form10-q209.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,
2009
|
|
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
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 o Non-accelerated
filer x
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 14, 2009, 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.
INDEX TO
QUARTERLY REPORT ON FORM 10-Q
For the
Quarterly Period Ended June 30, 2009
(Unaudited)
TABLE OF
CONTENTS
|
PART
I — FINANCIAL INFORMATION
|
|
|
|
Page
No.
|
Item 1.
|
Consolidated
Financial Statements (Unaudited):
|
|
|
|
3
|
|
|
4
|
|
|
|
|
|
5
|
|
|
6
|
|
|
|
|
|
8
|
Item 2.
|
|
45
|
Item 3.
|
|
78
|
Item 4.
|
|
78
|
|
PART
II — OTHER INFORMATION
|
|
Item 1.
|
|
79
|
Item
1A.
|
|
80
|
|
|
|
Item
6.
|
|
81
|
|
|
|
|
|
82
|
Item
1. Consolidated Financial Statements
OSI
Restaurant Partners, LLC
CONSOLIDATED
BALANCE SHEETS
(IN
THOUSANDS, EXCEPT COMMON UNITS, UNAUDITED)
|
|
JUNE
30,
|
|
|
DECEMBER
31,
|
|
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
112,381 |
|
|
$ |
271,470 |
|
Current
portion of restricted cash
|
|
|
4,324 |
|
|
|
5,875 |
|
Inventories
|
|
|
63,099 |
|
|
|
84,568 |
|
Deferred
income tax assets
|
|
|
37,612 |
|
|
|
35,634 |
|
Other
current assets
|
|
|
96,225 |
|
|
|
61,823 |
|
Total
current assets
|
|
|
313,641 |
|
|
|
459,370 |
|
Property,
fixtures and equipment, net
|
|
|
941,432 |
|
|
|
1,073,499 |
|
Investments
in and advances to unconsolidated affiliates, net
|
|
|
23,223 |
|
|
|
20,322 |
|
Goodwill
|
|
|
448,722 |
|
|
|
459,800 |
|
Intangible
assets, net
|
|
|
600,280 |
|
|
|
650,431 |
|
Other
assets, net
|
|
|
153,573 |
|
|
|
194,473 |
|
Total
assets
|
|
|
2,480,871 |
|
|
|
2,857,895 |
|
LIABILITIES
AND DEFICIT
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
104,499 |
|
|
|
184,752 |
|
Sales
taxes payable
|
|
|
15,666 |
|
|
|
16,111 |
|
Accrued
expenses
|
|
|
199,170 |
|
|
|
168,095 |
|
Current
portion of accrued buyout liability
|
|
|
13,174 |
|
|
|
17,228 |
|
Unearned
revenue
|
|
|
130,254 |
|
|
|
212,677 |
|
Income
taxes payable
|
|
|
696 |
|
|
|
799 |
|
Current
portion of long-term debt
|
|
|
79,852 |
|
|
|
30,953 |
|
Current
portion of guaranteed debt
|
|
|
- |
|
|
|
33,283 |
|
Total
current liabilities
|
|
|
543,311 |
|
|
|
663,898 |
|
Partner
deposit and accrued buyout liability
|
|
|
114,259 |
|
|
|
107,143 |
|
Deferred
rent
|
|
|
61,086 |
|
|
|
50,856 |
|
Deferred
income tax liability
|
|
|
179,027 |
|
|
|
199,984 |
|
Long-term
debt
|
|
|
1,409,619 |
|
|
|
1,721,179 |
|
Guaranteed
debt of consolidated joint venture partner
|
|
|
24,500 |
|
|
|
- |
|
Other
long-term liabilities, net
|
|
|
231,075 |
|
|
|
250,882 |
|
Total
liabilities
|
|
|
2,562,877 |
|
|
|
2,993,942 |
|
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, 2009 and December 31, 2008
|
|
|
- |
|
|
|
- |
|
Additional
paid-in capital
|
|
|
711,909 |
|
|
|
651,043 |
|
Accumulated
deficit
|
|
|
(792,854 |
) |
|
|
(788,940 |
) |
Accumulated
other comprehensive loss
|
|
|
(22,679 |
) |
|
|
(24,857 |
) |
Total
OSI Restaurant Partners, LLC unitholder’s deficit
|
|
|
(103,624 |
) |
|
|
(162,754 |
) |
Noncontrolling
interest
|
|
|
21,618 |
|
|
|
26,707 |
|
Total
deficit
|
|
|
(82,006 |
) |
|
|
(136,047 |
) |
|
|
$ |
2,480,871 |
|
|
$ |
2,857,895 |
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
(IN
THOUSANDS, UNAUDITED)
|
|
THREE
MONTHS ENDED
|
|
|
SIX
MONTHS ENDED
|
|
|
|
JUNE
30,
|
|
|
JUNE
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
sales
|
|
$ |
898,716 |
|
|
$ |
1,010,781 |
|
|
$ |
1,857,795 |
|
|
$ |
2,075,082 |
|
Other
revenues
|
|
|
7,054 |
|
|
|
5,727 |
|
|
|
12,369 |
|
|
|
10,908 |
|
Total
revenues
|
|
|
905,770 |
|
|
|
1,016,508 |
|
|
|
1,870,164 |
|
|
|
2,085,990 |
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
291,496 |
|
|
|
355,178 |
|
|
|
612,835 |
|
|
|
728,058 |
|
Labor
and other related
|
|
|
258,394 |
|
|
|
282,538 |
|
|
|
527,965 |
|
|
|
577,039 |
|
Other
restaurant operating
|
|
|
241,475 |
|
|
|
262,397 |
|
|
|
478,224 |
|
|
|
521,015 |
|
Depreciation
and amortization
|
|
|
43,479 |
|
|
|
46,990 |
|
|
|
89,851 |
|
|
|
94,041 |
|
General
and administrative
|
|
|
71,114 |
|
|
|
54,306 |
|
|
|
129,597 |
|
|
|
126,480 |
|
Loss
on contingent debt guarantee
|
|
|
- |
|
|
|
- |
|
|
|
24,500 |
|
|
|
- |
|
Goodwill
impairment
|
|
|
11,078 |
|
|
|
161,589 |
|
|
|
11,078 |
|
|
|
161,589 |
|
Provision
for impaired assets and restaurant closings
|
|
|
112,206 |
|
|
|
23,928 |
|
|
|
119,342 |
|
|
|
27,592 |
|
Loss
(income) from operations of unconsolidated affiliates
|
|
|
355 |
|
|
|
(2,368 |
) |
|
|
(117 |
) |
|
|
(3,245 |
) |
Total
costs and expenses
|
|
|
1,029,597 |
|
|
|
1,184,558 |
|
|
|
1,993,275 |
|
|
|
2,232,569 |
|
Loss
from operations
|
|
|
(123,827 |
) |
|
|
(168,050 |
) |
|
|
(123,111 |
) |
|
|
(146,579 |
) |
Gain
on extinguishment of debt
|
|
|
- |
|
|
|
- |
|
|
|
158,061 |
|
|
|
- |
|
Other
income (expense), net
|
|
|
2,466 |
|
|
|
(3,805 |
) |
|
|
(3,194 |
) |
|
|
(3,805 |
) |
Interest
income
|
|
|
63 |
|
|
|
1,660 |
|
|
|
258 |
|
|
|
2,447 |
|
Interest
expense
|
|
|
(22,934 |
) |
|
|
(21,960 |
) |
|
|
(49,944 |
) |
|
|
(69,787 |
) |
Loss
before benefit from income taxes
|
|
|
(144,232 |
) |
|
|
(192,155 |
) |
|
|
(17,930 |
) |
|
|
(217,724 |
) |
Benefit
from income taxes
|
|
|
(56,177 |
) |
|
|
(14,751 |
) |
|
|
(13,287 |
) |
|
|
(31,482 |
) |
Net
loss
|
|
|
(88,055 |
) |
|
|
(177,404 |
) |
|
|
(4,643 |
) |
|
|
(186,242 |
) |
Less:
net (loss) income attributable to noncontrolling interest
|
|
|
(1,794 |
) |
|
|
(739 |
) |
|
|
(729 |
) |
|
|
120 |
|
Net
loss attributable to OSI Restaurant Partners, LLC
|
|
$ |
(86,261 |
) |
|
$ |
(176,665 |
) |
|
$ |
(3,914 |
) |
|
$ |
(186,362 |
) |
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
CONSOLIDATED
STATEMENTS OF (DEFICIT) EQUITY
(IN
THOUSANDS, EXCEPT COMMON UNITS, UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON
|
|
|
ADDITIONAL
|
|
|
|
|
|
OTHER
|
|
|
|
|
|
|
|
|
|
COMMON
|
|
|
UNITS
|
|
|
PAID-IN
|
|
|
ACCUMULATED
|
|
|
COMPREHENSIVE
|
|
|
NONCONTROLLING
|
|
|
|
|
|
|
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 interest
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,700 |
) |
|
|
(4,700 |
) |
Contributions
from noncontrolling interest
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
340 |
|
|
|
340 |
|
Balance,
June 30, 2009
|
|
|
100 |
|
|
$ |
- |
|
|
$ |
711,909 |
|
|
$ |
(792,854 |
) |
|
$ |
(22,679 |
) |
|
$ |
21,618 |
|
|
$ |
(82,006 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON
|
|
|
ADDITIONAL
|
|
|
|
|
|
OTHER
|
|
|
|
|
|
|
|
|
|
COMMON
|
|
|
UNITS
|
|
|
PAID-IN
|
|
|
ACCUMULATED
|
|
|
COMPREHENSIVE
|
|
|
NONCONTROLLING
|
|
|
|
|
|
|
UNITS
|
|
|
AMOUNT
|
|
|
CAPITAL
|
|
|
DEFICIT
|
|
|
LOSS
|
|
|
INTEREST
|
|
|
TOTAL
|
|
Balance,
December 31, 2007
|
|
|
100 |
|
|
$ |
- |
|
|
$ |
641,647 |
|
|
$ |
(40,055 |
) |
|
$ |
(2,200 |
) |
|
$ |
34,862 |
|
|
$ |
634,254 |
|
Adjustment
for EITF No. 06-4 adoption
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(9,477 |
) |
|
|
- |
|
|
|
- |
|
|
|
(9,477 |
) |
Stock-based
compensation
|
|
|
- |
|
|
|
- |
|
|
|
3,542 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,542 |
|
Net
(loss) income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(186,362 |
) |
|
|
- |
|
|
|
120 |
|
|
|
(186,242 |
) |
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6,771 |
) |
|
|
- |
|
|
|
(6,771 |
) |
Total
comprehensive loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(193,013 |
) |
Distributions
to noncontrolling interest
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,955 |
) |
|
|
(4,955 |
) |
Contributions
from noncontrolling interest
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
445 |
|
|
|
445 |
|
Balance,
June 30, 2008
|
|
|
100 |
|
|
$ |
- |
|
|
$ |
645,189 |
|
|
$ |
(235,894 |
) |
|
$ |
(8,971 |
) |
|
$ |
30,472 |
|
|
$ |
430,796 |
|
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(IN
THOUSANDS, UNAUDITED)
|
|
SIX
MONTHS ENDED
|
|
|
|
JUNE
30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows used in operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(4,643 |
) |
|
$ |
(186,242 |
) |
Adjustments
to reconcile net loss to cash
|
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
89,851 |
|
|
|
94,041 |
|
Amortization
of deferred financing fees
|
|
|
4,480 |
|
|
|
5,535 |
|
Amortization
of capitalized gift card sales commissions
|
|
|
5,368 |
|
|
|
- |
|
Goodwill
impairment
|
|
|
11,078 |
|
|
|
161,589 |
|
Provision
for impaired assets and restaurant closings
|
|
|
119,342 |
|
|
|
27,592 |
|
Stock-based
and other non-cash compensation expense
|
|
|
28,796 |
|
|
|
18,241 |
|
Income
from operations of unconsolidated affiliates
|
|
|
(117 |
) |
|
|
(3,245 |
) |
Change
in deferred income taxes
|
|
|
(23,232 |
) |
|
|
(38,243 |
) |
Loss
(gain) on disposal of property, fixtures and equipment
|
|
|
2,391 |
|
|
|
(1,794 |
) |
Unrealized
gain on derivative financial instruments
|
|
|
(1,086 |
) |
|
|
(1,611 |
) |
(Gain)
loss on life insurance investments
|
|
|
(2,915 |
) |
|
|
3,642 |
|
Gain
on restricted cash investments
|
|
|
(8 |
) |
|
|
(461 |
) |
Loss
on contingent debt guarantee
|
|
|
24,500 |
|
|
|
- |
|
Gain
on extinguishment of debt
|
|
|
(158,061 |
) |
|
|
- |
|
Gain
on disposal of subsidiary
|
|
|
(2,001 |
) |
|
|
- |
|
Allowance
for receivables
|
|
|
2,508 |
|
|
|
- |
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in inventories
|
|
|
21,397 |
|
|
|
(2,532 |
) |
(Increase)
decrease in other current assets
|
|
|
(13,370 |
) |
|
|
2,208 |
|
Decrease
in other assets
|
|
|
4,226 |
|
|
|
8,103 |
|
Increase
(decrease) in accrued interest payable
|
|
|
4,903 |
|
|
|
(1,490 |
) |
Decrease
in accounts payable, sales taxes
|
|
|
|
|
|
|
|
|
payable
and accrued expenses
|
|
|
(70,421 |
) |
|
|
(54,339 |
) |
Increase
in deferred rent
|
|
|
10,264 |
|
|
|
16,001 |
|
Decrease
in unearned revenue
|
|
|
(82,255 |
) |
|
|
(69,815 |
) |
Decrease
in income taxes payable
|
|
|
(59 |
) |
|
|
(1,461 |
) |
(Decrease)
increase in other long-term liabilities
|
|
|
(11,031 |
) |
|
|
1,450 |
|
Net
cash used in operating activities
|
|
|
(40,095 |
) |
|
|
(22,831 |
) |
Cash
flows used in investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of Company-owned life insurance
|
|
|
(6,571 |
) |
|
|
(652 |
) |
Proceeds
from sale of Company-owned life insurance
|
|
|
9,657 |
|
|
|
- |
|
Acquisitions
of liquor licenses
|
|
|
(19 |
) |
|
|
(1,702 |
) |
Capital
expenditures
|
|
|
(32,641 |
) |
|
|
(60,232 |
) |
Proceeds
from the sale of property, fixtures and equipment
|
|
|
961 |
|
|
|
9,753 |
|
Restricted
cash received for capital expenditures, property
|
|
|
|
|
|
|
|
|
taxes
and certain deferred compensation plans
|
|
|
17,150 |
|
|
|
94,445 |
|
Restricted
cash used to fund capital expenditures, property
|
|
|
|
|
|
|
|
|
taxes
and certain deferred compensation plans
|
|
|
(15,869 |
) |
|
|
(92,171 |
) |
Payments
from unconsolidated affiliates
|
|
|
- |
|
|
|
1,490 |
|
Net
cash used in investing activities
|
|
$ |
(27,332 |
) |
|
$ |
(49,069 |
) |
(CONTINUED...)
OSI
Restaurant Partners, LLC
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(IN
THOUSANDS, UNAUDITED)
|
|
SIX
MONTHS ENDED
|
|
|
|
JUNE
30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows used in financing activities:
|
|
|
|
|
|
|
Proceeds
from issuance of long-term debt
|
|
$ |
700 |
|
|
$ |
310 |
|
Repayments
of long-term debt
|
|
|
(23,851 |
) |
|
|
(8,790 |
) |
Extinguishment
of senior notes
|
|
|
(75,967 |
) |
|
|
- |
|
Deferred
financing fees
|
|
|
(155 |
) |
|
|
- |
|
Purchase
of note related to guaranteed debt for consolidated
affiliate
|
|
|
(33,283 |
) |
|
|
- |
|
Contribution
from OSI HoldCo, Inc.
|
|
|
47,000 |
|
|
|
- |
|
Contributions
from noncontrolling interest
|
|
|
340 |
|
|
|
445 |
|
Distributions
to noncontrolling interest
|
|
|
(4,700 |
) |
|
|
(4,955 |
) |
Repayment
of partner deposit and
|
|
|
|
|
|
|
|
|
accrued
buyout contributions
|
|
|
(2,463 |
) |
|
|
(10,308 |
) |
Receipt
of partner deposit and
|
|
|
|
|
|
|
|
|
accrued
buyout contributions
|
|
|
1,854 |
|
|
|
4,064 |
|
Net
cash used in financing activities
|
|
|
(90,525 |
) |
|
|
(19,234 |
) |
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(1,137 |
) |
|
|
- |
|
Net
decrease in cash and cash equivalents
|
|
|
(159,089 |
) |
|
|
(91,134 |
) |
Cash
and cash equivalents at the beginning of the period
|
|
|
271,470 |
|
|
|
171,104 |
|
Cash
and cash equivalents at the end of the period
|
|
$ |
112,381 |
|
|
$ |
79,970 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
47,200 |
|
|
$ |
66,928 |
|
Cash
paid for income taxes, net of refunds
|
|
|
7,359 |
|
|
|
235 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of non-cash items:
|
|
|
|
|
|
|
|
|
Conversion
of partner deposit and accrued buyout
|
|
|
|
|
|
|
|
|
liability
to notes
|
|
$ |
635 |
|
|
$ |
2,955 |
|
Acquisitions
of property, fixtures and equipment
|
|
|
|
|
|
|
|
|
through
accounts payable
|
|
|
2,255 |
|
|
|
2,881 |
|
Litigation
liability and insurance receivable
|
|
|
20,300 |
|
|
|
10,791 |
|
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
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 10), proceeds from the 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
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, 2008 (the “2008
10-K”).
On
January 1, 2009, the Company adopted SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – Including an Amendment of ARB No. 51” (“SFAS
No. 160”). SFAS No. 160 modifies the presentation of noncontrolling
interests in the consolidated balance sheet and the consolidated statement of
operations. It requires noncontrolling interests to be clearly
identified, labeled and included separately from the parent’s equity (deficit)
and consolidated net income (loss). The presentation and disclosure
requirements of SFAS No. 160 have been applied retrospectively, and the
Company’s consolidated financial statements have been recharacterized
accordingly. Other than the change in presentation of noncontrolling
interests, the adoption of SFAS No. 160 did not have a material impact on the
Company’s consolidated financial statements.
The
Company owns and operates casual and upscale casual dining restaurants
primarily in the United States. The Company’s concepts include
Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill, Fleming’s Prime
Steakhouse and Wine Bar, Roy’s and Cheeseburger in
Paradise. Additional Outback Steakhouse, Carrabba’s Italian Grill and
Bonefish Grill restaurants in which the Company has no direct investment are
operated under franchise agreements.
Revisions
Certain
prior year amounts shown in the accompanying Consolidated Statements of
Cash Flows in the consolidated financial statements have been revised to
correctly reflect the 2009 presentation and are deemed not to be material
to the Consolidated Statements of Cash Flows. These revisions had no effect on
total assets, total liabilities, total deficit or net loss. The Company
has revised its Consolidated Statements of Cash Flows to reflect “Purchases of
Company-owned life insurance” separately as investing cash flows rather than
combined in “Decrease in other assets” as operating cash flows. This
change caused the line items “Decrease in other assets” and “Net cash used in
investing activities” to increase by $652,000 and the line item “Net cash used
in operating activities” to decrease by $652,000 for the six months ended June
30, 2008.
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis
of Presentation (continued)
Economic
Outlook
The
ongoing disruptions in the financial markets and adverse changes in the economy
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 2008, the Company incurred goodwill
impairment charges of $604,071,000, intangible asset impairment charges of
$46,420,000 and restaurant impairment charges of $65,767,000, such that at
December 31, 2008, the Company had a Total OSI Restaurant Partners, LLC
unitholder’s deficit of $162,754,000. During the six months ended
June 30, 2009, the Company incurred goodwill impairment charges of $11,078,000
and intangible asset impairment charges of $43,016,000, the majority of which
were recorded during the second quarter of 2009, and restaurant impairment
charges of $76,326,000, such that at June 30, 2009, the Company had a Total OSI
Restaurant Partners, LLC unitholder’s deficit of $103,624,000. In
2008, the Company experienced downgrades in its credit ratings, and it continues
to experience declining restaurant sales and be subject to risk from: consumer
confidence and spending patterns; the availability of credit presently arranged
from revolving credit facilities; the future cost and availability of credit;
interest rates; foreign currency exchange rates; and the liquidity or operations
of the Company’s third-party vendors and other service
providers. Additionally, the Company’s substantial leverage could
adversely affect the ability to raise additional capital, to fund operations or
to react to changes in the economy or industry. In response to these
conditions, the Company accelerated existing initiatives and implemented new
measures in 2008 to manage liquidity. The Company has continued these
measures and implemented additional measures in 2009.
The
Company has implemented various cost-saving initiatives, including food cost
decreases via waste reduction and supply chain efficiency, labor efficiency
initiatives and reductions to both capital expenditures and general and
administrative expenses. The Company developed new menu items to
appeal to value-conscious consumers and has used marketing campaigns to promote
these items. Additionally, interest expense declined significantly
for the six months ended June 30, 2009 as compared to the same period in 2008
due to (i) a significant decrease in outstanding senior notes as a result of the
Company’s open market purchases during the fourth quarter of 2008 and the
completion of a cash tender offer during the first quarter of 2009 and (ii) an
overall decline in the variable interest rates on the Company’s senior secured
term loan facility and other variable-rate debt (see Note 10).
If the
Company’s revenue and resulting cash flow decline to levels that cannot be
offset by reductions in costs, efficiency programs and improvements in working
capital management, the Company may not remain in compliance with the various
financial and operating covenants in the instruments governing its senior
secured credit facilities. If this occurs, the Company intends to take such
actions available and determined to be appropriate at such time, which may
include, but are not limited to, engaging in a permitted equity issuance,
seeking a waiver from its lenders, amending the terms of such facilities, or
refinancing all or a portion of the facilities under modified terms. There can
be no assurance that the Company will be able to effect any such actions on
terms that are acceptable or at all or that such actions will be successful in
maintaining covenant compliance. The failure to meet debt service
obligations or to remain in compliance with the financial covenants would
constitute an event of default under those facilities and the lenders could
elect to declare all amounts outstanding to be immediately due and payable and
terminate all commitments to extend further credit.
The
Company believes that its implemented initiatives 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 the economic
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
September 2006, the Financial Accounting Standards Board (the “FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements” (“SFAS No. 157”), which defines fair value, establishes a
framework for measuring fair value and expands the related disclosure
requirements. The provisions of SFAS No. 157 are effective for fiscal
years beginning after November 15, 2007 for financial assets and liabilities or
for nonfinancial assets and liabilities that are re-measured at least
annually. In February 2008, the FASB issued FASB Staff Position
(“FSP”) SFAS No. 157-2, “Effective Date of FASB Statement No. 157” to defer the
effective date for nonfinancial assets and liabilities that are recognized or
disclosed at fair value in the financial statements on a non-recurring basis
until fiscal years beginning after November 15, 2008. Beginning
January 1, 2009, the Company applied SFAS No. 157 to nonfinancial assets and
liabilities that are recognized or disclosed at fair value on a nonrecurring
basis. The adoption of SFAS No. 157 did not have a material impact on
the Company’s consolidated financial statements. See Note 4 for the
Company’s disclosure requirements and accounting effect of the adoption of SFAS
No. 157 on the Company’s consolidated financial statements.
In
October 2008, the FASB issued FSP SFAS No. 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of SFAS No. 157 in a market that is not active and provides
guidance for determining the fair value of a financial asset when the market for
that financial asset is not active. This FSP was effective upon
issuance, but it did not impact the Company’s consolidated financial
statements. In April 2009, the FASB issued FSP SFAS No. 157-4,
“Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly” (“FSP SFAS No. 157-4”). FSP SFAS No. 157-4 provides
additional guidance on measuring fair value when there has been a significant
decrease in the volume and level of activity for an asset or liability, and for
identifying transactions that are not orderly. The guidance for FSP
SFAS No. 157-4 also emphasizes that the objective of a fair value measurement
will remain in accordance with SFAS No. 157’s provisions, even when there has
been a significant decrease in market activity and regardless of the valuation
technique used. The adoption of FSP SFAS No. 157-4 for the
period ended June 30, 2009 did not have a material impact on the Company’s
consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141 (Revised), “Business Combinations”
(“SFAS No. 141R”), a revision of SFAS No. 141. SFAS No. 141R retains
the fundamental requirements of SFAS No. 141, but revises certain elements
including: the recognition and fair value measurement as of the acquisition date
of assets acquired and liabilities assumed, the accounting for goodwill and
financial statement disclosures. In April 2009, the FASB issued FSP
SFAS No. 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies” (“FSP SFAS No. 141(R)-1”),
which amends and clarifies the provisions in SFAS No. 141R relating to the
initial recognition and measurement, subsequent measurement and accounting, and
disclosures for assets and liabilities arising from contingencies in business
combinations. The provisions of FSP SFAS No. 141(R)-1 are effective
for contingent assets and contingent liabilities acquired in business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008. The adoption of SFAS No. 141R and FSP SFAS No. 141(R)-1 on
January 1, 2009 did not have an effect on the Company’s consolidated financial
statements, as the Company did not engage in any business combinations during
the six months ended June 30, 2009. SFAS No. 141R and FSP SFAS No.
141(R)-1 will only impact the Company’s accounting should it acquire any
businesses in the future.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS No. 161”), an amendment of SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” (“SFAS No.
133”). SFAS No. 161 is intended to enable investors to better understand how
derivative instruments and hedging activities affect the entity’s financial
position, financial performance and cash flows by enhancing
disclosures. SFAS No. 161 requires disclosure of fair values of
derivative instruments and their gains and losses in a tabular format,
disclosure of derivative features that are credit-risk-related to provide
information about the entity’s liquidity and cross-referencing within the
footnotes to help financial statement users locate important information about
derivative instruments. The adoption of SFAS No. 161 on January 1,
2009 did not have a material impact on the Company’s consolidated financial
statements. See Note 5 for the Company’s disclosures required by the
adoption of SFAS No. 161.
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Recently
Issued Financial Accounting Standards (continued)
In April
2008, the FASB issued FSP SFAS No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP SFAS No. 142-3”). FSP SFAS No. 142-3 amends
the factors an entity should consider when developing renewal or extension
assumptions for determining the useful life of recognized intangible assets
under SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP SFAS
No. 142-3 is intended to improve the consistency between the useful life of
recognized intangible assets under SFAS No. 142 and the period of expected cash
flows used to measure the fair value of assets under SFAS No. 141R and other
U.S. GAAP. The adoption of FSP SFAS No. 142-3 on January 1, 2009 did not
have a material impact on the Company’s consolidated financial
statements.
In
November 2008, the FASB ratified the consensus on EITF Issue No. 08-6, “Equity
Method Investment Accounting Considerations” (“EITF No. 08-6”), which provides
guidance on and clarification of accounting and impairment considerations
involving equity method investments under SFAS No. 141R and SFAS No.
160. EITF No. 08-6 provides guidance on how the equity method
investor should initially measure the equity method investment, account for
impairment charges of the equity method investment and account for a share
issuance by the investee. The adoption of EITF No. 08-6 on January 1,
2009 did not have a material impact on the Company’s consolidated financial
statements.
In April
2009, the FASB issued FSP SFAS No. 107-1 and Accounting Principles Board (“APB”)
Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial
Instruments” (“FSP SFAS No. 107-1 and APB Opinion No. 28-1”). FSP
SFAS No. 107-1 and APB Opinion No. 28-1 amends SFAS No. 107, “Disclosures about
Fair Value of Financial Instruments” and APB Opinion No. 28, “Interim Financial
Reporting,” to require disclosures about fair value of financial instruments for
interim reporting periods. The adoption of FSP SFAS No. 107-1 and APB
Opinion No. 28-1 for the period ended June 30, 2009 did not have a material
impact on the Company’s consolidated financial statements. See
Note 4 for the Company’s disclosures required by the adoption of FSP SFAS No.
107-1 and APB Opinion No. 28-1.
In
May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No.
165”). SFAS No. 165 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. SFAS
No. 165 requires disclosure of the date through which subsequent events
have been evaluated and whether such date represents the date the financial
statements were issued or were available to be issued. The adoption
of SFAS No. 165 for the period ended June 30, 2009 did not have a material
impact on the Company’s consolidated financial statements. See Note 17
for the Company’s disclosures required by the adoption of SFAS No.
165.
