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EX-31.1 - EXHIBIT 31.1 EAS - OSI RESTAURANT PARTNERS, LLCexhibit31-1eas.htm
EX-10.2 - EXHIBIT 10.2 - OSI RESTAURANT PARTNERS, LLCexhibit10-2.htm
EX-10.1 - EXHIBIT 10.1 - OSI RESTAURANT PARTNERS, LLCexhibit10-1.htm
EX-31.2 - EXHIBIT 31.2 DAM - OSI RESTAURANT PARTNERS, LLCexhibit31-2dam.htm
EX-32.1 - EXHIBIT 32.1 EAS - OSI RESTAURANT PARTNERS, LLCexhibit32-1eas.htm
EX-32.2 - EXHIBIT 32.2 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 June 30, 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 o 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 August 13, 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 June 30, 2010
(Unaudited)

TABLE OF CONTENTS


 
PART I — FINANCIAL INFORMATION
 
            
 
Page No.
Item 1.
Consolidated Financial Statements (Unaudited):
 
                   
            
3
 
 
4
     
 
 
5
 
  6
     
 
8
 
Item 2.
37
 
Item 3.
63
 
Item 4.
63
 
 
PART II — OTHER INFORMATION
 
 
Item 1.
64
 
Item 1A.
65
     
Item 6.
66
     
  67
 


Item 1. Consolidated Financial Statements

OSI Restaurant Partners, LLC
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT COMMON UNITS, UNAUDITED)

   
JUNE 30,
   
DECEMBER 31,
 
   
2010
   
2009
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 137,643     $ 289,162  
Current portion of restricted cash
    5,330       3,989  
Inventories
    47,326       57,223  
Deferred income tax assets
    28,919       38,644  
Other current assets, net
    84,437       95,494  
Total current assets
    303,655       484,512  
Property, fixtures and equipment, net
    846,546       888,738  
Investments in and advances to unconsolidated affiliates, net
    24,772       22,718  
Goodwill
    448,722       448,722  
Intangible assets, net
    585,090       592,293  
Other assets, net
    134,979       148,046  
Total assets
    2,343,764       2,585,029  
LIABILITIES AND DEFICIT
               
Current Liabilities
               
Accounts payable
    107,744       107,147  
Accrued and other current liabilities
    164,387       218,560  
Current portion of accrued buyout liability
    11,091       15,111  
Unearned revenue
    148,208       237,580  
Current portion of long-term debt
    117,314       134,333  
Total current liabilities
    548,744       712,731  
Partner deposit and accrued buyout liability
    109,674       108,926  
Deferred rent
    76,283       69,801  
Deferred income tax liability
    188,304       198,081  
Long-term debt
    1,283,502       1,369,319  
Guaranteed debt
    24,500       24,500  
Other long-term liabilities, net
    218,960       228,495  
Total liabilities
    2,449,967       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 June 30, 2010 and December 31, 2009
    -       -  
Additional paid-in capital
    717,698       713,969  
Accumulated deficit
    (820,233 )     (842,966 )
Accumulated other comprehensive loss
    (19,781 )     (16,799 )
Total OSI Restaurant Partners, LLC unitholder’s deficit
    (122,316 )     (145,796 )
Noncontrolling interests
    16,113       18,972  
Total deficit
    (106,203 )     (126,824 )
Total liabilities and deficit
  $ 2,343,764     $ 2,585,029  

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


OSI Restaurant Partners, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, UNAUDITED)

   
THREE MONTHS ENDED
   
SIX MONTHS ENDED
 
 
 
JUNE 30,
   
JUNE 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenues
                       
Restaurant sales
  $ 908,888     $ 898,716     $ 1,848,903     $ 1,857,795  
Other revenues
    8,092       7,054       15,547       12,369  
Total revenues
    916,980       905,770       1,864,450       1,870,164  
Costs and expenses
                               
