S-4 1 ds4.htm FORM S-4 Form S-4
Table of Contents

As filed with the Securities and Exchange Commission on May 9, 2008.

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM S-4

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

 

OSI RESTAURANT PARTNERS, LLC

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   8050   59-3061413

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

OSI CO-ISSUER, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   8050   20-8941232

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

2202 N. West Shore Blvd., Suite 500

Tampa, Florida 33607

Telephone: (813)-282-1225

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Joseph J. Kadow

Executive Vice President and Chief Officer—Legal and Corporate Affairs

2202 N. West Shore Blvd., Suite 500

Tampa, Florida 33607

Telephone: (813)-282-1225

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

with a copy to:

Craig E. Marcus

Ropes & Gray LLP

One International Place

Boston, MA 02110-2624

(617) 951-7000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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

Large accelerated filer  ¨    Accelerated filer  ¨
Non-accelerated filer    x    Smaller reporting company  ¨

CALCULATION OF REGISTRATION FEE

 

 
Title of each class of securities to be registered   

Amount To be

Registered (1)

  

Proposed
Maximum
Offering Price

Per Unit (1)

  

Proposed
Maximum
Aggregate

Offering Price (1)

   Amount of
Registration Fee

10% Senior Notes due 2015

   $550,000,000    100%    $550,000,000    $21,615

Guarantees of 10% Senior Notes due 2015

   N/A    N/A    N/A    N/A (2)
 
 
(1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(f)(1) under the Securities Act of 1933, as amended (the “Securities Act”).
(2) The guarantee by each of the additional registrants listed below of the principal and interest on the notes is also being registered hereby. No separate consideration will be received for the guarantees. Pursuant to Rule 457(n) under the Securities Act, no registration fee is required with respect to the guarantees.

The registrants hereby amend this registration statement on such date or dates as may be necessary to delay its effective date until the registrants shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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ADDITIONAL REGISTRANTS

 

Exact Name of Registrant as Specified in its Charter

   State or Other
Jurisdiction of
Incorporation
or Organization
   Primary
Standard
Industry
Classification
Number
   I.R.S.
Employer
Identification
No.

A La Carte Event Pavilion, Ltd.

   FL    8050    59-3659025

Carrabba’s Designated Partner, LLC

   DE    8050    20-8475204

Carrabba’s Italian Grill, LLC

   FL    8050    59-3295193

Carrabba’s Italian Market, LLC

   FL    8050    26-0388687

Carrabba’s Kansas Designated Partner, LLC

   DE    8050    20-8719120

Carrabba’s Kansas, Inc.

   KS    8050    03-0460308

Carrabba’s Midwest Designated Partner, LLC

   DE    8050    20-8718725

Carrabba’s Midwest, Inc.

   KS    8050    59-3591788

Carrabba’s of Baton Rouge, LLC

   FL    8050    20-1579298

Carrabba’s of Bowie, LLC

   MD    8050    55-0800809

Carrabba’s Shreveport, LLC

   FL    8050    20-2152029

Carrabba’s/Arizona-I, Limited Partnership

   FL    8050    59-3391044

Carrabba’s/Birchwood, Limited Partnership

   FL    8050    51-0467086

Carrabba’s/Bobby Pasta, Limited Partnership

   FL    8050    20-2035579

Carrabba’s/Broken Arrow, Limited Partnership

   FL    8050    20-3029408

Carrabba’s/Canton, Limited Partnership

   FL    8050    59-3668459

Carrabba’s/Carolina-I, Limited Partnership

   FL    8050    59-3460180

Carrabba’s/Central Florida-I, Limited Partnership

   FL    8050    59-3386227

Carrabba’s/Chicago, Limited Partnership

   FL    8050    59-3694616

Carrabba’s/Colorado-I, Limited Partnership

   FL    8050    59-3329023

Carrabba’s/Crestview Hills, Limited Partnership

   FL    8050    20-0178000

Carrabba’s/Dallas-I, Limited Partnership

   FL    8050    59-3627865

Carrabba’s/DC-I, Limited Partnership

   FL    8050    59-3391932

Carrabba’s/First Coast, Limited Partnership

   FL    8050    59-3400608

Carrabba’s/Georgia-I, Limited Partnership

   GA    8050    59-3295191

Carrabba’s/Great Lakes-I, Limited Partnership

   FL    8050    59-3542931

Carrabba’s/Gulf Coast-I, Limited Partnership

   FL    8050    20-1096125

Carrabba’s/Heartland-I, Limited Partnership

   FL    8050    03-0460287

Carrabba’s/Kansas Two-I, Limited Partnership

   KS    8050    20-1472721

Carrabba’s/Kansas-I, Limited Partnership

   KS    8050    03-0460331

Carrabba’s/Mid Atlantic-I, Limited Partnership

   FL    8050    59-3375677

Carrabba’s/Mid East, Limited Partnership

   FL    8050    20-3029369

Carrabba’s/Midwest-I, Limited Partnership

   KS    8050    59-3604371

Carrabba’s/New England, Limited Partnership

   FL    8050    59-3682742

Carrabba’s/Ohio, Limited Partnership

   FL    8050    59-3694613

Carrabba’s/Outback, Limited Partnership

   FL    8050    76-0396236

Carrabba’s/Pensacola, Limited Partnership

   FL    8050    90-0076800

Carrabba’s/Second Coast, Limited Partnership

   FL    8050    51-0467092

Carrabba’s/South Florida-I, Limited Partnership

   FL    8050    59-3329152

Carrabba’s/South Texas-I, Limited Partnership

   FL    8050    13-4246830

Carrabba’s/Sun Coast, Limited Partnership

   FL    8050    59-3698007

Carrabba’s/Texas, Limited Partnership

   FL    8050    59-3309113

Carrabba’s/Tri State-I, Limited Partnership

   FL    8050    20-0178997

Carrabba’s/Tropical Coast, Limited Partnership

   FL    8050    20-1050979

Carrabba’s/Virginia, Limited Partnership

   FL    8050    20-3036416

Carrabba’s/West Florida-I, Limited Partnership

   FL    8050    59-3321512

Carrabba’s/Z Team Two-I, Limited Partnership

   FL    8050    20-1166520

Carrabba’s/Z Team-I, Limited Partnership

   FL    8050    20-0209195


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Exact Name of Registrant as Specified in its Charter

   State or Other
Jurisdiction of
Incorporation
or Organization
   Primary
Standard
Industry
Classification
Number
   I.R.S.
Employer
Identification
No.

Cheeseburger Designated Partner, LLC

   DE    8050    20-8475937

Cheeseburger in Paradise of Kansas, Inc.

   KS    8050    20-1528140

Cheeseburger in Paradise, LLC

   DE    8050    59-3671653

Cheeseburger Kansas Designated Partner, LLC

   DE    8050    20-8719005

Cheeseburger-Buckeye, Limited Partnership

   FL    8050    20-0174348

Cheeseburger-Downer’s Grove, Limited Partnership

   FL    8050    05-0556946

Cheeseburger-Illinois, Limited Partnership

   FL    8050    20-0269240

Cheeseburger-Kansas, Limited Partnership

   KS    8050    20-1528193

Cheeseburger-Maryland, Limited Partnership

   FL    8050    20-0270250

Cheeseburger-Michigan, Limited Partnership

   FL    8050    20-2327923

Cheeseburger-Nebraska, Limited Partnership

   FL    8050    20-0194502

Cheeseburger-Northern New Jersey, Limited Partnership

   FL    8050    20-0270498

Cheeseburger-Northern Virginia, Limited Partnership

   FL    8050    56-2359756

Cheeseburger-Ohio, Limited Partnership

   FL    8050    59-7216459

Cheeseburger-South Carolina, Limited Partnership

   FL    8050    20-0270482

Cheeseburger-South Eastern Pennsylvania, Limited Partnership

   FL    8050    54-2120144

Cheeseburger-South Florida, Limited Partnership

   FL    8050    20-1014107

Cheeseburger-Southern NY, Limited Partnership

   FL    8050    20-0577766

Cheeseburger-West Nyack, Limited Partnership

   FL    8050    56-2314742

Cheeseburger-Wisconsin, Limited Partnership

   FL    8050    14-1871562

CIGI Beverages of Texas, Inc.

   TX    8050    76-0644450

CIGI Holdings, Inc.

   TX    8050    54-2147428

Frederick Outback, Inc.

   MD    8050    52-1823949

Heartland Outback, Inc.

   KS    8050    59-3392967

Heartland Outback-I, Limited Partnership

   KS    8050    59-3392974

Heartland Outback-II, Limited Partnership

   KS    8050    59-3470135

OBTex Holdings, Inc.

   TX    8050    26-0463212

OS Asset, Inc.

   FL    8050    59-3602393

OS Capital, Inc.

   DE    8050    51-0393481

OS Developers, LLC

   FL    8050    59-3604617

OS Management, Inc.

   FL    8050    59-3602392

OS Mortgage Holdings, Inc.

   DE    8050    20-2863689

OS Realty, LLC

   FL    8050    59-3671409

OS Restaurant Services, Inc.

   DE    8050    59-3549811

OS Speedway, LLC

   FL    8050    59-3630628

OS Tropical, LLC

   FL    8050    59-3668622

OSF/CIGI of Evesham Partnership

   FL    8050    20-5132036

OSI Gift Card Services, LLC

   FL    8050    59-2848217

OSI International, LLC

   FL    8050    02-0591579

Outback & Carrabba’s of New Mexico, Inc.

   NM    8050    59-3390138

Outback Alabama, Inc.

   AL    8050    20-0742496

Outback Beverages of Texas, Inc.

   TX    8050    75-2446167

Outback Catering Company, Limited Partnership

   FL    8050    59-3472937

Outback Catering Company-II, Limited Partnership

   FL    8050    59-3543172

Outback Catering Designated Partner, LLC

   DE    8050    20-8719164

Outback Catering of Pittsburgh, Ltd.

   FL    8050    59-3654957

Outback Catering, Inc.

   FL    8050    59-3554516

Outback Designated Partner, LLC

   DE    8050    20-8457976

Outback International Designated Partner, LLC

   DE    8050    20-8718909

Outback Kansas Designated Partner, LLC

   DE    8050    20-8719081


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Exact Name of Registrant as Specified in its Charter

   State or Other
Jurisdiction of
Incorporation
or Organization
   Primary
Standard
Industry
Classification
Number
   I.R.S.
Employer
Identification
No.

Outback of Aspen Hill, Inc.

   MD    8050    26-1478958

Outback of Germantown, Inc.

   MD    8050    26-0714562

Outback of Waldorf, Inc.

   MD    8050    59-3314442

Outback Sports, LLC

   DE    8050    59-3514778

Outback Steakhouse International, L.P.

   GA    8050    59-3316101

Outback Steakhouse International, LLC

   FL    8050    59-3308620

Outback Steakhouse of Central Florida, Ltd.

   FL    8050    59-2969147

Outback Steakhouse of Central Florida-II, Ltd.

   FL    8050    59-3168113

Outback Steakhouse of Dallas-I, Ltd.

   TX    8050    59-7052644

Outback Steakhouse of Dallas-II, Ltd.

   TX    8050    59-3324626

Outback Steakhouse of Florida, LLC

   FL    8050    59-2848217

Outback Steakhouse of Houston-I, Ltd.

   TX    8050    59-3324630

Outback Steakhouse of Houston-II, Ltd.

   TX    8050    59-3324636

Outback Steakhouse of Indianapolis, Ltd.

   FL    8050    59-3017233

Outback Steakhouse of Kentucky, Ltd.

   FL    8050    59-3168119

Outback Steakhouse of North Georgia-I, L.P.

   GA    8050    58-2114683

Outback Steakhouse of North Georgia-II, L.P.

   GA    8050    59-3267888

Outback Steakhouse of South Carolina, Inc.

   SC    8050    59-3134609

Outback Steakhouse of South Florida, Ltd.

   FL    8050    59-3111207

Outback Steakhouse of South Georgia-I, L.P.

   GA    8050    58-2114732

Outback Steakhouse of South Georgia-II, L.P.

   GA    8050    59-3335767

Outback Steakhouse of Washington D.C., Ltd.

   FL    8050    65-0225014

Outback Steakhouse West Virginia, Inc.

   WV    8050    59-3350085

Outback Steakhouse-NYC, Ltd.

   FL    8050    42-1577138

Outback/Alabama-I, Limited Partnership

   FL    8050    59-3333075

Outback/Alabama-II, Limited Partnership

   FL    8050    59-3772370

Outback/Bayou-I, Limited Partnership

   FL    8050    58-2114699

Outback/Bayou-II, Limited Partnership

   FL    8050    59-3270373

Outback/Billings, Limited Partnership

   FL    8050    20-3671099

Outback/Bluegrass-I, Limited Partnership

   FL    8050    59-3333076

Outback/Bluegrass-II, Limited Partnership

   FL    8050    59-3346424

Outback/Buckeye-I, Limited Partnership

   FL    8050    59-3333080

Outback/Buckeye-II, Limited Partnership

   FL    8050    59-3346428

Outback/Carrabba’s Partnership

   FL    8050    59-3381148

Outback/Central Mass, Limited Partnership

   FL    8050    20-4952902

Outback/Charlotte-I, Limited Partnership

   FL    8050    65-0201445

Outback/Chicago-I, Limited Partnership

   FL    8050    59-3167848

Outback/Cleveland-I, Limited Partnership

   FL    8050    59-3177208

Outback/Cleveland-II, Limited Partnership

   FL    8050    59-3412031

Outback/DC, Limited Partnership

   FL    8050    20-3127799

Outback/Denver-I, Limited Partnership

   FL    8050    59-3248393

Outback/Detroit-I, Limited Partnership

   FL    8050    38-3046363

Outback/East Michigan, Limited Partnership

   FL    8050    20-3597673

Outback/Empire-I, Limited Partnership

   FL    8050    59-3270369

Outback/Hawaii-I, Limited Partnership

   FL    8050    59-3640519

Outback/Heartland-I, Limited Partnership

   FL    8050    59-3333079

Outback/Heartland-II, Limited Partnership

   FL    8050    59-3346422

Outback/Indianapolis-II, Limited Partnership

   FL    8050    59-3167850

Outback/Metropolis-I, Limited Partnership

   FL    8050    59-3262681

Outback/Mid Atlantic-I, Limited Partnership

   FL    8050    59-3134612


Table of Contents

Exact Name of Registrant as Specified in its Charter

   State or Other
Jurisdiction of
Incorporation
or Organization
   Primary
Standard
Industry
Classification
Number
   I.R.S.
Employer
Identification
No.

Outback/Midwest-I, Limited Partnership

   FL    8050    59-3333078

Outback/Midwest-II, Limited Partnership

   FL    8050    59-3346419

Outback/Missouri-I, Limited Partnership

   FL    8050    59-3333083

Outback/Missouri-II, Limited Partnership

   FL    8050    59-3346417

Outback/Nevada-I, Limited Partnership

   FL    8050    59-3224004

Outback/Nevada-II, Limited Partnership

   FL    8050    59-3359890

Outback/New England-I, Limited Partnership

   FL    8050    59-3596315

Outback/New England-II, Limited Partnership

   FL    8050    59-3596312

Outback/New York, Limited Partnership

   FL    8050    20-3629909

Outback/North Florida-I, Limited Partnership

   FL    8050    59-3248313

Outback/North Florida-II, Limited Partnership

   FL    8050    59-3320869

Outback/Phoenix-I, Limited Partnership

   FL    8050    59-3224005

Outback/Phoenix-II, Limited Partnership

   FL    8050    59-3392979

Outback/Shenandoah-I, Limited Partnership

   FL    8050    59-3333081

Outback/Shenandoah-II, Limited Partnership

   FL    8050    59-3346418

Outback/South Florida-II, Limited Partnership

   FL    8050    59-3258845

Outback/Southwest Georgia, Limited Partnership

   FL    8050    20-3044402

Outback/Stone-II, Limited Partnership

   FL    8050    59-3143049

Outback/Utah-I, Limited Partnership

   FL    8050    59-3333072

Outback/Virginia, Limited Partnership

   FL    8050    20-3860075

Outback/West Florida-I, Limited Partnership

   FL    8050    59-3111202

Outback/West Florida-II, Limited Partnership

   FL    8050    65-0507336

Outback/West Penn, Limited Partnership

   FL    8050    20-3025197

Private Restaurant Master Lessee, LLC

   DE    8050    20-8515350

The address, including zip code, and telephone number, including area code, of each registrant’s principal executive offices is: c/o OSI Restaurant Partners, LLC, 2202 N. West Shore Blvd., Suite 500, Tampa, FL 33607, Telephone: (813) 282-1225

The name, address, including zip code and telephone number, including area code, of agent for service for each of the Additional Registrants is:

Joseph J. Kadow

Executive Vice President and Chief Officer—Legal and Corporate Affairs

2202 N. West Shore Blvd., Suite 500

Tampa, Florida 33607

Telephone: (813)-282-1225

with a copy to:

Craig E. Marcus

Ropes & Gray LLP

One International Place

Boston, MA 02110-2624

(617) 951-7000


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not complete the exchange offer until the registration statement filed with the Securities and Exchange Commission is declared effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED MAY 9, 2008.

Prospectus

LOGO

OSI Restaurant Partners, LLC

OSI Co-Issuer, Inc.

Offer to Exchange

$550,000,000 principal amount of our 10% Senior Notes due 2015, which have been registered under the Securities Act, for any and all of our outstanding 10% Senior Notes due 2015.

We are offering to exchange, upon the terms and subject to the conditions set forth in this prospectus and the accompanying letter of transmittal, all of our 10% Senior Notes due 2015, which we refer to as the outstanding notes, for our registered 10% Senior Notes due 2015, which we refer to as exchange notes, and together with the outstanding notes, the notes. We are also offering the subsidiary guarantees of the exchange notes, which are described in this prospectus. The terms of the exchange notes are identical to the terms of the outstanding notes except that the exchange notes have been registered under the Securities Act of 1933, and therefore are freely transferable. Interest on the notes will be payable on June 15 and December 15 of each year. The notes will mature on June 15, 2015.

The principal features of the exchange offer are as follows:

 

   

We will exchange all outstanding notes that are validly tendered and not validly withdrawn prior to the expiration of the exchange offer for an equal principal amount of exchange notes that are freely tradable.

 

   

You may withdraw tendered outstanding notes at any time prior to the expiration of the exchange offer.

 

   

The exchange offer expires at 12:00 a.m. midnight, New York City time, on                      , 2008, unless extended.

 

   

The exchange of outstanding notes for exchange notes pursuant to the exchange offer will not be a taxable event for U.S. federal income tax purposes.

 

   

We will not receive any proceeds from the exchange offer.

 

   

We do not intend to apply for listing of the exchange notes on any securities exchange or automated quotation system.

Broker-dealers receiving exchange notes in exchange for outstanding notes acquired for their own account through market-making or other trading activities must deliver a prospectus in any resale of the exchange notes.

All untendered outstanding notes will continue to be subject to the restrictions on transfer set forth in the outstanding notes and in the applicable indenture. In general, the outstanding notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with the exchange offer, we do not currently anticipate that we will register the outstanding notes under the Securities Act.

 

 

You should consider carefully the risk factors beginning on page 14 of this prospectus before participating in the exchange offer.

 

 

Neither the U.S. Securities and Exchange Commission nor any other federal or state agency has approved or disapproved of these securities to be distributed in the exchange offer, nor have any of these organizations determined that this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is                     , 2008.


Table of Contents

TABLE OF CONTENTS

 

     Page

Prospectus Summary

   1

Summary Historical and Pro Forma Consolidated Financial Data

   11

Risk Factors

   14

Market and Industry Information

   26

Cautionary Note Regarding Forward-Looking Statements

   26

The Exchange Offer

   27

The Transactions

   37

Use of Proceeds

   39

Capitalization

   40

Selected Historical Consolidated Financial and Operating Data

   41

Unaudited Pro Forma Condensed Consolidated Financial Statements

   43

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   46

Business

   84

Management

   103

Executive Compensation

   105

Principal Stockholders and Management Ownership

   120

Certain Relationships and Related Party Transactions

   123

Description of Other Indebtedness

   126

Description of PRP Sale-Leaseback Transaction

   131

Description of the Exchange Notes

   133

Material United States Federal Income Tax Considerations

   192

Certain Considerations for Benefit Plan Investors

   197

Plan of Distribution

   198

Legal Matters

   198

Experts

   199

Where You Can Find More Information

   199

Index to Consolidated Financial Statements

   F-1

This prospectus contains summaries of the terms of several material documents. These summaries include the terms that we believe to be material, but we urge you to review these documents in their entirety. We will provide without charge to each person to whom a copy of this prospectus is delivered, upon written or oral request of that person, a copy of any and all of this information. Requests for copies should be directed to Joseph J. Kadow, OSI Restaurant Partners, LLC, 2202 N. West Shore Blvd., Suite 500, Tampa, FL 33607. You should request this information at least five business days in advance of the date on which you expect to make your decision with respect to the exchange offer. In any event, you must request this information prior to , 2008, in order to receive the information prior to the expiration of the exchange offer.

 

i


Table of Contents

PROSPECTUS SUMMARY

The following summary contains basic information about OSI Restaurant Partners, LLC and the exchange offer. It likely does not contain all of the information that is important to you. Before you make an investment decision, you should review this prospectus in its entirety, including the risk factors, our financial statements and the related notes and the pro forma financial data appearing elsewhere in this prospectus. Please note that the presentation of our consolidated financial statements consists of two periods: the “Predecessor” period, which covers the period preceding the Merger, as defined below, and the “Successor” period, which covers the period after the Merger. Accordingly, the results of operations for the year ended December 31, 2007 includes the results of operations from January 1 to June 14, 2007 of the Predecessor and the results of operations for the period from June 15 to December 31, 2007 of the Successor, on a combined basis. Although this combined basis does not comply with generally accepted accounting principles in the United States (“U.S. GAAP”), we believe it provides a more meaningful method of comparison to the other periods presented in this prospectus. Unless otherwise indicated, the terms “OSI,” “the Company,” “our company,” “us,” “we” and “our” refer to OSI Restaurant Partners, LLC and OSI Co-Issuer, Inc., together with their subsidiaries. In addition, unless otherwise noted, references to “pro forma,” and other financial terms have the meanings set forth under “—Summary Historical and Pro Forma Consolidated Financial Information.” Unless otherwise indicated, restaurant count data is as of December 31, 2007.

Our Company

We are one of the largest casual dining restaurant companies in the United States, with a significant international presence. Through our restaurant concepts, each with a distinct theme, menu offering and price point, we serve a broad customer base and cater to multiple dining occasions. Our primary concepts include Outback Steakhouse, or Outback, Carrabba’s Italian Grill, or Carrabba’s, Bonefish Grill, or Bonefish, and Fleming’s Prime Steakhouse and Wine Bar, or Fleming’s. Our other concepts include Roy’s, Cheeseburger in Paradise, Lee Roy Selmon’s and Blue Coral Seafood and Spirits, or Blue Coral. We have entered into an agreement in principle to sell the majority of our interest in our Lee Roy Selmon’s concept to an investor group led by Lee Roy Selmon and Peter Barli, president of the concept. We are evaluating strategies for exiting our other, non-primary concepts. Outback, our largest restaurant concept, is the leading steakhouse chain in the United States with 2007 restaurant sales greater than the sales of its three closest steakhouse chain competitors combined, as reported by Technomic. We also hold leading positions in the Italian and seafood categories: Carrabba’s is the third largest full-service Italian chain in the United States and Bonefish is the second largest full-service seafood chain in the United States, in each case based on 2007 restaurant sales as reported by Technomic. We have 1,318 company-owned and 162 franchised and development joint venture restaurants located in all 50 states and in 20 countries internationally. For the year ended December 31, 2007, we generated total revenues of approximately $4.1 billion.

We believe we maintain our strong market position by serving high-quality food, providing attentive service and operating efficient restaurants. Each of our restaurant concepts offers a limited number of menu items to maximize the quality and consistency of each item we serve while offering sufficient breadth to appeal to a broad array of tastes. We believe our concepts, which range from casual to upscale casual dining atmospheres, attract a diverse customer mix. We believe our attentive service contributes to maintaining a loyal customer base. In addition, we believe we are able to align the incentives of our restaurant general managers with those of our Company and foster long-term employee commitment by providing them with the opportunity to share in the cash flows of the restaurants they manage. We believe this business model drives strong unit-level economics, which has enabled us to maintain a healthy restaurant base.

 

 

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The Transactions

On June 14, 2007, OSI Restaurant Partners, Inc., by means of a merger transaction (referred to as the Merger) and related transactions (referred to collectively with the Merger as the Transactions), was acquired by an investor group comprised of Bain Capital Partners, LLC and Catterton Partners (collectively referred to as the Sponsors) our founders, Robert D. Basham, J. Timothy Gannon and Chris T. Sullivan (collectively referred to as the Founders), and certain members of our management team. In connection with the Merger, OSI Restaurant Partners, Inc. was converted in accordance with Delaware law into a Delaware limited liability company, OSI Restaurant Partners, LLC, and deregistered its common stock from public trading. OSI Co-Issuer, Inc. exists solely for the purpose of serving as a co-issuer of the exchange notes. All of our issued and outstanding equity interests are held by OSI HoldCo, Inc., or Holdings, which has no material assets or operations other than its direct ownership of OSI and its indirect ownership of our newly-formed sister company, Private Restaurant Properties, LLC, or PRP, through PRP’s parent companies. Holdings is a wholly-owned subsidiary of OSI HoldCo I, Inc., which is a wholly-owned subsidiary of OSI HoldCo II, Inc., which is a wholly-owned subsidiary of Kangaroo Holdings, Inc., our ultimate parent company, which we refer to as Parent. Through their ownership interests in Parent, the Sponsors, certain co-investors designated by the Sponsors, which we refer to collectively with the Sponsors as the Investors, the Founders and certain members of our management collectively indirectly own OSI. See “The Transactions.”

In connection with the Merger, we caused our wholly-owned subsidiaries that own domestic restaurant properties to sell substantially all of these company-owned restaurant properties to PRP. PRP financed the purchase of these properties through a new real estate credit facility, and then leased the properties to Private Restaurant Master Lessee, LLC, one of our wholly-owned subsidiaries, under a market rate master lease. We refer to the sale of certain of our domestic company-owned restaurant properties to PRP and entry into the market rate master lease and the related underlying subleases as the PRP Sale-Leaseback Transaction. Neither PRP nor any of its parent companies will be a guarantor of the exchange notes offered hereby or will have any liability with respect to the exchange notes offered hereby or any of our other indebtedness or obligations. The restaurant properties and other assets sold to PRP pursuant to the PRP Sale-Leaseback Transaction will not be available to satisfy any of our obligations, including indebtedness evidenced by the exchange notes offered hereby. The terms of the PRP real estate credit facility permit PRP to distribute certain excess cash amounts to the holders of its equity.

The Merger was financed by borrowings under our new senior secured credit facilities, the proceeds from the issuance of the outstanding notes, the proceeds to us from the PRP Sale-Leaseback Transaction, the investment in our equity securities by the Sponsors and certain members of our management, the rollover of equity owned by the Founders, and available cash on hand.

The offering of the outstanding notes, the initial borrowings under our new senior secured credit facilities, the PRP Sale-Leaseback Transaction, the cash equity investment by the Sponsors and management, the Founders’ rollover equity and the unvested restricted stock rollover by other members of our management team, the purchase of the Founders’ non-rollover equity, the Merger, the conversion to an LLC, and other related transactions are collectively referred to in this prospectus as the Transactions. For a more complete description of the Transactions, see “The Transactions,” “Description of Other Indebtedness” and “Description of PRP Sale-Leaseback Transaction.”

The Sponsors

Bain Capital Partners, LLC. Bain Capital is a global private investment firm whose affiliates manage several pools of capital including private equity, venture capital, public equity, and leveraged debt assets with approximately $50 billion in assets under management. Since its inception in 1984, Bain Capital has made private equity investments and add-on acquisitions in over 230 companies around the world, including such

 

 

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leading retailers and consumer companies as Burger King, Domino’s Pizza, Dunkin Brands, Michaels Stores, Burlington Coat Factory, Toys “R” Us, Dollarama, Staples, Shopper’s Drug Mart, Brookstone, Sealy Corp., Sports Authority and Duane Reade. Headquartered in Boston, Bain Capital also has offices in New York, London, Munich, Hong Kong, Shanghai and Tokyo.

Catterton Partners. With more than $2 billion in assets under management, Catterton is a leading private equity firm in the United States focused exclusively on the consumer industry. Since its founding in 1990, Catterton has leveraged its investment capital, strategic and operating skills, and network of industry contacts to establish one of the strongest investment track records in the consumer industry. Catterton invests in all major consumer segments, including Food and Beverage, Retail and Restaurants, Consumer Products and Services, and Media and Marketing Services. Catterton has led investments in companies such as Build-A-Bear Workshop, Cheddar’s Restaurant Holdings Inc., P.F. Chang’s China Bistro, Baja Fresh Mexican Grill, First Watch Restaurants, Frederic Fekkai, Kettle Foods, Farley’s and Sathers Candy Co., and Odwalla, Inc.

 

 

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The Exchange Offer

On June 14, 2007, we completed an offering of $550 million aggregate principal amount of 10% Senior Notes due 2015 in a private offering which was exempt from registration under the Securities Act.

