**United StatesSecurities and Exchange Commission**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

ý                                  **Annual Report Pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the fiscal yearended****December 31,2005**

 

**or**

 

o                                   **Transition ReportPursuant to Section 13 or 15(d) of the Securities Exchange Act of1934**

 

**For the transitionperiod from                          to                          **

 

**Commission filenumber: 000-17287**

 

**OUTDOOR CHANNEL HOLDINGS, INC.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                    | ** ** | **33-0074499**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.) |

 

**43445 Business Park Dr., Suite 113,Temecula, California 92590**

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, includingarea code: **(951) 699-4749**

 

Securities registered pursuant to Section 12(b) of the Act: **None**

 

Securities registered pursuant to Section 12 (g) of theAct:

 

**Common Stock, $0.001 par value**

(Title of Class)

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes  o  No  ý

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act. Yes  o  No  ý

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes  ý  No  o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  o  Accelerated filer  ý  Non-accelerated filer  o

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes  o  No  ý

 

The aggregate market valueof voting stock held by non-affiliates of the registrant as of June 30,2005 was approximately $95.1 million computed by reference to the closing priceon such date as reported on The Nasdaq National Market.

 

On February 28, 2006,the number of shares of common stock outstanding of the registrant’s commonstock was 24,416,093.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

The information required by Part IIIof this report, to the extent not set forth herein, is incorporated herein byreference from the registrant’s definitive proxy statement relating to theAnnual Meeting of Stockholders to be held in 2006, which definitive proxystatement shall be filed with the Securities and Exchange Commission within 120days after the end of the fiscal year to which this report relates.

 

 

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**OUTDOOR CHANNEL HOLDINGS, INC.**

**FORM 10-KTABLE OF CONTENTS**

** **
|       | PART I                                                                                                            |   |
|------------|------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1.    | Business                                                                                                               | 3      |
| Item 1A.   | Risk Factors                                                                                                           | 13     |
| Item 1B.   | Unresolved Staff Comments                                                                                              | 22     |
| Item 2.    | Properties                                                                                                             | 23     |
| Item 3.    | Legal Proceedings                                                                                                      | 23     |
| Item 4.    | Submission of Matters to a Vote of Security  Holders                                                                   | 23     |
|       |                                                                                                                   |   |
|       | PART II                                                                                                           |   |
| Item 5.    | Market for the Registrant’s Common Equity, Related Stockholder  Matters and Issuer Purchases of Equity Securities | 24     |
| Item 6.    | Selected Consolidated Financial Data                                                                                   | 25     |
| Item 7.    | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                            | 26     |
| Item 7A.   | Quantitative and Qualitative Disclosures  About Market Risk                                                            | 39     |
| Item 8.    | Financial Statements and Supplementary Data                                                                            | 39     |
| Item 9.    | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure                             | 68     |
| Item 9A.   | Controls and Procedures                                                                                                | 68     |
| Item 9B.   | Other Information                                                                                                      | 69     |
|       |                                                                                                                   |   |
|       | PART III                                                                                                          |   |
| Item 10.   | Directors and Executive Officers of the  Registrant                                                                    | 70     |
| Item 11.   | Executive Compensation                                                                                                 | 70     |
| Item 12.   | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters                        | 70     |
| Item 13.   | Certain Relationships and Related Transactions                                                                         | 70     |
| Item 14.   | Principal Accountant Fees and Services                                                                                 | 70     |
|       |                                                                                                                   |   |
|       | PART IV                                                                                                           |   |
| Item 15.   | Exhibits, Financial Statement, and  Schedules                                                                          | 71     |
|       |                                                                                                                   |   |
| SIGNATURES |                                                                                                                   | 73     |

 

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**PART I**

 

**ITEM 1.****                                                    ****BUSINESS.**

 

As used in this annual report on Form 10-K, the terms“we,” “us,” “our” and the “Company” refer to Outdoor Channel Holdings, Inc.and its subsidiaries as a combined entity, except where noted or where thecontext makes clear the reference is only to Outdoor Channel Holdings, Inc.or one of its subsidiaries.

 

**Forward-Looking Statements**

 

Theinformation contained in this report may include forward-lookingstatements. Our actual results could differ materially from those discussed inany forward-looking statements. The statements contained in this report thatare not historical are “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended (the “Securities Act”), and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”),including statements, without limitation, regarding our expectations, beliefs,intentions or strategies regarding the future. We intend that suchforward-looking statements be subject to the safe-harbor provisions containedin those sections. Such forward-looking statements relate to, among otherthings: (1) expected revenue and earnings growth and changes in mix; (2) anticipatedexpenses including advertising, programming, personnel and others; (3) NielsenMedia Research, which we refer to as Nielsen, estimates regarding totalhouseholds and cable and satellite homes subscribing to and viewers (ratings)of The Outdoor Channel; and (4) other matters. We undertake no obligationto publicly update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise.

 

Thesestatements involve significant risks and uncertainties and are qualified byimportant factors that could cause our actual results to differ materially fromthose reflected by the forward-looking statements. Such factors include but arenot limited to risks and uncertainties which are discussed below under “Item 1ARisk Factors” and other risks and uncertainties discussed elsewhere in thisreport. In assessing forward-looking statements contained herein, readers are urgedto read carefully all cautionary statements contained in this Form 10-Kand in our other filings with the Securities and Exchange Commission. For theseforward-looking statements, we claim the protection of the safe harbor forforward-looking statements in Section 27A of the Securities Act and Section 21Eof the Exchange Act.

 

**Company Overview**

** **

We own andoperate The Outdoor Channel®, a national television network devoted totraditional outdoor activities such as hunting, fishing and shooting sports, aswell as off-road motor sports and other outdoor related lifestyle programming.Our target audience is comprised of sportsmen and outdoor enthusiaststhroughout the U.S. According to a survey by the U.S. Fish andWildlife Service, in 2001 there were over 82 million outdoor enthusiaststhroughout the U.S. who spent in excess of $100 billion in pursuit oftheir outdoor activities. As of December 2005, we had relationships oragreements with over 5,800 cable and satellite service providers to carry TheOutdoor Channel, including the 10 largest in the U.S. Through thesearrangements, we believe The Outdoor Channel is available to, and couldpotentially be subscribed by, over 77.6 million U.S. households.According to estimates by Nielsen, The Outdoor Channel was subscribed to byapproximately 25.7 million households in December 2005.

 

The OutdoorChannel was established in 1993 and began broadcasting 24 hours a day in May 1994.Since inception, we have been committed to providing excellent programming andcustomer service to our distribution partners. In recognition of our efforts,The Outdoor Channel was named Programmer of the Year in 2003 by the NationalCable Television Cooperative. We believe The Outdoor Channel provides viewerswith a unique destination for authentic, informative and entertaining outdoorprogramming. As a result, we believe that our viewers tend to be more loyal andspend more time watching The Outdoor Channel than other networks that offeroutdoor programming. We also believe that The Outdoor Channel has become adesirable network for advertisers of products and services used by outdoorenthusiasts.

 

We also ownand operate two national membership organizations, Gold Prospector’sAssociation of America, LLC, or GPAA, and LDMA-AU, Inc., or Lost Dutchman’s.The theme of these organizations is the search for gold deposits and treasureswhile enjoying the outdoors. Initially, we created The Outdoor Channel tomarket memberships in these organizations by airing programming related tothese activities. Through this process, we discovered that members in theseorganizations were veryenthusiastic about their activities which resulted in a strongconsumer demand for The Outdoor Channel. We believe by airing programsassociated with our membership organizations and other membership, or affinity,organizations, such as the National Rifle Association and the North AmericanHunting and Fishing Clubs, we enhance consumer demand and consequently provideopportunities to increase the number of subscribers to The Outdoor Channel.

 

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**2005 Developments**

 

During 2005, we undertookstrategic initiatives intended to grow The Outdoor Channel’s subscriber baseand increase our long-term profitability. First, we purchased a new buildingand began building out this property for use as our state-of-the-art broadcastfacility in the future. We are currently planning on moving our broadcastoperations into this facility sometime in March 2006. Second, we launcheda second network – Outdoor Channel 2 HDSM that offers programming similar to The Outdoor Channel producedentirely in high definition format. Third, we continued to produce moreprogramming in-house. Fourth, we expanded our advertising sales office in NewYork. Finally, on July 1, 2005, we completed a public offering of ourshares of common stock in which the net proceeds to the Company wasapproximately $43,350,000. We intend to use the majority of these net proceedsto expand our marketing and sales efforts to increase the number of subscribersto The Outdoor Channel. We expect to use the remainder of the net proceeds topurchase programming from third parties, increase the amount of our internallyproduced programming and for general corporate purposes. Although we anticipateundertaking these initiatives will increase our costs in the near term, webelieve such strategic pursuits will ultimately enhance our performance.

 

**Industry**

** **

Historically,television broadcasters have transmitted signals through the airwaves andhouseholds received the signals through antennas at no cost. This method ofbroadcasting signals had several disadvantages. The signal could not reach manyareas due to signal strength, remoteness of many communities and topography. Inaddition, for those households that could receive the signal, it often producedpoor picture and sound quality.

 

Unliketraditional television broadcasters which deliver their programming withoutcharge, cable companies provide subscription television service for a fee. Theseservice providers transmit signals through coaxial cable connected directly toindividual homes. In most markets, this service delivers a much improvedpicture and sound quality and offers an increased number and wider variety ofchannels as compared to broadcast television. In addition to using cable forconnectivity, companies use satellite technology to provide subscriptiontelevision service directly to households. This industry of providingtelevision service to households for a fee, or on a subscription basis, istypically referred to as “pay television.”

 

The paytelevision industry is comprised primarily of two segments: service providersand networks.

 

ServiceProviders. Pay television serviceproviders, also commonly referred to as distributors, are primarily comprisedof two types: cable and satellite. These service providers own and operate theplatforms they use to deliver television programming to subscribers. Cable andsatellite service providers compete against each other for subscribers. Theseservice providers attempt to create a mix of channels, or tiers, that will beattractive to the households in the markets they serve in an effort to attractand retain these households as subscribers. Service providers generate revenueprimarily by selling television service to households. They also make many ofthe programming decisions, including which channels to carry and in whichpackaged offering, or tier, a channel should be included.

 

* Cable Systems.* Paytelevision cable systems consist of two groups: independent cable providers andmulti-system cable operators, or MSOs. Independent cable providers are smaller,individual systems that deliver the television signal to households in only oneor a limited number of regions. Generally, independent cable service providersoperate in distinct markets that range from large metropolitan centers to smallrural areas and do not compete directly with each other in their respectivemarkets. In comparison, MSOs are companies that are affiliated with, or control,a number of regional or individual cable systems. Examples of MSOs include TimeWarner Cable and Comcast Cable Communications. In many instances, channels needto establish a relationship with an MSO in order to pursue carriage on itsaffiliated regional cable systems. As of December 2005, cable providersdelivered pay television to approximately 71.5 millionU.S. households, according to Nielsen estimates.

 

* **Satellite Systems.*Paytelevision satellite systems deliver television signals to households viaorbiting satellites using digital technology. Unlike cable, where the serviceproviders generally do not compete against each other, satellite serviceproviders compete against each other directly because reception from any onesatellite service provider is generally available to substantially all viewerswishing to subscribe to it. Examples of satellite service providers includeDIRECTV® and DISH NetworkTM. As of December 2005, there wereapproximately 22.9 million homes receiving pay television using some meansother than cable, according to Nielsen. We believe that most of thesehouseholds subscribe to a satellite service.

 

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Networks.Networks, also commonly referred to as television channels, bringtogether television programs and package them into a branded schedule ofentertainment. The two types of networks include broadcast networks, which areavailable to households through traditional broadcast free of charge, and paytelevision networks, which are only available to households through cable andsatellite service providers. Most networks are owned by MSOs or mediaconglomerates. In order to secure the content necessary for a cohesiveschedule, channels can produce programming internally and acquire third-partyprogramming from production companies. Broadcast networks, which are regulatedby the Federal Communications Commission, or the FCC, generate revenueprimarily by selling advertising whereas pay television networks generaterevenue by both selling advertising included in their programming and throughsubscription fees paid by service providers for the right to deliver thenetwork to their customers.

 

To gaindistribution to households, new networks need to establish carriage agreementswith service providers. In order to initiate or improve carriage, manynetworks, and in particular those networks not affiliated with any majorservice provider, may need to offer launch incentives, which can includemarketing support, upfront cash payments or other forms of incentives. Theseincentives or payments are typically made on a per-subscriber basis andgenerally before receiving any subscriber fee revenues.

 

** *Trends in Pay Television***

 

Transitionfrom Analog to Digital in Cable Systems. Cable distribution has been undergoing dramatic changes in thetechnologies that are used to deliver programming and services includingdigital transmission technology. Digital transmission enables improved pictureand sound quality, faster signal transmission and additional channel capacity.Cable system operators can now offer additional services such as pay-per-view,video-on-demand and connectivity for Internet and telephone service. We believehouseholds that receive a digital signal account for over one-third of the householdsreached by cable providers.

 

Emergence ofHigh Definition Television.Digital transmission technology, whether used by cable or satellite systems,provides a platform for a new content category: high-definitiontelevision, which is commonly referred to as HD TV. HD TV offers a clearer andsharper picture and enhanced sound, as compared to standard definitiontelevision. In addition, HD TV provides a wider field of vision than astandard definition television. In order to deliver HD TV, service providershave invested and are expected to continue to invest in HD-enabledinfrastructure. The number of U.S. households that are expected to beviewing HD TV is projected to grow to 41.6 million by year-end 2007,according to the Yankee Group.

 

ChannelProliferation.Increased system capacity has enabled service providers to carry channels thatoffer programming on more focused subject matter and themes. These channels cancapture an audience that is interested in a particular subject and chooses towatch dedicated and consistently themed programming. We believe the audiencedemographics of these specialized channels tend to be more highly concentratedthan those of general entertainment or broadcast channels. As a result, suchspecialized channels offer advertisers an opportunity to communicate with ahighly targeted and relevant audience. Based on an analysis of Nielsen data bythe Cabletelevision Advertising Bureau, from 1992 through 2003 cable televisionattracted viewers as viewership of national commercial broadcast networksdeclined, and during the 2003/04 official TV season, more viewers watchedtelevision on cable networks than on broadcast networks ABC, CBS, NBC and FOX.

 

Focused andSegmented Advertising. Webelieve many advertisers have become increasingly dissatisfied with the resultsof broadcasting to a broad audience and have become increasingly focused onmaximizing the returns generated per advertising dollar. We believe thatindividual, specialized channels on pay television offer advertisers the opportunityto reach a more focused demographic as compared to broadcast television. Tothis end, we believe many advertisers have begun dedicating portions of theiradvertising budgets towards channels focused on targeted market segments.

 

** **OurCompetitive Strengths

 

Webelieve the following strengths enable us to offer a network that is appealingto viewers, service providers and advertisers.

 

*** ****Authentic, Informative and Entertaining OutdoorProgramming*

** **

We believethat The Outdoor Channel is a preferred destination for television viewersseeking high-quality, traditional outdoor programming. We are differentiatedfrom other television networks categorized as sports networks that offeroutdoor programming through our focus on traditional outdoor activities such ashunting, fishing and shooting sports, as well as off-road motor sports andother outdoor related lifestyle programming. Our programming does not includeteam sports or

 

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“extreme sports” that other networksoffer, which we believe dilutes the interest of our target audience. We believethis strategy has enabled us to build a loyal audience that tends to watch TheOutdoor Channel instead of other channels that offer outdoor programming.

 

*** Attractive Viewer Demographics***

** **

Webelieve that The Outdoor Channel delivers a television audience that may notbe available through other networks and is particularly desirable foradvertisers seeking to target a large and concentrated audience of outdoorenthusiasts. We believe The Outdoor Channel audience consists primarily ofmales between the ages of 25 and 54, representing a demographic for which manyadvertisers allocate a portion of their budgets. According to studies byMediamark Research Inc., in 2005, approximately 79% of the viewers of TheOutdoor Channel were male. Nielsen indicates that  in December 2005 the majority of ourviewers in primetime did not watch competing specialized sports channels, suchas The Golf Channel, ESPN2, OLN or Speed Channel.

 

*** ****Large Outdoor-Focused Market*

** **

Webelieve our programming appeals to traditional outdoor sports enthusiasts,including those who hunt and fish. According to the U.S. Fish and WildlifeService’s latest survey conducted in 2001, there were estimated to be over 82 millionpeople who participated in outdoor recreation and spent in excess of$100 billion pursuing these activities. Of this amount, people whoparticipated in fishing or hunting collectively spent approximately$70 billion in pursuit of these activities. In addition, we believe ourprogramming, which also includes off-road motor sports and other outdoorrelated lifestyle programming, appeals to an even broader audience. We alsobelieve that our programming appeals to viewers that may have participatedin traditional outdoor sports in the past or desire to do so in the future. Aswe continue to increase our subscriber base, we believe that national accountswill advertise on The Outdoor Channel to reach our focused audience of outdoorenthusiasts.

 

*** ****Extensive Service Provider Relationships*

** **

Wehave relationships or affiliate agreements with the majority of pay televisionservice providers, including the 10 largest in the U.S. In fact, TheOutdoor Channel was carried by the highest percentage of cable operators amongthose networks with 40 million or less subscribers, according to a November 2005survey by Beta Research Corporation. According to Nielsen, The Outdoor Channelhad approximately 25.7 million subscribers in December 2005. Based onour estimates, The Outdoor Channel is currently available to, and couldpotentially be subscribed by, over 77.6 million households.

 

*** ****Highly Leverageable Business Model*

** **

Weanticipate that we will be able to transmit our programming to additionalsubscribers with little or no incremental delivery costs. We also believe thatour programming, focused on traditional outdoor activities and recorded innatural settings, tends to be less expensive to produce than programming thatrequires elaborate sets, soundstages, highly compensated actors and a largeproduction staff. Furthermore, the timeless nature of our outdoor programmingallows us to rebroadcast and use our programming for additional purposes.

 

** *Experienced and Committed Management Team***

** **

Themembers of our senior management team and our board of directors havesignificant experience in the cable television sector and many of them havebeen associated with us for a considerable amount of time. The Outdoor Channelwas founded by outdoor enthusiasts for outdoor enthusiasts. We believe that ourthorough knowledge of the market for, and our active participation in, outdooractivities fosters an unwavering commitment to programming that is relevant toour viewers, producers, advertisers and sponsors.

 

** OurBusiness Growth Strategies**

 

Theprincipal components of our strategy to grow our business are as follows.

 

*** Seek to Grow Our Subscriber Base***

** **

As a resultof our focused content and affinity group marketing initiatives, we have beensuccessful in increasing our subscriber base to approximately 25.7 millionhouseholds in December 2005, as estimated by Nielsen, from our estimate ofapproximately 5.3 million households in 1999. We intend to seek newopportunities to continue to grow our subscriber base through the followinginitiatives:

 

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•                  Expand distribution relationships. We intend to expand our marketing and sales efforts to grow oursubscriber base. Through our existing relationships with carriers, we intend tooffer service providers incentives to migrate our channel from premium packagesto more affordable basic or expanded basic service packages with a greaternumber of subscribers. In addition, we plan to continue to pursue agreementswith additional service providers. The incentives we intend to offer to serviceproviders may include, but are not limited to, the following:

 

•                  local marketing support, such as promotional materials and sharingof costs for local advertising;

•                  training support for customer service representatives;

•                  subscription fee waivers for a limited time; and

•                  upfront payments to service providers, in the form of cash orour securities.

