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EX-31.1 - EXHIBIT31.1 EAS - OSI RESTAURANT PARTNERS, LLCexhibit31-1eas.htm
EX-32.1 - EXHIBIT32.1 EAS - OSI RESTAURANT PARTNERS, LLCexhibit32-1eas.htm
EX-31.2 - EXHIBIT31.2 DAM - OSI RESTAURANT PARTNERS, LLCexhibit31-2dam.htm
EX-32.2 - EXHIBIT32.2 DAM - OSI RESTAURANT PARTNERS, LLCexhibit32-2dam.htm


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, 2010
 
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
OSI logo
OSI RESTAURANT PARTNERS, LLC
(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)

N/A
(Former name, former address and former fiscal year, if changed since last report)

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 checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES o   NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer Accelerated filer  Non-accelerated filer Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES  o  NO  x

As of May 14, 2010, the registrant has 100 Common Units, no par value, outstanding (all of which are owned by OSI HoldCo, Inc., the registrant’s direct owner), and none are publicly traded.


OSI RESTAURANT PARTNERS, LLC

INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended March 31, 2010
(Unaudited)

TABLE OF CONTENTS


 
PART I — FINANCIAL INFORMATION
 
            
 
Page No.
Item 1.
Consolidated Financial Statements (Unaudited):
 
                   
            
 
3
 
 
 
4
     
 
 
5
 
 
6
     
 
 
8
 
Item 2.
 
34
 
Item 3.
 
56
 
Item 4.
 
56
 
 
PART II — OTHER INFORMATION
 
 
Item 1.
 
57
 
Item 1A.
58
 
     
Item 6.
59
     
 
 
60
 


PART I: FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

OSI Restaurant Partners, LLC
(IN THOUSANDS, EXCEPT COMMON UNITS, UNAUDITED)
 
       
   
MARCH 31,
   
DECEMBER 31,
 
   
2010
   
2009
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 186,734     $ 289,162  
Current portion of restricted cash
    3,186       3,989  
Inventories
    45,464       57,223  
Deferred income tax assets
    28,502       38,644  
Other current assets, net
    89,334       95,494  
Total current assets
    353,220       484,512  
Property, fixtures and equipment, net
    862,858       888,738  
Investments in and advances to unconsolidated affiliates, net
    23,861       22,718  
Goodwill
    448,722       448,722  
Intangible assets, net
    588,601       592,293  
Other assets, net
    144,690       148,046  
Total assets
    2,421,952       2,585,029  
LIABILITIES AND DEFICIT
               
Current Liabilities
               
Accounts payable
    110,238       107,147  
Accrued and other current liabilities
    193,326       218,560  
Current portion of accrued buyout liability
    10,601       15,111  
Unearned revenue
    158,484       237,580  
Current portion of long-term debt
    85,342       134,333  
Total current liabilities
    557,991       712,731  
Partner deposit and accrued buyout liability
    108,876       108,926  
Deferred rent
    72,483       69,801  
Deferred income tax liability
    187,871       198,081  
Long-term debt
    1,364,782       1,369,319  
Guaranteed debt
    24,500       24,500  
Other long-term liabilities, net
    224,332       228,495  
Total liabilities
    2,540,835       2,711,853  
Commitments and contingencies
               
Deficit
               
OSI Restaurant Partners, LLC Unitholder’s Deficit
               
Common units, no par value, 100 units authorized, issued and
               
 outstanding as of March 31, 2010 and December 31, 2009
    -       -  
Additional paid-in capital
    715,813       713,969  
Accumulated deficit
    (837,866 )     (842,966 )
Accumulated other comprehensive loss
    (14,384 )     (16,799 )
Total OSI Restaurant Partners, LLC unitholder’s deficit
    (136,437 )     (145,796 )
Noncontrolling interest
    17,554       18,972  
Total deficit
    (118,883 )     (126,824 )
Total liabilities and unitholder's deficit
  $ 2,421,952     $ 2,585,029  
 
The accompanying notes are an integral part of these Consolidated Financial Statements.


OSI Restaurant Partners, LLC
(IN THOUSANDS, UNAUDITED)
 
   
THREE MONTHS ENDED
 
 
 
MARCH 31,
 
   
2010
   
2009
 
Revenues
           
Restaurant sales
  $ 940,015     $ 959,079  
Other revenues
    7,455       5,315  
Total revenues
    947,470       964,394  
Costs and expenses
               
Cost of sales
    300,301       321,339  
Labor and other related
    261,902       269,571  
Other restaurant operating
    235,115       236,749  
Depreciation and amortization
    35,814       46,372  
General and administrative
    65,019       58,483  
Loss on contingent debt guarantee
    -       24,500  
Provision for impaired assets and restaurant closings
    1,932       7,136  
Income from operations of unconsolidated affiliates
    (1,063 )     (472 )
Total costs and expenses
    899,020       963,678  
Income from operations
    48,450       716  
Gain on extinguishment of debt
    -       158,061  
Other income (expense), net
    117       (5,660 )
Interest expense, net
    (18,712 )     (26,815 )
Income before provision for income taxes
    29,855       126,302  
Provision for income taxes
    28,582       42,890  
Net income
    1,273       83,412  
Less: net income attributable to noncontrolling interest
    2,251       1,065  
Net (loss) income attributable to OSI Restaurant Partners, LLC
  $ (978 )   $ 82,347  
 
The accompanying notes are an integral part of these Consolidated Financial Statements.


OSI Restaurant Partners, LLC
(IN THOUSANDS, EXCEPT COMMON UNITS, UNAUDITED)
 
                           
ACCUMULATED
             
         
COMMON
   
ADDITIONAL
         
OTHER
   
NON-
       
   
COMMON
   
UNITS
   
PAID-IN
   
ACCUMULATED
   
COMPREHENSIVE
   
CONTROLLING
       
   
UNITS
   
AMOUNT
   
CAPITAL
   
DEFICIT
   
LOSS
   
INTEREST
   
TOTAL
 
Balance, December 31, 2009
    100     $ -     $ 713,969     $ (842,966 )   $ (16,799 )   $ 18,972     $ (126,824 )
Cumulative effect from adoption of variable interest entity guidance
    -       -       -       6,078       -       (386 )     5,692  
Stock-based compensation
    -       -       1,844       -       -       -       1,844  
Net (loss) income
    -       -       -       (978 )     -       2,251       1,273  
Foreign currency translation adjustment
    -       -       -       -       2,415       -       2,415  
Total comprehensive income
    -       -       -       -       -       -       3,688  
Distributions to noncontrolling interest
    -       -       -       -       -       (3,386 )     (3,386 )
Contributions from noncontrolling interest
    -       -       -       -       -       103       103  
Balance, March 31, 2010
    100     $ -     $ 715,813     $ (837,866 )   $ (14,384 )   $ 17,554     $ (118,883 )
 
                           
ACCUMULATED
             
         
COMMON
   
ADDITIONAL
         
OTHER
   
NON-
       
   
COMMON
   
UNITS
   
PAID-IN
   
ACCUMULATED
   
COMPREHENSIVE
   
CONTROLLING
       
   
UNITS
   
AMOUNT
   
CAPITAL
   
DEFICIT
   
LOSS
   
INTEREST
   
TOTAL
 
Balance, December 31, 2008
    100     $ -     $ 651,043     $ (788,940 )   $ (24,857 )   $ 26,707     $ (136,047 )
Stock-based compensation
    -       -       1,726       -       -       -       1,726  
Contribution from OSI HoldCo, Inc.
    -       -       47,000       -       -       -       47,000  
Net income
    -       -       -       82,347       -       1,065       83,412  
Foreign currency translation adjustment
    -       -       -       -       (3,599 )     -       (3,599 )
Total comprehensive income
    -       -       -       -       -       -       79,813  
Distributions to noncontrolling interest
    -       -       -       -       -       (2,317 )     (2,317 )
Contributions from noncontrolling interest
    -       -       -       -       -       322       322  
Balance, March 31, 2009
    100     $ -     $ 699,769     $ (706,593 )   $ (28,456 )   $ 25,777     $ (9,503 )

The accompanying notes are an integral part of these Consolidated Financial Statements.