If we and the subsidiary guarantors are not able to effect the exchange offer contemplated by this prospectus, we and the subsidiary guarantors will use reasonable best efforts to file and cause to become effective a shelf registration statement relating to the resale of the outstanding notes. We may be required to pay additional interest on the notes in certain circumstances.

The following is a brief summary of the terms of the exchange offer. For a more complete description of the exchange offer, see “The Exchange Offer.”

 

Securities Offered

OSI and Co-Issuer are offering to exchange $550.0 million aggregate principal amount of 10% Senior Notes due 2015.

 

Exchange Offer

In connection with the private offering, OSI Restaurant Partners, LLC, OSI Co-Issuer, Inc. and the guarantors of the outstanding notes entered into a registration rights agreement with the initial purchasers in which they agreed, among other things, to deliver this prospectus to you and to complete the exchange offer within 365 days after the date of the original issuance of the outstanding notes. If we are unable to complete the exchange offer within this time period we are required, subject to the terms and conditions set forth in the registration rights agreement, to pay additional interest to holders of the notes as described in “The Exchange Offer—Purpose and Effect of the Exchange Offer.” You are entitled to exchange in the exchange offer your outstanding notes for exchange notes which are identical in all material respects to the outstanding notes except:

 

   

the exchange notes have been registered under the Securities Act;

 

   

the exchange notes are not entitled to any registration rights which are applicable to the outstanding notes under the registration rights agreements; and

 

   

the liquidated damages provisions of the registration rights agreements are no longer applicable.

 

Resale

Based upon interpretations by the Staff of the Securities and Exchange Commission, or the Commission, set forth in no-action letters issued to unrelated third-parties, we believe that the exchange notes may be offered for resale, resold or otherwise transferred by you without compliance with the registration and prospectus delivery requirements of the Securities Act, unless you:

 

   

are an “affiliate” of ours within the meaning of Rule 405 under the Securities Act;

 

   

are a broker-dealer who purchased the notes directly from us for resale under Rule 144A, Regulation S or any other available exemption under the Securities Act;

 

   

acquired the exchange notes other than in the ordinary course of your business;

 

 

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have an arrangement with any person to engage in the distribution of the exchange notes; or

 

   

are prohibited by law or policy of the SEC from participating in the exchange offer.

However, we have not submitted a no-action letter, and there can be no assurance that the SEC will make a similar determination with respect to the exchange offer. Furthermore, in order to participate in the exchange offer, you must make the representations set forth in the letter of transmittal that we are sending you with this prospectus.

 

Expiration Date

The exchange offer will expire at 12:00 a.m. midnight, New York City time on                    , 2008, which we refer to as the expiration date, unless we decide to extend the exchange offer. We do not currently intend to extend the expiration date.

 

Conditions to the Exchange Offer

The exchange offer is subject to certain customary conditions, some of which may be waived by us. See “The Exchange Offer—Conditions to the Exchange Offer.”

 

Procedures for Tendering Notes

If you wish to tender your outstanding notes for exchange pursuant to the exchange offer, you must transmit to Wells Fargo Bank, as exchange agent, on or prior to the expiration date, either:

 

   

a properly completed and duly executed copy of the letter of transmittal accompanying this prospectus, or a facsimile of the letter of transmittal, together with your outstanding notes and any other documentation required by the letter of transmittal, at the address set forth on the cover page of the letter of transmittal; or

 

   

if you are effecting delivery by book-entry transfer, a computer generated message transmitted by means of the Automated Tender Offer Program System of The Depository Trust Company, or DTC, in which you acknowledge and agree to be bound by the terms of the letter of transmittal and which, when received by the exchange agent, forms a part of a confirmation of book-entry transfer.

In addition, you must deliver to the exchange agent on or prior to the expiration date, if you are effecting delivery by book-entry transfer, a timely confirmation of book-entry transfer of your outstanding notes into the account of the exchange agent at DTC pursuant to the procedures for book-entry transfers described in this prospectus under the heading “The Exchange Offer—Procedures for Tendering Outstanding Notes.”

By executing and delivering the accompanying letter of transmittal or effecting delivery by book-entry transfer, you are representing to us that, among other things:

 

   

neither the holder nor any other person receiving the exchange notes pursuant to the exchange offer is an “affiliate” of ours within the meaning of Rule 405 under the Securities Act;

 

 

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if you are a broker-dealer that will receive exchange notes for your own account in exchange for outstanding notes that were acquired as a result of market-making or other trading activities, then you will deliver a prospectus in connection with any resale of such exchange notes;

 

   

the person receiving the exchange notes pursuant to the exchange offer, whether or not this person is the holder, is receiving them in the ordinary course of business; and

 

   

neither the holder nor any other person receiving the exchange notes pursuant to the exchange offer has an arrangement or understanding with any person to participate in the distribution of such exchange notes and that such holder is not engaged in, and does not intend to engage in, a distribution of the exchange notes;

See “The Exchange Offer—Procedures for Tendering Outstanding Notes” and “Plan of Distribution.”

 

Special Procedures for Beneficial Owners

If you are the beneficial owner of outstanding notes and your name does not appear on a security listing of DTC as the holder of those notes or if you are a beneficial owner of notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender those notes in the exchange offer, you should promptly contact the person in whose name your notes are registered and instruct that person to tender on your behalf. If you, as a beneficial holder, wish to tender on your own behalf you must, prior to completing and executing the letter of transmittal and delivering your notes, either make appropriate arrangements to register ownership of the notes in your name or obtain a properly completed bond power from the registered holder. The transfer of record ownership may take considerable time.

 

Guaranteed Delivery Procedures

If you wish to tender your outstanding notes and your outstanding notes are not immediately available or you cannot deliver your outstanding notes, the applicable letter of transmittal or any other documents required by the applicable letter of transmittal or comply with the applicable procedures under DTC’s Automated Tender Offer Program prior to the expiration date, you must tender your outstanding notes according to the guaranteed delivery procedures set forth in this prospectus under “The Exchange Offer—Guaranteed Delivery Procedures.”

 

Withdrawal Rights

The tender of the outstanding notes pursuant to the exchange offer may be withdrawn at any time prior to 12:00 a.m. midnight, New York City time, on the expiration date.

 

 

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Acceptance of Outstanding Notes and Delivery of Exchange Notes

Subject to customary conditions, we will accept outstanding notes that are properly tendered in the exchange offer and not withdrawn prior to the expiration date. The exchange notes will be delivered as promptly as practicable following the expiration date.

 

Effect of Not Tendering in the Exchange Offer

Any outstanding notes that are not tendered or that are tendered but not accepted will remain subject to the restrictions on transfer. Since the outstanding notes have not been registered under the federal securities laws, they bear a legend restricting their transfer absent registration or the availability of a specific exemption from registration. Upon the completion of the exchange offer, we will have no further obligations to register, and we do not currently anticipate that we will register, the outstanding notes under the Securities Act. See “The Exchange Offer—Consequences of Failure to Exchange.”

 

Interest on the Exchange Notes and the Outstanding Notes

The exchange notes will bear interest from the most recent interest payment date to which interest has been paid on the outstanding notes. Holders whose outstanding notes are accepted for exchange will be deemed to have waived the right to receive interest accrued on the outstanding notes.

 

Broker-Dealers

Each broker-dealer that receives exchange notes for its own account in exchange for outstanding notes, where such outstanding notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. See “Plan of Distribution.”

 

Material United States Federal Income Tax Considerations

The exchange of outstanding notes for exchange notes by tendering holders will not be a taxable exchange for United States federal income tax purposes, and such holders will not recognize any taxable gain or loss or any interest income for United States federal income tax purposes as a result of such exchange. See “Material United States Federal Income Tax Considerations.”

 

Exchange Agent

Wells Fargo Bank, National Association, the trustee under the indenture, is serving as exchange agent in connection with the exchange offer.

 

Use of Proceeds

We will not receive any cash proceeds from the issuance of exchange notes in the exchange offer.

 

 

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The Exchange Notes

The summary below describes the principal terms of the notes. Certain of the terms and conditions described below are subject to important limitations and exceptions. The “Description of the Exchange Notes” section of this prospectus contains a more detailed description of the terms and conditions of the notes.

 

Co-Issuers

OSI Restaurant Partners, LLC, a Delaware limited liability company, and OSI Co-Issuer, Inc., a Delaware corporation and a wholly-owned subsidiary of OSI Restaurant Partners, LLC.

 

Securities Offered

$550,000,000 aggregate principal amount of Senior Notes due 2015.

 

Maturity Date

June 15, 2015.

 

Interest Rate

10% per year

 

Interest Payment Dates

June 15 and December 15 of each year, commencing June 15, 2008. Interest on the exchange notes will accrue from the most recent date to which interest has been paid on the outstanding notes.

 

Guarantees

Each of our current and future wholly-owned domestic restricted subsidiaries that acts as a guarantor under our senior secured credit facilities will jointly, severally, irrevocably, fully and unconditionally guarantee the notes. The notes will be guaranteed on a senior unsecured basis.

 

Ranking

The exchange notes and related guarantees will be general unsecured obligations of us and the guarantors, and will rank equally in right of payment to all of our and the guarantors’ indebtedness and other obligations that are not, by their terms, expressly subordinated in right of payment to the notes and the guarantees. The notes and any guarantees will be senior in right of payment to any future indebtedness and other obligations of us or the guarantors that are, by their terms, expressly subordinated in right of payment to the notes and the subsidiary guarantees. The notes and any guarantees will be effectively subordinated to all senior secured indebtedness and other obligations of us and the subsidiary guarantors (including our senior secured credit facilities) to the extent of the value of the assets securing such obligations, and to all indebtedness and other obligations of our subsidiaries that do not guarantee the notes.

As of December 31, 2007, the outstanding notes and related guarantees ranked effectively junior to approximately $1.3 billion of senior secured debt outstanding under our senior secured credit facilities and certain other existing indebtedness. In addition, we have an additional $200.5 million of available unused borrowing capacity under the revolving portions of our senior secured credit facilities (after giving effect to outstanding letters of credit of approximately $49.5 million).

 

 

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Optional Redemption

Prior to June 15, 2011, we may redeem some or all of the notes at any time at a price of 100% of the principal amount of the notes redeemed plus a “make-whole” premium. On or after June 15, 2011, we may redeem some or all of the notes at any time at the redemption prices described under “Description of the Exchange Notes—Optional Redemption,” plus accrued and unpaid interest. In addition, at any time prior to June 15, 2010, we may also redeem up to 35% of the aggregate principal amount of the notes with the net cash proceeds of certain equity offerings at the redemption price specified under “Description of the Exchange Notes—Optional Redemption,” plus accrued and unpaid interest.

 

Change of Control Offer

If we experience certain kinds of changes of control, we must offer to purchase the notes at 101% of their principal amount plus accrued and unpaid interest (if any).

 

Mandatory Offer to Repurchase Following Certain Asset Sales

If we sell certain assets and do not reinvest the net proceeds in compliance with the indenture, we must offer to repurchase the notes at 100% of their principal amount plus accrued and unpaid interest (if any).

 

Certain Indenture Provisions

The indenture contains covenants that limit, among other things, our ability and the ability of our restricted subsidiaries to:

 

   

incur additional indebtedness;

 

   

pay dividends on our capital stock or repurchase our capital stock;

 

   

make certain investments;

 

   

use assets as security to secure other debt; and

 

   

sell assets to, or merge with or into, another company.

 

Transfer Restrictions

The exchange notes will be freely transferable but will be new securities for which there will not initially be a market. Accordingly, we cannot assure you whether a market for the exchange notes will develop or as to the liquidity of any market. The initial purchasers in the private offering of the outstanding notes have advised us that they currently intend to make a market in the exchange notes. The initial purchasers are not obligated, however, to make a market in the exchange notes, and such market-making may be discontinued by the initial purchasers in their discretion at any time without notice.

 

 

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Risk Factors

Participating in the exchange offer, and therefore investing in the exchange notes, involves substantial risk. See the “Risk Factors” section of this prospectus for a description of material risks you should consider before investing in the exchange notes.

Corporate Information

Our principal executive offices are located at 2202 N. West Shore Blvd., Suite 500, Tampa, FL 33607. Our telephone number at that address is (813) 282-1225. Our corporate website address is http://www.osirestaurantpartners.com. Our website and the information contained on our website is not part of this prospectus.

 

 

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SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA

The following table sets forth summary historical and unaudited pro forma consolidated financial and other data of our business at the dates and for the periods indicated. The summary historical financial data for, and as of, the years ended December 31, 2005 and 2006, the period from January 1 to June 14, 2007 and the period from June 15 to December 31, 2007 have been derived from our historical audited consolidated financial statements. The unaudited pro forma financial data for the year ended December 31, 2007 gives effect to the Transactions as if the Transactions had occurred at the beginning of the period presented. The summary information in the following tables should be read in conjunction with “Use of Proceeds,” “Capitalization,” “Unaudited Pro Forma Consolidated Financial Data,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical audited consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Successor     Predecessor  
   Pro Forma
Year Ended
December 31,

2007
    Period from
June 15 to
December 31,

2007 (1)
    Period
from
January 1
to June 14,

2007 (1)
    Year Ended
December 31,
 
         2006      2005  
   (in thousands)     (in thousands)  

Statement of Operations Data:

           

Revenues

           

Restaurant sales

   $ 4,144,615     $ 2,227,926     $ 1,916,689     $ 3,919,776      $ 3,590,869  

Other revenues

     22,046       12,098       9,948       21,183        21,848  
                                         

Total revenues

     4,166,661       2,240,024       1,926,637       3,940,959        3,612,717  

Costs and expenses

           

Cost of sales

     1,472,047       790,592       681,455       1,415,459        1,315,340  

Labor and other related (2)

     1,163,440       623,159       540,281       1,087,258        930,356  

Other restaurant operating

     1,035,780       557,459       440,545       885,562        783,745  

Depreciation and amortization

     183,063       102,263       74,846       151,600        127,773  

General and administrative (2)

     249,180       138,376       158,147       234,642        197,135  

Hurricane property losses

     —         —         —         —          3,101  

Provision for impaired assets and restaurant closings

     30,296       21,766       8,530       14,154        27,170  

Contribution for “Dine Out for Hurricane Relief”

     —         —         —         —          1,000  

(Income) loss from operations of unconsolidated affiliates

     (569 )     (1,261 )     692       (5 )      (1,479 )
                                         

Total costs and expenses

     4,133,237       2,232,354       1,904,496       3,788,670        3,384,141  
                                         

Income from operations

     33,424       7,670       22,141       152,289        228,576  

Other income (expense), net

     —         —         —         7,950        (2,070 )

Interest income

     6,286       4,725       1,561       3,312        2,087  

Interest expense

     (176,420 )     (98,722 )     (6,212 )     (14,804 )      (6,848 )
                                         

Loss (income) before (benefit) provision for income taxes and minority interest in consolidated entities’ income

     (136,710 )     (86,327 )     17,490       148,747        221,745  

(Benefit) provision for income taxes

     (74,864 )     (47,143 )     (1,656 )     41,812        73,808  
                                         

(Loss) income before minority interest in consolidated entities’ income

     (61,846 )     (39,184 )     19,146       106,935        147,937  

Minority interest in consolidated entities’ income

     2,556       871       1,685       6,775        1,191  
                                         

Net (loss) income

   $ (64,402 )   $ (40,055 )   $ 17,461     $ 100,160      $ 146,746  
                                         

(continued…)

 

 

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     Successor     Predecessor  
   Pro Forma
Year Ended
December 31,
   Period from
June 15 to
December 31,
    Period
from
January 1
to
June 14,
    Year Ended
December 31,
 
   2007    2007 (1)     2007 (1)     2006      2005  
   (in thousands)     (in thousands, except ratio data)  

Statement of Cash Flows Data:

            

Cash provided by (used in):

            

Operating activities

     N/A    $ 160,781     $ 155,633     $ 350,713      $ 364,114  

Investing activities

     N/A      (2,297,634 )     (119,753 )     (336,735 )      (318,782 )

Financing activities

     N/A      2,265,127       (87,906 )     (3,998 )      (48,433 )

Capital expenditures

     N/A      77,065       119,359       297,734        327,862  

Other Financial Data:

            

Cash rent expense

   $ 162,910    $ 94,367     $ 51,156     $ 101,577      $ 85,489  

Ratio of earnings to fixed charges (3)

     —        —         1.7 x     3.8 x      6.6 x

Management fee (4)

   $ 9,100    $ 5,162       —         —          —    

 

     Successor     Predecessor  
   As of
December 31,
2007
    As of December 31,  
     2006     2005  
         (in thousands)        

Balance Sheet Data (end of period):

      

Cash and cash equivalents

   $ 171,104     $ 94,856     $ 84,876  

Restricted cash (current and long-term)

     36,243       —         —    

Working capital deficit (5)

     (222,428 )     (248,991 )     (219,291 )

Total assets

     3,703,459       2,258,587       2,009,498  

Total debt, including current portion

     1,878,528       269,956       185,348  

Total unitholder’s/stockholders’ equity

     599,392       1,221,213       1,144,420  

 

     Successor           Predecessor  
   Year Ended
December 31,
          Year Ended
December 31,
 
   2007           2006     2005  

Restaurant Operating Data:

           

Company-owned restaurants (end of period)

           

Outback (domestic)

   688          679     670  

Outback (international)

   129          118     88  

Carrabba’s

   238          229     200  

Bonefish

   134          112     86  

Fleming’s

   54          45     39  

Other concepts

   75          67     54  

Franchise and development joint venture (end of period)

           

Outback (domestic)

   107          107     105  

Outback (international)

   49          44     52  

Bonefish

   6          7     4  
                       

Total restaurants (end of period)

   1,480          1,408     1,298  
                       

Same store sales growth (company-owned domestic restaurants): (6)

           

Outback

   (0.7 )%        (1.5 )%   (0.8 )%

Carrabba’s

   (1.0 )%        (1.1 )%   6.0  %

Bonefish

   (1.7 )%        0.4  %   4.3  %

Fleming’s

   0.4  %        4.3  %   11.5  %

 

(1) On June 14, 2007, OSI Restaurant Partners, Inc. was acquired by an investor group. Immediately following consummation of the Merger on June 14, 2007, OSI Restaurant Partners, Inc. converted into a Delaware limited liability company named OSI Restaurant Partners, LLC. The historical audited consolidated financial statements are presented for two periods: Predecessor and Successor, which relate to the period preceding the Merger and the period succeeding the

(continued…)

 

 

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Merger, respectively. The operations of OSI Restaurant Partners, Inc. are referred to for the Predecessor period and the operations of OSI Restaurant Partners, LLC are referred to for the Successor period.

 

  Assets and liabilities were assigned values, part carryover basis pursuant to Emerging Issues Task Force Issue No. 88-16, “Basis in Leveraged Buyout Transactions,” and part fair value, similar to a step acquisition, pursuant to EITF No. 90-12, “Allocating Basis to Individual Assets and Liabilities for Transactions within the Scope of Issue No. 88 -16.” As a result, there were zero retained earnings and accumulated depreciation and amortization after the allocation was made. Depreciation and amortization are higher in the Successor period due to these fair value assessments resulting in increases to the carrying value of property, plant and equipment and intangible assets.

 

  Interest expense has increased substantially in the Successor period in connection with our new financing arrangements. These arrangements include the issuance of senior notes in an aggregate principal amount of $550.0 million and senior secured credit facilities with a syndicate of institutional lenders and financial institutions. The senior secured credit facilities provide for senior secured financing of up to $1,560.0 million and consist of a $1,310.0 million term loan facility, a $150.0 million working capital revolving credit facility, including letter of credit and swing-line loan sub-facilities, and a $100.0 million pre-funded revolving credit facility that provides financing for capital expenditures only.

 

  Merger expenses of approximately $33.2 million and $7.6 million for the periods from January 1 to June 14, 2007 (Predecessor) and from June 15 to December 31, 2007 (Successor), respectively, and management fees of approximately $5.2 million for the period from June 15 to December 31, 2007 (Successor) were included in general and administrative expenses in our Consolidated Statements of Operations and reflect primarily the professional service costs incurred in connection with the Merger and the management services as described in (4) below.

 

(2) In 2006, we adopted the fair value method of accounting for stock-based employee compensation as required by SFAS no. 123R, “Share-Based Payment,” a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” The fair value based method required us to expense all stock-based employee compensation. We adopted SFAS No. 123R using the modified prospective method. Accordingly, we have expensed all unvested and newly granted stock-based employee compensation beginning January 1, 2006, but prior period amounts have not been retrospectively adjusted.

 

(3) The ratio of earnings to fixed charges is computed by dividing earnings to fixed charges. For purposes of calculating the ratio of earnings to fixed charges, earnings represents pre-tax income from continuing operations before adjustment for minority interests in consolidated subsidiaries plus fixed charges and amortization of capitalized interest, less capitalized interest. Fixed charges include: (i) interest expense, whether expensed or capitalized; (ii) amortization of deferred financing fees; and (iii) the portion of rental expense that we believe is representative of the interest component of rental expense. For the pro forma year ended December 31, 2007 and for the period from June 15 to December 31, 2007, earnings were insufficient to cover fixed charges by approximately $138.5 million and $88.2 million, respectively.

 

(4) Upon completion of the Merger, we 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 Partners, LLC and Catterton Partners. In accordance with the terms of the agreement, the Management Company will provide management services to us 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 $9.1 million 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.

 

(5) We define working capital as current assets, including cash and the current portion of restricted cash, minus current liabilities, which includes the current portion of long-term debt and guaranteed debt.

 

(6) Same store sales increase (decrease) represents the percentage increase (decrease) in net sales, for restaurants open the same number of months in the indicated period and comparable period of the previous year. A restaurant is deemed to become comparable in its 18th month of operation in order to eliminate new opening sales distortions.

 

 

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RISK FACTORS

You should carefully consider the risk factors set forth below as well as the other information contained in this prospectus before deciding to tender your outstanding notes in the exchange offer. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition or results of operations. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. In such a case, you may lose all or part of your original investment.

Risks Related to the Exchange Offer

There may be adverse consequences if you do not exchange your outstanding notes.

If you do not exchange your outstanding notes for exchange notes in the exchange offer, you will continue to be subject to restrictions on transfer of your outstanding notes as set forth in the prospectus distributed in connection with the private offering of the outstanding notes. In general, the outstanding notes may not be offered or sold unless they are registered or exempt from registration under the Securities Act and applicable state securities laws. Except as required by the registration rights agreements, we do not intend to register resales of the outstanding notes under the Securities Act. You should refer to “Summary—The Exchange Offer” and “The Exchange Offer” for information about how to tender your outstanding notes.

The tender of outstanding notes under the exchange offer will reduce the outstanding amount of the outstanding notes, which may have an adverse effect upon, and increase the volatility of, the market prices of the outstanding notes due to a reduction in liquidity.

Risks Related to Our Indebtedness and Certain Other Obligations

Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, 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 notes.

We are highly leveraged. The following chart shows our level of indebtedness as of December 31, 2007:

 

     December 31, 2007
   (in thousands)

Term loan facility

   $ 1,260,000

The notes

     550,000

Guaranteed debt, sale-leaseback obligations and existing notes payable

     68,528
      

Total indebtedness

   $ 1,878,528
      

As of December 31, 2007, we also had approximately $100.5 million in available unused borrowing capacity under our working capital revolving credit facility (after giving effect to undrawn letters of credit of approximately $49.5 million) and $100.0 million in available unused borrowing capacity under our pre-funded revolving credit facility that provides financing for capital expenditures only. In addition, our South Korean subsidiary had available approximately 17.0 billion Korean won ($18.1 million at December 31, 2007) in unused borrowing capacity under a revolving credit line and an overdraft line.

Our high degree of leverage could have important consequences for you, including:

 

   

making it more difficult for us to make payments on the notes;

 

   

increasing our vulnerability to general economic and industry conditions;

 

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requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;

 

   

exposing us to the risk of increased interest rates as certain of our borrowings under our senior secured credit facilities will be at variable rates of interest;

 

   

restricting us from making strategic acquisitions or divestitures or causing us to make non-strategic divestitures;

 

   

limiting our ability to obtain additional financing for working capital, capital expenditures, restaurant development, debt service requirements, acquisitions and general corporate or other purposes; and

 

   

limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future, subject to the restrictions contained in our senior secured credit facilities and the indenture governing our notes. If new indebtedness is added to our current debt levels, the related risks that we now face could intensify.

As of December 31, 2007, we had $1,260.0 million of debt outstanding under our senior secured credit facilities, which bear interest based on a floating rate index. An increase in these floating rates could cause a material increase in our annual interest expense.

Our debt agreements contain restrictions that limit our flexibility in operating our business.

Our senior secured credit facilities and the indenture governing the notes contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and our restricted subsidiaries’ ability to, among other things, incur or guarantee additional indebtedness, pay dividends on, redeem or repurchase, our capital stock, make certain acquisitions or investments, incur or permit to exist certain liens, enter into transactions with affiliates or sell our assets to, merge or consolidated with or into, another company. In addition, our senior secured credit facilities require us to satisfy certain financial tests and ratios and limit our ability to make capital expenditures. Our ability to satisfy such tests and ratios may be affected by events outside of our control.

Upon the occurrence of an event of default under the senior secured credit facilities, 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. If we are unable to repay those amounts, the lenders under the senior secured credit facilities could proceed against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under the senior secured credit facilities. If the lenders under the senior secured credit facilities accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay the senior secured credit facilities, as well as our unsecured indebtedness, including the notes.

Certain of our domestic company-owned restaurants are subject to a market rate master lease with our sister company, PRP. An event of default under this lease could result in our loss of use of some or all of these restaurant properties.

In connection with the Transactions, the fee owned real estate and certain related assets associated with 343 of our domestic company-owned restaurants were sold to PRP and then leased to us and our subsidiaries through a market rate master lease and a series of underlying subleases. The market rate master lease contains customary representations and warranties, affirmative and negative covenants and events of default. The market rate master lease requires an aggregate monthly rental payment with respect to all leased restaurants, without any grace period for late payment. If a default occurs under the market rate master lease, PRP is entitled to take various actions to enforce its rights, including, in certain circumstances, termination of the master lease. In

 

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addition, if PRP were to default under its real estate credit facility, the lenders would be entitled to take various actions to enforce their rights, including, in certain circumstances, foreclosing on the restaurant properties. PRP’s primary source of revenue (and consequently its primary source of funds available to service its own debt under its real estate credit facility) is the monthly rental payments we make under the market rate master lease. If we fail to make payments or otherwise default under the market rate master lease, PRP could default under its real estate credit facility. If the market rate master lease were to be terminated in connection with any default by us 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, we could, subject to the terms of a subordination and nondisturbance agreement, lose the use of some or all of the properties that we lease under the market rate master lease. Any such loss of the use of such restaurant properties could have a material adverse effect on our business.

Risks Related to Our Business

Competition for customers, real estate, employees, and supplies, and changes in certain conditions, may affect our profit margins.

The restaurant industry is highly competitive with respect to price, service, location and food quality, and there are many well-established competitors with greater financial and other resources than ours. Some of our competitors have been in existence for a substantially longer period than we have and may be better established in the markets where our restaurants are or may be located. There is also active competition for management personnel as well as attractive suitable real estate sites. Changes in consumer tastes, nutritional and dietary trends, attitudes about alcohol consumption, local, regional, national or international economic conditions, demographic trends, traffic patterns, and the type, number and location of competing restaurants often affect the restaurant business. In addition, factors such as inflation, increased prices for food, fuel costs, marketing costs and effectiveness, labor and benefit costs, energy costs and the availability of experienced management and hourly employees may adversely affect the restaurant industry in general and our restaurants in particular.

Our business is subject to seasonal fluctuations.

Historically, customer spending patterns for our established restaurants are generally highest in the first quarter of the year and lowest in the third quarter of the year. Additionally, holidays, severe winter weather, hurricanes, thunderstorms and similar conditions may affect sales volumes seasonally in some of the markets where we operate. Our quarterly results have been and will continue to be significantly affected by the timing of new restaurant openings and their associated pre-opening costs. As a result of these and other factors, our financial results for any given quarter may not be indicative of the results that may be achieved for a full fiscal year.

Loss of key personnel or our inability to attract and retain new qualified personnel could hurt our business and inhibit our ability to operate and grow successfully.

Our success will continue to depend to a significant extent on our leadership team and other key management personnel. If we are unable to attract and retain sufficiently experienced and capable management personnel, our business and financial results may suffer. Our success also will continue to depend on our ability to attract and retain qualified personnel to operate our restaurants. When talented employees leave, we may have difficulty replacing them, and our business may suffer. There can be no assurance that we will be able to successfully attract and retain the personnel that we need.

 

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Risks associated with our expansion plans may have adverse consequences on our ability to increase revenues.

We are pursuing a disciplined growth strategy by expanding our restaurant base at a more measured pace relative to recent history. A variety of factors could cause the actual results and outcome of those expansion plans to differ from the anticipated results. Our development schedule for new restaurant openings is subject to a number of risks that could cause actual results to differ, including among other things:

 

   

availability of attractive sites for new restaurants and the ability to obtain appropriate real estate sites at acceptable prices;

 

   

the ability to obtain all required governmental permits, including zoning approvals and liquor licenses, on a timely basis;

 

   

impact of moratoriums or approval processes of state, local or foreign governments, which could result in significant delays;

 

   

the ability to obtain all necessary contractors and sub-contractors;

 

   

union activities such as picketing and hand billing which could delay construction;

 

   

the ability to negotiate suitable lease terms;

 

   

the ability to generate and borrow funds;

 

   

the ability to recruit and train skilled management and restaurant employees;

 

   

the ability to receive the premises from the landlord’s developer without any delays; and

 

   

weather and acts of God beyond our control resulting in construction delays.