 

•                  Adopt HD technology early–Outdoor Channel 2 HDSM. In March 2005, we began broadcasting a new channel calledOutdoor Channel 2 HD with similar but different programs, produced entirely inhigh definition. This channel was formally launched on July 1, 2005. Webelieve that HD television complements our outdoor-themed content andrepresents a significant opportunity for us to expand our distribution andsubscriber base. The audio and visual characteristics of HD substantiallyenhance the experience and sense of adventure provided by our programming. As avalidation of the high quality, visually compelling nature of our HD programming,through an arrangement with Premier Retail Networks, Inc., we providebranded HD content being used to promote the sales of HD television sets inwell known retail stores, such as Wal-Mart, Circuit City and Best Buy. As anearly adopter of HD TV technology, we are ready to assist service providers asthey migrate their offerings to HD TV by providing quality HD TV programming,thereby gaining distribution to this new customer segment early in itsdevelopment. In addition, in an effort to increase distribution of The OutdoorChannel, we intend to offer price incentives to those service providersdesiring to distribute both The Outdoor Channel and Outdoor Channel 2 HD.

 

•                  Broaden our consumer-focused marketing. Our consumer marketing strategy is designed to increase consumer,or subscriber, demand. We currently have working relationships with numerousaffinity organizations whose members are interested in outdoor activities suchas hunting, fishing and shooting sports, off-road motor sports and otheroutdoor related lifestyle activities. We plan to strengthen these currentrelationships and to seek opportunities to enter into similar relationshipswith additional affinity groups and membership organizations interested intraditional outdoor activities and related pursuits. We also plan to increaseconsumer demand by expanding our marketing efforts to include broader-basedadvertising to enhance awareness of The Outdoor Channel and reach new viewersinterested in outdoor activities. We believe that increased consumer awarenessof our programming will create additional demand for The Outdoor Channel andencourage service providers to offer The Outdoor Channel within their mostwidely subscribed programming packages.

 

*** ****Increase Sales and Marketing Efforts to AttractNational Advertisers*

** **

We plan toattract additional national advertisers to The Outdoor Channel, and we believeit will become easier to do so if we are successful in our efforts to grow oursubscriber base. Over the past several years, we have increased our efforts todemonstrate the benefits of advertising on The Outdoor Channel to companiesthat advertise nationally. A significant portion of the increase in ouradvertising revenue over the last two years is attributable to increases innational advertising on The Outdoor Channel.

 

Currently,national advertisers such as Ace Hardware, Arctic Cat, Cabela’s, Dickies,Enterprise Rent-a-Car, Geico Insurance, Gateway Computer, Jack Daniel’s,Remington, Sprint, and the U.S. Army regularly advertise on The OutdoorChannel. We believe our viewer demographics are attractive to these and manyother national advertisers. In an effort to increase our advertising revenue,we have established a New York advertising sales office and plan to increaseour visibility to national advertisers.

 

We alsooffer national advertisers the opportunity to sponsor several hours of themedprogramming as a means to increase brand awareness and visibility to a targetedaudience. These opportunities, which we refer to as block-programmingsponsorships, enable advertisers to embed advertising messages and products inthe programming itself in addition to purchasing traditional commercial spots.Our current block-programming sponsorships include Monday Night Fishingsponsored by Cabela’s, Tuesday Night Hunting sponsored by Mossy Oak andWednesday Night Horsepower sponsored by Optima Batteries.

 

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*** ****Create and Acquire High-Quality, Popular Programs*

** **

Historically,we have contracted with third-party producers to provide a majority of ourprogramming. These third-party producers retain ownership of their programmingthat we air and typically purchase from us a block of the advertising timeavailable during the airing of their programming which they then resell toadvertisers or use themselves. We currently produce approximately 22% of ourprogramming schedule. In the future, we intend to produce more in-houseprogramming and acquire ownership of programs produced by third parties byentering into exclusive, multi-year agreements. We believe this will allow usto retain and sell more advertising time for our own account at higher rates.

 

We believeour programming has qualities that will provide opportunities for rebroadcastor additional uses in the future. As we develop in-house programming andacquire additional programming, we expect to develop a library of standarddefinition and HD programs that may be re-broadcast with littleincremental cost. As a secondary use, we intend to seek opportunities to sellthe airing rights to portions of footage captured in the normal course of ourprogram production to production companies in need of natural setting footage.In addition, we believe that by owning the content that we air on The OutdoorChannel, we can better leverage other potential opportunities that may existsuch as DVD sales and international syndication.

 

*** Expand the Membership in Our ClubOrganizations***

** **

Weoriginally founded The Outdoor Channel in an attempt to more effectively marketour club organizations, the theme of which is the search for small golddeposits and other treasure. In an effort to increase the membership base ofGPAA and Lost Dutchman’s, we intend to continue to market to viewers of TheOutdoor Channel and by producing programs that are specifically directedtowards their interests. We will present to such viewers the benefits ofmembership in GPAA and Lost Dutchman’s while promoting subscriptions to ourGold Prospector & Treasure Hunters in the Great Outdoors magazine. Inaddition, we promote and market these two club organizations through directmail campaigns and our promotion and sponsorship throughout the country ofexpositions dedicated to gold prospecting, treasure hunting and relatedinterests. We also offer introductory outings at our campsites in an effort toincrease membership sales in our national gold prospecting campground club andto increase the number of participants attending our unique expeditions heldnear Nome, Alaska and in the Motherlode area of California.

 

** Sources ofRevenue**

 

Nosingle customer of ours accounts for greater than 10% of our total revenue. Ourrevenues from The Outdoor Channel are derived primarily from two sources,advertising fees and subscriber fees, as discussed below.

 

** **AdvertisingFees

** **

We have twoforms of advertising fees, short-form and long-form.

 

Short-form Advertising. We sell short-form advertisements on The Outdoor Channelfor commercial products and services, usually in 30 second increments. Thetotal inventory for our short-form advertising consists of seven minutesper half hour. Of this available advertising time, one minute is reserved forthe local service providers who may preempt the advertisement we insertinto the program with a local advertisement. Of the remaining six minutes, weeither sell it to advertisers for our own account or to third-party producerswho then resell this time to advertisers for their own account or use itthemselves.

 

Advertiserspurchase from us the one minute of advertising time per half hour that isreserved for the local service providers at a discount understanding that someof the service providers will superimpose their own spots over the advertisingthat we have inserted in the program, causing these advertisements to be seenby less than all of the viewers of any program. All of this advertising time issold to direct response advertisers. Direct response advertisers rely on directappeals to our viewers to purchase products or services from toll-freetelephone numbers or websites and generally pay lower rates than nationaladvertisers.

 

For theadvertising time that we retain for our own account, we endeavor to sell thistime to national marketing firms and advertising agencies. The price we areable to charge for this advertising time is dependent on market conditions,perceived desirability of our viewers and, as estimated by Nielsen, the numberof households subscribing to The Outdoor Channel and ratings. If we are unableto sell all of this advertising time to national firms and agencies, we sellthe remaining time to direct response advertisers. We have been successful inincreasing the amount of revenue generated from national advertisers in thelast two years. The majority of our revenue from short-form advertising isa result of arrangements with advertising agencies, for which we pay acommission. However, we have some relationships with marketers who buy directlyfrom us.

 

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For theadvertising time that we sell to third-party producers, we receive revenuedirectly from the producers. This revenue is often at a lower rate than we may havereceived if we were to retain such time and sell it ourselves. The producersthen resell this advertising time to others or use this time to advertise theirown products or services.

 

Ouradvertising revenue tends to reflect seasonal patterns of advertisingexpenditures, which is common in the broadcast industry. Typically, ouradvertising revenue from short-form advertising during the second quarteris greater than the first quarter, and the fourth quarter is greater than thethird quarter of each year.

 

Long-form Advertising. Long form advertisements are infomercials that we typicallyrun for 30 minutes, the majority of which are during the overnight hours.In the future, we may reduce the programming time used for infomercials byreplacing it with traditional outdoor programming.

 

*** ****Subscriber Fees*

** **

Cable andsatellite service providers typically pay monthly subscriber fees to us for theright to broadcast our channel. Our service provider contracts typically rangefrom 5 to 10 years and contain an annual increase in the monthlysubscriber fees. Our contracts also contain volume discounts for increaseddistribution by any one service provider.

 

** Programming**

 

The OutdoorChannel’s programming emphasizes traditional outdoor activities such ashunting, fishing and shooting sports, as well as off-road motor sports andother outdoor related lifestyle programming. Some examples of our programs are:

 
| **Hunting/ Shooting**     | ** ** | **Fishing** | ** **                           | **Special Interest** |
|--------------------------------|------------|-------------|--------------------------------------|---------------------------|
|                           |       |        |                                 |                      |
| Ted Nugent Spirit of the  Wild |       |        | Mark Sosin’s Saltwater  Journal |                      |   | World of Outlaws Sprint  Car Racing* |
| Jim Zumbo Outdoors*            |       |        | Randy Jones Strike Zone*             |                      |   | Monsters of Destruction* |
| Guns and Ammo TV               |       |        | World Class Sportfishing*       |                      |   | Four Wheeler TV |

 

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*            Designates programs that are produced or ownedby The Outdoor Channel, Inc.

 

Weeither acquire or produce a program in-house or we license a program from athird party. We have been producing in-house programs since our founding in1993, and in 2005 we produced and aired on The Outdoor Channel 20 regularlyscheduled programs. Third-party programming license agreements typicallyprovide that the producers retain ownership of the programming and that TheOutdoor Channel is entitled to air each episode several times per week forperiods ranging from three months to three years. Substantially all of ourprogramming contracts with third parties allow us exclusive U.S. rightsand non-exclusive foreign rights during the term of the licensing agreement. In2005, we produced approximately 22% of our programs in-house and licensed theremaining 78% of our programs from third-party producers.

 

** Salesand Marketing**

 

Our salesand marketing efforts are focused on: (a) adding subscribers both throughimproved positioning with those service providers already carrying The OutdoorChannel and through new agreements with service provider systems not currentlycarrying The Outdoor Channel, (b) increasing demand from the viewingaudience for both accessibility to The Outdoor Channel and for viewership ofour programming and (c) cultivating existing and pursuing new advertisingclients.

 

*** ******Service Providers***

 

Generally,our sales and marketing efforts to increase distribution focus on developingstrong relationships with existing and potential cable and satellite serviceproviders through multiple points of contact including traditional salesvisits, a dedicated customer service staff, an active local event team and theuse of a dedicated web site. In addition to building strong relationships withour service providers, we are involved with a wide variety of traditionalmarketing efforts including advertising in trade publications, participating inindustry trade shows, and supporting industry related associations. Weanticipate that the widespread adoption of the digital and high definitionproducts offered by our service providers will provide us with additionalopportunities to grow and develop The Outdoor Channel and OutdoorChannel 2 HD. In order to strengthen the sales efforts of theseservice providers, we offer a wide variety of market specific support includingthe opportunity to partner with local outdoor clubs, local promotions, directmail campaigns and integration into existing consumer marketing initiatives.

 

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*** Consumers***

 

We marketThe Outdoor Channel to potential viewers to both create brand awareness and todrive consumer requests for carriage, or for more accessible packaging, by theservice providers. These consumer-directed marketing efforts are coordinatedwith and may be funded in part by the service providers. Theseefforts often include traditional marketing campaigns consisting of print andradio advertising. We also use our website to market and promote The OutdoorChannel through schedule information, show synopses, games and contests.

 

In addition,we have relationships with a number of outdoor clubs and organizations whichprovide opportunities for us to utilize their communication channels to reachtheir membership with targeted marketing messages. These relationships alsoallow The Outdoor Channel to be associated with organizations that havecredibility and relevance to outdoor enthusiasts. Examples of the clubs and organizationswith which we have developed these relationships include National RifleAssociation, North American Hunting Club, North American Fishing Club andthe National Wild Turkey Federation.

 

We also haverelationships and sponsorships with the following special interest groups:Congressional Sportsmen’s Foundation, National Shooting Sports Foundation,Paralyzed Veterans of America, International Hunter Education Association,International Association of Fish and Wildlife Agencies, U.S. Fish andWildlife Service and Farmers and Hunters Feeding the Hungry.

 

In addition,we purchase advertisements in magazines that specialize in content similar toThe Outdoor Channel. We currently advertise in approximately 90 magazines,including *A**merican Rifleman, Boys Life, Heartland USA, Off-Road Adventures**and**Sports Afield**.*

 

*** ******Advertisers***

 

Salesand distribution of The Outdoor Channel’s advertising time are conducted by TheOutdoor Channel’s in-house sales personnel. In 2002, we began to subscribe toNielsen’s services, and the availability of this information has become acritical tool in attracting advertisers. Our sales team sells directly tonational advertising accounts, and continuously monitors available spots in aneffort to maximize advertising revenue. To increase our visibility in theadvertising community, we advertise in trade publications and on trade websites directed toward advertising executives.

 

**Other Businesses**

** **

In addition to The Outdoor Channel, we own and operaterelated businesses that serve the interests of The Outdoor Channel viewers andother outdoor enthusiasts. These related businesses include Gold Prospector’sAssociation of America LLC, or GPAA, and LDMA-AU, Inc., or Lost Dutchman’s.

 

We believe GPAA is one of the largest gold prospectingclubs in the world. GPAA’s members currently pay an initial membership fee of$79 and annual renewal fees ranging between $24 and $54. GPAA sells productsand services related to gold prospecting and is the publisher of the “GoldProspectors & Treasure Hunters in the Great Outdoors” magazine.

 

Lost Dutchman’s is a national gold prospectingcampground club with properties in Arizona, California, Colorado, Georgia,Michigan, Nevada, North Carolina, Oregon and South Carolina. Lost Dutchman’smembers currently pay a membership fee ranging between $3,500 and $3,750 and anannual maintenance fee of $120. Members are entitled to use any of thecampgrounds we own or have rights to use and are entitled to keep all goldfound while prospecting on any of these properties.

 

We also offer unique expeditions where participantsenjoy gold prospecting and other outdoor activities. The expeditions includeannual expeditions to the heart of the historic Motherlode area in centralCalifornia and the camp on our 2,300-acre property along the Cripple Riverwhich empties into the Bering Sea near Nome, Alaska. Participants pay on aper-expedition basis.

 

** FinancialInformation about Segments**

 

Financialinformation related to our operating segments is included in Note 13 tothe consolidated financial statements included in this Form 10-K, whichnote is incorporated by reference herein. The Outdoor Channel, or TOC, segmenthas provided greater than 15% of our consolidated revenue during each of thelast three fiscal years.

 

**Competition**

 

We competewith other television channels for distribution, audience viewership andadvertising sales.

 

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The OutdoorChannel competes with other television channels to be included in the offeringsof each system provider and for placement in the packaged offerings having themost subscribers. In addition, each television channel focusing on a particularform of content competes directly with other channels offering similarprogramming. In the case of The Outdoor Channel, we compete for distributionand viewers with other television networks aimed at our own target audiencewhich we believe consists primarily of males between the ages of 25 and 54. Webelieve such competitors include OLN, Spike TV, ESPN and others. It ispossible that these or other competitors, many of which have substantiallygreater financial and operational resources than us, could revise theirprogramming to offer more traditional outdoor activities such as hunting,fishing, shooting and other topics which are of interest to our viewers.

 

Certaintechnological advances, including the increased deployment of fiber opticcable, are expected to allow cable systems to greatly expand their presentchannel capacity. Such added capacity leaves room for additionalprogramming of all types which could dilute our market share by enabling theemergence of channels with programming similar to that offered by The OutdoorChannel and lead to increased competition for viewers from existing or newchannels.

 

We alsocompete with television networks that generally have large subscriber bases andsignificant investments in, and access to, competitive programming sources. Inaddition, large cable companies have the financial and technological resourcesto create and distribute their own channels. For instance,  OLN, which we currently consider to be ourclosest direct competitor, is owned and operated by Comcast, the largest MSO inthe U.S. We believe that while our closest competitor currently offersblocks of similar programs, there is a substantial difference between the twonetworks. The Outdoor Channel emphasizes traditional outdoor activities, suchas fishing and hunting, while OLN currently features a significant amount ofprogramming concerning outdoor competitive, or extreme, sports and natureobservation. As The Outdoor Channel becomes more established, however, it ispossible that other channels will attempt to offer programming similar to ours.

 

We competefor advertising revenue with other pay television networks, broadcast networks,and local over-the-air television stations. In addition, we compete foradvertisers with other forms of advertising such as satellite and broadcastradio and the print media. We believe that many of these advertising avenues may notpermit an advertiser to target the specific demographic audience who watchesThe Outdoor Channel.

 

While LostDutchman’s has numerous campground competitors, we believe it is the largestcampground club in the United States that has a gold prospecting theme.Campgrounds compete primarily by quality of facilities and amenities offered.Lost Dutchman’s has rustic facilities and few amenities and seeks to attractpersons who are interested in gold prospecting and hands-on outdoor activitiesand who wish to be part of an informal family-oriented environment. We arenot aware of any national direct competitor for our gold prospecting club GPAA,although in a broad sense both GPAA and Lost Dutchman’s compete with othersources of recreational activities. Lost Dutchman’s and GPAA both competeprimarily through marketing and promotional activities involving expositions,advertisements and shows on The Outdoor Channel, reaching prospective membersthrough our*Gold Prospectors &Treasure Hunters in the Great Outdoors*magazine and other marketing activities.

 

**Other Information**

 

OutdoorChannel Holdings, Inc. was originally incorporated in Alaska in 1984. On September 8,2004, we acquired all of the outstanding shares of The Outdoor Channel, Inc.that we did not previously own. Effective September 15, 2004 wereincorporated from Alaska into Delaware.

 

## **Employees**

## ** **

As of February 1, 2006, we had a total of 145employees of which 139 were full time. None of our employees are covered by acollective bargaining agreement. We consider our relationship with ouremployees to be good.

 

## **GovernmentRegulation**

## ** **

Our operations are subject to various governmentregulations. The operations of cable television systems, satellite distributionsystems and broadcast television program distribution companies are subject tothe Communications Act of 1934, as amended, and to regulatory supervision bythe FCC. Our leased uplink facility in Perris, California is licensed by theFCC and must be operated in conformance with the terms and conditions of thatlicense. The license is also subject to periodic renewal and ongoing regulatoryrequirements. Cable systems that carry our programming also are subjected tolocal franchise authority regulation.

 

### *Local CableRegulation*

### * *

The cable television industry is regulated bymunicipalities or other local government authorities which have thejurisdiction to grant and to assign franchises and to negotiate generally theterms and conditions of such franchises, including rates for basic servicecharged to subscribers, except to the extent that such jurisdiction ispreempted by federal law. Any such rate regulation could place downwardpressure on the potential subscriber fees we can earn.

 

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### *Federal Cable Regulation*

### * *

In 1992, Congress enacted the Cable TelevisionConsumer Protection and Competition Act of 1992, or the 1992 Cable Act, whichprovides, among other things, for a “must-carry” regime for local broadcaststations (which requires the mandatory carriage of certain broadcast stationsand consideration to other broadcast stations for retransmission of theirsignals and carriage of local broadcast stations on specific channels. TheCable Communication Policy Act of 1984 requires cable television systems with36 or more “activated” channels to reserve a percentage of such channels forcommercial use by unaffiliated third parties and permits franchise authoritiesto require channel capacity, equipment and facilities for public educationaland government access channels.