OSI Restaurant Partners, LLC
(IN THOUSANDS, UNAUDITED)
 
   
THREE MONTHS ENDED
 
 
 
MARCH 31,
 
   
2010
   
2009
 
Cash flows used in operating activities:
           
Net income
  $ 1,273     $ 83,412  
Adjustments to reconcile net income to cash
               
used in operating activities:
               
Depreciation and amortization
    35,814       46,372  
Amortization of deferred financing fees
    2,017       2,374  
Amortization of capitalized gift card sales commissions
    4,627       3,350  
Provision for impaired assets and restaurant closings
    1,932       7,136  
Stock-based and other non-cash compensation expense
    8,898       6,056  
Income from operations of unconsolidated affiliates
    (1,063 )     (472 )
Change in deferred income taxes
    (2 )     40,991  
Loss on disposal of property, fixtures and equipment
    539       1,351  
Unrealized gain on derivative financial instruments
    (4,891 )     (174 )
(Gain) loss on life insurance and restricted cash investments
    (1,242 )     779  
Loss on contingent debt guarantee
    -       24,500  
Gain on extinguishment of debt
    -       (158,061 )
Gain on disposal of subsidiary
    -       (2,001 )
Allowance for receivables
    2,009       2,037  
Change in assets and liabilities:
               
Decrease in inventories
    10,801       15,259  
Increase in other current assets
    (10,548 )     (26,091 )
Decrease in other assets
    2,789       20,523  
Increase in accrued interest payable
    6,294       4,903  
Decrease in accounts payable and accrued
               
and other current liabilities
    (10,055 )     (67,850 )
Increase in deferred rent
    4,569       5,145  
Decrease in unearned revenue
    (79,009 )     (72,312 )
Decrease in other long-term liabilities
    (711 )     (3,705 )
Net cash used in operating activities
    (25,959 )     (66,478 )
Cash flows used in investing activities:
               
Purchases of Company-owned life insurance
    -       (261 )
Proceeds from sale of Company-owned life insurance
    -       203  
De-consolidation of subsidiary
    (4,398 )     -  
Capital expenditures
    (10,216 )     (15,210 )
Proceeds from the sale of property, fixtures and equipment
    -       961  
Restricted cash received for capital expenditures, property
               
taxes and certain deferred compensation plans
    3,746       5,597  
Restricted cash used to fund capital expenditures, property
               
taxes and certain deferred compensation plans
    (3,007 )     (2,768 )
Net cash used in investing activities
  $ (13,875 )   $ (11,478 )
 
(CONTINUED...)
 

OSI Restaurant Partners, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
 
   
THREE MONTHS ENDED
 
   
MARCH 31,
 
   
2010
   
2009
 
Cash flows used in financing activities:
           
Repayments of long-term debt
  $ (4,673 )   $ (5,951 )
Repayments of borrowings on revolving credit facilities
    (50,000 )     -  
Extinguishment of senior notes
    -       (75,967 )
Deferred financing fees
    (1,286 )     -  
Purchase of note related to guaranteed debt
    -       (33,283 )
Contribution from OSI HoldCo, Inc.
    -       47,000  
Contributions from noncontrolling interest
    103       322  
Distributions to noncontrolling interest
    (3,386 )     (2,317 )
Repayment of partner deposit and
               
accrued buyout contributions
    (4,878 )     (1,305 )
Receipt of partner deposit and
               
accrued buyout contributions
    831       1,075  
Net cash used in financing activities
    (63,289 )     (70,426 )
Effect of exchange rate changes on cash and cash equivalents
    695       -  
Net decrease in cash and cash equivalents
    (102,428 )     (148,382 )
Cash and cash equivalents at the beginning of the period
    289,162       271,470  
Cash and cash equivalents at the end of the period
  $ 186,734     $ 123,088  
                 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
  $ 15,822     $ 20,324  
Cash paid for income taxes, net of refunds
    2,943       1,516  
                 
Supplemental disclosures of non-cash investing and financing activities:
               
Conversion of partner deposit and accrued buyout
               
liability to notes payable
  $ 3,696     $ 282  
Acquisitions of property, fixtures and equipment
               
through accounts payable
    97       3,420  
 
The accompanying notes are an integral part of these Consolidated Financial Statements.
 
OSI Restaurant Partners, LLC
(UNAUDITED)

1.           Basis of Presentation

Basis of Presentation
 
On June 14, 2007, OSI Restaurant Partners, Inc., by means of a merger and related transactions (the “Merger”), was acquired by Kangaroo Holdings, Inc. (the “Ultimate Parent” or “KHI”), which is controlled by an investor group comprised of funds advised by Bain Capital Partners, LLC (“Bain Capital”), Catterton Partners (“Catterton”), Chris T. Sullivan, Robert D. Basham and J. Timothy Gannon (the “Founders” of the Company) and certain members of management of the Company. In connection with the Merger, OSI Restaurant Partners, Inc. converted into a Delaware limited liability company named OSI Restaurant Partners, LLC (the “Company”).

The total purchase price for the Merger was approximately $3.1 billion, and it was financed by borrowings under senior secured credit facilities and proceeds from the issuance of senior notes (see Note 8), proceeds from a sale-leaseback transaction with Private Restaurant Properties, LLC (“PRP”), an investment made by Bain Capital and Catterton, rollover equity from the Founders and investments made by certain members of management.

The Company owns and operates casual and upscale casual dining restaurants primarily in the United States.  The Company’s restaurant portfolio consists of the Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill, Fleming’s Prime Steakhouse and Wine Bar and Roy’s restaurant concepts.  Additional Outback Steakhouse, Carrabba’s Italian Grill and Bonefish Grill restaurants in which the Company has no direct investment are operated under franchise agreements.

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 in the United States (“U.S. GAAP”) for complete financial statements. In the opinion of the Company, all adjustments (consisting only of normal recurring entries) necessary for the fair presentation of the Company's results of operations, financial position and cash flows for the periods presented have been included.  The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.  These financial statements should be read in conjunction with the financial statements and financial notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 10-K”).

On January 1, 2010, the Company adopted new accounting guidance related to the consolidation of variable interest entities which requires an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity.  These changes require an ongoing assessment and eliminate the quantitative approach previously required for determining whether an entity is the primary beneficiary.  As a result of adopting this guidance, the Company no longer consolidates in its consolidated financial statements (see Note 6): Paradise Restaurant Group, LLC (“PRG”), the entity to whom the Company sold its Cheeseburger in Paradise concept in September 2009, and T-Bird Nevada, LLC (“T-Bird”), a limited liability company owned by the principal of each of the Company’s California franchisees of Outback Steakhouse restaurants.  Combined revenues and net loss included in the Company’s Consolidated Statement of Operations for these two entities for the year ended December 31, 2009 were $75,767,000 and $56,476,000, respectively, and combined assets and liabilities included in the Company’s Consolidated Balance Sheet at December 31, 2009 were $78,082,000 and $204,634,000, respectively. This guidance caused a $6,078,000 and a $386,000 reduction to the January 1, 2010 balance of Accumulated deficit and Noncontrolling interest, respectively.

 
OSI Restaurant Partners, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.           Basis of Presentation (continued)

Economic Outlook
 
The recessionary economic conditions that began in 2008 have created a challenging environment for the Company and for the restaurant industry, and these factors have limited and may continue to limit the Company’s liquidity.  During 2009, the Company experienced declining revenues, comparable store sales and operating cash flows and incurred operating losses. It also incurred goodwill impairment charges of $11,078,000, intangible asset impairment charges of $43,741,000, and restaurant and other impairment charges of $94,471,000, such that at December 31, 2009, the Company had an Accumulated deficit of $842,966,000.  During the first quarter of 2010, although revenues declined on a consolidated basis, the Company experienced a strengthening of trends in consumer traffic and a deceleration of declines in comparable store sales consistent with reports of others in the restaurant industry.  However, although there have been recent signs of improvement in consumer spending, the industry continues to be challenged and uncertainty exists as to the level and sustainability of these favorable trends. 
 