Some of our new restaurants may take several months to reach planned operating levels due to inefficiencies typically associated with new restaurants, including lack of market awareness and other factors. There is also the possibility that new restaurants may attract customers of existing restaurants, thereby reducing the revenues of such existing restaurants.

It is difficult to estimate the performance of newly opened restaurants. Earnings achieved to date by restaurants opened for less than two years may not be indicative of future operating results. Should enough of these new restaurants not meet targeted performance, it could have a material adverse effect on our operating results.

The development of newer concepts may not be as successful as our experience in the development of the Outback concept. Development rates for newer concepts may differ significantly and there is increased risk in the development of a new restaurant system.

Our ability to comply with government regulation, and the costs of compliance, could affect our business.

Our restaurants are subject to various federal, state, local and international laws affecting our business. Each of our restaurants is subject to licensing and regulation by a number of governmental authorities, which may include, among others, alcoholic beverage control, health and safety, environmental and fire agencies in the state, municipality or country in which the restaurant is located. Difficulty in obtaining or failing to obtain the required licenses or approvals could delay or prevent the development of a new restaurant in a particular area. Additionally, difficulties or inabilities to retain or renew licenses, or increased compliance costs due to changed regulations, could adversely affect operations at existing restaurants.

Approximately 15% of our restaurant sales are attributable to the sale of alcoholic beverages. Alcoholic beverage control regulations require each of our restaurants to apply to a state authority and, in certain locations, county or municipal authorities for a license or permit to sell alcoholic beverages on the premises and to provide

 

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service for extended hours and on Sundays. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of daily operations of our restaurants, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling and storage and dispensing of alcoholic beverages. The failure of a restaurant to obtain or retain liquor or food service licenses would adversely affect the restaurant’s operations. Additionally, we may be subject in certain states to “dramshop” statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. We carry liquor liability coverage as part of our existing comprehensive general liability insurance, but cannot guarantee that this insurance will be adequate in the event we are found liable.

Our restaurant operations are also subject to federal and state labor laws, including the Fair Labor Standards Act, governing such matters as minimum wages, overtime, tip credits and worker conditions. Our employees who receive tips as part of their compensation, such as servers, are paid at a minimum wage rate, after giving effect to applicable tip credits. Our other personnel, such as our kitchen staff, are typically paid in excess of minimum wage. As significant numbers of our food service and preparation personnel are paid at rates related to the applicable minimum wage, further increases in the minimum wage or other changes in these laws could increase our labor costs. Our ability to respond to minimum wage increases by increasing menu prices will depend on the responses of our competitors and customers. Other governmental initiatives such as mandated health insurance, if implemented, could adversely affect us as well as the restaurant industry in general. We are subject to the Americans With Disabilities Act, or the Act, which, among other things, requires our restaurants to meet federally mandated requirements for the disabled. The Act prohibits discrimination in employment and public accommodations on the basis of disability. The Act became effective in January 1992 with respect to public accommodation and July 1992 with respect to employment. Under the Act, we could be required to expend funds to modify our restaurants to provide service to, or make reasonable accommodations for the employment of, disabled persons. In addition, our employment practices are subject to the requirements of the Immigration and Naturalization Service relating to citizenship and residency. We may also become subject to legislation or regulation seeking to tax and/or regulate high-fat and high-sodium foods, particularly in the United States, which could be costly to comply with.

We face a variety of risks associated with doing business in foreign markets.

We have a significant number of company-owned and franchised Outback restaurants outside the United States and intend to continue our efforts to grow internationally. Although we believe we have developed the support structure for international operations and growth, there is no assurance that international operations will be profitable or international growth will occur.

Our foreign operations are subject to all of the same risks as our domestic restaurants, as well as a number of additional risks. These additional risks include, among others, international economic and political conditions and the possibility of instability and unrest, differing cultures and consumer preferences, diverse government regulations and tax systems, the ability to source high-quality ingredients and other commodities in a cost-effective manner, uncertain or differing interpretations of rights and obligations in connection with international franchise agreements and the collection of ongoing royalties from international franchisees, the availability and cost of land and construction costs, and the availability of experienced management, appropriate franchisees, and area operating partners.

Currency regulations and fluctuations in exchange rates could also affect our performance. We have direct investments in restaurants in Canada, South Korea, Hong Kong, Japan, the Philippines and Brazil, as well as international franchises, in a total of 20 countries. As a result, we may experience losses from foreign currency translation, and such losses could adversely affect our overall sales and earnings.

 

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Additionally, we are subject to governmental regulation throughout the world, including antitrust and tax requirements, anti-boycott regulations, import/export/customs regulations and other international trade regulations, the USA Patriot Act and the Foreign Corrupt Practices Act. Any new regulatory or trade initiatives could impact our operations in certain countries. Failure to comply with any such legal requirements could subject us to monetary liabilities and other sanctions, which could harm our business, results of operations and financial condition.

Increased commodity, energy and other costs could adversely affect our business.

The performance of our restaurants depends on our ability to anticipate and react to changes in the price and availability of food commodities, including among other things beef, chicken, seafood, butter, cheese and produce. Prices may be affected due to the general risk of inflation, shortages or interruptions in supply due to weather, disease or other conditions beyond our control, or other reasons. Increased prices or shortages could affect the cost and quality of the items we buy. These events, combined with other more general economic and demographic conditions, could impact our pricing and negatively affect our profit margins.

The performance of our restaurants is also adversely affected by increases in the price of utilities on which the restaurants depend, such as natural gas, whether as a result of inflation, shortages or interruptions in supply, or otherwise. We are using derivative instruments to mitigate our exposure to material increases in natural gas prices. We are not applying hedge accounting, as defined by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and any changes in fair value of the derivative instruments are marked-to-market through earnings in the period of change. To date, effects of these derivative instruments have been immaterial to our financial statements for all periods presented.

Our business also incurs significant costs for insurance, labor, marketing, taxes, real estate, borrowing and litigation, all of which could increase due to inflation, changes in laws, competition, or other events beyond our control.

Our ability to respond to increased costs by increasing menu prices or by implementing alternative processes or products will depend on our ability to anticipate and react to such increases and other more general economic and demographic conditions, as well as the responses of our competitors and customers. All of these things may be difficult to predict and beyond our control. In this manner, increased costs could adversely affect our performance.

Infringement of our intellectual property could harm our business.

We regard our service marks, including “Outback Steakhouse,” “Carrabba’s Italian Grill,” “Bonefish Grill,” “Fleming’s Prime Steakhouse and Wine Bar,” and our “Bloomin’ Onion” trademark as having significant value and as being important factors in the marketing of our restaurants. We have also obtained trademarks for several other of our menu items, and “No Rules. Just Right,” “Aussie Mood Awesome Food” and other advertising slogans. In addition, the overall layout, appearance and designs of our restaurants are our valuable assets. We believe that these and other intellectual property are valuable assets that are critical to our success. We rely on a combination of protections provided by contracts, copyrights, patents, trademarks, and other common law rights, such as trade secret and unfair competition laws, to protect our restaurants and services from infringement. We have registered certain trademarks and service marks and have other registration applications pending in the United States and foreign jurisdictions. However, not all of the trademarks or service marks that we currently use have been registered in all of the countries in which we do business and they may never be registered in all of these countries. There may not be adequate protection for certain intellectual property such as the overall appearance of our restaurants. We are aware of names and marks similar to our service marks being used by other persons in certain geographic areas in which we have restaurants. Although we believe such uses will not adversely affect us, further or currently unknown unauthorized uses or other misappropriation of our trademarks or service marks could diminish the value of our brands and restaurant concepts and may adversely affect our

 

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business. We may be unable to detect such unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Effective intellectual property protection may not be available in every country in which we have or intend to open or franchise a restaurant. Failure to adequately protect our intellectual property rights could damage or even destroy our brands and impair our ability to compete effectively. Even where we have effectively secured statutory protection for intellectual property, our competitors may misappropriate our intellectual property and our employees, consultants and suppliers may breach their obligations not to reveal our confidential information including trade secrets. Although we have taken appropriate measures to protect our intellectual property, there can be no assurance that these protections will be adequate or that our competitors will not independently develop products or concepts that are substantially similar to our restaurants and services. Despite our efforts, it may be possible for third-parties to reverse-engineer, otherwise obtain, copy, and use information that we regard as proprietary. Furthermore, defending or enforcing our trademark rights, branding practices and other intellectual property, and seeking injunction and/or compensation for misappropriation of confidential information, could result in the expenditure of significant resources.

The interests of our controlling stockholders may conflict with yours as a holder of the notes.

The Sponsors, together with certain co-investors designated by the Sponsors, indirectly own approximately 79% of our equity securities. Their interests as equity holders may conflict with yours as a holder of notes. They may have an incentive to increase the value of their investment or cause us to distribute funds at the expense of our financial condition and affect our ability to make payments on the notes. In addition, they will have the power to elect a majority of our board of managers (the “Board”) and appoint new officers and management and, therefore, effectively will control many other major decisions regarding our operations. For more information, see “Management” and “Certain Relationships and Related Party Transactions.”

Litigation could adversely affect our business.

Our business is subject to the risk of litigation by employees, consumers, suppliers, shareholders or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action and regulatory actions, is difficult to assess or quantify. Plaintiffs may seek recovery of large amounts and the magnitude of potential loss may remain unknown for substantial periods of time. The cost to defend future litigation may be significant. Adverse publicity resulting from litigation, regardless of the validity of any allegations, may adversely affect our business. See “Business—Legal Proceedings” for a description of certain litigation involving the Company.

Conflict or terrorism could negatively affect our business.

We cannot predict the effects of actual or threatened armed conflicts or terrorist attacks, efforts to combat terrorism, military action against any foreign state or group located in a foreign state or heightened security requirements on local, regional, national, or international economies or consumer confidence.

Unfavorable publicity could harm our business.

Our business could be negatively affected by publicity resulting from complaints or litigation, either against us or other restaurant companies, alleging poor food quality, food-borne illness, personal injury, adverse health effects (including obesity) or other concerns. Regardless of the validity of any such allegations, unfavorable publicity relating to any number of restaurants or even a single restaurant could adversely affect public perception of the entire brand.

Additionally, unfavorable publicity towards a food product generally could negatively impact our business. For example, publicity regarding health concerns or outbreaks of disease in a food product, such as bovine spongiform encephalopathy (also known as “mad cow” disease), could reduce demand for our menu offerings. These factors could have a material adverse affect on our business.

 

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The food service industry is affected by consumer preferences and perceptions. Changes in these preferences and perceptions may lessen the demand for our products, which would reduce sales and harm our business.

Food service businesses are affected by changes in consumer tastes, national, regional and local economic conditions, and demographic trends. For instance, if prevailing health or dietary preferences cause consumers to avoid steak and other products we offer in favor of foods that are perceived as more healthy, our business and operating results would be harmed. Additionally, if consumers’ perception of the economy deteriorates, consumers may change spending patterns to reduce discretionary spending, such as dining at restaurants.

We have long-term agreements and contracts with select suppliers. If our suppliers are unable to fulfill their obligations under their contracts, we would encounter supply shortages and incur higher costs.

We have a limited number of suppliers for our major products, such as beef. Domestically, we currently purchase 90% of our beef from four beef suppliers. These four beef suppliers represent 87% of the total beef marketplace in the United States. Although we have not experienced significant problems with our suppliers, if our suppliers are unable to fulfill their obligations under their contracts, we would encounter supply shortages and incur higher costs.

Shortages or interruptions in the supply or delivery of fresh food products could adversely affect our operating results.

We are dependent on frequent deliveries of fresh food products that meet our specifications. Shortages or interruptions in the supply of fresh food products caused by unanticipated demand, problems in production or distribution, inclement weather or other conditions could adversely affect the availability, quality and cost of ingredients, which would adversely affect our operating results.

The possibility of future misstatement exists due to inherent limitations in our control systems.

We cannot be certain that our internal control over financial reporting and disclosure controls and procedures will prevent all possible error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of error or fraud, if any, in our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.

Risks Related to the Notes

We may not be able to generate sufficient cash to service all of our indebtedness, including the notes, and operating lease obligations, and we may be forced to take other actions to satisfy our obligations under our indebtedness and operating lease obligations, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations and to satisfy our operating lease obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you that we will maintain a level of cash flow from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the notes, or to pay our operating lease obligations. 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 investments and capital expenditures, or to

 

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sell assets, seek additional capital or restructure or refinance our indebtedness, including the 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 substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our senior secured credit facilities and the indenture governing the 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.

Your right to receive payments on the notes is effectively junior to those lenders who have a security interest in our assets.

Our obligations under the notes and our guarantors’ obligations under their guarantees of the notes are unsecured, but our obligations under our senior secured credit facilities and each guarantor’s obligations under their respective guarantees of the senior secured credit facilities are secured by a security interest in substantially all of our tangible and intangible assets, including the stock and the assets of certain of our current and future wholly-owned U.S. subsidiaries and a portion of the stock of certain of our non-U.S. subsidiaries. Our obligations under the notes are also structurally subordinated to our sale-leaseback. As of December 31, 2007, we had $1,878.5 million in outstanding debt on our consolidated balance sheet, of which $1.3 billion was secured. We also had $100.5 million in available unused borrowing capacity under our working capital revolving credit facility (after giving effect to undrawn letters of credit of approximately $49.5 million) and $100.0 million in available unused borrowing capacity under our pre-funded revolving credit facility that provides financing for capital expenditures only.

If we are declared bankrupt or insolvent, or if we default under our senior secured credit facilities, the lenders could declare all of the funds borrowed thereunder, together with accrued interest, immediately due and payable. If we were unable to repay such indebtedness, the lenders could foreclose on the pledged assets to the exclusion of holders of the notes, even if an event of default exists under the indenture governing the notes offered hereby at such time. Because of the structural subordination of the notes relative to our secured indebtedness, in the event of our bankruptcy, liquidation or dissolution, our assets will not be available to pay obligations under the notes until we have made all payments in cash on our secured indebtedness. We cannot assure you that sufficient assets will remain after all these payments have been made to make any payments on the notes, including payments of principal or interest when due.

Furthermore, if the lenders foreclose and sell the pledged equity interests in any subsidiary guarantor under the notes, then that guarantor will be released from its guarantee of the notes automatically and immediately upon such sale. In any such event, because the notes will not be secured by any of our assets or the equity interests in subsidiary guarantors, it is possible that there would be no assets remaining from which your claims could be satisfied or, if any assets remained, they might be insufficient to satisfy your claims fully. See “Description of Other Indebtedness.”

The indenture governing the notes permits us and our restricted subsidiaries to incur substantial additional indebtedness in the future, including additional senior secured indebtedness.

Your claims to our assets will be structurally subordinated to all of the creditors of any non-guarantor subsidiaries.

Not all of our subsidiaries guarantee the notes. The notes are structurally subordinated to indebtedness (and other liabilities) of our subsidiaries that do not guarantee the notes. In the event of a bankruptcy, liquidation or reorganization of any of these non-guarantor subsidiaries, the non-guarantor subsidiaries will pay the holders of their debt and their trade creditors before they will be able to distribute any of their assets to us.

As more fully described in this prospectus under “Description of the Exchange Notes—Certain Covenants—Limitation on Guarantees of Indebtedness by Restricted Subsidiaries,” the indenture requires that each of our

 

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domestic wholly-owned restricted subsidiaries that guarantees the obligations under the senior secured credit facilities or any of our other indebtedness also be a guarantor of the notes. Our other subsidiaries are not required to guarantee the notes under the indenture. The senior secured credit facilities require guarantees of the obligations thereunder from each of our current and future domestic wholly-owned restricted subsidiaries in our Outback, Carrabba’s and Cheeseburger in Paradise concepts, which consequently are guarantors of the notes under the indenture. Additionally, the senior secured credit facilities will require us to provide additional guarantees of the senior secured credit facilities in the future from other domestic wholly-owned restricted subsidiaries if the consolidated EBITDA (as defined in the senior secured credit facilities) attributable to our non-guarantor domestic wholly-owned restricted subsidiaries (taken together as a group) would exceed 10% of our consolidated EBITDA as determined on a company-wide basis; at which time 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 (taken together as a group) to an amount not in excess of 10% of our company-wide consolidated EBITDA. Consequently, such additional domestic wholly-owned restricted subsidiaries will be required to be guarantors of the notes under the indenture. The terms of the senior secured credit facilities, including the provisions relating to which of our subsidiaries guarantee the obligations under the senior secured credit facilities, may be amended, modified or waived, and guarantees thereunder may be released, in each case at the lenders discretion and without the consent or approval of noteholders. You will not have a claim as a creditor against any subsidiary that is no longer a guarantor of the notes, and the indebtedness and other liabilities, including trade payables, whether secured or unsecured, of those subsidiaries will effectively be senior, in respect of the assets of such subsidiaries, to claims of noteholders.

For the period from January 1 to June 14, 2007 and for the period from June 15 to December 31, 2007, the non-guarantor Subsidiaries taken together represented approximately 26.6% and 27.2%, respectively, of our total revenues and had net income of approximately $12.5 million and $8.6 million, respectively, while we had aggregate net income of approximately $17.5 million and a net loss of $40.1 million, respectively, for such periods. As of December 31, 2007, such non-guarantor subsidiaries held approximately 36.9% of our total assets. As of December 31, 2007, the non-guarantor subsidiaries had approximately $237.3 million of liabilities (including trade payables but excluding intercompany transactions), to which the Notes are structurally subordinated. In addition, our South Korean subsidiary has available approximately $18.1 million in unused borrowing capacity under a revolving credit line and an overdraft line.

If we default on our obligations to pay our indebtedness, we may not be able to make payments on the notes.

Any default under the agreements governing our indebtedness, including a default under the senior secured credit facilities, that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness, could prevent us from paying principal, premium, if any, and interest on the notes and could substantially decrease the market value of the notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including covenants in our senior secured credit facilities and the indenture governing the notes offered hereby), we could be in default under the terms of the agreements governing such indebtedness, including our senior secured credit facilities and the indenture governing the notes offered hereby. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under our senior secured credit facilities could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to obtain waivers from the required lenders under our senior secured credit facilities to avoid being in default. If we breach our covenants under our senior secured credit facilities and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under our senior secured credit facilities, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.

 

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We may not be able to repurchase the notes upon a change of control.

Upon the occurrence of specific kinds of change of control events, we are required to offer to repurchase all outstanding notes at 101% of their principal amount plus accrued and unpaid interest. The source of funds for any such purchase of the notes will be our available cash or cash generated from our subsidiaries’ operations or other sources, including borrowings, sales of assets or sales of equity. We may not be able to repurchase the notes upon a change of control because we may not have sufficient financial resources to purchase all of the notes that are tendered upon a change of control. Further, we are contractually restricted under the terms of our senior secured credit facilities from repurchasing all of the notes tendered by holders upon a change of control. Accordingly, we may not be able to satisfy our obligations to purchase the notes unless we are able to refinance or obtain waivers under our senior secured credit facilities. Our failure to repurchase the notes upon a change of control would cause a default under the indenture governing the notes and a cross-default under the senior secured credit facilities. The senior secured credit facilities also provide that a change of control will be a default that permits lenders to accelerate the maturity of borrowings thereunder. Any of our future debt agreements may contain similar provisions.

Federal and state fraudulent transfer laws may permit a court to void the notes or the guarantees, and, if that occurs, you may not receive any payments on the notes.

Federal and state fraudulent transfer and conveyance statutes may apply to the issuance of the notes and the incurrence of the guarantees. Under federal bankruptcy law and comparable provisions of state fraudulent transfer or conveyance laws, which may vary from state to state, the notes or guarantees could be voided as a fraudulent transfer or conveyance if (1) we or any of the guarantors, as applicable, issued the notes or incurred the guarantees with the intent of hindering, delaying or defrauding creditors or (2) we or any of the guarantors, as applicable, received less than reasonably equivalent value or fair consideration in return for either issuing the notes or incurring the guarantees and, in the case of (2) only, one of the following is also true at the time thereof:

 

   

we or any of the guarantors, as applicable, were insolvent or rendered insolvent by reason of the issuance of the notes or the incurrence of the guarantees;

 

   

the issuance of the notes or the incurrence of the guarantees left us or any of the guarantors, as applicable, with an unreasonably small amount of capital to carry on the business;

 

   

we or any of the guarantors intended to, or believed that we or such guarantor would, incur debts beyond our or such guarantor’s ability to pay as they mature; or

 

   

we or any of the guarantors were a defendant in an action for money damages, or had a judgment for money damages docketed against us or such guarantor if, in either case, after final judgment, the judgment is unsatisfied.

If a court were to find that the issuance of the notes or the incurrence of the guarantee was a fraudulent transfer or conveyance, the court could void the payment obligations under the notes or such guarantee or subordinate the notes or such guarantee to presently existing and future indebtedness of ours or of the related guarantor, or require the holders of the notes to repay any amounts received. In the event of a finding that a fraudulent transfer or conveyance occurred, you may not receive any payment on the notes. Further, the voidance of the notes could result in an event of default with respect to our and our subsidiaries’ other debt that could result in acceleration of such debt. As a general matter, value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied. A debtor will generally not be considered to have received value in connection with a debt offering if the debtor uses the proceeds of that offering to make a dividend payment or otherwise retire or redeem equity securities issued by the debtor.

We cannot be certain as to the standards a court would use to determine whether or not we or the guarantors were solvent at the relevant time or, regardless of the standard that a court uses, that the notes or the guarantees would not be subordinated to our or any of our guarantors’ other debt.

 

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Your ability to transfer the exchange notes may be limited by the absence of an active trading market, and an active trading market for the exchange notes may not develop.

The exchange notes are new securities for which there is currently no market. Accordingly, the development or liquidity of any market for the exchange notes is uncertain. We do not intend to apply for a listing of the exchange notes on a securities exchange or on any automated dealer quotation system.

We cannot assure you as to the liquidity of markets that may develop for the exchange notes, your ability to sell the exchange notes or the price at which you would be able to sell the exchange notes. If such markets were to exist, the exchange notes could trade at prices that may be lower than their principal amount or purchase price depending on many factors, including prevailing interest rates, the market for similar notes, our financial and operating performance and other factors. Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the exchange notes. The market, if any, for the exchange notes may experience similar disruptions and any such disruptions may adversely affect the prices at which you may sell your notes.

You should not rely on the Co-Issuer in evaluating an investment in the notes.

The Co-Issuer was formed in connection with the initial offering of the outstanding notes and currently has no independent operations and no assets and generally will be prohibited, for so long as it is required to be a co-issuer of the notes, from engaging in any material business activities, except in connection with the issuance of the notes, incurrence of indebtedness permitted under the indenture governing the notes, including guaranteeing the senior secured credit facilities, and activities incidental thereto. You should therefore not rely upon the Co-Issuer in evaluating whether to invest in the notes.

 

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MARKET AND INDUSTRY INFORMATION

The data included in this prospectus regarding markets and ranking, including the size of certain markets and our position and the position of our competitors within these markets, are based on reports of published industry sources, and our estimates based on our management’s knowledge and experience in the markets in which we operate. We believe this information to be accurate as of the date of this prospectus. However, this information may prove to be inaccurate because of the method by which we obtained some of the data for our estimates or because this information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. As a result, you should be aware that market, ranking and other similar data included in this prospectus, and estimates and beliefs based on that data, may not be reliable. We cannot guarantee the accuracy or completeness of such information contained in this prospectus.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This registration statement contains “forward-looking statements” within the meaning of the federal securities laws, which statements involve risks and uncertainties. You can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or “anticipates” or similar expressions that concern our strategy, plans or intentions. All statements we make relating to the closing of the transactions described in this registration statement or to our estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performances and other developments. These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore our actual results may differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results.

Important factors that could cause actual results to differ materially from our expectations (“cautionary statements”) are disclosed under “Risk Factors” and elsewhere in this registration statement, including, without limitation, in conjunction with the forward-looking statements included in this registration statement. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements.

The matters referred to in the forward-looking statements contained in this registration statement may not in fact occur. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

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THE EXCHANGE OFFER

Purpose and Effect of the Exchange Offer

Concurrently with the consummation of the Transactions, we entered into a registration rights agreement with the initial purchasers of the outstanding notes, which requires us to file a registration statement under the Securities Act with respect to the exchange notes and, upon the effectiveness of the registration statement, offer to the holders of the outstanding notes the opportunity to exchange their outstanding notes for a like principal amount of exchange notes. The exchange notes will be issued without a restrictive legend and generally may be reoffered and resold without registration under the Securities Act.

Except as described below, upon the completion of the exchange offer, our obligations with respect to the registration of the outstanding notes and the exchange notes will terminate. A copy of the registration rights agreement has been filed as an exhibit to the registration statement of which this prospectus is a part, and this summary of the material provisions of the registration rights agreement does not purport to be complete and is qualified in its entirety by reference to the complete registration rights agreement. Under the registration rights agreement, we are obligated to use our reasonable best efforts to cause the exchange offer to be completed within 365 days after the issue date of the notes or, if required, to have one or more shelf registration statements declared effective on the time frames specified in the registration rights agreement. If we fail to meet this target, which we refer to as a registration default, the annual interest rate on the notes will increase by 0.25%. The annual interest rate on the notes will increase by an additional 0.25% for each subsequent 90-day period during which the registration default continues, up to a maximum additional interest rate of 1.00% per year over the interest rate shown on the cover of this offering memorandum. If the registration default is corrected, the interest rate on such notes will revert to the original level. If we must pay additional interest, we will pay it to holders of the outstanding notes in cash on the same dates that we make other interest payments on the outstanding notes, until the registration default is corrected.

Following the completion of the exchange offer, holders of outstanding notes not tendered will not have any further registration rights other than as set forth in the paragraphs below, and the outstanding notes will continue to be subject to certain restrictions on transfer. Additionally, the liquidity of the market for the outstanding notes could be adversely affected upon consummation of the exchange offer.

In order to participate in the exchange offer, a holder must represent to us, among other things, that:

 

   

the exchange notes acquired pursuant to the exchange offer are being obtained in the ordinary course of business;

 

   

the holder does not have an arrangement or understanding with any person to participate in the distribution of the exchange notes;

 

   

the holder is not an “affiliate,” as defined under Rule 405 under the Securities Act, of us or any subsidiary guarantor; and

 

   

if the holder is a broker-dealer that will receive exchange notes for its own account in exchange for outstanding notes that were acquired a result of market-making or other trading activities, then the holder will deliver a prospectus in connection with any resale of such exchange notes.

Under certain circumstances specified in the registration rights agreement, we may be required to file a “shelf” registration statement for a continuous offer in connection with the outstanding notes pursuant to Rule 415 under the Securities Act.

 

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Based on an interpretation by the Staff of the Commission set forth in no-action letters issued to third-parties unrelated to us, we believe that, with the exceptions set forth below, exchange notes issued in the exchange offer may be offered for resale, resold and otherwise transferred by the holder of exchange notes without compliance with the registration and prospectus delivery requirements of the Securities Act, unless the holder:

 

   

is an “affiliate,” within the meaning of Rule 405 under the Securities Act, of us or any subsidiary guarantor;

 

   

is a broker-dealer who purchased outstanding notes directly from us for resale under Rule 144A or Regulation S or any other available exemption under the Securities Act;

 

   

acquired the exchange notes other than in the ordinary course of the holder’s business;

 

   

has an arrangement with any person to engage in the distribution of the exchange notes; or

 

   

is prohibited by any law or policy of the Commission from participating in the exchange offer.

Any holder who tenders in the exchange offer for the purpose of participating in a distribution of the exchange notes cannot rely on this interpretation by the Staff of the Commission and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. Each broker-dealer that receives exchange notes for its own account in exchange for outstanding notes, where such outstanding notes were acquired by such broker-dealer as a result of market making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such exchange note. See “Plan of Distribution.” Broker-dealers who acquired outstanding notes directly from us and not as a result of market making activities or other trading activities may not rely on the Staff’s interpretations discussed above or participate in the exchange offer, and must comply with the prospectus delivery requirements of the Securities Act in order to sell the outstanding notes.

Terms of the Exchange Offer

On the terms and subject to the conditions set forth in this prospectus and in the accompanying letters of transmittal, we will accept for exchange in the exchange offer any outstanding notes that are validly tendered and not validly withdrawn prior to the expiration date. Outstanding notes may only be tendered in multiples of $1,000. We will issue $1,000 principal amount of exchange notes in exchange for each $1,000 principal amount of outstanding notes surrendered in the exchange offer.

The form and terms of the exchange notes will be identical in all material respects to the form and terms of the outstanding notes except the exchange notes will be registered under the Securities Act, will not bear legends restricting their transfer and will not provide for any additional interest upon our failure to fulfill our obligations under the registration rights agreement to complete the exchange offer, or file, and cause to be effective, a shelf registration statement, if required thereby, within the specified time period. The exchange notes will evidence the same debt as the outstanding notes. The exchange notes will be issued under and entitled to the benefits of the same indenture that authorized the issuance of the outstanding notes. For a description of the indenture, see “Description of the Notes.”