 

In response to the 1992 Cable Act , the FCC adoptedregulations prohibiting programmers in which cable operators have an “attributableinterest” from discriminating between cable operators and their competitors, oramong cable operators, and for increased competition in video programmingdistribution (both within the cable industry and between cable and competingvideo distributors). The 1992 Cable Act also directed the FCC to adoptregulations limiting the percentage of nationwide subscribers any one MSO couldserve and the carriage by cable systems and other video distributors ofaffiliated programming services. Although the FCC adopted such regulations,they were invalidated by a Court of Appeals in 2001. The FCC subsequentlyinitiated rulemaking proceedings which remain pending.

 

In addition, the 1992 Cable Act requires the FCC toestablish regulations for the rates that cable operators subject to rateregulation may charge for basic cable service and certain other services.Rates are not regulated for cable systems which are subject to effectivecompetition, as defined in the FCC’s regulations. The 1993 Cable Act alsodirected the FCC to establish guidelines for determining when cable programmingmay not be provided exclusively to cable operators. The FCC’s implementingregulations preclude virtually all exclusive programming contracts betweencable operators and satellite programmers affiliated with any cable operator(unless the FCC first determines the contract serves the public interest) andgenerally prohibit a cable operator that has an attributable interest in asatellite programmer from improperly influencing the terms and conditions ofsale to unaffiliated multi-channel video programming distributors.

 

In 1996, Congress enacted the most comprehensiverewrite of telecommunications law since the Communications Act of 1934,modifying many of the provisions of the 1992 Act. Among other things, thelegislation allows the cable and telephone industries to compete in each other’smarkets and phased out federal cable rate regulation of non-basic services,such as the rates charged by cable operators to subscribers for ourprogramming, in most instances. It also required the FCC to establish rules ensuringthat video programming is fully accessible to the hearing impaired throughclosed captioning. The rules adopted by the FCC require substantial closedcaptioning over a six to ten year phase-in period, which began in 2000, withonly limited exceptions.

 

Congress and the FCC may, in the future, adopt newlaws, regulations and policies regarding a wide variety of matters which couldaffect The Outdoor Channel. We are unable to predict the outcome of futurefederal legislation, regulation or policies, or the impact of any such laws,regulations or policies on The Outdoor Channel’s operations.

 

### *GPAA and LostDutchman’s Regulations*

### * *

To operate our campgrounds and mining sites, we mustobtain discretionary permits or approvals issued by local governments underlocal zoning ordinances and other state laws. In addition, to constructimprovements, we have usually been required to obtain permits such as buildingand sanitary sewage permits. Some states in which we sell memberships have lawsregulating campground memberships. These laws sometimes require comprehensivedisclosure to prospective purchasers. Some states have laws requiring us toregister with a state agency and obtain a permit to market.

 

### *Other Regulations*

### * *

In addition to the regulations applicable to the cabletelevision and gold mining industries in general, we are also subject tovarious local, state and federal regulations, including, without limitation,regulations promulgated by federal and state environmental, health and laboragencies. In addition, our mining clubs are subject to various local, state andfederal statutes, ordinances, rules and regulations concerning, zoning,development, and other utilization of its properties.

 

## **IntellectualProperty**

## ** **

“The Outdoor Channel®” is a registeredtrademark, and “Outdoor Channel 2 HDSM” is a service mark, of TheOutdoor Channel, Inc. We have also filed for registration of othertrademarks, none of which we consider material at this time. In addition, werely on copyright protection of those programs that we own.

 

**Available Information**

 

We file annual, quarterlyand current reports, proxy statements and other information with the Securitiesand Exchange Commission. You may read and copy any materials we have filedwith the Securities and Exchange Commission at the Securities and ExchangeCommission’s Public Reference Room at 450 Fifth Street, N.W., Washington,D.C. 20549. Please call the Securities and Exchange Commission at1-800-SEC-0330 for further information on the Public Reference Room. TheSecurities and Exchange Commission also maintains a web site at http://www.sec.govthat contains reports, proxy and

 

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information statements and other informationconcerning issuers that file electronically with the Securities and ExchangeCommission, including us. Our common stock is listed on The Nasdaq NationalMarket. We also maintain an internet site at http://www.outdoorchannelholdings.comthat contains information concerning us. Information included or referred to onour website is not incorporated by reference in or otherwise a part ofthis report.

 

You may obtain a freecopy of our annual reports on Form 10-K, quarterly reports on Form 10-Qand current reports on Form 8-K and amendments to those reports on the dayof filing with the Securities and Exchange Commission on our website on theWorld Wide Web at http://www.outdoorchannelholdings.com. We will also providewithout charge, upon written or oral request, a copy of any or all of thedocuments referred to above. Requests for such documents should be directed toAttention: General Counsel, 43445 Business Park Drive, Suite 113,Temecula, California 92590 (Telephone: (951) 699-4749).

 

**ITEM 1A.****                                           ****RISK FACTORS.**

 

The Company’sbusiness and operations are subject to a number of risks and uncertainties, andthe following list should not be considered to be a definitive list of allfactors that may affect the Company’s business, financial condition andfuture operating results and should be read in conjunction with the risks anduncertainties, including risk factors, contained in our other filings with theSecurities and Exchange Commission. Any forward-looking statements made by theCompany are made with the intention of obtaining the benefits of the “safeharbor” provisions of the Securities Litigation Reform Act and a number offactors, including, but not limited to those discussed below, could cause ouractual results and experiences to differ materially from the anticipatedresults or expectations expressed in any forward-looking statements.

 

**We may not be ableto grow our subscriber base at a sufficient rate to offset planned increasedcosts or at all, and as a result our revenues and profitability may notincrease and could decrease.**

 

A majorcomponent of our growth strategy is based on increasing the number ofsubscribers to our channels. Growing our subscriber base depends upon manyfactors, such as the success of our marketing efforts in driving consumerdemand for our channels; overall growth in cable and satellite subscribers; thepopularity of our programming; our ability to negotiate new carriageagreements, or amendments to current carriage agreements, and maintain existingdistribution; plus other factors that are beyond our control. There can be noassurance that we will be able to maintain or increase the subscriber base ofour channels on cable and satellite systems or that our current carriage willnot decrease as a result of a number of factors. In particular, negotiationsfor new carriage agreements, or amendments to current carriage agreements, arelengthy and complex, and we are not able to predict with any accuracy when suchincreases in our subscriber base may occur, if at all. If we are unable togrow our subscriber base, our subscriber and advertising revenues may notincrease and could decrease. In addition, as we plan and prepare for suchprojected growth in our subscriber base, we plan to increase our expensesaccordingly. If we are not able to increase our revenue to offset theseincreased expenses, our profitability could decrease.

 

**If we offer increasedlaunch support fees or other incentives to service providers in order to growour subscriber base, our operating results may be harmed.**

 

Although wecurrently have plans to increase our marketing and sales efforts in an attemptto increase the number of our subscribers, we may not be able to do soeconomically or at all. If we are unable to increase the number of oursubscribers on a cost-effective basis, or if the benefits of doing so do notmaterialize, our business and operating results would be harmed. In particular,if we make any upfront cash payments to service providers for an increase inour subscriber base, our cash flow could be adversely impacted, and we may incurnegative cash flow for some time. In addition, if we were to make such upfrontcash payments or provide other incentives to service providers, we expect toamortize such amounts ratably over the term of the agreements with the serviceproviders. However, if a service provider terminates any such agreement priorto the expiration of the term of such agreement, then under current accounting rules wemay incur a large expense in that quarter in which the agreement isterminated equal to the remaining un-amortized amounts and our operatingresults could accordingly be adversely affected.

 

**If, in our attempt toincrease our number of subscribers, we structure launch support fees with oneservice provider in a way that would require us to offer the same support orincentives to all other service providers, our operating results may beharmed.**

 

Many of ourexisting agreements with cable and satellite service providers contain “mostfavored nation” clauses. These clauses typically provide that if we enter intoan agreement with another service provider on more favorable terms, these termsmust be offered to the existing service provider, subject to some exceptionsand conditions. Future agreements with service providers may also containsimilar “most favored nation” clauses. If, in our attempt to increase ournumber of subscribers, we structure launch support fees to effectively offermore favorable terms to any service provider, these clauses

 

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may require us to reduce theeffective subscriber fee rates that we receive from other service providers,and this could negatively affect our operating results.

 

**If our channels areplaced in unpopular program packages by cable or satellite service providers,or if service fees are increased for our subscribers, the number of viewers ofour channels****may decline which could harm our business and operating results.**

 

We do notcontrol the channels with which our channels are packaged by cable or satelliteservice providers. The placement by a cable or satellite service provider ofour channels in unpopular program package could reduce or impair the growth ofthe number of our viewers and subscriber fees paid by service providers to us.In addition, we do not set the prices charged by cable and satellite serviceproviders to their subscribers when our channels are packaged with othertelevision channels. The prices for the channel packages in which our channelsare bundled may be set too high to appeal to individuals who mightotherwise be interested in our networks. Further, if our channels are bundledby service providers with networks that do not appeal to our viewers or ismoved to packages with fewer subscribers, we may lose viewers. Thesefactors may reduce the number of viewers of our channel, which in turnwould reduce our subscriber fees and advertising revenue.

 

**Cable and satelliteservice providers could discontinue or refrain from carrying The OutdoorChannel, which could reduce the number of viewers and harm our operatingresults.**

 

The successof The Outdoor Channel is dependent, in part, on our ability to enter into newcarriage agreements and maintain existing agreements with, and carriage by,satellite systems and multiple system operators’, which we refer to as MSOs,affiliated regional or individual cable systems. Although we have relationshipsor agreements with most of the largest MSOs and satellite service providers,execution of an agreement with an MSO does not ensure that its affiliatedregional or individual cable systems will carry The Outdoor Channel. Under ourcurrent agreements, The Outdoor Channel typically offers MSOs and their cableaffiliates the right to broadcast The Outdoor Channel to their subscribers, butsuch contracts do not require that The Outdoor Channel be offered to allsubscribers of, or any tiers offered by, the MSO. Because certain carriageagreements do not specify on which service levels The Outdoor Channel iscarried, such as analog versus basic digital, expanded digital or specialtytiers, and in which geographic markets The Outdoor Channel will be offered, wehave no assurance that The Outdoor Channel will be carried and available toviewers of any particular MSO or to all satellite subscribers. If cable andsatellite service providers discontinue or refrain from carrying The OutdoorChannel, this could reduce the number of viewers and harm our operatingresults.

 

**We may not beable to effectively manage our future growth, and our growth may notcontinue, which may substantially harm our business and prospects.**

 

We haveundergone rapid and significant growth in revenue and subscribers over the lastseveral years, and our strategic objectives include not only further developingand enhancing our existing business, but also expanding our in-house productioncapabilities. There are risks inherent in rapid growth and the pursuit of newstrategic objectives, including among others: investment and development ofappropriate infrastructure, such as facilities, information technology systemsand other equipment to support a growing organization; hiring and training newmanagement, sales and marketing, production, and other personnel and thediversion of management’s attention and resources from critical areas andexisting projects; and implementing systems and procedures to successfullymanage growth, such as monitoring operations, controlling costs, maintainingeffective quality and service, and implementing and maintaining adequateinternal controls. Although we have recently upgraded our Temecula, Californiaproduction facility, we expect that additional expenditures will be required aswe continue to upgrade our facilities and to begin transmitting our channelfrom our facilities directly. In particular, we have purchased a building nearour current headquarters and are currently building out this property primarilyfor use as our broadcast facility in the future. We could incur cost overruns,delays and other difficulties with this construction. In addition, moving ourbroadcast facility and some of our personnel into this new facility could bedisruptive to our operations. We cannot assure you that we will be able tosuccessfully manage our growth, that future growth will occur or that we willbe successful in managing our business objectives. We can provide no assurancethat our profitability or revenues will not be harmed by future changes in ourbusiness. Our operating results could be harmed if such growth does not occur,or is slower or less profitable than projected.

 

**We may not beable to secure national advertising accounts, and as a result, our revenues andprofitability may be negatively impacted.**

 

Our abilityto secure national advertising accounts, which generally pay higher advertisingrates, depends upon the size of our audience, the popularity of our programmingand the demographics of our viewers, as well as strategies taken by ourcompetitors, strategies taken by advertisers and the relative bargaining powerof advertisers. Competition for national advertising accounts and relatedadvertising expenditures is intense. We face competition for such advertisingexpenditures

 

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from a variety of sources, including othercable network companies and other media. We cannot assure you that our sponsorswill pay advertising rates for commercial air time at levels sufficient for usto make a profit or that we will be able to attract new advertising sponsors orincrease advertising revenues. If we are unable to attract national advertisingaccounts in sufficient quantities, our revenues and profitability may beharmed.

 

**We may berequired to pay additional state income taxes for past years.**

 

We arerequired to pay income taxes in various states in which we conduct our businessoperations. In the past, we have paid state income taxes only in California(where our headquarters is located) and have not paid income taxes to any otherstate. We have determined that we may have state income tax liability inthe eight states other than California in which our gold prospecting propertiesare located. Although we expect in the near future to gather sufficientinformation to enable us to apportion our income to such states and file incometax returns in those states for past years, we can offer no assurances as towhen we will be able to file state income tax returns in those states where we may haveoutstanding, current and future tax liabilities. In general, we believe anyincome taxes that we may be required to pay to states other thanCalifornia will be partially offset by a refund from the State of Californiafor income tax amounts we have overpaid to California in past years. We may,however, be limited as to the number of years for which we can receive a refundfrom California for taxes previously paid, and we cannot predict when we wouldreceive any such refund. In addition, because each state to which we may oweoutstanding income taxes has a different methodology for calculating tax owedand a different tax rate, our aggregate state income tax liability could begreater than what we have paid to California in prior years. Our aggregatestate income tax liability, on which we may owe accrued interest andpenalties, could be material to our results of operations.

 

**Expenses relating toprogramming costs are generally increasing and a number of factors can causecost overruns and delays, and our operating results may be adverselyimpacted if we are not able to successfully recover the costs of developing andacquiring new programming.**

 

The averagecost of programming has increased recently for the cable industry and such increasesmay continue. We plan to build our programming library through theacquisition of long-term broadcasting rights from third party producers,in-house production and outright acquisition of programming, and this may leadto increases in our programming costs. The development, production and editingof television programming requires a significant amount of capital and thereare substantial financial risks inherent in developing and producing televisionprograms. Actual programming and production costs may exceed theirbudgets. Factors such as labor disputes, death or disability of keyspokespersons or program hosts, damage to film negatives, master tapes andrecordings or adverse weather conditions may cause cost overruns and delayor prevent completion of a project. If we are not able to successfully recoverthe costs of developing or acquiring programming through increased revenues,whether the programming is produced by us or acquired from third-partyproducers, our business and operating results will be harmed.

 

**Our operating resultsmay be negatively impacted if our Outdoor Channel 2 HD network is not assuccessful as we anticipate.**

 

In July 2005,we launched an all new, all native high definition network called OutdoorChannel 2 HD. There can be no assurance that Outdoor Channel 2 HD will notincur unexpected costs and expenses. Distribution of Outdoor Channel 2 HD willdepend on successfully executing new or amended distribution agreements withcable and satellite service providers. There can be no assurance that suchagreements can be made, and if they are made, that they will be on termsfavorable to us or that they will not require us to grant periods of freeservice and/or marketing commitments to encourage carriage. The public may notadopt HD consumer television equipment in numbers sufficient to allow profitsfor an advertiser-supported service. Bandwidth constraints may keepOutdoor Channel 2 HD from achieving sufficient distribution from serviceproviders to reach profitability. Competition for quality HD content may increasethe costs of programming for Outdoor Channel 2 HD beyond our control orexpectations. All of these factors, combined or separately, could increasecosts or restrain revenue and adversely affect our operating results.

 

**Our operating resultsmay vary significantly, and historical comparisons of our operatingresults are not necessarily meaningful and should not be relied upon as anindicator of future performance.**

 

Ouroperations are influenced by many factors. These factors may cause ourfinancial results to vary significantly in the future and our operating resultsmay not meet the expectations of securities analysts or investors. If thisoccurs, the price of our stock may decline. Factors that can cause ourresults to fluctuate include, but are not limited to:

 

•                  carriage decisions of cable and satellite service providers;

 

•                  demand for advertising, advertising rates and offerings ofcompeting media;

 

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•                  changes in the growth rate of cable and satellite subscribers;

 

•                  cable and satellite service providers’ capital and marketingexpenditures and their impact on programming offerings and penetration;

 

•                  seasonal trends in viewer interests and activities;

 

•                  pricing, service, marketing and acquisition decisions that couldreduce revenues and impair quarterly financial results;

 

•                  the mix of cable television and satellite-delivered programmingproducts and services sold and the distribution channels for those products andservices;

 

•                  our ability to react quickly to changing consumer trends;

 

•                  specific economic conditions in the cable television and relatedindustries; and

 

•                  changing regulatory requirements.

 

Dueto the foregoing and other factors, many of which are beyond our control, ourrevenue and operating results vary from period to period and are difficult toforecast. Our expense levels are based in significant part on ourexpectations of future revenue. Therefore, our failure to meet revenueexpectations would seriously harm our business, operating results, financialcondition and cash flows. Further, an unanticipated decline in revenue for aparticular calendar quarter may disproportionately affect ourprofitability because our expenses would remain relatively fixed and would notdecrease correspondingly.

 

**Changes to financialaccounting standards or our accounting estimates may affect our reportedoperating results.**

 

Weprepare our financial statements to conform with generally acceptedaccounting principles (“GAAP”), which are subject to interpretations by theFinancial Accounting Standards Board, the Securities and Exchange Commissionand various bodies formed to interpret and create appropriate accountingpolicies. A change in those policies can have a significant effect on ourreported results and may even affect our reporting of transactionscompleted before a change is announced. Accounting policies affecting manyother aspects of our business, including rules relating to businesscombinations and employee stock option grants, have recently been revised orare under review. Changes to those rules or the questioning of currentpractices may adversely affect our reported financial results or the waywe conduct our business. In addition, our preparation of financial statementsin accordance with GAAP requires that we make estimates, judgments andassumptions that affect the recorded amounts of assets and liabilities,disclosure of those assets and liabilities at the date of the financialstatements and the recorded amounts of revenue and expenses during thereporting period. A change in the facts and circumstances surrounding thoseestimates, including the interpretation of the terms and conditions of ourcontractual obligations, could result in a change to our estimates and couldimpact our future operating results.

 

**If we fail to developand distribute popular programs, our viewership would likely decline, whichcould cause advertising and subscriber fee revenues to decrease.**

 

Ouroperating results depend significantly upon the generation of advertisingrevenue. Our ability to generate advertising revenues is largely dependent onour Nielsen ratings, which estimates the number of viewers of The OutdoorChannel, and this directly impacts the level of interest of advertisers andrates we are able to charge. If we fail to program popular shows that maintainor increase our current number of viewers, our Nielsen ratings could decline,which in turn could cause our advertising revenue to decline and adverselyimpact our business and operating results. In addition, if we fail to programpopular shows the number of subscribers to our channel may also decrease,resulting in a decrease in our subscriber fee and advertising revenue.

