters ended March 31, 2005 and 2004, respectively. The decline in the
ratio is primarily the resul t of the
lower percentage of minority partners’ ownership interests in Fleming’s and
Carrabba’s in 2005 due to our acquisition of those interests.
 
 *Provision
for income taxes* . The
provision for income taxes in the first quarter of both 2005 and 2004 reflects
expected income taxes due at federal statutory rates and state income tax rates,
net of the federal benefit. The effective income tax rate was 35.1% during the
first quarter of 2005 and 34.6% during the first quarter of 2004. The increase
in the rate resulted from non-deductibility of certain management compensation
during the first quarter of 2005.  Approximately
23% of our international restaurants in which we have a direct investment are
owned through a Cayman Island corporation.
 
 *Net
income and earnings per share* . Net
income for the first quarter of 2005 was $50,958,000 compared with $47,831,000
in the same period in 2004. Basic earnings per share increased to $0.69 during
the first quarter of 2005 compared with $0.64 for the same period in 2004 as a
result of the increas e in net
income, partially offset by a decrease in basic weighted average shares
outstanding of approximately 687,000 shares. Th e
decrease in basic weighted average shares outstanding for the quarter ended
March 31, 2005 compared with March 31, 2004 was primarily due to common
stock repurchases ,
partially offset by the issuance of shares under stock option plans.  Diluted
earnings per share increased to $0.66 during the first quarter of 2005 compared
with $0.61 for the same period in 2004 as a resu lt of the
increase in net income, partially offset by a decrease in diluted weighted
average shares outstanding of approximately 1,232,000 shares. The decrease
in diluted weighted average shares outstanding for the quarter ended March 31,
2005 compared with March 31, 2004 was primarily due to common
stock repurchases.
 
 **Liquidity
and Capital Resources**
 
 The
following table presents a summary of our cash flows from operating, investing
and financing activities for the periods indicated (in thousands):
 
 **THREE
      MONTHS ENDED****MARCH
      31,****2005**
    
    **2004**Net
      cash provided by operating activities
    
    $
    84,963
    
    $
    69,744Net
      cash used in investing activities
    
    
    (67,124
    )
    
    (53,574
    )Net
      cash used in financing activities
    
    
    (2,455
    )
    
    (26,758
    )Net
      increase (decrease) in cash and cash equivalents
    
    $
    15,384
    
    $
    (10,588
    )
 
 We
require capital principally for the development of new restaurants, remodeling
older restaurants and investments in technology, and on occasion also use
capital for acquisitions of franchisees and joint venture partners. We also
require capital to pay dividends to common stockholders (refer to additional
discussion in the Dividends section of Management’s Discussion and Analysis of
Financial Condition and Results of Operations). We also utilize capital to
repurchase our common stock as part of an ongoing share repurchase program.
Capital expenditures totaled approximately $254,871,000 for the year ended
December 31, 2004 and approximately $64,796,000 and $57,838,000 during the first
three months of 2005 and 2004, respectively. We either lease our restaurants
under operating leases for periods ranging from five to 30 years (including
renewal periods) or build free standing restaurants where it is cost
effective.
  28
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **MANAGEMENT'S
DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
CONDITION AND RESULTS OF OPERATIONS**
 
 **Liquidity
and Capital Resources (continued)**
 
 If demand
for our products and services were to decrease as a result of increased
competition, changing consumer tastes, changes in local, regional, national and
international economic conditions or changes in the level of consumer acceptance
of our restaurant brands, our restaurant sales could decline significantly. The
following table sets forth approximate amounts by which cash provided by
operating activities may decline in the event of a decline in restaurant sales
of 5%, 10% and 15% compared with total revenues for the year ended December 31,
2004 (in thousands):
 
 **5%**
    
    **10%**
    
    **15%**Decrease
      in restaurant sales
    
    $
    (159,165
    )
    $
    (318,330
    )
    $
    (477,495
    )Decrease
      in cash provided by operating activities
    
    
    (30,003
    )
    
    (60,005
    )
    
    (90,008
    )
 
 The
estimates above are based on the assumption that earnings before income taxes,
depreciation and amortization decrease approximately $0.29 for every $1.00
decrease in restaurant sales. These numbers are estimates only and do not
consider other measures we could implement were such decreases in revenue to
occur.
 
 We have
formed joint ventures to develop Outback Steakhouses in Brazil and the
Philippines. We are also developing Company-owned restaurants internationally in
Puerto Rico, Korea, Hong Kong and Japan.
 
 During
September 2003, we formed a limited liability company to develop Paul Lee’s
Chinese Kitchen (“Paul Lee’s”) restaurants, which is included in our
Consolidated Financial Statements. Under the terms of the agreement, we
committed to the first $10,000,000 of future development costs to open the first
five restaurants, all of which had been expended as of March 31, 2005.
Additionally, we are subject to a purchase or sale option if for eighteen
consecutive months there is no restaurant development, whereby our partner may
purchase our interest in the LLC for five times the restaurant cash flows for
the immediately preceding twelve months.
 
 On August
3, 2004, we were approved by the United States Bankruptcy Court for the District
of Delaware as the successful bidder at an auction of designation rights for 76
properties of Chi-Chi’s, Inc. and its affiliates. Our objective in acquiring
these rights is to have access to restaurant sites for conversion to one of our
own concepts under our current expansion plans. The original 76 properties
included 23 locations with owned land and building, 15 sale-leaseback properties
with reversion rights and purchase options, 23 ground leases and 15 leases. The
properties include any real property, furniture, fixtures and equipment and
liquor licenses. The designation rights allow us to transfer properties to
ourselves, to transfer properties to others or to require Chi-Chi’s to retain
properties. The right to designate properties will expire one year from the date
of closing, which occurred September 20, 2004. The purchase price for the
designation rights was $42,500,000. We are responsible for paying the carrying
costs on each of the properties from the closing date until the date the
property is designated for transfer.
 