As of the date of this prospectus, $550 million aggregate principal amount of the 10% Senior Notes due 2015 are outstanding. This prospectus and the letters of transmittal are being sent to all registered holders of outstanding notes. There will be no fixed record date for determining registered holders of outstanding notes entitled to participate in the exchange offer. We intend to conduct the exchange offer in accordance with the provisions of the registration rights agreement, the applicable requirements of the Securities Act and the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the rules and regulations of the SEC. Outstanding notes that are not tendered for exchange in the exchange offer will remain outstanding and continue to accrue interest and will be entitled to the rights and benefits such holders have under the indenture and the registration rights agreement except we will not have any further obligation to you to provide for the registration of the outstanding notes under the registration rights agreement.

 

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We will be deemed to have accepted for exchange properly tendered outstanding notes when we have given oral or written notice of the acceptance to the exchange agent. The exchange agent will act as agent for the tendering holders for the purposes of receiving the exchange notes from us and delivering exchange notes to holders. Subject to the terms of the registration rights agreement, we expressly reserve the right to amend or terminate the exchange offer and to refuse to accept the occurrence of any of the conditions specified below under “—Conditions to the Exchange Offer.”

If you tender your outstanding notes in the exchange offer, you will not be required to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of outstanding notes. We will pay all charges and expenses, other than certain applicable taxes described below in connection with the exchange offer. It is important that you read “—Fees and Expenses” below for more details regarding fees and expenses incurred in the exchange offer.

Expiration Date; Extensions, Amendments

As used in this prospectus, the term “expiration date” means 5 p.m., New York City time, on             , 2008. However, if we, in our sole discretion, extend the period of time for which the exchange offer is open, the term “expiration date” will mean the latest time and date to which the exchange offer is extended.

To extend the period of time during which the exchange offer is open, we will notify the exchange agent of any extension by oral or written notice, followed by notification by press release or other public announcement to the registered holders of the outstanding notes no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date.

We reserve the right, in our sole discretion:

 

   

to delay accepting for exchange any outstanding notes (if we amend or extend the exchange offer);

 

   

to extend or terminate the exchange offer if any of the conditions set forth below under “—Conditions to the Exchange Offer” have not been satisfied, by giving oral or written notice of such delay, extension or termination to the exchange agent; and

 

   

subject to the terms of the registration rights agreement, to amend the terms of the exchange offer in any manner.

Any delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice to the registered holders of the outstanding notes. If we amend the exchange offer in a manner that we determine to constitute a material change, we will promptly disclose the amendment in a manner reasonably calculated to inform the holders of the outstanding notes of that amendment.

Conditions to the Exchange Offer

Despite any other term of the exchange offer, we will not be required to accept for exchange, or to issue exchange notes in exchange for, any outstanding notes and we may terminate or amend the exchange offer as provided in this prospectus prior to the expiration date if in our reasonable judgment:

 

   

the exchange offer or the making of any exchange by a holder violates any applicable law or interpretation of the SEC; or

 

   

any action or proceeding has been instituted or threatened in any court or by or before any governmental agency with respect to the exchange offer that, in our judgment, would reasonably be expected to impair our ability to proceed with the exchange offer.

 

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In addition, we will not be obligated to accept for exchange the outstanding notes of any holder that has not made to us:

 

   

the representations described under “—Purpose and Effect of the Exchange Offer,” “—Procedures for Tendering Outstanding Notes” and “Plan of Distribution;” or

 

   

any other representations as may be reasonably necessary under applicable SEC rules, regulations, or interpretations to make available to us an appropriate form for registration of the exchange notes under the Securities Act.

We expressly reserve the right at any time or at various times to extend the period of time during which the exchange offer is open. Consequently, we may delay acceptance of any outstanding notes by giving oral or written notice of such extension to the holders of outstanding notes. We will return any outstanding notes that we do not accept for exchange for any reason without expense to their tendering holder promptly after the expiration or termination of the exchange offer.

We expressly reserve the right to amend or terminate the exchange offer and to reject for exchange any outstanding notes not previously accepted for exchange, upon the occurrence of any of the conditions of the exchange offer specified above. We will give oral or written notice of any extension, amendment, non-acceptance or termination to the holders of the outstanding notes as promptly as practicable. In the case of any extension, such notice will be issued no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date.

These conditions are for our sole benefit and we may assert them regardless of the circumstances that may give rise to them or waive them in whole or in part at any or at various times prior to the expiration date in our sole discretion. If we fail at any time to exercise any of the foregoing rights, this failure will not constitute a waiver of such right. Each such right will be deemed an ongoing right that it may assert at any time or at various times prior to the expiration date.

In addition, we will not accept for exchange any outstanding notes tendered, and will not issue exchange notes in exchange for any such outstanding notes, if at such time any stop order is threatened or in effect with respect to the registration statement of which this prospectus constitutes a part or the qualification of the indentures under the Trust Indenture Act of 1939 (the “TIA”).

Procedures for Tendering Outstanding Notes

To tender your outstanding notes in the exchange offer, you must comply with either of the following:

 

   

complete, sign and date the letter of transmittal, or a facsimile of the letter of transmittal, have the signature(s) on the letter of transmittal guaranteed if required by the letter of transmittal and mail or deliver such letter of transmittal or facsimile thereof to the exchange agent at the address set forth below under “—Exchange Agent—Notes” prior to the expiration date; or

 

   

comply with DTC’s Automated Tender Offer Program procedures described below.

In addition, either:

 

   

the exchange agent must receive certificates for outstanding notes along with the letter of transmittal prior to the expiration date;

 

   

the exchange agent must receive a timely confirmation of book-entry transfer of outstanding notes into the exchange agent’s account at DTC according to the procedures for book-entry transfer described below or a properly transmitted agent’s message prior to the expiration date; or

 

   

you must comply with the guaranteed delivery procedures described below.

 

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Your tender, if not withdrawn prior to the expiration date, constitutes an agreement between us and you upon the terms and subject to the conditions described in this prospectus and in the letter of transmittal.

The method of delivery of outstanding notes, letters of transmittal, and all other required documents to the exchange agent is at your election and risk. We recommend that instead of delivery by mail, you use an overnight or hand delivery service, properly insured. In all cases, you should allow sufficient time to assure timely delivery to the exchange agent before the expiration date. You should not send letters of transmittal or certificates representing outstanding notes to us. You may request that your broker, dealer, commercial bank, trust company or nominee effect the above transactions for you.

If you are a beneficial owner whose outstanding notes are registered in the name of a broker, dealer, commercial bank, trust company, or other nominee and you wish to tender your outstanding notes, you should promptly contact the registered holder and instruct the registered holder to tender on your behalf. If you wish to tender the outstanding notes yourself, you must, prior to completing and executing the letter of transmittal and delivering your outstanding notes, either:

 

   

make appropriate arrangements to register ownership of the outstanding notes in your name; or

 

   

obtain a properly completed bond power from the registered holder of outstanding notes.

The transfer of registered ownership may take considerable time and may not be able to be completed prior to the expiration date.

Signatures on the applicable letter of transmittal or a notice of withdrawal, as the case may be, must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or another “eligible guarantor institution” within the meaning of Rule 17A(d)-15 under the Exchange Act unless the outstanding notes surrendered for exchange are tendered:

 

   

by a registered holder of the outstanding notes who has not completed the box entitled “Special Registration Instructions” or “Special Delivery Instructions” on the letter of transmittal; or

 

   

for the account of an eligible guarantor institution.

If the letter of transmittal is signed by a person other than the registered holder of any outstanding notes listed on the outstanding notes, such outstanding notes must be endorsed or accompanied by a properly completed bond power. The bond power must be signed by the registered holder as the registered holder’s name appears on the outstanding notes and an eligible guarantor institution must guarantee the signature on the bond power.

If the letter of transmittal or any certificates representing outstanding notes, or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations, or others acting in a fiduciary or representative capacity, those persons should also indicate when signing and, unless waived by us, they should also submit evidence satisfactory to us of their authority to so act.

The exchange agent and DTC have confirmed that any financial institution that is a participant in DTC’s system may use DTC’s Automated Tender Offer Program to tender. Participants in the program may, instead of physically completing and signing the applicable letter of transmittal and delivering it to the exchange agent, electronically transmit their acceptance of the exchange by causing DTC to transfer the outstanding notes to the exchange agent in accordance with DTC’s Automated Tender Offer Program procedures for transfer. DTC will then send an agent’s message to the exchange agent. The term “agent’s message” means a message transmitted by DTC, received by the exchange agent and forming part of the book-entry confirmation, which states that:

 

   

DTC has received an express acknowledgment from a participant in its Automated Tender Offer Program that is tendering outstanding notes that are the subject of the book-entry confirmation;

 

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the participant has received and agrees to be bound by the terms of the letter of transmittal, or in the case of an agent’s message relating to guaranteed delivery, that such participant has received and agrees to be bound by the notice of guaranteed delivery; and

 

   

we may enforce that agreement against such participant.

DTC is referred to herein as a “book-entry transfer facility.”

Acceptance of Exchange Notes

In all cases, we will promptly issue exchange notes for outstanding notes that we have accepted for exchange under the exchange offer only after the exchange agent timely receives:

 

   

outstanding notes or a timely book-entry confirmation of such outstanding notes into the exchange agent’s account at the book-entry transfer facility; and

 

   

a properly completed and duly executed letter of transmittal and all other required documents or a properly transmitted agent’s message.

By tendering outstanding notes pursuant to the exchange offer, you will represent to us that, among other things:

 

   

you are not our affiliate or an affiliate of any guarantor within the meaning of Rule 405 under the Securities Act;

 

   

you do not have an arrangement or understanding with any person or entity to participate in a distribution of the exchange notes; and

 

   

you are acquiring the exchange notes in the ordinary course of your business.

In addition, each broker-dealer that is to receive exchange notes for its own account in exchange for outstanding notes must represent that such outstanding notes were acquired by that broker-dealer as a result of market-making activities or other trading activities and must acknowledge that it will deliver a prospectus that meets the requirements of the Securities Act in connection with any resale of the exchange notes. The letter of transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act. See “Plan of Distribution.”

We will interpret the terms and conditions of the exchange offer, including the letters of transmittal and the instructions to the letters of transmittal, and will resolve all questions as to the validity, form, eligibility, including time of receipt, and acceptance of outstanding notes tendered for exchange. Our determinations in this regard will be final and binding on all parties. We reserve the absolute right to reject any and all tenders of any particular outstanding notes not properly tendered or to not accept any particular outstanding notes if the acceptance might, in our or our counsel’s judgment, be unlawful. We also reserve the absolute right to waive any defects or irregularities as to any particular outstanding notes prior to the expiration date.

Unless waived, any defects or irregularities in connection with tenders of outstanding notes for exchange must be cured within such reasonable period of time as we determine. Neither we, the exchange agent, nor any other person will be under any duty to give notification of any defect or irregularity with respect to any tender of outstanding notes for exchange, nor will any of us or them incur any liability for any failure to give notification. Any outstanding notes received by the exchange agent that are not properly tendered and as to which the irregularities have not been cured or waived will be returned by the exchange agent to the tendering holder, unless otherwise provided in the letter of transmittal, promptly after the expiration date.

 

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Book-Entry Delivery Procedures

Promptly after the date of this prospectus, the exchange agent will establish an account with respect to the outstanding notes at DTC and, as the book-entry transfer facility, for purposes of the exchange offer. Any financial institution that is a participant in the book-entry transfer facility’s system may make book-entry delivery of the outstanding notes by causing the book-entry transfer facility to transfer those outstanding notes into the exchange agent’s account at the facility in accordance with the facility’s procedures for such transfer. To be timely, book-entry delivery of outstanding notes requires receipt of a confirmation of a book-entry transfer, a “book-entry confirmation,” prior to the expiration date. In addition, although delivery of outstanding notes may be effected through book-entry transfer into the exchange agent’s account at the book-entry transfer facility, the applicable letter of transmittal or a manually signed facsimile thereof, together with any required signature guarantees and any other required documents, or an “agent’s message,” as defined below, in connection with a book-entry transfer, must, in any case, be delivered or transmitted to and received by the exchange agent at its address set forth on the cover page of the applicable letter of transmittal prior to the expiration date to receive exchange notes for tendered outstanding notes, or the guaranteed delivery procedure described below must be complied with. Tender will not be deemed made until such documents are received by the exchange agent. Delivery of documents to the book-entry transfer facility does not constitute delivery to the exchange agent.

Holders of outstanding notes who are unable to deliver confirmation of the book-entry tender of their outstanding notes into the exchange agent’s account at the book-entry transfer facility or all other documents required by the applicable letter of transmittal to the exchange agent on or prior to the expiration date must tender their outstanding notes according to the guaranteed delivery procedures described below.

Guaranteed Delivery Procedures

If you wish to tender your outstanding notes but your outstanding notes are not immediately available or you cannot deliver your outstanding notes, the applicable letter of transmittal or any other required documents to the exchange agent or comply with the procedures under DTC’s Automatic Tender Offer Program in the case of outstanding notes, prior to the expiration date, you may still tender if:

 

   

the tender is made through an eligible guarantor institution;

 

   

prior to the expiration date, the exchange agent receives from such eligible guarantor institution either a properly completed and duly executed notice of guaranteed delivery, by facsimile transmission, mail, or hand delivery or a properly transmitted agent’s message and notice of guaranteed delivery, that (1) sets forth your name and address, the certificate number(s) of such outstanding notes and the principal amount of outstanding notes tendered; (2) states that the tender is being made thereby; and (3) guarantees that, within three New York Stock Exchange trading days after the expiration date, the letter of transmittal, or facsimile thereof, together with the outstanding notes or a book-entry confirmation, and any other documents required by the letter of transmittal, will be deposited by the eligible guarantor institution with the exchange agent; and

 

   

the exchange agent receives the properly completed and executed letter of transmittal or facsimile thereof, as well as certificate(s) representing all tendered outstanding notes in proper form for transfer or a book-entry confirmation of transfer of the outstanding notes into the exchange agent’s account at DTC all other documents required by the letter of transmittal within three New York Stock Exchange trading days after the expiration date.

Upon request, the exchange agent will send to you a notice of guaranteed delivery if you wish to tender your outstanding notes according to the guaranteed delivery procedures.

 

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Withdrawal Rights

Except as otherwise provided in this prospectus, you may withdraw your tender of outstanding notes at any time prior to 12:00 a.m. midnight, New York City time, on the expiration date.

For a withdrawal to be effective:

 

   

the exchange agent must receive a written notice, which may be by telegram, telex, facsimile or letter, of withdrawal at its address set forth below under “—Exchange Agent”; or

 

   

you must comply with the appropriate procedures of DTC’s Automated Tender Offer Program system.

 

   

Any notice of withdrawal must:

 

   

specify the name of the person who tendered the outstanding notes to be withdrawn;

 

   

identify the outstanding notes to be withdrawn, including the certificate numbers and principal amount of the outstanding notes; and

 

   

where certificates for outstanding notes have been transmitted, specify the name in which such outstanding notes were registered, if different from that of the withdrawing holder.

If certificates for outstanding notes have been delivered or otherwise identified to the exchange agent, then, prior to the release of such certificates, you must also submit:

 

   

the serial numbers of the particular certificates to be withdrawn; and

 

   

a signed notice of withdrawal with signatures guaranteed by an eligible institution unless you are an eligible guarantor institution.

If outstanding notes have been tendered pursuant to the procedures for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at the book-entry transfer facility to be credited with the withdrawn outstanding notes and otherwise comply with the procedures of the facility. We will determine all questions as to the validity, form, and eligibility, including time of receipt of notices of withdrawal and our determination will be final and binding on all parties. Any outstanding notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the exchange offer. Any outstanding notes that have been tendered for exchange but that are not exchanged for any reason will be returned to their holder, without cost to the holder, or, in the case of book-entry transfer, the outstanding notes will be credited to an account at the book-entry transfer facility, promptly after withdrawal, rejection of tender or termination of the exchange offer. Properly withdrawn outstanding notes may be retendered by following the procedures described under “—Procedures for Tendering Outstanding Notes” above at any time on or prior to the expiration date.

Exchange Agent

Wells Fargo Bank has been appointed as the exchange agent for the exchange offer. Wells Fargo Bank also acts as trustee under the indenture governing the notes. You should direct all executed letters of transmittal and all questions and requests for assistance, requests for additional copies of this prospectus or of the letters of transmittal, and requests for notices of guaranteed delivery to the exchange agent addressed as follows:

 

By Registered & Certified

Mail:

   By Regular Mail or Overnight Courier:    In Person by Hand Only:    By Facsimile (for Eligible Institutions only):

WELLS FARGO BANK, N.A. Corporate Trust Operations MAC N9303-121

   WELLS FARGO BANK, N.A. Corporate Trust Operations MAC N9303-121    WELLS FARGO BANK, N.A. 12th Floor Northstar East Building    (612) 667-6282

PO Box 1517

Minneapolis, MN 55480

   Sixth & Marquette Avenue Minneapolis, MN 55479   

Corporate Trust Operations

608 Second Avenue South Minneapolis, MN

  

For Confirmation by Telephone:

(800) 344-5128

 

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If you deliver the letter of transmittal to an address other than the one set forth above or transmit instructions via facsimile other than the one set forth above, that delivery or those instructions will not be effective.

Fees and Expenses

The registration rights agreement provides that we will bear all expenses in connection with the performance of our obligations relating to the registration of the exchange notes and the conduct of the exchange offer. These expenses include registration and filing fees, accounting and legal fees and printing costs, among others. We will pay the exchange agent reasonable and customary fees for its services and reasonable out-of-pocket expenses. We will also reimburse brokerage houses and other custodians, nominees and fiduciaries for customary mailing and handling expenses incurred by them in forwarding this prospectus and related documents to their clients that are holders of outstanding notes and for handling or tendering for such clients.

We have not retained any dealer-manager in connection with the exchange offer and will not pay any fee or commission to any broker, dealer, nominee or other person, other than the exchange agent, for soliciting tenders of outstanding notes pursuant to the exchange offer.

Accounting Treatment

We will record the exchange notes in our accounting records at the same carrying value as the outstanding notes, which is the aggregate principal amount as reflected in our accounting records on the date of exchange. Accordingly, we will not recognize any gain or loss for accounting purposes upon the consummation of the exchange offer. We will record the expenses of the exchange offer as incurred.

Transfer Taxes

We will pay all transfer taxes, if any, applicable to the exchange of outstanding notes under the exchange offer. The tendering holder, however, will be required to pay any transfer taxes, whether imposed on the registered holder or any other person, if:

 

   

certificates representing outstanding notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be issued in the name of, any person other than the registered holder of outstanding notes tendered;

 

   

tendered outstanding notes are registered in the name of any person other than the person signing the letter of transmittal; or

 

   

a transfer tax is imposed for any reason other than the exchange of outstanding notes under the exchange offer.

If satisfactory evidence of payment of such taxes is not submitted with the letter of transmittal, the amount of such transfer taxes will be billed to that tendering holder.

Holders who tender their outstanding notes for exchange will not be required to pay any transfer taxes. However, holders who instruct us to register exchange notes in the name of, or request that outstanding notes not tendered or not accepted in the exchange offer be returned to, a person other than the registered tendering holder will be required to pay any applicable transfer tax.

 

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Consequences of Failure to Exchange

If you do not exchange your outstanding notes for exchange notes under the exchange offer, your outstanding notes will remain subject to the restrictions on transfer of such outstanding notes:

 

   

as set forth in the legend printed on the outstanding notes as a consequence of the issuance of the outstanding notes pursuant to the exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws; and

 

   

as otherwise set forth in the offering memorandum distributed in connection with the private offering of the outstanding notes.

In general, you may not offer or sell your outstanding notes unless they are registered under the Securities Act or if the offer or sale is exempt from registration under the Securities Act and applicable state securities laws. Except as required by the registration rights agreement, we do not intend to register resales of the outstanding notes under the Securities Act.

Other

Participating in the exchange offer is voluntary, and you should carefully consider whether to accept. You are urged to consult your financial and tax advisors in making your own decision on what action to take.

We may in the future seek to acquire untendered outstanding notes in open market or privately negotiated transactions, through subsequent exchange offers or otherwise. We have no present plans to acquire any outstanding notes that are not tendered in the exchange offer or to file a registration statement to permit resales of any untendered outstanding notes.

 

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THE TRANSACTIONS

On November 5, 2006, OSI Restaurant Partners, Inc., Parent, and Kangaroo Acquisition, Inc., a Delaware corporation and wholly-owned subsidiary of Parent, which we refer to as Merger Sub, entered into an Agreement and Plan of Merger, which was subsequently amended on May 21, 2007 and which we refer to as the Merger Agreement. At the effective time of the Merger on June 14, 2007, each share of the Company’s common stock outstanding immediately prior to the Merger (other than shares held in treasury, shares held by any subsidiary of the Company, Parent or Merger Sub and shares contributed to Parent as rollover equity) was cancelled and converted into the right to receive $41.15 in cash. Immediately before the completion of the Merger, the Founders contributed as rollover equity approximately half of the common stock they held in the Company to Parent in exchange for common stock of Parent, and also received only $40.00 per share in cash for their remaining shares in a sale transaction consummated immediately prior to the completion of the Merger. After the Transactions, the separate corporate existence of Merger Sub ceased, as OSI continued as the surviving entity, having converted in accordance with Delaware law into a Delaware limited liability company named OSI Restaurant Partners, LLC.

The diagram below represents a summary of our overall corporate structure after giving effect to the Transactions.

LOGO

 

(1) Immediately following consummation of the Merger, OSI Restaurant Partners, Inc. converted, in accordance with Delaware law, into a Delaware limited liability company named OSI Restaurant Partners, LLC.

 

(2) In connection with the Transactions, we sold substantially all of our domestic company-owned restaurant properties to PRP, an indirect wholly-owned subsidiary of PRP Holdco, for approximately $987.7 million. PRP then entered into a market rate master lease with Master Lessee and leased all of the transferred restaurant properties from PRP. PRP Holdco owns PRP indirectly through a chain of limited liability companies that are not shown in the chart above, each of which is a borrower with respect to a portion of the PRP real estate credit facility.

 

(3) $11.1 million of the proceeds to us were held in reserve pending correction of all defects and completion of construction work at certain properties. If within one year from the PRP Sale-Leaseback Transaction all such defects and construction work are not corrected, we must purchase such properties back from PRP. As of December 31, 2007, approximately $11.3 million was held in such reserve.

 

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In connection with the Merger, the following transactions took place:

 

   

each outstanding option to purchase shares of the Company’s common stock, whether vested or unvested, was canceled and converted into the right to receive a cash payment equal to the excess (if any) of the $41.15 per share cash merger consideration over the exercise price per share of the option, multiplied by the number of shares subject to the option, without interest and less any applicable withholding taxes;

 

   

each holder under the Company’s Directors’ Deferred Compensation Plan, as amended, was paid $41.15 per each notional share held under such holder’s account;

 

   

each award of restricted stock held by A. William Allen, III, Chief Executive Officer, Joseph J. Kadow, Executive Vice President, Chief Officer-Legal and Corporate Affairs and Secretary, and Dirk A. Montgomery, Senior Vice President and Chief Financial Officer, was exchanged for shares of unvested restricted common stock of Parent. In addition, Parent granted to Paul E. Avery, Chief Operating Officer, restricted shares of Parent common stock with an aggregate value of $12.0 million upon closing of the Transactions and Mr. Kadow purchased shares of Parent common stock with an aggregate value of $0.2 million. Immediately following the closing of the Merger, each of Mr. Allen, Mr. Avery, Mr. Kadow and Mr. Montgomery owned approximately 1.9%, 1.4%, 0.5% and 0.5%, respectively, of the outstanding common stock of Parent. Additional members of management also exchanged restricted or unrestricted OSI stock for shares of unvested restricted common stock of Parent or purchased shares of Parent common stock at the same price per share as the executives identified above;

 

   

each award of restricted stock held by an executive officer, director, or other person that was not exchanged for Parent common stock as described in the immediately preceding bullet point was converted into the right to receive $41.15 per share in cash, plus certain earnings thereon, less any applicable withholding taxes, payable on a deferred basis at the time the underlying restricted stock would have vested under its terms as in effect immediately prior to the effective time of the Merger and subject to the satisfaction by the holder of all terms and conditions to which such vesting was subject; provided, however, that the holder’s deferred cash account will become immediately vested and payable upon termination of such holder’s employment by us without cause or upon such holder’s death or disability; and

 

   

all amounts held in the accounts denominated in shares of the Company’s common stock under the Partner Equity Deferred Compensation Stock Plan component of the PEP, were converted into an obligation to pay cash with a value equal to the product of (i) the $41.15 per share merger consideration and (ii) the number of notional shares of the Company’s common stock credited to such participant’s deferred account, in accordance with the payment schedule and consistent with the terms of the PEP as in effect from time to time.

In connection with the Merger, we (i) entered into new senior secured credit facilities, consisting of a $1,310.0 million term loan facility, a $150.0 million working capital revolving credit facility and a $100.0 million pre-funded revolving credit facility, (ii) issued the $550.0 million aggregate principal amount of outstanding notes, and (iii) sold substantially all of our domestic company-owned restaurant properties to PRP for $987.7 million. See “Description of Other Indebtedness” and “Description of PRP Sale-Leaseback Transaction.”

 

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USE OF PROCEEDS

The exchange offer is intended to satisfy our obligations under the registration rights agreement, dated June 14, 2007, by and among us, the subsidiary guarantors party thereto and the initial purchasers of the outstanding notes. We will not receive any cash proceeds from the issuance of the exchange notes pursuant to the exchange offer. In consideration for issuing the exchange notes as contemplated in this prospectus, we will receive a like principal amount of outstanding notes, the terms of which are identical in all material respects to the exchange notes, except as otherwise noted in this prospectus. We will retire or cancel all of the outstanding notes tendered in the exchange offer. Accordingly, issuing the exchange notes will not result in any change in our capitalization.

 

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CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2007 . The information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical audited consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of
December 31,
2007
     (in thousands)

Debt:

  

Term loan facility

   $ 1,260,000

The notes

     550,000

Sale-leaseback obligations

     22,750

Other notes payable

     10,700

Guaranteed debt of franchisees and unconsolidated affiliates

     35,078
      

Total debt

     1,878,528
      

Total unitholder’s equity

     599,392
      

Total capitalization

   $ 2,477,920
      

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA

The following table presents the selected historical consolidated financial data of our business at the dates and for the periods indicated. The selected historical consolidated financial data as of December 31, 2006 and 2007, for the years ended December 31, 2005 and 2006, for the period from January 1 to June 14, 2007 and for the period from June 15 to December 31, 2007 presented in this table, have been derived from the historical audited consolidated financial statements included elsewhere in this prospectus. The selected historical consolidated financial data as of December 31, 2003, 2004 and 2005, and for the years ended December 31, 2003 and 2004, presented in this table have been derived from our historical audited consolidated financial statements not included in this prospectus. The selected historical consolidated financial data set forth below should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical audited consolidated financial statements and related notes included elsewhere in this prospectus.

 

    Successor          Predecessor  
  Period from
June 15 to
December 31,

2007
         Period from
January 1 to
June 14,

2007
    Year Ended December 31,  
           2006     2005     2004 (1)     2003  
               (in thousands, except ratio data)  

Statement of Operations Data:

               

Revenues

               

Restaurant sales

  $ 2,227,926         $ 1,916,689     $ 3,919,776     $ 3,590,869     $ 3,197,536     $ 2,654,541  

Other revenues

    12,098           9,948       21,183       21,848       18,453       17,786  
                                                   

Total revenues

    2,240,024           1,926,637       3,940,959       3,612,717       3,215,989       2,672,327  

Costs and expenses

               

Cost of sales

    790,592           681,455       1,415,459       1,315,340       1,203,107       987,866  

Labor and other related (2)

    623,159           540,281       1,087,258       930,356       817,214       670,798  

Other restaurant operating

    557,459           440,545       885,562       783,745       667,797       537,854  

Depreciation and amortization

    102,263           74,846       151,600       127,773       104,767       85,076  

General and administrative (2)

    138,376           158,147       234,642       197,135       174,047       138,063  

Hurricane property losses

    —             —         —         3,101       3,024       —    

Provision for impaired assets and restaurant closings

    21,766           8,530       14,154       27,170       2,394       5,319  

Contribution for “Dine Out for Hurricane Relief”

    —             —         —         1,000       1,607       —    

(Income) loss from operations of unconsolidated affiliates

    (1,261 )         692       (5 )     (1,479 )     (1,725 )     (6,015 )
                                                   

Total costs and expenses

    2,232,354           1,904,496       3,788,670       3,384,141       2,972,232       2,418,961  
                                                   

Income from operations

    7,670           22,141       152,289       228,576       243,757       253,366  

Other income (expense), net

    —             —         7,950       (2,070 )     (2,104 )     (1,100 )

Interest income

    4,725           1,561       3,312       2,087       1,349       1,479  

Interest expense

    (98,722 )         (6,212 )     (14,804 )     (6,848 )     (3,629 )     (1,810 )
                                                   

Income before (benefit) provision for income taxes and minority interest in consolidated entities’ income

    (86,327 )         17,490       148,747       221,745       239,373       251,935  

(Benefit) provision for income taxes

    (47,143 )         (1,656 )     41,812       73,808       78,622       85,214  
                                                   

(continued. . .)