 

**Changes in themethodology used by Nielsen to estimate our subscriber base or televisionratings, or****inaccuracies in such estimates, could cause our advertising revenue todecrease.**

 

Our abilityto sell advertising is largely dependent on television ratings and oursubscriber base estimated by Nielsen. We do not control the methodology used byNielsen for these estimates. If Nielsen modifies its methodology or changes thestatistical sample it uses for these estimates, such as the demographiccharacteristics of the households, our ratings could be negatively affectedresulting in a decrease in our advertising revenue.

 

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**The market in whichwe operate is highly competitive, and we may not be able to competeeffectively, particularly against competitors with greater financial resources,brand recognition, marketplace presence and relationships with serviceproviders.**

 

We competefor viewers with other pay cable television and broadcast networks, includingOLN, Spike TV, ESPN2 and others. If these or other competitors, many of whichhave substantially greater financial and operational resources than us,significantly expand their operations with respect to outdoor-relatedprogramming or their market penetration, our business could be harmed. Inaddition, certain technological advances, including the deployment of fiberoptic cable, which are already substantially underway, are expected to allowcable systems to greatly expand their current channel capacity, which coulddilute our market share and lead to increased competition for viewers fromexisting or new programming services.

 

We alsocompete with television network companies that generally have large subscriberbases and significant investments in, and access to, competitive programmingsources. In some cases, we compete with cable and satellite service providersthat have the financial and technological resources to create and distributetheir own television networks, such as OLN, which is owned and operated byComcast. In order to compete for subscribers, we may pay either launchfees or marketing support or both for carriage in certain circumstances in thefuture, which may require significant cash expenditures, harming ouroperating results and margins. We may also issue our securities from timeto time in connection with our attempts for broader distribution of The OutdoorChannel and the number of such securities could be significant. We compete foradvertising sales with other pay television networks, broadcast networks, andlocal over-the-air television stations. We also compete for advertising saleswith satellite and broadcast radio and the print media. We compete with othercable television networks for subscriber fees from, and affiliation agreementswith, cable and satellite service providers. Actions by the FederalCommunications Commission, which we refer to as the FCC, and the courts haveremoved certain of the impediments to entry by local telephone companies intothe video programming distribution business, and other impediments could beeliminated or modified in the future. These local telephone companies may distributeprogramming that is competitive with the programming provided by us to cableoperators.

 

**Changes in corporategovernance and securities disclosure and compliance practices have increasedand may continue to increase our legal compliance and financial reportingcosts.**

 

TheSarbanes-Oxley Act of 2002 required us to change or supplement some of ourcorporate governance and securities disclosure and compliance practices. TheSecurities and Exchange Commission and Nasdaq have revised, and continue torevise, their regulations and listing standards. These developments haveincreased, and may continue to increase, our legal compliance andfinancial reporting costs.

 

**We may not beable to attract new, or retain existing, members in our club organizations, andas a result our revenues and profitability may be harmed.**

 

Our abilityto attract new members and retain existing members in our club organizations,GPAA and Lost Dutchman’s, depends, in part, upon our marketing efforts,including our programming on The Outdoor Channel and such other efforts asdirect mail campaigns, continued sponsorship of expositions dedicated to goldprospecting, treasure hunting and related interests around the country andintroductory outings held at our campsites. We cannot assure you that we willsuccessfully attract new members or retain existing members. A decline inmembership in our club organizations could harm our business and operatingresults.

 

**Consolidation amongcable and satellite distributors may harm our business.**

 

Cable andsatellite operators continue to consolidate, making The Outdoor Channelincreasingly dependent on fewer operators. If these operators fail to carry TheOutdoor Channel, use their increased distribution and bargaining power tonegotiate less favorable terms of carriage or to obtain additional volumediscounts, our business and operating results would suffer.

 

**The satelliteinfrastructure that we use may fail or be preempted by another signal,which could impair our ability to deliver programming to our cable andsatellite service providers.**

 

Our abilityto deliver programming to service providers, and their subscribers, isdependent upon the satellite equipment and software that we use to workproperly to distribute our programming. If this satellite system fails, or asignal with a higher priority replaces our signal, which is determined by ouragreement with the owner of the satellite, we may not be able to deliverprogramming to our cable and satellite service provider customers and theirsubscribers within the time periods advertised. We have negotiated for back-upcapability with our satellite provider on an in-orbit spare satellite, whichprovides us carriage on the back-up satellite in the event that catastrophicfailure occurs on the primary satellite. Our contract provides

 

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that our main signal is subject topreemption and until the back-up satellite is in position, we could lose oursignal for a period of time. A loss of our signal could harm our reputation andreduce our revenues and profits.

 

**Natural disasters andother events beyond our control could interrupt our signal.**

 

Our systemsand operations may be vulnerable to damage or interruption fromearthquakes, floods, fires, power loss, telecommunication failures and similarevents. They also could be subject to break-ins, sabotage and intentional actsof vandalism. Since our production facilities for The Outdoor Channel are alllocated in Temecula, California, the results of such events could beparticularly disruptive because we do not have readily available alternativefacilities from which to conduct our business. Our business interruptioninsurance may not be sufficient to compensate us for losses that may occur.Despite any precautions we may take, the occurrence of a natural disasteror other unanticipated problems at our facilities could result in interruptionsin our services. Interruptions in our service could harm our reputation andreduce our revenues and profits.

 

**Seasonal increases ordecreases in advertising revenue may negatively affect our business.**

 

Seasonaltrends are likely to affect our viewership, and consequently, could causefluctuations in our advertising revenues. Our business reflects seasonalpatterns of advertising expenditures, which is common in the broadcastindustry. For this reason, fluctuations in our revenues and net income couldoccur from period to period depending upon the availability of advertisingrevenues. Due, in part, to these seasonality factors, the results of any onequarter are not necessarily indicative of results for future periods, and ourcash flows may not correlate with revenue recognition.

 

**We may be unableto access capital on acceptable terms to fund our future operations.**

 

Ourfuture capital requirements will depend on numerous factors, including thesuccess of our efforts to increase advertising revenues, the amount ofresources devoted to increasing distribution of The Outdoor Channel, andacquiring and producing programming for The Outdoor Channel. As a result, wecould be required to raise substantial additional capital through debt orequity financing. To the extent that we raise additional capital through thesale of equity or convertible debt securities, the issuance of such securitiescould result in dilution to existing stockholders. If we raise additionalcapital through the issuance of debt securities, the debt securities would haverights, preferences and privileges senior to holders of common stock and theterms of such debt could impose restrictions on our operations. In November 2005,we entered into an aggregate of up to thirteen million dollars in debtfinancing from a commercial bank. We cannot assure you that additional capital,if required, will be available on acceptable terms, or at all. If we are unableto obtain additional capital, our current business strategies and plans andability to fund future operations may be harmed.

 

**We may not beable to attract and retain key personnel.**

 

Oursuccess depends to a significant degree upon the continued contributions of theprincipal members of our sales, marketing, production and management personnel,many of whom would be difficult to replace. None of our employees are undercontract and all of our employees are “at-will.” Any of our officers or keyemployees could leave at any time, and we do not have “key person” lifeinsurance policies covering any of our employees. The competition for qualifiedpersonnel has been strong in our industry. This competition could make it moredifficult to retain our key personnel and to recruit new highly qualifiedpersonnel. The loss of Perry T. Massie, our President and Chief ExecutiveOfficer and Co-President of The Outdoor Channel, Inc., or Thomas H.Massie, our Executive Vice President, or William A. Owen, our Chief FinancialOfficer, or Andrew J. Dale, the Chief Executive Officer and Co-President of TheOutdoor Channel, Inc., or Thomas E. Hornish, our General Counsel, couldadversely impact our business. To attract and retain qualified personnel, we may berequired to grant large option or other stock-based incentive awards, which may behighly dilutive to existing stockholders. We may also be required to paysignificant base salaries and cash bonuses to attract and retain theseindividuals, which payments could harm our operating results. If we are notable to attract and retain the necessary personnel we may not be able toimplement our business plan.

 

**New video recordingtechnologies may reduce our advertising revenue.**

 

Anumber of new personal video recorders, such as TiVo® in the United States,have emerged in recent years. These recorders often contain features allowingviewers to watch pre-recorded programs without watching advertising. The effectof these recorders on viewing patterns and exposure to advertising could harmour operations and results if our advertisers reduce the advertising rates theyare willing to pay because they believe television advertisements are lesseffective with these technologies.

 

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**Cable and satellitetelevision programming signals have been stolen or could be stolen in thefuture, which reduces our potential revenue from subscriber fees and advertising.**

 

Thedelivery of subscription programming requires the use of conditional accesstechnology to limit access to programming to only those who subscribe toprogramming and are authorized to view it. Conditional access systems use,among other things, encryption technology to protect the transmitted signalfrom unauthorized access. It is illegal to create, sell or otherwise distributesoftware or devices to circumvent conditional access technologies. However,theft of cable and satellite programming has been widely reported, and theaccess or “smart” cards used in cable and satellite service providers’conditional access systems have been compromised and could be furthercompromised in the future. When conditional access systems are compromised, wedo not receive the potential subscriber fee revenues from the cable andsatellite service providers. Further, measures that could be taken by cable andsatellite service providers to limit such theft are not under our control.Piracy of our copyrighted materials could reduce our revenue from subscriberfees and advertising and negatively affect our business and operating results.

 

**Because we expect tobecome increasingly dependent upon our intellectual property rights, ourinability to protect those rights could negatively impact our ability tocompete.**

 

Wecurrently license approximately 78% of programs we air on The Outdoor Channelfrom third-party television and film producers. In order to build a library ofprograms and programming distribution rights, we must obtain all of thenecessary rights, releases and consents from the parties involved in developinga project or from the owners of the rights in a completed program. There can beno assurance that we will be able to obtain the necessary rights on acceptableterms, or at all, or properly maintain and document such rights. In addition,protecting our intellectual property rights by pursuing those who infringe ordilute our rights can be costly and time consuming. If we are unable to protectour portfolio of trademarks, service marks, copyrighted material andcharacters, trade names and other intellectual property rights, our businessand our ability to compete could be harmed.

 

**We may faceintellectual property infringement claims that could be time-consuming, costlyto defend and result in our loss of significant rights.**

 

Otherparties may assert intellectual property infringement claims against us,and our products may infringe the intellectual property rights of thirdparties. From time to time, we receive letters alleging infringement ofintellectual property rights of others. Intellectual property litigation can beexpensive and time-consuming and could divert management’s attention from ourbusiness. If there is a successful claim of infringement against us, we may berequired to pay substantial damages to the party claiming infringement or enterinto royalty or license agreements that may not be available on acceptableor desirable terms, if at all. Our failure to license the proprietary rights ona timely basis would harm our business.

 

**Some of our existingstockholders can exert control over us and may not make decisions that arein the best interests of all stockholders.**

 

Ourcurrent officers, directors and greater than 5% stockholders together currentlycontrol approximately 52.5% of our outstanding common stock. As a result, thesestockholders, acting together, would be able to exert significant influenceover all matters requiring stockholder approval, including the election ofdirectors and approval of significant corporate transactions. In addition, thisconcentration of ownership may delay or prevent a change in control of ourcompany, even when a change may be in the best interests of stockholders.In addition, the interests of these stockholders may not always coincidewith our interests as a company or the interests of other stockholders.Accordingly, these stockholders could cause us to enter into transactions oragreements that you would not approve.

 

**Themarket price of our common stock has been and may continue to be subjectto wide fluctuations.**

 

Ourstock has historically been and continues to be traded at relatively lowvolumes and therefore has been subject to price volatility. Various factorscontribute to the volatility of our stock price, including, for example, lowtrading volume, quarterly variations in our financial results, increasedcompetition and general economic and market conditions. While we cannot predictthe individual effect that these factors may have on the market price ofour common stock, these factors, either individually or in the aggregate, couldresult in significant volatility in our stock price during any given period oftime. There can be no assurance that a more active trading market in our stockwill develop. As a result, relatively small trades may have a significantimpact on the price of our common stock. Moreover, companies that haveexperienced volatility in the market price of their stock often are subject tosecurities class action litigation. If we were the subject of suchlitigation, it could result in substantial costs and divert management’sattention and resources.

 

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**Anti-takeoverprovisions in our certificate of incorporation, our bylaws and under Delawarelaw may enable our incumbent management to retain control of us anddiscourage or prevent a change of control that may be beneficial to ourstockholders.**

 

Provisionsof Delaware law, our certificate of incorporation and bylaws could discourage,delay or prevent a merger, acquisition or other change in control thatstockholders may consider favorable, including transactions in which youmight otherwise receive a premium for your shares. These provisions also couldlimit the price that investors might be willing to pay in the future for sharesof our common stock, thereby depressing the market price of our common stock.Furthermore, these provisions could prevent attempts by our stockholders toreplace or remove our management. These provisions:

 

•                  allow the authorized number of directors to be changed only byresolution of our board of directors;

 

•                  establish a classified board of directors, providing that not allmembers of the board be elected at one time;

 

•                  require a 66 2/3% stockholder vote to remove a director, and onlyfor cause;

 

•                  authorize our board of directors to issue without stockholderapproval blank check preferred stock that, if issued, could operate as a “poisonpill” to dilute the stock ownership of a potential hostile acquirer to preventan acquisition that is not approved by our board of directors;

 

•                  require that stockholder actions must be effected at a duly calledstockholder meeting and prohibit stockholder action by written consent;

 

•                  establish advance notice requirements for stockholder nominationsto our board of directors or for stockholder proposals that can be acted on atstockholder meetings;

 

•                  except as provided by law, allow only our board of directors tocall a special meeting of the stockholders; and

 

•                  require a 66 2/3% stockholder vote to amend our certificate ofincorporation or bylaws.

 

Inaddition, because we are incorporated in Delaware, we are governed by theprovisions of Section 203 of the Delaware General Corporation Law, whichmay, unless certain criteria are met, prohibit large stockholders, inparticular those owning 15% or more of our outstanding voting stock, frommerging or combining with us for a prescribed period of time.

 

**Technologies in thecable and satellite television industry are constantly changing, and ourfailure to acquire or maintain state-of-the-art technology may harm ourbusiness and competitive advantage.**

 

Thetechnologies used in the cable and satellite television industry are rapidlyevolving. Many technologies and technological standards are in development andhave the potential to significantly transform the ways in whichprogramming is created and transmitted. In addition, under some of our MSOcontracts, we may be required to encrypt our signal. We cannot accuratelypredict the effects that implementing new technologies will have on ourprogramming and broadcasting operations. We may be required to incursubstantial capital expenditures to implement new technologies, or, if we failto do so, may face significant new challenges due to technologicaladvances adopted by competitors, which in turn could result in harming ourbusiness and operating results.

 

**The cable andsatellite television industry is subject to substantial governmental regulationfor which compliance may increase our costs and expose us to penalties forfailure to comply.**

 

Thecable television industry is subject to extensive legislation and regulation atthe federal and local levels, and, in some instances, at the state level, andmany aspects of such regulation are currently the subject of judicialproceedings and administrative or legislative proposals. Similarly, thesatellite television industry is subject to federal regulation. Operating in aregulated industry increases our cost of doing business as a video programmer.

 

TheCable Television Consumer Protection and Competition Act of 1992, to which werefer as the 1992 Cable Act, includes provisions that preclude cable operatorsaffiliated with video programmers from favoring their programmers overcompetitors. The 1992 Cable Act also precludes such programmers from sellingtheir programming exclusively to cable operators. These provisions potentiallybenefit independent programmers such as us by limiting the ability of cableoperators affiliated with programmers from carrying only programming in whichthey have an ownership interest and from offering exclusive programmingarrangements. However, the United States Court of Appeals for the District ofColumbia Circuit vacated the FCC Rule limiting the carriage of affiliatedprogrammers by cable operators. Although the FCC issued further

 

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notices of proposed rulemaking in 2001 and2005 addressing this issue, it has not adopted new rules. The exclusivityprovision is scheduled to expire in October 2007 unless the FCC thendetermines that a further extension is necessary to protect competition anddiversity. If these provisions of the 1992 Cable Act expire or become no longerapplicable, and if we are still able to increase the number of subscribers toour channel, then the costs associated with doing so may increasesignificantly.

 

Regulatorycarriage requirements also could reduce the number of channels available tocarry The Outdoor Channel. The 1992 Cable Act granted television broadcasters achoice of must-carry rights or retransmission consent rights. The rules adoptedby the FCC generally provided for mandatory carriage by cable systems of alllocal full-power commercial television broadcast signals selecting must-carry rightsand, depending on a cable system’s channel capacity, non-commercial televisionbroadcast signals. Such statutorily mandated carriage of broadcast stations,coupled with the provisions of the Cable Communications Policy Act of 1984,which require cable television systems with 36 or more “activated” channels toreserve a percentage of such channels for commercial use by unaffiliated thirdparties and permit franchise authorities to require the cable operator toprovide channel capacity, equipment and facilities for public, educational andgovernment access channels, could reduce carriage of The Outdoor Channel bylimiting its carriage in cable systems with limited channel capacity. In 2001,the FCC adopted rules relating to the cable carriage of digital televisionsignals. Among other things, the rules clarify that a digital-onlytelevision station can assert a right to analog or digital carriage on a cablesystem. The FCC initiated a further proceeding to determine whether televisionbroadcasters may assert the rights to carriage of both analog and digitalsignals during the transition to digital television and to carriage of alldigital signals. On February 10, 2005, the FCC decided that televisionbroadcasters do not have such additional must-carry rights. Broadcastersformally have requested that the FCC reconsider this decision and are seekinglegislative change to require such carriage. The imposition of such additionalmust-carry regulation, in conjunction with any limited cable system channel capacity,would increase the likelihood that cable operators may be forced to dropsome cable programming services and could reduce carriage of The OutdoorChannel.

 

TheTelecommunications Act of 1996 required the FCC to establish rules and animplementation schedule to ensure that video programming is fullyaccessible to the hearing impaired through closed captioning. The rules adoptedby the FCC require substantial closed captioning over a six to ten yearphase-in period, which began in 2000, with only limited exemptions. As aresult, we will continue to incur additional costs for closed captioning.

 

If wedistribute television programming through other types of media, we may berequired to obtain federal, state and local licenses or other authorizations tooffer such services. We may not be able to obtain licenses orauthorizations in a timely manner, or at all, or conditions could be imposedupon licenses and authorizations that may not be favorable to us.

 

Inthe future, any increased regulation of rates, and in particular the rates forbasic cable services, could, among other things, put downward pressure on therates charged by cable programming services, and affect the ability orwillingness of cable system operators to retain or to add The Outdoor Channel networkon their cable systems. In response to a request from the Committee on Energyand Commerce of the House of Representatives, the FCC’s Media Bureau conducteda study in 2004 regarding, among other things, government-mandated a la carteor mini-tier packaging of programming services in which each subscriber wouldpurchase only those channels that he or she desired instead of the largerbundles of different channels as is typical today. The Media Bureau’s report onNovember 18, 2004 observed that such packaging would increase the cost ofprogramming to consumers and injure programmers. On February 9, 2006, theMedia Bureau released a further report which stated that the 2004 report wasflawed and which concluded that a-la-carte sales could be in the best interestsof consumers. Although the FCC cannot mandate a-al-carte sales, its endorsementof the concept could encourage Congress to consider proposals to mandatea-ala-carte sales or otherwise seek to impose greater regulatory controls onhow cable programming is sold. If, in response to any statue enacted byCongress, or any rate or other government regulation, cable system operatorsimplement channel offerings that require subscribers to affirmatively choose topay a separate fee to receive The Outdoor Channel, either by itself or incombination with a limited number of other channels, the number of viewers forThe Outdoor Channel could be reduced.

