Outdoor Channel Holdings, Inc. (NASDAQ:OUTD) filed a non-reliance 8-K on January 9, putting its 2005 fiscal year filings and subsequent 2006 10-Q’s into reliance limbo. The issue: an intangible asset for the value of distributor relationships acquired by the company in its September 2004 purchase of the minority interest of The Outdoor Channel, Inc. A “change in the company’s strategy to increase the number of subscribers” to The Outdoor Channel rendered the value of those distributor relationships worthless in the third quarter of 2006, though the filing is silent on how the change in strategy backfired so badly.
It’s also silent on how the company went from an indefinite life on the intangible to a life of 21.33 years to totally worthless. (Two decimal places - that’s pretty definite!) The firm concludes that the error in the estimated life will cause them to restate their financials; there’ll be about $1 million of amortization recognized through the third quarter of 2006, and the remaining balance of $9.5 million will be written off in that revised third quarter. On an after-tax basis, the amortization for 2005 amounted to a little shy of 14% of the net income. A big bite, and the entire write-off is a big bite when you consider that the attacking intangibles amounted to about 7% of year end 2005 total assets.
It’s an odd set of circumstances: from indefinite life in one quarter, to a definite life of 21.33 years the next, a revision of history to the present, then a total write-off. There’s no reason not to call this is an “error” in the initial recording of the asset, as the firm describes it. But one has to wonder how effective their reporting controls really were at the end of 2005 when the management “concluded that our disclosure controls and procedures were effective as of December 31, 2005.” You’d think an effective set of controls would have ascertained that the intangibles had a definite life before they were completely impaired, and amortization would have started sooner than when recognized in a restatement.