In response to the economic environment, the Company implemented various cost-saving initiatives, including food cost decreases through waste reduction and supply chain efficiency, labor efficiency initiatives and reductions to capital expenditures.  The Company developed new menu items to appeal to value-conscious consumers and used marketing campaigns to promote these items.  Additionally, interest expense declined significantly for the first quarter of 2010 as compared to the same period in 2009 primarily due to a $240,145,000 decrease in outstanding senior notes as a result of the Company’s completion of a cash tender offer during March of 2009.

The Company believes that its implemented initiatives and reductions in principal amounts of outstanding debt will allow it to appropriately manage its liquidity to meet its debt service requirements, operating lease obligations, capital expenditures and working capital obligations for the next twelve months.  The Company’s anticipated revenues and cash flows have been estimated based on results of actions taken, its knowledge of economic and industry trends and the declines in sales at its restaurants combined with its attempts to mitigate the impact of those declines.  However, further deterioration in excess of the Company’s estimates could cause a material adverse impact on its business, liquidity and financial position.


OSI Restaurant Partners, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

2.         Recently Issued Financial Accounting Standards

In October 2009, the FASB provided accounting and reporting guidance for arrangements consisting of multiple revenue-generating activities. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable.  The amendments modify the criteria for separating deliverables, measuring, and allocating arrangement consideration to one or more units of accounting. Enhanced disclosures are also required to provide information about a vendor’s multiple-deliverable revenue arrangements, including information about the nature and terms, significant deliverables and its performance within arrangements. The amendments also require providing information about the significant judgments made and changes to those judgments and about how the application of the relative selling-price method affects the timing or amount of revenue recognition. This guidance is effective January 1, 2011, although early application is permitted.  The Company does not expect the adoption of this guidance to materially affect its consolidated financial statements and does not plan to early or retroactively adopt this guidance.

In January 2010, the FASB amended the guidance related to fair value measurements and disclosures. Effective for interim and annual reporting periods beginning after December 15, 2009, disclosure of the amount and reasons for significant transfers in and out of Level 1 and Level 2 fair value measurements is required.  Further, this guidance clarified that fair value measurement disclosures should be provided for each class of assets and liabilities.  The amendment also clarified that for Level 2 and Level 3 fair value measurements, valuation techniques and inputs used for both recurring and nonrecurring fair value measurements are required to be disclosed.  The adoption of this guidance on January 1, 2010 did not have a material impact on the Company’s consolidated financial statements.  See Note 4 for the Company’s disclosures required by this guidance.  Additionally, effective for fiscal years beginning after December 15, 2010, a reporting entity should separately present information about purchases, sales, issuances and settlements on a gross basis in its reconciliation of Level 3 recurring fair value measurements.  This accounting guidance is not expected to materially affect the Company’s consolidated financial statements.

3.            Stock-based Compensation Plans

The Company’s Ultimate Parent has adopted the Kangaroo Holdings, Inc. 2007 Equity Incentive Plan (the “KHI Equity Plan”) which permits grants of stock options and restricted stock of KHI to Company management and other key employees. As KHI is a holding company with no significant operations of its own, equity transactions in KHI are pushed down to the Company and stock-based compensation expense is recorded by the Company, where applicable.

In March 2010, KHI offered all active employees the opportunity to exchange outstanding stock options with a $10.00 exercise price for the same number of replacement stock options with a $6.50 exercise price. The replacement options were immediately vested and exercisable in the same amount as the exchanged options were vested as of the grant date of the replacement options.  The unvested portion of the exchanged options were exchanged for unvested replacement options that vest and become exercisable over a period of time that is equal to the remaining vesting period of the exchanged options, plus one year, subject to the participant’s continued employment through the applicable vesting date. For exchanged options that contained both performance-based and time-based vesting conditions, the replacement options contain only time-based vesting conditions and vest in accordance with the above terms. All eligible options were tendered and accepted for exchange pursuant to the exchange offer.  The original options were cancelled following the expiration of the offer and the issuance of the replacement options occurred on April 6, 2010. The stock options exchange did not have a material effect on the Company’s consolidated financial statements.


OSI Restaurant Partners, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

4.           Fair Value Measurements

Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date (exit price) and is a market-based measurement, not an entity-specific measurement. To measure fair value, the Company incorporates assumptions that market participants would use in pricing the asset or liability, and utilizes market data to the maximum extent possible.  Measurement of fair value incorporates nonperformance risk (i.e., the risk that an obligation will not be fulfilled). In measuring fair value, the Company reflects the impact of its own credit risk on its liabilities, as well as any collateral. The Company also considers the credit standing of its counterparties in measuring the fair value of its assets.

As a basis for considering market participant assumptions in fair value measurements, a three-tier fair value hierarchy prioritizes the inputs used in measuring fair value as follows:

·  
Level 1 – Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access;
·  
Level 2 – Inputs, other than the quoted market prices included in Level 1, which are observable for the asset or liability, either directly or indirectly; and
·  
Level 3 – Unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market data available.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Fair Value Measurements on a Recurring Basis

The Company is highly leveraged and exposed to interest rate risk to the extent of its variable-rate debt.  In September 2007, the Company entered into an interest rate collar with a notional amount of $1,000,000,000 as a method to limit the variability of its senior secured credit facilities.   The collar consists of a London Interbank Offered Rate (“LIBOR”) cap of 5.75% and a LIBOR floor of 2.99%.  The collar’s first variable-rate set date was December 31, 2007, and the option pairs expire at the end of each calendar quarter beginning March 31, 2008 and ending September 30, 2010.   The quarterly expiration dates correspond to the scheduled amortization payments of the Company’s term loan.

The valuation of the Company’s interest rate collar is based on a discounted cash flow analysis on the expected cash flows of the derivative.  This analysis reflects the contractual terms of the collar, including the period to maturity, and uses observable market-based inputs, including interest rate curves.  Interest rate curves are used to determine forward LIBOR rates on each quarter’s interest rate reset date (approximately 0.39% on the interest rate collar’s final interest rate reset date of June 28, 2010).  Given the short period to maturity, implied volatilities and discount factors have an insignificant impact on the valuation.


OSI Restaurant Partners, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

4.           Fair Value Measurements (continued)

Fair Value Measurements on a Recurring Basis (continued)

Although the Company has determined that the majority of the inputs used to value its interest rate collar fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with this derivative utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties.  However, as of March 31, 2010, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its interest rate collar derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of this derivative.  As a result, the Company has determined that its interest rate collar derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The following table presents the Company’s interest rate collar measured at fair value on a recurring basis as of March 31, 2010, aggregated by the level in the fair value hierarchy within which this measurement falls (in thousands):
 
   
TOTAL
                   
   
MARCH 31,
                   
   
2010
   
LEVEL 1
   
LEVEL 2
   
LEVEL 3
 
Liabilities:
                       
Interest rate collar
  $ 13,168     $ -     $ 13,168     $ -  
 
Fair Value Measurements on a Nonrecurring Basis

The Company did not have material impairment charges as a result of fair value measurements on a nonrecurring basis during the three months ended March 31, 2010.