 Prior to
September 30, 2004, Chi-Chi’s exercised a right to exclude one property from the
designation rights listing. We received a $1,100,000 payment from Chi-Chi’s in
October 2004, which reduced our total purchase price for the remaining 75
properties. Additionally, in October 2004, we completed an assignment to a third
party of our designation rights for 25 properties in exchange for $9,975,000.
The third party will pay the carrying costs on these properties from the closing
date until the property is designated for transfer. In November 2004, we
required Chi-Chi’s to retain 15 properties, leaving 35 properties to which we
had rights as of December 31, 2004. The remaining properties include 14
properties with owned land and building, 10 sale-leaseback properties with
reversion rights and purchase options, nine ground leases and two
leases.
 
  29
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **MANAGEMENT'S
DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
CONDITION AND RESULTS OF OPERATIONS**
 
 **Liquidity
and Capital Resources (continued)**
 
 In 1985,
the state legislature in Florida passed a “substitute communications tax” for
telephone company switched service. As a result of recent rulemaking and audits,
the Department of Revenue has identified local area networks, intercom systems,
wireless routers and other internal communication systems as included in the
definition of substitute communications. The substitute communications tax will
be actively enforced after the 2005 legislative session, if it is not repealed,
and could result in material charges to us by taxing any system that allows
intra-company communications based on the actual cost of that equipment. As of
March 31, 2005, we are unable to estimate any potential liability due to the
lack of regulatory guidance from the Department of Revenue.
 
 CREDIT
FACILITIES
 
 Effective
April 27, 2004, we replaced a $125,000,000 revolving credit facility that was
scheduled to mature in December 2004, with a new uncollateralized three-year
$150,000,000 revolving bank credit facility that matures in June 2007. The
revolving line of credit permits borrowing at interest rates ranging from 50 to
90 basis points over the 30, 60, 90 or 180-day LIBOR (ranging from 2.85% to
3.38% at March 31, 2005).  At March 31, 2005, the unused portion of the
line of credit was $81,000,000.
 
 The
credit agreement contains certain restrictions and conditions as defined in the
agreement that require us to maintain consolidated net worth equal to or greater
than consolidated total debt and to maintain a ratio of total consolidated debt
to EBITDAR (earnings before interest, taxes, depreciation, amortization and
rent) equal to or less than 3.0 to 1.0. At March 31, 2005, we were in compliance
with these debt covenants.
 
 We also
replaced a $15,000,000 line of
credit that was scheduled to mature in December 2004, with a new $20,000,000
uncollateralized line of credit. The new line of credit matures in June 2007 and
permits borrowing at interest rates ranging from 50 to 90 basis points over
LIBOR for loan draws and 65 to 112.5 basis points over LIBOR for letter of
credit advances. The credit agreement contains certain restrictions and
conditions as defined in the agreement. At March 31, 2005 and December 31, 2004,
$20,000,000 and $11,782,000, respectively, of the line of credit was committed
for the issuance of letter of credit advances as required by insurance companies
that underwrite our workers’ compensation insurance and also where required for
construction of new restaurants. On April 28, 2005, this line of credit was
amended to a maximum borrowing of $30,000,000. All other terms and conditions of
the line remain unchanged.
 
 As of
March 31, 2005, we had approximately $7,024,000 of notes payable at interest
rates ranging from 2.07% to 7.00%. These notes have been primarily issued for
buyouts of general manager interests in the cash flows of their restaurants and
generally are payable over five years.
 
 We have
notes payable with banks bearing interest at rates ranging from 5.45% to 7.00%
to finance development of our restaurants in Korea. The notes are denominated
and payable in Korean won and mature at dates ranging from June 2005 to January
2007. As of March 31, 2005 and December 31, 2004, the outstanding balance was
approximately $32,157,000 and $27,717,000, respectively. Certain of the notes
payable are collateralized by lease and other deposits. At March 31, 2005 and
December 31, 2004, collateralized notes totaled approximately $29,581,000 and
$25,346,000, respectively.
 
 We have
notes payable with banks to finance the development of our restaurants in Japan
(“Outback Japan”). The notes are payable to banks, collateralized by lease
deposits of approximately $3,400,000 and $3,600,000 at March 31, 2005 and
December 31, 2004, respectively, and letters of credit and bear interest at
0.85% and at rates ranging from 0.95% to 0.96% at March 31, 2005 and December
31, 2004, respectively. The notes are denominated and payable in Japanese yen,
with outstanding balances as of March 31, 2005 maturing in September 2005. As of
March 31, 2005 and December 31, 2004, outstanding balances totaled approximately
$5,714,000 and $5,769,000, respectively.
 
  30
 Table of Contents
  
 **Outback
Steakhouse, Inc.**
 **MANAGEMENT'S
DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
CONDITION AND RESULTS OF OPERATIONS**
 
 **Liquidity
and Capital Resources (continued)**
 
 CREDIT
FACILITIES (continued)
 
 In
October 2003, Outback Japan established a revolving line of credit to finance
the development of new restaurants in Japan and refinance certain notes payable.
The line permits borrowing up to a maximu m of
$10,000,000 with interest rates ranging from 70.0 to 107.5 basis points over
LIBOR. The line originally matured in December 2004, but was amended in April
2004 with a new maturity date in June 2007. As of March 31, 2005 and December
31, 2004, Outback Japan had borrowed approximately $10,163,000 and $10,260,000,
respectively, on th e line of
credit at an average interest rate of 0.69%, with draws as of March 31, 2005
maturing from June to August 2005. The revolving line of credit contains certain
restrictions and conditions as defined in the agreement. As of March 31, 2005,
we were in compliance with all of the debt covenants.
 