In
June 2009, the FASB issued SFAS No. 167, “Amendments to FASB
Interpretation No. 46R” (“SFAS No. 167”). SFAS No. 167 amends revised FASB
Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46R”)
to require an analysis to determine whether a variable interest gives the entity
a controlling financial interest in a variable interest entity. SFAS No. 167
requires an ongoing reassessment and eliminates the quantitative approach
previously required for determining whether an entity is the primary
beneficiary. SFAS No. 167 is effective for fiscal years beginning after November
15, 2009. The Company is currently evaluating the impact that
SFAS No. 167 will have on its financial statements, as it has variable interest
entities that may be affected by the adoption of SFAS No. 167 (see Note
16).
In July
2009, the FASB issued SFAS No. 168, “FASB Accounting Standards
Codification” (“SFAS No. 168”), as the single source of authoritative
nongovernmental U.S. GAAP. All existing accounting standards are
superseded as described in SFAS No. 168. All other accounting literature not
included in the codification is non-authoritative. SFAS No. 168 is effective for
interim and annual periods ending after September 15, 2009. The
Company does not expect SFAS No. 168 to materially affect its 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 the grant 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.
On June
14, 2009 and 2008, 2,978,437 and 941,512 shares of KHI restricted stock,
respectively, issued to four of the Company’s executive officers and other
members of management vested either pursuant to the terms of the applicable
restricted stock agreements or pursuant to amendments to restricted stock
agreements referred to below. The shares of restricted stock that vested were
originally “rolled over” from OSI Restaurant Partners, Inc. in conjunction with
the Merger or issued under a separate agreement and were not issued under the
KHI Equity Plan. In accordance with the terms of the applicable restricted
stock agreements, KHI loaned an aggregate of approximately $3,332,000 and
$2,067,000 to these individuals in June 2009 and July 2008, respectively, for
their personal income tax obligations that resulted from vesting. The
loans are full recourse and are also collateralized by the vested shares of KHI
restricted stock. The Company recorded $11,824,000 and $13,549,000 of
compensation expense in its Consolidated Statements of Operations for the three
and six months ended June 30, 2009, respectively, and $1,745,000 and $3,489,000
for the three and six months ended June 30, 2008, respectively, for the vesting
of KHI restricted stock.
During
the second quarter of 2009, the restricted stock and stock option agreements
between KHI and three of the Company’s named executive officers were
amended. The amendments to the restricted stock agreements accelerated the
vesting of these officers’ shares of KHI restricted stock such that they were
fully vested on June 14, 2009. Of the total compensation expense recorded
for the vesting of KHI restricted stock during the three months ended June 30,
2009, $10,289,000 (2,036,925 shares) related to the accelerated vesting of the
restricted stock held by these officers. The amendments to the stock
option agreements eliminated a call provision that allowed KHI to repurchase all
shares acquired by the executives upon exercise of stock options following
termination of employment. In accordance with SFAS No. 123R, “Share-Based
Payment,” a revision of SFAS No. 123, “Accounting for Stock-Based Compensation,”
as a result of the call provision, the Company historically has not recorded any
compensation expense relating to these stock options. Since the call
provision has been removed for these officers, the Company recorded $317,000 of
compensation expense for the vested stock options in its Consolidated Statements
of Operations for the three and six months ended June 30, 2009 and will continue
to record compensation expense in future periods through the applicable vesting
dates. The amended stock option agreements also contain provisions that
extend the stock option exercise period for each of these officers under certain
circumstances. Further, the amendments add a provision that upon
retirement, the number of options to be fully vested and exercisable shall be
the greater of (i) the amount of options that are vested and exercisable as of
the officer’s separation date or (ii) 40%, 60% or 100% of the officer’s options,
depending on the officer.
Due to
the retirement of one of these named executive officers on July 1, 2009, 275,530
stock options were forfeited subsequent to the end of the second quarter of
2009. Additionally, this officer’s stock option agreement was further
amended to require the officer to pay to the Company any future sales proceeds
from the officer’s sales of KHI stock acquired upon exercise of the options in
excess of $20.00 per share, less the taxes that must be paid by the officer on
the proceeds in excess of $20.00 per share.
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Fair
Value Measurements
On
January 1, 2008, the Company adopted SFAS No. 157 for financial assets and
liabilities and nonfinancial assets and liabilities that are re-measured at
least annually. On January 1, 2009, the Company applied SFAS No. 157
to nonfinancial assets and liabilities that are recognized or disclosed at fair
value on a nonrecurring basis. SFAS No. 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. SFAS No. 157 applies to reported balances
that are required or permitted to be measured at fair value under existing
accounting pronouncements; accordingly, the standard does not require any new
fair value measurements of reported balances.
SFAS No.
157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. As defined in SFAS No. 157, fair
value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date (exit price). 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. In
accordance with SFAS No. 157, 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,
SFAS No. 157 establishes a three-tier fair value hierarchy which 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 invests its
excess cash in money market funds classified as Cash and cash equivalents
or restricted cash in its Consolidated Balance Sheet at June 30, 2009 at a net
value of 1:1 for each dollar invested. The fair value of the majority
of the investment in the money market fund is determined by using quotes for
similar assets in an active market. As a result, the Company has
determined that the majority of the inputs used to value this investment fall
within Level 2 of the fair value hierarchy. As of June 30, 2009,
$30,968,000 of the Company’s money market investments were guaranteed by the
federal government under the Treasury Temporary Guarantee Program for Money
Market Funds. This program expires on September 18,
2009.
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Fair
Value Measurements (continued)
Fair
Value Measurements on a Recurring Basis (continued)
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 variable-rate
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 and
implied volatilities.
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,
2009, 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
Company’s restaurants are dependent upon energy to operate and are affected by
changes in energy prices, including natural gas. The Company uses
derivative instruments to mitigate some of its overall exposure to material
increases in natural gas prices. The valuation of the Company’s
natural gas derivatives is based on quoted exchange prices and is classified in Level 2 of
the fair value hierarchy.
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 financial statements for all periods presented and have been
excluded from the tables within this footnote.
The
following table presents the Company’s money market funds and derivative
financial instruments measured at fair value on a recurring basis as of June 30,
2009, aggregated by the level in the fair value hierarchy within which those
measurements fall (in thousands):
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
JUNE
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
LEVEL
1
|
|
|
LEVEL
2
|
|
|
LEVEL
3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
$ |
31,939 |
|
|
$ |
- |
|
|
$ |
31,939 |
|
|
$ |
- |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
financial instruments
|
|
$ |
24,340 |
|
|
$ |
- |
|
|
$ |
24,340 |
|
|
$ |
- |
|
A SFAS
No. 157 credit valuation adjustment of $1,652,000 decreased the liability
recorded for the interest rate collar as of June 30, 2009.
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Fair
Value Measurements (continued)
Fair
Value Measurements on a Nonrecurring Basis
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 |
|
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” (“SFAS No. 144”), 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. Due to the pending 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 in order to reduce the carrying value of this concept’s long-lived assets
to their estimated fair market value (see Note 7). 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.
In accordance with SFAS
No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142), and as a result
of the Company’s annual impairment test in the second quarter, 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. 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.
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Fair
Value Measurements (continued)
Fair
Value Measurements on a Nonrecurring Basis
(continued)
The
following table presents the range of assumptions the Company used to derive its
fair value estimates among its reporting units during the impairment test
conducted in the second quarter of 2009.
|
|
ASSUMPTIONS
|
|
|
|
GOODWILL
|
|
|
TRADE
NAMES
|
|
Weighted-average
cost of capital
|
|
|
12.5%
- 15.0 |
% |
|
|
13.0%
- 14.0 |
% |
Long-term
growth rates
|
|
|
3.0 |
% |
|
|
3.0 |
% |
Annual
revenue growth rates
|
|
|
(6.9)%
- 12.0 |
% |
|
|
(3.9)%
- 5.0 |
% |
FSP
SFAS No. 107-1 and APB Opinion No. 28-1
During
the second quarter of 2009, the Company adopted FSP SFAS
No. 107-1 and APB Opinion No. 28-1 which requires disclosures
about the fair value of financial instruments for interim reporting periods.
The
Company’s non-derivative financial instruments at June 30, 2009 and December 31,
2008 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, 2009 and December 31, 2008 (in thousands):
|
|
JUNE
30,
|
|
|
DECEMBER
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
CARRYING
VALUE
|
|
|
FAIR
VALUE
|
|
|
CARRYING
VALUE
|
|
|
FAIR
VALUE
|
|
Senior
secured term loan facility
|
|
$ |
1,178,450 |
|
|
$ |
854,376 |
|
|
$ |
1,185,000 |
|
|
$ |
533,250 |
|
Senior
secured working capital revolving credit facility
|
|
|
50,000 |
|
|
|
36,250 |
|
|
|
50,000 |
|
|
|
22,500 |
|
Senior
secured pre-funded revolving credit facility
|
|
|
- |
|
|
|
- |
|
|
|
12,000 |
|
|
|
5,400 |
|
Senior
notes
|
|
|
248,075 |
|
|
|
173,653 |
|
|
|
488,220 |
|
|
|
91,541 |
|
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Derivative
Instruments and Hedging Activities
Effective
January 1, 2009, the Company adopted SFAS No. 161 which requires
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about the fair value of and gains and losses on
derivative instruments and disclosures about credit-risk-related contingent
features in derivative instruments.
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 10). 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’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’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 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, the Philippines
and Brazil and to our 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 2008, the Company purchased approximately 90% of its beef
raw materials from four beef suppliers who represented 87% of the total beef
marketplace in the United States. In 2009, the Company
contracted more than 90% of its beef raw materials from two beef
suppliers. These two beef suppliers represent approximately 47% 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 and Commodity Price Risk
The
Company’s objectives in using an interest rate derivative are to add stability
to interest expense and 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
$1,310,000,000 variable-rate term loan. 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, 2009, the Company’s interest rate collar was a non-designated hedge of
the Company’s exposure to interest rate risk. The Company records
marked-to-market changes in the fair value of the derivative instrument in
earnings in the period of change in accordance with SFAS No. 133.
The
Company’s objective in using natural gas derivatives is to mitigate some of its
overall exposure to material increases in natural gas prices. As of
June 30, 2009, the Company had a notional volume of 155,400 MMBtus in unrealized
natural gas swaps. These natural gas derivatives were a
non-designated hedge, and the Company records marked-to-market changes in the
fair value of these derivative instruments in earnings in the period of change
in accordance with SFAS No. 133.
The
following table presents the fair value of the Company’s derivative financial
instruments and their classification in its Consolidated Balance Sheets as of
June 30, 2009 and December 31, 2008 (in thousands):
|
FAIR
VALUES OF DERIVATIVE INSTRUMENTS
|
|
|
ASSET
DERIVATIVES
|
|
LIABILITY
DERIVATIVES
|
|
|
JUNE
30, 2009
|
|
DECEMBER
31, 2008
|
|
JUNE
30, 2009
|
|
DECEMBER
31, 2008
|
|
|
BALANCE
|
|
|
|
BALANCE
|
|
|
|
BALANCE
|
|
|
|
BALANCE
|
|
|
|
|
SHEET
|
|
FAIR
|
|
SHEET
|
|
FAIR
|
|
SHEET
|
|
FAIR
|
|
SHEET
|
|
FAIR
|
|
|
LOCATION
|
|
VALUE
|
|
LOCATION
|
|
VALUE
|
|
LOCATION
|
|
VALUE
|
|
LOCATION
|
|
VALUE
|
|
Derivatives
not designated as hedging
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
instruments
under SFAS No. 133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate collar
|
Other current
assets
|
|
$ |
- |
|
Other
current assets
|
|
$ |
- |
|
Accrued
expenses
|
|
$ |
23,749 |
|
Accrued
expenses
|
|
$ |
24,285 |
|
Natural
gas swaps
|
Other
current assets
|
|
|
- |
|
Other
current assets
|
|
|
- |
|
Accrued
expenses
|
|
|
591 |
|
Accrued
expenses
|
|
|
1,172 |
|
Total
derivatives not designated as
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hedging
instruments under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS
No. 133
|
|
|
$ |
- |
|
|
|
$ |
- |
|
|
|
$ |
24,340 |
|
|
|
$ |
25,457 |
|
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Derivative
Instruments and Hedging Activities (continued)
The
following table presents the location and effects of the Company’s derivative
financial instruments on its Consolidated Statements of Operations for the three
and six months ended June 30, 2009 and 2008 (in thousands):
|
LOCATION
OF
|
|
AMOUNT
OF (LOSS) OR GAIN RECOGNIZED
|
|
|
(LOSS)
OR GAIN
|
|
IN
INCOME ON DERIVATIVE
|
|
DERIVATIVES
NOT DESIGNATED
|
RECOGNIZED
IN
|
|
THREE
MONTHS ENDED
|
|
|
SIX
MONTHS ENDED
|
|
AS
HEDGING INSTRUMENTS
|
INCOME
ON
|
|
JUNE
30,
|
|
|
JUNE
30,
|
|
UNDER
SFAS NO. 133
|
DERIVATIVE
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Interest
rate collar
|
Interest
expense
|
|
$ |
(4,648 |
) |
|
$ |
11,713 |
|
|
$ |
(7,802 |
) |
|
$ |
857 |
|
Natural
gas swaps
|
Other
restaurant operating
|
|
|
(65 |
) |
|
|
821 |
|
|
|
(651 |
) |
|
|
921 |
|
Total
|
|
|
$ |
(4,713 |
) |
|
$ |
12,534 |
|
|
$ |
(8,453 |
) |
|
$ |
1,778 |
|
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, 2009 and December 31, 2008, the fair value of the interest rate collar
derivative related to this agreement, including accrued interest but excluding
any adjustment for nonperformance risk, was in a net liability position of
$25,467,000 and $28,857,000, respectively. As of June 30, 2009 and
December 31, 2008, 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, 2009, it would be required to settle its obligation under
the agreement at its termination value of $25,467,000.
6. Other
Current Assets
Other
current assets consisted of the following (in thousands):
|
|
JUNE
30,
|
|
|
DECEMBER
31,
|
|
|
|
2009
|
|
|
2008
|
|
Prepaid
expenses
|
|
$ |
25,916 |
|
|
$ |
14,664 |
|
Accounts
receivable
|
|
|
25,167 |
|
|
|
25,296 |
|
Accounts
receivable - franchisees, net
|
|
|
4,868 |
|
|
|
4,476 |
|
Insurance
receivable
|
|
|
20,300 |
|
|
|
- |
|
Other
current assets
|
|
|
19,974 |
|
|
|
17,387 |
|
|
|
$ |
96,225 |
|
|
$ |
61,823 |
|
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Property,
Fixtures and Equipment, Net
|
|
JUNE
30,
|
|
|
DECEMBER
31,
|
|
|
|
2009
|
|
|
2008
|
|
Land
|
|
$ |
12,012 |
|
|
$ |
11,957 |
|
Buildings
and building improvements
|
|
|
392,781 |
|
|
|
427,348 |
|
Furniture
and fixtures
|
|
|
192,440 |
|
|
|
192,331 |
|
Equipment
|
|
|
295,729 |
|
|
|
296,736 |
|
Leasehold
improvements
|
|
|
372,514 |
|
|
|
383,313 |
|
Construction
in progress
|
|
|
11,364 |
|
|
|
19,036 |
|
Less:
accumulated depreciation
|
|
|
(335,408 |
) |
|
|
(257,222 |
) |
|
|
$ |
941,432 |
|
|
$ |
1,073,499 |
|
In May
2009, the Company executed a letter of intent to sell its Cheeseburger in
Paradise concept for $2,000,000 to an entity to be formed and controlled by the
president of the concept. Based on the proposed terms as outlined in
the letter of intent, including the Company’s financing of the proposed
transaction, the Company determined that its Cheeseburger in Paradise concept
does not meet the assets held for sale criteria defined in SFAS No.
144. In addition, the Company recorded a $45,962,000 impairment
charge during the second quarter of 2009 in order to reduce the carrying value
of this concept’s assets to their estimated fair market value. This
impairment included $39,169,000 of charges to fixed assets, $5,861,000 of
charges to intangible assets and $932,000 of charges to other
assets.
During
the three and six months ended June 30, 2009, the Company recorded impairment
charges and restaurant closing expense (including the Cheeseburger in Paradise
fixed asset impairment charges described above) of $68,604,000 and $75,144,000,
respectively, and during the three and six months ended June 30, 2008, recorded
total impairment charges and restaurant closing expense of $17,429,000 and
$21,093,000, respectively, for certain of the Company’s restaurants in the line
item “Provision for impaired assets and restaurant closings” in its Consolidated
Statement of Operations (see Note 4). These fixed asset impairment
charges primarily occurred as a result of the carrying value of a restaurant’s
assets exceeding its estimated fair market value, generally due to anticipated
closures or declining future cash flows from lower projected future sales on
existing locations.
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. Goodwill
and Intangible Assets, Net
The
change in the carrying amount of goodwill for the six months ended June 30, 2009
is as follows (in thousands):
December
31, 2008
|
|
$ |
459,800 |
|
Impairment
loss
|
|
|
(11,078 |
) |
June
30, 2009
|
|
$ |
448,722 |
|
During
the second quarter of 2009, the Company performed its annual assessment for
impairment of goodwill and other indefinite-lived intangible
assets. The Company’s review of the recoverability of goodwill was
based primarily upon an analysis of the discounted cash flows of the related
reporting units as compared to the carrying values (see Note 4). The
Company also used the discounted cash flow method to determine the fair value of
its intangible assets. Due to poor overall economic conditions, declining
sales at Company-owned restaurants, reductions in the Company’s projected
results for future periods and a challenging environment for the restaurant
industry, the Company recorded an aggregate goodwill impairment loss of
$11,078,000 for the domestic Outback Steakhouse, Bonefish Grill and
Fleming’s Prime Steakhouse and Wine Bar concepts and impairment charges of
$36,000,000 for the domestic Outback Steakhouse and Carrabba’s Italian Grill
trade names during the three and six months ended June 30, 2009. The Company
also recorded impairment charges of $6,670,000 and $7,016,000 for other
intangible assets for the three and six months ended June 30, 2009,
respectively. The Company recorded goodwill and intangible asset
impairment charges of $161,589,000 and $6,499,000, respectively, during the
three and six months ended June 30, 2008.
At June
30, 2009, remaining goodwill by reporting unit is as follows (in
thousands):
|
|
JUNE
30, 2009
|
|
Outback
Steakhouse (domestic)
|
|
$ |
319,108 |
|
Outback
Steakhouse (international)
|
|
|
59,740 |
|
Carrabba's
Italian Grill
|
|
|
20,354 |
|
Bonefish
Grill
|
|
|
49,520 |
|
|
|
$ |
448,722 |
|
9. Accrued
Expenses
Accrued
expenses consisted of the following (in thousands):
|
|
JUNE
30,
|
|
|
DECEMBER
31,
|
|
|
|
2009
|
|
|
2008
|
|
Accrued
payroll and other compensation
|
|
$ |
73,719 |
|
|
$ |
66,057 |
|
Accrued
insurance
|
|
|
43,796 |
|
|
|
19,480 |
|
Other
accrued expenses
|
|
|
81,655 |
|
|
|
82,558 |
|
|
|
$ |
199,170 |
|
|
$ |
168,095 |
|
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. Long-term
Debt
Long-term
debt consisted of the following (in thousands):
|
|
JUNE
30,
|
|
|
DECEMBER
31,
|
|
|
|
2009
|
|
|
2008
|
|
Senior
secured term loan facility, interest rate of 2.63% at June 30,
2009
|
|
|
|
|
|
|
and
2.81% at December 31, 2008
|
|
$ |
1,178,450 |
|
|
$ |
1,185,000 |
|
Senior
secured working capital revolving credit facility, interest rate of 2.63%
at
|
|
|
|
|
|
|
|
|
June
30, 2009 and 2.81% at December 31, 2008
|
|
|
50,000 |
|
|
|
50,000 |
|
Senior
secured pre-funded revolving credit facility, interest rate of
2.81%
|
|
|
|
|
|
|
|
|
at
December 31, 2008
|
|
|
- |
|
|
|
12,000 |
|
Senior
notes, interest rate of 10.00% at June 30, 2009 and December 31,
2008
|
|
|
248,075 |
|
|
|
488,220 |
|
Other
notes payable, uncollateralized, interest rates ranging from 1.21% to
7.30%
|
|
|
|
|
|
|
|
|
at
June 30, 2009 and 2.28% to 7.30% at December 31, 2008
|
|
|
8,021 |
|
|
|
11,987 |
|
Sale-leaseback
obligations
|
|
|
4,925 |
|
|
|
4,925 |
|
Guaranteed
debt of consolidated joint venture partner
|
|
|
24,500 |
|
|
|
- |
|
Guaranteed
debt of consolidated affiliate
|
|
|
- |
|
|
|
33,283 |
|
|
|
|
1,513,971 |
|
|
|
1,785,415 |
|
Less:
current portion of long-term debt of OSI Restaurant Partners,
LLC
|
|
|
(79,852 |
) |
|
|
(30,953 |
) |
Less:
guaranteed debt
|
|
|
(24,500 |
) |
|
|
(33,283 |
) |
Long-term
debt of OSI Restaurant Partners, LLC
|
|
$ |
1,409,619 |
|
|
$ |
1,721,179 |
|
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,
2009 and December 31, 2008). The Eurocurrency Rate option is the 30, 60,
90 or 180-day Eurocurrency Rate (“Eurocurrency Rate”) (ranging from 0.31%
to 1.11% and from 0.44% to 1.75% at June 30, 2009 and December 31, 2008,
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, 2009 and December 31,
2008).
The
Company will be 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)
10. Long-term
Debt (continued)
Additionally,
the Company will, on an annual basis, be required 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 2009, the
Company repaid 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 $1,178,450,000 and $1,185,000,000 at
June 30, 2009 and December 31, 2008, respectively. The Company has
classified $75,000,000 of its term loans as current at June 30, 2009 due to its
prepayment requirements.
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. At June 30, 2009 and December 31, 2008, the
outstanding balance was $50,000,000. In addition to outstanding borrowings
at June 30, 2009 and December 31, 2008, $70,770,000 and $63,300,000,
respectively, of the credit facility was not available for borrowing as (i)
$37,540,000 of the credit facility was committed for the issuance of letters of
credit as required by insurance companies that underwrite the Company’s workers’
compensation insurance and also, where required, for construction of new
restaurants, (ii) $24,500,000 of the credit facility was committed for the
issuance of a letter of credit for the Company’s guarantee of an
uncollateralized line of credit for its joint venture partner, RY-8, Inc.
(“RY-8”), in the development of Roy's restaurants (iii) $6,000,000 of the credit
facility at June 30, 2009 was committed for the issuance of a letter of credit
to the insurance company that underwrites our bonds for liquor licenses,
utilities, liens and construction and (iv) $2,730,000 and $1,260,000,
respectively, of the credit facility was committed for the issuance of other
letters of credit. As of June 30, 2009, the Company’s total
outstanding letters of credit were $4,230,000 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 once the Company fully
utilizes $100,000,000 of restricted cash that was funded on the closing date of
the Merger. At June 30, 2009 and December 31, 2008, the Company had fully
utilized all of its restricted cash for capital expenditures, and at December
31, 2008, it had borrowed $12,000,000 from its pre-funded revolving credit
facility. This borrowing was recorded in “Current portion of
long-term debt” in the Company’s Consolidated Balance Sheet at December 31,
2008, as the Company was required to repay this outstanding loan in April 2009
using its “annual true cash flow,” as defined in the credit
agreement. At June 30, 2009, no draws were outstanding on the
pre-funded revolving credit facility. 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. Subsequent to the end
of the second quarter of 2009, the Company drew $7,700,000 from its pre-funded
revolving credit facility.
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. Long-term
Debt (continued)
The
Company’s senior secured credit facilities require it to comply with certain
financial covenants, including a quarterly Total Leverage Ratio (“TLR”) test and
an annual Minimum Free Cash Flow (“MFCF”) test. The TLR is the ratio of
Consolidated Total Debt to Consolidated EBITDA (earnings before interest, taxes,
depreciation and amortization as defined in the senior secured credit
facilities) and may not exceed 6.00 to 1.00. On an annual basis, if
the Rent Adjusted Leverage Ratio is greater than or equal to 5.25 to 1.00, the
Company’s MFCF cannot be less than $75,000,000. MFCF is calculated as
Consolidated EBITDA plus decreases in Consolidated Working Capital less
Consolidated Interest Expense, Capital Expenditures (except for that funded by
the Company’s senior secured pre-funded revolving credit facility), increases in
Consolidated Working Capital and cash paid for taxes. (All of the
above capitalized terms are as defined in the credit agreement). The
Company’s senior secured credit facilities agreement also includes negative
covenants that, subject to significant exceptions, limit its ability and the
ability of its restricted subsidiaries to: incur liens, make investments and
loans, make capital expenditures (as described below), incur indebtedness or
guarantees, engage in mergers, acquisitions and assets sales, declare dividends,
make payments or redeem or repurchase equity interests, alter its business,
engage in certain transactions with affiliates, enter into agreements limiting
subsidiary distributions and prepay, redeem or purchase certain
indebtedness. The Company’s senior secured credit facilities contain
customary representations and warranties, affirmative covenants and events of
default.
The
Company’s capital expenditures are limited by the credit agreement. The
annual capital expenditure limits range from $200,000,000 to $250,000,000 with
various carry-forward and carry-back allowances. The Company’s annual
expenditure limits may increase after an acquisition. However, if (i) the
Rent Adjusted Leverage Ratio at the end of a fiscal year is greater than 5.25 to
1.00, (ii) the “annual true cash flows” are insufficient to repay fully our
pre-funded revolving credit facility and (iii) the capital expenditure account
has a zero balance, its capital expenditures will be limited to $100,000,000 for
the succeeding fiscal year. This limitation will remain until there are no
pre-funded revolving credit facility loans outstanding and the amount on deposit
in the capital expenditures account is greater than zero or until the Rent
Adjusted Leverage Ratio is less than 5.25 to 1.00.
The
obligations under the Company’s senior secured credit facilities are guaranteed
by each of its current and future domestic 100% owned restricted subsidiaries in
its Outback Steakhouse, Carrabba’s Italian Grill and Cheeseburger in Paradise
concepts and certain non-restaurant subsidiaries (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. Subject to the
conditions described below, the obligations are secured by a perfected security
interest in substantially all of the Company’s assets and assets of the
Guarantors and OSI HoldCo, in each case, now owned or later acquired, including
a pledge of all of the Company’s capital stock, the capital stock of
substantially all of the Company’s domestic wholly-owned subsidiaries and 65% of
the capital stock of certain of the Company’s material foreign subsidiaries that
are directly owned by the Company, OSI HoldCo, or a Guarantor. Also, the
Company is required to provide additional guarantees of the senior secured
credit facilities in the future from other domestic wholly-owned restricted
subsidiaries if the consolidated EBITDA (earnings before interest, taxes,
depreciation and amortization as defined in the senior secured credit
facilities) attributable to the Company’s non-guarantor domestic wholly-owned
restricted subsidiaries as a group exceeds 10% of the Company’s consolidated
EBITDA as determined on a Company-wide basis. If this occurs, guarantees
would be required from additional domestic wholly-owned restricted subsidiaries
in such number that would be sufficient to lower the aggregate consolidated
EBITDA of the non-guarantor domestic wholly-owned restricted subsidiaries as a
group to an amount not in excess of 10% of the Company-wide consolidated
EBITDA.
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. 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”), Wells Fargo Bank, National
Association, as trustee, and 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
senior notes are guaranteed on a senior unsecured basis by each restricted
subsidiary that guarantees the senior secured credit facility (see Note
13). The senior notes are general, unsecured senior obligations of
the Company, Co-Issuer and the Guarantors and are equal in right of payment to
all existing and future senior indebtedness, including the senior secured credit
facility. The senior notes are effectively subordinated to all of the
Company’s, Co-Issuer’s and the Guarantors’ secured indebtedness, including the
senior secured credit facility, to the extent of the value of the assets
securing such indebtedness. The senior notes are senior in right of
payment to all of the Company’s, Co-Issuer’s and the Guarantors’ existing and
future subordinated indebtedness.
The
indenture governing the senior notes limits, under certain circumstances, the
Company’s ability and the ability of Co-Issuer and the Company’s restricted
subsidiaries to: incur liens, make investments and loans, incur indebtedness or
guarantees, engage in mergers, acquisitions and assets sales, declare dividends,
make payments or redeem or repurchase equity interests, alter its business,
engage in certain transactions with affiliates, enter into agreements limiting
subsidiary distributions and prepay, redeem or purchase certain
indebtedness.
In
accordance with the terms of the senior notes and the senior secured credit
facility, the Company’s restricted subsidiaries are also subject to restrictive
covenants. Under certain circumstances, the Company is permitted to
designate subsidiaries as unrestricted subsidiaries, which would cause them not
to be subject to the restrictive covenants of the indenture or the credit
agreement. As of December 31, 2008, all of the Company’s consolidated
subsidiaries were restricted subsidiaries. In April 2009, one of the
Company’s restricted subsidiaries that operated six restaurants in Canada was
designated as an unrestricted subsidiary.