Interim Disclosures about Fair Value of Financial Instruments

The Company’s non-derivative financial instruments at March 31, 2010 and December 31, 2009 consist of cash equivalents, accounts receivable, accounts payable and current and long-term debt.  The fair values of cash equivalents, accounts receivable and accounts payable approximate their carrying amounts reported in the Consolidated Balance Sheets due to their short duration.  The carrying amount of the Company’s other notes payable, sale-leaseback obligations and guaranteed debt approximates fair value.  The fair value of its senior secured credit facilities and senior notes is determined based on quoted market prices.  The following table includes the carrying value and fair value of the Company’s senior secured credit facilities and senior notes at March 31, 2010 and December 31, 2009 (in thousands):

   
MARCH 31,
   
DECEMBER 31,
 
   
2010
   
2009
 
   
CARRYING VALUE
   
FAIR VALUE
   
CARRYING VALUE
   
FAIR VALUE
 
Senior secured term loan facility
  $ 1,168,625     $ 1,072,213     $ 1,171,900     $ 950,704  
Senior secured working capital revolving credit facility
    -       -       50,000       40,563  
Senior secured pre-funded revolving credit facility
    23,000       21,103       23,000       18,659  
Senior notes
    248,075       242,493       248,075       218,926  

 
OSI Restaurant Partners, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

5.           Derivative Instruments and Hedging Activities

The Company is exposed to market risk from changes in interest rates on debt, changes in commodity prices and changes in foreign currency exchange rates.

The Company’s exposure to interest rate fluctuations includes its borrowings under its senior secured credit facilities that bear interest at floating rates based on the Eurocurrency Rate or the Base Rate, in each case plus an applicable borrowing margin (see Note 8).  The Company manages its interest rate risk by offsetting some of its variable-rate debt with fixed-rate debt, through normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments.  The Company does not enter into financial instruments for trading or speculative purposes.

Many of the ingredients used in the products sold in the Company’s restaurants are commodities that are subject to unpredictable price volatility.  Although the Company attempts 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 the Company is 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 Company attempts to offset the impact of fluctuating commodity prices with other strategic purchasing initiatives.  The Company does not use derivative financial instruments to manage its commodity price risk, except for natural gas and diesel fuel, as described below.

The Company’s restaurants are dependent upon energy to operate and are impacted by changes in energy prices, including natural gas.  The Company utilizes derivative instruments to mitigate some of its overall exposure to material increases in natural gas prices.  The Company records mark-to-market changes in the fair value of these derivative instruments in earnings in the period of change.  The effects of these natural gas swaps were immaterial to the Company’s consolidated financial statements for all periods presented and have been excluded from the tables within this footnote.

The Company’s third party distributor charges the Company for the diesel fuel used to deliver inventory to the Company’s restaurants.   The Company enters into forward contracts to procure certain amounts of this diesel fuel at set prices in order to mitigate the Company’s exposure to unpredictable fuel prices.  The effects of this derivative instrument were immaterial to the Company’s consolidated financial statements for all periods presented and have been excluded from the tables within this footnote.

The Company’s exposure to foreign currency exchange fluctuations relates primarily to its direct investment in restaurants in South Korea, Japan, Hong Kong and Brazil and to its royalties from international franchisees.  The Company does not use financial instruments to hedge foreign currency exchange rate changes.  In January 2010, the Company announced its intent to sell its subsidiaries in Korea, Japan and Hong Kong and certain other rights specified in the amendment to its credit agreement (the “Asian Business”). The Company may also seek to sell development rights in other parts of Asia.  The Company is pursuing a sale of its Asian Business due to attractive market conditions and because its investment priorities do not allow it to aggressively invest in the Asian Business to take full advantage of future growth opportunities.  As of March 31, 2010, the Company determined that the accounting criteria for assets held for sale has not been met.  In the event any such sale occurs, the Company will use 75% of the proceeds to repay indebtedness as required under its credit agreement and the remainder to invest more aggressively in its core domestic concepts.  A sale of the Company’s Asian Business would substantially decrease its exposure to foreign currency exchange fluctuations.

In addition to the market risks identified above, the Company is subject to business risk as its beef supply is highly dependent upon a limited number of vendors.  In 2009, the Company purchased approximately 90% of its beef raw materials from two beef suppliers who represented approximately 32% of the total beef marketplace in the United States.   In 2010, the Company will contract approximately 90% of its beef raw materials from four beef suppliers.  These four beef suppliers represent approximately 76% of the total beef marketplace in the United States.


OSI Restaurant Partners, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

5.           Derivative Instruments and Hedging Activities (continued)

Non-designated Hedges of Interest Rate Risk

The Company’s objective in using an interest rate derivative is to manage its exposure to interest rate movements.  For the Company’s variable-rate debt, interest rate changes generally impact its earnings and cash flows, assuming other factors are held constant.  The Company uses an interest rate collar as part of its interest rate risk management strategy.

In September 2007, the Company entered into an interest rate collar with a notional amount of $1,000,000,000 as a method to limit the variability of its senior secured credit facilities.   The collar consists of a LIBOR cap of 5.75% and a LIBOR floor of 2.99%.  The collar’s first variable-rate set date was December 31, 2007, and the option pairs expire at the end of each calendar quarter beginning March 31, 2008 and ending September 30, 2010.   The quarterly expiration dates correspond to the scheduled amortization payments of the Company’s term loan.

As of March 31, 2010, the Company’s interest rate collar was a non-designated hedge of the Company’s exposure to interest rate risk.  The Company records mark-to-market changes in the fair value of the derivative instrument in earnings in the period of change.

The following table presents the fair value of the Company’s interest rate collar and its classification in the Company’s Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009 (in thousands):

 
LIABILITY DERIVATIVES
 
 
MARCH 31,
 
DECEMBER 31,
 
 
2010
 
2009
 
 
BALANCE
     
BALANCE
     
 
SHEET
 
FAIR
 
SHEET
 
FAIR
 
 
LOCATION
 
VALUE
 
LOCATION
 
VALUE
 
Derivatives not designated as hedging instruments
               
Interest rate
Accrued and other
     
Accrued and other
     
collar
current liabilities
  $ 13,168  
current liabilities
  $ 18,458  
 
 
OSI Restaurant Partners, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

5.           Derivative Instruments and Hedging Activities (continued)

Non-designated Hedges of Interest Rate Risk (continued)

The following table presents the location and effects of the Company’s interest rate collar on its Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009 (in thousands):

 
LOCATION OF
 
AMOUNT OF LOSS RECOGNIZED
 
DERIVATIVES NOT
LOSS
 
IN INCOME ON DERIVATIVE
 
DESIGNATED AS
RECOGNIZED IN
 
THREE MONTHS ENDED
 
HEDGING
INCOME ON
 
MARCH 31,
 
INSTRUMENTS
DERIVATIVE
 
2010
   
2009
 
Interest rate collar
Interest expense
  $ (1,564 )   $ (3,154 )
 
Credit-risk-related Contingent Features

The Company’s agreement with its derivative counterparty for the interest rate collar contains a provision in which the Company could be declared in default on its derivative obligation if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness.

As of March 31, 2010 and December 31, 2009, the fair value of the interest rate collar derivative related to this agreement, including accrued interest but excluding any adjustment for nonperformance risk, was a net liability position of $13,469,000 and $19,225,000, respectively.  As of March 31, 2010 and December 31, 2009, the Company was not required to post and did not post any collateral related to this agreement. If the Company breached the agreement’s provision at March 31, 2010, it would be required to settle its obligation under the agreement at its termination value of $13,469,000.

6.           Variable Interest Entities

The Company consolidates variable interest entities in which the Company is deemed to have a controlling financial interest as a result of the Company having (1) the power to direct the activities that most significantly impact the entity’s economic performance and (2) the obligation to absorb the losses or the right to receive the benefits that could potentially be significant to the variable interest entity. If the Company has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the operations of the variable interest entity are included in the consolidated financial statements.

Roy’s and RY-8, Inc.

The Company’s consolidated financial statements include the accounts and operations of its Roy’s joint venture although it has less than majority ownership.  The Company determined it is the primary beneficiary of the joint venture since the Company has the power to direct or cause the direction of the activities that most significantly impact the entity on a day-to-day basis such as decisions regarding menu development, purchasing, restaurant expansion and closings and the management of employee-related processes.  Additionally, the Company has the obligation to absorb losses or the right to receive benefits of Roy's joint venture that could potentially be significant to Roy's joint venture.  The majority of capital contributions made by the Company’s partner in the Roy’s joint venture, RY-8, Inc. (“RY-8”), have been funded by loans to RY-8 from a third party where the Company provides a guarantee (see Note 8). The guarantee is secured by a collateral interest in RY-8’s membership interest in the joint venture.  The carrying amounts of consolidated assets and liabilities included within the Company’s Consolidated Balance Sheets for the Roy’s joint venture were $31,640,000 and $6,883,000, respectively, at March 31, 2010 and $33,721,000 and $7,586,000, respectively, at December 31, 2009.
 