 In
February 2004, Outback Japan established an additional revolving line of credit
to finance the development of new restaurants in Japan and refinance certain
notes payable. The line permits borrowing up to a maximum of $10,000,000 with
interest of LIBOR divided by a percentage equal to 1.00 minus the Eurocurrency
Reserve Percentage. The line matures in December 2006. As of March 31, 2005 and
December 31, 2004, Outback Japan had borrowed approximately $8,552,000 and
$8,635,000, respectively, on the line of credit at an average interest rate of
0.76%, with draws as of March 31, 2005 maturing from April to September 2005.
The revolving line of credit contains certain restrictions and conditions as
defined in the agreement. As of March 31, 2005, we were in compliance with all
of the debt covenants.
 
 We are
the guarantor of an uncollateralized line of credit that permits borrowing of up
to $35,000,000 for a limited liability company, T-Bird Nevada, LLC (“T-Bird”),
owned by a California franchisee. This line of credit was scheduled to mature in
December 2004 but was replaced in January 2005 by an amended agreement with a
new maturity date in December 2008. The line of credit bears interest at rates
ranging from 50 to 90 basis points over LIBOR. We were required to consolidate
T-Bird effective January 1, 2004 upon adoption of FIN 46R. At March 31, 2005 and
December 31, 2004, the outstanding balance on the line of credit was
approximately $30,283,000 and $30,343,000, respectively, and is included in our
Consolidated Balance Sheets as long-term debt.
 
 T-Bird
uses proceeds from the line of credit for the purchase of real estate and
construction of buildings to be operated as Outback Steakhouse restaurants and
leased to our franchisees. According to the terms of the line of credit, T-Bird
may borrow, repay, re-borrow, or prepay advances at any time before the
termination date of the agreement. The line of credit matures on December 31,
2008, at which time the entire outstanding principal amount of the loan and any
accrued interest is due.
 
 If a
default under the line of credit were to occur requiring us to perform under the
guarantee obligation, we have the right to call into default all of our
franchisees in California and exercise any rights and remedies under those
agreements as well as the right to recourse under loans T-Bird has made to
individual corporations in California which own the land and/or building which
is leased to those franchise locations. Events of default are defined in the
line of credit agreement and include our covenant commitments under existing
lines of credit. We are not the primary obligor on the line of credit and we are
not aware of any non-compliance with the underlying terms of the line of credit
agreement that would result in us having to perform in accordance with the terms
of the guarantee. We also guarantee additional term loans associated with the
owner of T-Bird, which are not consolidated, and which had outstanding balances
of approximately $118,000 as of March 31, 2005.
 
 We expect
that our capital requirements through the end of 2005 will be met by cash flows
from operations and, to the extent needed, advances on our lines of
credit.
  31
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **MANAGEMENT'S
DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
CONDITION AND RESULTS OF OPERATIONS**
 
 **Liquidity
and Capital Resources (continued)**
 
 Our
primary source of credit is our uncollateralized revolving line of credit that
permits borrowing up to $150,000,000. Based upon provisions of the line of
credit agreement and operating data and outstanding borrowings as of and through
March 31, 2005, the margin over LIBOR rates charged to us on future amounts
drawn under the line would not be affected unless: (i) outstanding debt balances
increased by more than $91,000,000; or (ii) earnings before interest, taxes,
depreciation, amortization and rent decreased more than 11%. In addition, based
upon provisions of the line of credit agreement, availability of funds under the
uncollateralized revolving line of credit would not be affected unless: (i)
outstanding debt balances increased by more than $385,000,000; (ii) earnings
before interest, taxes, depreciation, amortization and rent decreased more than
40%; or (iii) our net worth decreased approximately 33%.
 
 DEBT
GUARANTEES
 
 We are
the guarantor of an uncollateralized line of credit that permits borrowing of up
to a maximum of $24,500,000 for our joint venture partner, RY-8, Inc. (“RY-8”),
in the development of Roy's restaurants. The line of credit originally expired
in December 2004 and was renewed with a new termination date of June 30, 2007.
According to the terms of the credit agreement, RY-8 may borrow, repay,
re-borrow or prepay advances at any time before the termination date of the
agreement. On the termination date of the agreement, the entire outstanding
principal amount of the loan then outstanding and any accrued interest is due.
At March 31, 2005, the outstanding balance on the line of credit was
approximately $22,173,000.
 
 RY-8’s
obligations under the line of credit are unconditionally guaranteed by us and
Roy’s Holdings, Inc. (“RHI”). If an event of default occurs (as defined in the
agreement, and including our covenant commitments under existing lines of
credit), then the total outstanding balance, including any accrued interest, is
immediately due from the guarantors.
 
 If an
event of default occurs and RY-8 is unable to pay the outstanding balance owed,
we would, as guarantor, be liable for this balance. However, in conjunction with
the credit agreement, RY-8 and RHI have entered into an Indemnity Agreement and
a Pledge of Interest and Security Agreement in favor of Outback Steakhouse, Inc.
These agreements provide that if we are required to perform our obligation as
guarantor pursuant to the credit agreement, then RY-8 and RHI will indemnify us
against all losses, claims, damages or liabilities which arise out of or are
based upon our guarantee of the credit agreement. RY-8’s and RHI’s obligations
under these agreements are collateralized by a first priority lien upon and a
continuing security interest in any and all of RY-8’s interests in the joint
venture.
 
 We are
the guarantor of up to $9,445,000 of a $68,000,000 note for an unconsolidated
affiliate, Kentucky Speedway, in which we have a 22.22% equity interest and for
which we operate catering and concession facilities. At March 31, 2005, the
outstanding balance on the note and our guarantee on the note were approximately
$65,000,000 and $9,445,000, respectively. Our investment is included in the line
item entitled “Investments In and Advances to Unconsolidated Affiliates, Net.”
This affiliate has not yet reached its operating break-even point. Accordingly,
we have made five a dditional
working capital contributions totaling $2,244,000 since
2001. We have not made any contributions in 2005 and $800,000 was paid in 2004.
We anticipate that we may need to make additional contributions for our pro rata
portion of future losses, if any.
 