Additional
senior notes may be issued under the indenture from time to time, subject to
certain limitations. Initial and additional senior notes issued under the
indenture will be treated as a single class for all purposes under the
indenture, including waivers, amendments, redemptions and offers to
purchase.
The
Company filed a Registration Statement on Form S-4 (which became effective June
2, 2008) for an exchange offer relating to its senior notes. As a result,
the Company is required to file reports under Section 15(d) of the Securities
Exchange Act of 1934, as amended.
The
Company may redeem some or all of the senior notes on and after June 15, 2011 at
the redemption prices (expressed as percentages of principal amount of the
senior notes to be redeemed) listed below, plus accrued and unpaid interest
thereon and additional interest, if any, to the applicable redemption
date.
Year
|
|
Percentage
|
2011
|
|
105.0%
|
2012
|
|
102.5%
|
2013
and thereafter
|
|
100.0%
|
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. Long-term
Debt (continued)
The
Company also may redeem all or part of the senior notes at any time prior to
June 15, 2011, at a redemption price equal to 100% of the principal amount of
the senior notes redeemed plus the applicable premium as of, and accrued and
unpaid interest and additional interest, if any, to the date of
redemption.
Upon a
change in control as defined in the indenture, the Company would be required to
make an offer to purchase all of the senior notes at a price in cash equal to
101% of the aggregate principal amount thereof plus accrued interest and unpaid
interest and additional interest, if any, to the date of purchase.
Between
November 18, 2008 and November 21, 2008, the Company purchased on the open
market and extinguished $61,780,000 in aggregate principal amount of its
senior notes for $11,711,000, representing an average of 19.0% of face value,
and $2,729,000 of accrued interest.
On
February 18, 2009, the Company commenced a cash tender offer to purchase the
maximum aggregate principal amount of its senior notes that it could purchase
for $73,000,000, excluding accrued interest. The tender offer expired on
March 20, 2009, and the Company accepted for purchase $240,145,000 in principal
amount of its senior notes. The Company paid $72,998,000 for the
senior notes accepted for purchase and $6,671,000 of accrued
interest. The Company recorded a gain from the extinguishment of its
debt of $158,061,000 in the line item “Gain on extinguishment of debt” in its
Consolidated Statement of Operations for the six months ended June 30,
2009. The gain was reduced by $6,117,000 for the pro rata
portion of unamortized deferred financing fees that related to the extinguished
senior notes and by $2,969,000 of fees related to the tender offer. The
principal balance of senior notes outstanding at June 30, 2009 and December 31,
2008 was $248,075,000 and $488,220,000, respectively. The purpose of the
tender offer was to reduce the principal amount of debt outstanding, reduce the
related debt service obligations and improve the Company’s financial covenant
position under its senior secured credit facilities.
The
Company funded the tender offer with (i) cash on hand and (ii) proceeds from a
contribution (the “Contribution”) of $47,000,000 from the
Company’s direct owner, OSI HoldCo. The Contribution was funded
through distributions to OSI HoldCo by one of its subsidiaries that owns
(indirectly through subsidiaries) approximately 340 restaurant properties that
are sub-leased to the Company.
In June
2009, the Company renewed a one-year line of credit with a reduced maximum
borrowing amount of 10,000,000,000 Korean won, or $7,784,000 at June 30, 2009
(12,000,000,000 Korean won, or $9,543,000 at December 31, 2008). The
line bears interest at 2.51% and 1.50% over the Korean Stock Exchange
three-month certificate of deposit rate (4.92% and 6.94% at June 30, 2009 and
December 31, 2008, respectively). The line matures June 14,
2010. There were no draws outstanding on this line of credit as of June
30, 2009 and December 31, 2008.
In June
2009, the Company renewed a one-year overdraft line of credit with a maximum
borrowing amount of 5,000,000,000 Korean won ($3,892,000 and $3,976,000 at
June 30, 2009 and December 31, 2008, respectively). The line bears
interest at 2.75% and 1.15% over the Korean Stock Exchange three-month
certificate of deposit rate (5.16% and 6.59% at June 30, 2009 and December 31,
2008, respectively) and matures June 14, 2010. There were no draws
outstanding on this line of credit as of June 30, 2009 and December 31,
2008.
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. Long-term
Debt (continued)
DEBT
GUARANTEES
The
Company was the guarantor of an uncollateralized line of credit that
matured December 31, 2008 and permitted borrowing of up to $35,000,000 by a
limited liability company, T-Bird Nevada, LLC (“T-Bird”), which is owned by the
principal of each of the Company’s California franchisees of Outback Steakhouse
restaurants. The line of credit bore interest at rates ranging from
50 to 90 basis points over LIBOR. The Company was required to
consolidate T-Bird effective January 1, 2004 upon adoption of FIN
46R. At December 31, 2008, the outstanding balance on the line of
credit was approximately $33,283,000 and was included in the Company’s
Consolidated Balance Sheet. 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. According to the terms of the line of credit, T-Bird
was able to borrow, repay, re-borrow or prepay advances at any time before the
termination date of the agreement.
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. Therefore, 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 against the Company and certain of its officers and affiliates (see
Note 14).
As a
result of these lawsuits, the Company made certain assumptions and estimates in
its consolidation of T-Bird at and for the three and six months ended June 30,
2009, as T-Bird did not provide the Company with financial statements for the
first and second quarters of 2009. The Company is not aware of any
events or transactions for T-Bird that are not reflected in the Company’s
consolidated financial statements at and for the three and six months ended June
30, 2009 that would materially affect these consolidated financial
statements.
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, 2009 and December 31, 2008, 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, 2009
and December 31, 2008, $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.
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. Long-term
Debt (continued)
DEBT
GUARANTEES (continued)
If an
event of default occurs and RY-8 is unable to pay the outstanding balance owed,
the Company would, as guarantor, be liable for this balance. However, in
conjunction with the credit agreement, RY-8 and RHI have entered into an
Indemnity Agreement and a Pledge of Interest and Security Agreement in the
Company’s favor. These agreements provide that if the Company is required to
perform its obligation as guarantor pursuant to the credit agreement, then RY-8
and RHI will indemnify 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 a long-term contingent obligation
was probable under SFAS No. 5, “Accounting for Contingencies.” As a
result of the amendment of the line of credit and extension of the Company’s
guarantee obligation on April 1, 2009, the Company reconsidered its relationship
with RY-8 in accordance with FIN 46R during the second quarter of
2009. The Company determined that RY-8 is a variable interest entity
for which the Company is the primary beneficiary (see Note
16). Therefore, the Company began consolidating RY-8 effective April
1, 2009 and reclassified the $24,500,000 contingent obligation to guaranteed
debt, which is included in the line item “Guaranteed debt of consolidated joint
venture partner” in its Consolidated Balance Sheet at June 30,
2009. No other assets or liabilities have been recorded as a result
of consolidating RY-8.
11. Comprehensive
Loss and Foreign Currency Translation and Transactions
Comprehensive
loss includes net loss and foreign currency translation
adjustments. Total comprehensive loss for the three months ended June
30, 2009 and 2008 was ($82,278,000), and ($180,346,000), respectively, which
included the effect of gains and (losses) from translation adjustments of
approximately $5,777,000 and ($2,942,000), respectively.
Total
comprehensive loss for the six months ended June 30, 2009 and 2008 was
($2,465,000) and ($193,013,000), respectively, which included the effect of
gains and (losses) from translation adjustments of approximately $2,178,000 and
($6,771,000), respectively.
Accumulated
other comprehensive loss contained only foreign currency translation adjustments
as of June 30, 2009 and December 31, 2008.
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 $2,466,000 and ($3,194,000) for the
three and six months ended June 30, 2009, respectively, and a net loss of
$3,805,000 for the three and six months ended June 30, 2008.
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. Income
Taxes
As of
June 30, 2009 and December 31, 2008, the Company had $18,079,000 and
$16,537,000, respectively, of unrecognized tax benefits ($10,414,000 and
$10,412,000, respectively, in “Other long-term liabilities” and $7,665,000 and
$6,125,000, respectively, in “Accrued expenses”). Of these amounts,
$16,877,000 and $14,710,000, 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. The Company’s liability for
unrecognized tax benefits increased by $1,542,000 during the six months ended
June 30, 2009 as a result of an increase for tax positions taken during a
prior period.
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 $6,700,000 to
$7,400,000 within the next twelve months after June 30, 2009.
The
Company is currently open to audit under the statute of limitations by the
Internal Revenue Service for the years ended December 31, 2005 through
2008. The Company and its subsidiaries’ state income tax returns and foreign
income tax returns also are open to audit under the statute of limitations for
the years ended December 31, 1999 through 2008.
As of
June 30, 2009 and December 31, 2008, the Company accrued $6,929,000 and
$5,162,000, 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
from income taxes and recognized related expense of $969,000 and
$1,188,000 for the three and six months ended June 30, 2009, respectively, and
expense of $423,000 and $550,000 for the three and six months ended June 30,
2008, respectively. The Company’s policy on classification of
interest and penalties did not change as a result of the adoption of FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109” (“FIN 48”), and it has not changed
since the adoption of FIN 48.
The
effective income tax rate for the three months ended June 30, 2009 was 38.9%
compared to 7.7% for the three months ended June 30, 2008. The net increase of
31.2% in the effective income tax rate was primarily due to a $150,511,000
decrease in Goodwill impairment for the three months ended June 30, 2009 as
compared to the same period in 2008. 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, 2009 was 74.1%
compared to 14.5% for the six months ended June 30, 2008. The effective
income tax rate for the six months ended June 30, 2009 was significantly higher
than the combined federal and state statutory rate of 38.9% due to the benefit
of the expected tax credit for excess FICA tax on employee-reported tips being
such a large percentage of projected annual pretax loss. The net increase
of 59.6% in the effective income tax rate during the six months ended June 30,
2009 from the rate in the same period in 2008 was primarily due to a
$150,511,000 decrease in Goodwill impairment for the six months ended June 30,
2009 as compared to the same period in 2008. 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. This increase was partially
offset by applying the combined federal and state statutory tax rate of 38.9% to
the $158,061,000 gain on extinguishment of debt realized during the six months
ended June 30, 2009. This gain is a discrete item for which deferred taxes are
provided for at the combined statutory federal and state income tax
rates.
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. Supplemental
Guarantor Condensed Consolidating Financial Statements
The
Company’s senior notes, a current aggregate outstanding principal amount of
$248,075,000, are jointly and severally, fully and unconditionally guaranteed on
a senior unsecured basis by the Guarantors, or each of its current and future
domestic 100% owned restricted subsidiaries in its Outback Steakhouse,
Carrabba’s Italian Grill and Cheeseburger in Paradise concepts and certain
non-restaurant subsidiaries (see Note 10). All other concepts and certain
non-restaurant subsidiaries of the Company do not guarantee the senior notes
(“Non-Guarantors”).
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, 2009
|
|
|
|
OSI
Parent
|
|
|
OSI
Co-Issuer
|
|
|
Guarantors
|
|
|
Non-Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
60,339 |
|
|
$ |
- |
|
|
$ |
35,232 |
|
|
$ |
16,810 |
|
|
$ |
- |
|
|
$ |
112,381 |
|
Current
portion of restricted cash
|
|
|
686 |
|
|
|
- |
|
|
|
3,638 |
|
|
|
- |
|
|
|
- |
|
|
|
4,324 |
|
Inventories
|
|
|
17,005 |
|
|
|
- |
|
|
|
30,322 |
|
|
|
15,772 |
|
|
|
- |
|
|
|
63,099 |
|
Deferred
income tax assets
|
|
|
35,834 |
|
|
|
- |
|
|
|
1,823 |
|
|
|
(45 |
) |
|
|
- |
|
|
|
37,612 |
|
Other
current assets
|
|
|
43,716 |
|
|
|
- |
|
|
|
29,663 |
|
|
|
22,846 |
|
|
|
- |
|
|
|
96,225 |
|
Total
current assets
|
|
|
157,580 |
|
|
|
- |
|
|
|
100,678 |
|
|
|
55,383 |
|
|
|
- |
|
|
|
313,641 |
|
Property,
fixtures and equipment, net
|
|
|
25,936 |
|
|
|
- |
|
|
|
563,193 |
|
|
|
352,303 |
|
|
|
- |
|
|
|
941,432 |
|
Investments
in and advances to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unconsolidated
affiliates, net
|
|
|
920 |
|
|
|
- |
|
|
|
- |
|
|
|
22,303 |
|
|
|
- |
|
|
|
23,223 |
|
Investments
in subsidiaries
|
|
|
- |
|
|
|
- |
|
|
|
2,166 |
|
|
|
- |
|
|
|
(2,166 |
) |
|
|
- |
|
Due
from (to) subsidiaries
|
|
|
2,322,175 |
|
|
|
- |
|
|
|
295,168 |
|
|
|
255,932 |
|
|
|
(2,873,275 |
) |
|
|
- |
|
Goodwill
|
|
|
- |
|
|
|
- |
|
|
|
339,462 |
|
|
|
109,260 |
|
|
|
- |
|
|
|
448,722 |
|
Intangible
assets, net
|
|
|
- |
|
|
|
- |
|
|
|
438,183 |
|
|
|
162,097 |
|
|
|
- |
|
|
|
600,280 |
|
Other
assets, net
|
|
|
89,242 |
|
|
|
- |
|
|
|
20,801 |
|
|
|
43,530 |
|
|
|
- |
|
|
|
153,573 |
|
Total
assets
|
|
$ |
2,595,853 |
|
|
$ |
- |
|
|
$ |
1,759,651 |
|
|
$ |
1,000,808 |
|
|
$ |
(2,875,441 |
) |
|
$ |
2,480,871 |
|
(CONTINUED…)
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. Supplemental
Guarantor Condensed Consolidating Financial Statements (continued)
|
|
CONDENSED
CONSOLIDATING BALANCE SHEET
|
|
|
|
AS
OF JUNE 30, 2009
|
|
|
|
OSI
Parent
|
|
|
OSI
Co-Issuer
|
|
|
Guarantors
|
|
|
Non-Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
LIABILITIES
AND (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
3,301 |
|
|
$ |
- |
|
|
$ |
67,951 |
|
|
$ |
33,247 |
|
|
$ |
- |
|
|
$ |
104,499 |
|
Sales
taxes payable
|
|
|
6 |
|
|
|
- |
|
|
|
11,825 |
|
|
|
3,835 |
|
|
|
- |
|
|
|
15,666 |
|
Accrued
expenses
|
|
|
97,616 |
|
|
|
- |
|
|
|
74,834 |
|
|
|
26,720 |
|
|
|
- |
|
|
|
199,170 |
|
Current
portion of accrued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
buyout
liability
|
|
|
- |
|
|
|
- |
|
|
|
8,456 |
|
|
|
4,718 |
|
|
|
- |
|
|
|
13,174 |
|
Unearned
revenue
|
|
|
213 |
|
|
|
- |
|
|
|
100,940 |
|
|
|
29,101 |
|
|
|
- |
|
|
|
130,254 |
|
Income
taxes payable
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
696 |
|
|
|
- |
|
|
|
696 |
|
Current
portion of long-term debt
|
|
|
75,005 |
|
|
|
- |
|
|
|
3,174 |
|
|
|
1,673 |
|
|
|
- |
|
|
|
79,852 |
|
Total
current liabilities
|
|
|
176,141 |
|
|
|
- |
|
|
|
267,180 |
|
|
|
99,990 |
|
|
|
- |
|
|
|
543,311 |
|
Partner
deposit and accrued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
buyout
liability
|
|
|
104 |
|
|
|
- |
|
|
|
87,203 |
|
|
|
26,952 |
|
|
|
- |
|
|
|
114,259 |
|
Deferred
rent
|
|
|
845 |
|
|
|
- |
|
|
|
39,091 |
|
|
|
21,150 |
|
|
|
- |
|
|
|
61,086 |
|
Deferred
income tax liability
|
|
|
48,623 |
|
|
|
- |
|
|
|
135,753 |
|
|
|
(5,349 |
) |
|
|
- |
|
|
|
179,027 |
|
Long-term
debt
|
|
|
1,401,545 |
|
|
|
248,075 |
|
|
|
6,980 |
|
|
|
1,094 |
|
|
|
(248,075 |
) |
|
|
1,409,619 |
|
Guaranteed
debt of consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
joint
venture partner
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
24,500 |
|
|
|
- |
|
|
|
24,500 |
|
Accumulated
losses in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
excess of investment
|
|
|
720,340 |
|
|
|
- |
|
|
|
- |
|
|
|
2,046 |
|
|
|
(722,386 |
) |
|
|
- |
|
Due
to (from) subsidiaries
|
|
|
213,232 |
|
|
|
- |
|
|
|
1,381,041 |
|
|
|
1,279,002 |
|
|
|
(2,873,275 |
) |
|
|
- |
|
Other
long-term liabilities, net
|
|
|
138,647 |
|
|
|
- |
|
|
|
68,446 |
|
|
|
23,982 |
|
|
|
- |
|
|
|
231,075 |
|
Total
liabilities
|
|
|
2,699,477 |
|
|
|
248,075 |
|
|
|
1,985,694 |
|
|
|
1,473,367 |
|
|
|
(3,843,736 |
) |
|
|
2,562,877 |
|
(Deficit)
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OSI
Restaurant Partners, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unitholder’s
(Deficit) Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
711,909 |
|
|
|
(248,075 |
) |
|
|
- |
|
|
|
- |
|
|
|
248,075 |
|
|
|
711,909 |
|
(Accumulated
deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
retained
earnings
|
|
|
(792,854 |
) |
|
|
- |
|
|
|
(226,043 |
) |
|
|
(471,498 |
) |
|
|
697,541 |
|
|
|
(792,854 |
) |
Accumulated
other comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(loss)
income
|
|
|
(22,679 |
) |
|
|
- |
|
|
|
- |
|
|
|
(22,679 |
) |
|
|
22,679 |
|
|
|
(22,679 |
) |
Total
OSI Restaurant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners,
LLC unitholder’s
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(deficit)
equity
|
|
|
(103,624 |
) |
|
|
(248,075 |
) |
|
|
(226,043 |
) |
|
|
(494,177 |
) |
|
|
968,295 |
|
|
|
(103,624 |
) |
Noncontrolling
interest
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
21,618 |
|
|
|
- |
|
|
|
21,618 |
|
Total
(deficit) equity
|
|
|
(103,624 |
) |
|
|
(248,075 |
) |
|
|
(226,043 |
) |
|
|
(472,559 |
) |
|
|
968,295 |
|
|
|
(82,006 |
) |
|
|
$ |
2,595,853 |
|
|
$ |
- |
|
|
$ |
1,759,651 |
|
|
$ |
1,000,808 |
|
|
$ |
(2,875,441 |
) |
|
$ |
2,480,871 |
|
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. Supplemental
Guarantor Condensed Consolidating Financial Statements (continued)
|
|
CONDENSED
CONSOLIDATING BALANCE SHEET
|
|
|
|
AS
OF DECEMBER 31, 2008
|
|
|
|
OSI
Parent
|
|
|
OSI
Co-Issuer
|
|
|
Guarantors
|
|
|
Non-Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
178,275 |
|
|
$ |
- |
|
|
$ |
50,126 |
|
|
$ |
43,069 |
|
|
$ |
- |
|
|
$ |
271,470 |
|
Current
portion of restricted cash
|
|
|
2,578 |
|
|
|
- |
|
|
|
3,297 |
|
|
|
- |
|
|
|
- |
|
|
|
5,875 |
|
Inventories
|
|
|
36,343 |
|
|
|
- |
|
|
|
30,523 |
|
|
|
17,702 |
|
|
|
- |
|
|
|
84,568 |
|
Deferred
income tax assets
|
|
|
34,309 |
|
|
|
- |
|
|
|
1,370 |
|
|
|
(45 |
) |
|
|
- |
|
|
|
35,634 |
|
Other
current assets
|
|
|
12,228 |
|
|
|
- |
|
|
|
24,483 |
|
|
|
25,112 |
|
|
|
- |
|
|
|
61,823 |
|
Total
current assets
|
|
|
263,733 |
|
|
|
- |
|
|
|
109,799 |
|
|
|
85,838 |
|
|
|
- |
|
|
|
459,370 |
|
Property,
fixtures and equipment, net
|
|
|
26,560 |
|
|
|
- |
|
|
|
660,490 |
|
|
|
386,449 |
|
|
|
- |
|
|
|
1,073,499 |
|
Investments
in and advances to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unconsolidated
affiliates, net
|
|
|
145 |
|
|
|
- |
|
|
|
- |
|
|
|
20,177 |
|
|
|
- |
|
|
|
20,322 |
|
Investments
in subsidiaries
|
|
|
- |
|
|
|
- |
|
|
|
1,611 |
|
|
|
- |
|
|
|
(1,611 |
) |
|
|
- |
|
Due
from (to) subsidiaries
|
|
|
2,333,806 |
|
|
|
- |
|
|
|
- |
|
|
|
20 |
|
|
|
(2,333,826 |
) |
|
|
- |
|
Goodwill
|
|
|
- |
|
|
|
- |
|
|
|
340,608 |
|
|
|
119,192 |
|
|
|
- |
|
|
|
459,800 |
|
Intangible
assets, net
|
|
|
- |
|
|
|
- |
|
|
|
484,572 |
|
|
|
165,859 |
|
|
|
- |
|
|
|
650,431 |
|
Other
assets, net
|
|
|
127,654 |
|
|
|
- |
|
|
|
23,040 |
|
|
|
43,779 |
|
|
|
- |
|
|
|
194,473 |
|
Total
assets
|
|
$ |
2,751,898 |
|
|
$ |
- |
|
|
$ |
1,620,120 |
|
|
$ |
821,314 |
|
|
$ |
(2,335,437 |
) |
|
$ |
2,857,895 |
|
(CONTINUED…)
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. Supplemental
Guarantor Condensed Consolidating Financial Statements (continued)
|
|
CONDENSED
CONSOLIDATING BALANCE SHEET
|
|
|
|
AS
OF DECEMBER 31, 2008
|
|
|
|
OSI
Parent
|
|
|
OSI
Co-Issuer
|
|
|
Guarantors
|
|
|
Non-Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
LIABILITIES
AND (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
11,119 |
|
|
$ |
- |
|
|
$ |
114,757 |
|
|
$ |
58,876 |
|
|
$ |
- |
|
|
$ |
184,752 |
|
Sales
taxes payable
|
|
|
93 |
|
|
|
- |
|
|
|
11,293 |
|
|
|
4,725 |
|
|
|
- |
|
|
|
16,111 |
|
Accrued
expenses
|
|
|
69,854 |
|
|
|
- |
|
|
|
71,863 |
|
|
|
26,378 |
|
|
|
- |
|
|
|
168,095 |
|
Current
portion of accrued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
buyout
liability
|
|
|
- |
|
|
|
- |
|
|
|
12,948 |
|
|
|
4,280 |
|
|
|
- |
|
|
|
17,228 |
|
Unearned
revenue
|
|
|
192 |
|
|
|
- |
|
|
|
171,105 |
|
|
|
41,380 |
|
|
|
- |
|
|
|
212,677 |
|
Income
taxes payable
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
799 |
|
|
|
- |
|
|
|
799 |
|
Current
portion of long-term debt
|
|
|
25,106 |
|
|
|
- |
|
|
|
4,008 |
|
|
|
1,839 |
|
|
|
- |
|
|
|
30,953 |
|
Current
portion of guaranteed debt
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
33,283 |
|
|
|
- |
|
|
|
33,283 |
|
Total
current liabilities
|
|
|
106,364 |
|
|
|
- |
|
|
|
385,974 |
|
|
|
171,560 |
|
|
|
- |
|
|
|
663,898 |
|
Partner
deposit and accrued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
buyout
liability
|
|
|
221 |
|
|
|
- |
|
|
|
79,598 |
|
|
|
27,324 |
|
|
|
- |
|
|
|
107,143 |
|
Deferred
rent
|
|
|
841 |
|
|
|
- |
|
|
|
32,056 |
|
|
|
17,959 |
|
|
|
- |
|
|
|
50,856 |
|
Deferred
income tax liability
|
|
|
58,293 |
|
|
|
- |
|
|
|
147,421 |
|
|
|
(5,730 |
) |
|
|
- |
|
|
|
199,984 |
|
Long-term
debt
|
|
|
1,710,140 |
|
|
|
488,220 |
|
|
|
9,405 |
|
|
|
1,634 |
|
|
|
(488,220 |
) |
|
|
1,721,179 |
|
Accumulated
losses in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
excess of investment
|
|
|
659,249 |
|
|
|
- |
|
|
|
- |
|
|
|
1,772 |
|
|
|
(661,021 |
) |
|
|
- |
|
Due
to (from) subsidiaries
|
|
|
228,495 |
|
|
|
- |
|
|
|
1,070,286 |
|
|
|
1,035,045 |
|
|
|
(2,333,826 |
) |
|
|
- |
|
Other
long-term liabilities, net
|
|
|
151,049 |
|
|
|
- |
|
|
|
72,307 |
|
|
|
27,526 |
|
|
|
- |
|
|
|
250,882 |
|
Total
liabilities
|
|
|
2,914,652 |
|
|
|
488,220 |
|
|
|
1,797,047 |
|
|
|
1,277,090 |
|
|
|
(3,483,067 |
) |
|
|
2,993,942 |
|
(Deficit)
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OSI
Restaurant Partners, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unitholder’s
(Deficit) Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
651,043 |
|
|
|
(488,220 |
) |
|
|
- |
|
|
|
- |
|
|
|
488,220 |
|
|
|
651,043 |
|
(Accumulated
deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
retained
earnings
|
|
|
(788,940 |
) |
|
|
- |
|
|
|
(176,927 |
) |
|
|
(457,626 |
) |
|
|
634,553 |
|
|
|
(788,940 |
) |
Accumulated
other comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(loss)
income
|
|
|
(24,857 |
) |
|
|
- |
|
|
|
- |
|
|
|
(24,857 |
) |
|
|
24,857 |
|
|
|
(24,857 |
) |
Total
OSI Restaurant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners,
LLC unitholder’s
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(deficit)
equity
|
|
|
(162,754 |
) |
|
|
(488,220 |
) |
|
|
(176,927 |
) |
|
|
(482,483 |
) |
|
|
1,147,630 |
|
|
|
(162,754 |
) |
Noncontrolling
interest
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
26,707 |
|
|
|
- |
|
|
|
26,707 |
|
Total
(deficit) equity
|
|
|
(162,754 |
) |
|
|
(488,220 |
) |
|
|
(176,927 |
) |
|
|
(455,776 |
) |
|
|
1,147,630 |
|
|
|
(136,047 |
) |
|
|
$ |
2,751,898 |
|
|
$ |
- |
|
|
$ |
1,620,120 |
|
|
$ |
821,314 |
|
|
$ |
(2,335,437 |
) |
|
$ |
2,857,895 |
|
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. Supplemental
Guarantor Condensed Consolidating Financial Statements (continued)
|
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
|
|
|
THREE
MONTHS ENDED JUNE 30, 2009
|
|
|
|
OSI
Parent
|
|
|
OSI
Co-Issuer
|
|
|
Guarantors
|
|
|
Non-Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
sales
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
663,756 |
|
|
$ |
234,960 |
|
|
$ |
- |
|
|
$ |
898,716 |
|
Other
revenues
|
|
|
43 |
|
|
|
- |
|
|
|
4,019 |
|
|
|
2,992 |
|
|
|
- |
|
|
|
7,054 |
|
Total
revenues
|
|
|
43 |
|
|
|
- |
|
|
|
667,775 |
|
|
|
237,952 |
|
|
|
- |
|
|
|
905,770 |
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
- |
|
|
|
- |
|
|
|
217,963 |
|
|
|
73,533 |
|
|
|
- |
|
|
|
291,496 |
|
Labor
and other related
|
|
|
3,518 |
|
|
|
- |
|
|
|
188,075 |
|
|
|
66,801 |
|
|
|
- |
|
|
|
258,394 |
|
Other
restaurant operating
|
|
|
325 |
|
|
|
- |
|
|
|
182,419 |
|
|
|
58,731 |
|
|
|
- |
|
|
|
241,475 |
|
Depreciation