Cost of sales
    292,149       291,496       592,450       612,835  
Labor and other related
    259,044       258,394       520,946       527,965  
Other restaurant operating
    240,848       241,475       475,963       478,224  
Depreciation and amortization
    35,040       43,479       70,854       89,851  
General and administrative
    65,022       71,114       130,041       129,597  
Loss on contingent debt guarantee
    -       -       -       24,500  
Goodwill impairment
    -       11,078       -       11,078  
Provision for impaired assets and restaurant closings
    2,082       112,206       4,014       119,342  
(Income) loss from operations of unconsolidated affiliates
    (908 )     355       (1,971 )     (117 )
Total costs and expenses
    893,277       1,029,597       1,792,297       1,993,275  
Income (loss) from operations
    23,703       (123,827 )     72,153       (123,111 )
Gain on extinguishment of debt
    -       -       -       158,061  
Other income (expense), net
    876       2,466       993       (3,194 )
Interest expense, net
    (16,623 )     (22,871 )     (35,335 )     (49,686 )
Income (loss) before (benefit) provision for income taxes
    7,956       (144,232 )     37,811       (17,930 )
(Benefit) provision for income taxes
    (11,275 )     (56,177 )     17,307       (13,287 )
Net income (loss)
    19,231       (88,055 )     20,504       (4,643 )
Less: net income (loss) attributable to noncontrolling interests
    1,598       (1,794 )     3,849       (729 )
Net income (loss) attributable to OSI Restaurant Partners, LLC
  $ 17,633     $ (86,261 )   $ 16,655     $ (3,914 )

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


OSI Restaurant Partners, LLC
CONSOLIDATED STATEMENTS OF DEFICIT
(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
    -       -       3,729       -       -       -       3,729  
Net income
    -       -       -       16,655       -       3,849       20,504  
Foreign currency translation adjustment
    -       -       -       -       (2,982 )     -       (2,982 )
Total comprehensive income
    -       -       -       -       -       -       17,522  
Distributions to noncontrolling interests
    -       -       -       -       -       (6,425 )     (6,425 )
Contributions from noncontrolling interests
    -       -       -       -       -       103       103  
Balance, June 30, 2010
    100     $ -     $ 717,698     $ (820,233 )   $ (19,781 )   $ 16,113     $ (106,203 )


                           
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
    -       -       13,866       -       -       -       13,866  
Contribution from OSI HoldCo, Inc.
    -       -       47,000       -       -       -       47,000  
Net loss
    -       -       -       (3,914 )     -       (729 )     (4,643 )
Foreign currency translation adjustment
    -       -       -       -       2,178       -       2,178  
Total comprehensive loss
    -       -       -       -       -       -       (2,465 )
Distributions to noncontrolling interests
    -       -       -       -       -       (4,700 )     (4,700 )
Contributions from noncontrolling interests
    -       -       -       -       -       340       340  
Balance, June 30, 2009
    100     $ -     $ 711,909     $ (792,854 )   $ (22,679 )   $ 21,618     $ (82,006 )

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


OSI Restaurant Partners, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
 
   
SIX MONTHS ENDED
 
 
 
JUNE 30,
 
   
2010
   
2009
 
Cash flows provided by (used in) operating activities:
           
Net income (loss)
  $ 20,504     $ (4,643 )
Adjustments to reconcile net income to cash provided by
               
(used in) operating activities:
               
Depreciation and amortization
    70,854       89,851  
Amortization of deferred financing fees
    4,057       4,480  
Amortization of capitalized gift card sales commissions
    7,735       5,368  
Goodwill impairment
    -       11,078  
Provision for impaired assets and restaurant closings
    4,014       119,342  
Stock-based and other non-cash compensation expense
    14,591       28,796  
Income from operations of unconsolidated affiliates
    (1,971 )     (117 )
Change in deferred income taxes
    (2 )     (23,232 )
Loss on disposal of property, fixtures and equipment
    1,443       2,391  
Unrealized gain on derivative financial instruments
    (12,164 )     (1,086 )
Loss (gain) on life insurance and restricted cash investments
    952       (2,923 )
Loss on contingent debt guarantee
    -       24,500  
Gain on extinguishment of debt
    -       (158,061 )
Gain on disposal of subsidiary
    -       (2,001 )
Allowance for receivables
    1,298       2,508  
Change in assets and liabilities:
               
Decrease in inventories
    8,804       21,397  
Increase in other current assets
    (10,601 )     (13,370 )
Decrease in other assets
    5,313       4,226  
(Decrease) increase in accrued interest payable
    (32 )     4,903  
Decrease in accounts payable and accrued
               
and other current liabilities
    (30,228 )     (70,480 )
Increase in deferred rent
    8,520       10,264  
Decrease in unearned revenue
    (89,106 )     (82,255 )
Decrease in other long-term liabilities
    (2,836 )     (11,031 )
Net cash provided by (used in) operating activities
    1,145       (40,095 )
Cash flows used in investing activities:
               