 
OSI Restaurant Partners, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

6.           Variable Interest Entities (continued)

Roy’s and RY-8, Inc. (continued)

The Company consolidates RY-8 because the Company’s guarantee of RY-8’s debt, which was renewed on April 1, 2009, indicated that the Company was likely to absorb the majority of RY-8’s expected losses, as RY-8 does not have sufficient resources to fund its activities without additional subordinated financial support.  Since RY-8’s $24,500,000 line of credit became fully extended in 2007, the Company has made interest payments, paid line of credit renewal fees and made capital expenditures for additional restaurant development on behalf of RY-8.  The Company is obligated to provide financing, either through a guarantee with a third-party institution or Company loans, for all required capital contributions and interest payments.  Therefore, any additional RY-8 capital requirements in connection with the joint venture likely will be the Company’s responsibility.  On April 1, 2009, the Company reclassified its $24,500,000 contingent obligation to guaranteed debt and beginning on that date, the portion of income or loss attributable to RY-8, excluding interest expense on the line of credit, is eliminated in the line item in the Consolidated Statement of Operations entitled “Net income attributable to noncontrolling interest.”  No other assets or liabilities were recorded as a result of consolidating RY-8. All material intercompany balances and transactions have been eliminated.  The adoption of new accounting guidance for variable interest entities on January 1, 2010 did not affect the Company’s consolidation of RY-8.  The Company determined that it remains RY-8’s primary beneficiary because its implicit variable interest in RY-8, which is considered a de facto related party, indirectly receives the variability of the entity through absorption of RY-8’s expected losses.

T-Bird Nevada, LLC

The Company was the guarantor on an uncollateralized line of credit that matured in December 2008 and permitted borrowing of up to $35,000,000 for a limited liability company, T-Bird, an entity affiliated with its California franchisees of Outback Steakhouse Restaurants.  The Company was required to consolidate T-Bird effective January 1, 2004 because the Company determined that it absorbed the majority of expected losses.  T-Bird used proceeds from the line of credit for loans to its affiliates (“T-Bird Loans”) that serve as general partners of 42 franchisee limited partnerships, which own and operate 41 Outback Steakhouse restaurants.  The funds were ultimately used for the purchase of real estate and construction of buildings to be opened as Outback Steakhouse restaurants and leased to the franchisees’ limited partnerships.

On January 12, 2009, the Company received notice that an event of default had occurred in connection with the line of credit because T-Bird failed to pay the outstanding balance of $33,283,000 due on the maturity date.  On February 17, 2009, the Company terminated its guarantee obligation by purchasing the note and all related rights from the lender for $33,311,000, which included the principal balance due on maturity and accrued and unpaid interest.  In anticipation of receiving a notice of default subsequent to the end of the year, the Company recorded a $33,150,000 allowance for the T-Bird Loan receivables during the fourth quarter of 2008.  Since T-Bird defaulted on its line of credit, the Company has the right to call into default all of its franchise agreements in California and exercise any rights and remedies under those agreements as well as the right to recourse under loans T-Bird has made to individual corporations in California which own the land and/or building that is leased to those franchise locations.  On February 19, 2009, the Company filed suit against T-Bird and its affiliates in Florida state court seeking, among other remedies, to enforce the note and collect on the T-Bird Loans.  On February 20, 2009, T-Bird and certain of its affiliates filed suit in California against the Company and certain of its officers and affiliates (see Note 12).

Upon adoption of new accounting guidance for variable interest entities on January 1, 2010, the Company is no longer the primary beneficiary of T-Bird since it does not have direct involvement in the entity nor does it have the power to direct the activities that most significantly impact the entity.  As a result, on January 1, 2010, the Company de-consolidated T-Bird.  The effect of the de-consolidation was not material to the Company’s consolidated financial statements.


OSI Restaurant Partners, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

6.           Variable Interest Entities (continued)

Paradise Restaurant Group, LLC

In September 2009, the Company sold its Cheeseburger in Paradise concept, which included 34 restaurants, for $2,000,000 to PRG, an entity formed and controlled by the president of the concept.  Based on the terms of the purchase and sale agreement, the Company determined that it was the primary beneficiary and continued to consolidate PRG after the sale transaction.  Therefore, the Company classified 100% of PRG’s net operating results as “Net income attributable to noncontrolling interest” in its Consolidated Statement of Operations for the year ended December 31, 2009 and classified PRG’s equity as “Noncontrolling interest” in its Consolidated Balance Sheet subsequent to the sale transaction.  Any receivables, payables, income or expenses between the Company and PRG during the year ended December 31, 2009 were eliminated in consolidation.

Upon adoption of new accounting guidance for variable interest entities on January 1, 2010, the Company determined that it is no longer the primary beneficiary of PRG.  As a result, the Company de-consolidated PRG on January 1, 2010 (see Note 1). The Company determined that certain rights within a $2,000,000 promissory note owed to the Company by PRG are non-substantive participating rights, and as a result, the Company does not have the power to direct the activities that most significantly impact the entity.  De-consolidated assets and liabilities were $9,433,000 and $8,314,000, respectively, at December 31, 2009.  The maximum exposure to loss as a result of the Company’s involvement with PRG is $36,028,000 related to lease payments over a period of 13 years in the event that PRG defaults on certain third-party leases, of which $28,022,000 relates to lease payments to the Company’s sister company, PRP (see Note 13).  The Company does not have a liability recorded at March 31, 2010 for these potential lease payments.  The Company had approximately $5,012,000 and ($1,972,000) due from (to) PRG, respectively, at March 31, 2010, and settled the majority of these amounts subsequent to the end of the first quarter.  The Company recorded a $2,000,000 allowance for the PRG promissory note during the three months ended March 31, 2010.
 
7.           Accrued and Other Current Liabilities

Accrued and other current liabilities consisted of the following (in thousands):

   
MARCH 31,
   
DECEMBER 31,
 
   
2010
   
2009
 
Accrued payroll and other compensation
  $ 70,411     $ 101,849  
Accrued insurance
    20,603       36,057  
Other
    102,312       80,654  
    $ 193,326     $ 218,560  
 
 
OSI Restaurant Partners, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

   
MARCH 31,
   
DECEMBER 31,
 
 
 
2010
   
2009
 
Senior secured term loan facility, interest rate of 2.56%
           
at March 31, 2010 and December 31, 2009
  $ 1,168,625     $ 1,171,900  
Senior secured working capital revolving credit facility, interest rate of 2.56%
               
at December 31, 2009
    -       50,000  
Senior secured pre-funded revolving credit facility, interest rate of 2.56%
               
at March 31, 2010 and December 31, 2009
    23,000       23,000  
Senior notes, interest rate of 10.00% at March 31, 2010 and December 31, 2009
    248,075       248,075  
Other notes payable, uncollateralized, interest rates ranging from 1.21% to 8.25%
               
at March 31, 2010 and December 31, 2009
    8,049       5,752  
Sale-leaseback obligations
    2,375       4,925  
Guaranteed debt
    24,500       24,500  
      1,474,624       1,528,152  
Less: current portion of long-term debt of OSI Restaurant Partners, LLC
    (85,342 )     (134,333 )
Less: guaranteed debt
    (24,500 )     (24,500 )
Long-term debt of OSI Restaurant Partners, LLC
  $ 1,364,782     $ 1,369,319  

On June 14, 2007, in connection with the Merger, the Company entered into senior secured credit facilities with a syndicate of institutional lenders and financial institutions.  These senior secured credit facilities provide for senior secured financing of up to $1,560,000,000, consisting of a $1,310,000,000 term loan facility, a $150,000,000 working capital revolving credit facility, including letter of credit and swing-line loan sub-facilities, and a $100,000,000 pre-funded revolving credit facility that provides financing for capital expenditures only.