 We are
not aware of any non-compliance with the underlying terms of the borrowing
agreements for which we provide a guarantee that would result in us having to
perform in accordance with the terms of the guarantee.
  32
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **MANAGEMENT'S
DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
CONDITION AND RESULTS OF OPERATIONS**
 
 **Liquidity
and Capital Resources (continued)**
 
 SHARE
REPURCHASE
 
 On July
26, 2000, our Board of Directors authorized the repurchase of up to 4,000,000
shares of our common stock, with the timing, price, quantity and manner of the
purchases to be made at the discretion of management, depending upon market
conditions. In addition, the Board of Directors also authorized the repurchase
of shares on a regular basis to offset shares issued as a result of stock option
exercises. On July 23, 2003, our Board of Directors extended both the repurchase
authorization for an additional 2,500,000 shares of our common stock, and the
authorization to offset shares issued as a result of stock option exercises. We
will fund the repurchase program with available cash and bank credit facilities.
During the period from the authorization date through March 31, 2005,
approximately 6,983,000 shares of our common stock have been issued as the
result of stock option exercises. As of March 31, 2005, under these
authorizations we have repurchased approximately 12,216,000 shares of our common
stock for approximately $418,127,000.
 
 DIVIDENDS
 
 Our Board
of Directors authorized the following dividends during 2004 and
2005:
 
 Declaration
    
    Record
    
    Payable
    
    
    Amount
      per ShareDate
    
    Date
    
    Date
    
    
    of
      Common StockJanuary
      28, 2004
    
    February
      20, 2004
    
    March
      5, 2004
    
    
    $
    0.13April
      21, 2004
    
    May
      21, 2004
    
    June
      4, 2004
    
    
    
    0.13July
      21, 2004
    
    August
      20, 2004
    
    September
      3, 2004
    
    
    
    0.13October
      27, 2004
    
    November
      19, 2004
    
    December
      3, 2004
    
    
    
    0.13January
      26, 2005
    
    February
      18, 2005
    
    March
      4, 2005
    
    
    
    0.13April
      27, 2005
    
    May
      20, 2005
    
    June
      3, 2005
    
    
    
    0.13
 
 At the
current dividend rate, the annual dividend payment is expected to be
between $38,000,000 and $40,000,000 depending
on the shares outstanding during the respective quarters. We intend to pay
dividends with cash flow from operations.
 
 **CRITICAL
ACCOUNTING POLICIES AND ESTIMATES**
 
 Our
discussion and analysis of our financial condition and results of operations are
based upon our Unaudited Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities during the reporting period. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Our significant accounting
policies are described in Note 1 of Notes to Consolidated Financial Statements
included in our 2004 10-K. We consider the following policies to be the most
critical in understanding the judgments that are involved in preparing our
financial statements.
 
  33
 Table of Contents
 **Outback
Steakhouse, Inc.**
 **MANAGEMENT'S
DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
CONDITION AND RESULTS OF OPERATIONS**
 
 **CRITICAL
ACCOUNTING POLICIES AND ESTIMATES (continued)**
 
 Property,
Fixtures and Equipment
 
 Property,
fixtures and equipment are stated at cost, net of accumulated depreciation. At
the time property, fixtures and equipment are retired, or otherwise disposed of,
the asset and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in earnings. We expense repair and
maintenance costs incurred to maintain the appearance and functionality of the
restaurant that do not extend the useful life of any restaurant asset or are
less than $1,000. Improvements to leased properties are depreciated over the
shorter of their useful life or the lease term, which includes cancelable
renewal periods where failure to exercise such options would result in an
economic penalty. Depreciation is computed on the straight-line method over the
following estimated useful lives:
 Buildings
      and building improvements
    
    20
      to 31.5 yearsFurniture
      and fixtures
    
    7
      yearsEquipment
    
    2
      to 15 yearsLeasehold
      improvements
    
    5
      to 20 years
 
 Our
accounting policies regarding property, fixtures and equipment include certain
management judgments and projections regarding the estimated useful lives of
these assets 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.
 
 Operating
Leases
 
 Rent
expense for our operating leases, which generally have escalating rentals over
the term of the lease, is recorded on a straight-line basis over the initial
lease term and those renewal periods that are reasonably assured. The initial
lease term includes the “build-out” period of our leases, where no rent payments
are typically due under the terms of the lease. The difference between rent
expense and rent paid is recorded as deferred rent and is included in the
Consolidated Balance Sheets.
 
 Goodwill
 
 Goodwill
represents the residual purchase price after allocation of the purchase price of
assets acquired. On an annual basis, we review the recoverability of goodwill
based primarily upon an analysis of discounted cash flows of the related
investment asset as compared to the carrying value or whenever events or changes
in circumstances indicate that the carrying amounts may not be recoverable.
Generally, we perform our annual assessment for impairment during the third
quarter of the fiscal year, unless facts and circumstances require
differently.
 
 Impairment
of Long-Lived Assets
 
 We assess
the potential impairment of identifiable intangibles, long-lived assets and
goodwill whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Recoverability of assets is measured by comparing
the carrying value of the asset to the future cash flows expected to be
generated by the asset. In evaluating long-lived restaurant assets for
impairment, we consider a number of factors such as:
 
 a)
    
    Restaurant
      sales and cash flow trends;b)
    
    Local
      competition;c)
    
    Changing
      demographic profiles;d)
    
    Local
      economic conditions;e)
    
    New
      laws and government regulations that adversely affect sales and profits;
      andf)
    
    The
      ability to recruit and train skilled restaurant
  employees.
  34
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **MANAGEMENT'S
DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
CONDITION AND RESULTS OF OPERATIONS**
 
 **CRITICAL
ACCOUNTING POLICIES AND ESTIMATES (continued)**
 
 Impairment
of Long-Lived Assets (continued)
 
 If the
aforementioned factors indicate that we should review the carrying value of the
restaurant’s long-lived assets, we perform an impairment analysis. Identifiable
cash flows that are largely independent of other assets and liabilities
typically exist for land and buildings, and for combined fixtures, equipment and
improvements for each restaurant. If the total future cash flows are less than
the carrying amount of the asset, the carrying amount is written down to the
estimated fair value, and a loss resulting from value impairment is recognized
by a charge to earnings.
 