Purchases of Company-owned life insurance
    (641 )     (6,571 )
Proceeds from sale of Company-owned life insurance
    4,011       9,657  
De-consolidation of subsidiary
    (4,398 )     -  
Capital expenditures
    (26,473 )     (32,660 )
Proceeds from the sale of property, fixtures and equipment
    -       961  
Restricted cash received for capital expenditures, property
               
taxes and certain deferred compensation plans
    8,893       17,150  
Restricted cash used to fund capital expenditures, property
               
taxes and certain deferred compensation plans
    (10,205 )     (15,869 )
Net cash used in investing activities
  $ (28,813 )   $ (27,332 )
 
 (CONTINUED...)


OSI Restaurant Partners, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
 
   
SIX MONTHS ENDED
 
   
JUNE 30,
 
   
2010
   
2009
 
Cash flows used in financing activities:
           
Proceeds from issuance of long-term debt
  $ -     $ 700  
Repayments of long-term debt
    (70,901 )     (23,851 )
Proceeds from borrowings on revolving credit facilities
    21,000       -  
Repayments of borrowings on revolving credit facilities
    (55,928 )     -  
Extinguishment of senior notes
    -       (75,967 )
Deferred financing fees
    (1,286 )     (155 )
Purchase of note related to guaranteed debt
    -       (33,283 )
Contribution from OSI HoldCo, Inc.
    -       47,000  
Contributions from noncontrolling interests
    103       340  
Distributions to noncontrolling interests
    (6,425 )     (4,700 )
Repayment of partner deposit and
               
accrued buyout contributions
    (11,137 )     (2,463 )
Receipt of partner deposit and
               
accrued buyout contributions
    2,382       1,854  
Net cash used in financing activities
    (122,192 )     (90,525 )
Effect of exchange rate changes on cash and cash equivalents
    (1,659 )     (1,137 )
Net decrease in cash and cash equivalents
    (151,519 )     (159,089 )
Cash and cash equivalents at the beginning of the period
    289,162       271,470  
Cash and cash equivalents at the end of the period
  $ 137,643     $ 112,381  
                 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
  $ 43,883     $ 47,200  
Cash paid for income taxes, net of refunds
    7,068       7,359  
                 
Supplemental disclosures of non-cash investing and financing activities:
               
Conversion of partner deposit and accrued buyout
               
liability to notes payable
  $ 4,326     $ 635  
Acquisitions of property, fixtures and equipment
               
through accounts payable
    3,366       2,255  
Acquisitions of property, fixtures and equipment under
               
capital lease
    1,217       -  
 
The accompanying notes are an integral part of these Consolidated Financial Statements.


 OSI Restaurant Partners, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 9), 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 balances of Accumulated deficit and Noncontrolling interests, 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 half of 2010, the Company experienced a strengthening of trends in consumer traffic and increases in comparable-store sales.  Notwithstanding these recent signs of improvement, 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 has continued to implement 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, net interest expense declined by 28.9% for the first half of 2010 as compared to the same period in 2009 primarily due to a net $6,480,000 decrease in interest expense on the Company’s interest rate collar and a decrease of approximately $5,200,000 related to the $240,145,000 decrease in outstanding senior notes from 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.

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.


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

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.

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.


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

4.           Fair Value Measurements (continued)

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.  Since the interest rate collar matures on September 30, 2010, its final interest rate reset date was June 28, 2010.

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 June 30, 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 tables present the Company’s interest rate collar measured at fair value on a recurring basis as of June 30, 2010 and December 31, 2009, aggregated by the level in the fair value hierarchy within which the measurements fall (in thousands):

   
TOTAL
                   
   
JUNE 30,
                   
   
2010
   
LEVEL 1
   
LEVEL 2
   
LEVEL 3
 
Liabilities:
                       
Interest rate collar
  $ 6,103     $ -     $ 6,103     $ -  

   
TOTAL
                   
   
DECEMBER 31,
                   
   
2009
   
LEVEL 1
   
LEVEL 2
   
LEVEL 3
 
Liabilities:
                       
Interest rate collar
  $ 18,458     $ -     $ 18,458     $ -  
 

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

4.           Fair Value Measurements (continued)

Fair Value Measurements on a Nonrecurring Basis
 
The Company performed its annual impairment test during the second quarter of 2010.  The Company did not have material impairment charges as a result of fair value measurements on a nonrecurring basis during the three and six months ended June 30, 2010.