 

Theregulation of programming services, cable television systems and satellitelicensees is subject to the political process and has been in constant fluxover the past decade. Further material changes in the law and regulatoryrequirements are difficult to anticipate and our business may be harmed byfuture legislation, new regulation, deregulation or court decisionsinterpreting laws and regulations.

 

**We must comply withmany local, state, federal and environmental regulations, for which compliance may becostly and may expose us to substantial penalties.**

 

Ourrecreational outdoor activity entities, GPAA and Lost Dutchman’s, share thegeneral risks of all outdoor recreational activities such as personal injury,environmental compliance and real estate and environmental regulation. Inaddition to the general cable television industry regulations, we are also subjectto various local, state and federal regulations, including, without limitation,regulations promulgated by federal and state environmental, health and laboragencies. Our

 

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prospecting clubs are subject to variouslocal, state and federal statutes, ordinances, rules and regulationsconcerning zoning, development and other utilization of their properties. Wecannot predict what impact current or future regulations may have on thesebusinesses. In addition, failure to maintain required permits or licenses, orto comply with applicable regulations, could result in substantial fines orcosts or revocation of our operating licenses, which would have a materialadverse effect on our business and operating results.

 

**If our goodwill orother indefinite-lived intangibles become impaired, we will be required to takea non-cash charge which could have a significant effect on our reported netearnings.**

 

Asignificant portion of our assets consists of goodwill and otherindefinite-lived intangible assets. In accordance with Statement of FinancialAccounting Standards No. 142, “Goodwill and Other Intangible Assets”, orSFAS 142, we test goodwill and other indefinite-lived intangible assets forimpairment during the fourth quarter of each year, and on an interim date iffactors or indicators become apparent that would require an interim test. Asignificant downward revision in the present value of estimated future cashflows for a reporting unit could result in an impairment of goodwill or otherindefinite-lived intangibles under SFAS 142 and a non-cash charge would berequired. Such a charge could have a significant effect on our reported netearnings. For 2005, no impairment charge was required.

 

**Future issuance by usof preferred shares could adversely affect the holders of existing shares, andtherefore reduce the value of existing shares.**

 

Weare authorized to issue up to 25,000,000 shares of preferred stock. Theissuance of any preferred stock could adversely affect the rights of theholders of shares of our common stock, and therefore reduce the value of suchshares. No assurance can be given that we will not issue shares of preferredstock in the future.

 

**We do not expect topay dividends in the foreseeable future.**

 

We donot anticipate paying cash dividends on our common stock in the foreseeablefuture. Any payment of cash dividends will also depend on our financialcondition, operating results, capital requirements and other factors and willbe at the discretion of our board of directors. Furthermore, we may in thefuture become subject to contractual restrictions on, or prohibitions against,the payment of dividends.

 

**ITEM 1B.****                                           ****UNRESOLVED STAFF COMMENTS.**

 

None.

 

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**ITEM 2.****    ****PROPERTIES.**

 

We arecurrently leasing approximately 32,000 square feet of commercial propertylocated at 43445 Business Park Drive in Temecula, California. In addition, weown approximately 36,000 square feet including 23,000 square feet of office spaceand 13,000 square feet of warehouse space located at 43455 Business Park Drivein Temecula. The property located at 43445 Business Park Drive is currentlyused as both our headquarters and as our broadcast facility for The OutdoorChannel, and we are currently completing the build out of the property locatedat 43455 Business Park Drive for use as our broadcast facility. Both of theseproperties are used in connection with our two segments (The Outdoor Channeland Membership Division) and the Corporate unit.

 

We also ownthe following properties that we use for camping and gold prospecting inconnection with our membership division segment:

 
| **Designation of Property** | ** ** | **Approximate Number of Acres** | ** ** | **Location**   |
|---------------------------------------|------------|------------------------------------------------|------------|----------------|
| Cripple River                         |       | 2,300                                          |       | Alaska         |
| Loud Mine                             |       | 38                                             |       | Georgia        |
| Stanton Property                      |       | 35                                             |       | Arizona        |
| Burnt River                           |       | 135                                            |       | Oregon         |
| Cave Creek                            |       | 32                                             |       | Oregon         |
| Vein Mountain Camp                    |       | 130                                            |       | North Carolina |
| Junction Bar Place                    |       | 26                                             |       | California     |
| Oconee Camp                           |       | 120                                            |       | South Carolina |
| Leadville Property                    |       | 60                                             |       | Colorado       |
| Omilak Silver Mine                    |       | 40                                             |       | Alaska         |
| High Divide Property                  |       | 20                                             |       | Nevada         |
| Athens Property                       |       | 70                                             |       | Michigan       |
| Blue Bucket                           |       | 119                                            |       | Oregon         |

 

Inconnection with our Membership Division segment, we also have a mutual useagreement with a non-profit organization, Lost Dutchman’s Mining Association, Inc.,that owns property near some of the above properties. This mutual use agreementallows our members to camp and gold prospect on the properties owned by LostDutchman’s Mining Association, Inc., and in return, the members of LostDutchman’s Mining Association, Inc. may camp and gold prospect on ourproperties.

 

**ITEM 3.****                                                    ****LEGAL PROCEEDINGS.**

 

From time totime, we may be involved in litigation relating to claims arising out ofour operations. As of the date of this report, we are not a party to any legalproceedings that are expected, individually or in the aggregate, to have amaterial adverse effect on our business, financial condition or operatingresults.

 

**ITEM 4.****                                                    ****SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.**

 

None

 

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**PART II**

 

**ITEM 5.****                ****MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

*Market Information*

 

Our commonstock began trading on The Nasdaq National Market on September 15, 2004under the symbol “OUTD”. Prior to September 14, 2004, our common stock waslisted for trading on NASD’s OTC Bulletin Board, also under the trading symbol “OUTD”.The following table sets forth for the quarters indicated the reported high andlow bid prices of our common stock as quoted on NASD’s OTC Bulletin Boardthrough September 14, 2004 and is adjusted for the 5 for 2 stock spliteffective September 15, 2004. These quotations reflect inter-dealerprices, without retail mark-up, mark-down or commission, and may notrepresent actual transactions. After September 15, 2004 the table setsforth the high and low closing prices of our common stock as reported on TheNasdaq National Market.

 
| ** ** | ** **                               | ** ** | **Bid**  | ** ** |
|------------|------------------------------------------|------------|----------|------------|
| ** ** | ** **                               | ** ** | **High** | ** ** | **Low** | ** ** |
| 2004       | First Quarter                            |       | 15.84    |       | 11.96 |   |
|       | Second Quarter                           |       | 17.20    |       | 13.60 |   |
|       | Third Quarter to September 14, 2004 |       | 15.60    |       | 13.40 |   |

 
| ** ** | ** **                                  | ** ** | **Closing Price** | ** ** |
|------------|---------------------------------------------|------------|------------------------|------------|
| ** ** | ** **                                  | ** ** | **High**               | ** ** | **Low** | ** ** |
|       | Third Quarter from September 15,  2004 |       | 18.00                  |       | 15.50 |   |
|       | Fourth Quarter                              |       | 15.25                  |       | 13.25 |   |
|       |                                        |       |                   |       |   |   |
| 2005       | First Quarter                               |       | 14.95                  |       | 13.36 |   |
|       | Second Quarter                              |       | 17.00                  |       | 13.76 |   |
|       | Third Quarter                               |       | 14.76                  |       | 12.77 |   |
|       | Fourth Quarter                              |       | 16.50                  |       | 13.47 |   |

 

As of December 31,2005, there were approximately 911 holders of record of our common stock.

 

**DIVIDENDPOLICY**

 

We have never declared orpaid any cash dividends on our common stock, and we do not anticipate payingany cash dividends in the foreseeable future. We currently anticipate that wewill retain all of our future earnings for use in the development and expansionof our business and for general corporate purposes. Any determination to paydividends in the future will be at the discretion of our board of directors andwill depend upon our results of operation, financial condition and otherfactors as the board of directors, in its discretion, deems relevant.

 

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**ITEM 6.****                                                   ****SELECTED CONSOLIDATED FINANCIAL DATA**

 

You should read the selected consolidatedfinancial data presented below in conjunction with the audited consolidatedfinancial statements appearing elsewhere in this report and the notes to thosestatements and “Management’s Discussion and Analysis of Financial Condition andResults of Operations.” The selected consolidated financial data as of December 31,2005 and 2004, and for each of the years in the three-year period ended December 31,2005 have been derived from our audited consolidated financial statements whichappear elsewhere in this report. The selected consolidated financial data as ofDecember 31, 2003, 2002 and 2001 and for each of the years in the two-yearperiod ended December 31, 2002 have been derived from our auditedconsolidated financial statements which are not included in this report. Thehistorical results are not necessarily indicative of the operating results tobe expected in the future. All financial information presented has beenprepared in United States dollars and in accordance with accounting principlesgenerally accepted in the United States of America (U.S. GAAP).

 

In 2004, we completed the acquisition of all of theoutstanding shares of The Outdoor Channel, Inc. that we did not previouslyown. Please see “Management’s Discussion and Analysis of Financial Conditionand Results of Operations—Acquisition of the Minority Interest of The OutdoorChannel, Inc.” for a discussion regarding this transaction and thecomparability of the 2004 information.

 
| ** **                                                    | ** ** | **Year Ended December 31,**              | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                    | ** ** | **(In thousands, except per share  amounts)** | ** ** |
| **Income Statement Data:**                                    |       |                                          |       |   |   |   |   |   |   |   |   |
| Revenues:                                                     |       |                                          |       |   |   |   |   |   |   |   |   |
| Advertising                                                   |       | $                                             | 22,769     |   | $ | 21,817 |   | $ | 16,396 |   | $ | 10,969 |   | $ | 8,645 |   |
| Subscriber  fees                                              |       | 15,432                                        |       | 13,391 |   | 10,836 |   | 6,071 |   | 3,874 |   |
| Membership  income                                            |       | 4,707                                         |       | 4,746 |   | 4,456 |   | 4,353 |   | 4,715 |   |
| Total  revenues                                               |       | 42,908                                        |       | 39,954 |   | 31,688 |   | 21,393 |   | 17,234 |   |
|                                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Expenses:                                                     |       |                                          |       |   |   |   |   |   |   |   |   |
| Satellite  transmission fees                                  |       | 2,497                                         |       | 2,351 |   | 2,423 |   | 2,359 |   | 2,238 |   |
| Advertising                                                   |       | 7,100                                         |       | 5,596 |   | 3,767 |   | 3,619 |   | 2,431 |   |
| Programming                                                   |       | 5,604                                         |       | 2,521 |   | 1,117 |   | 235 |   | 51 |   |
| Non-cash  compensation expense from exchange of stock options |       | —                                        |       | 47,983 |   | — |   | — |   | — |   |
| Selling,  general and administrative                          |       | 24,413                                        |       | 21,042 |   | 16,754 |   | 10,604 |   | 10,830 |   |
| Total  expenses                                               |       | 39,614                                        |       | 79,493 |   | 24,061 |   | 16,817 |   | 15,550 |   |
| Income (loss) from operations                                 |       | 3,294                                         |       | (39,539 | ) | 7,627 |   | 4,576 |   | 1,684 |   |
| Other  income, net                                            |       | 898                                           |       | 115 |   | 26 |   | 45 |   | 26 |   |
| Income  (loss) before income taxes and minority interest      |       | 4,192                                         |       | (39,424 | ) | 7,653 |   | 4,621 |   | 1,710 |   |
| Income tax  provision (benefit)                               |       | 1,699                                         |       | (15,946 | ) | 3,162 |   | 1,882 |   | 718 |   |
| Income  (loss) before minority interest                       |       | 2,493                                         |       | (23,478 | ) | 4,491 |   | 2,739 |   | 992 |   |
| Minority  interest in net income of consolidated subsidiary   |       | —                                        |       | 682 |   | 897 |   | 444 |   | 181 |   |
| Net income  (loss)                                            |       | 2,493                                         |       | (24,160 | ) | 3,594 |   | 2,295 |   | 811 |   |
| Preferred  stock dividends                                    |       | —                                        |       | — |   | — |   | (90 | ) | — |   |
| Net income  (loss) applicable to common stock                 |       | $                                             | 2,493      |   | $ | (24,160 | ) | $ | 3,594 |   | $ | 2,205 |   | $ | 811 |   |
| Earnings  (loss) per common share:                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Basic                                                         |       | $                                             | 0.12       |   | $ | (1.51 | ) | $ | 0.26 |   | $ | 0.17 |   | $ | 0.06 |   |
| Diluted                                                       |       | $                                             | 0.10       |   | $ | (1.51 | ) | $ | 0.19 |   | $ | 0.15 |   | $ | 0.06 |   |
| Weighted  average number of common shares outstanding:        |       |                                          |       |   |   |   |   |   |   |   |   |
| Basic                                                         |       | 21,423                                        |       | 15,998 |   | 13,824 |   | 13,220 |   | 13,071 |   |
| Diluted                                                       |       | 24,732                                        |       | 15,998 |   | 14,768 |   | 14,627 |   | 14,597 |   |

 

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| ** **                      | ** ** | **As of December 31,** | ** ** |
|---------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                      | ** ** | **(In thousands)**          | ** ** |
| **Balance Sheet Data:**         |       |                        |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents       |       | $                           | 18,276     |   | $ | 13,105 |   | $ | 7,214 |   | $ | 3,248 |   | $ | 2,574 |   |
| Goodwill                        |       | 44,457                      |       | 44,457 |   | — |   | — |   | — |   |
| Total assets                    |       | 152,222                     |       | 99,669 |   | 19,848 |   | 11,830 |   | 9,214 |   |
| Total liabilities               |       | 10,018                      |       | 6,187 |   | 4,353 |   | 4,405 |   | 4,387 |   |
| Minority interest in subsidiary |       | —                      |       | — |   | 2,302 |   | 1,263 |   | 812 |   |
| Stockholders’ equity       |       | $                           | 142,204    |   | $ | 93,482 |   | $ | 13,193 |   | $ | 6,162 |   | $ | 4,015 |   |

 

**ITEM 7.****                ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS.**

 

**Safe Harbor Statement**

 

Theinformation contained in this report may include forward-lookingstatements. Our actual results could differ materially from those discussed inany forward-looking statements. The statements contained in this report thatare not historical are “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended (the “Securities Act”), and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”), includingstatements, without limitation, regarding our expectations, beliefs, intentionsor strategies regarding the future. We intend that such forward-lookingstatements be subject to the safe-harbor provisions contained in thosesections. Such forward-looking statements relate to, among other things: (1) expectedrevenue and earnings growth and changes in mix; (2) anticipated expensesincluding advertising, programming, personnel and others; (3) NielsenMedia Research, which we refer to as Nielsen, estimates regarding totalhouseholds and cable and satellite homes subscribing to and viewers (ratings)of The Outdoor Channel; and (4) other matters. We undertake no obligationto publicly update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise.

 

Thesestatements involve significant risks and uncertainties and are qualified byimportant factors that could cause our actual results to differ materially fromthose reflected by the forward-looking statements. Such factors include but arenot limited to risks and uncertainties which are discussed above under “Item 1ARisk Factors” and other risks and uncertainties discussed elsewhere in thisreport. In assessing forward-looking statements contained herein, readers areurged to read carefully all cautionary statements contained in this Form 10-Kand in our other filings with the Securities and Exchange Commission. For theseforward-looking statements, we claim the protection of the safe harbor forforward-looking statements in Section 27A of the Securities Act and Section 21Eof the Exchange Act.

 

**General**

 

Through ourindirect wholly-owned subsidiary, The Outdoor Channel, Inc. or TOC, we ownand operate The Outdoor Channel which is a national television network devotedprimarily to traditional outdoor activities, such as hunting, fishing andshooting sports, as well as off-road motor sports and other outdoor relatedlifestyle programming. We also own and operate related businesses which servethe interests of The Outdoor Channel’s viewers and other outdoor enthusiasts.These related businesses include: LDMA-AU, Inc., which we refer to as LostDutchman’s, and Gold Prospector’s Association of America, LLC, which we referto as GPAA. Lost Dutchman’s is a national gold prospecting campground club withproperties in Arizona, California, Colorado, Georgia, Michigan, North Carolina,Oregon and South Carolina. GPAA is the publisher of the *GoldProspector & Treasure Hunters in the Great Outdoors*magazine. In addition, we are the owner of a 2,300 acre property nearNome, Alaska used to provide outings for a fee to the members of Lost Dutchman’sand GPAA. Outdoor Channel Holdings also wholly owns 43455 BPD, LLC which ownsthe building housing our broadcast facility.

 

Our revenuesinclude (1) advertising fees from advertisements aired on The OutdoorChannel and from advertisements in *Gold Prospector &Treasure Hunters in the Great Outdoors* magazine; (2) subscriberfees paid by cable and satellite service providers that air The OutdoorChannel; and (3) membership fees from members in both Lost Dutchman’s andGPAA and other income including magazine sales, products and services relatedto gold prospecting, gold expositions, expeditions and outings. Advertisingfees include fees paid by third-party programmers to purchase advertising timein connection with the airing of their programs on The Outdoor Channel.

 

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**Acquisition of theMinority Interest of The Outdoor Channel, Inc.**

 

On September 8,2004, we completed the acquisition of the remaining minority interest in TOCwhich we did not previously own through (i) the merger of TOC with ournewly-formed, wholly-owned subsidiary, with TOC being the survivingcorporation, and (ii) the exchange of each share of TOC common stock notpreviously held by us or our subsidiaries for 0.65 shares of our common stock.In addition, each outstanding option to purchase one share of TOC common stockwas exchanged for an option to purchase 0.65 shares of our common stock. In September 2004,every two outstanding shares of our common stock were converted into fiveoutstanding shares of common stock in conjunction with our reincorporation fromAlaska to Delaware (the “5 for 2 split”).

 

Based on theexchange ratio in the merger we issued 3,069,790 shares of our commonstock as well as options to purchase 4,012,125 additional shares, each asadjusted for the 5 for 2 split. The shares issued include the shares of commonstock issued to a former TOC shareholder who originally exercised hisdissenters’ rights in connection with the transaction, but who later withdrew,with our consent, the demand to exercise such dissenter’s rights. Foraccounting purposes, all previously outstanding TOC common shares, includingthe dissenting shares, have been deemed to have been exchanged for shares ofour common stock in September 2004.

 

Theacquisition of the 17.6% minority interest in TOC was accounted for using thepurchase method of accounting. The cost of acquiring the minority interestincluded the aggregate fair value of our common shares issued in exchange forcommon shares of TOC and certain other direct costs. The acquisition cost wasallocated based on the fair value of the assets of TOC that were acquired andliabilities that were assumed, including intangible assets that arose fromcontractual or other legal rights or met certain other recognition criteriathat underlie the minority interest that was acquired. The excess of the costof the minority interest over the fair value of the underlying interest in thenet identifiable assets acquired was allocated to goodwill. In addition, inaccordance with the provisions of Statement of Financial Accounting Standards No. 109,“Accounting for Income Taxes” (“SFAS 109”) the tax effect of the intangibleassets have been treated as additional consideration. This additionalconsideration has also been allocated to goodwill.