The senior secured term loan facility matures June 14, 2014, and its proceeds were used to finance the Merger.  At each rate adjustment, the Company has the option to select a Base Rate plus 125 basis points or a Eurocurrency Rate plus 225 basis points for the borrowings under this facility.  The Base Rate option is the higher of the prime rate of Deutsche Bank AG New York Branch and the federal funds effective rate plus ½ of 1% (“Base Rate”) (3.25% at March 31, 2010 and December 31, 2009).  The Eurocurrency Rate option is the 30, 60, 90 or 180-day Eurocurrency Rate (“Eurocurrency Rate”) (ranging from 0.25% to 0.44% and from 0.26% to 0.46% at March 31, 2010 and December 31, 2009, respectively).  The Eurocurrency Rate may have a nine- or twelve-month interest period if agreed upon by the applicable lenders.  With either the Base Rate or the Eurocurrency Rate, the interest rate is reduced by 25 basis points if the Company’s Moody’s Applicable Corporate Rating then most recently published is B1 or higher (the rating was Caa1 at March 31, 2010 and December 31, 2009).

The Company is required to prepay outstanding term loans, subject to certain exceptions, with:

·  
50% of its “annual excess cash flow” (with step-downs to 25% and 0% based upon its rent-adjusted leverage ratio), as defined in the credit agreement and subject to certain exceptions;
·  
100% of its “annual minimum free cash flow,” as defined in the credit agreement, not to exceed $50,000,000 for the fiscal year ended December 31, 2007 or $75,000,000 for each subsequent fiscal year, if its rent-adjusted leverage ratio exceeds a certain minimum threshold;
·  
100% of the net proceeds of certain assets sales and insurance and condemnation events, subject to reinvestment rights and certain other exceptions; and
·  
100% of the net proceeds of any debt incurred, excluding permitted debt issuances.


OSI Restaurant Partners, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

8.           Long-term Debt (continued)

Additionally, the Company is required, on an annual basis, to (1) first, repay outstanding loans under the pre-funded revolving credit facility and (2) second, fund a capital expenditure account established on the closing date of the Merger to the extent amounts on deposit are less than $100,000,000, in both cases with 100% of the Company’s “annual true cash flow,” as defined in the credit agreement.  In accordance with these requirements, in April 2010, the Company repaid $5,928,000 of its pre-funded revolving credit facility outstanding loan balance.

The Company’s senior secured credit facilities require scheduled quarterly payments on the term loans equal to 0.25% of the original principal amount of the term loans for the first six years and three quarters following the closing of the Merger.  These payments will be reduced by the application of any prepayments, and any remaining balance will be paid at maturity.  The outstanding balance on the term loans was $1,168,625,000 and $1,171,900,000 at March 31, 2010 and December 31, 2009, respectively.  The Company has classified $75,000,000 of its term loans as current at March 31, 2010 due to its prepayment requirements and quarterly payments.  In April 2010, the Company paid the remainder of its $75,000,000 prepayment for 2009 that is required by the credit agreement, as described above.

Proceeds of loans and letters of credit under the $150,000,000 working capital revolving credit facility provide financing for working capital and general corporate purposes and, subject to a rent-adjusted leverage condition, for capital expenditures for new restaurant growth.  This revolving credit facility matures June 14, 2013 and bears interest at rates ranging from 100 to 150 basis points over the Base Rate or 200 to 250 basis points over the Eurocurrency Rate.  There were no loans outstanding under the revolving credit facility at March 31, 2010.  At December 31, 2009, the outstanding balance was $50,000,000.  This borrowing was recorded in “Current portion of long-term debt” in the Company’s Consolidated Balance Sheet at December 31, 2009, since it was repaid during the first quarter of 2010.  In addition to outstanding borrowings, if any, at March 31, 2010 and December 31, 2009, $70,935,000 and $71,632,000, respectively, of the credit facility was committed for the issuance of letters of credit.  As of March 31, 2010, the Company’s total outstanding letters of credit were $4,065,000 below the maximum of $75,000,000 of letters of credit permitted to be issued under its working capital revolving credit facility. Fees for the letters of credit range from 2.00% to 2.50% and the commitment fees for unused working capital revolving credit commitments range from 0.38% to 0.50%.

Proceeds of loans under the $100,000,000 pre-funded revolving credit facility are available to provide financing for capital expenditures.  As of March 31, 2010 and December 31, 2009, the Company had borrowed $23,000,000 from its pre-funded revolving credit facility.  The Company recorded $5,928,000 in “Current portion of long-term debt” and $17,072,000 in “Long-term debt” in the Company’s Consolidated Balance Sheets at March 31, 2010 and December 31, 2009 as the Company is required to repay any outstanding loans in April following each fiscal year using its “annual true cash flow,” as defined in the credit agreement.  This facility matures June 14, 2013.  At each rate adjustment, the Company has the option to select the Base Rate plus 125 basis points or a Eurocurrency Rate plus 225 basis points for the borrowings under this facility.  In either case, the interest rate is reduced by 25 basis points if the Company’s Moody’s Applicable Corporate Rating then most recently published is B1 or higher.  Fees for the unused portion of the pre-funded revolving credit facility are 2.43%.  Subsequent to the end of the first quarter of 2010, the Company borrowed $10,000,000 from its pre-funded revolving credit facility.

At March 31, 2010 and December 31, 2009, the Company was in compliance with its debt covenants.  See the 2009 10-K for further information about the Company’s debt covenant requirements.


OSI Restaurant Partners, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

8.           Long-term Debt (continued)

On January 28, 2010, the Company executed an amendment to its current credit agreement dated as of June 14, 2007 with a syndicate of institutional lenders and financial institutions. The Company sought this amendment to permit the Company to sell its Asian Business.  The Company may also seek to sell development rights in other parts of Asia.  In the event any such sale occurs, the Company will use the proceeds to repay indebtedness under its credit agreement and invest more aggressively in its core domestic concepts.  As of March 31, 2010, the Company determined that the accounting criteria for assets held for sale has not been met.

Among other things, this amendment: (i) permits the sale of the Asian Business provided that at least 75% of such sale consideration is cash and cash equivalents, (ii) requires that 75% of Net Cash Proceeds, as defined, from any such sale be applied to pay down outstanding term loans under the credit agreement, (iii) provides that the remaining Net Cash Proceeds be reinvested in assets useful to the Company’s business within a period set forth in the amendment or, if not otherwise reinvested, used to pay down outstanding term loans and (iv) modifies the credit agreement’s Minimum Free Cash Flow (“MFCF”) covenant, as defined.  Prior to the amendment, on an annual basis, if the Company’s Rent Adjusted Leverage Ratio (“RALR”) was greater than or equal to 5.25 to 1.00, the Company’s MFCF could not have been less than $75,000,000. As a result of the amendment, should the Company dispose of all or a portion of the Asian Business and if, on an annual basis, the Company’s RALR equals or exceeds 5.25 to 1.00, the required MFCF will be reduced by a specified percentage of the last twelve months Consolidated EBITDA (earnings before interest, taxes, depreciation and amortization and certain other adjustments as defined in the senior secured credit facilities) attributable to the disposed portion of the Asian Business, as defined in the amendment.

On June 14, 2007, the Company issued senior notes in an original aggregate principal amount of $550,000,000 under an indenture among the Company, as issuer, OSI Co-Issuer, Inc., as co-issuer (“Co-Issuer”), a third-party trustee and each of its current and future domestic 100% owned restricted subsidiaries in its Outback Steakhouse and Carrabba’s Italian Grill concepts and certain non-restaurant subsidiaries (the “Guarantors”).  Proceeds from the issuance of the senior notes were used to finance the Merger, and the senior notes mature on June 15, 2015.  Interest is payable semiannually in arrears, at 10% per annum, in cash on each June 15 and December 15, commencing on December 15, 2007.  Interest payments to the holders of record of the senior notes occur on the immediately preceding June 1 and December 1.  Interest is computed on the basis of a 360-day year consisting of twelve 30-day months.  The principal balance of senior notes outstanding at March 31, 2010 and December 31, 2009 was $248,075,000.