and amortization
|
|
|
234 |
|
|
|
- |
|
|
|
30,281 |
|
|
|
12,964 |
|
|
|
- |
|
|
|
43,479 |
|
General
and administrative
|
|
|
20,899 |
|
|
|
- |
|
|
|
32,523 |
|
|
|
17,692 |
|
|
|
- |
|
|
|
71,114 |
|
Goodwill
impairment
|
|
|
- |
|
|
|
- |
|
|
|
1,146 |
|
|
|
9,932 |
|
|
|
- |
|
|
|
11,078 |
|
Provision
for impaired assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
restaurant closings
|
|
|
- |
|
|
|
- |
|
|
|
97,182 |
|
|
|
15,024 |
|
|
|
- |
|
|
|
112,206 |
|
Loss
from operations of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unconsolidated
affiliates
|
|
|
158 |
|
|
|
- |
|
|
|
- |
|
|
|
197 |
|
|
|
- |
|
|
|
355 |
|
Total
costs and expenses
|
|
|
25,134 |
|
|
|
- |
|
|
|
749,589 |
|
|
|
254,874 |
|
|
|
- |
|
|
|
1,029,597 |
|
Loss
from operations
|
|
|
(25,091 |
) |
|
|
- |
|
|
|
(81,814 |
) |
|
|
(16,922 |
) |
|
|
- |
|
|
|
(123,827 |
) |
Equity
in (losses) earnings of subsidiaries
|
|
|
(98,076 |
) |
|
|
- |
|
|
|
439 |
|
|
|
(113 |
) |
|
|
97,750 |
|
|
|
- |
|
Other
(expense) income, net
|
|
|
(6 |
) |
|
|
- |
|
|
|
- |
|
|
|
2,472 |
|
|
|
- |
|
|
|
2,466 |
|
Interest
income
|
|
|
1,194 |
|
|
|
- |
|
|
|
380 |
|
|
|
568 |
|
|
|
(2,079 |
) |
|
|
63 |
|
Interest
expense
|
|
|
(22,576 |
) |
|
|
- |
|
|
|
(1,688 |
) |
|
|
(749 |
) |
|
|
2,079 |
|
|
|
(22,934 |
) |
(Loss)
income before (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provision
from income taxes
|
|
|
(144,555 |
) |
|
|
- |
|
|
|
(82,683 |
) |
|
|
(14,744 |
) |
|
|
97,750 |
|
|
|
(144,232 |
) |
(Benefit)
provision from income taxes
|
|
|
(58,294 |
) |
|
|
- |
|
|
|
885 |
|
|
|
1,232 |
|
|
|
- |
|
|
|
(56,177 |
) |
Net
(loss) income
|
|
|
(86,261 |
) |
|
|
- |
|
|
|
(83,568 |
) |
|
|
(15,976 |
) |
|
|
97,750 |
|
|
|
(88,055 |
) |
Less:
net loss attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling
interest
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,794 |
) |
|
|
- |
|
|
|
(1,794 |
) |
Net
(loss) income attributable to OSI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
Partners, LLC
|
|
$ |
(86,261 |
) |
|
$ |
- |
|
|
$ |
(83,568 |
) |
|
$ |
(14,182 |
) |
|
$ |
97,750 |
|
|
$ |
(86,261 |
) |
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. Supplemental
Guarantor Condensed Consolidating Financial Statements (continued)
|
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
|
|
|
SIX
MONTHS ENDED JUNE 30, 2009
|
|
|
|
OSI
Parent
|
|
|
OSI
Co-Issuer
|
|
|
Guarantors
|
|
|
Non-Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
sales
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,369,396 |
|
|
$ |
488,399 |
|
|
$ |
- |
|
|
$ |
1,857,795 |
|
Other
revenues
|
|
|
86 |
|
|
|
- |
|
|
|
6,979 |
|
|
|
5,304 |
|
|
|
- |
|
|
|
12,369 |
|
Total
revenues
|
|
|
86 |
|
|
|
- |
|
|
|
1,376,375 |
|
|
|
493,703 |
|
|
|
- |
|
|
|
1,870,164 |
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
- |
|
|
|
- |
|
|
|
457,745 |
|
|
|
155,090 |
|
|
|
- |
|
|
|
612,835 |
|
Labor
and other related
|
|
|
7,638 |
|
|
|
- |
|
|
|
382,773 |
|
|
|
137,554 |
|
|
|
- |
|
|
|
527,965 |
|
Other
restaurant operating
|
|
|
427 |
|
|
|
- |
|
|
|
354,765 |
|
|
|
123,032 |
|
|
|
- |
|
|
|
478,224 |
|
Depreciation
and amortization
|
|
|
507 |
|
|
|
- |
|
|
|
61,317 |
|
|
|
28,027 |
|
|
|
- |
|
|
|
89,851 |
|
General
and administrative
|
|
|
35,043 |
|
|
|
- |
|
|
|
62,365 |
|
|
|
32,189 |
|
|
|
- |
|
|
|
129,597 |
|
Loss
on contingent debt guarantee
|
|
|
24,500 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
24,500 |
|
Goodwill
impairment
|
|
|
|
|
|
|
|
|
|
|
1,146 |
|
|
|
9,932 |
|
|
|
|
|
|
|
11,078 |
|
Provision
for impaired assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
restaurant closings
|
|
|
(10 |
) |
|
|
- |
|
|
|
102,165 |
|
|
|
17,187 |
|
|
|
- |
|
|
|
119,342 |
|
Loss
(income) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
unconsolidated affiliates
|
|
|
303 |
|
|
|
- |
|
|
|
- |
|
|
|
(420 |
) |
|
|
- |
|
|
|
(117 |
) |
Total
costs and expenses
|
|
|
68,408 |
|
|
|
- |
|
|
|
1,422,276 |
|
|
|
502,591 |
|
|
|
- |
|
|
|
1,993,275 |
|
Loss
from operations
|
|
|
(68,322 |
) |
|
|
- |
|
|
|
(45,901 |
) |
|
|
(8,888 |
) |
|
|
- |
|
|
|
(123,111 |
) |
Equity
in (losses) earnings of subsidiaries
|
|
|
(63,270 |
) |
|
|
- |
|
|
|
555 |
|
|
|
(274 |
) |
|
|
62,989 |
|
|
|
- |
|
Gain
on extinguishment of debt
|
|
|
158,061 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
158,061 |
|
Other
expense, net
|
|
|
(6 |
) |
|
|
- |
|
|
|
- |
|
|
|
(3,188 |
) |
|
|
- |
|
|
|
(3,194 |
) |
Interest
income
|
|
|
2,521 |
|
|
|
- |
|
|
|
788 |
|
|
|
1,289 |
|
|
|
(4,340 |
) |
|
|
258 |
|
Interest
expense
|
|
|
(49,375 |
) |
|
|
- |
|
|
|
(3,528 |
) |
|
|
(1,381 |
) |
|
|
4,340 |
|
|
|
(49,944 |
) |
(Loss)
income before (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provision
from income taxes
|
|
|
(20,391 |
) |
|
|
- |
|
|
|
(48,086 |
) |
|
|
(12,442 |
) |
|
|
62,989 |
|
|
|
(17,930 |
) |
(Benefit)
provision from income taxes
|
|
|
(16,477 |
) |
|
|
- |
|
|
|
1,031 |
|
|
|
2,159 |
|
|
|
- |
|
|
|
(13,287 |
) |
Net
(loss) income
|
|
|
(3,914 |
) |
|
|
- |
|
|
|
(49,117 |
) |
|
|
(14,601 |
) |
|
|
62,989 |
|
|
|
(4,643 |
) |
Less:
net loss attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling
interest
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(729 |
) |
|
|
- |
|
|
|
(729 |
) |
Net
(loss) income attributable to OSI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
Partners, LLC
|
|
$ |
(3,914 |
) |
|
$ |
- |
|
|
$ |
(49,117 |
) |
|
$ |
(13,872 |
) |
|
$ |
62,989 |
|
|
$ |
(3,914 |
) |
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. Supplemental
Guarantor Condensed Consolidating Financial Statements (continued)
|
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
|
|
|
THREE
MONTHS ENDED JUNE 30, 2008
|
|
|
|
OSI
Parent
|
|
|
OSI
Co-Issuer
|
|
|
Guarantors
|
|
|
Non-Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
sales
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
736,758 |
|
|
$ |
274,023 |
|
|
$ |
- |
|
|
$ |
1,010,781 |
|
Other
revenues
|
|
|
- |
|
|
|
- |
|
|
|
4,324 |
|
|
|
1,403 |
|
|
|
- |
|
|
|
5,727 |
|
Total
revenues
|
|
|
- |
|
|
|
- |
|
|
|
741,082 |
|
|
|
275,426 |
|
|
|
- |
|
|
|
1,016,508 |
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
386 |
|
|
|
- |
|
|
|
262,951 |
|
|
|
91,841 |
|
|
|
- |
|
|
|
355,178 |
|
Labor
and other related
|
|
|
(26 |
) |
|
|
- |
|
|
|
204,630 |
|
|
|
77,934 |
|
|
|
- |
|
|
|
282,538 |
|
Other
restaurant operating
|
|
|
- |
|
|
|
- |
|
|
|
191,836 |
|
|
|
70,561 |
|
|
|
- |
|
|
|
262,397 |
|
Depreciation
and amortization
|
|
|
590 |
|
|
|
- |
|
|
|
29,766 |
|
|
|
16,634 |
|
|
|
- |
|
|
|
46,990 |
|
General
and administrative
|
|
|
11,741 |
|
|
|
- |
|
|
|
24,411 |
|
|
|
18,154 |
|
|
|
- |
|
|
|
54,306 |
|
Goodwill
impairment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
161,589 |
|
|
|
- |
|
|
|
161,589 |
|
Provision
for impaired assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
restaurant closings
|
|
|
- |
|
|
|
- |
|
|
|
9,347 |
|
|
|
14,581 |
|
|
|
- |
|
|
|
23,928 |
|
Loss
(income) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
unconsolidated affiliates
|
|
|
411 |
|
|
|
- |
|
|
|
- |
|
|
|
(2,779 |
) |
|
|
- |
|
|
|
(2,368 |
) |
Total
costs and expenses
|
|
|
13,102 |
|
|
|
- |
|
|
|
722,941 |
|
|
|
448,515 |
|
|
|
- |
|
|
|
1,184,558 |
|
(Loss)
income from operations
|
|
|
(13,102 |
) |
|
|
- |
|
|
|
18,141 |
|
|
|
(173,089 |
) |
|
|
- |
|
|
|
(168,050 |
) |
Equity
in (losses) earnings of subsidiaries
|
|
|
(157,850 |
) |
|
|
- |
|
|
|
424 |
|
|
|
(421 |
) |
|
|
157,847 |
|
|
|
- |
|
Other
(expense) income, net
|
|
|
- |
|
|
|
- |
|
|
|
20 |
|
|
|
(3,825 |
) |
|
|
- |
|
|
|
(3,805 |
) |
Interest
income
|
|
|
2,190 |
|
|
|
- |
|
|
|
563 |
|
|
|
1,056 |
|
|
|
(2,149 |
) |
|
|
1,660 |
|
Interest
expense
|
|
|
(21,439 |
) |
|
|
- |
|
|
|
(1,673 |
) |
|
|
(997 |
) |
|
|
2,149 |
|
|
|
(21,960 |
) |
(Loss)
income before (benefit) provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
income taxes
|
|
|
(190,201 |
) |
|
|
- |
|
|
|
17,475 |
|
|
|
(177,276 |
) |
|
|
157,847 |
|
|
|
(192,155 |
) |
(Benefit)
provision for income taxes
|
|
|
(13,536 |
) |
|
|
- |
|
|
|
416 |
|
|
|
(1,631 |
) |
|
|
- |
|
|
|
(14,751 |
) |
Net
(loss) income
|
|
|
(176,665 |
) |
|
|
- |
|
|
|
17,059 |
|
|
|
(175,645 |
) |
|
|
157,847 |
|
|
|
(177,404 |
) |
Less:
net loss attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling
interest
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(739 |
) |
|
|
- |
|
|
|
(739 |
) |
Net
(loss) income attributable to OSI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
Partners, LLC
|
|
$ |
(176,665 |
) |
|
$ |
- |
|
|
$ |
17,059 |
|
|
$ |
(174,906 |
) |
|
$ |
157,847 |
|
|
$ |
(176,665 |
) |
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. Supplemental
Guarantor Condensed Consolidating Financial Statements (continued)
|
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
|
|
|
SIX
MONTHS ENDED JUNE 30, 2008
|
|
|
|
OSI
Parent
|
|
|
OSI
Co-Issuer
|
|
|
Guarantors
|
|
|
Non-Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
sales
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,509,985 |
|
|
$ |
565,097 |
|
|
$ |
- |
|
|
$ |
2,075,082 |
|
Other
revenues
|
|
|
- |
|
|
|
- |
|
|
|
7,436 |
|
|
|
3,472 |
|
|
|
- |
|
|
|
10,908 |
|
Total
revenues
|
|
|
- |
|
|
|
- |
|
|
|
1,517,421 |
|
|
|
568,569 |
|
|
|
- |
|
|
|
2,085,990 |
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
386 |
|
|
|
- |
|
|
|
538,451 |
|
|
|
189,221 |
|
|
|
- |
|
|
|
728,058 |
|
Labor
and other related
|
|
|
(2,437 |
) |
|
|
- |
|
|
|
419,278 |
|
|
|
160,198 |
|
|
|
- |
|
|
|
577,039 |
|
Other
restaurant operating
|
|
|
- |
|
|
|
- |
|
|
|
376,309 |
|
|
|
144,706 |
|
|
|
- |
|
|
|
521,015 |
|
Depreciation
and amortization
|
|
|
1,292 |
|
|
|
- |
|
|
|
59,782 |
|
|
|
32,967 |
|
|
|
- |
|
|
|
94,041 |
|
General
and administrative
|
|
|
26,622 |
|
|
|
- |
|
|
|
60,287 |
|
|
|
39,571 |
|
|
|
- |
|
|
|
126,480 |
|
Goodwill
impairment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
161,589 |
|
|
|
- |
|
|
|
161,589 |
|
Provision
for impaired assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
restaurant closings
|
|
|
- |
|
|
|
- |
|
|
|
13,339 |
|
|
|
14,253 |
|
|
|
- |
|
|
|
27,592 |
|
Loss
(income) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
unconsolidated affiliates
|
|
|
1,204 |
|
|
|
- |
|
|
|
- |
|
|
|
(4,449 |
) |
|
|
- |
|
|
|
(3,245 |
) |
Total
costs and expenses
|
|
|
27,067 |
|
|
|
- |
|
|
|
1,467,446 |
|
|
|
738,056 |
|
|
|
- |
|
|
|
2,232,569 |
|
(Loss)
income from operations
|
|
|
(27,067 |
) |
|
|
- |
|
|
|
49,975 |
|
|
|
(169,487 |
) |
|
|
- |
|
|
|
(146,579 |
) |
Equity
in (losses) earnings of subsidiaries
|
|
|
(126,247 |
) |
|
|
- |
|
|
|
759 |
|
|
|
(722 |
) |
|
|
126,210 |
|
|
|
- |
|
Other
(expense) income, net
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
(3,805 |
) |
|
|
- |
|
|
|
(3,805 |
) |
Interest
income
|
|
|
4,590 |
|
|
|
- |
|
|
|
1,142 |
|
|
|
2,091 |
|
|
|
(5,376 |
) |
|
|
2,447 |
|
Interest
expense
|
|
|
(68,893 |
) |
|
|
- |
|
|
|
(4,239 |
) |
|
|
(2,031 |
) |
|
|
5,376 |
|
|
|
(69,787 |
) |
(Loss)
income before (benefit) provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
income taxes
|
|
|
(217,617 |
) |
|
|
- |
|
|
|
47,637 |
|
|
|
(173,954 |
) |
|
|
126,210 |
|
|
|
(217,724 |
) |
(Benefit)
provision for income taxes
|
|
|
(31,255 |
) |
|
|
- |
|
|
|
812 |
|
|
|
(1,039 |
) |
|
|
- |
|
|
|
(31,482 |
) |
Net
(loss) income
|
|
|
(186,362 |
) |
|
|
- |
|
|
|
46,825 |
|
|
|
(172,915 |
) |
|
|
126,210 |
|
|
|
(186,242 |
) |
Less:
net income attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling
interest
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
120 |
|
|
|
- |
|
|
|
120 |
|
Net
(loss) income attributable to OSI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
Partners, LLC
|
|
$ |
(186,362 |
) |
|
$ |
- |
|
|
$ |
46,825 |
|
|
$ |
(173,035 |
) |
|
$ |
126,210 |
|
|
$ |
(186,362 |
) |
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. Supplemental
Guarantor Condensed Consolidating Financial Statements (continued)
|
|
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
|
|
|
|
SIX
MONTHS ENDED JUNE 30, 2009
|
|
|
|
OSI
Parent
|
|
|
OSI
Co-Issuer
|
|
|
Guarantors
|
|
|
Non-Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operating
activities
|
|
$ |
(72,871 |
) |
|
$ |
- |
|
|
$ |
6,283 |
|
|
$ |
26,493 |
|
|
$ |
- |
|
|
$ |
(40,095 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows provided by (used in)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of Company-owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
life
insurance
|
|
|
(6,571 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6,571 |
) |
Proceeds
from sale of Company-owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
life
insurance
|
|
|
9,657 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,657 |
|
Acquisitions
of liquor licenses
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(19 |
) |
|
|
- |
|
|
|
(19 |
) |
Capital
expenditures
|
|
|
(2,134 |
) |
|
|
- |
|
|
|
(18,059 |
) |
|
|
(12,448 |
) |
|
|
- |
|
|
|
(32,641 |
) |
Proceeds
from the sale of property,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fixtures
and equipment
|
|
|
- |
|
|
|
- |
|
|
|
961 |
|
|
|
- |
|
|
|
- |
|
|
|
961 |
|
Restricted
cash received for capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenditures,
property taxes and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
certain
deferred compensation plans
|
|
|
12,928 |
|
|
|
- |
|
|
|
4,222 |
|
|
|
- |
|
|
|
- |
|
|
|
17,150 |
|
Restricted
cash used to fund capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenditures,
property taxes and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
certain
deferred compensation plans
|
|
|
(11,309 |
) |
|
|
- |
|
|
|
(4,560 |
) |
|
|
- |
|
|
|
- |
|
|
|
(15,869 |
) |
Net
cash provided by (used in)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investing
activities
|
|
|
2,571 |
|
|
|
- |
|
|
|
(17,436 |
) |
|
|
(12,467 |
) |
|
|
- |
|
|
|
(27,332 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows used in financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of long-term debt
|
|
|
700 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
700 |
|
Repayments
of long-term debt
|
|
|
(19,250 |
) |
|
|
- |
|
|
|
(3,486 |
) |
|
|
(1,115 |
) |
|
|
- |
|
|
|
(23,851 |
) |
Extinguishment
of senior notes
|
|
|
(75,967 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(75,967 |
) |
Deferred
financing fees
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(155 |
) |
|
|
|
|
|
|
(155 |
) |
Purchase
of note related to guaranteed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
debt
for consolidated affiliate
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(33,283 |
) |
|
|
- |
|
|
|
(33,283 |
) |
Contribution
from OSI HoldCo, Inc.
|
|
|
47,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
47,000 |
|
Contributions
from noncontrolling
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
340 |
|
|
|
- |
|
|
|
340 |
|
Distributions
to noncontrolling interest
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,700 |
) |
|
|
- |
|
|
|
(4,700 |
) |
Repayment
of partner deposit and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accrued
buyout contributions
|
|
|
(119 |
) |
|
|
- |
|
|
|
(1,412 |
) |
|
|
(932 |
) |
|
|
- |
|
|
|
(2,463 |
) |
Receipt
of partner deposit and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accrued
buyout contributions
|
|
|
- |
|
|
|
- |
|
|
|
1,157 |
|
|
|
697 |
|
|
|
- |
|
|
|
1,854 |
|
Net
cash used in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financing
activities
|
|
|
(47,636 |
) |
|
|
- |
|
|
|
(3,741 |
) |
|
|
(39,148 |
) |
|
|
- |
|
|
|
(90,525 |
) |
Effect
of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
cash equivalents
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,137 |
) |
|
|
- |
|
|
|
(1,137 |
) |
Net
decrease in cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
cash equivalents
|
|
|
(117,936 |
) |
|
|
- |
|
|
|
(14,894 |
) |
|
|
(26,259 |
) |
|
|
- |
|
|
|
(159,089 |
) |
Cash
and cash equivalents at the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
beginning
of the period
|
|
|
178,275 |
|
|
|
- |
|
|
|
50,126 |
|
|
|
43,069 |
|
|
|
- |
|
|
|
271,470 |
|
Cash
and cash equivalents at the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
end
of the period
|
|
$ |
60,339 |
|
|
$ |
- |
|
|
$ |
35,232 |
|
|
$ |
16,810 |
|
|
$ |
- |
|
|
$ |
112,381 |
|
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. Supplemental
Guarantor Condensed Consolidating Financial Statements (continued)
|
|
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
|
|
|
|
SIX
MONTHS ENDED JUNE 30, 2008
|
|
|
|
OSI
Parent
|
|
|
OSI
Co-Issuer
|
|
|
Guarantors
|
|
|
Non-Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operating
activities
|
|
$ |
20,343 |
|
|
$ |
- |
|
|
$ |
(92,266 |
) |
|
$ |
(12,371 |
) |
|
$ |
61,463 |
|
|
$ |
(22,831 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows used in investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of Company-owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
life
insurance
|
|
|
(652 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(652 |
) |
Acquisitions
of liquor licenses
|
|
|
- |
|
|
|
- |
|
|
|
(1,054 |
) |
|
|
(648 |
) |
|
|
- |
|
|
|
(1,702 |
) |
Capital
expenditures
|
|
|
(3,467 |
) |
|
|
- |
|
|
|
(24,316 |
) |
|
|
(32,449 |
) |
|
|
- |
|
|
|
(60,232 |
) |
Proceeds
from the sale of property,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fixtures
and equipment
|
|
|
- |
|
|
|
- |
|
|
|
9,753 |
|
|
|
- |
|
|
|
- |
|
|
|
9,753 |
|
Restricted
cash received for capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenditures,
property taxes and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
certain
deferred compensation plans
|
|
|
92,956 |
|
|
|
- |
|
|
|
1,489 |
|
|
|
- |
|
|
|
- |
|
|
|
94,445 |
|
Restricted
cash used to fund capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenditures,
property taxes and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
certain
deferred compensation plans
|
|
|
(90,451 |
) |
|
|
- |
|
|
|
(1,720 |
) |
|
|
- |
|
|
|
- |
|
|
|
(92,171 |
) |
Payments
from unconsolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
affiliates
|
|
|
13 |
|
|
|
- |
|
|
|
- |
|
|
|
1,477 |
|
|
|
- |
|
|
|
1,490 |
|
Net
cash used in investing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
activities
|
|
|
(1,601 |
) |
|
|
- |
|
|
|
(15,848 |
) |
|
|
(31,620 |
) |
|
|
- |
|
|
|
(49,069 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows used in financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
long-term
debt
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
310 |
|
|
|
- |
|
|
|
310 |
|
Repayments
of long-term debt
|
|
|
(6,550 |
) |
|
|
- |
|
|
|
(1,531 |
) |
|
|
(709 |
) |
|
|
- |
|
|
|
(8,790 |
) |
Contributions
from noncontrolling
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
445 |
|
|
|
- |
|
|
|
445 |
|
Distributions
to noncontrolling interest
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,955 |
) |
|
|
- |
|
|
|
(4,955 |
) |
Repayment
of partner deposit and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accrued
buyout contributions
|
|
|
- |
|
|
|
- |
|
|
|
(8,973 |
) |
|
|
(1,335 |
) |
|
|
- |
|
|
|
(10,308 |
) |
Receipt
of partner deposit and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accrued
buyout contributions
|
|
|
- |
|
|
|
- |
|
|
|
2,216 |
|
|
|
1,848 |
|
|
|
- |
|
|
|
4,064 |
|
Net
cash used in financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
activities
|
|
|
(6,550 |
) |
|
|
- |
|
|
|
(8,288 |
) |
|
|
(4,396 |
) |
|
|
- |
|
|
|
(19,234 |
) |
Net
increase (decrease) in cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
cash equivalents
|
|
|
12,192 |
|
|
|
- |
|
|
|
(116,402 |
) |
|
|
(48,387 |
) |
|
|
61,463 |
|
|
|
(91,134 |
) |
Cash
and cash equivalents at the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
beginning
of the period
|
|
|
- |
|
|
|
- |
|
|
|
148,005 |
|
|
|
84,562 |
|
|
|
(61,463 |
) |
|
|
171,104 |
|
Cash
and cash equivalents at the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
end
of the period
|
|
$ |
12,192 |
|
|
$ |
- |
|
|
$ |
31,603 |
|
|
$ |
36,175 |
|
|
$ |
- |
|
|
$ |
79,970 |
|
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
14. Commitments
and Contingencies
Pursuant
to the Company’s joint venture agreement for the development of Roy’s
restaurants, RY-8, its joint venture partner, has the right to require the
Company to purchase up to 25% of RY-8’s interests in the joint venture at
any time after June 17, 2004 and up to another 25% (total 50%) of its
interests in the joint venture at any time after June 17,
2009. The purchase price to be paid by the Company would be equal to
the fair market value of the joint venture as of the date that RY-8 exercised
its put option multiplied by the percentage purchased.
As of
June 30, 2009, 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 totaling approximately $4,416,000 because the joint venture
partner’s $24,500,000 line of credit was fully extended. Additional payments on
behalf of RY-8 for these items may be required in the future.
The
Company is subject to legal proceedings, claims and liabilities, such as liquor
liability, sexual harassment and slip and fall cases, which arise in the
ordinary course of business and are generally covered by insurance. In the
opinion of management, the amount of ultimate liability with respect to those
actions will not have a material adverse impact on the Company’s financial
position or results of operations and cash flows. In addition, the Company
is subject to the following legal proceedings and actions, which depending on
the outcomes that are uncertain at this time, could have a material adverse
effect on the Company’s financial condition.
Outback
Steakhouse of Florida, Inc. and OS Restaurant Services, Inc. are the
defendants in a class action lawsuit brought by the U.S. Equal Employment
Opportunity Commission (EEOC v. Outback Steakhouse of Florida, Inc. and OS
Restaurant Services, Inc., U.S. District Court, District of Colorado, filed
September 28, 2006) alleging that they have engaged in a pattern or
practice of discrimination against women on the basis of their gender with
respect to hiring and promoting into management positions as well as
discrimination against women in terms and condition of their employment and
seeks damages and injunctive relief. In addition to the EEOC, two former
employees have successfully intervened as party plaintiffs in the case. On
November 3, 2007, the EEOC’s nationwide claim of gender discrimination was
dismissed and the scope of the suit was limited to the states of Colorado,
Wyoming and Montana. However, the Company expects the EEOC to pursue claims of
gender discrimination against the Company on a nationwide basis through other
proceedings. Litigation is, by its nature, uncertain both as to time and expense
involved and as to the final outcome of such matters. While the Company
intends to vigorously defend itself in this lawsuit, protracted litigation or
unfavorable resolution of this lawsuit could have a material adverse effect on
the Company’s business, results of operations or financial condition and could
damage the Company’s reputation with its employees and its
customers.
On
February 21, 2008, a purported class action complaint captioned Ervin, et
al. v. OS Restaurant Services, Inc. was filed in the U.S. District Court,
Northern District of Illinois. This lawsuit alleges violations of state and
federal wage and hour law in connection with tipped employees and overtime
compensation and seeks relief in the form of unspecified back pay and attorney
fees. It alleges a class action under state law and a collective action under
federal law. While the Company intends to vigorously defend itself, it is not
possible at this time to reasonably estimate the possible loss or range of loss,
if any.
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
14. Commitments
and Contingencies (continued)
In March
2008, one of the Company’s subsidiaries received a notice of proposed assessment
of employment taxes from the Internal Revenue Service (“IRS”) for calendar years
2004 through 2006. The IRS asserts that certain cash distributions paid to
the Company’s general manager partners, chef partners, and area operating
partners who hold partnership interests in limited partnerships with Company
affiliates should have been treated as wages and subjected to employment
taxes. The Company believes that it has complied and continues to comply
with the law pertaining to the proper federal tax treatment of partner
distributions. In May 2008, the Company filed a protest of the proposed
employment tax assessment. Because the Company is at a preliminary stage
of the administrative process for resolving disputes with the IRS, it cannot, at
this time, reasonably estimate the amount, if any, of additional employment
taxes or other interest, penalties or additions to tax that would ultimately be
assessed at the conclusion of this process. If the IRS examiner’s position were
to be sustained, the additional employment taxes and other amounts that would be
assessed would be material.