 

The cost ofour acquisition of the minority interest in TOC was $54,985,000 based on theissuance at the closing of 3,069,790 shares of our common stock (includingshares issued to the former dissenter) and the average closing price of $16.24per share of our common stock for a specified period before and after April 20,2004, the last trading day before the public announcement of the material termsof the acquisition plus the assumption of 325,000 fully vested options of aformer employee of TOC with an intrinsic value of $4,250,000 plus certain othercosts including income tax effects. Based on the analysis of the fair value ofthe assets that were acquired and liabilities that were assumed, theacquisition costs of $54,985,000 were allocated primarily to intangible assetsas follows:

 
| ** **                                                | ** ** | **Allocation (in thousands)** | ** ** | **Estimated  Useful Life** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------|------------|
|                                                      |       |                                    |       |                            |       |
| MSO Relationships                                         |       | $                                       | 10,573     |                            | Indefinite |   |
| Advertising Customer  Relationships:                      |       |                                    |       |                            |       |
| Short Form                                                |       | 1,351                                   |       | 4 years                    |       |
| Long Form                                                 |       | 621                                     |       | 3 years                    |       |
|                                                      |       |                                    |       |                            |       |
| Total Identifiable  Intangible Assets                     |       | 12,545                                  |       |                            |       |
| Goodwill                                                  |       | 44,457                                  |       | Indefinite                      |       |
| Deferred Tax Liability  Associated With Intangible Assets |       | (5,001                                  | )          |                            |       |
| Minority Interest in  Subsidiary                          |       | 2,984                                   |       |                            |       |
|                                                      |       |                                    |       |                            |       |
| Aggregate Purchase Price                                  |       | $                                       | 54,985     |                            |       |   |

 

The exchangeof vested employee stock options by us for vested stock options held byemployees of TOC resulted in a charge to operations in our consolidatedstatement of operations on September 8, 2004 equal to the value of theoptions issued on that date net of any related income tax benefit. The optionsto purchase approximately 3,687,125 shares that we issued in exchange forvested stock options held by the employees of TOC on September 8, 2004 hada fair value of $14.00 per share based on the closing price of our common stockon that day. As a result, we incurred a non-cash, non-recurring charge tooperating expenses of $47,983,000 and recognized an income tax benefit of$19,098,000 or a net charge of $28,885,000.

 

27

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In some ofthe following period-to-period comparisons, we have specifically noted, and attimes excluded the non-cash, non-recurring compensation expense of $47,983,000incurred by us and the related tax benefit of $19,098,000 as the result of theassumption of TOC options in connection with our acquisition of the minorityinterest in TOC as part of our analysis because we believe separatelyquantifying the effects of these items provides the reader with a betterunderstanding of our operating results. We also believe that an analysis of ourresults in this manner, when presented in conjunction with our analysis of thecorresponding GAAP measures, provides useful information to management andothers in identifying and understanding our operating performance for theperiods presented and in making useful comparisons.

 

** Critical Accounting Policies and Estimates**

 

Thepreparation of financial statements in conformity with United States generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates. We believethe following critical accounting policies affect our more significantjudgments and estimates used in the preparation of financial statements.

 

 *Revenue Recognition*

 

Advertisingrevenues for The Outdoor Channel are recognized when the advertisement isaired. Advertising revenues from advertisements in our bi-monthly magazine arerecognized when the magazine is distributed. Revenues from the expeditions arerecognized when they are taken in June through August each year.Revenues from outings and gold expositions are recognized at the time of theevent. Subscriber fees for The Outdoor Channel are recognized in the period theprogramming is aired by the distributor and collection is probable.

 

Broadcastand national television network advertising contracts may guarantee theadvertiser a minimum audience for its advertisements over the term of thecontracts. We provide the advertiser with additional advertising time if we donot deliver the guaranteed audience size. The amount of additional advertisingtime is generally based upon the percentage of shortfall in audience size. Thisrequires us to make estimates of the audience size that will be deliveredthroughout the terms of the contracts. We base our estimate of audience size oninformation provided by ratings services and our historical experience. If wedetermine we will not deliver the guaranteed audience, an accrual for “make-good”advertisements is recorded as a reduction of revenue. The estimated make-goodaccrual is adjusted throughout the terms of the advertising contracts.

 

We recognizemerchandise sales when the product is shipped and collection of the receivableis probable. Lost Dutchman’s campground membership sales are generallyrecognized on a straight-line basis over the estimated average life(7 years) of the membership. We do not record receivables arising underthese contracts. Accordingly, revenues recognized do not exceed the total cashpayments received and cash received in excess of revenue earned is recorded asdeferred revenue. The majority of GPAA membership sales is for one year and isgenerally recognized in the year of sale. Multi-year GPAA membership sales arerecognized on a straight-line basis over the life of a membership, and anestimated life of 15 years for a lifetime membership.

 

*Long-LivedAssets*

 

Long-livedassets, such as property and equipment, goodwill and trademarks, are reviewedfor impairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. Impairment losses arerecognized when events or changes in circumstances indicate that theundiscounted cash flows estimated to be generated by such assets are less thantheir carrying value and, accordingly, all or a portion of such carrying value may notbe recoverable. Impairment losses for assets to be held and used are thenmeasured based on the excess, if any, of the carrying amounts of the assetsover their estimated fair values. Long-lived assets to be disposed of in amanner that meets specific criteria are stated at the lower of their carryingamounts or fair values less costs to sell and are no longer depreciated.

 

*AccountsReceivable*

 

We maintainan allowance for doubtful accounts for estimated losses that may arise ifany of our customers are unable to make required payments. Managementspecifically analyzes the age of customer balances, historical bad debtexperience, customer credit-worthiness and trade publications regarding thefinancial health of our larger customers and changes in customer payment termswhen making estimates of the uncollectability of our trade accounts receivablebalances. If we determine that the financial condition of any of our customersdeteriorated, whether due to customer specific or general economic issues,increases in the allowance may be made.

 

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*DeferredTax Assets*

 

We accountfor income taxes pursuant to the asset and liability method which requiresdeferred income tax assets and liabilities to be computed for temporarydifferences between the financial statement and tax bases of assets andliabilities that will result in taxable or deductible amounts in the futurebased on enacted laws and rates applicable to the periods in which thetemporary differences are expected to affect taxable income. Valuationallowances are established when necessary to reduce deferred tax assets to theamounts expected to be realized. The income tax provision is the tax payable orrefundable for the period plus or minus the change during the period indeferred tax assets and liabilities.

 

*Derivative Instrumentsand Certain Hedging Activity*

 

At the timewe entered into long-term debt agreements, we also entered into interest rateswap agreements. These swap agreements change the variable-rate cash flowexposure on the debt obligations to fixed cash flows so that we can managefluctuations in cash flows resulting from interest rate fluctuations and thusinterest rate risk. These swap arrangements essentially create the equivalentof fixed rate debt. These referenced transactions are accounted for underStatement of Financial Accounting Standards No. 133 “Accounting forDerivative Instruments and Certain Hedging Activities” and Statement ofFinancial Accounting Standards No. 138 “Accounting for DerivativeInstruments and Certain Hedging Activity, an amendment of SFAS No. 133.”These standards require a derivative to be recognized on the balance sheet asan asset or liability at its fair value and the changes in fair value to beaccounted for as other comprehensive income or loss. We measure theeffectiveness of the interest rate swap derivative by comparing the presentvalue of the cumulative change in the expected future cash flows on thevariable portion of the swap with the present value of the cumulative change inthe expected future interest cash flows on the floating rate liability. Theaccounting for gains and losses associated with the changes in fair value ofthe derivative and the effect on the consolidated financial statements willdepend on the respective hedge’s designation and whether the hedge is highlyeffective in offsetting changes in fair value of cash flows of the asset orliability hedged. We have determined that the interest rate swap agreements wehave entered into are highly effective in achieving the offsetting changes inthe fair value of cash flows and there has been no ineffectiveness during theyear ended December 31, 2005.

 

 **Recent Accounting Developments**

 

In December 2004,the FASB issued Statement of Financial Accounting Standards No. 123(R) (“SFAS 123(R)”).“Share-Based Payment” which revised the standards for the accounting fortransactions in which an entity exchanges its equity instruments for goods orservices and focuses primarily on accounting for transactions in which anentity obtains employee services in share-based payment transactions.SFAS 123(R) requires that the fair value of such equity instruments,including all options granted to employees, be recognized as expense in thehistorical financial statements as services are performed. Prior toSFAS 123(R), only certain pro forma disclosures of fair value wererequired. SFAS 123 (R) shall be effective for issuers as of the beginning ofthe first annual reporting period that begins after December 15, 2005.Accordingly, we will adopt the provisions of SFAS No. 123 (R) effective January 1,2006. Since we have used the intrinsic value method to account for employeestock options, the adoption of SFAS 123 (R) is expected to have amaterial impact on our financial statements.

 

The FASB hadissued certain other accounting pronouncements as of December 31, 2005that will become effective in subsequent periods; however, our management doesnot believe that any of those pronouncements would have significantly affectedour financial accounting measurements or disclosures had they been in effectduring 2005, 2004 or 2003.

 

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**Comparison ofOperating Results for the Years Ended December 31, 2005 and December 31,2004**

 

Thefollowing table discloses certain financial information for the periods presented,expressed in terms of dollars, dollar change, percentage change and as apercent of total revenue (all dollar amounts are in thousands):

 
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** | **% of Total Revenue** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------------------|------------|
| ** **                                                    | ** ** | **2005**   | ** ** | **2004**   | ** ** | **$**      | ** ** | **%**                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                     |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Advertising                                                   |       | $          | 22,769     |       | $          | 21,817     |       | $                      | 952        |   | 4.4 | % | 53.0 | % | 54.6 | % |
| Subscriber  fees                                              |       | 15,432     |       | 13,391     |       | 2,041      |       | 15.2                   |       | 36.0 |   | 33.5 |   |
| Membership  income                                            |       | 4,707      |       | 4,746      |       | (39        | )          | (0.8                   | )          | 11.0 |   | 11.9 |   |
| Total  revenues                                               |       | 42,908     |       | 39,954     |       | 2,954      |       | 7.4                    |       | 100.0 |   | 100.0 |   |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Expenses:                                                     |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Satellite  transmission fees                                  |       | 2,497      |       | 2,351      |       | 146        |       | 6.2                    |       | 5.8 |   | 5.9 |   |
| Advertising                                                   |       | 7,100      |       | 5,596      |       | 1,504      |       | 26.9                   |       | 16.5 |   | 14.0 |   |
| Programming                                                   |       | 5,604      |       | 2,521      |       | 3,083      |       | 122.3                  |       | 13.1 |   | 6.3 |   |
| Non-cash  compensation expense from exchange of stock options |       | —     |       | 47,983     |       | (47,983    | )          | (100.0                 | )          | — |   | 120.1 |   |
| Selling,  general and administrative                          |       | 24,413     |       | 21,042     |       | 3,371      |       | 16.0                   |       | 56.9 |   | 52.7 |   |
| Total  expenses                                               |       | 39,614     |       | 79,493     |       | (39,879    | )          | (50.2                  | )          | 92.3 |   | 199.0 |   |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income  (loss) from operations                                |       | 3,294      |       | (39,539    | )          | 42,833     |       | NMF                    |       | 7.7 |   | (99.0 | ) |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Other  income, net                                            |       | 898        |       | 115        |       | 783        |       | 680.9                  |       | 2.1 |   | 0.3 |   |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income  (loss) before income taxes and minority interest      |       | 4,192      |       | (39,424    | )          | 43,616     |       | NMF                    |       | 9.8 |   | (98.7 | ) |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income tax  provision (benefit)                               |       | 1,699      |       | (15,946    | )          | 17,645     |       | NMF                    |       | 4.0 |   | (39.9 | ) |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income  (loss) before minority interest                       |       | 2,493      |       | (23,478    | )          | 25,971     |       | NMF                    |       | 5.8 |   | (58.8 | ) |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Minority  interest in net income of consolidated subsidiary   |       | —     |       | 682        |       | (682       | )          | (100.0                 | )          | — |   | 1.7 |   |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Net income  (loss)                                            |       | $          | 2,493      |       | $          | (24,160    | )          | $                      | 26,653     |   | NMF | % | 5.8 | % | (60.5 | )% |

 

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**NMF – Not Meaningful**

 

**Revenues**

 

Our revenuesinclude revenues from (1) advertising fees; (2) subscriber fees; and (3) membershipincome. Advertising revenue is generated from the sale of advertising time onThe Outdoor Channel including advertisements shown during a program (also knownas short-form advertising) and infomercials in which the advertisement isthe program itself (also known as long-form advertising) and from the saleof advertising space in publications such as the *GoldProspectors & Treasure Hunters in the Great Outdoors*magazine. Advertising revenue is also generated from fees paid by third partyprogrammers that purchase advertising time in connection with the airing oftheir programs on The Outdoor Channel. For the years ended December 31,2005 and 2004, The Outdoor Channel generated approximately 97.0% and 97.2% ofour advertising revenue, respectively. Subscriber fees are solely related toThe Outdoor Channel. Membership income is generated by our activities otherthan the operation of The Outdoor Channel and includes membership sales,magazine sales, merchandise sales, and sponsored outings and expeditions inconnection with GPAA and Lost Dutchman’s.

 

Totalrevenues for the year ended December 31, 2005 were $42,908,000, anincrease of $2,954,000, or 7.4%, compared to revenues of $39,954,000 for theyear ended December 31, 2004. The net increases were the result of changesin several items comprising revenue as discussed below.

 

Advertisingrevenue for the year ended December 31, 2005 was $22,769,000, an increaseof $952,000 or 4.4% compared to $21,817,000 for the year ended December 31,2004. For December 2005, Nielsen estimated that The Outdoor Channel had25.7 million viewers compare to 24.8 million for the same period a year ago.(Nielsen revises this estimate each month and for March 2006, Nielsenincreased its estimate to approximately 26.2 million subscribers). The increasein advertising revenue for the year ended December 31, 2005 reflects alarger percentage of our short-form advertising

 

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inventory being sold to national andendemic advertisers, generally at higher rates, than inventory being sold todirect response advertisers or long-form (infomercial) advertisers.

 

Subscriberfees for the year ended December 31, 2005 were $15,432,000, an increase of$2,041,000 or 15.2% compared to $13,391,000 for the year ended December 31,2004. The increase in subscriber fees for the period was primarily due to anincreased number of paying subscribers both from new affiliates and fromexisting distributors and contractual subscriber fee rate increases withexisting service providers carrying The Outdoor Channel. We plan to accelerateour subscriber growth utilizing various means including deployment ofsubscriber acquisition or launch support fees. Such fees are capitalized andamortized over the period that the pay television distributor is required tocarry the newly acquired TOC subscriber. To the extent revenue is associatedwith the incremental subscribers, the amortization is charged to offset the relatedrevenue. Any excess of launch support amortization over the related subscriberfee revenue is charged to expense. As a result, we anticipate that subscriberfee revenue, net of amortization of launch fees, may not increase over theforeseeable future once we deploy this tactic and, in fact, due to contractualvolume discounts, subscriber fee revenue could actually decrease over the newcontract lives.

 

Membershipincome for the year ended December 31, 2005 was $4,707,000, a decrease of$39,000 or 0.8% compared to $4,746,000 for the year ended December 31,2004. We do not consider this decline to be significant; rather the relativelystatic balance reflects our belief that this revenue source has reachedrelative maturity. We do not expect significant change in the balance fromyear-to-year in the near term.

 

**Expenses**

 

Expensesconsist of the cost of (1) satellite transmission fees; (2) advertising;(3) programming; (4) compensation expense from the exchange of TOCstock options; and (5) selling, general and administrative expenses.

 

Totalexpenses for the year ended December 31, 2005 were $39,614,000, a decreaseof $39,879,000 or 50.2%, compared to $79,493,000 for the year ended December 31,2004. As a percentage of revenues, total expenses were 92.3% and 199.0% in theyears ended December 31, 2005 and 2004, respectively. The decrease inexpenses was due to the non-recurring charge to compensation expense incurredin September 2004 as a result of the issuance of options to TOC employeeswith an intrinsic value of $47,983,000 in accordance with the terms of theacquisition by the Company of substantially all of the remaining 17.6% minorityinterest in TOC it did not already own. Otherwise total expenses increased asillustrated when the non-cash, non-recurring compensation expense of$47,983,000 incurred in September 2004 is excluded.

 

Totalexpenses, net of the compensation expense from exchange of stock options,increased $8,104,000 or 25.7% for the year ended December 31, 2005. As apercentage of revenues, total expenses, net of compensation expense from theexchange of stock options, were 92.3% and 78.9% in the years ended December 31,2005 and 2004, respectively.

 

The increasein expenses was due to several factors, such as increased corporate costs including:(1) amortization of intangible assets; (2) costs associated withcompliance with Sarbanes-Oxley Act of 2002; and (3) costs associated withincorporation in Delaware and listing on The Nasdaq National Market, to whichwe became subject as of September 2004. Those increased costs willcontinue to be incurred becoming part of our cost of doing business. Theincrease is also attributable to increased programming and personnel costs,costs associated with the launch of our second channel, Outdoor Channel 2 HD,marketing and promotion costs and other items more fully described as follows.

 

Satellitetransmission fees for the year ended December 31, 2005 were $2,497,000, anincrease of $146,000, or 6.2%, compared to $2,351,000 for the year ended December 31,2004. This increase reflects an additional charge for the back-up satellitecapability negotiated with our satellite provider during the fourth quarter of2004 and a scheduled price increase of $5,000 per month in October 2005.

 

Advertisingexpenses for the year ended December 31, 2005 were $7,100,000, an increaseof $1,504,000 or 26.9% compared to $5,596,000 for the year ended December 31,2004. The increase in advertising expenses is principally a result of ourincreased spending on consumer and trade industry awareness campaigns designedto build demand for The Outdoor Channel and for Outdoor Channel 2 HD. We planon continuing to spend on these awareness programs, and when expressed as apercentage of revenues, we expect the rate to be closer to the rate experiencedin 2005 rather than 2004.

 

Programmingexpenses for the year ended December 31, 2005 were $5,604,000, an increaseof $3,083,000 or 122.3% compared to $2,521,000 for the year ended December 31,2004. The increase is principally a result of our decision to launch our secondchannel, Outdoor Channel 2 HD, on July 1, 2005. In 2005, this channel wasprogrammed with native high definition shows produced almost entirely in-houseas opposed to the preponderance of third party production on our standarddefinition channel. We produced in excess of 40 shows plus numerous specialsin-house that aired in the third and

 

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fourth quarters of 2005. In somesituations, shows that ran in 2005 on only one of our channels are planned tobe aired again in 2006, but on our other channel. We aired 16 shows that wereinternally produced during the third and fourth quarters of 2004.

 

Our policyis to charge costs of specific shows to programming expense over the expectedairing period beginning when the program first airs. The cost of programming isgenerally first recorded as prepaid programming costs and is then charged toprogramming expense based on the anticipated airing schedule. If theanticipated airing schedule changes, the timing and amount of the chargeto expense is adjusted accordingly. Many of these programs began airing onOutdoor Channel 2 HD during the third quarter of 2005 with re-airing in thefourth quarter and, in some situations, re-airing the same programs on TheOutdoor Channel in 2006. A substantial portion of the prepaid programming costshas been and will be charged to expense in these quarters. Programming expensesare expected to increase as a percentage of revenue as we pursue our strategy toproduce, or acquire, more programming in-house as opposed to selling the airtime to third party producers. As a result, we believe we will control more ofour programs’ quality, advertising inventory, sponsorship opportunities and thepotential to re-package our programming for other uses such as video-on-demand,international licensing and production of DVDs for retail distribution.