 OSI Restaurant Partners, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

8.           Long-term Debt (continued)

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, in the development of Roy's restaurants. The line of credit originally expired in December 2004 and was amended for a fourth time on April 1, 2009 to a revised termination date of April 15, 2013. 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, 2010 and December 31, 2009, the outstanding balance on the line of credit was $24,500,000.

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, then the total outstanding balance, including any accrued interest, is immediately due from the guarantors.  At March 31, 2010 and December 31, 2009, $24,500,000 of the Company’s $150,000,000 working capital revolving credit facility was committed for the issuance of a letter of credit for this guarantee.

If an event of default occurs and RY-8 is unable to pay the outstanding balance owed, the Company would, as one of the two guarantors, 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 the Company’s favor. These agreements provide that if the Company is required to perform under its obligation as guarantor pursuant to the credit agreement, then RY-8 and RHI will indemnify it 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.

During the three months ended March 31, 2009, the Company recorded a loss related to this guarantee of $24,500,000 in its Consolidated Statement of Operations based on its determination that its performance under a long-term contingent obligation was probable.  In connection with the amendment of the line of credit and extension of the Company’s guarantee obligation, the Company determined that RY-8 is a variable interest entity for which the Company is the primary beneficiary (see Note 6).  Therefore, the Company began consolidating RY-8 effective April 1, 2009 and reclassified the $24,500,000 contingent obligation to guaranteed debt.  No other assets or liabilities have been recorded as a result of consolidating RY-8.  The adoption of new accounting guidance for variable interest entities on January 1, 2010 did not affect the Company’s consolidation of RY-8.  The Company determined that it remains RY-8’s primary beneficiary because its implicit variable interest in RY-8, which is considered a de facto related party, indirectly receives the variability of the entity through absorption of RY-8’s expected losses.


 OSI Restaurant Partners, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

9.           Comprehensive Income and Foreign Currency Translation and Transactions

Comprehensive income includes net income and foreign currency translation adjustments.  Total comprehensive income for the three months ended March 31, 2010 and 2009 was $3,688,000 and $79,813,000, respectively, which included the effect of gains and (losses) from translation adjustments of approximately $2,415,000 and ($3,599,000), respectively.

Accumulated other comprehensive loss contained only foreign currency translation adjustments as of March 31, 2010 and December 31, 2009.

Foreign currency transaction gains and losses are recorded in “Other income (expense), net” in the Company’s Consolidated Statements of Operations and was a net gain (loss) of $117,000 and ($5,660,000) for the three months ended March 31, 2010 and 2009, respectively.

10.           Income Taxes

The effective rate for the three months ended March 31, 2010 was 95.7% compared to 34.0% for the three months ended March 31, 2009. The increase in the effective rate was primarily attributable to an increase in the valuation allowance on deferred tax assets for excess tax credits expected for the year and income taxes expected in states that only have limited deductions in computing taxable income being a larger percent of projected pre-tax income for the year.
 
As of March 31, 2010 and December 31, 2009, the Company had $14,616,000 and $14,411,000, respectively, of unrecognized tax benefits ($3,845,000 and $3,815,000, respectively, in “Other long-term liabilities,” $3,949,000 and $3,774,000, respectively, in “Accrued and other current liabilities” and $6,822,000 at March 31, 2010 and December 31, 2009 in “Deferred income tax liability”).  Of these amounts, $13,642,000 and $13,209,000, respectively, if recognized, would impact the Company’s effective tax rate.  The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective tax rate consists of items that are offset by deferred income tax assets and the federal tax benefit of state income tax items.

In many cases, the Company’s uncertain tax positions are related to tax years that remain subject to examination by the relevant taxable authorities.  Based on the outcome of these examinations, or as a result of the expiration of the statute of limitations for specific jurisdictions, it is reasonably possible that the related recorded unrecognized tax benefits for tax positions taken on previously filed tax returns will decrease by approximately $4,500,000 to $5,500,000 within the next twelve months after March 31, 2010.

The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2006 through 2009. The Company and its subsidiaries’ state and foreign income tax returns are also open to audit under the statute of limitations for the years ended December 31, 2000 through 2009.

As of March 31, 2010 and December 31, 2009, the Company accrued $3,628,000 and $3,203,000, respectively, of interest and penalties related to uncertain tax positions.  The Company accounts for interest and penalties related to uncertain tax positions as part of its Provision for income taxes and recognized expense of $469,000 and $219,000 for the three months ended March 31, 2010 and 2009, respectively.  The Company’s policy on classification of interest and penalties did not change as a result of the adoption of guidance related to accounting for uncertainty in income taxes, and it has not changed since the adoption of this guidance.


OSI Restaurant Partners, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

11.           Supplemental Guarantor Condensed Consolidating Financial Statements
 
The Company’s senior notes are jointly and severally, fully and unconditionally guaranteed on a senior unsecured basis by the Guarantors and by OSI HoldCo, Inc. (“OSI HoldCo”), the Company’s direct owner and an indirect, wholly-owned subsidiary of the Company’s Ultimate Parent.  All other concepts and certain non-restaurant subsidiaries of the Company do not guarantee the senior notes (“Non-Guarantors”).  As a result of the sale of Cheeseburger in Paradise to PRG in September 2009, the Cheeseburger in Paradise subsidiaries were no longer considered Guarantors, as they were no longer 100% owned restricted subsidiaries.  Since the Company consolidated PRG after the sale transaction in accordance with accounting guidance in effect until December 31, 2009, these subsidiaries were considered Non-Guarantors through December 31, 2009.  The accompanying Condensed Consolidating Statements of Operations and Cash Flows for the three months ended March 31, 2009 have been restated to include the Cheeseburger in Paradise subsidiaries with the Non-Guarantors. Upon adoption of new accounting guidance for variable interest entities on January 1, 2010, the Company de-consolidated PRG, and the Cheeseburger in Paradise subsidiaries are not included in the accompanying 2010 condensed consolidating financial statements (see Note 6). Additionally, the 2009 Condensed Consolidating Statements of Operations and Cash Flows have been restated to reflect a shift in ownership of seven Guarantor restaurants from a Non-Guarantor parent to a Guarantor parent.  This change in ownership did not have a material effect on the statements.

The following condensed consolidating financial statements present the financial position, results of operations and cash flows for the periods indicated of OSI Restaurant Partners, LLC - Parent only (“OSI Parent”), OSI Co-Issuer, which is a wholly-owned subsidiary and exists solely for the purpose of serving as a co-issuer of the senior notes, the Guarantors, the Non-Guarantors and the elimination entries necessary to consolidate the Company. Investments in subsidiaries are accounted for using the equity method for purposes of the consolidated presentation. The principal elimination entries relate to senior notes presented as an obligation of both OSI Parent and OSI Co-Issuer, investments in subsidiaries, and intercompany balances and transactions.
 