On
December 29, 2008, American Restaurants, Inc. (“AR”) filed a Petition with the
United States District Court for the Southern District of Florida, captioned
American Restaurants, Inc. v. Outback Steakhouse International, L.P., seeking
confirmation of a purported November 24, 2008 arbitration award against Outback
Steakhouse International, L.P. (“Outback International”), the Company’s indirect
wholly-owned subsidiary, in the amount of $97,997,000, plus interest from August
7, 2006. The award purportedly resolved a dispute involving Outback
International’s alleged wrongful termination in 1998 of a Restaurant Franchise
Agreement (the “Agreement”) entered into in 1996 concerning one restaurant in
Argentina. On February 20, 2009, Outback International filed its
Opposition to the petition to confirm and raised five separate and independent
defenses to confirmation under Article 5 of the Inter-American Convention on
International Commercial Arbitration. On July 28, 2009, the U.S. District
Court for the Southern District of Florida stayed all further proceedings and
closed the case administratively, pending final resolution of Outback
International’s appeal before the Argentine Commercial Court of Appeals
(“Argentine Court of Appeals”) seeking annulment of the purported award.
On
December 9, 2008, in accordance with a procedure provided under Argentine law,
Outback International filed with the arbitrator a motion seeking leave to file
an appeal to nullify the purported award. On February 27, 2009, the
arbitrator denied Outback International’s motion. On March 16, 2009,
Outback International filed a direct appeal with the Argentine Court of Appeals
seeking to annul the purported award. On June 26, 2009, the Argentine
Court of Appeals accepted Outback International’s appeal and expressly suspended
enforcement of the purported award in Argentina pending the outcome of Outback
International’s appeal seeking nullification.
Outback
International believes that the purported arbitration award resulted from a
process that materially violated the terms of the Agreement, and that the
arbitrator who issued the purported award violated Outback International’s
rights to due process. Outback International intends to contest vigorously
the validity and enforceability of the purported arbitration award in the courts
of both the United States and Argentina.
Based in
part on legal opinions Outback International has received from Argentine
counsel, the Company does not expect the arbitration award or the petition
seeking its confirmation to have a material adverse effect on its results of
operations, financial condition or cash flows. However, litigation is
inherently uncertain and the ultimate resolution of this matter cannot be
guaranteed.
On
February 19, 2009, the Company filed an action in Florida against T-Bird
Nevada, LLC and its affiliates. T-Bird is a limited liability company
that is owned by the principal of the franchisee of each of the California
Outback Steakhouse restaurants. The action seeks payment on a
promissory note made by T-Bird that the Company purchased from T-Bird’s former
lender, among other remedies. The principal balance on the promissory
note, plus accrued and unpaid interest, is approximately
$33,000,000. On July 31, 2009, the court denied T-Bird’s motions to
dismiss for lack of personal jurisdiction and improper venue (see Note
10).
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
14. Commitments
and Contingencies (continued)
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. The suit
claims, among other things, that the Company made various misrepresentations and
breached certain oral promises allegedly made by the Company and certain of its
officers to T-Bird and its affiliates that the Company would acquire the
restaurants owned by T-Bird and its affiliates and until that time the Company
would maintain financing for the restaurants that would be nonrecourse to T-Bird
and its affiliates. The complaint seeks damages in excess of $100,000,000,
exemplary or punitive damages, and other remedies. The Company and the
other defendants believe the suit is without merit, and they intend to defend
the suit vigorously. The Company has filed motions to dismiss
T-Bird's complaint on the grounds that a binding agreement between the Company
and T-Bird related to the loan at issue in the Florida litigation requires
that T-Bird litigate its claims in Florida, rather than in California. The
parties have fully briefed the motion to dismiss and await the California
Court's ruling (see Note 10).
15. Related
Parties
In
connection with the Merger, the Company caused its wholly-owned subsidiaries to
sell substantially all of the Company’s domestic restaurant properties to its
sister company, PRP, for approximately $987,700,000. PRP then leased the
properties to Private Restaurant Master Lessee, LLC, the Company’s wholly-owned
subsidiary, under a master lease. The master lease is a triple net lease with a
15-year term. This sale-leaseback transaction resulted in operating leases for
the Company. Under the master lease, the Company has the right to
request termination of a lease if it determines that the related location is
unsuitable for its intended use. Rental payments continue as
scheduled until consummation of sale occurs for the property. Once a
sale occurs, the Company must make up the differential, if one exists, between
the sale price and 90% of the original purchase price (a “Release Amount”), as
set forth in the master lease. The Company is also responsible for
paying PRP an amount equal to the then present value, using a five percent
discount rate, of the excess, if any, of the scheduled rent payments for the
remainder of the 15-year term over the then fair market rental for the remainder
of the 15-year term. The Company owed $961,000 of Release Amounts to
PRP for the year ended December 31, 2008 and made this payment in January
2009. The Company accrued $3,651,000 of Release Amounts at June 30,
2009 for three closed locations, but it will not be required to pay PRP until
the sales occur. The Company was not required to make any fair
market rental payments to PRP during 2008 or during the six months ended June
30, 2009. PRP reimbursed the Company $287,000 in January 2009 for
invoices that the Company had paid on PRP’s behalf during the year ended
December 31, 2008.
Upon
completion of the Merger, the Company entered into a management agreement with
Kangaroo Management Company I, LLC (the “Management Company”), whose members are
the Founders and entities affiliated with Bain Capital and
Catterton. In accordance with the terms of the agreement, the
Management Company will provide management services to the Company until the
tenth anniversary of the consummation of the Merger, with one-year extensions
thereafter until terminated. The Management Company will receive an
aggregate annual management fee equal to $9,100,000 and reimbursement for
out-of-pocket expenses incurred by it, its members, or their respective
affiliates in connection with the provision of services pursuant to the
agreement. Management fees, including out-of-pocket expenses, of
$2,361,000 and $4,902,000 for the three and six months ended June 30, 2009,
respectively, and of $2,275,000 and $4,550,000 for the three and six
months ended June 30, 2008, respectively, were included in general and
administrative expenses in the Company’s Consolidated Statements of
Operations. The management agreement includes customary exculpation
and indemnification provisions in favor of the Management Company, Bain Capital
and Catterton and their respective affiliates. The management agreement may be
terminated by the Company, Bain Capital and Catterton at any time and will
terminate automatically upon an initial public offering or a change of control
unless the Company and the counterparty(s) determine otherwise.
In
January 2009, Bain Capital and Catterton elected to defer receipt of their
respective portions of the first quarter of 2009 management fees of
approximately $865,000. These fees were paid in July
2009. Reimbursement of any out-of-pocket expenses incurred in
connection with the provision of services pursuant to the agreement and payment
of the remainder of 2009 fees were not deferred.
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
16. Variable
Interest Entities
The
Company’s consolidated financial statements include the accounts and operations
of OSI Restaurant Partners, LLC, OSI Co-Issuer, Inc. and the Company’s
affiliated partnerships and limited liability corporations in which it is a
general partner or managing member and owns a controlling financial interest.
OSI Co-Issuer, Inc., a wholly-owned subsidiary of OSI Restaurant Partners, LLC,
was formed to facilitate the Merger and does not conduct ongoing business
operations. The Company consolidates variable interest entities in
which the Company absorbs a majority of the entity’s expected losses,
receives a majority of the entity’s expected residual returns, or both, as a
result of ownership, contractual or other financial interests in the entity.
Therefore, if the Company has a controlling financial interest in a variable
interest entity, the assets, liabilities, and results of the activities of the
variable interest entity are included in the consolidated financial
statements.
The
Company’s consolidated financial statements include the accounts and operations
of its Roy’s consolidated joint venture in which it has a less than majority
ownership. The Company controls the executive committee (which functions as a
board of directors) through representation on the board by related parties, and
it is able to direct or cause the direction of management and operations on
a day-to-day basis. Additionally, the majority of capital contributions made by
the Company’s partner in the Roy’s consolidated joint venture, RY-8, have been
funded by loans to the partner from a third party where the
Company provides a guarantee. The guarantee provides the Company
control through its collateral interest in RY-8’s membership interest. As a
result of the Company’s controlling financial interest and control of the
executive committee, the joint venture is included in the Company’s consolidated
financial statements.
During
the second quarter of 2009, the Company reconsidered its relationship with RY-8
in accordance with FIN 46R as a result of the amendment to RY-8’s line of credit
and extension of the Company’s guarantee obligation on April 1,
2009. The Company determined that RY-8 is a variable interest entity
because the Company’s guarantee obligation (see Note 10) indicates that there is
insufficient equity at risk, and the Company will 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
the joint venture partner’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 believes it 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. The Company determined
it is the primary beneficiary and began consolidating RY-8 effective April 1,
2009. The Company reclassified its $24,500,000 contingent obligation
to guaranteed debt, which is included in the line item “Guaranteed debt of
consolidated joint venture partner” in its Consolidated Balance Sheet at June
30, 2009. No other assets or liabilities have been recorded as a
result of consolidating RY-8. Effective April 1, 2009, 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 the noncontrolling
interest.” All material intercompany balances and transactions have
been eliminated.
In
accordance with FIN 46R, the Company determined that PRP is a variable interest
entity; however the Company is not its primary beneficiary, as the Company
determined that it does not absorb a majority of the expected losses and/or
residual returns of PRP or protect equity and other variable interest holders
from suffering the majority of expected losses through implicit guarantees of
PRP’s assets or liabilities. As a result, PRP has not been consolidated
into the Company’s financial statements. If the master lease were to be
terminated in connection with any default by the Company or if the lenders under
PRP’s real estate credit facility were to foreclose on the restaurant properties
as a result of a PRP default under its real estate credit facility, the Company
could, subject to the terms of a subordination and nondisturbance agreement,
lose the use of some or all of the properties that it leases under the master
lease. The Company is
unable to estimate the maximum loss, which it has determined is remote, that
would be incurred from losing the use of the properties it leases under the
master lease. Accordingly, the Company has not recognized an
obligation associated with the loss of use of some or all of its properties, but
it believes such a loss would be material.
OSI
Restaurant Partners, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
16. Variable
Interest Entities (continued)
The
equity method of accounting is used for investments in affiliated companies
which: are not controlled by the Company, the Company’s interest is generally
between 20% and 50% and the Company has the ability to exercise significant
influence over the entity. The Company’s share of earnings or losses
of affiliated companies accounted for under the equity method is recorded in
“(Loss) income from operations of unconsolidated affiliates” in its Consolidated
Statements of Operations.
The
Company is a franchisor of 148 restaurants as of June 30, 2009, but does not
possess any ownership interests in its franchisees and generally does not
provide financial support to franchisees in its typical franchise relationship.
These franchise relationships are not deemed variable interest entities and are
not consolidated.
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. This entity 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. Therefore, 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 against the Company and certain of its officers and
affiliates. The Company consolidates T-Bird because it is a variable
interest entity and the Company absorbs the majority of the expected losses (see
Note 10).
17. Subsequent
Events
The
Company evaluated its subsequent events through August 14, 2009, which was the
date the financial statements were issued, and concluded that there were not any
additional items requiring disclosure.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Management’s
discussion and analysis of financial condition and results of operations should
be read in conjunction with the Unaudited Consolidated Financial Statements and
the related Notes. Unless the context otherwise indicates, as used in
this report, the term the “Company,” “we,” “us,” “our” and other similar
terms mean OSI Restaurant Partners, LLC.
Overview
We are
one of the largest casual dining restaurant companies in the world, with six
restaurant concepts, more than 1,475 system-wide restaurants and 2008 annual
revenues for Company-owned restaurants exceeding $3.9 billion. We operate in 49
states and in 20 countries internationally, predominantly through Company-owned
restaurants, but we also operate under a variety of partnerships and
franchises. Our primary concepts include Outback Steakhouse,
Carrabba’s Italian Grill, Bonefish Grill and Fleming’s Prime Steakhouse and Wine
Bar. Our other non-core concepts include Roy’s and Cheeseburger in
Paradise. In May 2009, we executed a letter of intent to sell our
Cheeseburger in Paradise concept for $2,000,000 to an entity to be formed and
controlled by the president of the concept. Our long-range plan is to
exit our Roy’s concept, but we do not have an established timeframe within which
this will occur.
Our
primary focus as a company of restaurants is to provide a quality product
together with quality service across all of our brands. This goal entails
offering consumers of different demographic backgrounds an array of dining
alternatives suited for differing needs. Our sales are primarily generated
through a diverse customer base, which includes people eating in our restaurants
as regular patrons who return for meals several times a week or on special
occasions such as birthday parties, private events and for business
entertainment. Secondarily, we generate revenues through sales of franchises and
ongoing royalties.
The
restaurant industry is a highly competitive and fragmented business, which is
subject to sensitivity from changes in the economy, trends in lifestyles,
seasonality (customer spending patterns at restaurants are generally highest in
the first quarter of the year and lowest in the third quarter of the year) and
fluctuating costs. Operating margins for restaurants are susceptible to
fluctuations in prices of commodities, which include among other things, beef,
chicken, seafood, butter, cheese, produce and other necessities to operate a
restaurant, such as natural gas or other energy supplies. Additionally,
the restaurant industry is characterized by a high initial capital investment,
coupled with high labor costs. The combination of these factors underscores our
initiatives to drive increased sales at existing restaurants in order to raise
margins and profits, because the incremental contribution to profits from every
additional dollar of sales above the minimum costs required to open, staff and
operate a restaurant is high. We are not a company focused on growth in the
number of restaurants just to generate additional sales. Our expansion and
operation strategies are to balance investment costs and the economic factors of
operation, in order to generate reasonable, sustainable margins and achieve
acceptable returns on investment from our restaurant concepts.
The
ongoing disruptions in the economy and the financial markets pose challenges to
our business as consumer confidence and spending, availability of credit,
interest rates, foreign currency exchanges rates and other items are adversely
impacted (see “Current Economic Challenges and Impacts of Market Conditions”
included in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” for further discussion).
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
(continued)
We
promote our Outback Steakhouse, Carrabba’s Italian Grill and Bonefish Grill
restaurants through national and spot television and/or radio media. We
advertise on television in spot markets when our brands achieve sufficient
penetration to make a meaningful broadcast schedule affordable. We rely on
word-of-mouth customer experience, grassroots marketing in local venues, direct
mail and national print media to support broadcast media and as the primary
campaigns for our upscale casual and smaller brands. Our advertising
spending is targeted to promote and maintain brand image and develop consumer
awareness of new menu offerings, such as new items added to appeal to
value-conscious consumers. We also strive to increase sales through
excellence in execution. Our marketing strategy of enticing customers to visit
frequently and also recommending our restaurants to others complements what we
believe are the fundamental elements of success: convenient sites,
service-oriented employees and flawless execution in a well-managed
restaurant. We have developed a multi-year plan to refresh and update
our Outback Steakhouse restaurants. The new look delivers an experience that we
believe reaches beyond the existing interpretation of Australia and the Outback
in our restaurants, and it is expressed in updated fabrics, textures, art,
lighting, props and murals.
Key
factors we use in evaluating our restaurants and assessing our business include
the following:
·
|
Average
unit volumes - average sales per restaurant to measure changes in
consumer traffic, pricing and development of the
brand;
|
·
|
Operating
margins - restaurant revenues after deduction of the main restaurant-level
operating costs (including cost of sales, restaurant operating expenses,
and labor and related costs);
|
·
|
System-wide
sales - total sales volume for all company-owned, franchise and
unconsolidated joint venture restaurants, regardless of ownership, to
interpret the overall health of our brands;
and
|
·
|
Same-store
or comparable sales - year-over-year comparison of sales volumes for
restaurants that are open in both years in order to remove the impact of
new openings in comparing the operations of existing
restaurants.
|
Our
industry’s challenges and risks include, but are not limited to, economic
conditions, including weak consumer spending, the impact of government
regulation, the availability of qualified employees, consumer perceptions
regarding food safety and/or the health benefits of certain types of food,
including attitudes about alcohol consumption, and commodity pricing.
Additionally, our planned development schedule is subject to risk because of
significant real estate and construction costs and the availability of capital,
and our results are affected by consumer tolerance of price increases. Changes
in our operations in future periods may also result from changes in beef prices
and other commodity costs and continued pre-opening expenses from the
development of new restaurants and our expansion strategy.
Our
substantial leverage could adversely affect our ability to raise additional
capital to fund our operations, limit our ability to make capital expenditures
to invest in new restaurants, limit our ability to react to changes in the
economy or our industry, expose us to interest rate risk to the extent of our
variable-rate debt and prevent us from meeting our obligations under the senior
notes.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results
of Operations
The
following tables set forth, for the periods indicated, (i) percentages that
items in our Consolidated Statements of Operations bear to total revenues or
restaurant sales, as indicated, and (ii) selected operating
data:
|
|
THREE
MONTHS ENDED
|
|
|
SIX
MONTHS ENDED
|
|
|
|
JUNE
30,
|
|
|
JUNE
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
sales
|
|
|
99.2 |
% |
|
|
99.4 |
% |
|
|
99.3 |
% |
|
|
99.5 |
% |
Other
revenues
|
|
|
0.8 |
|
|
|
0.6 |
|
|
|
0.7 |
|
|
|
0.5 |
|
Total
revenues
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales (1)
|
|
|
32.4 |
|
|
|
35.1 |
|
|
|
33.0 |
|
|
|
35.1 |
|
Labor
and other related (1)
|
|
|
28.8 |
|
|
|
28.0 |
|
|
|
28.4 |
|
|
|
27.8 |
|
Other
restaurant operating (1)
|
|
|
26.9 |
|
|
|
26.0 |
|
|
|
25.7 |
|
|
|
25.1 |
|
Depreciation
and amortization
|
|
|
4.8 |
|
|
|
4.6 |
|
|
|
4.8 |
|
|
|
4.5 |
|
General
and administrative
|
|
|
7.9 |
|
|
|
5.3 |
|
|
|
6.9 |
|
|
|
6.1 |
|
Loss
on contingent debt guarantee
|
|
|
- |
|
|
|
- |
|
|
|
1.3 |
|
|
|
- |
|
Goodwill
impairment
|
|
|
1.2 |
|
|
|
15.9 |
|
|
|
0.6 |
|
|
|
7.7 |
|
Provision
for impaired assets and restaurant closings
|
|
|
12.4 |
|
|
|
2.4 |
|
|
|
6.4 |
|
|
|
1.3 |
|
Loss
(income) from operations of unconsolidated affiliates
|
|
|
* |
|
|
|
(0.2 |
) |
|
|
(* |
) |
|
|
(0.2 |
) |
Total
costs and expenses
|
|
|
113.7 |
|
|
|
116.5 |
|
|
|
106.6 |
|
|
|
107.0 |
|
Loss
from operations
|
|
|
(13.7 |
) |
|
|
(16.5 |
) |
|
|
(6.6 |
) |
|
|
(7.0 |
) |
Gain
on extinguishment of debt
|
|
|
- |
|
|
|
- |
|
|
|
8.5 |
|
|
|
- |
|
Other
income (expense), net
|
|
|
0.3 |
|
|
|
(0.4 |
) |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
Interest
income
|
|
|
* |
|
|
|
0.2 |
|
|
|
* |
|
|
|
0.1 |
|
Interest
expense
|
|
|
(2.5 |
) |
|
|
(2.2 |
) |
|
|
(2.7 |
) |
|
|
(3.3 |
) |
Loss
before benefit from income taxes
|
|
|
(15.9 |
) |
|
|
(18.9 |
) |
|
|
(1.0 |
) |
|
|
(10.4 |
) |
Benefit
from income taxes
|
|
|
(6.2 |
) |
|
|
(1.4 |
) |
|
|
(0.8 |
) |
|
|
(1.5 |
) |
Net
loss
|
|
|
(9.7 |
) |
|
|
(17.5 |
) |
|
|
(0.2 |
) |
|
|
(8.9 |
) |
Less:
net (loss) income attributable to noncontrolling interest
|
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
(* |
) |
|
|
* |
|
Net
loss attributable to OSI Restaurant Partners, LLC
|
|
|
(9.5 |
)% |
|
|
(17.4 |
)% |
|
|
(0.2 |
)% |
|
|
(8.9 |
)% |
__________________
(1)
|
As a
percentage of restaurant sales.
|
*
|
Less
than 1/10 of one percent of total
revenues.
|
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results
of Operations (continued)
System-wide
sales declined by 10.8% and 10.2% for the three and six months ended June 30,
2009 compared with the corresponding periods in 2008. System-wide sales is
a non-GAAP financial measure that includes sales of all restaurants operating
under our brand names, whether we own them or not. There are two
components of system-wide sales, sales of Company-owned restaurants of OSI
Restaurant Partners, LLC and sales of franchised and development joint venture
restaurants. The table below presents the first component of
system-wide sales, sales of Company-owned restaurants:
|
|
THREE
MONTHS ENDED
|
|
|
SIX
MONTHS ENDED
|
|
|
|
JUNE
30,
|
|
|
JUNE
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
COMPANY-OWNED
RESTAURANT SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Outback
Steakhouse
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
496 |
|
|
$ |
553 |
|
|
$ |
1,030 |
|
|
$ |
1,136 |
|
International
|
|
|
56 |
|
|
|
72 |
|
|
|
120 |
|
|
|
156 |
|
Total
|
|
|
552 |
|
|
|
625 |
|
|
|
1,150 |
|
|
|
1,292 |
|
Carrabba's
Italian Grill
|
|
|
162 |
|
|
|
175 |
|
|
|
333 |
|
|
|
360 |
|
Bonefish
Grill
|
|
|
95 |
|
|
|
101 |
|
|
|
193 |
|
|
|
201 |
|
Fleming's
Prime Steakhouse and Wine Bar
|
|
|
47 |
|
|
|
54 |
|
|
|
99 |
|
|
|
112 |
|
Other
restaurants
|
|
|
43 |
|
|
|
56 |
|
|
|
83 |
|
|
|
110 |
|
Total
Company-owned restaurant sales
|
|
$ |
899 |
|
|
$ |
1,011 |
|
|
$ |
1,858 |
|
|
$ |
2,075 |
|
The
following information presents the second component of system-wide sales, sales
of franchised and unconsolidated development joint venture
restaurants. These are restaurants that are not owned by us and from
which we only receive a franchise royalty or a portion of their total
income. Management believes that franchise and unconsolidated
development joint venture sales information is useful in analyzing our revenues
because franchisees and affiliates pay service fees and/or royalties that
generally are based on a percentage of sales. Management also uses
this information to make decisions about future plans for the development of
additional restaurants and new concepts as well as evaluation of current
operations.
These
sales do not represent sales of OSI Restaurant Partners, LLC, and are presented
only as an indicator of changes in the restaurant system, which management
believes is important information regarding the health of our restaurant
brands.
|
|
THREE
MONTHS ENDED
|
|
|
SIX
MONTHS ENDED
|
|
|
|
JUNE
30,
|
|
|
JUNE
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
FRANCHISE
AND DEVELOPMENT JOINT VENTURE SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions) (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Outback
Steakhouse
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
75 |
|
|
$ |
85 |
|
|
$ |
155 |
|
|
$ |
173 |
|
International
|
|
|
38 |
|
|
|
40 |
|
|
|
72 |
|
|
|
76 |
|
Total
|
|
|
113 |
|
|
|
125 |
|
|
|
227 |
|
|
|
249 |
|
Carrabba's
Italian Grill
|
|
|
1 |
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
Bonefish
Grill
|
|
|
4 |
|
|
|
4 |
|
|
|
8 |
|
|
|
8 |
|
Total
franchise and development joint venture sales (1)
|
|
$ |
118 |
|
|
$ |
129 |
|
|
$ |
237 |
|
|
$ |
257 |
|
Income
from franchise and development joint ventures (2)
|
|
$ |
6 |
|
|
$ |
7 |
|
|
$ |
11 |
|
|
$ |
13 |
|
__________________
(1)
|
Franchise
and development joint venture sales are not included in revenues as
reported in the Consolidated Statements of
Operations.
|
(2)
|
Represents
the franchise royalty and portion of total income related to restaurant
operations included in the Consolidated Statements of Operations in the
line items “Other revenues” or “(Loss) income from operations of
unconsolidated affiliates.”
|
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results
of Operations (continued)
The table
below presents the number of our restaurants in operation at the end of the
periods indicated:
|
|
JUNE
30,
|
|
|
|
2009
|
|
|
2008
|
|
Number
of restaurants (at end of the period):
|
|
|
|
|
|
|
Outback
Steakhouse
|
|
|
|
|
|
|
Company-owned
- domestic
|
|
|
687 |
|
|
|
686 |
|
Company-owned
- international
|
|
|
121 |
|
|
|
131 |
|
Franchised
and development joint venture - domestic
|
|
|
108 |
|
|
|
108 |
|
Franchised
and development joint venture - international
|
|
|
56 |
|
|
|
51 |
|
Total
|
|
|
972 |
|
|
|
976 |
|
Carrabba's
Italian Grill
|
|
|
|
|
|
|
|
|
Company-owned
|
|
|
231 |
|
|
|
237 |
|
Franchised
and development joint venture
|
|
|
1 |
|
|
|
- |
|
Total
|
|
|
232 |
|
|
|
237 |
|
Bonefish
Grill
|
|
|
|
|
|
|
|
|
Company-owned
|
|
|
144 |
|
|
|
144 |
|
Franchised
and development joint venture
|
|
|
7 |
|
|
|
7 |
|
Total
|
|
|
151 |
|
|
|
151 |
|
Fleming’s
Prime Steakhouse and Wine Bar
|
|
|
|
|
|
|
|
|
Company-owned
|
|
|
63 |
|
|
|
57 |
|
Other
|
|
|
|
|
|
|
|
|
Company-owned
|
|
|
59 |
|
|
|
72 |
|
System-wide
total
|
|
|
1,477 |
|
|
|
1,493 |
|
None of
our individual brands are considered separate reportable segments for purposes
of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related
Information” (“SFAS No. 131”), as the brands have similar economic
characteristics, nature of products and services, class of customer and
distribution methods.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three
months ended June 30, 2009 compared to three months ended
June 30, 2008
REVENUES
Restaurant sales. Restaurant
sales decreased by 11.1% or $112,065,000 during the three months ended June 30,
2009 as compared with the same period in 2008. The decrease in restaurant sales
was primarily attributable to decreases in sales volume at existing restaurants
and the closing of 36 restaurants since June 30, 2008 and was partially offset
by additional revenues of approximately $16,357,000 from the opening of 21 new
restaurants after June 30, 2008. The following table
includes additional information about changes in restaurant sales at domestic
Company-owned restaurants for the three months ended June 30, 2009 and
2008:
|
|
THREE
MONTHS ENDED
|
|
|
|
JUNE
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Average
restaurant unit volumes (weekly):
|
|
|
|
|
|
|
Outback
Steakhouse
|
|
$ |
55,481 |
|
|
$ |
61,948 |
|
Carrabba's
Italian Grill
|
|
$ |
54,046 |
|
|
$ |
56,876 |
|
Bonefish
Grill
|
|
$ |
51,325 |
|
|
$ |
55,341 |
|
Fleming's
Prime Steakhouse and Wine Bar
|
|
$ |
57,739 |
|
|
$ |
73,720 |
|
Operating
weeks:
|
|
|
|
|
|
|
|
|
Outback
Steakhouse
|
|
|
8,936 |
|
|
|
8,931 |
|
Carrabba's
Italian Grill
|
|
|
3,003 |
|
|
|
3,076 |
|
Bonefish
Grill
|
|
|
1,861 |
|
|
|
1,822 |
|
Fleming's
Prime Steakhouse and Wine Bar
|
|
|
819 |
|
|
|
730 |
|
Year
over year percentage change:
|
|
|
|
|
|
|
|
|
Menu
price increases: (1)
|
|
|
|
|
|
|
|
|
Outback
Steakhouse
|
|
|
1.5 |
% |
|
|
4.0 |
% |
Carrabba's
Italian Grill
|
|
|
1.8 |
% |
|
|
1.4 |
% |
Bonefish
Grill
|
|
|
1.2 |
% |
|
|
1.5 |
% |
Fleming's
Prime Steakhouse and Wine Bar
|
|
|
0.6 |
% |
|
|
4.1 |
% |
Same-store
sales (stores open 18 months or more):
|
|
|
|
|
|
|
|
|
Outback
Steakhouse
|
|
|
-10.2 |
% |
|
|
-5.3 |
% |
Carrabba's
Italian Grill
|
|
|
-5.9 |
% |
|
|
-5.0 |
% |
Bonefish
Grill
|
|
|
-8.2 |
% |
|
|
-8.0 |
% |
Fleming's
Prime Steakhouse and Wine Bar
|
|
|
-22.4 |
% |
|
|
-8.4 |
% |
__________________
(1) The
stated pricing excludes the impact of product mix shifts to new menu
offerings.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three
months ended June 30, 2009 compared to three months ended June 30, 2008
(continued)
COSTS AND
EXPENSES
Cost of sales. Cost of sales,
consisting of food and beverage costs, decreased by 2.7% of restaurant sales to
32.4% in the three months ended June 30, 2009 as compared with 35.1% in the same
period in 2008. The decrease as a percentage of restaurant sales was
primarily due to the following: (i) 1.5% from the impact of certain cost
savings initiatives, (ii) 1.0% from decreases in beef, dairy and other commodity
costs and (iii) 0.3% from increased sales of items that generate more favorable
returns. This decrease as a percentage of restaurant sales was
partially offset by increases in produce and seafood costs that negatively
impacted cost of sales by 0.4% as a percentage of restaurant sales.