 

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    Successor          Predecessor  
  Period from
June 15 to
December 31,

2007
         Period
from
January 1
to June 14,

2007
    Year Ended December 31,  
           2006     2005     2004 (1)     2003  

(Loss ) income before minority interest in consolidated entities’ income

    (39,184 )         19,146       106,935       147,937       160,751       166,721  

Minority interest in consolidated entities’ income

    871           1,685       6,775       1,191       9,180       2,476  
                                                   

Net (loss) income

  $ (40,055 )       $ 17,461     $ 100,160     $ 146,746     $ 151,571     $ 164,245  
                                                   
 

Other Financial Data:

               

Capital expenditures

  $ 77,065         $ 119,359     $ 297,734     $ 327,862     $ 254,871     $ 193,828  

Ratio of earnings to fixed charges (3)

    —             1.7 x     3.8 x     6.6 x     8.8 x     11.7 x

 

    Successor          Predecessor  
    As of
December 31,
2007
         As of December 31,  
         2006     2005     2004     2003  
               (in thousands)  

Balance Sheet Data:

             

Working capital deficit

  $ (222,428 )       $ (248,991 )   $ (219,291 )   $ (185,893 )   $ (121,307 )

Total assets

    3,703,459           2,258,587       2,009,498       1,733,392       1,497,619  

Total debt, including current portion

    1,878,528           269,956       185,348       144,869       58,451  

Minority interest in consolidated entities

    34,862           36,929       44,259       48,092       52,885  

Unitholder’s/stockholders’ equity

    599,392           1,221,213       1,144,420       1,047,111       968,419  

 

(1) In 2004, we adopted FASB issued Interpretation No. 46R, Consolidation of Variable Interest Entities, and began consolidating variable interest entities in which we absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity.

 

(2) In 2006, we adopted the fair value based method of accounting for stock-based employee compensation as required by SFAS No. 123R, Share-Based Payment, a revision of SFAS No. 123, Accounting for Stock-Based Compensation. The fair value based method requires us to expense all stock-based employee compensation. We adopted SFAS No. 123R using the modified prospective method. Accordingly, we have expensed all unvested and newly granted stock-based employee compensation beginning January 1, 2006, but prior period amounts have not been retrospectively adjusted.

 

(3) The ratio of earnings to fixed charges is computed by dividing earnings to fixed charges. For purposes of calculating the ratio of earnings to fixed charges, earnings represents pre-tax income from continuing operations before adjustment for minority interests in consolidated subsidiaries plus fixed charges and amortization of capitalized interest, less capitalized interest. Fixed charges include: (i) interest expense, whether expensed or capitalized; (ii) amortization of debt issuance cost; and (iii) the portion of rental expense that we believe is representative of the interest component of rental expense. For the period from June 15 to December 31, 2007, earnings were insufficient to cover fixed charges by approximately $88.2 million.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following unaudited pro forma condensed consolidated financial data has been derived by the application of pro forma adjustments to our historical consolidated financial statements included elsewhere in this prospectus.

The unaudited pro forma consolidated financial data has been prepared to give effect to the Transactions, including the PRP Sale-Leaseback Transaction and the accounting for the acquisition of our business as a purchase business combination in accordance with SFAS No. 141, Business Combinations, which resulted in a new basis of accounting in accordance with EITF No. 88-16, Basis in Leveraged Buyout Transactions. Pursuant to that guidance, a portion of the continuing ownership of the continuing stockholders was carried over at predecessor basis and the remainder of the purchase price for the acquisition was allocated to our assets and liabilities based on estimates of fair value, similar to a step acquisition, pursuant to EITF No. 90-12, Allocating Basis to Individual Assets and Liabilities for Transactions within the scope of Issue No. 88-16.

The unaudited pro forma consolidated statement of operations for the year ended December 31, 2007 gives effect to the Transactions as if the Transactions had occurred at the beginning of the period presented. The unaudited pro forma adjustments described in the accompanying notes are based upon estimates and assumptions that management believes are reasonable. The unaudited pro forma condensed consolidated financial statements are presented for illustrative purposes only and do not purport to be indicative of the operating results that would have actually occurred if the above Transactions had been in effect on the date indicated, nor is it necessarily indicative of future operating results.

The unaudited pro forma consolidated statement of operations does not reflect nonrecurring charges that have been incurred in connection with the Transactions, including (i) compensation charges for the acceleration of vesting of stock options and restricted shares, (ii) compensation charges for supplemental contributions to the PEP and (iii) certain non-recurring advisory and legal costs.

The unaudited pro forma condensed consolidated financial data and the accompanying notes should be read in conjunction with our historical audited consolidated financial statements and related notes included elsewhere in this prospectus and the other financial information contained in “Use of Proceeds,” “Capitalization,” “Selected Historical Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2007

(in thousands)

 

      Predecessor           Successor        
   Period from
January 1 to
June 14,

2007
          Period from
June 15 to
December 31,
2007
    Pro Forma
Adjustments
    Pro Forma  

Revenues

             

Restaurant sales

   $ 1,916,689          $ 2,227,926     $ —       $ 4,144,615  

Other revenues

     9,948            12,098       —         22,046  
                                     

Total revenues

     1,926,637            2,240,024       —         4,166,661  

Costs and expenses

             

Cost of sales

     681,455            790,592       —         1,472,047  

Labor and other related

     540,281            623,159       —         1,163,440  

Other restaurant operating

     440,545            557,459       37,776 (a)     1,035,780  

Depreciation and amortization

     74,846            102,263       5,954 (b)     183,063  

General and administrative

     158,147            138,376       (47,343 )(c)     249,180  

Provision for impaired assets and restaurant closings

     8,530            21,766       —         30,296  

Loss (income) from operations of unconsolidated affiliates

     692            (1,261 )     —         (569 )
                                     

Total costs and expenses

     1,904,496            2,232,354       (3,613 )     4,133,237  
                                     

Income from operations

     22,141            7,670       3,613       33,424  

Interest income

     1,561            4,725       —         6,286  

Interest expense

     (6,212 )          (98,722 )     (71,486 )(d)     (176,420 )
                                     

Income (loss) before benefit for income taxes and minority interest in consolidated entities’ income

     17,490            (86,327 )     (67,873 )     (136,710 )

Benefit for income taxes

     (1,656 )          (47,143 )     (26,065 )(e)     (74,864 )
                                     

Income (loss) before minority interest in consolidated entities’ income

     19,146            (39,184 )     (41,808 )     (61,846 )

Minority interest in consolidated entities’ income

     1,685            871       —         2,556  
                                     

Net income (loss)

   $ 17,461          $ (40,055 )   $ (41,808 )   $ (64,402 )
                                     

 

(a) Reflects: (1) the pro forma rent expense adjustment of $35.5 million associated with the PRP Sale— Leaseback Transaction, (2) an increase in rent expense of $1.6 million as a result of the difference between the revised deferred rent after purchase accounting and historical deferred rent, and (3) an increase in rent expense of $0.7 million as a result of net favorable lease amortization expense.

 

(b) Reflects: (1) an increase of $3.6 million in incremental depreciation expense associated with the net step-up to fair market value for the property, plant and equipment not transferred to PRP in connection with the PRP Sale-Leaseback Transaction, based upon appraised values and useful lives. The adjustment is calculated as follows: depreciation expense of $175.5 million had the Merger occurred January 1, 2007, less historical depreciation expense of $172.9 million and (2) an increase in amortization expense of $2.3 million associated with the estimated net step-up to fair market value of $115.1 million for acquired definite-lived intangible assets. The expense has been calculated using an estimated weighted average useful life of 21 years for trademarks and 12 years for franchise agreements.

 

(c)

Reflects: (1) the reversal of $41.0 million for legal and advisory costs incurred by us in 2007 in connection with the Transactions, (2) a reduction in compensation expense of $10.4 million because there is no expense for new stock options issued under the KHI Equity Incentive Plan, offset by (3) a $4.1 million increase in

 

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expense for additional management fees payable to a management company owned by affiliates of the Sponsors and the Founders under the terms of a management agreement.

 

(d) Reflects additional net interest expense as a result of the new financing arrangements used to fund the Transactions, and is calculated as follows:

 

Interest on new borrowings (in thousands):

  

Working capital revolving credit facility (i)

   $ 789  

Pre-funded revolving credit facility (ii)

     1,092  

Term loan facility (iii)

     44,825  

Senior notes (iv)

     24,712  

Amortization of deferred financing fees (v)

     4,015  

Reduction of interest expense on historical line of credit (vi)

     (3,947 )
        

Net pro forma adjustment to interest expense

   $ 71,486  
        

 

  (i) Relates to fees charged for unused commitments of 2.5% on approximately $49.5 million of committed letters of credits and 0.5% on the unused portion of the $150 million working capital revolving credit facility, less the $49.5 million of the aforementioned letters of credit;

 

  (ii) Relates to fees charged for unused commitments of 2.43% on the undrawn balance of $100 million under the pre-funded revolving credit facility that provides financing for capital expenditures only;

 

  (iii) Relates to interest expense on the term loan facility that bears interest at our option at each rate adjustment of Base Rate plus 125 basis points or a Eurocurrency Rate plus 225 basis points. Since we have traditionally selected the Eurocurrency Rate plus 225 basis points option, the pro forma adjustment is computed as the Eurocurrency Rate plus 225 basis points applied to amounts outstanding under the term loan facility as if the term loan facility was outstanding beginning January 1, 2007 and scheduled principle payments occurred;

 

  (iv) Relates to senior notes bearing interest at a fixed rate of 10 percent per annum;

 

  (v) Relates to non-cash amortization expense associated with an estimated $63.3 million of deferred financing fees, utilizing a weighted average debt maturity of 7.1 years.

 

  (vi) Relates to interest expense on the previous revolving line of credit that was paid off with proceeds from the Transactions. Interest expense, at 6.0%, would have continued to been incurred on the previous revolving line of credit had the Transactions and subsequent replacement of the revolving credit not occurred on June 14, 2007.

A 0.125 percent variance in the interest rates on the floating debt would result in a change in total annual pro forma interest expense of approximately $1.8 million.

 

(e) Represents an adjustment to the historical provision for income taxes to reflect pro forma income taxes at the statutory rate of approximately 39%. The 55% effective tax rate used in the pro forma column differs from the U.S. statutory rate of 39% primarily due to an increased level of FICA tax credits for employee reported tips as a percentage of pro forma loss before provision for income taxes and a higher percentage of profits in lower-taxed jurisdictions. These rates are not necessarily indicative of our expected future effective tax rate.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our results of operations and financial condition with the “Unaudited Pro Forma Consolidated Financial Data,” “Selected Historical Consolidated Financial Data” and the historical audited consolidated financial statements and related notes included elsewhere in this prospectus. The results of operation for the year ended December 31, 2007 includes the results of operations for the period from January 1 to June 14, 2007 of the Predecessor and the results of operations for the period from June 15 to December 31, 2007 of the Successor on a combined basis. Although this combined basis does not comply with U.S. GAAP, we believe it provides a more meaningful method of comparison. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section of this prospectus. Actual results may differ materially from those contained in any forward-looking statements.

Overview

We are one of the largest casual dining restaurant companies in the world, with eight restaurant concepts, more than 1,475 system-wide restaurants and 2007 annual revenues for Company-owned restaurants exceeding $4.1 billion. We operate in all 50 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 concepts include Roy’s, Cheeseburger in Paradise, Lee Roy Selmon’s and Blue Coral. 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 sales contribution to profits from every additional dollar of sales above the minimum costs required to open, staff and operate a restaurant is very high. We are not a company focused on growth in the number of restaurants just to generate additional sales. Our expansion and operation strategies are to balance investment costs and the economic factors of operation, in order to generate reasonable, sustainable margins and achieve acceptable returns on investment from our restaurant concepts.

Promotion of our Outback Steakhouse and Carrabba’s Italian Grill restaurants is assisted by the use of national and spot television and radio media, which we have also begun to use in certain markets for our Bonefish Grill brand. We advertise on television in spot markets when our brands achieve sufficient penetration to make a meaningful broadcast schedule affordable. We rely on word-of-mouth customer experience, grassroots marketing in local venues, direct mail and national print media to support broadcast media and as the primary campaigns for our upscale casual and newer brands. We do not attempt to lure customers with discounts, as is common to many restaurants in the casual dining industry. Our advertising spending is targeted to promote and maintain brand image and develop consumer awareness. We strive to drive sales through excellence in execution

 

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rather than through discounting and other short-lived marketing efforts. Our marketing strategy of getting people 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.

Key factors that can be used in evaluating and understanding our restaurants and assessing our business include the following:

 

   

Average unit volumes—a per restaurant calculated average sales amount, which helps us gauge the 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—a total sales volume for all company-owned, franchise and unconsolidated joint venture restaurants, regardless of ownership, to interpret the health of our brands; and

 

   

Same-store or comparable sales—a year-over-year comparison of sales volumes for restaurants that are open in both years in order to remove the impact of new openings in comparing the operations of existing restaurants.

Our 2007 financial results included:

 

   

Growth of consolidated revenues by 5.7% to $4.17 billion;

 

   

72 new unit openings across all brands;

 

   

Decline in net income by 122.6% to a net loss of $22.6 million, caused by a decrease in comparable store sales, increases in restaurant operating expenses and a significant increase in general and administrative costs and interest expense as a result of the Merger.

We focus on our same store sales growth in an effort to raise our margins and profits. We are not a company focused on growing the number of our 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 sustainable margins and achieve acceptable returns on investment from our restaurant concepts. The following table sets forth the number of our company-owned and franchised and development joint venture restaurants at the dates below:

 

     At December 31,
   2007    2006    2005

Number of company-owned restaurants:

        

Outback—domestic

   688    679    670

Outback—international

   129    118    88

Carrabba’s

   238    229    200

Bonefish

   134    112    86

Fleming’s

   54    45    39

Other Concepts

   75    67    54
              

Total

   1,318    1,250    1,137
              

Number of franchised and development joint venture restaurants:

        

Outback—domestic

   107    107    105

Outback—international

   49    44    52

Bonefish

   6    7    4
              

Total

   162    158    161
              

System-wide total

   1,480    1,408    1,298
              

 

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Our consolidated operating results are affected by the growth of our newer brands. As we continue to develop and expand new restaurant concepts at different rates, our cost of sales, labor costs, restaurant operating expenses and income from operations change from the mix of brands in our portfolio with slightly different operating characteristics. Labor and related expenses as a percentage of restaurant sales are higher at our newer format restaurants than have typically been experienced at Outback Steakhouses. However, cost of sales as a percentage of restaurant sales at those restaurants is lower than those at Outback Steakhouse. These trends are expected to continue with our planned development of restaurants.

Our industry’s challenges and risks include, but are not limited to, 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, economic conditions and commodity pricing. Additionally, our planned development schedule is subject to risk because of rising real estate and construction costs, and our results are affected by consumer tolerance of price increases. 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.

Our ownership interests in our owned restaurants are divided into two basic categories: (i) company-owned restaurants and (ii) development joint ventures. In addition, a number of our restaurants are operated as franchises in which we have no ownership interest. We derive no direct income from operations of franchised restaurants other than initial franchise fees and ongoing royalty payments based on sales, which are included in the line item “Other revenues” in our consolidated statements of operations.

Company-owned restaurants include restaurants owned by partnerships in which we are a general partner and joint ventures in which we are one of two members. Our ownership interests in the partnerships and joint ventures generally range from 50% to 90%. Company-owned restaurants also include restaurants owned by our Roy’s consolidated venture in which we have less than a majority ownership. We consolidate this venture because we control the executive committee (which functions as a board of directors) through representation on the committee by related parties, and we are able to direct or cause the direction of management and operations on a day-to-day basis. Additionally, the majority of capital contributions made by our partner in the Roy’s consolidated venture have been funded by loans to the partner from a third party where we are required to be a guarantor of the line of credit, which provides us control through our collateral interest in the joint venture partner’s membership interest. As a result of our controlling financial interest in this venture, it is included in Company-owned restaurants. We are responsible for 50% of the costs of new restaurants operated under this consolidated joint venture and our joint venture partner is responsible for the other 50%. Our joint venture partner in the consolidated joint venture funds its portion of the costs of new restaurants through a line of credit that we guarantee (see Liquidity and Capital Resources). The results of operations of Company-owned restaurants are included in our consolidated operating results. The portion of income or loss attributable to the other partners’ interests is eliminated in the line item in our consolidated statements of operations entitled “Minority interest in consolidated entities’ income.”

Development joint venture restaurants are organized as general partnerships and joint ventures in which we are one of two general partners and generally own 50% of the partnership and our joint venture partner generally owns 50%. We are responsible for 50% of the costs of new restaurants operated as development joint ventures and our joint venture partner is responsible for the other 50%. Our investments in these ventures are accounted for under the equity method, therefore the income derived from restaurants operated as development joint ventures is presented in the line item “(Income) loss from operations of unconsolidated affiliates” in our consolidated statements of operations.

 

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We derive no direct income from operations of franchised restaurants other than initial franchise fees and ongoing royalties, which are included in “Other revenues.”

Items Affecting Comparability

On November 5, 2006, OSI Restaurant Partners, Inc. entered into a definitive agreement to be acquired by our Parent, which is controlled by an investor group comprised of affiliates of Bain Capital and Catterton, our Founders and certain members of management for $40.00 per share in cash. On May 21, 2007, this agreement was amended to increase the merger consideration to $41.15 per share in cash, payable to all shareholders except our Founders, who instead converted a portion of their equity interest to equity in our Parent and received $40.00 per share for their remaining shares. Immediately following consummation of the Merger on June 14, 2007, we converted into a Delaware limited liability company named OSI Restaurant Partners, LLC.

The accompanying consolidated financial statements are presented for two periods: Predecessor and Successor, which relate to the period preceding the Merger and the period succeeding the Merger, respectively. The operations of OSI Restaurant Partners, Inc. are referred to for the Predecessor period and the operations of OSI Restaurant Partners, LLC are referred to for the Successor period. Unless the context otherwise indicates, as used in this report, the term the “Company,” “we,” “us,” “our” and other similar terms mean (a) prior to the Merger, OSI Restaurant Partners, Inc. and (b) after the Merger, OSI Restaurant Partners, LLC.

Our assets and liabilities were assigned values, part carryover basis pursuant to Emerging Issues Task Force Issue No. 88-16, “Basis in Leveraged Buyout Transactions” (“EITF No. 88-16”), and part fair value, similar to a step acquisition, pursuant to EITF No. 90-12, “Allocating Basis to Individual Assets and Liabilities for Transactions within the Scope of Issue No. 88-16” (“EITF No. 90-12”). As a result, there were zero retained earnings and accumulated depreciation and amortization after the allocation was made. Depreciation and amortization are higher in the Successor period due to these fair value assessments resulting in increases to the carrying value of property, plant and equipment and intangible assets.

Interest expense has increased substantially in the Successor period in connection with our new financing arrangements. These arrangements include the issuance of senior notes in an aggregate principal amount of $550,000,000 and senior secured credit facilities with a syndicate of institutional lenders and financial institutions. The senior secured credit facilities provide for senior secured financing of up to $1,560,000,000 and consist 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.

Merger expenses of approximately $33,174,000 and $7,590,000 for the periods from January 1 to June 14, 2007 and from June 15 to December 31, 2007, respectively, and management fees of approximately $5,162,000 for the period from June 15 to December 31, 2007 were included in general and administrative expenses in our Consolidated Statements of Operations and reflect primarily the professional service costs incurred in connection with the Merger and the management services provided by our Management Company as described in “—Liquidity and Capital Resources.”

In connection with the Merger, we caused our wholly-owned subsidiaries to sell substantially all of our domestic restaurant properties to our newly-formed sister company, PRP, for approximately $987,700,000. PRP then leased the properties to Private Restaurant Master Lessee, LLC, our wholly-owned subsidiary, under a market rate master lease. The market rate master lease is a triple net lease with a 15-year term. The sale of substantially all of our domestic wholly-owned restaurant properties to PRP and entry into the market rate master lease and the underlying subleases resulted in operating leases for us and is referred to as the “PRP Sale-Leaseback Transaction.” Rent expense has increased substantially in the Successor period in connection with the PRP Sale-Leaseback Transaction since these properties were previously owned.

We identified six restaurant properties included in the PRP Sale-Leaseback Transaction that failed to qualify for sale-leaseback accounting treatment in accordance with SFAS No. 98, “Accounting for Leases”

 

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(“SFAS No. 98”), as we have an obligation to repurchase such properties from PRP under certain circumstances. If within one year from the PRP Sale-Leaseback Transaction all title defects and construction work at such properties are not corrected, we must purchase such properties back from PRP on or before the expiration of the one-year period at the original purchase price. We have included approximately $17,825,000 for the fair value of these properties in the line items “Property, fixtures and equipment, net” and “Current portion of long-term debt” in our Consolidated Balance Sheet at December 31, 2007. The future lease payments made pursuant to the lease agreement will be treated as interest expense and principal payments until such time as the requirements for sale-leaseback treatment are achieved or we repurchase the properties.

Results of Operations

The following table sets forth our combined, consolidated results of operations for the year ended December 31, 2007. The year ended December 31, 2007 includes the results of operations for the period from January 1, 2007 to June 14, 2007 of the Predecessor and the results of operations for the period from June 15, 2007 to December 31, 2007 of the Successor on a combined basis.

Although this presentation does not comply with U.S. GAAP, we believe it provides a more meaningful method of comparison to prior years. The combined information is the result of adding the Successor and Predecessor columns and does not include any pro forma assumptions or adjustments.

The following table presents our consolidated results of operations for the periods from January 1, 2007 to June 14, 2007 (Predecessor) and June 15, 2007 to December 31, 2007 (Successor) and the combined results of these periods (in thousands):

 

    Predecessor           Successor     Non-GAAP
Combined
Predecessor/
Successor
 
  Period From
January 1 to
June 14,
2007
          Period From
June 15 to
December 31,
2007
    Year Ended
December 31,

2007
 

Revenues

          

Restaurant sales

  $ 1,916,689          $ 2,227,926     $ 4,144,615  

Other revenues

    9,948            12,098       22,046  
                            

Total revenues

    1,926,637            2,240,024       4,166,661  
                            

Costs and expenses

          

Cost of sales

    681,455            790,592       1,472,047  

Labor and other related

    540,281            623,159       1,163,440  

Other restaurant operating

    440,545            557,459       998,004  

Depreciation and amortization

    74,846            102,263       177,109  

General and administrative

    158,147            138,376       296,523  

Provision for impaired assets and restaurant closings

    8,530            21,766       30,296  

Loss (income) from operations of unconsolidated affiliates

    692            (1,261 )     (569 )
                            

Total costs and expenses

    1,904,496            2,232,354       4,136,850  
                            

Income from operations

    22,141            7,670       29,811  

Interest income

    1,561            4,725       6,286  

Interest expense

    (6,212 )          (98,722 )     (104,934 )
                            

Income (loss) before benefit from income taxes and minority interest in consolidated entities’ income

    17,490            (86,327 )     (68,837 )

Benefit from income taxes

    (1,656 )          (47,143 )     (48,799 )
                            

Income (loss) before minority interest in consolidated entities’ income

    19,146            (39,184 )     (20,038 )

Minority interest in consolidated entities’ income

    1,685            871       2,556  
                            

Net income (loss)

  $ 17,461          $ (40,055 )   $ (22,594 )
                            

 

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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:

 

     Non-GAAP
Combined
Predecessor/
Successor
    Predecessor  
   Years Ended December 31,  
   2007     2006     2005  

Revenues

      

Restaurant sales

   99.5 %   99.5 %   99.4 %

Other revenues

   0.5     0.5     0.6  
                  

Total revenues

   100.0     100.0     100.0  

Costs and expenses

      

Cost of sales (1)

   35.5     36.1     36.6  

Labor and other related (1)

   28.1     27.7     25.9  

Other restaurant operating (1)

   24.1     22.6     21.8  

Depreciation and amortization

   4.3     3.8     3.5  

General and administrative

   7.1     6.0     5.5  

Hurricane property losses

   —       —       0.1  

Provision for impaired assets and restaurant closings

   0.7     0.4     0.8  

Contribution for “Dine Out for Hurricane Relief”

   —       —       *  

Income from operations of unconsolidated affiliates

   (* )   (* )   (* )

Total costs and expenses

   99.3     96.1     93.7  
                  

Income from operations

   0.7     3.9     6.3  

Other income (expense), net

   —       0.2     (0.1 )

Interest income

   0.2     0.1     0.1  

Interest expense

   (2.5 )   (0.4 )   (0.2 )
                  

(Loss) income before (benefit) provision for income taxes and minority interest in consolidated entities’ income

   (1.6 )   3.8     6.1  

(Benefit) provision for income taxes

   (1.2 )   1.1     2.0  
                  

(Loss) income before minority interest in consolidated entities’ income

   (0.4 )   2.7     4.1  

Minority interest in consolidated entities’ income

   0.1     0.2     *  
                  

Net (loss) income

   (0.5 )%   2.5 %   4.1 %
                  

 

(1) As a percentage of restaurant sales.

 

* Less than 1/10 of one percent of total revenues.

 

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System-wide sales grew by 5.6% in 2007 and by 7.9% in 2006. 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:

 

Company-Owned Restaurant Sales    Non-GAAP
Combined
Predecessor/
Successor
   Predecessor
   Years Ended December 31,
   2007    2006    2005
   (in millions)

Outback Steakhouses

        

Domestic

   $ 2,284    $ 2,260    $ 2,238

International

     329      308      258
                    

Total

     2,613      2,568      2,496

Carrabba’s Italian Grills

     705      649      580

Bonefish Grills

     373      311      224

Fleming’s Prime Steakhouse and Wine Bars

     221      188      150

Other restaurants

     233      204      141
                    

Total Company-owned restaurant sales

   $ 4,145    $ 3,920    $ 3,591
                    

The following information presents the second component of system-wide sales—sales for franchised and unconsolidated development joint venture restaurants. These are restaurants that are not owned by us and from which we only receive a franchise royalty or a portion of their total income. 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.

 

     Non-GAAP
Combined
Predecessor/
Successor
   Predecessor
   Years Ended December 31,
   2007    2006    2005
Franchise and Development Joint Venture Sales    (in millions)

Outback Steakhouses

        

Domestic

   $ 353    $ 359    $ 362

International

     132      106      113
                    

Total

     485      465      475

Bonefish Grills

     17      16      11
                    

Total franchise and development joint venture sales (1)

   $ 502    $ 481    $ 486
                    

Income from franchise and development joint ventures (2)

   $ 23    $ 21    $ 20
                    

 

(1) Franchise and development joint venture sales are not included in revenues as reported in the Consolidated Statements of Operations.

 

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(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 “Income from operations of unconsolidated affiliates.”

The following is the number of system-wide restaurants at the end of each period presented:

 

     December 31,
   2007
(Successor)
       2006
(Predecessor)

Outback Steakhouses

         

Company-owned—domestic

   688        679

Company-owned—international

   129        118

Franchised and development joint venture—domestic

   107        107

Franchised and development joint venture—international

   49        44
             

Total

   973        948
             

Carrabba’s Italian Grills

         

Company-owned

   238        229
             

Bonefish Grills

         

Company-owned

   134        112

Franchised and development joint venture

   6        7
             

Total

   140        119
             

Fleming’s Prime Steakhouse and Wine Bars

         

Company-owned

   54        45
             

Other

         

Company-owned

   75        67
             

System-wide total

   1,480        1,408
             

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.

 

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Revenues

Restaurant sales. Restaurant sales increased by 5.7% or $224,839,000 in 2007 as compared with 2006 and by 9.2% or $328,907,000 in 2006 as compared with 2005. The 2007 increase in restaurant sales was attributable to additional revenues of approximately $164,292,000 from the opening of new restaurants after December 31, 2006 and incremental sales from restaurants that opened during 2006. This increase was partially offset by decreases in sales at existing restaurants. The 2006 increase in restaurant sales was attributable to additional revenues of approximately $202,433,000 from the opening of new restaurants after December 31, 2005 and revenues of approximately $18,449,000 from the purchase in February 2006 of ten Eastern Canada Outback Steakhouse franchise restaurants. This increase was partially offset by decreases in sales at existing restaurants. The following table includes additional information about changes in restaurant sales at domestic Company-owned restaurants for the years ended December 31, 2007, 2006 and 2005:

 

     Non-GAAP
Combined
Predecessor/
Successor
    Predecessor  
   2007     2006     2005  

Average restaurant unit volumes (in thousands):

      

Outback Steakhouses

   $ 3,336     $ 3,348     $ 3,397  

Carrabba’s Italian Grills

     2,992       3,053       3,168  

Bonefish Grills

     2,979       3,058       3,090  

Fleming’s Prime Steakhouse and Wine Bars

     4,363       4,512       4,527  

Operating weeks:

      

Outback Steakhouses

     35,720       35,230       34,313  

Carrabba’s Italian Grills

     12,280       11,082       9,538  

Bonefish Grills

     6,524       5,306       3,783  

Fleming’s Prime Steakhouse and Wine Bars

     2,636       2,172       1,725  

Year to year percentage change:

      

Same-store sales (stores open 18 months or more):

      

Outback Steakhouses

     -0.7 %     -1.5 %     -0.8 %

Carrabba’s Italian Grills

     -1.0 %     -1.1 %     6.0 %

Bonefish Grills

     -1.7 %     0.4 %     4.3 %

Fleming’s Prime Steakhouse and Wine Bars

     0.4 %     4.3 %     11.5 %

Other revenues. Other revenues, consisting primarily of initial franchise fees and royalties, increased by $863,000 to $22,046,000 in 2007 as compared with $21,183,000 in 2006. This increase resulted primarily from five additional franchised and development joint venture restaurants for Outback Steakhouse International in 2007 as compared to 2006. Other revenues decreased by $665,000 to $21,183,000 in 2006 as compared with $21,848,000 in 2005. This decrease primarily resulted from lower franchise fees and royalties for Outback Steakhouse International as a result of the purchase in February 2006 of ten Eastern Canada Outback Steakhouse franchise restaurants.