The following tables present losses related to the Company’s assets and liabilities that were measured at fair value on a nonrecurring basis during the three and six months ended June 30, 2009 aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):

   
THREE MONTHS ENDED
                         
   
JUNE 30,
                     
TOTAL
 
   
2009
   
LEVEL 1
   
LEVEL 2
   
LEVEL 3
   
LOSSES
 
                               
Long-lived assets held and used
  $ 3,912     $ -     $ -     $ 3,912     $ 69,716  
Goodwill
    368,628       -       -       368,628       11,078  
Indefinite-lived intangible assets
    362,000       -       -       362,000       36,000  


   
SIX MONTHS ENDED
                         
   
JUNE 30,
                     
TOTAL
 
   
2009
   
LEVEL 1
   
LEVEL 2
   
LEVEL 3
   
LOSSES
 
                               
Long-lived assets held and used
  $ 4,623     $ -     $ -     $ 4,623     $ 74,846  
Goodwill
    368,628       -       -       368,628       11,078  
Indefinite-lived intangible assets
    362,000       -       -       362,000       36,000  

The Company recorded $69,716,000 and $74,846,000 of impairment charges as a result of the fair value measurement on a nonrecurring basis of its long-lived assets held and used during the three and six months ended June 30, 2009, respectively.  At the time of such impairment, the impaired long-lived assets had $3,912,000 and $4,623,000 of remaining fair value during the three and six months ended June 30, 2009, respectively.  Due to the third quarter of 2009 sale of its Cheeseburger in Paradise concept, the Company recorded a $45,962,000 impairment charge (included in the totals above) during the second quarter of 2009 to reduce the carrying value of this concept’s long-lived assets to their estimated fair market value.  The Company used a weighted-average probability analysis and estimates of expected future cash flows to determine the fair value of this concept at June 30, 2009.  The Company used a discounted cash flow model to estimate the fair value of the remaining long-lived assets included in the table above at June 30, 2009.  Discount rate and growth rate assumptions are derived from current economic conditions, expectations of management and projected trends of current operating results.  As a result, the Company has determined that the majority of the inputs used to value its long-lived assets held and used are unobservable inputs that fall within Level 3 of the fair value hierarchy.


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

4.           Fair Value Measurements (continued)

Fair Value Measurements on a Nonrecurring Basis (continued)

The Company recorded goodwill impairment charges of $11,078,000 and indefinite-lived intangible asset impairment charges of $36,000,000 during the three and six months ended June 30, 2009 as a result of its annual impairment test.  The Company tests both its goodwill and its indefinite-lived intangible assets, which are trade names, for impairment by utilizing discounted cash flow models to estimate their fair values. These cash flow models involve several assumptions. Changes in the Company’s assumptions could materially impact its fair value estimates. Assumptions critical to its fair value estimates are: (i) weighted-average cost of capital rates used to derive the present value factors used in determining the fair value of the reporting units and trade names; (ii) projected annual revenue growth rates used in the reporting unit and trade name models; and (iii) projected long-term growth rates used in the derivation of terminal year values. Other assumptions include estimates of projected capital expenditures and working capital requirements. These and other assumptions are impacted by economic conditions and expectations of management and will change in the future based on period-specific facts and circumstances.  As a result, the Company has determined that the majority of the inputs used to value its goodwill and indefinite-lived intangible assets are unobservable inputs that fall within Level 3 of the fair value hierarchy.
 
Interim Disclosures about Fair Value of Financial Instruments

The Company’s non-derivative financial instruments at June 30, 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 June 30, 2010 and December 31, 2009 (in thousands):

   
JUNE 30,
   
DECEMBER 31,
 
   
2010
   
2009
 
   
CARRYING VALUE
   
FAIR VALUE
   
CARRYING VALUE
   
FAIR VALUE
 
Senior secured term loan facility
  $ 1,103,450     $ 940,691     $ 1,171,900     $ 950,704  
Senior secured working capital revolving credit facility
    -       -       50,000       40,563  
Senior secured pre-funded revolving credit facility
    38,072       32,456       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 9).  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 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 June 30, 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 June 30, 2010 and December 31, 2009 (in thousands):
 
 
LIABILITY DERIVATIVES
 
 
JUNE 30,
 
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
  $ 6,103  
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 and six months ended June 30, 2010 and 2009 (in thousands):
 