 Judgments
and estimates made by us related to the expected useful lives of long-lived
assets are affected by factors such as changes in economic conditions and
changes in operating performance. As we assess the ongoing expected cash flows
and carrying amounts of our long-lived assets, these factors could cause us to
realize a material impairment charge.
 
 Insurance
Reserves
 
 We
self-insure a significant portion of expected losses under our workers’
compensation, general liability, health and property insurance programs. We
purchase insurance for individual claims that exceed the amounts listed in the
following table:
 
 **2005**Workers'
      Compensation
    
    $
    1,000,000General
      Liability (1)
    
    
    1,500,000Health
      (2)
    
    
    300,000Property
      Coverage
    
    
    5,000,000
 ____________
 (1)
    For
      claims arising from liquor liability, there is an additional $1,000,000
      deductible until a $2,000,000 aggregate has been met. At that time, any
      claims arising from liquor liability revert to the general liability
      deductible.
 (2)
    We
      are self-insured for annual aggregate health insurance claims that exceed
      113% of estimates provided by our third party administrator and insurance
      company.
 
 We record
a liability for all unresolved claims and for an estimate of incurred but not
reported claims at the anticipated cost to us based on estimates provided by a
third party administrator and insurance company. Our accounting policies
regarding insurance reserves include certain actuarial assumptions and
management judgments regarding economic conditions, the frequency and severity
of claims and claim development history and settlement practices. Unanticipated
changes in these factors may produce materially different amounts of expense
that would be reported under these programs.
 
 Revenue
Recognition
 
 We record
revenues for normal recurring sales upon the performance of services. Revenues
from the sales of franchises are recognized as income when we have substantially
performed all of our material obligations under the franchise agreement.
Continuing royalties, which are a percentage of net sales of franchised
restaurants, are accrued as income when earned. These revenues are included in
the line “Other revenues” in the Consolidated Statements of Income.
 
 Unearned
revenues primarily represent our liability for gift certificates that have been
sold but not yet redeemed and are recorded at the anticipated redemption value.
When the gift certificates are redeemed, we recognize restaurant sales and
reduce the related deferred liability.
 
  35
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **MANAGEMENT'S
DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
CONDITION AND RESULTS OF OPERATIONS**
 
 **CRITICAL
ACCOUNTING POLICIES AND ESTIMATES (continued)**
 
 Employee
Partner Stock Buyout Expense
 
 Area
operating partners are required to purchase a 4% to 9% interest in the
restaurants they develop for an initial investment of $50,000. This interest
gives the area operating partner the right to receive a percentage of his or her
restaurants' annual cash flows for the duration of the agreement. Under the
terms of these partners' employment agreements, we have the option to purchase
their interest after a five-year period under the conditions of the agreement.
We estimate future purchases of area operating partners' interests using current
information on restaurant performance to calculate and record an accrued buyout
liability in the line item “Partner deposit and accrued buyout liability” in the
Consolidated Balance Sheets. When partner buyouts occur, they are completed
primarily through issuance of our common stock to the partner equivalent to the
fair value of their interest. In the period we complete the buyout, an
adjustment is recorded to recognize any remaining expense associated with the
purchase and reduce the related accrued buyout liability.
 
 Principles
of Consolidation
 
 The
Consolidated Financial Statements include the accounts and operations of Outback
Steakhouse, Inc. and our affiliated partnerships in which we are a general
partner and own a controlling financial interest. We consolidate variable
interest entities in which we absorb a majority of the entity’s expected losses,
receive a majority of the entity’s expected residual returns, or both, as a
result of ownership, contractual or other financial interests in the entity. We
consolidate a limited liability company affiliated with our California
franchisees that holds a line of credit that we guarantee. The consolidated
financial statements also include the accounts and operations of our Roy’s
consolidated venture in which we have a less than majority ownership. We
consolidate this venture because we control the executive committee (which
functions as a board of directors) through representation on the board by
related parties and we are able to direct or cause the direction of management
and operations on a day-to-day basis. Additionally, the majority of capital
contributions made by our partner in the consolidated venture have been funded
by loans to the partner from a third party where we are required to be a
guarantor of the debt, which provides us control through our collateral interest
in the joint venture partner’s membership interest. As a result of our
controlling financial interest in this venture, it is included in our
consolidated financial statements. The portion of income or loss attributable to
the minority interests, not to exceed the minority interest’s equity in the
subsidiary, is eliminated in the line item in our Consolidated Statements of
Income entitled “Elimination of minority partners’ interest.” All material
intercompany balances and transactions have been eliminated.
 
 Recently
Issued Financial Accounting Standards
 
 In
December 2004, the FASB issued SFAS No. 123 (Revised), “Share-Based Payment”, a
revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No.
123R requires the fair value measurement of all stock-based payments to
employees, including grants of employee stock options, and recognition of those
expenses in the statement of operations. SFAS No. 123R is effective at the
beginning of the next fiscal year after June 15, 2005. We will continue to
account for stock-based compensation using the intrinsic value method until
adoption of SFAS No. 123R on January 1, 2006. Historically, the compensation
expense recognized related to stock options under this method has been minimal.
As a result, adoption of the provisions of SFAS No. 123R is expected to have a
significant impact to reported net income and earnings per share. We have not
yet determined the method of adoption or the effect of adopting SFAS No. 123R
and have not determined whether the adoption will result in amounts that are
similar to the current pro forma disclosures under SFAS No.
123.
  36
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **MANAGEMENT'S
DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
CONDITION AND RESULTS OF OPERATIONS**
 
 **OUTLOOK**
 
 The
following discussion of our future operating results and expansion strategy and
other statements in this report that are not historical statements constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements represent our
expectations or beliefs concerning future events and may be identified by words
such as “believes,” “anticipates,” “expects,” “plans,” “should,” “estimates” and
similar expressions. Our forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
stated or implied in the forward-looking statement. We have endeavored to
identify the most significant factors that could cause actual results to differ
materially from those stated or implied in the forward-looking statements in the
section entitled “Cautionary Statement” on page 39. The results of operations
for interim periods are not necessarily indicative of the results to be expected
for the full year.
 