Costs and Expenses

Cost of sales. Cost of sales, consisting of food and beverage costs, decreased by 0.6% of restaurant sales to 35.5% in 2007 as compared with 36.1% in 2006. Of the decrease as a percentage of restaurant sales, 0.2% was attributable to an increase in the proportion of consolidated sales associated with our non-Outback Steakhouse restaurants, which have lower cost of goods sold ratios than Outback Steakhouses, 0.5% was due to the impact of certain Outback Steakhouse and Carrabba’s Italian Grill efficiency initiatives, 0.4% was a result of general menu price increases and 0.2% was from produce and seafood cost savings. This decrease as a percentage of restaurant sales was partially offset by increases in beef and dairy costs. Our increased beef costs negatively impacted cost of sales by 0.5% as a percentage of restaurant sales, and our increased dairy costs negatively impacted cost of

 

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sales by 0.2% as a percentage of restaurant sales. Cost of sales decreased by 0.5% of restaurant sales to 36.1% in 2006 as compared with 36.6% in 2005. This decrease in cost of sales as a percentage of restaurant sales was attributable to an increase in menu prices and to an increase in the proportion of consolidated sales associated with our non-Outback Steakhouse restaurants that have lower cost of goods sold ratios than Outback Steakhouses. Decreases in dairy, chicken and international beef costs during 2006 compared with 2005 were partially offset by higher produce and seafood costs.

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 0.4% as a percentage of restaurant sales to 28.1% in 2007 as compared with 27.7% in 2006. Of the increase as a percentage of restaurant sales, approximately 0.3% was attributable to minimum wage increases, 0.2% was due to increases in kitchen labor costs, 0.2% was due to increases in restaurant management salaries, 0.1% was attributable to stock-based and incentive compensation expense and 0.1% was from an increase in health insurance costs. Additionally, declines in average unit volumes at Outback Steakhouses, Carrabba’s Italian Grills, Bonefish Grills and Fleming’s Prime Steakhouse and Wine Bars accounted for 0.2% of the increase as a percentage of restaurant sales, and increases in the proportion of new restaurant formats, which have higher average labor costs than domestic Outback Steakhouses and Carrabba’s Italian Grills increased labor and other related expenses by 0.1% as a percentage of restaurant sales compared to 2006. The increase as a percentage of restaurant sales was partially offset by a reduction in the conversion costs and ongoing expense for our PEP of 0.5% as a percentage of restaurant sales, Outback Steakhouse labor efficiencies of 0.2% as a percentage of restaurant sales and a reduction in distribution expense to managing partners of 0.1% as a percentage of restaurant sales.

Labor and other related expenses increased by 1.8% of restaurant sales to 27.7% in 2006 as compared with 25.9% in 2005. Of the increase, approximately 0.6% was attributable to conversion costs related to the implementation of the new Partner Equity Program and 0.7% resulted from ongoing costs from the Partner Equity Program, stock-based compensation expenses resulting from the implementation of a new accounting standard and restricted stock grants to managing partners. The total costs associated with implementation of the Partner Equity Program caused a corresponding $27,468,000 increase in the “Partner deposit and accrued buyout liability” balance in our Consolidated Balance Sheet as of December 31, 2006 as compared to December 31, 2005. Additionally, declines in average unit volumes at domestic Outback Steakhouses and Carrabba’s Italian Grills, minimum wage increases and increases in the proportion of new restaurant formats, which have higher average labor costs than domestic Outback Steakhouses and Carrabba’s Italian Grills, increased labor and other related expenses as a percentage of restaurant sales compared to 2005. This increase was partially offset by a decrease in distribution expense to managing partners.

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 1.5% to 24.1% as a percentage of restaurant sales in 2007 as compared with 22.6% in 2006. Of the increase as a percentage of restaurant sales, approximately 1.0% was attributable to increased cash and non-cash rent charges from PRP, 0.3% resulted from increased advertising, 0.1% was from declines in average unit volumes, 0.2% was due to higher occupancy, supply, utility and repair and maintenance costs, 0.1% resulted from amortization of net favorable leases and 0.1% was due to an increase in the proportion of new format restaurants and international Outback Steakhouses in operation, which have higher average restaurant operating expenses as a percentage of restaurant sales than domestic Outback Steakhouses and Carrabba’s Italian Grills. The increase as a percentage of restaurant sales was partially offset by a reduction in pre-opening costs of 0.3% as a percentage of restaurant sales. Other operating expenses as a percentage of restaurant sales increased by 0.8% to 22.6% in 2006 as compared with 21.8% in 2005. This increase resulted from higher utility, supplies and repair and maintenance costs, declines in average unit volumes at domestic Outback Steakhouses and Carrabba’s Italian Grills and an increase in the proportion of new format restaurants

 

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and international Outback Steakhouses in operation, which have higher average restaurant operating expenses as a percentage of restaurant sales than domestic Outback Steakhouses and Carrabba’s Italian Grills.

Depreciation and amortization. Depreciation and amortization costs increased 0.5% as a percentage of total revenues to 4.3% in 2007 compared with 3.8% in 2006. Increased depreciation expense as a percentage of total revenues resulted from higher depreciation costs for certain of our new restaurant formats, which have higher average construction costs than an Outback Steakhouse. As a result of the Merger, our assets and liabilities have been assigned new values which are part carryover basis and part fair value basis as of the closing date, June 14, 2007. Depreciation and amortization costs as a percentage of total revenues increased as a result of these fair value assessments that caused increases to the carrying value of our property, plant and equipment and intangible assets. Depreciation and amortization costs as a percentage of total revenues increased 0.3% to 3.8% in 2006 compared with 3.5% in 2005. Increased depreciation expense as a percentage of total revenues resulted from lower average unit volumes at domestic Outback Steakhouses and Carrabba’s Italian Grills during 2006 and higher depreciation costs for certain of our new restaurant formats, which have higher average construction costs than an Outback Steakhouse.

General and administrative. General and administrative costs increased by $61,881,000 to $296,523,000 in 2007 as compared with $234,642,000 in 2006. This increase primarily resulted from $37,900,000 of incremental costs associated with the Merger, $10,500,000 of additional corporate payroll, $5,200,000 of management fees incurred as a result of the Merger and $8,500,000 of additional consulting and other professional fees in 2007 as compared to 2006. Additionally, an increase in overall administrative costs associated with operating additional domestic and international Outback Steakhouses, Carrabba’s Italian Grills, Fleming’s Prime Steakhouses, Roy’s, Bonefish Grills and Cheeseburger in Paradise restaurants contributed to the increase in general and administrative costs. These increases were partially offset by $1,800,000 of reduced expense for our corporate aircraft. General and administrative expenses increased by $37,507,000 to $234,642,000 in 2006 as compared with $197,135,000 in 2005. This increase primarily resulted from an increase in overall administrative costs associated with operating additional domestic and international Outback Steakhouses, Carrabba’s Italian Grills, Fleming’s Prime Steakhouses, Roy’s, Bonefish Grills and Cheeseburger in Paradise restaurants. Additionally, the increase resulted from $4,063,000 of compensation expense recognized for restricted stock benefits for certain members of senior management that was not recognized in the prior year and $5,320,000 of stock options expensed as a result of the implementation of a new accounting standard. Also, during 2006 we incurred $3,900,000 of consulting expenses for reviewing branding and strategic initiatives and $2,900,000 of professional fees related to the proposed merger transaction. These increases were offset by the reduction of $2,100,000 in compensation expense associated with our Chief Executive Officer recognized during the first quarter of 2005, which did not recur in 2006.

Hurricane property losses. During 2005, hurricanes caused property losses of $3,101,000.

Provision for impaired assets and restaurant closings. During 2007, we recorded a provision for impaired assets and restaurant closings of $30,296,000 which included the following: $25,573,000 of impairment charges for fourteen domestic Outback Steakhouse restaurants, three international Outback Steakhouse restaurants, four Carrabba’s Italian Grill restaurants, one Bonefish Grill restaurant, six Cheeseburger in Paradise restaurants and one Lee Roy Selmon’s restaurant, an impairment charge of $1,005,000 related to one of our corporate aircraft, $3,145,000 of impairment charges for our investment in Kentucky Speedway and $573,000 of other impairment charges.

During 2006, we recorded impairment charges for eight domestic Outback Steakhouse restaurants, three international Outback Steakhouse restaurants, three Carrabba’s Italian Grill restaurants, three Cheeseburger in Paradise restaurants and three Bonefish Grill restaurants. Of these restaurants, six domestic Outback Steakhouses, one Bonefish Grill and one Cheeseburger in Paradise closed in 2006. The total provision for impaired assets and restaurant closings was $14,154,000 in 2006.

 

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During 2005, we recorded a provision for impaired assets and restaurant closings of $27,170,000, which included $7,581,000 for an impairment charge against the deferred license fee related to certain non-restaurant operations, $14,975,000 for an impairment charge for intangible and other asset impairments related to the closing of Paul Lee’s Chinese Kitchen, $1,992,000 for the impairment of two Bonefish Grill restaurants in Washington, $816,000 for the impairment of two domestic Outback Steakhouse restaurants and $1,806,000 for the closing of five domestic Outback Steakhouse restaurants. Two of these Outback restaurants closed during 2005, and the other three closed in 2006.

In each instance, projected cash flows did not support the asset’s book value.

Contribution for “Dine Out for Hurricane Relief.” This line item represents our $1,000,000 contribution for “Dine for America,” a fundraising effort in October 2005 to provide support to the victims of hurricanes.

(Income) loss from operations of unconsolidated affiliates. (Income) loss from operations of unconsolidated affiliates represents our portion of net income from restaurants operated as development joint ventures. Income from development joint ventures increased by $564,000 in 2007 compared to 2006 as a result of an increase in income from our joint venture in Brazil. Income from development joint ventures decreased by $1,474,000 to $5,000 in 2006 as compared with $1,479,000 in 2005. This decrease is due to operating losses of $2,699,000 incurred on our investment in Kentucky Speedway, LLC during 2006. This decrease is partially offset by expenses resulting from the adoption of a buyout program for managing and area operating partners in certain Outback Steakhouses in our joint venture in Brazil during the first quarter of 2005, which did not recur in 2006. This decrease is also offset by a $574,000 write-down of an Outback Steakhouse operated as a joint venture in Pennsylvania during the second quarter of 2005. Operating performance issues and our inability to obtain more favorable lease terms resulted in a decision not to extend the lease for this restaurant past the initial term.

Income from operations. Income from operations decreased by $122,478,000 to $29,811,000 in 2007 as compared to $152,289,000 in 2006 primarily as a result of costs associated with the Merger, cash and non-cash rent charges from PRP, declines in average unit volumes at Outback Steakhouses, Carrabba’s Italian Grills, Bonefish Grills and Fleming’s Prime Steakhouse and Wine Bars, the increase in the provision for impaired assets and restaurant closings and the changes in the relationships between revenues and expenses discussed above. Income from operations decreased by $76,287,000 to $152,289,000 in 2006 as compared to $228,576,000 in 2005 primarily as a result of declines in average unit volumes at domestic Outback Steakhouses and Carrabba’s Italian Grills, conversion costs related to the implementation of the PEP, stock-based compensation expenses resulting from the implementation of a new accounting standard, the provision for impaired assets and restaurant closings and the changes in the relationships between revenues and expenses discussed above.

Other income (expense), net. Other income (expense) represents the net of revenues and expenses from non-restaurant operations. Net other income was $7,950,000 in 2006 compared with net other expense of $2,070,000 in 2005. The increase in other income (expense) primarily relates to a gain of $5,165,000 recorded during the second quarter of 2006 for amounts recovered in accordance with the terms of a lease termination agreement and a gain of $2,785,000 recorded during the fourth quarter of 2006 for amounts received from a sale of land in Tampa, Florida.

Interest income. Interest income was $6,286,000 in 2007 as compared with $3,312,000 in 2006 and $2,087,000 in 2005. Interest income increased due to higher cash and cash equivalent and restricted cash balances and higher interest rates on cash and cash equivalent and restricted cash balances during 2007 as compared with 2006 and 2005. Interest income for the years ended December 31, 2007, 2006 and 2005 included interest of approximately $2,439,000, $1,764,000 and $1,131,000, respectively, from notes receivable held by a limited liability company owned by our California franchisee.

Interest expense. Interest expense was $104,934,000 in 2007 as compared with $14,804,000 in 2006 and $6,848,000 in 2005. The year-to-year changes in interest expense resulted from changes in borrowing needs to finance the Merger in 2007 and various minority ownership interest or franchisee acquisitions in 2006 and from

 

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changes in short-term interest rates. Interest expense for the years ended December 31, 2007, 2006 and 2005 included approximately $2,439,000, $1,764,000 and $1,131,000, respectively, of expense from outstanding borrowings on the line of credit held by a limited liability company owned by our California franchisee.

(Benefit) provision for income taxes. The effective income tax rates for the periods from January 1, 2007 to June 14, 2007 and from June 15, 2007 to December 31, 2007 were (9.5)% and 54.6%, respectively, compared to 28.1% for the year ended December 31, 2006. The decrease in the effective income tax rate for the period from January 1, 2007 to June 14, 2007 as compared to the year ended December 31, 2006 is primarily due to a $131,257,000 decrease in pretax income. While this decrease caused most of the permanent differences related to non-deductible expenses to increase the effective tax rate, the FICA tax credit for employee-reported tips is a large percentage of pretax income which caused the effective tax rate for the period from January 1, 2007 to June 14, 2007 to be negative. The increase in the effective income tax rate for the period from June 15, 2007 to December 31, 2007 as compared to the year ended December 31, 2006 is primarily due to a change in pretax (loss) income. The effective income tax rate is unusually high due to the FICA tax credit for employee-reported tips being such a large percentage of pretax (loss) income.

The effective income tax rate was 28.1% in 2006 compared to 33.3% in 2005. The decline in the effective tax rate in 2006 compared to 2005 was primarily due to an increase in FICA tax credits for employee-reported tips as a percentage of income before provision for income taxes and a higher percentage of profits in lower-taxed jurisdictions.

Minority interest in consolidated entities’ income. The allocation of minority owners’ income included in this line item represents the portion of income or loss from operations included in consolidated operating results attributable to the ownership interests in certain restaurants in which we have a controlling interest. As a percentage of total revenues, the income allocations were 0.1% in 2007 compared with 0.2% in 2006 and less than 0.1% in 2005. The decrease from 2006 to 2007 is due to the acquisition of the remaining minority ownership interests in eleven Carrabba’s and nine Bonefish Grill restaurants in October 2006 and eighty-eight Outback Steakhouse restaurants in South Korea in November 2006. The charge for intangible and other asset impairments related to the closing of Paul Lee’s Chinese Kitchen caused the decrease in minority interest in consolidated entities’ income as a percentage of revenues in 2005.

Net (loss) income. Net (loss) income decreased by 122.6% or $122,754,000 to a net loss of $22,594,000 in 2007 compared with net income of $100,160,000 in 2006 primarily as a result of an increase in costs associated with the Merger, cash and non-cash rent charges from PRP, declines in average unit volumes at Outback Steakhouses, Carrabba’s Italian Grills, Bonefish Grills and Fleming’s Prime Steakhouse and Wine Bars, the increase in the provision for impaired assets and restaurant closings, an increase in interest expense primarily from additional borrowings in 2007 and the changes in the relationships between revenues and expenses discussed above. This decrease was partially offset by gains from the Outback Steakhouse efficiency initiatives announced in 2006.

Net income decreased by 31.7% or $46,586,000 to net income of $100,160,000 in 2006 compared with net income of $146,746,000 in 2005 primarily as a result of declines in average unit volumes at domestic Outback Steakhouses and Carrabba’s Italian Grills, conversion costs related to the implementation of the PEP, stock-based compensation expenses resulting from the implementation of a new accounting standard, the provision for impaired assets and restaurant closings, an increase in interest expense and the changes in the relationships between revenues and expenses discussed above.

 

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Liquidity and Capital Resources

The following table presents a summary of our cash flows from operating, investing and financing activities for the periods indicated (in thousands):

 

     Successor           Predecessor  
   Period from
June 15 to
December 31,
2007
          Period from
January 1 to
June 14,
2007
    Year Ended
December 31,
2006
    Year Ended
December 31,
2005
 

Net cash provided by operating activities

   $ 160,781          $ 155,633     $ 350,713     $ 364,114  

Net cash used in investing activities

     (2,297,634 )          (119,753 )     (336,735 )     (318,782 )

Net cash provided by (used in) financing activities

     2,265,127            (87,906 )     (3,998 )     (48,433 )
                                     

Net increase (decrease) in cash and cash equivalents

   $ 128,274          $ (52,026 )   $ 9,980     $ (3,101 )
                                     

Operating activities. For the periods from January 1 to June 14, 2007 and June 15 to December 31, 2007 we generated cash flow from operations of $155,633,000 and $160,781,000, respectively, as compared to $350,713,000 and $364,114,000 for the years ended December 31, 2006 and 2005, respectively. During the period from January 1 to June 14, 2007, we had net income of $17,461,000, non-cash charges for depreciation and amortization of $74,846,000, stock-based compensation expense of $33,981,000, an increase in long-term deferred income tax assets of $41,732,000 and a change in other operating assets and liabilities of $55,163,000. During the period from June 15 to December 31, 2007, we had a net loss of $40,055,000, non-cash charges for depreciation and amortization of $102,263,000, stock-based and other non-cash compensation expense of $24,168,000, an increase in the deferred income tax liability of $13,156,000 and a change in other operating assets and liabilities of $58,277,000.

Net cash provided by operating activities in 2006 included net income of $100,160,000, non-cash charges for depreciation and amortization of $151,600,000, stock-based compensation expense of $70,642,000, an increase in deferred income tax assets of $25,005,000 and a change in other operating assets and liabilities of $34,644,000. Net cash provided by operating activities in 2005 included net income of $146,746,000, non-cash charges for depreciation and amortization of $127,773,000, a provision for impaired assets and restaurant closings and hurricane losses of $30,271,000, an increase in deferred income tax assets of $23,318,000 and a change in other operating assets and liabilities of $49,337,000.

Investing activities. Net cash used in investing activities was $119,753,000 and $2,297,634,000 for the periods from January 1 to June 14, 2007 and from June 15 to December 31, 2007, respectively, as compared to $336,735,000 and $318,782,000 for the years ended December 31, 2006 and 2005, respectively. Cash used in the period from January 1 to June 14, 2007 includes capital expenditures of $119,359,000 and the purchase of investment securities for $2,455,000. Cash used in the period from June 15 to December 31, 2007 includes capital expenditures of $77,065,000, the acquisition of OSI for $3,092,296,000 and the purchase of Company-owned life insurance for $63,930,000. These are offset by $925,090,000 in proceeds from sale-leaseback transactions.

Net cash used in investing activities in 2006 included acquisitions of $63,622,000 for various Outback Steakhouse, Carrabba’s and Bonefish Grill restaurants and $297,734,000 of capital expenditures for investments in new products, capacity and facilities infrastructure. These were offset by $31,693,000 of proceeds from the sale of property, fixtures and equipment and lease terminations. Net cash used in investing activities in 2005 consisted of capital expenditures of $327,862,000, the purchase of investment securities for $5,568,000 and the acquisition of four Carrabba’s restaurants for $5,200,000. These were offset by $11,508,000 of proceeds from the sale of property, fixtures and equipment and lease terminations.

Financing activities. Net cash used in financing activities was $87,906,000 for the period from January 1 to June 14, 2007 and was primarily related to proceeds from the issuance of long-term debt of $123,648,000 and

 

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proceeds from the exercise of employee stock options of $14,477,000. These were offset by principal payments of $210,834,000, the payment of dividends of $9,887,000 and a decrease in partner deposit and accrued buyout liability of $6,212,000. Net cash provided by financing activities was $2,265,127,000 for the period from June 15 to December 31, 2007 and was principally related to proceeds from the issuance of long-term debt of $1,889,400,000 and proceeds from the issuance of common stock of $600,373,000. These were offset by principal payments of $199,388,000 and deferred financing fees of $63,313,000.

Net cash used in financing activities in 2006 and 2005 was $3,998,000 and $48,433,000, respectively. In 2006, we had cash inflows of $371,787,000 from the issuance of long-term debt and $34,004,000 from the exercise of employee stock options. These were offset by cash outflows of $294,147,000 for repayments of long-term debt, $59,435,000 of payments for the purchase of treasury stock and $38,896,000 for the payment of dividends. In 2005, we had cash inflows of $171,546,000 from the issuance of long-term debt and $49,655,000 from the exercise of employee stock options. These were offset by cash outflows of $141,084,000 for repayments of long-term debt, $92,363,000 of payments for the purchase of treasury stock, $38,753,000 for the payment of dividends and $17,899,000 of distributions to minority interest.

We require capital primarily for principal and interest payments on our debt, the development of new restaurants, remodeling older restaurants and investments in technology, and we also use capital for acquisitions of franchisees and joint venture partners. Capital expenditures totaled approximately $119,359,000 and $77,065,000 for the periods from January 1, 2007 to June 14, 2007 (Predecessor) and June 15, 2007 to December 31, 2007 (Successor), respectively, and totaled approximately $297,734,000 and $327,862,000 for the years ended December 31, 2006 and 2005 (Predecessor), respectively. We estimate that our capital expenditures for the development of new restaurants will be approximately $130,000,000 to $150,000,000 in 2008. We either lease our restaurants under operating leases for periods ranging from five to 30 years (including renewal periods) or build free standing restaurants where it is cost effective.

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.

If demand for our products and services were to decrease as a result of increased competition, changing consumer tastes, changes in local, regional, national and international economic conditions or changes in the level of consumer acceptance of our restaurant brands, our restaurant sales could decline significantly. The following table sets forth approximate amounts by which cash provided by operating activities may decline in the event of a decline in restaurant sales of 5%, 10% and 15% compared with total revenues for the periods indicated (in thousands):

 

     Successor          Predecessor  
   Period From June 15 to
December 31, 2007
         Period From January 1 to
June 14, 2007
 
   5%     10%     15%          5%     10%     15%  

Decrease in restaurant sales

   $ (111,396 )   $ (222,793 )   $ (334,189 )        $ (95,834 )   $ (191,669 )   $ (287,503 )

Decrease in cash provided by operating activities

     (20,998 )     (41,996 )     (62,995 )          (18,065 )     (36,130 )     (54,194 )

The estimates above are based on the assumption that earnings before income taxes, depreciation and amortization decrease approximately $0.19 for every $1.00 decrease in restaurant sales. These numbers are estimates only and do not consider other measures we could implement were such decreases in revenue to occur.

We have formed joint ventures to develop Outback Steakhouses in Brazil and the Philippines. We are also developing Company-owned restaurants internationally in Puerto Rico, South Korea, Hong Kong, Eastern Canada and Japan.

 

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On November 5, 2006, OSI Restaurant Partners, Inc. entered into a definitive agreement to be acquired by our Parent, which is controlled by an investor group comprised of affiliates of Bain Capital and Catterton, our Founders and certain members of management for $40.00 per share in cash. On May 21, 2007, this agreement was amended to increase the merger consideration to $41.15 per share in cash, payable to all shareholders except our Founders, who instead converted a portion of their equity interest to equity in our Parent and received $40.00 per share for their remaining shares. Immediately following consummation of the Merger on June 14, 2007, we converted into a Delaware limited liability company named OSI Restaurant Partners, LLC.

The total purchase price was approximately $3.1 billion. The Merger was financed by borrowings under new senior secured credit facilities, proceeds from the issuance of senior notes, the proceeds from the PRP Sale-Leaseback Transaction, the investment made by Bain Capital and Catterton, rollover equity from our Founders and investments made by certain members of management.

In connection with the Merger, we caused our wholly-owned subsidiaries to sell substantially all of our domestic restaurant properties to our newly-formed sister company, PRP, for approximately $987,700,000. PRP then leased the properties to Private Restaurant Master Lessee, LLC, our wholly-owned subsidiary, under a market rate master lease. The market rate master lease is a triple net lease with a 15-year term. The PRP Sale-Leaseback Transaction resulted in operating leases for us. Rent expense has increased substantially in the Successor period in connection with the PRP Sale-Leaseback Transaction.

We identified six restaurant properties included in the PRP Sale-Leaseback Transaction that failed to qualify for sale-leaseback accounting treatment in accordance with SFAS No. 98, as we have an obligation to repurchase such properties from PRP under certain circumstances. If within one year from the PRP Sale-Leaseback Transaction all title defects and construction work at such properties are not corrected, we must purchase such properties back from PRP on or before the expiration of the one-year period at the original purchase price. We have included approximately $17,825,000 for the fair value of these properties in the line items “Property, fixtures and equipment, net” and “Current portion of long-term debt” in our Consolidated Balance Sheet at December 31, 2007. The future lease payments made pursuant to the lease agreement will be treated as interest expense and principal payments until such time as the requirements for sale-leaseback treatment are achieved or we repurchase the properties.

In accordance with Revised FASB Interpretation No. 46 “Consolidation of Variable Interest Entities” (“FIN 46R”), we determined that PRP is a variable interest entity; however we are not its primary beneficiary. As a result, PRP has not been consolidated into our financial statements. If the market rate master lease were to be terminated in connection with any default by us 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, we could, subject to the terms of a subordination and nondisturbance agreement, lose the use of some or all of the properties that we lease under the market rate master lease.

Merger expenses of approximately $33,174,000 and $7,590,000 for the periods from January 1 to June 14, 2007 and from June 15 to December 31, 2007, respectively, and management fees of approximately $5,162,000 for the period from June 15 to December 31, 2007 were included in general and administrative expenses in our Consolidated Statements of Operations and reflect primarily the professional service costs incurred in connection with the Merger.

Upon completion of the Merger, we entered into a financial advisory agreement with certain entities affiliated with Bain Capital and Catterton who received aggregate fees of approximately $30,000,000 for providing services related to the Merger. We also entered into a management agreement with Kangaroo Management Company I, LLC (the “Management Company”), whose members are our 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 us until the tenth anniversary of the consummation of the Merger, with one-year extensions thereafter until terminated. The Management Company will receive an aggregate

 

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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.

In the first quarter of 2006, we implemented changes to our general manager partner program that are effective for all new general manager partner and chef partner employment agreements signed after March 1, 2006. Additionally, all managing partners under contract at that time were given an opportunity to elect participation in the new plan. Upon completion of each five-year term of employment, the managing partner will participate in a deferred compensation program in lieu of receiving stock options under the historical plan. We will require the use of capital to fund this new PEP as each general managing partner earns a contribution and currently estimate funding requirements ranging from $20,000,000 to $25,000,000 in each of the first two years of the plan. Future funding requirements will vary significantly depending on timing of partner contracts, forfeiture rates and numbers of partner participants and may differ materially from estimates. As a result of the Merger, the PEP was amended such that benefits under this plan will be earned and distributed in cash only, and participants will no longer be eligible for Company stock.

In connection with the Merger, we funded our outstanding PEP obligation as of June 14, 2007 by making a cash contribution to an irrevocable grantor or “rabbi” trust of $17,584,000 (we are the sole owner of any assets in the trust and participants are our general creditors with respect to their benefits under the PEP).

Area operating partners historically have been required, as a condition of employment, to purchase a 4% to 9% interest in the restaurants they develop for an initial investment of $50,000. This interest gives the area operating partner the right to receive a percentage of his or her restaurants’ annual cash flows for the duration of the agreement. Pursuant to these partners’ employment agreements, we have the option to purchase the partners’ interests after a five-year period on the terms specified in the agreements.

We have continued the area operating partner program subsequent to the Merger. However, in connection with the Merger each area operating partner sold his or her interest in the restaurants and became a partner in a new management partnership that provides services to the restaurants. The restaurants pay a management fee to the management partnerships based on a percentage of the cash flow of the restaurants. The area operating partner receives distributions from the management partnership based on a percentage of the restaurant’s annual cash flows for the duration of the agreement. We retained the option to purchase the partners’ interests in the management partnerships after the restaurant has been open for a five-year period on the terms specified in the agreements. For restaurants opened on or after January 1, 2007, the area operating partner’s percentage of cash distributions and percentage for buyout will be adjusted based on the associated restaurant’s return on investment compared to our targeted return on investment. The area operating partner percentage may range from 3.0% to 12.0%. This adjustment to the area operating partner’s percentage will be made beginning after the first five full calendar quarters from the date of the associated restaurant’s opening and will be made each quarter thereafter based on a trailing 12-month restaurant return on investment. The percentage for buy-out will be the distribution percentage for the 24 months preceding the buy-out. Area operating partner distributions will continue to be paid monthly and buyouts will be paid in cash over a two-year period.

Effective January 1, 2007, area operating partners who provide supervisory services for a restaurant in which they do not have an associated ownership interest in a management partnership have the opportunity to earn a bonus payment. This payment is based on growth in the associated restaurant cash flows according to terms specified in the program and will be paid in a lump sum within 90 days of the end of the five-year period provided for in the program.