Labor and other related
expenses. Labor and other related expenses include all direct and
indirect labor costs incurred in operations, including distribution expense to
managing partners, costs related to the Partner Equity Plan (the “PEP”) and
other stock-based and incentive compensation expenses. Labor and
other related expenses increased 0.8% as a percentage of restaurant sales to
28.8% in the three months ended June 30, 2009 as compared with 28.0% in the same
period in 2008. The increase as a percentage of restaurant sales was
primarily due to the following: (i) 1.6% from declines in average unit
volumes, (ii) 0.5% from higher kitchen, service and management labor costs and
(iii) 0.3% from an increase in expenses incurred as a result of gains
on participants’ PEP investment accounts. The increase was
partially offset by decreases as a percentage of restaurant sales of
approximately 1.7% from certain cost savings initiatives.
Other restaurant operating
expenses. Other restaurant operating expenses include certain
unit-level operating costs such as operating supplies, rent, repair and
maintenance, advertising expenses, utilities, pre-opening costs and other
occupancy costs. A substantial portion of these expenses is fixed or indirectly
variable. These costs increased 0.9% to 26.9% as a percentage of
restaurant sales in the three months ended June 30, 2009 as compared with 26.0%
in the same period in 2008. The increase as a percentage of
restaurant sales was primarily due to the following: (i) 1.6% from declines in
average unit volumes, (ii) 0.4% from increases in advertising costs and (iii)
0.3% from higher general liability insurance expense. The increase
was partially offset by decreases as a percentage of restaurant sales of 0.7%
from certain cost savings initiatives, 0.4% from decreases in utilities costs
and 0.3% from reduced pre-opening costs.
Depreciation and
amortization. Depreciation and amortization costs increased 0.2% as a
percentage of total revenues to 4.8% in the three months ended June 30, 2009 as
compared with 4.6% in the same period in 2008 primarily from declines in average
unit volumes.
General and administrative.
General and administrative costs increased by $16,808,000 to $71,114,000 in the
three months ended June 30, 2009 as compared with $54,306,000 in the same period
in 2008. This increase was primarily attributable to $10,606,000 of
compensation expense recorded during the second quarter of 2009 as a result of
amendments to restricted stock and stock option agreements for three of our
named executive officers, $3,700,000 of incremental bonus and severance expenses
in the second quarter of 2009, a shift in the timing of field operations’
meeting expenses to the second quarter of 2009 as opposed to the first quarter
of 2008 and a $6,662,000 gain from the sale of land in Las Vegas, Nevada in the
second quarter of 2008. This increase was partially offset by the
results of certain cost savings initiatives and a gain on the cash surrender
value of life insurance during the second quarter of 2009.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three
months ended June 30, 2009 compared to three months ended June 30, 2008
(continued)
COSTS AND EXPENSES
(continued)
Goodwill impairment. In
connection with our annual impairment test, we recorded a goodwill impairment
charge of $11,078,000 for the domestic Outback Steakhouse, Bonefish Grill and
Fleming’s Prime Steakhouse and Wine Bar concepts during the second quarter of
2009 and recorded a goodwill impairment charge of $161,589,000 for the domestic
and international Outback Steakhouse, Bonefish Grill and Fleming’s Prime
Steakhouse and Wine Bar concepts during the second quarter of 2008. Our
review of the recoverability of goodwill was based primarily upon an analysis of
the discounted cash flows of the related reporting units as compared to the
carrying values. These goodwill impairment charges occurred due to
poor overall economic conditions, declining sales at our restaurants, reductions
in our projected results for future periods and a challenging environment for
the restaurant industry.
Provision for impaired assets and
restaurant closings. During the second
quarter of 2009, we recorded a provision for impaired assets and restaurant
closings of $112,206,000 which included $45,962,000 of impairment charges to
reduce the carrying value of the assets of Cheeseburger in Paradise to their
estimated fair market value due to the concept’s pending sale, $29,435,000 of
impairment charges and restaurant closing expense for certain of our other
restaurants, $36,000,000 of impairment charges for the domestic Outback
Steakhouse and Carrabba’s Italian Grill trade names and $809,000 of impairment
charges for our favorable leases. During the second quarter of 2008,
a provision of $23,928,000 was recorded which included $17,429,000 of impairment
charges for certain of our restaurants, $3,037,000 of impairment charges for the
Carrabba’s Italian Grill trade name and $3,462,000 of impairment charges for the
Blue Coral Seafood and Spirits trademark. We used the discounted cash
flow method to determine the fair value of our intangible
assets. Restaurant impairment charges primarily occurred as a result
of the carrying value of a restaurant’s assets exceeding its estimated fair
market value, generally due to anticipated closures or declining future cash
flows from lower projected future sales on existing locations.
Loss (income) from operations of
unconsolidated affiliates. Loss (income) from operations of
unconsolidated affiliates represents our portion of net loss (income) from
restaurants operated as development joint ventures. Our loss from development
joint ventures was $355,000 in the second quarter of 2009 as compared with
income of $2,368,000 in the same period in 2008. This change was
primarily due to a decrease in income from our joint venture in
Brazil.
Other income (expense), net.
Other income (expense), net represents the foreign currency transaction gains
(losses) of $2,466,000 and ($3,805,000), respectively, on international
investments for the three months ended June 30, 2009 and 2008.
Benefit from income
taxes. The
effective income tax rate for the three months ended June 30, 2009 was 38.9%
compared to 7.7% for the three months ended June 30, 2008. The net increase of
31.2% in the effective income tax rate was primarily due to a $150,511,000
decrease in Goodwill impairment for the three months ended June 30, 2009 as
compared to the same period in 2008. 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.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Six
months ended June 30, 2009 compared to six months ended June 30,
2008
REVENUES
Restaurant
sales. Restaurant sales decreased by 10.5% or $217,287,000
during the first half of 2009 as compared with the same period in
2008. The decrease in restaurant sales was primarily attributable to
decreases in sales volume at existing restaurants and the closing of 36
restaurants since June 30, 2008 and was partially offset by additional revenues
of approximately $31,787,000 from the opening of 21 new restaurants after June
30, 2008. The following table includes additional information about
changes in restaurant sales at domestic Company-owned restaurants for the six
months ended June 30, 2009 and 2008:
|
|
SIX
MONTHS ENDED
|
|
|
|
JUNE
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Average
restaurant unit volumes (weekly):
|
|
|
|
|
|
|
Outback
Steakhouse
|
|
$ |
57,924 |
|
|
$ |
63,509 |
|
Carrabba's
Italian Grill
|
|
$ |
55,758 |
|
|
$ |
58,394 |
|
Bonefish
Grill
|
|
$ |
52,361 |
|
|
$ |
56,196 |
|
Fleming's
Prime Steakhouse and Wine Bar
|
|
$ |
62,384 |
|
|
$ |
77,792 |
|
Operating
weeks:
|
|
|
|
|
|
|
|
|
Outback
Steakhouse
|
|
|
17,781 |
|
|
|
17,894 |
|
Carrabba's
Italian Grill
|
|
|
5,976 |
|
|
|
6,168 |
|
Bonefish
Grill
|
|
|
3,691 |
|
|
|
3,582 |
|
Fleming's
Prime Steakhouse and Wine Bar
|
|
|
1,614 |
|
|
|
1,432 |
|
Year
over year percentage change:
|
|
|
|
|
|
|
|
|
Menu
price increases: (1)
|
|
|
|
|
|
|
|
|
Outback
Steakhouse
|
|
|
1.7 |
% |
|
|
3.6 |
% |
Carrabba's
Italian Grill
|
|
|
1.8 |
% |
|
|
1.4 |
% |
Bonefish
Grill
|
|
|
1.9 |
% |
|
|
1.3 |
% |
Fleming's
Prime Steakhouse and Wine Bar
|
|
|
0.4 |
% |
|
|
4.1 |
% |
Same-store
sales (stores open 18 months or more):
|
|
|
|
|
|
|
|
|
Outback
Steakhouse
|
|
|
-9.3 |
% |
|
|
-3.9 |
% |
Carrabba's
Italian Grill
|
|
|
-6.6 |
% |
|
|
-2.1 |
% |
Bonefish
Grill
|
|
|
-9.1 |
% |
|
|
-5.9 |
% |
Fleming's
Prime Steakhouse and Wine Bar
|
|
|
-21.0 |
% |
|
|
-7.4 |
% |
__________________
(1) The
stated pricing excludes the impact of product mix shifts to new menu
offerings.
COSTS AND
EXPENSES
Cost of sales. Cost of sales,
consisting of food and beverage costs, decreased by 2.1% of restaurant sales to
33.0% in the first half of 2009 as compared with 35.1% in the same period in
2008. The decrease as a percentage of restaurant sales was primarily
due to the following: (i) 1.4% from the impact of certain cost savings
initiatives, (ii) 0.8% from decreases in beef and dairy costs, (iii) 0.2%
from general menu price increases and (iv) 0.2% from increased sales of
items that generate more favorable returns. This decrease as a
percentage of restaurant sales was partially offset by increases in produce,
seafood and other commodity costs that negatively impacted cost of sales by 0.5%
as a percentage of restaurant sales.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Six
months ended June 30, 2009 compared to six months ended June 30, 2008
(continued)
COSTS AND
EXPENSES
(continued)
Labor and other related
expenses. Labor and other related expenses include all direct and
indirect labor costs incurred in operations, including distribution expense to
managing partners, costs related to the PEP and other stock-based and incentive
compensation expenses. Labor and other related expenses increased
0.6% as a percentage of restaurant sales to 28.4% in the first half of 2009 as
compared with 27.8% in the same period in 2008. The increase as a
percentage of restaurant sales was primarily due to the following: (i) 1.4%
from declines in average unit volumes and (ii) 0.8% from higher kitchen,
service and management labor costs, including payroll tax
expense. The increase was partially offset by decreases as a
percentage of restaurant sales of approximately 1.6% from certain cost savings
initiatives.
Other restaurant operating
expenses. Other restaurant operating expenses include certain
unit-level operating costs such as operating supplies, rent, repair and
maintenance, advertising expenses, utilities, pre-opening costs and other
occupancy costs. A substantial portion of these expenses is fixed or indirectly
variable. These costs increased 0.6% to 25.7% as a percentage of
restaurant sales in the first half of 2009 as compared with 25.1% in the same
period in 2008. The increase as a percentage of restaurant sales was
primarily due to the following: (i) 1.3% from declines in average unit volumes
and (ii) 0.2% from increases in advertising costs. The increase was
partially offset by decreases as a percentage of restaurant sales of 0.5% from
certain cost savings initiatives, 0.2% from decreases in utilities costs
and 0.2% from reduced pre-opening costs.
Depreciation and
amortization. Depreciation and amortization costs increased 0.3% as a
percentage of total revenues to 4.8% in the first half of 2009 as compared with
4.5% in the same period in 2008 primarily from declines in average unit
volumes.
General and administrative.
General and administrative costs increased by $3,117,000 to $129,597,000 in the
first half of 2009 as compared with $126,480,000 in the same period in
2008. This increase was primarily attributable to $10,606,000 of
compensation expense recorded during the second quarter of 2009 as a result of
amendments to restricted stock and stock option agreements for three of our
named executive officers, $8,200,000 of incremental bonus and severance expenses
in the first half of 2009 and a $6,662,000 gain from the sale of land in Las
Vegas, Nevada in the first half of 2008. This increase was partially
offset by the results of certain cost savings initiatives and a gain on the cash
surrender value of life insurance during the first half of 2009.
Loss on contingent debt
guarantee. We are the guarantor of an uncollateralized line of
credit that permits borrowing of up to a maximum of $24,500,000 for our joint
venture partner, RY-8, Inc. (“RY-8”), in the development of Roy's restaurants
(see “Debt Guarantees” included in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”). We recorded a
$24,500,000 loss associated with this guarantee for the six months ended June
30, 2009.
Goodwill impairment. In
connection with our annual impairment test, we recorded a goodwill impairment
charge of $11,078,000 for the domestic Outback Steakhouse, Bonefish Grill and
Fleming’s Prime Steakhouse and Wine Bar concepts during the first half of 2009
and recorded a goodwill impairment charge of $161,589,000 for the domestic and
international Outback Steakhouse, Bonefish Grill and Fleming’s Prime Steakhouse
and Wine Bar concepts during the first half of 2008. Our review of the
recoverability of goodwill was based primarily upon an analysis of the
discounted cash flows of the related reporting units as compared to the carrying
values. These goodwill impairment charges occurred due to poor
overall economic conditions, declining sales at our restaurants, reductions in
our projected results for future periods and a challenging environment for the
restaurant industry.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Six
months ended June 30, 2009 compared to six months ended June 30, 2008
(continued)
COSTS AND EXPENSES
(continued)
Provision for impaired assets and
restaurant closings. During the first half
of 2009, we recorded a provision for impaired assets and restaurant closings of
$119,342,000 which included $45,962,000 of impairment charges to reduce the
carrying value of the assets of Cheeseburger in Paradise to their estimated fair
market value due to the concept’s pending sale, $36,225,000 of impairment
charges and restaurant closing expense for certain of our other restaurants,
$36,000,000 of impairment charges for the domestic Outback Steakhouse and
Carrabba’s Italian Grill trade names and $1,155,000 of impairment charges for
our favorable leases. During the first half of 2008, a provision of
$27,592,000 was recorded which included $21,093,000 of impairment charges for
certain of our restaurants, $3,037,000 of impairment charges for the Carrabba’s
Italian Grill trade name and $3,462,000 of impairment charges for the Blue Coral
Seafood and Spirits trademark. We used the discounted cash flow
method to determine the fair value of our intangible
assets. Restaurant impairment charges primarily occurred as a result
of the carrying value of a restaurant’s assets exceeding its estimated fair
market value, generally due to anticipated closures or declining future cash
flows from lower projected future sales on existing locations.
Loss (income) from operations of
unconsolidated affiliates. Loss (income) from operations of
unconsolidated affiliates represents our portion of net loss (income) from
restaurants operated as development joint ventures. Our income from development
joint ventures decreased by $3,128,000 in the first half of 2009 compared to the
same period in 2008 primarily as a result of a decrease in income from our joint
venture in Brazil.
Gain on extinguishment of
debt. During the first quarter of 2009, we accepted for
purchase $240,145,000 in principal amount of our senior notes in a cash tender
offer. We paid $72,998,000 for the senior notes accepted for purchase
and $6,671,000 of accrued interest. We recorded a gain from the
extinguishment of our debt of $158,061,000 for the six months ended June 30,
2009. The gain was reduced by $6,117,000 for the pro rata portion of
unamortized deferred financing fees that related to the extinguished senior
notes and by $2,969,000 for fees related to the tender offer.
Interest
income. Interest income was $258,000 for the first half of
2009 as compared with $2,447,000 in the same period in 2008. The
decrease in interest income resulted primarily from a decline in interest rates
in the first half of 2009 as compared with the same period in 2008.
Interest expense. Interest
expense was $49,944,000 for the first half of 2009 as compared with $69,787,000
in the same period in 2008. The decrease in interest expense resulted from (i) a
significant decrease in outstanding senior notes as a result of our cash tender
offer during the first quarter of 2009 and our open market purchases during the
fourth quarter of 2008 and (ii) an overall decline in the variable interest
rates on our senior secured term loan facility and other variable-rate debt in
the first half of 2009 as compared with the same period in 2008.
Benefit from income
taxes. The effective income tax rate for the six months ended June
30, 2009 was 74.1% compared to 14.5% for the six months ended June 30,
2008. The effective income tax rate for the six months ended June 30, 2009
was significantly higher than the combined federal and state statutory rate of
38.9% due to the benefit of the expected tax credit for excess FICA tax on
employee-reported tips being such a large percentage of projected annual pretax
loss. The net increase of 59.6% in the effective income tax rate during
the six months ended June 30, 2009 from the rate in the same period in 2008 was
primarily due to a $150,511,000 decrease in Goodwill impairment for the six
months ended June 30, 2009 as compared to the same period in
2008. 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. This increase was partially offset by applying the
combined federal and state statutory tax rate of 38.9% to the $158,061,000 gain
on extinguishment of debt realized during the six months ended June 30, 2009.
This gain is a discrete item for which deferred taxes are provided for at the
combined statutory federal and state income tax
rates.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial
Condition
Cash and
cash equivalents was $112,381,000 at June 30, 2009 as compared with $271,470,000
at December 31, 2008. This decrease was partially due to our cash
tender offer in the first quarter of 2009 in which we paid $72,998,000 for the
senior notes accepted for purchase and $6,671,000 of accrued
interest. We funded the tender offer with (i) cash on hand and (ii)
proceeds from a $47,000,000 contribution from our direct owner, OSI HoldCo, Inc.
(“OSI HoldCo”), (see “Credit Facilities” included in “Management’s Discussion
and Analysis of Financial Condition and Results of Operations”). In
addition, we paid $33,311,000 upon termination of our guarantee obligation for
T-Bird Nevada, LLC (“T-Bird”) by purchasing the note and all related rights from
the lender in February 2009 (see “Debt Guarantees” included in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”) and
paid approximately $30,000,000 of Accounts payable from December 31, 2008 that
was delayed until the beginning of 2009 (which under our historic practices
would have been paid by December 31, 2008). Other current assets
totaled $96,225,000 at June 30, 2009 as compared with $61,823,000 at December
31, 2008. This increase was primarily due to reclassification of
$20,300,000 of insurance receivables to current from long-term. This
classification change also affected Other assets, which decreased to
$153,573,000 at June 30, 2009 from $194,473,000 at December 31,
2008. The decrease in Other assets was also attributable to a decline
in deferred financing fees as a result of our cash tender offer and periodic
amortization.
Working
capital (deficit) totaled ($229,670,000) and ($204,528,000) at June 30, 2009 and
December 31, 2008, respectively, and included Unearned revenue from gift cards
of $130,254,000 and $212,677,000 at June 30, 2009 and December 31, 2008,
respectively.
Current
liabilities totaled $543,311,000 at June 30, 2009 as compared with $663,898,000
at December 31, 2008 with the decrease primarily due to an $80,253,000 decrease
in Accounts payable and a $82,423,000 decrease in Unearned
revenue. The decline in Accounts payable is due to the normal
seasonal pattern combined with a reduction in purchasing volume, price savings
realized from certain costs savings initiatives and the aforementioned delay in
Accounts payable payments at December 31, 2008. The decrease in
Unearned revenue is due to the typical seasonal pattern for gift
cards. The decline in Current liabilities also resulted from the
termination of our $33,283,000 guarantee obligation for T-Bird in February 2009
(see “Debt Guarantees” included in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”). The decrease
in Current liabilities is partially offset by a $48,899,000 increase in the
Current portion of long-term debt and a $31,075,000 increase in Accrued
expenses. Current portion of long-term debt increased as a result of
the classification of a portion of our term loans as current at June 30, 2009
due to our prepayment requirements (see “Credit Facilities and Other
Indebtedness” included in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”). The increase
in Accrued expenses was primarily due to reclassification of $19,792,000 of
accrued insurance to current from long-term. The decline in Long-term
debt to $1,409,619,000 at June 30, 2009 from $1,721,179,000 at December 31, 2008
was primarily a result of our cash tender offer in the first quarter of 2009 in
which we accepted for purchase $240,145,000 in principal amount of our senior
notes and the classification of a portion of our term loans as current at June
30, 2009 due to our prepayment requirements.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity
and Capital Resources
CURRENT
ECONOMIC CHALLENGES AND POTENTIAL IMPACTS OF MARKET CONDITIONS
We
require capital primarily for principal and interest payments on our debt,
prepayment requirements under our term loan facility (see “Credit Facilities and
Other Indebtedness” included in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”), obligations related to our
deferred compensation plans, the development of new restaurants, remodeling
older restaurants, investments in technology and acquisitions of franchisees and
joint venture partners.
The
ongoing disruptions in the financial markets and adverse changes in the economy
have created a challenging environment for us and for the restaurant industry,
and these factors have limited and may continue to limit our
liquidity. During 2008, we incurred goodwill impairment charges of
$604,071,000, intangible asset impairment charges of $46,420,000 and
restaurant impairment charges of $65,767,000. During the six months
ended June 30, 2009, we incurred goodwill impairment charges of $11,078,000 and
intangible asset impairment charges of $43,016,000, the majority of which
were recorded during the second quarter of 2009, and restaurant impairment
charges of $76,326,000. In 2008, we experienced downgrades in our
credit ratings, and we continue to experience declining restaurant sales and be
subject to risk from: consumer confidence and spending patterns; the
availability of credit presently arranged from revolving credit facilities; the
future cost and availability of credit; interest rates; foreign currency
exchange rates; and the liquidity or operations of our third-party vendors and
other service providers. Additionally, our substantial leverage could
adversely affect the ability to raise additional capital, to fund operations or
to react to changes in the economy or industry. In response to these
conditions, we accelerated existing initiatives and implemented new measures in
2008 to manage liquidity. We have continued these measures and
implemented additional measures in 2009.
We have
implemented various cost-saving initiatives, including food cost decreases via
waste reduction and supply chain efficiency, labor efficiency initiatives and
reductions to both capital expenditures and general and administrative
expenses. We developed new menu items to appeal to value-conscious
consumers and have used marketing campaigns to promote these
items. Additionally, interest expense declined significantly for the
six months ended June 30, 2009 as compared to the same period in 2008 due to (i)
a significant decrease in outstanding senior notes as a result of our open
market purchases during the fourth quarter of 2008 and the completion of a cash
tender offer during the first quarter of 2009 and (ii) an overall decline in the
variable interest rates on our senior secured term loan facility and other
variable-rate debt (see “Credit Facilities and Other Indebtedness” included
in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations”). Based on anticipated revenues and cash flows, we
believe that the implemented initiatives noted above will allow us to
appropriately manage our liquidity and meet our debt service
requirements. Our anticipated revenues and cash flows have been
estimated based on results of actions taken, our knowledge of the economic
trends and the declines in sales at our restaurants combined with our attempts
to mitigate the impact of those declines. However, further
deterioration in excess of our estimates could cause an adverse impact on our
liquidity and financial position.
Further
deterioration in the financial markets could adversely affect our ability to
borrow under our revolving credit facilities. In April 2009, we repaid
outstanding loans under the pre-funded revolving credit facility and funded our
capital expenditures account using 100% of our “annual true cash flow,” as
required and defined in the credit agreement. At June 30, 2009, our
outstanding balance on the working capital revolving credit facility was
$50,000,000 and no draws were outstanding on the pre-funded revolving credit
facility. Subsequent to the end of the second quarter of 2009, we
drew $7,700,000 from our pre-funded revolving credit facility.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity
and Capital Resources (continued)
CURRENT
ECONOMIC CHALLENGES AND POTENTIAL IMPACTS OF MARKET CONDITIONS
(continued)
At June
30, 2009 and December 31, 2008, our Moody’s Applicable Corporate Rating was
Caa1, and our Standard & Poor’s corporate credit rating was
B-. Our credit agreement does not penalize us for a downgrade in our
credit ratings. We have not experienced a material change and do not
anticipate experiencing a material change in vendor pricing or supply as a
result of our credit ratings from Standard and Poor’s and Moody’s Investors
Service.
Our
current credit ratings, possible future downgrades in our credit ratings and
further disruptions in the financial markets could affect our ability to obtain
future credit and the cost of that credit. On April 1, 2009, a
$24,500,000 line of credit that we guarantee expired and was amended with a
revised termination date of April 15, 2013 (see “Debt Guarantees” included in
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations”). During the three months ended March 31, 2009, we
recorded a loss related to this guarantee of $24,500,000 in our
Consolidated Statement of Operations based on our determination that a long-term
contingent obligation was probable under SFAS No. 5, “Accounting for
Contingencies.” We reclassified the $24,500,000 contingent obligation to
guaranteed debt, which is included in the line item “Guaranteed debt of
consolidated joint venture partner” in our Consolidated Balance Sheet at June
30, 2009. At this time, we believe we have sufficient liquidity from
our cash, short-term investments, restricted cash and available borrowing
capacity on our revolving credit facilities to allow us to perform under the
guarantee, if necessary.
In
January 2009, we received notice that an event of default had occurred in
connection with an uncollateralized line of credit that matured December 31,
2008 and permitted borrowing of up to $35,000,000 by a limited liability
company, T-Bird, which is owned by the principal of each of our California
franchisees of Outback Steakhouse restaurants (see “Debt Guarantees” included in
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations”). 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. T-Bird failed to pay
the outstanding balance of $33,283,000 due on the maturity date, and this
balance was recorded in “Current portion of guaranteed debt” on our Consolidated
Balance Sheet at December 31, 2008. On February 17, 2009, we
terminated our 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. We consolidate T-Bird and the
related T-Bird Loans and, in anticipation of receiving a notice of default
subsequent to the end of the year, recorded a $33,150,000 allowance for the
T-Bird Loan receivables during the fourth quarter of 2008. On February 19,
2009, we 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 against us
and certain of our officers and affiliates. The suit claims, among
other things, that we made various misrepresentations and breached certain oral
promises allegedly made by us and certain of our officers to T-Bird and our
affiliates that we would acquire the restaurants owned by T-Bird and its
affiliates and until that time we would maintain financing for the restaurants
that would be nonrecourse to T-Bird and its affiliates. The complaint
seeks damages in excess of $100,000,000, exemplary or punitive damages, and
other remedies. We and the other defendants believe the suit is
without merit, and we intend to defend the suit vigorously.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity
and Capital Resources (continued)
CURRENT
ECONOMIC CHALLENGES AND POTENTIAL IMPACTS OF MARKET CONDITIONS
(continued)
Variable
interest rates on the senior secured term loan facility declined slightly during
the six months ended June 30, 2009 (2.63% at June 30, 2009 and 2.81% at December
31, 2008). The amount of required interest payments on our debt will
change as future interest rates fluctuate, without considering the effects of
the interest rate collar. Between November 18, 2008 and November 21, 2008,
in an effort to deleverage and reduce interest expense, we purchased and
extinguished $61,780,000 in aggregate principal amount of our senior notes at a
significant discount on the open market. On February 18, 2009,
we commenced a cash tender offer to purchase the maximum aggregate
principal amount of our senior notes that we could purchase for $73,000,000,
excluding accrued interest. The tender offer expired on March 20,
2009, and we accepted for purchase $240,145,000 in principal amount of our
senior notes (see “Credit
Facilities and Other Indebtedness” included in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”).
Current
market conditions have affected our foreign currency exchange
rates. These rates have stabilized during the first and second
quarters of 2009. However, we may experience declines in our
international operating results during the remainder of 2009, primarily due to
the depreciation of foreign currency exchange rates for certain countries in
which we operate.
The
challenging economy may adversely affect our suppliers and other third-party
service providers. At this time, however, we do not anticipate an
interruption in supplies from our most significant vendors. In the
six months ended June 30, 2009, we committed $7,470,000 of our working capital
revolving credit facility for the issuance of letters of credit. This
was primarily for a $6,000,000 letter of credit to the insurance company that
underwrites our bonds for liquor licenses, utilities, liens and
construction. We may have to extend additional letters of credit in
the future. As of the filing date of this report, we have total outstanding
letters of credit of $70,770,000, which is $4,230,000 below the maximum of
$75,000,000 of letters of credit permitted to be issued under our working
capital revolving credit facility. If requests for letters of credit
exceed the remaining availability on our working capital revolving credit
facility, then we may have to use cash to fulfill our collateral
requirements.