 In the
Outlook portion of Management’s Discussion and Analysis of Financial Condition
and Results of Operation in our 2004 10-K, we provided information on the
outlook for our businesses in 2005 and factors that may affect our financial
results for the year. The remaining paragraphs in this Outlook section update
the information provided in the Form referenced above and we recommend that this
section be read in conjunction with our 2004 10-K.
 
 Future
Operating Results
 
 Our
revenues and financial results in the remainder of 2005 could vary significantly
depending upon consumer and business spending trends.
 
 2005
Revenue. During the three-month period ended March 31, 2005, compared with the
same period a year ago, average unit volumes decreased by 0.1% for domestic
Company-owned Outback Steakhouses and increased by 2.2% for domestic
Company-owned Carrabba’s Italian Grills.  For the
remainder of 2005, average unit volumes for Outback Steakhouses are anticipated
to increase approximately 3%, predominantly resulting from increased menu prices
and projected traffic levels similar to those experienced in 2004. Our revised
estimate is the bottom of the range from our original estimate of 3.0% to 4.0%
for the year. Average unit volumes for Carrabba's Italian Grills for the
remainder of the year are expected to increase approximately 4%, which is an
increase from our original estimate of 3.0% to 3.25%.
 
 During
the quarter ended March 31, 2005, compared with the same period in 2004, average
unit volumes for Fleming's Prime Steakhouse and Wine Bar increased 4.4%, Roy’s
increased 5.5% and Bonefish Grills’ average unit volumes decreased 2.6%. We are
not adjusting our previous estimates on average unit volumes for Fleming’s and
Roy’s. We estimate average unit volumes for Bonefish Grill to be flat for the
remainder of the year based on our most recent sales trends, which is a decrease
from our original estimate of approximately 2.0%.
 
 2005 Cost
of Sales. As a result of more favorable commodity prices, particularly produce
such as potatoes and onions, we now expect cost of goods sold as a percentage of
restaurant sales to decrease approximately 40 to 50 basis points for the
remainder of the year from 2004 amounts.
 
 2005
Restaurant Operating Expenses. Due to higher utility costs and increases in fees
charged by credit card companies experienced during the first quarter of 2005,
we now expect restaurant operating expenses to be approximately 10 to 20
basis points higher for the remainder of the year.
 
 2005
Distribution Expense to Employee Partners. Distribution expense to employee
partners is affected by the number of cash buyouts of managing partners’
interests in their restaurants, average unit volumes, ownership percentage
levels of our employee partners and operating margins across the consolidated
brands. We expect distribution expense as a percentage of restaurant sales
to be flat for the remainder of the year.
 
  37
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **MANAGEMENT'S
DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
CONDITION AND RESULTS OF OPERATIONS**
 
 **OUTLOOK
(continued)**
 
 2005
General and Administrative Costs. As a result of the $2,100,000 in compensation
expense in the first quarter of 2005 associated with our new Chief Executive
Officer and continuing expense from the issuance of restricted shares, we expect
the range of general and administrative costs to be approximately 10 basis
points higher than our original estimate, with costs flat to decreasing 10 basis
points for the year.
 
 We are
now planning for the remainder of 2005 for all other expense ratio variances to
be comparable to those estimated in the 2004 10-K Outlook section.
 
 Expansion
Strategy
 
 The
following table presents a summary of the expected restaurant openings for the
full year 2005:
 
 **2005**Outback
      Steakhouses - DomesticCompany-owned
    25
    to
    27Franchised
    2
    to
    3Outback
      Steakhouses - InternationalCompany-owned
    15
    to
    17Franchised
    1
    to
    2Carrabba’s
      Italian GrillsCompany-owned
    25
    to
    30Bonefish
      GrillsCompany-owned
    35
    to
    40Fleming’s
      Prime Steakhouse and Wine BarsCompany-owned
    10
    to
    11Roy’sCompany-owned
    1
    to
    2Cheeseburger
      in ParadiseCompany-owned
    20
    to
    25Paul
      Lee's Chinese KitchenCompany-owned
    2
    to
    3Lee
      Roy Selmon’sCompany-owned
    1
    to
    2
  
   38
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **MANAGEMENT'S
DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
CONDITION AND RESULTS OF OPERATIONS**
 
 **Cautionary
Statement**
 
 As noted
above, our actual results could differ materially from those stated or implied
in the forward-looking statements included in the discussion of future operating
results and expansion strategy and elsewhere in this report as a result, among
other things, of the following:
 
 (i)
    
    The
      restaurant industry is a highly competitive industry with many
      well-established competitors;(ii)
    
    Our
      results can be impacted by changes in consumer tastes and the level of
      consumer acceptance of our restaurant concepts (including consumer
      tolerance of price increases); local, regional, national and international
      economic conditions; the seasonality of our business; demographic trends;
      traffic patterns; change in consumer dietary habits; employee
      availability; the cost of advertising and media; government actions and
      policies; inflation; and increases in various costs, including
      construction and real estate costs;(iii)
    
    Our
      results can be affected by consumer perception of food
    safety;(iv)
    
    Our
      ability to expand is dependent upon various factors such as the
      availability of attractive sites for new restaurants; ability to obtain
      appropriate real estate sites at acceptable prices; ability to obtain all
      required governmental permits including zoning approvals and liquor
      licenses on a timely basis; impact of government moratoriums or approval
      processes, which could result in significant delays; ability to obtain all
      necessary contractors and subcontractors; union activities such as
      picketing and hand billing that could delay construction; the ability to
      generate or borrow funds; the ability to negotiate suitable lease terms;
      and the ability to recruit and train skilled management and restaurant
      employees;(v)
    
    Price
      and availability of commodities, including but not limited to, such items
      as beef, chicken, shrimp, pork, seafood, dairy, potatoes, onions and
      energy supplies, which are subject to fluctuation and could increase
      or decrease more than we expect; and/or(vi)
    
    Weather
      and acts of God could result in construction delays and also adversely
      affect the results of one or more restaurants for an indeterminate amount
      of time.
 