Upon the closing of the Merger, stock options that had been granted under the Amended and Restated Managing Partner Stock Plan, or MP Stock Plan, to managing partners and chef partners upon completion of a previous employment contract (“buyout stock options”) were converted into the right to receive cash equal to the number of shares represented by the option times the excess, if any, of $41.15 over the exercise price per share, less any required tax withholdings. This applied to all buyout stock options, whether or not currently exercisable. If the cash received for buyout stock options plus the amount received for any prior exercise of part of that

 

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buyout stock option grant, prior to any reduction for applicable tax withholdings, was less than the partner would have received under the PEP, calculated as if the PEP was in place when the partner earned the buyout stock options, the partner also received a “supplemental PEP” contribution equal to the difference. Future payments under the supplemental PEP cannot be forfeited, and partners may elect to allocate the contributions into benchmark investment funds similar to those in the PEP. Supplemental PEP distributions have been and will be made using the original option vesting schedule pursuant to the terms of the partners’ employment contracts. We funded approximately $36,302,000 into the rabbi trust related to the PEP to satisfy our supplemental PEP contributions obligation. We included approximately $2,023,000 and $33,259,000 for our buyout stock options obligation in the line items “Accrued expenses” and “Other long-term liabilities,” respectively, in our Consolidated Balance Sheet at December 31, 2007. Amounts due to partners will fluctuate according to the performance of their allocated investments and may differ materially from the initial contribution.

Upon the closing of the Merger, stock options that had been granted under the MP Stock Plan to managing partners and chef partners at the beginning of an employment agreement (“employment stock options”) were converted into the right to receive cash equal to the number of shares represented by the option times the excess, if any, of $41.15 over the exercise price per share, less any required tax withholdings. This applied to all employment stock options, whether or not they were vested. If the cash received for employment stock options plus the amount received on any prior exercise of part of that employment stock option grant, prior to any reduction for applicable tax withholdings, was less than $25,000, the partner also was to receive a supplemental cash payment sufficient to bring the total amount to $25,000. Partners with vested employment stock options received this payment in the Merger. However, partners that were not vested in these options will not receive the supplemental cash payment if they resign or are terminated for cause prior to completing their current employment term. We recorded liabilities of approximately $1,606,000 and $5,068,000 for our supplemental cash payment obligation in the line items “Accrued expenses” and “Other long-term liabilities,” respectively, in our Consolidated Balance Sheet at December 31, 2007.

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 equal to the number of shares in the restricted stock grant times $41.15, less any required tax withholdings. Additionally, certain members of management were given the option to either convert some or all of their restricted stock granted under the Amended and Restated Stock Plan, or Stock Plan, in the same manner as managing partners or convert some or all of it into restricted stock of our Parent. These “restricted stock contributions” were deposited into an investment account, and partners and management may elect to allocate contributions into funds similar to those in the PEP. We funded approximately $14,537,000 into the rabbi trust related to the PEP to satisfy our restricted stock contributions obligation. Restricted stock distribution payments will be made using the same vesting schedule as the original restricted stock grants, and payments will occur upon the earlier of completion of the current employment term or termination of employment due to death or disability. Partners and management will not receive the undistributed restricted stock payment if they resign or are terminated for cause prior to completing their current employment term. We included approximately $6,149,000 for our restricted stock contributions obligation in the line item “Other long-term liabilities” in our Consolidated Balance Sheet at December 31, 2007. Amounts due to partners and management will fluctuate according to the performance of their allocated investments and may differ materially from the initial contribution.

Certain partners participating in the PEP were to receive common stock (“Partner Shares”) upon completion of their employment contract. These partners now will receive a deferred payment of cash equal to $41.15 per share, less required tax withholdings, 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. We recorded a liability of approximately $3,164,000 for these deferred cash payments in the line item “Other long-term liabilities” in our Consolidated Balance Sheet at December 31, 2007.

 

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Effective October 1, 2007, we implemented a deferred compensation plan for our highly-compensated employees who are not eligible to participate in the OSI Restaurant Partners, Inc. Salaried Employees 401(k) Plan and Trust. The deferred compensation plan will allow these employees to contribute up to 90% of their income on a pre-tax basis to an investment account consisting of twelve different investment fund options. We do not currently intend to provide any matching or profit-sharing contributions, and participants will always be fully vested in their deferrals and their related returns. Participants will be considered unsecured general creditors in the event of our bankruptcy or insolvency.

In October 2007, we entered into an agreement in principle to sell the majority of our interest in our Lee Roy Selmon’s concept to an investor group led by Lee Roy Selmon and Peter Barli, president of the concept. The agreement in principle has since expired and closing is subject to further negotiations of terms and the ability of the investor group to obtain financing. As of December 31, 2007, we determined that our Lee Roy Selmon’s 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”).

On April 4, 2008, the sale of land in Las Vegas, Nevada closed for $9,800,000, and as additional consideration, the purchaser is obligated to transfer and convey title for an approximately 8,000 square foot condominium unit in the completed condominium tower for us to utilize as a future full-service restaurant. Conveyance of title must be no later than September 9, 2012, subject to extensions, and both parties must agree to the plans and specifications of the restaurant unit by September 9, 2010. If title does not transfer or both parties do not agree to the plans and specifications per the terms of the contract, then we will receive an additional $4,000,000 from the purchaser.

Currently, we are marketing the sale of our Roy’s concept. As of December 31, 2007, we determined that our Roy’s concept does not meet the assets held for sale criteria defined in SFAS No. 144.

In March 2008, the Company purchased ownership interests in eighteen Outback Steakhouse restaurants and ownership interests in its Outback Steakhouse catering operations from one of its area operating partners for $3,615,000. The Company’s Parent also purchased this partner’s common shares in our Parent for $300,000.

Credit Facilities

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 and consist 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 $1,310,000,000 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  1/2 of 1% (7.25% at December 31, 2007) (“Base Rate”). The Eurocurrency Rate option is the 30, 60, 90 or 180-day Eurocurrency Rate (ranging from 4.60% to 4.70% at December 31, 2007) (“Eurocurrency Rate”). In either case, a 25 basis point reduction may be taken on the interest rate if our Moody’s Applicable Corporate Rating then most recently published is B1 or higher (B2 at December 31, 2007).

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;

 

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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 incurrence of debt, excluding permitted debt issuances.

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. Since there were no loans outstanding under the pre-funded revolving credit facility at December 31, 2007, we were not required to make any repayments under the pre-funded revolving credit facility. In April 2008, we funded our capital expenditure account with $90,018,000 for the year ended December 31, 2007 using our “annual true cash flow.”

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 $1,260,000,000 at December 31, 2007, as we made the remainder of our $50,000,000 prepayment required by the credit agreement during the fourth quarter of 2007.

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 2008 and ending September 30, 2010. The quarterly expiration dates correspond to the scheduled amortization payments of our term loan. 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. We included approximately $5,357,000 in the line item “Accrued expenses” in our Consolidated Balance Sheet as of December 31, 2007 and in the line item “Interest expense” in our Consolidated Statement of Operations for the period from June 15 to December 31, 2007 for the effects of this derivative instrument.

Proceeds of loans and letters of credit under the $150,000,000 working capital revolving credit facility provide financing for working capital and general corporate purposes and, subject to a rent-adjusted leverage condition, for capital expenditures for new restaurant growth. This revolving credit facility matures June 14, 2013 and bears interest at rates ranging from 100 to 150 basis points over the Base Rate or 200 to 250 basis points over the Eurocurrency Rate. There were no loans outstanding under the revolving credit facility at December 31, 2007; however, $49,540,000 of the credit facility was not available for borrowing as (i) $25,040,000 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 and (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, Inc. (“RY-8”), in the development of Roy’s restaurants. Effective January 9, 2008, we amended one of our letters of credit to increase its amount by $3,500,000. As a result, $53,040,000 of the working capital revolving credit facility is not available for borrowing. 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 December 31, 2007, $29,002,000 of restricted cash remains available for capital expenditures, and no draws are outstanding on the pre-funded revolving credit facility. This facility matures

 

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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, a 25 basis point reduction may be taken on the interest rate if the Moody’s Applicable Corporate Rating then most recently published is B1 or higher.

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. 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 December 31, 2007, we were in compliance with these debt covenants.

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 (ii) 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.

In accordance with the terms of the senior secured credit facility, our restricted subsidiaries are also subject to restrictive covenants. As of June 14, 2007 and December 31, 2007, all of our consolidated subsidiaries were restricted subsidiaries. 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 credit agreement.

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 (the “Guarantors”) and by OSI HoldCo, Inc. (our direct owner and a wholly-owned subsidiary of our Parent) and, subject to the conditions described below, are secured by a perfected security interest in substantially all of our assets and assets of the Guarantors and OSI HoldCo, Inc., 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, Inc., 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.

On June 14, 2007, we issued senior notes in an aggregate principal amount of $550,000,000 under an indenture among us, as issuer, Co-Issuer, Wells Fargo Bank, National Association, as trustee, and the Guarantors. Proceeds from the issuance of the notes were used to finance the Merger, and the 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 notes occur on the

 

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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 indenture governing the 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, our restricted subsidiaries are also subject to restrictive covenants. As of June 14, 2007 and December 31, 2007, all of our consolidated subsidiaries were restricted subsidiaries. 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.

Additional notes may be issued under the indenture from time to time, subject to certain limitations. Initial and additional 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 notes are initially guaranteed on a senior unsecured basis by each restricted subsidiary that guarantees the senior secured credit facility. The 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 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 notes are senior in right of payment to all of our, Co-Issuer’s and the Guarantors’ existing and future subordinated indebtedness. The notes will be subject to future registration with the Securities and Exchange Commission pursuant to the registration rights agreement.

We may redeem some or all of the notes on and after June 15, 2011 at the redemption prices (expressed as percentages of principal amount of the 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 %

We also may redeem all or part of the notes at any time prior to June 15, 2011, at a redemption price equal to 100% of the principal amount of the notes redeemed plus the applicable premium as of, and accrued and unpaid interest and additional interest, if any, to the date of redemption.

We also may redeem up to 35% of the aggregate principal amount of the notes until June 15, 2010, at a redemption price equal to 110% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon and additional interest, if any, to the applicable redemption date with the net cash proceeds of one or more equity offerings; provided that at least 50% of the sum of the aggregate principal amount of notes originally issued under the indenture and any additional notes issued under the indenture remains outstanding immediately after the occurrence of each such redemption; provided further that each such redemption occurs within 90 days of the closing date of each such equity offering.

Upon a change in control as defined in the indenture, we will be required to make an offer to purchase all of the 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.

 

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On June 14, 2007, our uncollateralized $225,000,000 revolving credit facility was paid off with proceeds from the Merger and terminated. This line of credit was scheduled to mature in June 2011 and permitted borrowing at interest rates ranging from 45 to 65 basis points over the 30, 60, 90 or 180-day London Interbank Offered Rate (LIBOR) (ranging from 5.35% to 5.36% at December 31, 2006). At December 31, 2006, the unused portion of the line of credit was $71,000,000.

On June 14, 2007, our $40,000,000 line of credit was paid off with proceeds from the Merger and terminated. This line was scheduled to mature in June 2011 and permitted borrowing at interest rates ranging from 45 to 65 basis points over LIBOR for loan draws and 55 to 80 basis points over LIBOR for letter of credit advances. There were no draws outstanding on this line of credit as of December 31, 2006. At December 31, 2006, $25,072,000 of the line of credit 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.

On June 14, 2007, our $50,000,000 short-term uncollateralized line of credit was paid off with proceeds from the Merger and terminated. The line was scheduled to mature on June 30, 2007 and permitted borrowing at an interest rate 55 basis points over the LIBOR Market Index Rate at the time of each draw. There were no draws outstanding on this line of credit as of December 31, 2006.

On June 13, 2007, we established a one-year line of credit with a maximum borrowing amount of 12,000,000,000 Korean won ($12,790,000 at December 31, 2007) to finance development of our restaurants in South Korea. The line bears interest at 0.80% over the Korean Stock Exchange three-month certificate of deposit rate (6.48% at December 31, 2007) and matures June 13, 2008. There were no draws outstanding on this line of credit as of December 31, 2007.

On June 12, 2007, we established a one-year overdraft line of credit with a maximum borrowing amount of 5,000,000,000 Korean won ($5,329,000 at December 31, 2007). The line bears interest at 1.15% over the Korean Stock Exchange three-month certificate of deposit rate (6.83% at December 31, 2007) and matures June 12, 2008. There were no draws outstanding on this line of credit as of December 31, 2007.

On May 2, 2007, our notes payable used to finance development of our restaurants in South Korea were paid off. The notes were denominated and payable in Korean won and had interest rates ranging from 5.27% to 6.29% at December 31, 2006. As of December 31, 2006, the combined outstanding balance was approximately $39,700,000. Certain of the notes payable were collateralized by lease and other deposits. At December 31, 2006, collateralized notes totaled approximately $41,360,000. At December 31, 2007, these lease and other deposits totaled approximately $45,254,000 but were no longer used as collateral on any of our Korean debt. We were pre-approved for additional borrowings of approximately $15,900,000 at December 31, 2006.

On May 2, 2007, our uncollateralized note payable with a principal amount of 10,000,000,000 Korean won was paid off. The note’s interest rate was 1.25% over the Korean Stock Exchange three-month certificate of deposit rate (5.85% as of December 31, 2006). The note was denominated and payable in Korean won and was scheduled to mature in September 2009. As of December 31, 2006, the outstanding principal on this note was approximately $10,629,000.

We had notes payable with banks to finance the development of our restaurants in Japan (“Outback Japan”). The notes were payable to banks, collateralized by letters of credit and lease deposits of approximately $3,300,000 at December 31, 2006, and had an interest rate of 1.40% at December 31, 2006. The notes were denominated and payable in Japanese yen. As of December 31, 2006, the outstanding balance totaled approximately $5,114,000. The notes had been paid as of March 31, 2007.

In October 2003, Outback Japan established a revolving line of credit to finance the development of new restaurants in Japan and refinance certain notes payable. The line permitted borrowing up to a maximum of $10,000,000, contained certain restrictions and conditions as defined in the agreement and was scheduled to

 

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mature in June 2011. The line of credit permitted borrowing at interest rates ranging from 45 to 65 basis points over LIBOR. As of December 31, 2006, Outback Japan had borrowed approximately $9,096,000 on the line of credit at an average interest rate of 1.19%. As of March 31, 2007, borrowings under this line of credit had been paid.

In February 2004, Outback Japan established an additional revolving line of credit to finance the development of new restaurants in Japan and to refinance certain notes payable. The line was scheduled to mature March 31, 2007 and permitted borrowing up to a maximum of $10,000,000 with interest of LIBOR divided by a percentage equal to 1.00 minus the Eurocurrency Reserve Percentage. As of December 31, 2006, Outback Japan had borrowed approximately $3,921,000 on the line of credit at an average interest rate of 1.17%. As of March 31, 2007, borrowings under this line of credit had been paid.

As of December 31, 2007 and 2006, we had approximately $10,700,000 and $7,993,000, respectively, of notes payable at interest rates ranging from 2.07% to 7.30% and from 2.07% to 7.75%, respectively. These notes have been primarily issued for buyouts of general manager interests in the cash flows of their restaurants and generally are payable over five years.

In connection with the Merger, we entered into the PRP Sale-Leaseback Transaction in which we caused our wholly-owned subsidiaries to sell substantially all of our domestic restaurant properties to PRP for approximately $987,700,000. We identified six restaurant properties included in the PRP Sale-Leaseback Transaction that failed to qualify for sale-leaseback accounting treatment in accordance with SFAS No. 98, as we have an obligation to repurchase such properties from PRP under certain circumstances. If within one year from the PRP Sale-Leaseback Transaction all title defects and construction work at such properties are not corrected, we must purchase such properties back from PRP on or before the expiration of the one-year period at the original purchase price. We have included approximately $17,825,000 for the fair value of these properties in the line items “Property, fixtures and equipment, net” and “Current portion of long-term debt” in our Consolidated Balance Sheet at December 31, 2007. The future lease payments made pursuant to the lease agreement will be treated as interest expense and principal payments until such time as the requirements for sale-leaseback treatment are achieved or we repurchase the properties.

We believe that cash flow from operations, planned borrowing capacity and restricted cash balances are adequate to fund debt service requirements, capital expenditures and working capital requirements for the foreseeable future. Our ability to continue to fund these items and continue to reduce debt may be affected by general economic, financial, competitive, legislative and regulatory factors, among other things.

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.

Debt Guarantees

We are the guarantor of an uncollateralized line of credit that permits borrowing of up to $35,000,000 for a limited liability company, T-Bird Nevada, LLC (“T-Bird”), owned by a California franchisee. This line of credit bears interest at rates ranging from 50 to 90 basis points over LIBOR and matures in December 2008. We were required to consolidate T-Bird effective January 1, 2004 upon adoption of FIN 46R. The outstanding balance on the line of credit at December 31, 2007 and 2006 was approximately $32,583,000 and $32,083,000, respectively, and was included in our Consolidated Balance Sheets. T-Bird uses proceeds from the line of credit for the purchase of real estate and construction of buildings to be operated as Outback Steakhouse restaurants and leased to our franchisees. According to the terms of the line of credit, T-Bird may borrow, repay, re-borrow or prepay advances at any time before the termination date of the agreement.

 

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If a default under the line of credit were to occur requiring us to perform under the guarantee obligation, we have the right to call into default all of our 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. Events of default are defined in the line of credit agreement and include our covenant commitments under existing lines of credit. We are not the primary obligor on the line of credit and we are not aware of any non-compliance with the underlying terms of the line of credit agreement that would result in us having to perform in accordance with the terms of the guarantee.

The consolidated financial statements include the accounts and operations of our Roy’s consolidated venture in which we have a less than majority ownership. We consolidate this venture because we control the executive committee (which functions as a board of directors) through representation on the board by related parties, and we are able to direct or cause the direction of management and operations on a day-to-day basis. Additionally, the majority of capital contributions made by our partner in the Roy’s consolidated venture have been funded by loans to the partner from a third party where we are required to be a guarantor of the debt, which provides us control through our collateral interest in the joint venture partner’s membership interest. As a result of our controlling financial interest in this venture, it is included in our consolidated financial statements. The portion of income or loss attributable to the minority interests, not to exceed the minority interest’s equity in the subsidiary, is eliminated in the line item in our Consolidated Statements of Operations entitled “Minority interest in consolidated entities’ income.” All material intercompany balances and transactions have been eliminated.

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 renewed three times with a termination date in April 2009. 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 December 31, 2007 and 2006, the outstanding balance on the line of credit was approximately $24,500,000 and $24,349,000, respectively.

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 December 31, 2007, $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.

We are a partial guarantor of $68,000,000 in bonds issued by Kentucky Speedway, LLC (“Speedway”). Speedway is an unconsolidated affiliate in which we have a 22.5% equity interest and for which we operate catering and concession facilities. Payments on the bonds began in December 2003 and will continue according to a redemption schedule with final maturity in December 2022. The bonds have a put feature that allows the lenders to require full payment of the debt on or after June 2011. At December 31, 2007 and 2006, the outstanding balance on the bonds was approximately $63,300,000, and our guarantee was $17,585,000. Our guarantee will proportionally decrease as payments are made on the bonds.

 

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As part of the guarantee, we and other Speedway equity owners are obligated to contribute, either as equity or subordinated debt, any amounts necessary to maintain Speedway’s defined fixed charge coverage ratio. We are obligated to contribute 27.78% of such amounts. Speedway has not yet reached its operating break-even point. Since the initial investment, we have increased our investment by making additional working capital contributions and subordinated loans to this affiliate in payments totaling $7,636,000. Of this amount, we made subordinated loans of $2,133,000 during 2007 and $1,867,000 during 2006. However, we anticipate making additional contributions in 2008 of approximately $2,000,000 to $3,000,000. This affiliate is expected to incur further operating losses at least through 2008.

Each guarantor has unconditionally guaranteed Speedway’s obligations under the bonds not to exceed its maximum guaranteed amount. Our maximum guaranteed amount is $17,585,000. If an event of default occurs as defined by the amended guarantee, or if the lenders exercise the put feature, the total outstanding amount on the bonds, plus any accrued interest, is immediately due from Speedway and each guarantor would be obligated to make payment under its guaranty up to its maximum guaranteed amount.

In June 2006, in accordance with FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), we recognized a liability of $2,495,000, representing the estimated fair value of the guarantee and a corresponding increase to the investment in Speedway, which is included in the line item entitled “Investments in and advances to unconsolidated affiliates, net” in our Consolidated Balance Sheets. Prior to the modifications of our guarantee in June 2006, the guarantee was not subject to the recognition or measurement requirements of FIN 45 and no liability related to the guarantee was recorded at December 31, 2005 or any prior period.

During the fourth quarter of 2007, we assessed our investment in Speedway for impairment using a discounted weighted average potential outcome probability analysis and recorded an impairment charge of $3,145,000 in the line item “Provision for impaired assets and restaurant closings” in our Consolidated Statement of Operations for the period from June 15 to December 31, 2007. We recognized a corresponding decrease to our investment in Speedway in the line item “Investments in and advances to unconsolidated affiliates, net” in our Consolidated Balance Sheet at December 31, 2007.

Our Korean subsidiary is the guarantor of debt owed by landlords of two of our Outback Steakhouse restaurants in Korea. We are obligated to purchase the building units occupied by our two restaurants in the event of default by the landlords on their debt obligations, which were approximately $1,400,000 and $1,500,000 as of December 31, 2007 and 2006. Under the terms of the guarantees, our monthly rent payments are deposited with the lender to pay the landlords’ interest payments on the outstanding balances. The guarantees are in effect until the earlier of the date the principal is repaid or the entire lease term of ten years for both restaurants, which expire in 2014 and 2016. The guarantees specify that upon default the purchase price would be a maximum of 130% of the landlord’s outstanding debt for one restaurant and the estimated legal auction price for the other restaurant, approximately $1,900,000 and $2,300,000, respectively, as of December 31, 2007 and 2006. If we were required to perform under either guarantee, we would obtain full title to the corresponding building unit and could liquidate the property, each having an estimated fair value of approximately $3,000,000 and $2,800,000, respectively. We have considered these guarantees and accounted for them in accordance with FIN 45. We have various depository and banking relationships with the lender.

We are not aware of any non-compliance with the underlying terms of the borrowing agreements for which we provide a guarantee that would result in us having to perform in accordance with the terms of the guarantee.

Dividends

Payment of dividends is prohibited under our credit agreements, except for certain limited circumstances.

 

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Other Material Commitments

Our contractual obligations, debt obligations, commitments and debt guarantees as of December 31, 2007 are summarized in the table below (in thousands):

 

Contractual Obligations

  Payments Due By Period
  Total   Less Than
1 Year
  1-3
Years
  3-5
Years
  More
Than 5
Years

Long-term debt (including current portion) (1)

  $ 1,843,450   $ 34,975   $ 155,289   $ 151,361   $ 1,501,825

Interest (2)

    938,761     131,852     279,464     266,729     260,716

Operating leases

    1,791,973     176,113     337,672     301,118     977,070

Unconditional purchase obligations (3)

    836,767     673,769     74,737     73,180     15,081

Partner deposit and accrued buyout liability (4)

    134,531     11,793     30,176     89,428     3,134

Other long-term liabilities (5)

    128,024     —       47,544     28,502     51,978

Other current liabilities (6)

    12,046     12,046     —       —       —  
                             

Total contractual obligations

  $ 5,685,552   $ 1,040,548   $ 924,882   $ 910,318   $ 2,809,804
                             

Debt Guarantees

         

Maximum availability of debt guarantees

  $ 81,285   $ 35,000   $ 24,500   $ 17,585   $ 4,200

Amount outstanding under debt guarantees

    78,868     32,583     24,500     17,585     4,200

Carrying amount of liabilities

    35,078     32,583     —       2,495     —  

 

(1) Payments due by period assume that our rent-adjusted leverage ratio is greater than or equal to 5.25 to 1.00.

 

(2) Includes interest on our $550,000,000 senior notes and interest estimated on our senior secured term loan facility with an outstanding balance of $1,260,000,000 at December 31, 2007. A projected future interest rate that is based on the interest rate in effect at December 31, 2007 was used to estimate interest for the variable-rate term loan facility. This also includes letter of credit fees and commitment fees for the unused working capital revolving credit facility and commitment fees for the unused pre-funded revolving credit facility. Our notes payable of $10,700,000 at December 31, 2007 issued for buyouts of general manager interests in the cash flows of their restaurants have been excluded from the table. 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 term loan. The collar consists of a LIBOR cap of 5.75% and a LIBOR floor of 2.99%. The interest rate collar has been excluded from the table.

 

(3) We have minimum purchase commitments with various vendors through June 2013. Outstanding commitments consist primarily of minimum purchase levels of beef, butter, cheese and other food and beverage products related to normal business operations as well as contracts for advertising, marketing, sports sponsorships, printing and technology.

 

(4) Partner deposit and accrued buyout liability payments by period are estimates only and may vary significantly in amounts and timing of settlement based on employee turnover, return of deposits to us in accordance with employee agreements and change in buyout values of our employee partners.

 

(5) Other long-term liabilities include long-term insurance estimates, long-term incentive plan compensation for certain of our officers and the long-term portion of amounts owed to managing partners, chef partners and certain members of management for various compensation programs. The long-term portion of our liability for unrecognized tax benefits and the related accrued interest and penalties were $13,202,000 and $2,762,000, respectively, at December 31, 2007. These amounts were excluded from the table since it is not possible to estimate when these future payments will occur. As of December 31, 2007, we had $18,463,000 of total unrecognized tax benefits. Of this amount, $14,813,000, if recognized, would impact our effective tax rate. In addition, net unfavorable leases of $89,043,000 at December 31, 2007 were excluded from the table as payments are not associated with this liability.

 

(6) Other current liabilities include the current portion of our liability for unrecognized tax benefits and the accrued interest and penalties related to uncertain tax positions and the current portion of amounts owed to managing partners, chef partners and certain members of management for various compensation programs.

 

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We expect that our working capital and capital expenditure requirements through the next 12 months will be met by cash flow from operations and, to the extent needed, advances on our line of credit.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities during the reporting period. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider the following policies to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements.

Principles of Consolidation. Our consolidated financial statements include the accounts and operations of OSI Restaurant Partners, LLC, OSI Co-Issuer, Inc. and our affiliated partnerships and limited liability corporations in which we are a general partner or managing member and own 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. Our consolidated financial statements also include the accounts and operations of our Roy’s consolidated joint venture in which we have a less than majority ownership. We consolidate this venture because we control the executive committee (which functions as a board of directors) through representation on the board by related parties, and we are able to direct or cause the direction of management and operations on a day-to-day basis. Additionally, the majority of capital contributions made by our partner in the Roy’s consolidated joint venture have been funded by loans to the partner from a third party where we are required to be a guarantor of the debt, which provides us control through our collateral interest in the joint venture partner’s membership interest. As a result of our controlling financial interest in this venture, it is included in our consolidated financial statements. The portion of income or loss attributable to the minority interests, not to exceed the minority interest’s equity in the subsidiary, is eliminated in the line item in the Consolidated Statements of Operations entitled “Minority interest in consolidated entities’ income.” All material intercompany balances and transactions have been eliminated.

The unconsolidated affiliates are accounted for using the equity method.

We consolidate variable interest entities in which we absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Therefore, if we have 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.

We have a minority investment in an unconsolidated affiliate in which we have a 22.5% equity interest and for which we operate catering and concession facilities. Additionally, we guarantee a portion of the affiliate’s debt. Although we hold an interest in this variable interest entity, we are not the primary beneficiary of this entity and therefore it is not consolidated.

We are a franchisor of 144 restaurants as of December 31, 2007, but do not possess any ownership interests in our franchisees and generally do not provide financial support to franchisees in our typical franchise relationship. These franchise relationships are not deemed variable interest entities and are not consolidated. However, we guarantee an uncollateralized line of credit that permits borrowing of up to $35,000,000, maturing in December 2008, for an entity affiliated with our California franchisees. The limited liability company that holds this line of credit is a variable interest entity and is consolidated by us. This entity draws on its line of credit to loan funds to entities in California to purchase and/or build land and buildings for lease to individual

 

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Outback Steakhouse franchisees. Therefore, it holds as collateral the notes receivable and underlying assets from these corporations in offsetting amounts to the debt owed to the bank, which are both included in our Consolidated Balance Sheets.

Financial Instruments. SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” (“SFAS No. 107”) requires disclosure of fair value information about financial instruments, whether or not recognized in the Consolidated Balance Sheet, for which it is practical to estimate that value.

Our financial instruments at December 31, 2007 and 2006 consist of cash equivalents, short-term investments, accounts receivable, accounts payable and current and long-term debt. The fair values of cash equivalents, short-term investments, accounts receivable, accounts payable and current debt approximates their carrying amounts reported in the Consolidated Balance Sheets due to their short duration. The carrying value and fair value of the senior secured term loan facility at December 31, 2007 was $1,260,000,000 and $1,159,200,000, respectively. The carrying value and fair value of the senior notes at December 31, 2007 was $550,000,000 and $401,500,000, respectively. At December 31, 2006, the carrying amount of long-term debt approximated fair value. The fair value of long-term debt is determined based on quoted market prices or, if market prices are not available, the present value of the underlying cash flows discounted at our incremental borrowing rates.

Derivatives. 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 variable-rate debt. Additionally, our restaurants are dependent upon energy to operate and are impacted by changes in energy prices, including natural gas. We use derivative instruments to mitigate our exposure to material increases in natural gas prices.