Our
insurance reserves have not been affected by the disruptions in the financial
markets, and we anticipate being able to renew our policies. Any
changes in our counterparty credit risk for our interest rate collar have been
accounted for in the fair value measurement of the derivative (see “Fair Value
Measurements” included in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”). As of June 30, 2009 and
December 31, 2008, the fair value of the interest rate collar derivative,
including accrued interest but excluding any adjustment for nonperformance risk,
was in a net liability position of $25,467,000 and $28,857,000,
respectively. As of June 30, 2009 and December 31, 2008, we were not
required to post and did not post any collateral related to our interest rate
collar. Our agreement with our counterparty for the interest rate
collar contains a provision in which we could be declared in default on our
derivative obligation if repayment of the underlying indebtedness is
accelerated by the lender due to our default on the indebtedness. The
termination value for such a settlement would have been $25,467,000 at June 30,
2009.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity
and Capital Resources (continued)
CURRENT
ECONOMIC CHALLENGES AND POTENTIAL IMPACTS OF MARKET CONDITIONS
(continued)
We
believe that expected cash flow from operations, planned borrowing capacity,
short-term investments and restricted cash balances are adequate to fund debt
service requirements, operating lease obligations, capital expenditures and
working capital obligations for the next twelve months. However,
our ability to continue to meet these requirements will depend partially on our
ability to achieve anticipated levels of revenue and cash flow and to manage
costs. If our cash flow and capital resources are insufficient to
fund our debt service obligations and operating lease obligations, we may be
forced to reduce or delay capital expenditures, or to sell assets, seek
additional capital or restructure or refinance our indebtedness, including the
senior notes. These alternative measures may not be successful and
may not permit us to meet our scheduled debt service obligations. In the absence
of sufficient operating results and resources, we could face a substantial
liquidity shortfall and might be required to dispose of material assets or
operations, or take other actions, to meet our debt service and other
obligations. Our senior secured credit facilities and the indenture governing
the senior notes restrict our ability to dispose of assets and use the proceeds
from the disposition. We may not be able to consummate those dispositions or to
obtain the proceeds that we could otherwise realize from such dispositions and
any such proceeds that are realized may not be adequate to meet any debt service
obligations then due. The failure to meet our debt service
obligations or the failure to remain in compliance with the financial covenants
under our senior secured credit facilities, as described below, would constitute
an event of default under those facilities and the lenders could elect to
declare all amounts outstanding under the senior secured credit facilities to be
immediately due and payable and terminate all commitments to extend further
credit. See “Risk Factors” included in our Annual Report on Form 10-K
for the year ended December 31, 2008 (the “2008 10-K”).
Our
senior secured credit facilities require us to comply with certain financial
covenants, including a quarterly maximum total leverage ratio test, and, subject
to our exceeding a minimum rent-adjusted leverage level, an annual minimum free
cash flow test. At June 30, 2009, we were in compliance with our
covenants. However, our continued compliance with these covenants
will depend on our future levels of cash flow, which will be affected by our
ability to successfully reduce our costs, implement efficiency programs and
continue to improve our working capital management. If, as a
result of the economic challenges described above or otherwise, our revenue and
resulting cash flow decline to levels that cannot be offset by reductions in
costs, efficiency programs and improvements in working capital management, we
may not remain in compliance with the leverage ratio and free cash flow
covenants in our senior secured credit facilities agreement. In the
event of this occurrence, we intend to take such actions available to us as we
determine to be appropriate at such time, which may include, but are not limited
to, engaging in a permitted equity issuance, seeking a waiver from our lenders,
amending the terms of such facilities, including the covenants described above,
or refinancing all or a portion of our senior secured credit facilities under
modified terms. There can be no assurance that we will be able to
effect any such actions or terms acceptable to us or at all or that such actions
will be successful in maintaining our covenant compliance.
CAPITAL
EXPENDITURES
Capital
expenditures totaled approximately $32,641,000 and $60,232,000 for the six
months ended June 30, 2009 and 2008, respectively. We estimate that our
capital expenditures will total approximately $60,000,000 to $70,000,000 in both
2009 and 2010. However, the amount of actual capital expenditures may be
affected by general economic, financial, competitive, legislative and regulatory
factors, among other things, including restrictions imposed by our borrowing
arrangements. We expect to continue to review the level of capital expenditures
throughout the remainder of 2009 and in 2010.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity
and Capital Resources (continued)
SUMMARY
OF CASH FLOWS
The
following table presents a summary of our cash flows used in operating,
investing and financing activities for the periods indicated (in
thousands):
|
|
SIX
MONTHS ENDED
|
|
|
|
JUNE
30,
|
|
|
|
2009
|
|
|
2008
|
|
Net
cash used in operating activities
|
|
$ |
(40,095 |
) |
|
$ |
(22,831 |
) |
Net
cash used in investing activities
|
|
|
(27,332 |
) |
|
|
(49,069 |
) |
Net
cash used in financing activities
|
|
|
(90,525 |
) |
|
|
(19,234 |
) |
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(1,137 |
) |
|
|
- |
|
Net
decrease in cash and cash equivalents
|
|
$ |
(159,089 |
) |
|
$ |
(91,134 |
) |
Operating
activities
Net cash
used in operating activities for the six months ended June 30, 2009 was
$40,095,000 compared to $22,831,000 for the same period in 2008. The
increase in cash used in operating activities was primarily attributable to (i)
an increase in payments made on accounts payable, (ii) an increase in gift card
redemptions and (iii) a change in the timing of advertising payments between
periods and is partially offset by (i) a decrease in inventory and (ii) a change
in the timing of insurance payments during the first six months of 2009 as
compared to the first six months of 2008.
Investing
activities
Net cash
used in investing activities for the six months ended June 30, 2009 was
$27,332,000 compared to $49,069,000 for the same period in 2008. Net cash used
in investing activities for the six months ended June 30, 2009 was primarily
attributable to capital expenditures of $32,641,000. Net cash used in
investing activities for this period was partially offset by the $3,086,000 net
difference between the proceeds from the sale and purchases of Company-owned
life insurance. Net cash used in investing activities for the six months
ended June 30, 2008 was primarily attributable to capital expenditures of
$60,232,000 and was partially offset by $9,753,000 of proceeds from the sale of
property, fixtures and equipment.
Financing
activities
Net cash
used in financing activities for the six months ended June 30, 2009 was
$90,525,000 compared to $19,234,000 for the same period in 2008. Net cash
used in financing activities during the six months ended June 30, 2009 was
primarily attributable to (i) $75,967,000 of cash paid for the extinguishment of
a portion of our senior notes and related fees, (ii) $33,283,000 of cash paid
for the purchase of the note related to our guaranteed debt for T-Bird and (iii)
repayments of long-term debt of $23,851,000. Net cash used in financing
activities was partially offset by a $47,000,000 contribution from OSI HoldCo,
our direct owner, to partially fund our extinguishment of a portion of our
senior notes. Net cash used in financing activities for the six months
ended June 30, 2008 was primarily attributable to repayments of long-term debt
of $8,790,000 and the $6,244,000 net difference between the net payment and
receipt of partner deposit and accrued buyout contributions.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity
and Capital Resources (continued)
TRANSACTIONS
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 (our “Founders”) and certain members of our management. In connection
with the Merger, OSI Restaurant Partners, Inc. converted into a Delaware limited
liability company named OSI Restaurant Partners, LLC.
Our
non-core concepts include Roy’s and Cheeseburger in Paradise. Our
long-range plan is to exit our Roy’s concept, but we do not have an established
timeframe within which this will occur. In May 2009, we executed a
letter of intent to sell our Cheeseburger in Paradise concept for $2,000,000 to
an entity to be formed and controlled by the president of the
concept. Based on the proposed terms as outlined in the letter of
intent, including our financing of the proposed transaction, we determined that
our Cheeseburger in Paradise concept does not meet the assets held for sale
criteria defined in SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” (“SFAS No. 144”). In addition, we recorded a
$45,962,000 impairment charge in the line item “Provision for impaired assets
and restaurant closings” in our Consolidated Statement of Operations for the
three months ended June 30, 2009 in order to reduce the carrying value of this
concept’s assets to their estimated fair market value.
CREDIT
FACILITIES AND OTHER INDEBTEDNESS
On June
14, 2007, in connection with the Merger, we 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, we have 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, 2009 and December 31, 2008). The Eurocurrency Rate option is the
30, 60, 90 or 180-day Eurocurrency Rate (“Eurocurrency Rate”) (ranging from
0.31% to 1.11% and from 0.44% to 1.75% at June 30, 2009 and December 31, 2008,
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 our Moody’s Applicable Corporate Rating then most recently published
is B1 or higher (the rating was Caa1 at June 30, 2009 and December 31,
2008).
We will
be required to prepay outstanding term loans, subject to certain exceptions,
with:
§
|
50%
of our “annual excess cash flow” (with step-downs to 25% and 0% based upon
our rent-adjusted leverage ratio), as defined in the credit agreement and
subject to certain exceptions;
|
§
|
100%
of our “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 our
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
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity
and Capital Resources (continued)
CREDIT
FACILITIES AND OTHER INDEBTEDNESS (continued)
Additionally,
we will, on an annual basis, be required 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 our
“annual true cash flow,” as defined in the credit agreement. In
accordance with these requirements, in April 2009, we repaid our pre-funded
revolving credit facility outstanding loan balance.
Our
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 $1,178,450,000 and $1,185,000,000 at
June 30, 2009 and December 31, 2008, respectively. We have classified
$75,000,000 of our term loans as current at June 30, 2009 due to our prepayment
requirements.
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. At June 30, 2009 and December 31, 2008, the
outstanding balance was $50,000,000. In addition to outstanding
borrowings at June 30, 2009 and December 31, 2008, $70,770,000 and $63,300,000,
respectively, of the credit facility was not available for borrowing as (i)
$37,540,000 of the credit facility was committed for the issuance of letters of
credit as required by insurance companies that underwrite our workers’
compensation insurance and also, where required, for construction of new
restaurants, (ii) $24,500,000 of the credit facility was committed for the
issuance of a letter of credit for our guarantee of an uncollateralized line of
credit for our joint venture partner, RY-8, in the development of Roy's
restaurants, (iii) $6,000,000 of the credit facility at June 30, 2009 was
committed for the issuance of a letter of credit to the insurance company that
underwrites our bonds for liquor licenses, utilities, liens and construction and
(iv) $2,730,000 and $1,260,000, respectively, of the credit facility was
committed for the issuance of other letters of credit. We may have to
extend additional letters of credit in the future. As of the filing date of this
report, we have total outstanding letters of credit of $70,770,000, which is
$4,230,000 below the maximum of $75,000,000 of letters of credit permitted to be
issued under our 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 once we fully utilize
$100,000,000 of restricted cash that was funded on the closing date of the
Merger. At June 30, 2009 and December 31, 2008, we had fully utilized
all of our restricted cash for capital expenditures, and at December 31, 2008,
we had borrowed $12,000,000 from our pre-funded revolving credit
facility. This borrowing was recorded in “Current portion of
long-term debt” in our Consolidated Balance Sheet at December 31, 2008, as we
were required to repay this outstanding loan in April 2009 using our “annual
true cash flow,” as defined in the credit agreement. At June 30,
2009, no draws were outstanding on the pre-funded revolving credit
facility. This facility matures June 14, 2013. At each rate
adjustment, we have 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 our Moody’s Applicable Corporate Rating then most recently published
is B1 or higher. Subsequent to the end of the second quarter of 2009,
we drew $7,700,000 from our pre-funded revolving credit
facility.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity
and Capital Resources (continued)
CREDIT
FACILITIES AND OTHER INDEBTEDNESS (continued)
Our
senior secured credit facilities require us to comply with certain financial
covenants, including a quarterly Total Leverage Ratio (“TLR”) test and an annual
Minimum Free Cash Flow (“MFCF”) test. The TLR is the ratio of Consolidated Total
Debt to Consolidated EBITDA (earnings before interest, taxes, depreciation
and amortization as defined in the senior secured credit facilities) and may not
exceed 6.00 to 1.00. On an annual basis, if the Rent Adjusted
Leverage Ratio is greater than or equal to 5.25 to 1.00, our MFCF cannot be less
than $75,000,000. MFCF is calculated as Consolidated EBITDA plus
decreases in Consolidated Working Capital less Consolidated Interest Expense,
Capital Expenditures (except for that funded by our senior secured pre-funded
revolving credit facility), increases in Consolidated Working Capital and cash
paid for taxes. (All of the above capitalized terms are as defined in
the credit agreement). Our senior secured credit facilities agreement also
includes negative covenants that, subject to significant exceptions, limit our
ability and the ability of our restricted subsidiaries to: incur liens, make
investments and loans, make capital expenditures (as described below), incur
indebtedness or guarantees, engage in mergers, acquisitions and assets sales,
declare dividends, make payments or redeem or repurchase equity interests, alter
our business, engage in certain transactions with affiliates, enter into
agreements limiting subsidiary distributions and prepay, redeem or purchase
certain indebtedness. Our senior secured credit facilities contain
customary representations and warranties, affirmative covenants and events of
default. At June 30, 2009, we were in compliance with our debt
covenants (see “Current Economic Challenges and Potential Impacts of Market
Conditions” included in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”).
Our
capital expenditures are limited by the credit agreement. Our annual
capital expenditure limits range from $200,000,000 to $250,000,000 with various
carry-forward and carry-back allowances. Our annual expenditure
limits may increase after an acquisition. However, if (i) the Rent
Adjusted Leverage Ratio at the end of a fiscal year is greater than 5.25 to
1.00, (ii) the “annual true cash flows” are insufficient to repay fully our
pre-funded revolving credit facility and (iii) the capital expenditure account
has a zero balance, our capital expenditures will be limited to $100,000,000 for
the succeeding fiscal year. This limitation will remain until there
are no pre-funded revolving credit facility loans outstanding and the amount on
deposit in the capital expenditures account is greater than zero or until the
Rent Adjusted Leverage Ratio is less than 5.25 to 1.00.
The
obligations under our senior secured credit facilities are guaranteed by each of
our current and future domestic 100% owned restricted subsidiaries in our
Outback Steakhouse, Carrabba’s Italian Grill and Cheeseburger in Paradise
concepts and certain non-restaurant subsidiaries (the “Guarantors”) and by OSI
HoldCo, our direct owner and an indirect, wholly-owned subsidiary of
our Ultimate Parent. Subject to the conditions described below, the
obligations are secured by a perfected security interest in substantially
all of our assets and assets of the Guarantors and OSI HoldCo, in each case, now
owned or later acquired, including a pledge of all of our capital stock, the
capital stock of substantially all of our domestic wholly-owned subsidiaries and
65% of the capital stock of certain of our material foreign subsidiaries that
are directly owned by us, OSI HoldCo, or a Guarantor. Also, we are
required to provide additional guarantees of the senior secured credit
facilities in the future from other domestic wholly-owned restricted
subsidiaries if the consolidated EBITDA (earnings before interest, taxes,
depreciation and amortization as defined in the senior secured credit
facilities) attributable to our non-guarantor domestic wholly-owned restricted
subsidiaries as a group exceeds 10% of our consolidated EBITDA as determined on
a Company-wide basis. If this occurs, guarantees would be required
from additional domestic wholly-owned restricted subsidiaries in such number
that would be sufficient to lower the aggregate consolidated EBITDA of the
non-guarantor domestic wholly-owned restricted subsidiaries as a group to an
amount not in excess of 10% of our Company-wide consolidated
EBITDA.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity
and Capital Resources (continued)
CREDIT
FACILITIES AND OTHER INDEBTEDNESS (continued)
On June
14, 2007, we issued senior notes in an original aggregate principal amount of
$550,000,000 under an indenture among us, as issuer, OSI Co-Issuer, Inc., as
co-issuer (“Co-Issuer”), Wells Fargo Bank, National Association, as trustee, and
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
senior notes are guaranteed on a senior unsecured basis by each restricted
subsidiary that guarantees the senior secured credit facility. The
senior notes are general, unsecured senior obligations of us, Co-Issuer and the
Guarantors and are equal in right of payment to all existing and future senior
indebtedness, including the senior secured credit facility. The
senior notes are effectively subordinated to all of our, Co-Issuer’s and the
Guarantors’ secured indebtedness, including the senior secured credit facility,
to the extent of the value of the assets securing such
indebtedness. The senior notes are senior in right of payment to all
of our, Co-Issuer’s and the Guarantors’ existing and future subordinated
indebtedness.
The
indenture governing the senior notes limits, under certain circumstances, our
ability and the ability of Co-Issuer and our restricted subsidiaries to: incur
liens, make investments and loans, incur indebtedness or guarantees, engage in
mergers, acquisitions and assets sales, declare dividends, make payments or
redeem or repurchase equity interests, alter our business, engage in certain
transactions with affiliates, enter into agreements limiting subsidiary
distributions and prepay, redeem or purchase certain indebtedness.
In
accordance with the terms of the senior notes and the senior secured credit
facility, our restricted subsidiaries are also subject to restrictive
covenants. Under certain circumstances, we are permitted to designate
subsidiaries as unrestricted subsidiaries, which would cause them not to be
subject to the restrictive covenants of the indenture or the credit
agreement. As of December 31, 2008, all of our consolidated subsidiaries
were restricted subsidiaries. In April 2009, one of our restricted
subsidiaries that operated six restaurants in Canada was designated as an
unrestricted subsidiary.
Additional
senior notes may be issued under the indenture from time to time, subject to
certain limitations. Initial and additional senior notes issued under
the indenture will be treated as a single class for all purposes under the
indenture, including waivers, amendments, redemptions and offers to
purchase.
We filed
a Registration Statement on Form S-4 (which became effective June 2, 2008) for
an exchange offer relating to our senior notes. As a result, we are
required to file reports under Section 15(d) of the Securities Exchange Act of
1934, as amended.
We may
redeem some or all of the senior notes on and after June 15, 2011 at the
redemption prices (expressed as percentages of principal amount of the senior
notes to be redeemed) listed below, plus accrued and unpaid interest thereon and
additional interest, if any, to the applicable redemption date.
Year
|
|
Percentage
|
2011
|
|
105.0%
|
2012
|
|
102.5%
|
2013
and thereafter
|
|
100.0%
|
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity
and Capital Resources (continued)
CREDIT
FACILITIES AND OTHER INDEBTEDNESS (continued)
We also
may redeem all or part of the senior notes at any time prior to June 15, 2011,
at a redemption price equal to 100% of the principal amount of the senior notes
redeemed plus the applicable premium as of, and accrued and unpaid interest and
additional interest, if any, to the date of redemption.
Upon a
change in control as defined in the indenture, we would be required to make an
offer to purchase all of the senior notes at a price in cash equal to 101% of
the aggregate principal amount thereof plus accrued interest and unpaid interest
and additional interest, if any, to the date of purchase. If we were
required to make this offer, we may not have sufficient financial resources to
purchase all of the senior notes tendered and may be limited by our senior
secured facilities from doing so. See “Risk Factors” in our 2008 10-K
for additional information.
We may
from time to time seek to retire or purchase our outstanding debt through cash
purchases in open market purchases, privately negotiated transactions or
otherwise. Such repurchases or exchanges, if any, will depend on
prevailing market conditions, our liquidity requirements, contractual
restrictions and other factors. The amounts involved may be
material.
Between
November 18, 2008 and November 21, 2008, we purchased on the open market
and extinguished $61,780,000 in aggregate principal amount of our senior
notes for $11,711,000, representing an average of 19.0% of face value, and
$2,729,000 of accrued interest.
On
February 18, 2009, we commenced a cash tender offer to purchase the maximum
aggregate principal amount of our senior notes that we could purchase for
$73,000,000, excluding accrued interest. The tender offer expired on
March 20, 2009, and we accepted for purchase $240,145,000 in principal amount of
our senior notes. We paid $72,998,000 for the senior notes accepted
for purchase and $6,671,000 of accrued interest. We recorded a gain
from the extinguishment of our debt of $158,061,000 in the line item “Gain on
extinguishment of debt” in our Consolidated Statement of Operations for the six
months ended June 30, 2009. The gain was reduced by $6,117,000 for
the pro rata portion of unamortized deferred financing fees that related to
the extinguished senior notes and by $2,969,000 of fees related to the tender
offer. The principal balance of senior notes outstanding at June 30, 2009
and December 31, 2008 was $248,075,000 and $488,220,000, respectively. The
purpose of the tender offer was to reduce the principal amount of debt
outstanding, reduce the related debt service obligations and improve our
financial covenant position under our senior secured credit
facilities. Annual interest expense will be reduced by approximately
$30,000,000 as a result of the extinguishment of our senior notes through our
open market purchases and our tender offer.
We funded
the tender offer with (i) cash on hand and (ii) proceeds from a contribution
(the “Contribution”) of $47,000,000 from our direct owner, OSI
HoldCo. The Contribution was funded through distributions to OSI
HoldCo by one of its subsidiaries that owns (indirectly through subsidiaries)
approximately 340 restaurant properties that are sub-leased to us.
In June
2009, we renewed a one-year line of credit with a maximum borrowing amount of
10,000,000,000 Korean won, or $7,784,000 at June 30, 2009 (12,000,000,000 Korean
won, or $9,543,000 at December 31, 2008), to finance development of
our restaurants in South Korea. The line bears interest at 2.51% and
1.50% over the Korean Stock Exchange three-month certificate of deposit rate
(4.92% and 6.94% at June 30, 2009 and December 31,
2008, respectively). The line matures June 14, 2010. There were
no draws outstanding on this line of credit as of June 30, 2009 and December 31,
2008.
In June
2009, we renewed a one-year overdraft line of credit with a maximum borrowing
amount of 5,000,000,000 Korean won ($3,892,000 and $3,976,000 at June 30,
2009 and December 31, 2008, respectively). The line bears interest at
2.75% and 1.15% over the Korean Stock Exchange three-month certificate of
deposit rate (5.16% and 6.59% at June 30, 2009 and December 31, 2008,
respectively) and matures June 14, 2010. There were no draws outstanding
on this line of credit as of June 30, 2009 and December 31,
2008.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity
and Capital Resources (continued)
DEBT
GUARANTEES
We were
the guarantor of an uncollateralized line of credit that matured December 31,
2008 and permitted borrowing of up to $35,000,000 by a limited liability
company, T-Bird, which is owned by the principal of each of our California
franchisees of Outback Steakhouse restaurants. The line of credit
bore interest at rates ranging from 50 to 90 basis points over LIBOR. We
were required to consolidate T-Bird effective January 1, 2004 upon adoption of
FIN 46R. At December 31, 2008, the outstanding balance on the line of
credit was approximately $33,283,000 and was included in our Consolidated
Balance Sheet. 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. According to the terms of the line of credit, T-Bird
was able to borrow, repay, re-borrow or prepay advances at any time before the
termination date of the agreement.
On
January 12, 2009, we 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, we terminated our 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, we 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, we have the right to
call into default all of our 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. Therefore, on February 19, 2009, we 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 against us
and certain of our officers and affiliates. The suit claims, among
other things, that we made various misrepresentations and breached certain oral
promises allegedly made by us and certain of our officers to T-Bird and its
affiliates that we would acquire the restaurants owned by T-Bird and its
affiliates and until that time we would maintain financing for the restaurants
that would be nonrecourse to T-Bird and its affiliates. The complaint
seeks damages in excess of $100,000,000, exemplary or punitive damages, and
other remedies. We and the other defendants believe the suit is
without merit, and we intend to defend the suit vigorously.
As a
result of the lawsuits described above, we made certain assumptions and
estimates in our consolidation of T-Bird at and for the three and six months
ended June 30, 2009, as T-Bird did not provide us with financial statements for
the first and second quarters of 2009. We are not aware of any events
or transactions for T-Bird that are not reflected in our consolidated financial
statements at and for the three and six months ended June 30, 2009 that would
materially affect these consolidated financial statements.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity
and Capital Resources (continued)
DEBT
GUARANTEES (continued)
We are
the guarantor of an uncollateralized line of credit that permits borrowing of up
to a maximum of $24,500,000 for our joint venture partner, RY-8, 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, 2009 and December 31, 2008, 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 us 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, 2009 and December 31,
2008, $24,500,000 of our $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,
we would, as guarantor, be liable for this balance. However, in conjunction with
the credit agreement, RY-8 and RHI have entered into an Indemnity Agreement and
a Pledge of Interest and Security Agreement in our favor. These agreements
provide that if we are required to perform our obligation as guarantor pursuant
to the credit agreement, then RY-8 and RHI will indemnify us against all losses,
claims, damages or liabilities which arise out of or are based upon our
guarantee of the credit agreement. RY-8’s and RHI’s obligations under these
agreements are collateralized by a first priority lien upon and a continuing
security interest in any and all of RY-8’s interests in the joint
venture.
During
the three months ended March 31, 2009, we recorded a loss related to this
guarantee of $24,500,000 in our Consolidated Statement of Operations based on
our determination that a long-term contingent obligation was probable under SFAS
No. 5, “Accounting for Contingencies.” As a result of the amendment
of the line of credit and extension of our guarantee obligation on April 1,
2009, we reconsidered our relationship with RY-8 in accordance with FIN 46R
during the second quarter of 2009. We determined that RY-8 is a
variable interest entity for which we are the primary
beneficiary. Therefore, we began consolidating RY-8 effective April
1, 2009 and reclassified the $24,500,000 contingent obligation to guaranteed
debt, which is included in the line item “Guaranteed debt of consolidated joint
venture partner” in our Consolidated Balance Sheet at June 30,
2009. No other assets or liabilities have been recorded as a result
of consolidating RY-8.
Pursuant
to our joint venture agreement for the development of Roy’s restaurants, RY-8,
our joint venture partner, has the right to require us to purchase up to 25% of
RY-8’s interests in the joint venture at any time after June 17, 2004 and up to
another 25% (total 50%) of its interest in the joint venture at any time after
June 17, 2009. Our purchase price would be equal to the fair market
value of the joint venture as of the date that RY-8 exercised its put option
multiplied by the percentage purchased.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity
and Capital Resources (continued)
FAIR
VALUE MEASUREMENTS
SFAS No.
157, “Fair Value Measurements” (“SFAS No. 157”), emphasizes that fair value is a
market-based measurement, not an entity-specific measurement. As
defined in SFAS No. 157, fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (exit price). To measure fair value,
we incorporate assumptions that market participants would use in pricing the
asset or liability, and utilize market data to the maximum extent possible. In
accordance with SFAS No. 157, measurement of fair value incorporates
nonperformance risk (i.e., the risk that an obligation will not be fulfilled).
In measuring fair value, we reflect the impact of our own credit risk on our
liabilities, as well as any collateral. We also consider the credit standing of
our counterparties in measuring the fair value of our assets.
We are
highly leveraged and exposed to interest rate risk to the extent of our
variable-rate debt. In September 2007, we entered into an interest
rate collar with a notional amount of $1,000,000,000 as a method to limit the
variability of our $1,310,000,000 variable-rate term loan. 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 our term loan. We paid
$4,480,000 and $8,314,000 of interest for the three and six months ended June
30, 2009, respectively, as a result of the quarterly expiration of the collar’s
option pairs. We record marked-to-market changes in the fair value of
the derivative instrument in earnings in the period of change in accordance with
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,”
(“SFAS No. 133”). We included $23,749,000 and $24,285,000 in the line
item “Accrued expenses” in our Consolidated Balance Sheets as of June 30, 2009
and December 31, 2008, respectively, and included $151,000 of net interest
expense and $536,000 of net interest income for the three and six months ended
June 30, 2009, respectively, and $12,459,000 and $1,611,000 of net interest
income for the three and six months ended June 30, 2008, respectively, in the
line item “Interest expense” in our Consolidated Statement of Operations for the
mark-to-market effects of this derivative instrument. A SFAS No. 157
credit valuation adjustment of $1,652,000 and $4,529,000 decreased the liability
recorded as of June 30, 2009 and December 31, 2008, respectively.
The valuation of our
interest rate collar is based on a discounted cash flow analysis of 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 and implied
volatilities.
Although
we have determined that the majority of the inputs used to value our 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 us and our counterparties. However, as of June 30, 2009,
we have assessed the significance of the impact of the credit valuation
adjustments on the overall valuation of our interest rate collar derivative
positions and have determined that the credit valuation adjustments are not
significant to the overall valuation of this derivative. As a result,
we have determined that our interest rate collar derivative valuations in their
entirety are classified in Level 2 of the fair value hierarchy.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity
and Capital Resources (continued)
FAIR
VALUE MEASUREMENTS (continued)
Our
restaurants are dependent upon energy to operate and are affected by changes in
energy prices, including natural gas. We use derivative instruments
to mitigate some of our overall exposure to material increases in natural gas
prices. The valuation of our natural gas derivatives is based on
quoted exchange prices and is classified in Level 2 of the fair value
hierarchy.
Our third
party distributor charges us for the diesel fuel used to deliver inventory to
our restaurants. We enter into forward contracts to procure
certain amounts of this diesel fuel at set prices in order to mitigate our
exposure to unpredictable fuel prices. The effects of this derivative
instrument were immaterial to our financial statements for all periods
presented.
