It’s not often that you see an 8-K with both 1) an announcement that a deal has been reached for control of a company and 2) a revocation of prior financial statements on the grounds they contain material errors. But that’s what happened to day when OSI Restaurant Partners, the operator of the Outback Steakhouse chain, filed their deal-announcing/non-reliance 8-K.
The non-reliance issues are numerous, but apparently the largest chunk relates to the understatement of deferred revenues tied to gift cards, those bits of plastic that convey holiday sentiments so well. It seems that OSI had understated their liability for the revenue stored on those plastic stores of value by anywhere between “approximately $50,000,000 to $70,000,000 at September 30, 2006. The actual amount of the understatement, the periods affected and the related income tax effects are still being determined.” An understatement of the deferred revenues implies that revenue had been recognized prematurely. Items of lesser concern:
“… the Company is also assessing the correction of other less significant errors in its financial statements, including deferred rent, minority interests in consolidated entities and additional paid in capital. The correction of these balances may affect multiple historical periods, including 2006. Management has not yet completed its reassessment of the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2005, March 31, 2006 and June 30, 2006, including internal control over financial reporting. It is possible that management will determine that there were one or more material weaknesses in its disclosure controls and procedures as of those dates.”
None of this stuff is brand spanking new, in terms of botched reporting. Investors have seen stuff like this for years and coped. What’s strange about this episode is that it carries the implication that the numbers - used by market participants to value the company - have been wrong in a variety of ways, so you wonder how effectively the company has been valued in the market ever since the periods were misstated.
At the same time, the company is going private in a deal including insiders. What numbers are they using to value the company - the right ones? According to the 8-K, all of them aren’t yet known. Are the estimates of value based on the same rubbery numbers that the public investors can’t use to value their interests? On top of the contradictions on how management arrives at a value - how can investors properly assess the fairness of the buyout price for themselves without reliable figures? It’s a really fascinating set of contradictions. Slip another conundrum on the barbie, mate.