 

Compensationexpense from the exchange of stock options for the year ended December 31,2004 was $47,983,000 and was incurred as a result of the issuance of 3,687,125options to TOC option holders in accordance with the terms of the acquisitionof substantially all of the remaining 17.6% minority interest in TOC we did notalready own. This charge is both non-cash and non-recurring.

 

Selling,general and administrative expenses for the year ended December 31, 2005were $24,413,000, an increase of $3,371,000 or 16.0% compared to $21,042,000for the year ended December 31, 2004. As a percentage of revenues,selling, general and administrative expenses were 56.9% and 52.7% in the yearsended December 31, 2005 and 2004, respectively.

 

The increasewas primarily due to the increase in the number of employees late in 2004 andearly 2005. We opened our New York City advertising sales office with aresultant expense in 2005 that did not exist in the same period a year ago. Wehave also added an executive to our management team who holds the position ofGeneral Counsel. Others have been added in all departments to support ourlaunch of a second channel—Outdoor Channel 2 HD, and to support our increasedefforts of producing more of our shows in-house. We also experienced increasedtravel and related costs associated with our larger advertising sales staff,support of our service providers and the promotion of The Outdoor Channel andOutdoor Channel 2 HD through a stronger presence at trade shows and conferences.Depreciation and small equipment purchases have increased as a result of ouractivity related to the launch of Outdoor Channel 2 HD. Also included inselling, general and administrative costs is amortization of intangible assetscreated as part of the acquisition in September 2004 of the remainingminority interest of TOC we did not already own. These expenses did not existin the first half of 2004. We increased other corporate overhead expenses suchas our activity surrounding Sarbanes-Oxley compliance in 2005, fees for ourlisting on Nasdaq National Market and fees associated with incorporation in thestate of Delaware.

 

We anticipatethat selling, general and administrative costs will continue to increase overthe foreseeable future both in dollars and when expressed as a percent ofrevenue as we continue to work to gain increased distribution of both channelsincluding increases from the recognition of subscriber acquisition fee, alsoreferred to as launch support fee, amortization in excess of the relatedsubscriber revenue, corporate spending on Sarbanes-Oxley compliance, fees tomaintain our common stock listing and improved communication with ourstockholders, among other corporate expenses.

 

**Income (Loss) from Operations**

 

Income(loss) from operations for the year ended December 31, 2005 was$3,294,000, an increase of $42,833,000 compared to ($39,539,000) for the yearended December 31, 2004. As a percent of revenues, income (loss) fromoperations was 7.7% and (99.0%), respectively. As we continue to strive todrive growth of our subscriber base including the planned payment of launchsupport, and as we further develop our second channel, Outdoor Channel 2 HD, wewill incur increased expenses such as programming, marketing and advertisingthat are unlikely to be immediately offset by revenues. As a result, weanticipate our operating margins will be negatively impacted for the foreseeablefuture. There can be no assurance that these strategies will be successful.

 

As explainedabove, the non-cash, non-recurring compensation charge of $47,983,000, whichresulted from the assumption of options in connection with the acquisition of theminority interest in TOC, accounts for the majority of the loss from operationsfor the year ended December 31, 2004. If we excluded this charge, lossfrom operations for the year ended December 31, 2004 would have beenincome from operations of $8,444,000. As a percentage of revenue this adjustedbalance would have been 21.1% for the year ended December 31, 2004.

 

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**Other Income, Net**

 

Otherincome, net for the year ended December 31, 2005 was $898,000, an increaseof $783,000 compared to $115,000 for the year ended December 31, 2004.This improvement was primarily due to increased dividends and interest earnedon our increased investment in available-for-sale securities and cash and cashequivalent balances that resulted from the sale, on July 1, 2005, of3,500,000 shares of common stock for net cash proceeds of $43,350,000 plus$2,734,000 from the exercise of stock options during the year ended December 31,2005.

 

**Income (Loss) Before Income Taxes and Minority Interest in Net Income ofConsolidated Subsidiary**

 

Income(loss) before income taxes and minority interest as a percentage of revenueswas 9.8% for the year ended December 31, 2005 compared to (98.7%) for theyear ended December 31, 2004.

 

The TOC segment’sincome before income taxes and minority interest decreased to $5,906,000 forthe year ended December 31, 2005 from $9,954,000 for the year ended December 31,2004. Expressed as a percentage of revenue, the TOC segment’s income beforeincome taxes and minority interest decreased to 15.7% for the year ended December 31,2005, compared to 28.8% for the year ended December 31, 2004. The decreasewas due mainly to the growth of our programming expenses and increased staff insupport of the launch of our second channel, Outdoor Channel 2 HD, increasedspending on advertising, personnel and travel/promotional related expenses aswell as depreciation expenses related to the deployment of additionalequipment.

 

TheMembership Division segment’s income before income taxes and minority interestdecreased to $280,000 for the year ended December 31, 2005 from $354,000for the year ended December 31, 2004. Expressed as a percentage ofrevenues, the Membership Division segment’s income before income taxes andminority interest decreased to 5.2% for the year ended December 31, 2005compared to 6.6% for the year ended December 31, 2004. The decrease isprincipally a result of a 5% increase in payroll and related taxes along with acharge for stock compensation that did not exist in 2004.

 

Corporateincurred a loss before income taxes and minority interest for the year ended December 31,2005 amounting to $1,994,000, a decrease of $47,738,000 compared to a loss of$49,732,000 for the year ended December 31, 2004. The expenses allocatedto Corporate include: the 2004 non-cash, non-recurring charge of $47,983,000,professional fees such as public relations, accounting and legal fees,amortization of intangibles, business insurance, board of directors fees andexpenses and an allocation of corporate officers’ payroll and related expenses.The increase in the expenses of Corporate, net of the one-time charge in 2004of $47,983,000, is principally related to accounting services incurred inpositioning the Company to be in compliance with the requirements of theSarbanes-Oxley Act of 2002, taxes associated with being incorporated inDelaware, listing fees of The Nasdaq National Market and amortization of theintangible assets related to the acquisition of the minority interest of TOC.

 

**Income Tax Provision (Benefit)**

 

Income taxprovision for the year ended December 31, 2005 was $1,699,000, an increaseof $17,645,000 as compared to a benefit of $15,946,000 for the year ended December 31,2004. The increase was principally due to the Company earning taxable income in2005 as compared to a loss for 2004. The effective income tax rate wasapproximately 40.5% and 40.4% for the years ended December 31, 2005 and2004, respectively.

 

**Minority Interest in Net Income of Consolidated Subsidiary**

 

Minorityinterest for the year ended December 31, 2004 was $682,000. Minorityinterest was eliminated in September 2004 as a result of our acquisitionof the remaining minority interest in TOC we did not already own. Therefore,there was no minority interest for the year ended December 31, 2005.

 

**Net Income (Loss)**

 

Net income(loss) for the year ended December 31, 2005 was $2,493,000, an increase of$26,653,000 compared to ($24,160,000) for the year ended December 31,2004. The increase was due to the reasons stated above. Excluding the non-cash,non-recurring charge of $47,983,000, net of income tax benefit of $19,098,000,net income for the year ended December 31, 2004 would have been $4,725,000or 11.8% of revenue.

 

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**Comparison of OperatingResults for the Years Ended December 31, 2004 and December 31, 2003**

 

Thefollowing table discloses certain financial information for the periodspresented, expressed in terms of dollars, dollar change, percentage change andas a percent of total revenue (all dollar amounts are in thousands):

 
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** | **% of Total Revenue** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------------------|------------|
| ** **                                                    | ** ** | **2004**   | ** ** | **2003**   | ** ** | **$**      | ** ** | **%**                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                                     |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Advertising                                                   |       | $          | 21,817     |       | $          | 16,396     |       | $                      | 5,421      |   | 33.1 | % | 54.6 | % | 51.7 | % |
| Subscriber fees                                               |       | 13,391     |       | 10,836     |       | 2,555      |       | 23.6                   |       | 33.5 |   | 34.2 |   |
| Membership  income                                            |       | 4,746      |       | 4,456      |       | 290        |       | 6.5                    |       | 11.9 |   | 14.1 |   |
| Total  revenues                                               |       | 39,954     |       | 31,688     |       | 8,266      |       | 26.1                   |       | 100.0 |   | 100.0 |   |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Expenses:                                                     |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Satellite  transmission fees                                  |       | 2,351      |       | 2,423      |       | (72        | )          | (3.0                   | )          | 5.9 |   | 7.6 |   |
| Advertising                                                   |       | 5,596      |       | 3,767      |       | 1,829      |       | 48.6                   |       | 14.0 |   | 11.9 |   |
| Programming                                                   |       | 2,521      |       | 1,117      |       | 1,404      |       | 125.7                  |       | 6.3 |   | 3.5 |   |
| Non-cash  compensation expense from exchange of stock options |       | 47,983     |       | —     |       | 47,983     |       | NMF                    |       | 120.1 |   | — |   |
| Selling,  general and administrative                          |       | 21,042     |       | 16,754     |       | 4,288      |       | 25.6                   |       | 52.7 |   | 52.9 |   |
| Total  expenses                                               |       | 79,493     |       | 24,061     |       | 55,432     |       | 230.4                  |       | 199.0 |   | 75.9 |   |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income  (loss) from operations                                |       | (39,539    | )          | 7,627      |       | (47,166    | )          | (618.4                 | )          | (99.0 | ) | 24.1 |   |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Other  income, net                                            |       | 115        |       | 26         |       | 89         |       | 342.3                  |       | 0.3 |   | — |   |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income  (loss) before income taxes and minority interest      |       | (39,424    | )          | 7,653      |       | (47,077    | )          | (615.1                 | )          | (98.7 | ) | 24.1 |   |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income tax  provision (benefit)                               |       | (15,946    | )          | 3,162      |       | (19,108    | )          | (604.3                 | )          | (39.9 | ) | 10.0 |   |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income  (loss) before minority interest                       |       | (23,478    | )          | 4,491      |       | (27,969    | )          | (622.8                 | )          | (58.8 | ) | 14.1 |   |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Minority  interest in net income of consolidated subsidiary   |       | 682        |       | 897        |       | (215       | )          | (24.0                  | )          | 1.7 |   | 2.8 |   |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Net income  (loss)                                            |       | $          | (24,160    | )          | $          | 3,594      |       | $                      | (27,754    | ) | (772.2 | )% | (60.5 | )% | 11.3 | % |

 

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**NMF — Not Meaningful**

 

**Revenues**

 

Totalrevenues for the year ended December 31, 2004 were $39,954,000, anincrease of $8,266,000, or 26.1%, compared to revenues of $31,688,000 for theyear ended December 31, 2003. This net increase was the result of changesin several items comprising revenue as discussed below.

 

Advertisingrevenue for the year ended December 31, 2004 was $21,817,000, an increaseof $5,421,000 or 33.1% compared to $16,396,000 for the year ended December 31,2003. The increase was due, in part, to our improved ability to demonstrate thevalue of advertising on The Outdoor Channel to national advertisers. Nielsenreported that we had approximately 24.8 million subscribers for the month of December 2004compared to 25.7 million for the month of December 2003 a decrease of 0.9million or 3.5%. (Nielsen revises this estimate each month and for March 2005,Nielsen reported that we had approximately 24.4 million subscribers). HavingNielsen ratings and demographic data enabled us to better utilize our inventoryof available advertising time and increase our effective rates realized on ouradvertising time on The Outdoor Channel. Further, as demand for our air timeincreased, we negotiated higher fees from third party programmers that purchaseadvertising time in connection with the airing of their programs on The OutdoorChannel.

 

Subscriberfees for the year ended December 31, 2004 were $13,391,000, an increase of$2,555,000 or 23.6% compared to $10,836,000 for the year ended December 31,2003. The increase was primarily due to an increased number of payingsubscribers as we increased the number of service providers carrying TheOutdoor Channel from approximately 5,400 at the end of 2003 to 5,700 at 2004year end; contractual subscriber fee rate increases with existing serviceproviders carrying The Outdoor Channel; the beginning of payments late in 2003from certain carriers who had previously received The Outdoor Channel withoutcharge; and the increasing penetration of The Outdoor Channel on existingdistributors such as National Cable Television Cooperative (“NCTC”), DIRECTV,Comcast, DISH Network and Charter.

 

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Membershipincome for the year ended December 31, 2004 was $4,746,000, an increase of$290,000 or 6.5% compared to $4,456,000 for the year ended December 31,2003. The increase in membership income was driven by increased attendance atour gold expositions and greater participation in our annual expedition toCripple River, Alaska in 2004 compared to 2003.

 

**Expenses**

 

Expensesconsist of the cost of (1) satellite transmission fees; (2) advertisingand programming; (3) compensation expense from the exchange of TOC stockoptions; and (4) selling, general and administrative expenses.

 

Totalexpenses for the year ended December 31, 2004 were $79,493,000, anincrease of $55,432,000, or 230.4%, compared to $24,061,000 for the year ended December 31,2003. As a percentage of revenues, total expenses were 209.6% and 75.9% in theyears ended December 31, 2004 and 2003, respectively. The increase inexpenses was due to several factors, but is principally driven by the non-cash,non-recurring compensation expense incurred by the issuance of options inconnection with the TOC merger with an intrinsic value of $47,983,000 inaccordance with the terms of the acquisition by Outdoor Channel Holdings of theremaining 17.6% minority interest in TOC it did not already own.

 

Satellitetransmission fees for the year ended December 31, 2004 were $2,351,000, adecrease of $72,000, or 3%, compared to $2,423,000 for the year ended December 31,2003. This relatively static comparison reflects the substantially fixed natureof our contracts for these services and a negotiated price decrease in thecontract.

 

Advertisingexpense for the year ended December 31, 2004 was $5,596,000, an increaseof $1,829,000 or 48.6% compared to $3,767,000 for the year ended December 31,2003. The increase in advertising expense is principally a result of ourincreased spending on consumer and trade industry awareness campaigns to builddemand for The Outdoor Channel. Advertising expenses are expected to increaseas a percentage of revenue as we pursue our strategy to launch a second channeland to build awareness of our programming.

 

Programmingexpense for the year ended December 31, 2004 was $2,521,000, an increaseof $1,404,000 or 125.7% compared to $1,117,000 for the year ended December 31,2003. The increase in programming expense is principally a result of ourdecision to produce more of our programming in-house as opposed to selling theair time to third party producers. Our goal is to generate increased margindollars by producing programming in-house and retaining the advertisinginventory. Our costs will increase as a result but we not only expect togenerate more margin dollars but retain control of our programming forre-purposing, quality control and other reasons.

 

Compensationexpense from the exchange of stock options for the year ended December 31,2004 was $47,983,000 and was incurred as a result of the issuance of 4,012,125options to TOC option holders in accordance with the terms of the acquisitionby Outdoor Channel Holdings of all of the minority interest in TOC it did notalready own.

 

Selling,general and administrative expenses for the year ended December 31, 2004were $21,042,000, an increase of $4,288,000 or 25.6% compared to $16,754,000for the year ended December 31, 2003. As a percentage of revenues,selling, general and administrative expenses were 52.7% and 52.9% for the yearended December 31, 2004 and 2003, respectively. This increase wasprimarily due to the initiation of a program to provide digital receivers to anumber of our carriers, increased personnel costs and other costs as furtherdiscussed below.

 

During 2004,we made the decision to cease transmitting The Outdoor Channel as an analogsignal in order to conserve bandwidth and further our transition to fulldigital transmission in preparation for the launch of Outdoor Channel 2 HD. Toequip existing analog based service providers and to attract new serviceproviders, we began providing service providers digital receivers which havethe capability to output the signal in either a digital or analog format. In2004, we spent approximately $1,110,000 on such receivers. This receiverprogram was substantially completed in 2004; however we expect to continue toprovide newly launched service providers with such a receiver on an as-neededbasis.

 

Personnelexpenses increased approximately $1,100,000 in the year ended December 31,2004 over 2003 principally as a result of additional hiring during 2004. As of December 31,2004, we had 139 employees as compared to 86 at December 31, 2003.Further, we experienced increases in other components of selling, general andadministrative expenses: Professional fees and associated costs related to ourreincorporation from Alaska to Delaware; listing of our common stock on TheNasdaq National Market; increased depreciation expense as a result of equipmentpurchased in 2004 and 2003 to support our growth; and our increased travelrelated costs associated with our increased advertising sales staff, support ofour growing number of service providers and the promotion of The OutdoorChannel.

 

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**Income (Loss) From Operations**

 

Income(loss) from operations for the year ended December 31, 2004 was($39,539,000), a decrease of $47,166,000 compared to $7,627,000 for the yearended December 31, 2003. As a percentage of revenues, income (loss) fromoperations was (99.0%) and 24.1% for the year ended December 31, 2004 and2003, respectively. If the effect of the non-cash, non-recurring compensationexpense of $47,983,000 related to the assumption of TOC stock options isexcluded, income from operations for 2004 would have been $8,444,000, anincrease of $817,000 or 10.7% compared to income from operations for 2003.Income from operations as adjusted for the non-cash, non-recurring expense of$47,983,000 grew at a slower pace than revenue during 2004 reflecting ourinvestment in subscriber acquisition programs, increased in-house programmingand receivers for our service providers.

 

**Other Income, Net**

 

Otherincome, net for the year ended December 31, 2004 was $115,000, an increaseof $89,000 compared to $26,000 for the year ended December 31, 2003. Thisimprovement was primarily due to the retirement of our debt to stockholdersduring 2003, resulting in less interest expense complemented by the interestearned on increased cash balances.

 

**Income (Loss) Before Income Taxes and MinorityInterest in Net Income of Consolidated Subsidiary**

 

Income(loss) before income taxes and minority interest decreased significantly as apercentage of revenues to (98.7%) for the year ended December 31, 2004compared to 24.1% for the year ended December 31, 2003.

 

The TOCsegment’s income before income taxes and minority interest increased to$9,954,000 for the year ended December 31, 2004 from $9,315,000 for theyear ended December 31, 2003. Expressed as a percentage of revenue, theTOC segment’s income before income taxes and minority interest decreased to28.8% for the year ended December 31, 2004, compared to 34.7% for the yearended December 31, 2003. The decrease was due mainly to the implementationin 2004 of our digital receiver program; the growth of our advertising andprogramming expenses in the third quarter of 2004; and increases in personnelexpenses resulting from the increase in the average number of TOC employees in2004 compared to 2003.

 

TheMembership Division segment’s income (loss) before income taxes and minorityinterest increased to $354,000 for the year ended December 31, 2004 from aloss of $619,000 for the year ended December 31, 2003. Expressed as apercentage of revenues, the Membership Division segment’s income before incometaxes and minority interest improved to 6.6% for the year ended December 31,2004 compared to a loss of 12.8% for the year ended December 31, 2003. Theincrease principally reflects a concerted effort to control costs and makeadjustments in our marketing and advertising that yielded increased sales,particularly as it relates to our expedition to Cripple River, Alaska, whilespending less on selling, general and administrative expenses.