   
CONDENSED CONSOLIDATING BALANCE SHEET
 
   
AS OF MARCH 31, 2010
 
   
OSI Parent
   
OSI Co-Issuer
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
ASSETS
                                   
Current Assets
                                   
Cash and cash equivalents
  $ 120,753     $ -     $ 34,374     $ 31,607     $ -     $ 186,734  
Current portion of restricted cash
    192       -       2,994       -       -       3,186  
Inventories
    2,604       -       26,890       15,970       -       45,464  
Deferred income tax assets
    27,239       -       644       619       -       28,502  
Other current assets
    35,795       -       33,263       20,276       -       89,334  
Total current assets
    186,583       -       98,165       68,472       -       353,220  
Property, fixtures and equipment, net
    25,162       -       515,723       321,973       -       862,858  
Investments in and advances to
                                               
unconsolidated affiliates, net
    392       -       -       23,469       -       23,861  
Investments in subsidiaries
    -       -       3,757       -       (3,757 )     -  
Due from (to) subsidiaries
    2,113,488       -       717,106       408,079       (3,238,673 )     -  
Goodwill
    -       -       339,462       109,260       -       448,722  
Intangible assets, net
    -       -       433,382       155,219       -       588,601  
Other assets, net
    77,052       -       20,756       46,882       -       144,690  
Total assets
  $ 2,402,677     $ -     $ 2,128,351     $ 1,133,354     $ (3,242,430 )   $ 2,421,952  
 
(CONTINUED…)


OSI Restaurant Partners, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

11.           Supplemental Guarantor Condensed Consolidating Financial Statements (continued)
 
   
CONDENSED CONSOLIDATING BALANCE SHEET
 
   
AS OF MARCH 31, 2010
 
   
OSI Parent
   
OSI Co-Issuer
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
LIABILITIES AND (DEFICIT)
                                   
EQUITY
                                   
Current Liabilities
                                   
Accounts payable
  $ 7,457     $ -     $ 67,057     $ 35,724     $ -     $ 110,238  
Accrued and other current
                                               
liabilities
    98,806       -       61,993       32,527       -       193,326  
Current portion of accrued
                                               
buyout liability
    97       -       5,905       4,599       -       10,601  
Unearned revenue
    446       -       123,614       34,424       -       158,484  
Current portion of long-term debt
    80,989       -       2,926       1,427       -       85,342  
Total current liabilities
    187,795       -       261,495       108,701       -       557,991  
Partner deposit and accrued
                                               
buyout liability
    361       -       85,334       23,181       -       108,876  
Deferred rent
    833       -       46,788       24,862       -       72,483  
Deferred income tax liability
    58,778       -       135,769       (6,676 )     -       187,871  
Long-term debt
    1,358,802       248,075       5,039       941       (248,075 )     1,364,782  
Guaranteed debt
    -       -       -       24,500       -       24,500  
Accumulated losses in subsidiaries
                                               
in excess of investment
    512,799       -       -       -       (512,799 )     -  
Due to (from) subsidiaries
    279,076       -       1,592,421       1,367,176       (3,238,673 )     -  
Other long-term liabilities, net
    140,676       -       60,847       22,809       -       224,332  
Total liabilities
    2,539,120       248,075       2,187,693       1,565,494       (3,999,547 )     2,540,835  
(Deficit) Equity
                                               
OSI Restaurant Partners, LLC
                                               
Unitholder’s (Deficit) Equity
                                               
Additional paid-in capital
    715,813       (248,075 )     -       -       248,075       715,813  
(Accumulated deficit)
                                               
retained earnings
    (837,866 )     -       (59,342 )     (435,316 )     494,658       (837,866 )
Accumulated other comprehensive
                                               
(loss) income
    (14,384 )     -       -       (14,384 )     14,384       (14,384 )
Total OSI Restaurant
                                               
Partners, LLC unitholder’s
                                               
(deficit) equity
    (136,437 )     (248,075 )     (59,342 )     (449,700 )     757,117       (136,437 )
Noncontrolling interest
    (6 )     -       -       17,560       -       17,554  
Total (deficit) equity
    (136,443 )     (248,075 )     (59,342 )     (432,140 )     757,117       (118,883 )
    $ 2,402,677     $ -     $ 2,128,351     $ 1,133,354     $ (3,242,430 )   $ 2,421,952  
 

OSI Restaurant Partners, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

11.           Supplemental Guarantor Condensed Consolidating Financial Statements (continued)

   
CONDENSED CONSOLIDATING BALANCE SHEET
 
   
AS OF DECEMBER 31, 2009
 
   
OSI Parent
   
OSI Co-Issuer
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
ASSETS
                                   
Current Assets
                                   
Cash and cash equivalents
  $ 105,906     $ -     $ 124,560     $ 58,696     $ -     $ 289,162  
Current portion of restricted cash
    718       -       3,271       -       -       3,989  
Inventories
    7,723       -       31,598       17,902       -       57,223  
Deferred income tax assets
    37,153       -       872       619       -       38,644  
Other current assets
    51,051       -       28,611       15,832       -       95,494  
Total current assets
    202,551       -       188,912       93,049       -       484,512  
Property, fixtures and equipment, net
    25,297       -       528,599       334,842       -       888,738  
Investments in and advances to
                                               
unconsolidated affiliates, net
    615       -       -       22,103       -       22,718  
Investments in subsidiaries
    -       -       2,936       -       (2,936 )     -  
Due from (to) subsidiaries
    2,248,934       -       539,541       475,199       (3,263,674 )     -  
Goodwill
    -       -       339,462       109,260       -       448,722  
Intangible assets, net
    -       -       435,517       156,776       -       592,293  
Other assets, net
    80,094       -       20,779       47,173       -       148,046  
Total assets
  $ 2,557,491     $ -     $ 2,055,746     $ 1,238,402     $ (3,266,610 )   $ 2,585,029  

(CONTINUED…)


OSI Restaurant Partners, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

11.           Supplemental Guarantor Condensed Consolidating Financial Statements (continued)

   
CONDENSED CONSOLIDATING BALANCE SHEET
 
   
AS OF DECEMBER 31, 2009
 
   
OSI Parent
   
OSI Co-Issuer
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
LIABILITIES AND (DEFICIT)
                                   
EQUITY
                                   
Current Liabilities
                                   
Accounts payable
  $ 6,969     $ -     $ 61,590     $ 38,588     $ -     $ 107,147  
Accrued and other current
                                               
liabilities
    88,037       -       84,296       46,227       -       218,560  
Current portion of accrued
                                               
buyout liability
    -       -       9,054       6,057       -       15,111  
Unearned revenue
    136       -       190,049       47,395       -       237,580  
Current portion of long-term debt
    130,933       -       2,089       1,311       -       134,333  
Total current liabilities
    226,075       -       347,078       139,578       -       712,731  
Partner deposit and accrued
                                               
buyout liability
    88       -       85,027       23,811       -       108,926  
Deferred rent
    853       -       43,678       25,270       -       69,801  
Deferred income tax liability
    68,612       -       135,763       (6,294 )     -       198,081  
Long-term debt
    1,362,062       248,075       6,376       881       (248,075 )     1,369,319  
Guaranteed debt
    -       -       -       24,500       -       24,500  
Accumulated losses in subsidiaries
                                               
in excess of investment
    669,136       -       -       -       (669,136 )     -  
Due to (from) subsidiaries
    241,260       -       1,476,681       1,545,734       (3,263,675 )     -  
Other long-term liabilities, net
    135,201       -       61,969       31,325       -       228,495  
Total liabilities
    2,703,287       248,075       2,156,572       1,784,805       (4,180,886 )     2,711,853  
(Deficit) Equity
                                               
OSI Restaurant Partners, LLC
                                               
Unitholder’s (Deficit) Equity
                                               
Additional paid-in capital
    713,969       (248,075 )     -       -       248,075       713,969  
(Accumulated deficit)
                                               
retained earnings
    (842,966 )     -       (100,826 )     (548,576 )     649,402       (842,966 )
Accumulated other comprehensive
                                               
(loss) income
    (16,799 )     -       -       (16,799 )     16,799       (16,799 )
Total OSI Restaurant
                                               
Partners, LLC unitholder’s
                                               
(deficit) equity
    (145,796 )     (248,075 )     (100,826 )     (565,375 )     914,276       (145,796 )
Noncontrolling interest
    -       -       -       18,972       -       18,972  
Total (deficit) equity
    (145,796 )     (248,075 )     (100,826 )     (546,403 )     914,276       (126,824 )
    $ 2,557,491     $ -     $ 2,055,746     $ 1,238,402     $ (3,266,610 )   $ 2,585,029