  39
 Table of Contents
  **Outback Steakhouse, Inc.**
 **QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**
 
 **Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK**
 
 We are
exposed to market risk from changes in interest rates on debt, changes in
foreign currency exchange rates and changes in commodity prices.
 
 Our
exposure to interest rate fluctuations is limited to our outstanding bank debt.
At March 31, 2005, outstanding borrowings under our revolving lines of credit
bear interest at 50 to 90 basis points over the 30, 60, 90 or 180-day London
Interbank Offered Rate. The weighted average effective interest rate on the
$69,000,000 outstanding balance under these lines at March 31, 2005 was 3.35%.
At March 31, 2005, outstanding borrowings under our Japanese lines of credit
bear interest at either 70.0 to 107.5 basis points over LIBOR or LIBOR divided
by a percentage equal to 1.00 minus the Eurocurrency Reserve Percentage. The
weighted average effective interest rate on the approximately $18,715,000
outstanding balance at March 31, 2005 was 0.72%. Notes payable of approximately
$5,714,000 to Japanese banks bear interest at 0.85%. Notes payable of
approximately $32,157,000 to Korean banks bear interest at rates ranging from
5.45% to 7.00% at March 31, 2005.
 
 At March
31, 2005 and December 31, 2004, our total debt, including consolidated
guaranteed debt, was approximately $162,893,000 and $144,869,000, respectively.
Should interest rates based on our average borrowings of approximately
$153,900,000 through March 31, 2005 increase by one percentage point, our
estimated annual interest expense would increase by approximately $1,539,000
over amounts reported for the year ended December 31, 2004.
 
 Our
exposure to foreign currency exchange fluctuations relates primarily to our
direct investment in restaurants in Korea, Hong Kong, Japan, the Philippines and
Brazil, our outstanding debt to Japanese and Korean banks of approximately
$24,429,000 and $32,157,000, respectively, at March 31, 2005 and to our
royalties from international franchisees.  We do not use financial
instruments to hedge foreign currency exchange rate changes. Our investments in
these countries totaled approximately $25,345,000 and $24,346,000 as of March
31, 2005 and December 31, 2004, respectively.
 
 Many of
the ingredients used in the products sold in our restaurants are commodities
that are subject to unpredictable price volatility.  Although we attempt to
minimize the effect of price volatility by negotiating fixed price contracts for
the supply of key ingredients, there are no established fixed price markets for
certain commodities such as produce and wild fish and we are subject to
prevailing market conditions when purchasing those types of commodities. Other
commodities are purchased based upon negotiated price ranges established with
vendors with reference to the fluctuating market prices. The related agreements
may contain contractual features that limit the price paid by establishing
certain price floors and caps. We do not use financial instruments to hedge
commodity prices because these purchase arrangements help control the ultimate
cost paid.  Extreme changes in commodity prices and/or long-term changes
could affect our financial results adversely, although any changes in commodity
prices would affect our competitors at about the same time as us.  We
expect that in most cases increased commodity prices could be passed through to
our consumers via increases in menu prices.  However, if there is a time
lag between the increasing commodity prices and our ability to increase menu
prices or, if we believe the commodity price increase to be short in duration
and we choose not to pass on the cost increases, our short-term financial
results could be negatively affected. Additionally, from time to time,
competitive circumstances could limit menu price flexibility, and in those cases
margins would be negatively impacted by increased commodity prices.
 
 In
addition to the market risks identified above and to the risks discussed in
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” we are subject to business risk as our beef supply is highly
dependent upon four vendors. We currently purchase approximately 75% of our beef
from the two largest beef suppliers in the country. If these vendors were unable
to fulfill their obligations under their contracts, we would encounter supply
shortages and incur higher costs to secure adequate supplies.
 
 This
market risk discussion contains forward-looking statements. Actual results may
differ materially from the discussion based upon general market conditions and
changes in domestic and global financial markets.
 
  40
 Table of Contents
  **Outback Steakhouse, Inc.**
 **CONTROLS
AND PROCEDURES**
 
 **Item
4. CONTROLS AND PROCEDURES**
 
 **Evaluation
of Disclosure Controls and Procedures**
 
 We have
established and maintain disclosure controls and procedures that are designed to
ensure that material information relating to the Company and our subsidiaries
required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized, and reported
within the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. We carried out an evaluation,
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures as of the end
of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of the date of such
evaluation.
 
 **Changes
in Internal Control over Financial Reporting**
 
 There
have been no changes in our internal control over financial reporting during our
most recent quarter ended March 31, 2005 that have materially affected, or are
reasonably likely to affect, our internal control over financial
reporting.
 
 
 
  41
 Table of Contents
  
 **Outback
Steakhouse, Inc.**
 **PART
II: OTHER INFORMATION**
  **Item 1. Legal Proceedings**
 
 We are
subject to legal proceedings, claims and liabilities, such as liquor liability,
sexual harassment and slip and fall cases, etc., which arise in the ordinary
course of business and are generally covered by insurance. In the opinion of
management, the amount of the ultimate liability with respect to those actions
will not have a materially adverse impact on our financial position or results
of operations and cash flows.
 