 
LOCATION OF
 
AMOUNT OF GAIN OR (LOSS) RECOGNIZED
 
DERIVATIVES NOT
GAIN OR (LOSS)
 
IN INCOME ON DERIVATIVE
 
DESIGNATED AS
RECOGNIZED IN
 
THREE MONTHS ENDED
   
SIX MONTHS ENDED
 
HEDGING
INCOME ON
 
JUNE 30,
   
JUNE 30,
 
INSTRUMENTS
DERIVATIVE
 
2010
   
2009
   
2010
   
2009
 
Interest rate collar
Interest expense, net
  $ 242     $ (4,648 )   $ (1,322 )   $ (7,802 )
 
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 June 30, 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 $6,276,000 and $19,225,000, respectively.  As of June 30, 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 June 30, 2010, it would be required to settle its obligation under the agreement at its termination value of $6,276,000.

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 9). 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 $29,950,000 and $6,748,000, respectively, at June 30, 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 (loss) attributable to noncontrolling interests.”  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 of 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 13).

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 (loss) income attributable to noncontrolling interests” in its Consolidated Statement of Operations for the year ended December 31, 2009 and classified PRG’s equity as “Noncontrolling interests” 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 $35,077,000 related to lease payments over a period of 13 years in the event that PRG defaults on certain third-party leases, of which $27,520,000 relates to lease payments to the Company’s sister company, PRP (see Note 14).  The Company does not have a liability recorded at June 30, 2010 for these potential lease payments.  The Company had approximately $998,000 and ($109,000) due from (to) PRG, respectively, at June 30, 2010, and settled the majority of these amounts subsequent to the end of the second quarter.  The Company recorded a $2,000,000 allowance for the PRG promissory note during the first quarter of 2010.

7.           Other Current Assets, Net

Other current assets, net, consisted of the following (in thousands):

   
JUNE 30,
   
DECEMBER 31,
 
   
2010
   
2009
 
Prepaid expenses
  $ 27,278     $ 16,448  
Accounts receivable, net
    8,001       10,132  
Accounts receivable - vendors
    21,914       14,795  
Accounts receivable - franchisees, net
    5,214       5,312  
Insurance receivable
    1,013       19,000  
Other current assets, net
    21,017       29,807  
    $ 84,437     $ 95,494  
 
The $19,000,000 insurance receivable at December 31, 2009 relates to a reclassification to current from long-term as a result of a 2010 settlement of a class action lawsuit.  This amount is also included in Accrued and other current liabilities at December 31, 2009.
 
8.           Accrued and Other Current Liabilities

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

   
JUNE 30,
   
DECEMBER 31,
 
   
2010
   
2009
 
Accrued payroll and other compensation
  $ 75,701     $ 101,849  
Accrued insurance
    19,399       36,057  
Other
    69,287       80,654  
    $ 164,387     $ 218,560  
 
 
OSI Restaurant Partners, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

9.           Long-term Debt

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

   
JUNE 30,
   
DECEMBER 31,
 
 
 
2010
   
2009
 
Senior secured term loan facility, interest rate of 2.88% at June 30, 2010
           
and 2.56% at December 31, 2009
  $ 1,103,450     $ 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 2.88% at
               
June 30, 2010 and 2.56% at December 31, 2009
    38,072       23,000  
Senior notes, interest rate of 10.00% at June 30, 2010 and December 31, 2009
    248,075       248,075  
Other notes payable, uncollateralized, interest rates ranging from 1.21% to 8.25%
               
at June 30, 2010 and December 31, 2009
    7,669       5,752  
Sale-leaseback obligations
    2,375       4,925  
Capital lease obligations
    1,175       -  
Guaranteed debt
    24,500       24,500  
      1,425,316       1,528,152  
Less: current portion of long-term debt
    (117,314 )     (134,333 )
Less: guaranteed debt
    (24,500 )     (24,500 )
Long-term debt
  $ 1,283,502     $ 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 June 30, 2010 and December 31, 2009).  The Eurocurrency Rate option is the 30, 60, 90 or 180-day Eurocurrency Rate (“Eurocurrency Rate”) (ranging from 0.35% to 0.75% and from 0.26% to 0.46% at June 30, 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 June 30, 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)