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. We included approximately $5,357,000 in the line item “Accrued expenses” in our Consolidated Balance Sheet as of December 31, 2007 and in the line item “Interest expense” in our Consolidated Statement of Operations for the period from June 15 to December 31, 2007 for the effects of our interest rate collar. The effects of the natural gas hedges were immaterial to our financial statements for all periods presented.

Restricted Cash. As a result of the Merger, at December 31, 2007, the current portion of restricted cash consisted of $4,006,000 restricted for the payment of property taxes, and restricted cash consisted of $29,002,000 restricted for capital expenditures and $3,235,000 restricted for settlement of obligations in a rabbi trust for the Partner Equity Plan (the “PEP”) and other deferred compensation. At December 31, 2006, we did not have any restricted cash.

Property, Fixtures and Equipment. Property, fixtures and equipment are stated at cost, net of accumulated depreciation. At the time property, fixtures and equipment are retired, or otherwise disposed of, the asset and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in earnings. We expense repair and maintenance costs incurred to maintain the appearance and functionality of the restaurant that do not extend the useful life of any restaurant asset or are less than $1,000. Improvements to leased properties are depreciated over the shorter of their useful life or the lease term, which includes cancelable renewal periods where failure to exercise such options would result in an economic penalty. Depreciation is computed on the straight-line method over the following estimated useful lives:

 

Buildings and building improvements

   20 to 30 years

Furniture and fixtures

   5 to 7 years

Equipment

   2 to 7 years

Leasehold improvements

   5 to 20 years

 

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Our accounting policies regarding property, fixtures and equipment include certain management judgments and projections regarding the estimated useful lives of these assets and what constitutes increasing the value and useful life of existing assets. These estimates, judgments and projections may produce materially different amounts of depreciation expense than would be reported if different assumptions were used.

Operating Leases. Rent expense for our operating leases, which generally have escalating rentals over the term of the lease and may include potential rent holidays, is recorded on a straight-line basis over the initial lease term and those renewal periods that are reasonably assured. The initial lease term includes the “build-out” period of our leases, which is typically before rent payments are due under the terms of the lease. The difference between rent expense and rent paid is recorded as deferred rent and is included in our Consolidated Balance Sheets. Payments received from landlords as incentives for leasehold improvements are recorded as deferred rent and are amortized on a straight-line basis over the term of the lease as a reduction of rent expense. Lease termination fees are undiscounted and recorded in the period that they are incurred. Assets and liabilities resulting from the Merger relating to favorable and unfavorable lease amounts are amortized on a straight-line basis to expense over the remaining lease term.

Impairment of Long-Lived Assets. We assess the potential impairment of identifiable intangibles and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Recoverability of assets is measured by comparing the carrying value of the asset to the future cash flows expected to be generated by the asset. In evaluating long-lived restaurant assets for impairment, we consider a number of factors such as:

 

  a) Restaurant sales and cash flow trends;

 

  b) Local competition;

 

  c) Changing demographic profiles;

 

  d) Local economic conditions;

 

  e) New laws and government regulations that adversely affect sales and profits; and

 

  f) The ability to recruit and train skilled restaurant employees.

If the aforementioned factors indicate that we should review the carrying value of the restaurant’s long-lived assets, we perform an impairment analysis. Identifiable cash flows that are largely independent of other assets and liabilities typically exist for land and buildings and for combined fixtures, equipment and improvements for each restaurant. If the total future undiscounted cash flows are less than the carrying amount of the asset, the carrying amount is written down to the estimated fair value, and a loss resulting from value impairment is recognized by a charge to earnings.

Judgments and estimates made by us related to the expected useful lives of long-lived assets are affected by factors such as changes in economic conditions and changes in operating performance. As we assess the ongoing expected cash flows and carrying amounts of our long-lived assets, these factors could cause us to realize a material impairment charge.

Restaurant sites and certain other assets to be sold are included in assets held for sale when certain criteria defined in SFAS No. 144 are met, including the requirement that the likelihood of selling the assets within one year is probable. For assets that meet the held for sale criteria, we separately evaluate whether the assets also meet the requirements to be reported as discontinued operations. Primarily, if we no longer have any significant continuing involvement with respect to the operations of the assets and cash flows are discontinued, we classify the assets and related results of operations as discontinued. If we dispose of enough assets where classification between continuing operations and discontinued operations would be material to our consolidated financial statements, we utilize the reporting provisions for discontinued operations. Assets whose sale is not probable within one year remain in property, fixtures and equipment until their sale is probable within one year.

 

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Goodwill. Goodwill represents the residual after allocation of the purchase price to the individual fair values and carryover basis of assets acquired. On an annual basis, we review the recoverability of goodwill based primarily upon an analysis of discounted cash flows of the related reporting unit as compared to the carrying value or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. If the carrying amount of the reporting unit’s goodwill exceeds its estimated fair value, the amount of impairment loss is recognized in an amount equal to that excess. Generally, we perform our annual assessment for impairment during the second quarter of the fiscal year, unless facts and circumstances require differently.

Insurance Reserves. We self-insure a significant portion of expected losses under our workers’ compensation, general liability, health and property insurance programs. We purchase insurance for individual claims that exceed the amounts listed in the following table:

 

     2007    2008

Workers’ Compensation

   $ 1,500,000    $ 1,500,000

General Liability (1)

     1,500,000      1,500,000

Health (2)

     300,000      300,000

Property Coverage (3)

     5,000,000 /500,000      2,500,000 /500,000

 

(1) For claims arising from liquor liability, there is an additional $1,000,000 deductible until a $2,000,000 aggregate has been met. At that time, any claims arising from liquor liability revert to the general liability deductible.

 

(2) We are self-insured for all aggregate health benefits claims, limited to $300,000 per covered individual per year. In 2007, we retained the first $100,000 of payable losses under the plan as an additional deductible, and in 2008, we will retain the first $115,000 of payable losses under the plan as an additional deductible. The insurer’s liability is limited to $2,000,000 per individual per year.

 

(3) From January 1, 2007 until May 9, 2007, we had a 25% quota share participation of any loss excess of $5,000,000 up to $20,000,000 each occurrence and a 50% quota share participation of any loss excess of $20,000,000 up to $50,000,000 each occurrence. As a result of the PRP Sale-Leaseback Transaction, the property program changed. From May 9 to December 31, 2007, we had a $5,000,000 deductible per occurrence for all locations other than those included in the PRP Sale-Leaseback Transaction. Effective January 1, 2008, we have a $2,500,000 deductible per occurrence for all locations other than those included in the PRP Sale-Leaseback Transaction. In accordance with the terms of the market rate master lease agreement, we are responsible for paying PRP’s $500,000 deductible for those properties included in the PRP Sale-Leaseback Transaction. Property limits are $60,000,000 each occurrence, and there is no quota share of any loss above either deductible level.

We record a liability for all unresolved claims and for an estimate of incurred but not reported claims at the anticipated cost to us based on estimates provided by a third party administrator and insurance company. Our accounting policies regarding insurance reserves include certain actuarial assumptions and management judgments regarding economic conditions, the frequency and severity of claims and claim development history and settlement practices. Unanticipated changes in these factors or future adjustments to these estimates may produce materially different amounts of expense that would be reported under these programs.

In January 2008, we entered into a premium financing agreement for our 2008 general liability and property insurance. The agreement’s total premium balance is $3,729,000, payable in eleven monthly installments of $319,000 and one down payment of $319,000. The agreement includes interest at the rate of 5.75% per year.

Intangible Assets. Identifiable intangible assets include our trade names, trademarks, franchise agreements and net favorable leases. The fair values and useful lives of identified intangible assets are based on many factors, including estimates and assumptions of future operating performance, estimates of cost avoidance, the specific characteristics of the identified intangible assets and historical experience. We use the straight-line method to amortize definite-lived intangible assets.

 

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Deferred Financing Fees. We capitalized $19,884,000, $36,581,000 and $6,848,000 in deferred financing fees related to the issuance of the senior notes, the senior secured term loans and the working capital and pre-funded revolving credit facilities, respectively. For the period from June 15 to December 31, 2007, we amortized $5,879,000 of these costs to interest expense over the terms of the respective financing arrangements using the effective interest method. At December 31, 2007, approximately $18,091,000, $33,113,000 and $6,230,000 of the deferred costs related to the senior notes, the senior secured term loans and the working capital and pre-funded revolving credit facilities, respectively, remain to be amortized. There was no amortization of these costs in the Predecessor periods, as we did not have any deferred financing fees prior to the Merger.

Liquor Licenses. The costs of obtaining non-transferable liquor licenses directly issued by local government agencies for nominal fees are expensed as incurred. The costs of purchasing transferable liquor licenses through open markets in jurisdictions with a limited number of authorized liquor licenses are capitalized as indefinite-lived intangible assets and included in “Other assets.” Annual liquor license renewal fees are expensed over the renewal term.

Unearned Revenue. Unearned revenue represents our liability for gift cards and certificates that have been sold but not yet redeemed and are recorded at the redemption value. We recognize restaurant sales and reduce the related deferred liability when gift cards and certificates are redeemed or the likelihood of the gift card or certificate being redeemed by the customer is remote (gift card breakage). We recognize breakage income as a component of “Restaurant sales” in the Consolidated Statements of Operations.

Revenue Recognition. We record revenues for normal recurring sales upon the performance of services. Revenues from the sales of franchises are recognized as income when we have substantially performed all of our material obligations under the franchise agreement. Ongoing royalties, which are a percentage of net sales of franchised restaurants, are accrued as income when earned. These revenues are included in the line “Other revenues” in our Consolidated Statements of Operations.

We collect and remit sales, food and beverage, alcoholic beverage and hospitality taxes on transactions with customers and report such amounts under the net method in our Consolidated Statements of Operations. Accordingly, these taxes are not included in gross revenue.

Distribution Expense to Employee Partners. The general manager and area operating partner of each Company-owned domestic restaurant is currently required, as a condition of employment, to sign a five-year employment agreement and to purchase a non-transferable ownership interest in a Management Partnership that provides management and supervisory services to the restaurant he or she is employed to manage. Payments made to managing partners pursuant to these programs are included in the line item “Labor and other related” expenses, and payments made to area operating partners pursuant to these programs are included in the line item “General and administrative” expenses in the Consolidated Statements of Operations.

Employee Partner Buyout Expense. Area operating partners historically have been required, as a condition of employment, to purchase a 4% to 9% interest in the restaurants they develop for an initial investment of $50,000. This interest gives the area operating partner the right to receive a percentage of his or her restaurants’ annual cash flows for the duration of the agreement. Pursuant to these partners’ employment agreements, we have the option to purchase the partners’ interests after a five-year period on the terms specified in the agreements.

We have continued the area operating partner program subsequent to the Merger. However, in connection with the Merger, each area operating partner sold his or her interest in the restaurants and became a partner in a new Management Partnership that provides services to the restaurants. The restaurants pay a management fee to the Management Partnerships based on a percentage of the cash flow of the restaurants. The area operating partner receives distributions from the Management Partnership based on a percentage of the restaurant’s annual cash flows for the duration of the agreement. We retained the option to purchase the partners’ interests in the

 

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Management Partnerships after the restaurant has been open for a five-year period on the terms specified in the agreements. For restaurants opened on or after January 1, 2007, the area operating partner’s percentage of cash distributions and percentage for buyout will be adjusted based on the associated restaurant’s return on investment compared to our targeted return on investment. The area operating partner percentage may range from 3.0% to 12.0%. This adjustment to the area operating partner’s percentage will be made beginning after the first five full calendar quarters from the date of the associated restaurant’s opening and will be made each quarter thereafter based on a trailing 12-month restaurant return on investment. The percentage for buy-out will be the distribution percentage for the 24 months preceding the buy-out. Area operating partner distributions will continue to be paid monthly and buyouts will be paid in cash over a two-year period.

We estimate future purchases of area operating partners’ interests using current information on restaurant performance to calculate and record an accrued buyout liability in the line item “Partner deposit and accrued buyout liability” in our Consolidated Balance Sheets. Expenses associated with recording the buyout liability are included in the line “General and administrative” expenses in our Consolidated Statements of Operations. In the period we complete the buyout, an adjustment is recorded to recognize any remaining expense associated with the purchase and reduce the related accrued buyout liability.

Effective January 1, 2007, area operating partners who provide supervisory services for a restaurant in which they do not have an associated ownership interest in a Management Partnership have the opportunity to earn a bonus payment. This payment is based on growth in the associated restaurant cash flows according to terms specified in the program and will be paid in a lump sum within 90 days of the end of the five-year period provided for in the program.

Stock-Based Compensation. We account for our stock-based employee compensation using the fair value based method of accounting as required by SFAS No. 123R, “Share-Based Payment,” (“SFAS No. 123R”) a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). SFAS No. 123R requires all stock-based payments to employees to be measured at fair value and expensed in the statement of operations over the service period, generally the vesting period, of the grant. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as previously required. We adopted SFAS No. 123R using the modified prospective method. Accordingly, we have expensed all unvested and newly granted stock-based employee compensation beginning January 1, 2006, but prior period amounts have not been retrospectively adjusted. The incremental pre-tax stock-based compensation expense recognized for stock options due to the adoption of SFAS No. 123R for the period from January 1 to June 14, 2007 and the year ended December 31, 2006 was approximately $12,049,000 and $10,245,000, respectively. We did not recognize any stock-based compensation expense for stock options for the period from June 15 to December 31, 2007.

In connection with the Merger, our Parent adopted the Kangaroo Holdings, Inc. 2007 Equity Incentive Plan (the “Equity Plan”). This plan permits the grant of stock options and restricted stock of our Parent to our management and other key employees. The Equity Plan contains a call provision that allows our Parent to repurchase all shares purchased through exercise of stock options upon termination of employment at the lower of exercise cost or fair market value, depending on the circumstance, at any time prior to the earlier of an initial public offering or a change of control. If an employee’s termination of employment is a result of death or disability, by us other than for cause or by the employee for good reason then, under this call provision, our Parent may repurchase the stock for fair market value. If an employee’s termination of employment is by us for cause or by the employee then, under this call provision, our Parent may repurchase the stock for the lesser of cost or fair market value. As a result of this call provision, we have not recorded any stock option expense for options granted under the Equity Plan.

Prior to January 1, 2006, we accounted for our stock-based employee compensation under the intrinsic value method. No stock-based employee compensation cost was reflected in net income to the extent options granted had an exercise price equal to or exceeding the fair market value of the underlying common stock on the date of grant.

 

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Income Taxes. We use the asset and liability method which recognizes the amount of current and deferred taxes payable or refundable at the date of the financial statements as a result of all events that have been recognized in the consolidated financial statements as measured by the provisions of enacted tax laws.

The minority interest in affiliated entities includes no provision or liability for income taxes, as any tax liability related thereto is the responsibility of the minority owner.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for and disclosure of uncertainty in tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition associated with tax positions. Effective January 1, 2007, we adopted the provisions of FIN 48 resulting in a $1,612,000 increase in our liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings.

Recently Issued Financial Accounting Standards

In September 2006, the EITF reached a consensus on EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements” (“EITF No. 06-4”), which requires the application of the provisions of SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” to endorsement split dollar life insurance arrangements. EITF No. 06-4 requires recognition of a liability for the discounted future benefit obligation owed to an insured employee by the insurance carrier. EITF No. 06-4 is effective for fiscal years beginning after December 15, 2007 and will be adopted January 1, 2008. In the period of adoption, we anticipate a cumulative adjustment of approximately $9,550,000 to retained earnings.

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. In February 2008, the FASB also issued FSP SFAS No. 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements that Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13,” which excludes SFAS No. 13, “Accounting for Leases” (“SFAS No. 13”), as well as other accounting pronouncements that address fair value measurements on lease classification or measurement under SFAS No. 13, from SFAS No. 157’s scope. We do not expect the adoption of SFAS No. 157 to have a material effect on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS No. 159 to have a material effect on our 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.

 

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SFAS No. 141R is effective for fiscal years beginning on or after December 15, 2008 and is applicable to business combinations with an acquisition date on or after this date. We are currently evaluating the impact that SFAS No. 141R will have on our financial statements.

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 and consolidated net (loss) income. The provisions of SFAS No. 160 are effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact that SFAS No. 160 will have on our 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. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We are currently evaluating the impact that SFAS No. 161 will have on our financial statements.

Impact of Inflation

In the last three years, we have not operated in a period of high general inflation; however, we have experienced material increases in specific commodity costs and utilities. Our restaurant operations are subject to federal and state minimum wage laws governing such matters as working conditions, overtime and tip credits. Significant numbers of our food service and preparation personnel are paid at rates related to the federal and/or state minimum wage and, accordingly, increases in the minimum wage have increased our labor costs in the last three years. To the extent permitted by competition, we have mitigated increased costs by increasing menu prices and may continue to do so if deemed necessary in future years.

Quantitative and Qualitative Disclosure 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.

Interest Rate Risk

Our exposure to interest rate fluctuations includes our borrowings under our 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. We manage our interest rate risk by offsetting some of our variable-rate debt with fixed-rate debt, through normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. We do not enter into financial instruments for trading or speculative purposes.

For fixed-rate debt, interest rate changes do not affect our earnings or cash flows. However, for variable-rate debt, interest rate changes generally impact our earnings and cash flows, assuming other factors are held constant. 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 2008 and ending September 30, 2010. The quarterly expiration dates correspond to the scheduled amortization payments of our term loan. We

 

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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. We included approximately $5,357,000 in the line item “Accrued expenses” in our Consolidated Balance Sheet as of December 31, 2007 and in the line item “Interest expense” in our Consolidated Statement of Operations for the period from June 15 to December 31, 2007 for the effects of this derivative instrument.

At December 31, 2007, we had $550,000,000 of fixed-rate debt outstanding through our senior notes and $1,260,000,000 of variable-rate debt outstanding on our senior secured credit facilities. We also had $100,460,000 in available unused borrowing capacity under our working capital revolving credit facility (after giving effect to undrawn letters of credit of approximately $49,540,000) and $100,000,000 in available unused borrowing capacity under our pre-funded revolving credit facility that provides financing for capital expenditures only. Based on $1,260,000,000 of outstanding variable-rate debt, an immediate increase of one percentage point would cause an increase to cash interest expense of approximately $12,600,000 per year.

If a one percentage point increase in interest rates were to occur over the next four quarters, such an increase would result in the following additional interest expense, assuming the current borrowing level remains constant:

 

     Principal
Outstanding at
December 31,
   Additional Interest Expense
      Q1    Q2    Q3    Q4

Variable-Rate Debt

   2007    2008    2008    2008    2008

Senior secured term loan facility

   $ 1,260,000,000    $ 3,150,000    $ 3,150,000    $ 3,150,000    $ 3,150,000

At December 31, 2007, our interest rate on our term loan facility was 7.13%.

In June 2007, we established a one-year line of credit with a maximum borrowing amount of 12,000,000,000 Korean won ($12,790,000 at December 31, 2007) and a one-year overdraft line of credit with a maximum borrowing amount of 5,000,000,000 Korean won ($5,329,000 at December 31, 2007) to finance development of our restaurants in South Korea. These lines bear interest at 0.80% to 1.15% over the Korean Stock Exchange three-month certificate of deposit rate. There were no draws outstanding on these lines of credit as of December 31, 2007.

In connection with the Merger, we entered into the PRP Sale-Leaseback Transaction in which we caused our wholly-owned subsidiaries to sell substantially all of our domestic restaurant properties to PRP for approximately $987,700,000. We identified six restaurant properties included in the PRP Sale-Leaseback Transaction that failed to qualify for sale-leaseback accounting treatment in accordance with SFAS No. 98, as we have an obligation to repurchase such properties from PRP under certain circumstances. If within one year from the PRP Sale-Leaseback Transaction all title defects and construction work at such properties are not corrected, we must purchase such properties back from PRP on or before the expiration of the one-year period at the original purchase price. We have included approximately $17,825,000 for the fair value of these properties in the line items “Property, fixtures and equipment, net” and “Current portion of long-term debt” in our Consolidated Balance Sheet at December 31, 2007. The future lease payments made pursuant to the lease agreement will be treated as interest expense and principal payments until such time as the requirements for sale-leaseback treatment are achieved or we repurchase the properties.

On June 14, 2007, our uncollateralized $225,000,000 revolving credit facility, our $40,000,000 line of credit and our $50,000,000 short-term uncollateralized line of credit were paid off with proceeds from the Merger and terminated. On May 2, 2007, our notes payable used to finance development of our restaurants in South Korea were paid off. Our Japanese lines of credit and notes payable had been paid as of March 31, 2007. At December 31, 2007 and 2006, our total debt, excluding consolidated guaranteed debt, was approximately $1,843,450,000 and $235,378,000, respectively.

 

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Our ability to make scheduled payments on or to refinance our debt obligations and to satisfy our operating lease obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot be certain that we will maintain a level of cash flow from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the senior notes, or to pay our operating lease obligations. 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 investments and 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 substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our senior secured credit facilities and the indenture governing the 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.

A change in interest rates generally does not have an impact upon our future earnings and cash flow for fixed-rate debt instruments. As fixed-rate debt matures, however, and if additional debt is acquired to fund the debt repayment, future earnings and cash flow may be affected by changes in interest rates. This effect would be realized in the periods subsequent to the periods when the debt matures.

Foreign Currency Exchange Rate Risk

Our exposure to foreign currency exchange fluctuations relates primarily to our direct investment in restaurants in South Korea, Hong Kong, Japan, the Philippines and Brazil, to any outstanding debt to South Korean banks and to our royalties from international franchisees. We do not use financial instruments to hedge foreign currency exchange rate changes.

Many of the ingredients used in the products sold in our restaurants are commodities that are subject to unpredictable price volatility. Although we attempt to minimize the effect of price volatility by negotiating fixed price contracts for the supply of key ingredients, there are no established fixed price markets for certain commodities such as produce and wild fish, and we are subject to prevailing market conditions when purchasing those types of commodities. Other commodities are purchased based upon negotiated price ranges established with vendors with reference to the fluctuating market prices. The related agreements may contain contractual features that limit the price paid by establishing certain price floors and caps. Extreme changes in commodity prices and/or long-term changes could affect our financial results adversely, although any changes in commodity prices would affect our competitors at about the same time as us. We expect that in most cases increased commodity prices could be passed through to our consumers via increases in menu prices. However, if there is a time lag between the increasing commodity prices and our ability to increase menu prices or, if we believe the commodity price increase to be short in duration and we choose not to pass on the cost increases, our short-term financial results could be negatively affected. Additionally, from time to time, competitive circumstances could limit menu price flexibility, and in those cases margins would be negatively impacted by increased commodity prices.

Our restaurants are dependent upon energy to operate and are impacted by changes in energy prices, including natural gas. We utilize derivative instruments to mitigate our exposure to material increases in natural gas prices. 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. The effects of these derivative instruments were immaterial to our financial statements for all periods presented.

In addition to the market risks identified above and to the risks discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we are subject to business risk as our beef supply is

 

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highly dependent upon a limited number of vendors. Domestically, we currently purchase 90% of our beef from four beef suppliers. These four beef suppliers represent 87% of the total beef marketplace in the United States. If these vendors were unable to fulfill their obligations under their contracts, we could encounter supply shortages and incur higher costs to secure adequate supplies.

This market risk discussion contains forward-looking statements. Actual results may differ materially from the discussion based upon general market conditions and changes in domestic and global financial markets.

 

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BUSINESS

Our Company

We are one of the largest casual dining restaurant companies in the United States, with a significant international presence. Through our restaurant concepts, each with a distinct theme, menu offering and price point, we serve a broad customer base and cater to multiple dining occasions. Our primary concepts include Outback, Carrabba’s, Bonefish and Fleming’s. Our other concepts include Roy’s, Cheeseburger in Paradise, Lee Roy Selmon’s and Blue Coral. We have entered into an agreement in principle to sell the majority of our interest in our Lee Roy Selmon’s concept to an investor group led by Lee Roy Selmon and Peter Barli, president of the concept. We are evaluating strategies for exiting our other, non-primary concepts. Outback, our largest restaurant concept, is the leading steakhouse chain in the United States with 2007 restaurant sales greater than the sales of its three closest steakhouse chain competitors combined, as reported by Technomic. We also hold leading positions in the Italian and seafood categories: Carrabba’s is the third largest full-service Italian chain in the United States and Bonefish is the second largest full-service seafood chain in the United States, in each case based on 2007 restaurant sales as reported by Technomic. We have 1,318 company-owned and 162 franchised and development joint venture restaurants located in all 50 states and in 20 countries internationally. For the year ended December 31, 2007, we generated total revenues of $4.1 billion.

 

LOGO   LOGO

 

(1) Includes restaurant sales from Roy’s, Cheeseburger in Paradise, Lee Roy Selmon’s and Blue Coral.

 

(2) Consists primarily of initial franchise fees and ongoing royalties from Outback and Bonefish franchised restaurants.

We believe we maintain our strong market position by serving high-quality food, providing attentive service and operating efficient restaurants. Each of our restaurant concepts offers a limited number of menu items to maximize the quality and consistency of each item we serve while offering sufficient breadth to appeal to a broad array of tastes. We believe our concepts, which range from casual to upscale casual dining atmospheres, attract a diverse customer mix. We believe our attentive service contributes to maintaining a loyal customer base. In addition, we believe we are able to align the incentives of our restaurant general managers with those of our Company and foster long-term employee commitment by providing them with the opportunity to share in the cash flows of the restaurants they manage. We believe this business model drives strong unit-level economics, which has enabled us to maintain a healthy restaurant base.

The following provides an overview of our restaurant concepts:

Outback. Outback, our steakhouse concept founded in 1988, features a casual dining atmosphere with décor suggestive of the Australian Outback. We own and franchise 795 Outback restaurants in the United States and 178 Outback restaurants in international locations. The restaurant décor includes blond woods, large booths and

 

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tables. A substantial majority of Outback restaurants currently serve dinner only. The Outback menu includes several cuts of freshly prepared, specially seasoned and seared steaks, plus prime rib, barbecued ribs, pork chops, chicken, seafood and pasta. The menu also includes several specialty appetizers, including the signature “Bloomin’ Onion,” and desserts, together with full bar service featuring Australian wines and beers. Alcoholic beverages accounted for approximately 12.2% of Outback’s 2007 domestic revenues. In the United States, the price range of appetizers is $2.99 to $9.99, the price range of entrees is $7.29 to $31.99.

Carrabba’s. Carrabba’s, our Italian concept, in which we initially purchased an interest in 1993, features a casual dining atmosphere with a traditional Italian exhibition kitchen where customers can watch their meals being prepared. We own 238 Carrabba’s restaurants in the United States. The décor of our Carrabba’s concept includes dark woods, large booths and tables as well as Italian memorabilia featuring Carrabba family photos, authentic Italian pottery and cooking utensils. Carrabba’s restaurants currently serve dinner only. The Carrabba’s menu includes several types of specially prepared Italian dishes, including pastas, chicken, seafood and wood-fired pizza. The menu also includes several specialty appetizers, desserts and coffees, together with full bar service featuring Italian wines and specialty drinks. Alcoholic beverages accounted for approximately 16.0% of Carrabba’s 2007 revenues. In 2007, the price range of appetizers was $6.99 to $11.00 and the price of entrees was $8.99 to $22.00, with nightly specials ranging from $10.99 to $26.00.

Bonefish. Bonefish, our seafood concept, in which we initially purchased an interest in 2001, features a casual dining experience in an upbeat, refined setting. We own and franchise 140 Bonefish restaurants in the United States. The décor of our Bonefish concept includes a warm, inviting dining room with hardwood floors, large booths and tables and distinctive artwork inspired by Florida’s natural coastal setting. Bonefish restaurants currently serve dinner only. The Bonefish menu offers fresh grilled fish and other seafood specially prepared with a variety of freshly prepared sauces. The menu also includes beef, pork and chicken entrées, several specialty appetizers and desserts. In addition to full bar service, Bonefish offers a specialty martini list. Alcoholic beverages accounted for approximately 26.0% of Bonefish’s 2007 revenues. In 2007, the price range of entrees was $12.90 to $26.00, with appetizers ranging from $5.90 to $14.90.

Fleming’s. Fleming’s, our premium steakhouse concept, in which we initially purchased an interest in 1999, features an upscale casual dining atmosphere in an upbeat, refined setting. We own 54 Fleming’s restaurants in the United States. The décor of our Fleming’s restaurants features an open dining room built around an exhibition kitchen and expansive bar. The refined and casually elegant setting features lighter woods and colors with rich cherry wood accents and high ceilings. Fleming’s restaurants serve dinner only. The Fleming’s menu features prime cuts of beef, fresh seafood, as well as pork, veal and chicken entrées. Accompanying the entrées is an extensive assortment of freshly prepared salads and side dishes available à la carte. The menu also includes several specialty appetizers and desserts. In addition to full bar service, Fleming’s offers a selection of over 100 quality wines available by the glass. Alcoholic beverages accounted for approximately 31.0% of Fleming’s 2007 revenues. The price range of entrées was $23.50 to $43.95.

 

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The following table summarizes the key attributes of our primary concepts:

 

      Outback (1)    Carrabba’s    Bonefish    Fleming’s

Category

   Steak      Italian      Seafood      Premium Steak

Company-Owned Restaurants

   688 domestic

129 international

    

 

238 domestic

—  

    

 

134 domestic

—  

    

 

54 domestic

—  

Franchised and Development Joint Venture Restaurants

   107 domestic

49 international

    

 

—  

—  

    

 

6 domestic

—  

    

 

—&n