 We filed
a report on Form 8-K with the Securities and Exchange Commission dated June 27,
2003 regarding the jury verdict in a civil suit against us. On June 26, 2003, in
a civil case against us in the Delaware Circuit Court, County of Delaware, State
of Indiana, titled David D. Markley and Lisa K. Markley, Plaintiffs, vs. Outback
Steakhouse of Florida, Inc., et. al, Defendants, alleging liability under the
“dramshop” liquor liability statute, a jury returned a verdict in favor of the
two plaintiffs who were injured by a drunk driver. The portion of the verdict
against us was $39,000,000. We have appealed the verdict. Oral argument has been
made to the appellate court, and we are awaiting the decision by the court. We
have insurance coverage related to this case provided by our primary carrier for
$21,000,000 and by an excess insurance carrier for the balance of the verdict of
approximately $19,000,000. The excess insurance carrier, Fireman's Fund
Insurance Company, has filed a declaratory judgment suit in the U.S. District
Court, Southern District of Indiana claiming it was not notified of the case and
is therefore not liable for its portion of the verdict. We do not believe the
excess carrier’s case has any merit and we are vigorously defending this case.
Activity in this case has been held in abeyance pending the decision of the
appellate court in the “dramshop” case. We have filed counter-claims against the
excess carrier and cross-claims against the primary carrier and our third-party
administrator. If the excess carrier’s suit were to succeed, we believe we would
have rights against the primary carrier and our third party administrator to
recover any amounts we may have to pay.
 
 ****
  42
 Table of Contents
   **Outback
Steakhouse, Inc.**
 **PART
II: OTHER INFORMATION**
 
 **Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds**
 
  (a)
Following is information relating to the shares of common stock issued by us in
transactions not registered under the Securities Act of 1933:
  During
the quarter ended March 31, 2005, we issued approximately 14,400 shares of our
common stock at $44.24 per share to eight of our area operating partners for
their interests in seven Outback Steakhouses and two Carrabba’s Italian Grills.
The aggregate value of shares issued was approximately $637,000. These shares of
our common stock are exempted from registration under Rule 506.
 
 (c)
Issuer Purchases of Equity Securities
 
 The
following table includes information with respect to purchases of our common
stock made by us during the quarter ended March 31, 2005:
 
 ****
    
    
    
    **(c)**
    
    **(d)******
    
    ****
    
    
    
    **Total
      number of shares**
    
    **Maximum
      number of shares******
    
    **(a)**
      **Total
      number**
    
    ****
    
    **purchased
      as part of publicly**
    
    **that
      may yet be purchased****Period**
    
    **of
      shares**
      **purchased
      (1)**
    
    **Average
      price**
      **paid
      per share**
    
    **announced
      programs (1)**
    
    **under
      the programs (2)**Month
      #1(January
      1 to January 31)
    
    
    240,000
    
    $
    44.54
    
    
    240,000
    
    
    1,187,000Month
      #2(February
      1 to February 28)
    
    
    61,500
    
    
    45.34
    
    
    61,500
    
    
    1,222,000Month
      #3(March
      1 to March 31)
    
    
    95,000
    
    
    46.21
    
    
    95,000
    
    
    1,267,000Total
    
    
    396,500
    
    
    45.07
    
    
    396,500
    
    
    1,267,000
 ____________
 (1)
    Noshares were repurchased other than through our publicly announced
      repurchase programs and authorizations during the first quarter ended
      March 31, 2005.
 (2)
    On
      July 26, 2000, our Board of Directors authorized the repurchase of up to
      4,000,000 shares of our common stock, with the timing, price, quantity and
      manner of the purchases to be made at the discretion of management,
      depending upon market conditions. In addition, the Board of Directors also
      authorized the repurchase of shares on a regular basis to offset shares
      issued as a result of stock option exercises. On July 23, 2003, our Board
      of Directors extended both the repurchase authorization for an additional
      2,500,000 shares of our common stock, and the authorization to offset
      shares issued as a result of stock option exercises. During the period
      from the authorization date through March 31, 2005, approximately
      6,983,000 shares of our common stock have been issued as the result of
      stock option exercises. As of March 31, 2005, under these authorizations
      we have repurchased approximately 12,216,000 shares of our common stock
      for approximately $418,127,000.
  43
 Table of Contents
  **Outback
Steakhouse, Inc.**
 **PART
II: OTHER INFORMATION**
  **Item 6. Exhibits**
 
 **Number**
    
    **Description**4.01
    
    First
      Amendment to Credit Agreement dated as of April 28, 2005 by and among
      Outback Steakhouse, Inc., Wachovia Bank, National Association and Outback
      Steakhouse of Florida, Inc., Carrabba’s Italian Grill, Inc., Outback
      Steakhouse International, Inc., OS Capital, Inc., OS Pacific, Inc., OS
      Prime, Inc., Bonefish Grill, Inc. and Outback Sports, LLC (included as an
      exhibit to Registrant’s Current Report on Form 8-K filed May 3, 2005 and
      incorporated herein by reference)4.02
    
    Amended
      and Restated Note between Outback Steakhouse, Inc. and Wachovia Bank,
      National Association (included as an exhibit to Registrant’s Current
      Report on Form 8-K filed May 3, 2005 and incorporated herein by
      reference)31.1
    
    Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
    
    Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1
    
    Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002132.2
    
    Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 20021
 
 1 These
certifications are not deemed to be “filed” for purposes of Section 18 of the
Exchange Act, or otherwise subject to the liability of that section. These
certifications will not be deemed to be incorporated by reference into any
filing under the Securities Act or the Exchange Act, except to the extent that
the registrant specifically incorporates them by reference.
 
 The
registrant hereby undertakes to furnish supplementally a copy of any omitted
schedule or other attachment to the Securities and Exchange Commission upon
request.
 
  44
 Table of Contents
  **SIGNATURE**
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf of the undersigned thereunto
duly authorized.
 
 
 
 Date:
      May 9, 2005
    
    OUTBACK
      STEAKHOUSE, INC.By:/s/
      Robert S.
      MerrittRobert S. Merritt
      Senior
      Vice President and Chief Financial Officer
      (Principal
      Financial and Accounting Officer)
 
   
 
 45