9.           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 $1,103,450,000 and $1,171,900,000 at June 30, 2010 and December 31, 2009, respectively.  The Company classified $75,000,000 of its term loans as current at June 30, 2010 and at December 31, 2009 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 June 30, 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 June 30, 2010 and December 31, 2009, $70,457,000 and $71,632,000, respectively, of the credit facility was committed for the issuance of letters of credit.  As of June 30, 2010, the Company’s total outstanding letters of credit were $4,543,000 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 June 30, 2010 and December 31, 2009, the Company had borrowed $38,072,000 and $23,000,000, respectively, from its pre-funded revolving credit facility.  The Company recorded $38,072,000 in “Current portion of long-term debt” in its Consolidated Balance Sheet at June 30, 2010 and $5,928,000 in “Current portion of long-term debt” and $17,072,000 in “Long-term debt” in its Consolidated Balance Sheet at 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.  The amount of “annual true cash flow” available to repay outstanding loans under the pre-funded revolving credit facility may vary based on year-end results. 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 second quarter of 2010, the Company borrowed $5,000,000 from its pre-funded revolving credit facility.

At June 30, 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)

9.           Long-term Debt (continued)

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 June 30, 2010 and December 31, 2009 was $248,075,000.

On June 14, 2010, the Company’s one-year line of credit with a maximum borrowing amount of 10,000,000,000 Korean won and its one-year overdraft line of credit with a maximum borrowing amount of 5,000,000,000 Korean won matured and were not renewed. There were no draws outstanding on these lines of credit.

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 June 30, 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 June 30, 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.


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

10.           Comprehensive Income (Loss) and Foreign Currency Translation and Transactions

Comprehensive income (loss) includes net income (loss) and foreign currency translation adjustments.  Total comprehensive income (loss) for the three months ended June 30, 2010 and 2009 was $13,834,000 and ($82,278,000), respectively, which included the effect of (losses) and gains from foreign currency translation adjustments of approximately ($5,397,000) and $5,777,000, respectively.

Total comprehensive income (loss) for the six months ended June 30, 2010 and 2009 was $17,522,000 and ($2,465,000), respectively, which included the effect of (losses) and gains from foreign currency translation adjustments of approximately ($2,982,000) and $2,178,000, respectively.

Accumulated other comprehensive loss contained only foreign currency translation adjustments as of June 30, 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 of $876,000 and $2,466,000 for the three months ended June 30, 2010 and 2009, respectively, and a net gain (loss) of $993,000 and ($3,194,000) for the six months ended June 30, 2010 and 2009, respectively.

11.           Income Taxes

The effective income tax rate for the three months ended June 30, 2010 was (141.7)% compared to 38.9% for the same period in 2009. This decrease in the effective rate was primarily attributable to an increase in the projected pre-tax book income as compared to the previous period.  It was partially offset by 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 percentage of projected pre-tax income for the year.

The effective income tax rate for the six months ended June 30, 2010 was 45.8% compared to 74.1% for the same period in 2009.  This net decrease of 28.3% in the effective rate was primarily due to the increase in the valuation allowance on deferred tax assets for excess tax credits expected for the year and to the $11,078,000 goodwill impairment charge recorded in the six months ended June 30, 2009.  This goodwill impairment charge is not deductible for tax purposes, as the goodwill is related to KHI’s acquisition of OSI Restaurant Partners, Inc’s stock.

The effective income tax rate for the six months ended June 30, 2010 was higher than the combined federal and state statutory rate of 38.9% due 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 percentage of projected pre-tax income for the year.

As of June 30, 2010 and December 31, 2009, the Company had $14,482,000 and $14,411,000, respectively, of unrecognized tax benefits ($3,781,000 and $3,815,000, respectively, in “Other long-term liabilities,” $3,879,000 and $3,774,000, respectively, in “Accrued and other current liabilities” and $6,822,000 at June 30, 2010 and December 31, 2009 in “Deferred income tax liability”).  Of these amounts, $13,624,000 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 June 30, 2010.


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

11.           Income Taxes (continued)

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 June 30, 2010 and December 31, 2009, the Company accrued $3,797,000 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 (Benefit) provision for income taxes and recognized expense of $169,000 and $638,000 for the three and six months ended June 30, 2010, respectively, and expense of $969,000 and $1,188,000 for the three and six months ended June 30, 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.

12.           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 for the three and six months ended June 30, 2009 and the Condensed Consolidating Statement of Cash Flows for the six months ended June 30, 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.