We invest our excess cash in money
market funds classified as Cash and cash equivalents or restricted cash
in our Consolidated Balance Sheet at June 30, 2009 at a net value of 1:1 for
each dollar invested. The fair value of the majority of the
investment in the money market fund is determined by using quotes for similar
assets in an active market. As a result, we have determined that the
majority of the inputs used to value this investment fall within Level 2 of the
fair value hierarchy. As of June 30, 2009, $30,968,000 of our money
market investments were guaranteed by the federal government under the Treasury
Temporary Guarantee Program for Money Market Funds. This program
expires on September 18, 2009.
In
accordance with SFAS No. 144, we recorded $69,716,000 and $74,846,000 of
impairment charges as a result of the fair value measurement on a nonrecurring
basis of our long-lived assets held and used during the three and six months
ended June 30, 2009, respectively. Due to the pending sale of our
Cheeseburger in Paradise concept, we recorded a $45,962,000 impairment charge
(included in the totals above) during the second quarter of 2009 in order to
reduce the carrying value of this concept’s long-lived assets to their estimated
fair market value. We 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. We used a discounted cash flow model to
estimate the fair value of the remaining impaired long-lived assets held and
used 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, we have
determined that the majority of the inputs used to value our long-lived assets
held and used are unobservable inputs that fall within Level 3 of the fair value
hierarchy.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity
and Capital Resources (continued)
FAIR
VALUE MEASUREMENTS (continued)
In accordance with SFAS No.
142 and as a
result of our annual
impairment test in the second quarter, we 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. We
test both our goodwill and our 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 our assumptions could materially impact our fair value estimates. Assumptions
critical to our 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, we have determined that
the majority of the inputs used to value our goodwill and
indefinite-lived intangible assets are unobservable
inputs that fall within Level 3 of the fair value
hierarchy.
The
following table presents the range of assumptions we used to derive our fair
value estimates among our reporting units during the impairment test conducted
in the second quarter of 2009, and the additional impairment charges for
goodwill and trade names that would result from a hypothetical 0.5% change in
three key fair value assumptions.
|
|
|
|
|
|
|
|
ADDITIONAL
IMPAIRMENT CHARGES
|
|
|
|
|
|
|
|
|
|
ESTIMATED
AS A RESULT OF
|
|
|
|
|
|
|
|
|
|
A
HYPOTHETICAL
|
|
|
|
ASSUMPTIONS
|
|
|
0.5%
CHANGE IN ASSUMPTIONS
|
|
|
|
GOODWILL
|
|
|
TRADE
NAMES
|
|
|
GOODWILL
|
|
|
TRADE
NAMES
|
|
Weighted-average
cost of capital
|
|
|
12.5%
- 15.0 |
% |
|
|
13.0%
- 14.0 |
% |
|
$ |
8,000,000 |
|
|
$ |
21,000,000 |
|
Long-term
growth rates
|
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
19,000,000 |
|
|
|
14,000,000 |
|
Annual
revenue growth rates
|
|
|
(6.9)%
- 12.0 |
% |
|
|
(3.9)%
- 5.0 |
% |
|
|
1,000,000 |
|
|
|
19,000,000 |
|
At June
30, 2009, remaining goodwill by reporting unit is as follows (in
thousands):
|
|
JUNE
30, 2009
|
|
Outback
Steakhouse (domestic)
|
|
$ |
319,108 |
|
Outback
Steakhouse (international)
|
|
|
59,740 |
|
Carrabba's
Italian Grill
|
|
|
20,354 |
|
Bonefish
Grill
|
|
|
49,520 |
|
|
|
$ |
448,722 |
|
Continued
sales declines at our restaurants beyond our current projections, further
deterioration in overall economic conditions and significant challenges in the
restaurant industry may result in future impairment charges. It is
possible that changes in circumstances or changes in our judgments, assumptions
and estimates, could result in an impairment charge of a portion or all of our
goodwill or other intangible assets.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity
and Capital Resources (continued)
STOCK-BASED
AND DEFERRED COMPENSATION PLANS
Under our
general manager partner program, upon completion of each five-year term of
employment, our general manager and chef partners are eligible to participate in
a deferred compensation program (the Partner Equity Plan or “PEP”). We will
require the use of capital to fund the PEP as each general manager and chef
partner earns a contribution and currently estimate funding requirements ranging
from $15,000,000 to $20,000,000 in each of the next two years of the plan.
Future funding requirements may vary significantly depending on timing of
partner contracts, forfeiture rates and numbers of partner participants and may
differ materially from estimates.
Upon the
closing of the Merger, certain stock options that had been granted to managing
partners and chef partners under a pre-merger managing partner stock plan (the
“MP Stock Plan”) upon completion of a previous employment contract and at the
beginning of an employment agreement were converted into the right to receive
cash in the form of a “Supplemental PEP” contribution and a “Supplemental Cash”
payment, respectively.
Upon the
closing of the Merger, all outstanding, unvested partner employment grants of
restricted stock under the MP Stock Plan were converted into the right to
receive cash on a deferred basis. Additionally, certain members of management
were given the option to either convert some or all of their restricted stock
granted under the pre-merger stock plan in the same manner as managing partners
or convert some or all of it into restricted stock of KHI. Grants of
restricted stock under the pre-merger stock plan that converted into the right
to receive cash are referred to as “Restricted Stock
Contributions.”
As of
June 30, 2009, our total liability with respect to obligations under the PEP,
Supplemental PEP, Supplemental Cash and Restricted Stock Contributions was
approximately $85,820,000, of which approximately $12,491,000 and $73,329,000
was included in the line items “Accrued expenses” and “Other long-term
liabilities,” respectively, in our Consolidated Balance Sheet. As of
December 31, 2008, our total liability with respect to obligations under the
PEP, Supplemental PEP, Supplemental Cash and Restricted Stock Contributions was
approximately $83,858,000, of which approximately $13,302,000 and $70,556,000
was included in the line items “Accrued expenses” and “Other long-term
liabilities,” respectively, in our Consolidated Balance
Sheet. Partners and management may allocate the contributions into
benchmark investment funds, and these amounts due to participants will fluctuate
according to the performance of their allocated investments and may differ
materially from the initial contribution and current obligation.
As of
June 30, 2009 and December 31, 2008, we had approximately $57,730,000 and
$59,086,000, respectively, in various corporate owned life insurance policies
and another $971,000 and $2,579,000, respectively, of restricted cash, both of
which are held within an irrevocable grantor or “rabbi” trust account for
settlement of our obligations under the PEP, Supplemental PEP and Restricted
Stock Contributions. We are the sole owner of any assets within the rabbi trust
and participants are considered our general creditors with respect to assets
within the rabbi trust.
Certain
partners participating in the PEP were to receive common stock (“Partner
Shares”) upon completion of their employment contract. Upon closing
of the Merger, these partners now receive a deferred payment of cash instead of
common stock upon completion of their current employment
term. Partners will not receive the deferred cash payment if they
resign or are terminated for cause prior to completing their current employment
terms. There will not be any future earnings or losses on these
amounts prior to payment to the partners. The amount accrued for the
Partner Shares obligation is $5,277,000 and $4,587,000 as of June 30, 2009 and
December 31, 2008, respectively, and is included in the line item “Other
long-term liabilities” in our Consolidated Balance Sheets.
As of
June 30, 2009 and December 31, 2008, there was approximately $33,163,000 and
$28,501,000, respectively, of unfunded obligations related to the aforementioned
contribution liabilities that may require the use of cash resources in the
future.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity
and Capital Resources (continued)
STOCK-BASED
AND DEFERRED COMPENSATION PLANS (continued)
In
November 2008, we announced a plan to accelerate the distribution of PEP and
Supplemental PEP benefits to certain active participants. Under the
revised PEP, active general managers and chef partners who complete an
employment contract on or after January 1, 2009 and who remain employed with us
until their PEP accounts are fully distributed will receive their PEP
distributions according to the following schedule:
·
|
One
year through four years after completion of employment contract – each
year, lesser of $10,000 or remaining account
balance;
|
·
|
Five
years through six years after completion of employment contract – each
year, lesser of $20,000 or remaining account balance;
and
|
·
|
Seven
years after completion of employment contract, participants will receive
their entire remaining account balance.
|
General
managers and chef partners who complete an employment contract on or after
January 1, 2009 and who do not remain employed with us until their PEP accounts
are fully distributed will receive their entire PEP account balance in the
seventh year after completion of their employment contract. Their PEP
account balance will be determined as of the date of termination of employment,
subject to any subsequent increases or decreases based on the performance of
their investment elections.
DIVIDENDS
Payment
of dividends is prohibited under our credit agreements, except for certain
limited circumstances.
Recently
Issued Financial Accounting Standards
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”), which defines fair value, establishes a framework for measuring fair
value and expands the related disclosure requirements. The provisions
of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007
for financial assets and liabilities or for nonfinancial assets and liabilities
that are re-measured at least annually. In February 2008, the FASB
issued FASB Staff Position (“FSP”) SFAS No. 157-2, “Effective Date of FASB
Statement No. 157” to defer the effective date for nonfinancial assets and
liabilities that are recognized or disclosed at fair value in the financial
statements on a non-recurring basis until fiscal years beginning after November
15, 2008. Beginning January 1, 2009, we applied SFAS No. 157 to
nonfinancial assets and liabilities that are recognized or disclosed at fair
value on a nonrecurring basis. The adoption of SFAS No. 157 did not
have a material impact on our consolidated financial statements.
In
October 2008, the FASB issued FSP SFAS No. 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of SFAS No. 157 in a market that is not active and provides
guidance for determining the fair value of a financial asset when the market for
that financial asset is not active. This FSP was effective upon
issuance, but it did not impact our consolidated financial
statements. In April 2009, the FASB issued FSP SFAS No. 157-4,
“Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly” (“FSP SFAS No. 157-4”). FSP SFAS No. 157-4 provides
additional guidance on measuring fair value when there has been a significant
decrease in the volume and level of activity for an asset or liability, and for
identifying transactions that are not orderly. The guidance for FSP
SFAS No. 157-4 also emphasizes that the objective of a fair value measurement
will remain in accordance with SFAS No. 157’s provisions, even when there has
been a significant decrease in market activity and regardless of the valuation
technique used. The adoption of FSP SFAS No. 157-4 for the
period ended June 30, 2009 did not have a material impact on our consolidated
financial statements.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Recently
Issued Financial Accounting Standards (continued)
In
December 2007, the FASB issued SFAS No. 141 (Revised), “Business Combinations”
(“SFAS No. 141R”), a revision of SFAS No. 141. SFAS No. 141R retains
the fundamental requirements of SFAS No. 141, but revises certain elements
including: the recognition and fair value measurement as of the acquisition date
of assets acquired and liabilities assumed, the accounting for goodwill and
financial statement disclosures. In April 2009, the FASB issued FSP
SFAS No. 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies” (“FSP SFAS No. 141(R)-1”),
which amends and clarifies the provisions in SFAS No. 141R relating to the
initial recognition and measurement, subsequent measurement and accounting, and
disclosures for assets and liabilities arising from contingencies in business
combinations. The provisions of FSP SFAS No. 141(R)-1 are effective
for contingent assets and contingent liabilities acquired in business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008. The adoption of SFAS No. 141R and FSP SFAS No. 141(R)-1 on
January 1, 2009 did not have an effect on our consolidated financial statements,
as we did not engage in any business combinations during the six months ended
June 30, 2009. SFAS No. 141R and FSP SFAS No. 141(R)-1 will only
impact our accounting should we acquire any businesses in the
future.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – Including an Amendment of ARB No. 51” (“SFAS
No. 160”). SFAS No. 160 modifies the presentation of noncontrolling
interests in the consolidated balance sheet and the consolidated statement of
operations. It requires noncontrolling interests to be clearly
identified, labeled and included separately from the parent’s equity (deficit)
and consolidated net income (loss). The presentation and disclosure
requirements of SFAS No. 160 have been applied retrospectively. Other
than the change in presentation of noncontrolling interests, the adoption of
SFAS No. 160 on January 1, 2009 did not have a material impact on our
consolidated financial statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS No. 161”), an amendment of SFAS No. 133. SFAS No.
161 is intended to enable investors to better understand how derivative
instruments and hedging activities affect the entity’s financial position,
financial performance and cash flows by enhancing disclosures. SFAS
No. 161 requires disclosure of fair values of derivative instruments and their
gains and losses in a tabular format, disclosure of derivative features that are
credit-risk-related to provide information about the entity’s liquidity and
cross-referencing within the footnotes to help financial statement users locate
important information about derivative instruments. The adoption of
SFAS No. 161 on January 1, 2009 did not have a material impact on our
consolidated financial statements.
In April
2008, the FASB issued FSP SFAS No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP SFAS No. 142-3”). FSP SFAS No. 142-3 amends
the factors an entity should consider when developing renewal or extension
assumptions for determining the useful life of recognized intangible assets
under SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP SFAS
No. 142-3 is intended to improve the consistency between the useful life of
recognized intangible assets under SFAS No. 142 and the period of expected cash
flows used to measure the fair value of assets under SFAS No. 141R and other
U.S. GAAP. The adoption of FSP SFAS No. 142-3 on January 1, 2009 did not
have a material impact on our consolidated financial statements.
In
November 2008, the FASB ratified the consensus on EITF Issue No. 08-6, “Equity
Method Investment Accounting Considerations” (“EITF No. 08-6”), which provides
guidance on and clarification of accounting and impairment considerations
involving equity method investments under SFAS No. 141R and SFAS No.
160. EITF No. 08-6 provides guidance on how the equity method
investor should initially measure the equity method investment, account for
impairment charges of the equity method investment and account for a share
issuance by the investee. The adoption of EITF No. 08-6 on January 1,
2009 did not have a material impact on our consolidated financial
statements.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Recently
Issued Financial Accounting Standards (continued)
In April
2009, the FASB issued FSP SFAS No. 107-1 and Accounting Principles Board (“APB”)
Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial
Instruments” (“FSP SFAS No. 107-1 and APB Opinion No. 28-1”). FSP
SFAS No. 107-1 and APB Opinion No. 28-1 amends SFAS No. 107, “Disclosures about
Fair Value of Financial Instruments” and APB Opinion No. 28, “Interim Financial
Reporting,” to require disclosures about fair value of financial instruments for
interim reporting periods. The adoption of FSP SFAS No. 107-1 and APB
Opinion No. 28-1 for the period ended June 30, 2009 did not have a material
impact on our consolidated financial statements.
In
May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No.
165”). SFAS No. 165 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. SFAS
No. 165 requires disclosure of the date through which subsequent events
have been evaluated and whether such date represents the date the financial
statements were issued or were available to be issued. The adoption
of SFAS No. 165 for the period ended June 30, 2009 did not have a material
impact on our consolidated financial statements.
In
June 2009, the FASB issued SFAS No. 167, “Amendments to FASB
Interpretation No. 46R” (“SFAS No. 167”). SFAS No. 167 amends revised FASB
Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46R”)
to require an analysis to determine whether a variable interest gives the entity
a controlling financial interest in a variable interest entity. SFAS No. 167
requires an ongoing reassessment and eliminates the quantitative approach
previously required for determining whether an entity is the primary
beneficiary. SFAS No. 167 is effective for fiscal years beginning after November
15, 2009. We are currently evaluating the impact that SFAS No. 167
will have on our financial statements, as we have variable interest entities
that may be affected by the adoption of SFAS No. 167.
In July
2009, the FASB issued SFAS No. 168, “FASB Accounting Standards
Codification” (“SFAS No. 168”), as the single source of authoritative
nongovernmental U.S. GAAP. All existing accounting standards are
superseded as described in SFAS No. 168. All other accounting literature not
included in the codification is non-authoritative. SFAS No. 168 is effective for
interim and annual periods ending after September 15, 2009. We
do not expect SFAS No. 168 to materially affect our consolidated financial
statements.
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary
Statement
This
Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Exchange Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements represent OSI Restaurant Partners, LLC’s expectations or beliefs
concerning future events, including the following: any statements regarding
future sales, costs and expenses and gross profit percentages, any statements
regarding the continuation of historical trends, any statements regarding the
expected number of future restaurant openings and expected capital expenditures
and any statements regarding the sufficiency of our cash balances and cash
generated from operating and financing activities for future liquidity and
capital resource needs. Without limiting the foregoing, the words “believes,”
“anticipates,” “plans,” “expects,” “should,” “estimates” and similar expressions
are intended to identify forward-looking statements.
Our
actual results could differ materially from those stated or implied in the
forward-looking statements included elsewhere in this report as a result, among
other things, of the following:
(i)
|
|
Our
substantial leverage and significant restrictive covenants in our various
credit facilities could adversely affect our ability to raise additional
capital to fund our operations, limit our ability to make capital
expenditures to invest in new restaurants, limit our ability to react to
changes in the economy or our industry, expose us to interest rate risk to
the extent of our variable-rate debt and prevent us from meeting our
obligations under the senior notes;
|
|
|
|
(ii)
|
|
The
recent disruptions in the financial markets and the state of the economy
may continue to affect our liquidity by adversely impacting numerous items
that include, but are not limited to: consumer confidence and spending
patterns; the availability of credit presently arranged from our revolving
credit facilities; the future cost and availability of credit; interest
rates; foreign currency exchange rates; and the liquidity or operations of
our third-party vendors and other service providers;
|
|
|
|
(iii)
|
|
The
restaurant industry is a highly competitive industry with many
well-established competitors;
|
|
|
|
(iv)
|
|
Our
results can be impacted by changes in consumer tastes and the level of
consumer acceptance of our restaurant concepts (including consumer
tolerance of price increases); local, regional, national and international
economic conditions; the seasonality of our business; demographic trends;
traffic patterns and our ability to effectively respond in a timely manner
to changes in traffic patterns; changes in consumer dietary habits;
employee availability; the cost of advertising and media; government
actions and policies; inflation; interest rates; exchange rates; and
increases in various costs, including construction and real estate
costs;
|
(v)
|
|
Our
results can be affected by consumer reaction to public health issues such
as an outbreak of H1N1 flu (swine flu);
|
|
|
|
(vi)
|
|
Our
results can be affected by consumer perception of food
safety;
|
(vii)
|
|
Our
ability to expand is dependent upon various factors such as the
availability of attractive sites for new restaurants; ability to obtain
appropriate real estate sites at acceptable prices; ability to obtain all
required governmental permits including zoning approvals and liquor
licenses on a timely basis; impact of government moratoriums or approval
processes, which could result in significant delays; ability to obtain all
necessary contractors and subcontractors; union activities such as
picketing and hand billing that could delay construction; the ability to
generate or borrow funds; the ability to negotiate suitable lease terms;
the ability to recruit and train skilled management and restaurant
employees; and the ability to receive the premises from the landlord’s
developer without any delays;
|
OSI
Restaurant Partners, LLC
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary
Statement (continued)
|
|
|
(viii)
|
|
Weather
and acts of God could result in construction delays and also adversely
affect the results of one or more restaurants for an indeterminate amount
of time;
|
(ix)
|
|
Commodities,
including but not limited to, such items as beef, chicken, shrimp, pork,
seafood, dairy, potatoes, onions and energy supplies, are subject to
fluctuation in price and availability and price could increase or decrease
more than we expect;
|
|
|
|
(x)
|
|
Minimum
wage increases could cause a significant increase in our labor costs;
and/or
|
|
|
|
(xi)
|
|
Our
results can be impacted by tax and other legislation and regulation in the
jurisdictions in which we operate and by accounting standards or
pronouncements.
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
We are
exposed to market risk from changes in interest rates on debt, changes in
foreign currency exchange rates and changes in commodity prices. We
have not experienced a material change in market risk from changes in interest
rates on debt, changes in foreign currency exchange rates and changes in
commodity prices since December 31, 2008. See “Quantitative and
Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for
the year ended December 31, 2008 filed with the Securities and Exchange
Commission on March 31, 2009 for further information about market
risk.
Item 4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
We have
established and maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized, and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. We carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of June 30, 2009.
Changes
in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial reporting during our
most recent quarter ended June 30, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II: OTHER INFORMATION
Item
1. Legal Proceedings
We are
subject to legal proceedings, claims and liabilities, such as liquor liability,
sexual harassment and slip and fall cases, which arise in the ordinary course of
business and are generally covered by insurance. In the opinion of management,
the amount of ultimate liability with respect to those actions will not have a
material adverse impact on our financial position or results of operations and
cash flows. In addition, we are subject to the following legal proceedings and
actions, which depending on the outcomes that are uncertain at this time, could
have a material adverse effect on our financial condition.
Outback
Steakhouse of Florida, Inc. and OS Restaurant Services, Inc. are the defendants
in a class action lawsuit brought by the U.S. Equal Employment Opportunity
Commission (EEOC v. Outback Steakhouse of Florida, Inc. and OS Restaurant
Services, Inc., U.S. District Court, District of Colorado, filed September 28,
2006) alleging that they have engaged in a pattern or practice of discrimination
against women on the basis of their gender with respect to hiring and promoting
into management positions as well as discrimination against women in terms and
condition of their employment and seeks damages and injunctive
relief. In addition to the EEOC, two former employees have
successfully intervened as party plaintiffs in the case. On November 3, 2007,
the EEOC’s nationwide claim of gender discrimination was dismissed and the scope
of the suit was limited to the states of Colorado, Wyoming and Montana. However,
we expect the EEOC to pursue claims of gender discrimination against us on a
nationwide basis through other proceedings. Litigation is, by its nature,
uncertain both as to time and expense involved and as to the final outcome of
such matters. While we intend to vigorously defend ourselves in this lawsuit,
protracted litigation or unfavorable resolution of this lawsuit could have a
material adverse effect on our business, results of operations or financial
condition and could damage our reputation with our employees and our
customers.
On
February 21, 2008, a purported class action complaint captioned Ervin, et al. v.
OS Restaurant Services, Inc. was filed in the U.S. District Court, Northern
District of Illinois. This lawsuit alleges violations of state and federal wage
and hour law in connection with tipped employees and overtime compensation and
seeks relief in the form of unspecified back pay and attorney fees. It alleges a
class action under state law and a collective action under federal law. While we
intend to vigorously defend ourselves, it is not possible at this time to
reasonably estimate the possible loss or range of loss, if any.
In March
2008, one of our subsidiaries received a notice of proposed assessment of
employment taxes from the Internal Revenue Service (“IRS”) for calendar years
2004 through 2006. The IRS asserts that certain cash distributions paid to our
general manager partners, chef partners, and area operating partners who hold
partnership interests in limited partnerships with our affiliates should have
been treated as wages and subjected to employment taxes. We believe that we have
complied and continue to comply with the law pertaining to the proper federal
tax treatment of partner distributions. In May 2008, we filed a protest of the
proposed employment tax assessment. Because we are at a preliminary stage of the
administrative process for resolving disputes with the IRS, we cannot, at this
time, reasonably estimate the amount, if any, of additional employment taxes or
other interest, penalties or additions to tax that would ultimately be assessed
at the conclusion of this process. If the IRS examiner’s position were to be
sustained, the additional employment taxes and other amounts that would be
assessed would be material.
On
December 29, 2008, American Restaurants, Inc. (“AR”) filed a Petition with the
United States District Court for the Southern District of Florida, captioned
American Restaurants, Inc. v. Outback Steakhouse International, L.P., seeking
confirmation of a purported November 24, 2008 arbitration award against Outback
Steakhouse International, L.P. (“Outback International”), our indirect
wholly-owned subsidiary, in the amount of $97,997,000, plus interest from August
7, 2006. The award purportedly resolved a dispute involving Outback
International’s alleged wrongful termination in 1998 of a Restaurant Franchise
Agreement (the “Agreement”) entered into in 1996 concerning one restaurant in
Argentina. On February 20, 2009, Outback International filed its
Opposition to the petition to confirm and raised five separate and independent
defenses to confirmation under Article 5 of the Inter-American Convention on
International Commercial Arbitration. On July 28, 2009, the U.S. District
Court for the Southern District of Florida stayed all further proceedings and
closed the case administratively, pending final resolution of Outback
International’s appeal before the Argentine Commercial Court of Appeals
(“Argentine Court of Appeals”) seeking annulment of the purported award.
OSI
Restaurant Partners, LLC
PART
II: OTHER INFORMATION
Item
1. Legal Proceedings (continued)
On
December 9, 2008, in accordance with a procedure provided under Argentine law,
Outback International filed with the arbitrator a motion seeking leave to file
an appeal to nullify the purported award. On February 27, 2009, the
arbitrator denied Outback International’s motion. On March 16, 2009,
Outback International filed a direct appeal with the Argentine Court of Appeals
seeking to annul the purported award. On June 26, 2009, the Argentine
Court of Appeals accepted Outback International’s appeal and expressly suspended
enforcement of the purported award in Argentina pending the outcome of Outback
International’s appeal seeking nullification.
Outback
International believes that the purported arbitration award resulted from a
process that materially violated the terms of the Agreement, and that the
arbitrator who issued the purported award violated Outback International’s
rights to due process. Outback International intends to contest vigorously
the validity and enforceability of the purported arbitration award in the courts
of both the United States and Argentina.
Based in
part on legal opinions Outback International has received from Argentine
counsel, the Company does not expect the arbitration award or the petition
seeking its confirmation to have a material adverse effect on its results of
operations, financial condition or cash flows. However, litigation is
inherently uncertain and the ultimate resolution of this matter cannot be
guaranteed.
On
February 19, 2009, we filed an action in the Circuit Court for the Thirteenth
Judicial District of Florida in Hillsborough County against T-Bird
Nevada, LLC (“T-Bird”) and its affiliates. T-Bird is a limited
liability company that is owned by the principal of the franchisee of each of
the California Outback Steakhouse restaurants. The action seeks
payment on a promissory note made by T-Bird that we purchased from T-Bird’s
former lender, among other remedies. The principal balance on the
promissory note, plus accrued and unpaid interest, is approximately
$33,000,000. On July 31, 2009, the Hillsborough County Circuit Court
denied T-Bird’s motions to dismiss for lack of personal jurisdiction and
improper venue. See “Debt Guarantees” included in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” for
further discussion.
On
February 20, 2009, T-Bird and certain of its affiliates filed suit against us
and certain of our officers and affiliates in the Superior Court of the State of
California, County of Los Angeles. The suit claims, among other things,
that we made various misrepresentations and breached certain oral promises
allegedly made by us and certain of our officers to T-Bird and its affiliates
that we would acquire the restaurants owned by T-Bird and its affiliates and
until that time we would maintain financing for the restaurants that would be
nonrecourse to T-Bird and its affiliates. The complaint seeks damages in
excess of $100,000,000, exemplary or punitive damages, and other remedies.
We and the other defendants believe the suit is without merit, and we intend to
defend the suit vigorously. We have filed motions to dismiss
T-Bird's complaint on the grounds that a binding agreement between us and
T-Bird related to the loan at issue in the Florida litigation requires that
T-Bird litigate its claims in Florida, rather than in California. The
parties have fully briefed the motion to dismiss and await the California
Court's ruling.
In
addition to the other information discussed in this report, please consider the
factors described in Part I, Item 1A., “Risk Factors” in our 2008 10-K which
could materially affect our business, financial condition or future
results. There have not been any significant changes with respect to
the risks described in our 2008 10-K, but these are not the only risks facing
our Company. Additional risks and uncertainties not currently known
to us or that we currently deem to be immaterial also may adversely affect our
business, financial condition or operating results.
PART
II: OTHER INFORMATION
Item
6. Exhibits
Number
|
|
Description
|
|
|
|
10.1*
|
|
Amendment
to Amended and Restated Employment Agreement made and entered into June
12, 2009 by and between A. William Allen, III and OSI Restaurant Partners,
LLC (filed herewith)
|
|
|
|
10.2*
|
|
Amendment
to Amended and Restated Employment Agreement made and entered into June
12, 2009 by and between Joseph J. Kadow and OSI Restaurant Partners, LLC
(filed herewith)
|
|
|
|
10.3*
|
|
Retirement
letter dated June 3, 2009 and effective as of July 1, 2009 by and between
Paul E. Avery and OSI Restaurant Partners, LLC (filed
herewith)
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 20021
|
|
|
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 20021
|
*
Management contract or compensatory plan or arrangement required to be filed as
an exhibit.
1 These
certifications are not deemed to be “filed” for purposes of Section 18 of the
Exchange Act, or otherwise subject to the liability of that section. These
certifications will not be deemed to be incorporated by reference into any
filing under the Securities Act or the Exchange Act, except to the extent that
the registrant specifically incorporates them by reference.
The
registrant hereby undertakes to furnish supplementally a copy of any omitted
schedule or other attachment to the Securities and Exchange Commission upon
request.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date:
August 14, 2009
|
|
OSI
RESTAURANT PARTNERS, LLC
|
|
|
|
|
|
By: /s/ Dirk A.
Montgomery
|
|
|
Dirk
A. Montgomery
Senior
Vice President and Chief Financial Officer
(Principal
Financial and Accounting Officer)
|
82