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

12.           Supplemental Guarantor Condensed Consolidating Financial Statements (continued)

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 JUNE 30, 2010
 
   
OSI Parent
   
OSI Co-Issuer
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
ASSETS
                                   
Current Assets
                                   
Cash and cash equivalents
  $ 36,809     $ -     $ 53,739     $ 47,095     $ -     $ 137,643  
Current portion of restricted cash
    962       -       4,368       -       -       5,330  
Inventories
    5,605       -       26,039       15,682       -       47,326  
Deferred income tax assets
    27,647       -       653       619       -       28,919  
Other current assets
    26,170       -       36,451       21,816       -       84,437  
Total current assets
    97,193       -       121,250       85,212       -       303,655  
Property, fixtures and equipment, net
    25,824       -       510,037       310,685       -       846,546  
Investments in and advances to
                                               
unconsolidated affiliates, net
    242       -       -       24,530       -       24,772  
Investments in subsidiaries
    -       -       4,559       -       (4,559 )     -  
Due from (to) subsidiaries
    1,830,261       -       877,421       469,953       (3,177,635 )     -  
Goodwill
    -       -       339,462       109,260       -       448,722  
Intangible assets, net
    -       -       431,311       153,779       -       585,090  
Other assets, net
    70,137       -       20,559       44,283       -       134,979  
Total assets
  $ 2,023,657     $ -     $ 2,304,599     $ 1,197,702     $ (3,182,194 )   $ 2,343,764  

(CONTINUED…)


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

12.           Supplemental Guarantor Condensed Consolidating Financial Statements (continued)

   
CONDENSED CONSOLIDATING BALANCE SHEET
 
   
AS OF JUNE 30, 2010
 
   
OSI Parent
   
OSI Co-Issuer
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
LIABILITIES AND (DEFICIT)
                                   
EQUITY
                                   
Current Liabilities
                                   
Accounts payable
  $ 8,981     $ -     $ 66,438     $ 32,325     $ -     $ 107,744  
Accrued and other current
                                               
liabilities
    68,858       -       62,656       32,873       -       164,387  
Current portion of accrued
                                               
buyout liability
    64       -       6,334       4,693       -       11,091  
Unearned revenue
    441       -       114,278       33,489       -       148,208  
Current portion of long-term debt
    113,236       -       2,791       1,287       -       117,314  
Total current liabilities
    191,580       -       252,497       104,667       -       548,744  
Partner deposit and accrued
                                               
buyout liability
    332       -       85,121       24,221       -       109,674  
Deferred rent
    716       -       49,764       25,803       -       76,283  
Deferred income tax liability
    59,270       -       135,775       (6,741 )     -       188,304  
Long-term debt
    1,276,806       248,075       5,080       1,616       (248,075 )     1,283,502  
Guaranteed debt
    -       -       -       24,500       -       24,500  
Accumulated losses in subsidiaries
                                               
in excess of investment
    478,288       -       -       -       (478,288 )     -  
Due to (from) subsidiaries
    2,184       -       1,745,037       1,430,415       (3,177,636 )     -  
Other long-term liabilities, net
    136,810       -       60,142       22,008       -       218,960  
Total liabilities
    2,145,986       248,075       2,333,416       1,626,489       (3,903,999 )     2,449,967  
(Deficit) Equity
                                               
OSI Restaurant Partners, LLC
                                               
Unitholder’s (Deficit) Equity
                                               
Additional paid-in capital
    717,698       (248,075 )     -       -       248,075       717,698  
(Accumulated deficit)
                                               
retained earnings
    (820,233 )     -       (28,817 )     (425,132 )     453,949       (820,233 )
Accumulated other comprehensive
                                               
(loss) income
    (19,781 )     -       -       (19,781 )     19,781       (19,781 )
Total OSI Restaurant
                                               
Partners, LLC unitholder’s
                                               
(deficit) equity
    (122,316 )     (248,075 )     (28,817 )     (444,913 )     721,805       (122,316 )
Noncontrolling interests
    (13 )     -       -       16,126       -       16,113  
Total (deficit) equity
    (122,329 )     (248,075 )     (28,817 )     (428,787 )     721,805       (106,203 )
    $ 2,023,657     $ -     $ 2,304,599     $ 1,197,702     $ (3,182,194 )   $ 2,343,764  
 

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

12.           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)

12.           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