 

Corporate’sloss before income taxes and minority interest for the year ended December 31,2004 was $49,732 ,000, an increase of $48,689,000 compared to the loss of$1,043,000 for the year ended December 31, 2003. The expenses allocated tothis unit include: the non-cash, non-recurring compensation expense of$47,983,000 in the third quarter of 2004 which resulted from the issuance ofoptions in connection with the acquisition of the minority interest in TOC,professional fees including public relations, accounting and legal fees,business insurance, board of directors fees and expenses and an allocation ofcorporate officers’ payroll and related expenses. The increase in the expensesof the corporate unit is principally related to costs associated with theacquisition of the minority interest in TOC, legal fees resulting fromcorporate restructuring including our listing on The Nasdaq National Market andvarious securities filings fees.

 

**Income Tax Provision (Benefit)**

 

Income taxprovision (benefit) for the year ended December 31, 2004 was a benefit of$15,946,000, a change of $19,108,000 as compared to a $3,162,000 expense forthe year ended December 31, 2003. The significant decrease was due to theCompany recognizing an income tax benefit of $19,098,000 arising from anon-cash, non-recurring compensation expense charge of $47,983,000 whichresulted from the assumption of options in connection with the acquisition ofthe minority interest in TOC. The effective income tax rate was approximately40.4% and 41.3% for the years ended December 31, 2004 and 2003,respectively.

 

**Minority Interest in Net Income of ConsolidatedSubsidiary**

 

Minorityinterest for the year ended December 31, 2004 was $682,000 compared to$897,000 for the year ended December 31, 2003. Minority interest waseliminated in the month of September 2004 due to our acquisition of theremaining minority interest in TOC which we did not already own. The amountreported for the year ended December 31, 2004 reflects

 

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approximately eight months of the minorityinterest in 2004 while 2003 reflects a full twelve months. Further, based onour current ownership of our subsidiaries a minority interest in oursubsidiaries is not expected to continue as a result of our current capitalstructure.

 

**Net Income (Loss)**

 

Net income(loss) for the year ended December 31, 2004 was ($24,160,000) a change of$27,754,000 compared to $3,594,000 for the year ended December 31, 2003.As a percentage of revenues, net income (loss) was (60.5%) and 11.3% for theyears ended December 31, 2004 and 2003, respectively. If the non-cash,non-recurring compensation expense of $47,983,000 and the corresponding incometax benefit of $19,098,000 incurred as a result of our acquisition of theminority interest in TOC described above is excluded, net income for the yearended December 31, 2004 would have been $4,725,000 or 11.8% of sales.

 

**Liquidity and CapitalResources**

 

We generated$2,882,000 of cash in our operating activities in the year ended December 31,2005, compared to $8,045,000 in the year ended December 31, 2004 and hadcash and cash equivalent balance of $18,276,000 at December 31, 2005, anincrease of $5,171,000 from the balance of $13,105,000 at December 31,2004.  We also had short-term investmentsclassified as available-for-sale securities of $38,830 at December 31, 2005compared to only $741 at December 31, 2004. The investments at December 31, 2005 were comprised almost entirely ofauction rate securities with interest rates that generally reset every 28days.  The auction rate securities havelong-term maturity dates and provide us with enhanced yields.  We believe we have the ability to quicklyliquidate them at their original cost although there is no guaranty we would beable to do so.  Net working capitalincreased to $66,183,000 at December 31, 2005, compared to $17,042,000 at December 31,2004.

 

Net cashused in investing activities was $48,661,000 in the year ended December 31,2005 compared to $3,312,000 for the year ended December 31, 2004. Theincrease in cash used in investing activities was related to the purchase of (i) short-termauction rate securities and (ii) capital expenditures on “construction inprogress” and equipment related to the build-out of our new broadcast facilityas further discussed below. Additional capital expenditures were to build ourinventory of HD cameras and editing equipment used to support our increasedefforts to produce more of our programming in-house as opposed to licensingsuch programming from third parties.

 

Cashprovided by financing activities in the year ended December 31, 2005 was$50,950,000 compared to $1,158,000 for the year ended December 31, 2004.The cash provided by financing activities in 2005 was primarily from thecompletion, on July 1, 2005, of a public offering of our common stock,whereby we sold 3,500,000 shares of common stock and received net proceeds of$43,350,000. In addition, certain selling stockholders exercised options to buy1,688,000 shares of common stock which were resold in the public offering. On July 13,2005, the underwriters exercised their over-allotment option granted by certainselling stockholders and purchased an additional 442,000 shares of common stock.The shares sold by the selling stockholders were purchased immediately beforethe sale through the exercise of options they held to buy common shares fromthe Company. The Company received $2,168,000 in the aggregate from the exerciseof these options. Also in 2005, the Company received cash proceeds ofapproximately $566,000 from the exercise of other options for the purchase of318,000 shares of common stock. The cash provided by financing activities in2004 was primarily a result of the exercise of employee and service providerstock options from our 1995 incentive stock option plan. Also, we generated anaggregate of $4,950,000 from the issuance of long-term debt related to thefinancing of the acquisition and improvement of our new broadcasting facilityas well as the purchase of equipment for this facility.

 

The netproceeds from the public offering are intended to be used to expand ourmarketing and sales efforts to increase the number of subscribers to TheOutdoor Channel, the purchase of programming from third parties, increasedinternal production of programming and for general corporate purposes.

 

On November 2,2005, we renewed our revolving line of credit agreement (the “revolver”) withU.S. Bank N.A. (the “Bank”), extending the maturity date to September 7,2007 and increasing the total amount which can be drawn upon under therevolver from $5,000,000 to $8,000,000. The revolver provides that theinterest rate shall be LIBOR plus 1.25%. The revolver is collateralized bysubstantially all of our assets. This credit facility contains customaryfinancial and other covenants and restrictions, as amended on November 2,2005, including a change of control provision. As of December 31, 2005 andas of the date of this report, we did not have any amounts outstanding underthis credit facility.

 

Driven by aneed to increase office space, we reassessed our facilities including floorspace utilization, master control equipment, uplink equipment, and other needsduring the year ended December 31, 2004. On February 22, 2005, weannounced our intention to purchase a 28,000 square foot building in Temecula,California for approximately $2.6 million. We completed the purchase during thethird quarter of 2005. We are in the process of completing improvements to thisbuilding, including the mezzanine floor which will add approximately 8,000square feet, which is planned to house our broadcast facility including ourmaster control, our uplink satellite dish and various programming personnel. Wecurrently estimate that aggregate capital expenditures to complete thebuild-out including updated equipment could exceed $8 million. As of December 31,2005, we have spent approximately $4.9 million on such upgrades.

 

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On November 2,2005, we obtained a $1,950,000 mortgage loan from the Bank on our recentlypurchased broadcast facility located in Temecula, California which has a 10year term loan with a 25 year amortization schedule. This loan carries avariable interest rate of LIBOR plus 1.35%. This loan is secured primarily by aDeed of Trust on the property and is also secondarily secured by the sameassets as the revolver. It also contains customary financial and othercovenants and restrictions including a change of control provision. On November 7,2005, we entered into an interest rate swap agreement with the Bank to reducethe potential impact of increasing interest rates and effectively fixed theinterest rate on this loan at 6.59%.

 

On November 2,2005, we obtained a $3,000,000, five year fully amortizing term loan. This loancarries a variable interest rate of LIBOR plus 1.35%. This term loan is securedby the same assets as the revolver and contains customary financial and othercovenants and restrictions including a change of control provision. On November 7,2005, we entered into an interest rate swap agreement with the Bank to reducethe potential impact of increasing interest rates and effectively fixed theinterest rate on this term loan at 6.35%.

 

As of December 31,2005, we had sufficient cash on hand and had been generating sufficient cashflow from operations to meet our short-term cash flow requirements. Managementbelieves that our existing cash resources including cash on-hand, variousnotes, including the revolver at December 31, 2005, and anticipated cashflows from operations will be sufficient to fund our operations at currentlevels and anticipated capital requirements through at least March 1,2007. To the extent that such amounts are insufficient to finance our workingcapital requirements or our desire to expand operations beyond current levels,we could seek additional financing. There can be no assurance that equity ordebt financing will be available if needed or, if available, will be on termsfavorable to us or our stockholders.

 

A summary ofour contractual obligations as of December 31, 2005 (In thousands):

 
| **Contractual Obligations**  | ** ** | **Total** | ** ** | **Less than****1 year** | ** ** | **Over 1 year  Less than****3 years** | ** ** | **Over 3 years  Less than****5 years** | ** ** | **After****5 years** | ** ** |
|------------------------------|------------|-----------|------------|-------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|----------------------|------------|
|                         |       |      |       |                    |       |                                  |       |                                   |       |                 |       |
| Capital lease  obligations   |       | $         | 9          |                    | $          | 9                                     |       | $                                      | —     |                 | $          | — |   | $ | — |   |
| Long-term debt  obligations  |       | 4,892     |       | 699                     |       | 1,397                                 |       | 1,242                                  |       | 1,554                |       |
| Operating lease  obligations |       | 13,935    |       | 2,703                   |       | 4,926                                 |       | 4,206                                  |       | 2,100                |       |
| Standby letter of credit     |       | 140       |       | —                  |       | —                                |       | —                                 |       | 140                  |       |
| Purchase obligations         |       | 15,597    |       | 10,376                  |       | 5,221                                 |       | —                                 |       | —               |       |
| Other long-term  liabilities |       | 37        |       | 37                      |       | —                                |       | —                                 |       | —               |       |
|                         |       |      |       |                    |       |                                  |       |                                   |       |                 |       |
| **Total**                    | ** ** | **$**     | **34,610** | ** **              | **$**      | **13,824**                            | ** ** | **$**                                  | **11,544** | ** **           | **$**      | **5,448** | ** ** | **$** | **3,794** | ** ** |

 

Long-term debt obligations are the newloans entered into as described above, to finance the purchase and build-outincluding equipment of our new broadcast facility.  Operating lease obligations principallyrelate to commitments for delivery of our signal via satellite.  Purchase obligations relate to purchasecommitments made for the acquisition of programming, advertising and promotionincluding magazine advertisements, talent agreements and sponsorship of a racecar in the Nascar Busch series.

 

38

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**ITEM 7A.****      ****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

At December 31, 2005 and 2004, ourinvestment portfolio included fixed-income securities of $38,830,000 and$741,000, respectively. These securities are subject to interest rate risk andwill decline in value if interest rates increase. However, due to the shortduration of our investment portfolio, an immediate 10% change in interest rateswould have no material impact on our financial condition, operating results orcash flows. Declines in interest rates over time will, however, reduce ourinterest income while increases in interest rates over time may increase ourinterest expense.

 

We do not have a significant level oftransactions denominated in currencies other than U.S. dollars and as a resultwe have very limited foreign currency exchange rate risk. The effect of animmediate 10% change in foreign exchange rates would have no material impact onour financial condition, operating results or cash flows.

 

As of December 31, 2005 and as of the dateof this report, we had aggregate outstanding borrowings of approximately$4,901,000 and $4,717,000 (unaudited), respectively. The rates of interest onour currently outstanding debt are fixed while the rate of interest on ourline-of-credit is variable, but we currently have no outstanding balance underthis credit facility. Because of these reasons, an immediate 10% change ininterest rates would have no material, immediate impact on our financialcondition, operating results or cash flows.

 

**ITEM 8.****         ****FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**I N D E X**

 
| Report of Independent  Registered Public Accounting Firm                                                    |   |
|-------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                        |   |
| Consolidated  Balance Sheets as of December 31, 2005 and 2004                                               |   |
|                                                                                                        |   |
| Consolidated  Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003                 |   |
|                                                                                                        |   |
| Consolidated  Statements of Stockholders’ Equity for the Years Ended December 31, 2005,  2004 and 2003 |   |
|                                                                                                        |   |
| Consolidated Statements of  Cash Flows for the Years Ended December 31, 2005, 2004 and 2003                 |   |
|                                                                                                        |   |
| Notes  to Consolidated Financial Statements                                                                 |   |

 

* * *

 

39

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**Report of IndependentRegistered Public Accounting Firm**

 

To the Stockholders and Board of Directors

Outdoor Channel Holdings, Inc. andSubsidiaries

 

We have audited the accompanyingconsolidated balance sheets of Outdoor Channel Holdings, Inc. and subsidiariesas of December 31, 2005 and 2004, and the related consolidated statements ofoperations, stockholders’ equity and cash flows for each of the years in thethree-year period ended December 31, 2005. These consolidated financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financial statementsbased on our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, theconsolidated financial position of Outdoor Channel Holdings, Inc., andsubsidiaries as of December 31, 2005 and 2004, and their results of operationsand cash flows for each of the years in the three-year period ended December31, 2005, in conformity with accounting principles generally accepted in theUnited States of America.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Outdoor Channel Holdings, Inc. and subsidiaries’internal control over financial reporting as of December 31, 2005, basedon criteria established in “Internal Control-Integrated Framework” issued bythe Committee of Sponsoring Organizations of the Treadway Commission and ourreport dated March 9, 2006 expressed an unqualified opinionthereon.

 
|   | /s/ J.H. Cohn LLP |   |
|--------|-------------------|--------|

 

San Diego, California

March 9, 2006

 

40

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**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES**

**Consolidated BalanceSheets**

**As of December 31, 2005 and 2004**

(In thousands, except per share data)

 
| ** **                                                                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Assets**                                                                                                  |       |     |       |     |       |
| Current assets:                                                                                             |       |     |       |     |       |
| Cash  and cash equivalents                                                                                  |       | $        | 18,276     |     | $          | 13,105 |   |
| Investment  in available-for-sale securities                                                                |       | 38,830   |       | 741      |       |
| Accounts  receivable, net of allowance for doubtful accounts of $275 and $207                               |       | 5,320    |       | 4,848    |       |
| Income  tax refund receivable                                                                               |       | 3,843    |       | 2,291    |       |
| Deferred  tax assets, net                                                                                   |       | 1,015    |       | —   |       |
| Prepaid  programming costs                                                                                  |       | 2,381    |       | 606      |       |
| Other  current assets                                                                                       |       | 689      |       | 135      |       |
| Total  current assets                                                                                       |       | 70,354   |       | 21,726   |       |
|                                                                                                        |       |     |       |     |       |
| Property, plant and  equipment at cost, net:                                                                |       |     |       |     |       |
| Membership  division                                                                                        |       | 3,526    |       | 3,527    |       |
| Outdoor  Channel equipment and improvements                                                                 |       | 12,097   |       | 3,199    |       |
| Property,  plant and equipment, net                                                                         |       | 15,623   |       | 6,726    |       |
| Amortizable intangible  assets                                                                              |       | 1,380    |       | 1,939    |       |
| Goodwill                                                                                                    |       | 44,457   |       | 44,457   |       |
| Other non-amortizable  intangible assets                                                                    |       | 10,573   |       | 10,573   |       |
| Deferred tax assets, net                                                                                    |       | 9,230    |       | 14,074   |       |
| Deposits and other  assets                                                                                  |       | 605      |       | 174      |       |
| Totals                                                                                                      |       | $        | 152,222    |     | $          | 99,669 |   |
|                                                                                                        |       |     |       |     |       |
| **Liabilities and Stockholders’ Equity**                                                               |       |     |       |     |       |
|                                                                                                        |       |     |       |     |       |
| Current liabilities:                                                                                        |       |     |       |     |       |
| Accounts  payable and accrued expenses                                                                      |       | $        | 2,864      |     | $          | 3,705 |   |
| Accrued  severance payments                                                                                 |       | 18       |       | 28       |       |
| Current  portion of long-term debt and capital lease obligations                                            |       | 708      |       | 26       |       |
| Deferred  tax liabilities, net                                                                              |       | —   |       | 494      |       |
| Current  portion of deferred revenue                                                                        |       | 422      |       | 370      |       |
| Customer  deposits                                                                                          |       | 159      |       | 61       |       |
| Total  current liabilities                                                                                  |       | 4,171    |       | 4,684    |       |
|                                                                                                        |       |     |       |     |       |
| Accrued severance  payments, net of current portion                                                         |       | 16       |       | 37       |       |
| Long-term debt and  capital lease obligations, net of current portion                                       |       | 4,193    |       | 9        |       |
| Deferred revenue, net of  current portion                                                                   |       | 1,271    |       | 1,145    |       |
| Derivative instruments                                                                                      |       | 72       |       | —   |       |
| Deferred satellite rent  obligations                                                                        |       | 295      |       | 312      |       |
| Total  liabilities                                                                                          |       | 10,018   |       | 6,187    |       |
|                                                                                                        |       |     |       |     |       |
| Commitments  and contingencies                                                                              |       |     |       |     |       |
| Stockholders’  equity:                                                                                 |       |     |       |     |       |
| Preferred  stock; 25,000 shares authorized; none issued                                                     |       | —   |       | —   |       |
| Common  stock, $0.001 par value; 75,000 shares authorized: 24,409 and 18,394 shares  issued and outstanding |       | 24       |       | 18       |       |
| Additional  paid-in capital                                                                                 |       | 158,700  |       | 111,912  |       |
| Deferred  compensation                                                                                      |       | (1,520   | )          | (1,034   | )          |
| Accumulated  other comprehensive income(loss):                                                              |       |     |       |     |       |
| Net  unrealized losses on derivative instruments                                                            |       | (72      | )          | —   |       |
| Net  unrealized gains on available-for-sale securities                                                      |       | 36       |       | 43       |       |
| Total  accumulated other comprehensive income (loss)                                                        |       | (36      | )          | 43       |       |
| Accumulated  deficit                                                                                        |       | (14,964  | )          | (17,457  | )          |
| Total  stockholders’ equity                                                                            |       | 142,204  |       | 93,482   |       |
| Totals                                                                                                      |       | $        | 152,222    |     | $          | 99,669 |   |

 

See Notes to Consolidated FinancialStatements

 

41

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**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES**

**Consolidated Statements of Operations**

**For The Years Ended December 31, 2005, 2004 and 2003**

(In thousands, except per share data)

** **
| ** **                                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenues:                                                     |       |     |       |     |       |     |       |
| Advertising                                                   |       | $        | 22,769     |     | $          | 21,817   |       | $ | 16,396 |   |
| Subscriber  fees                                              |       | 15,432   |       | 13,391   |       | 10,836   |       |
| Membership  income                                            |       | 4,707    |       | 4,746    |       | 4,456    |       |
|                                                          |       |     |       |     |       |     |       |
| Total  revenues                                               |       | 42,908   |       | 39,954   |       | 31,688   |       |
|                                                          |       |     |       |     |       |     |       |
| Expenses:                                                     |       |     |       |     |       |     |       |
| Satellite  transmission fees                                  |       | 2,497    |       | 2,351    |       | 2,423    |       |
| Advertising                                                   |       | 7,100    |       | 5,596    |       | 3,767    |       |
| Programming                                                   |       | 5,604    |       | 2,521    |       | 1,117    |       |
| Non-cash  compensation expense from exchange of stock options |       | —   |       | 47,983   |       | —   |       |
| Selling,  general and administrative                          |       | 24,413   |       | 21,042   |       | 16,754   |       |
|                                                          |       |     |       |     |       |     |       |
| Total  expenses                                               |       | 39,614   |       | 79,493   |       | 24,061   |       |
|                                                          |       |     |       |     |       |     |       |
| Income  (loss) from operations                                |       | 3,294    |       | (39,539  | )          | 7,627    |       |
|                                                          |       |     |       |     |       |     |       |
| Interest  expense                                             |       | (45      | )          | (5       | )          | (42      | )          |
| Other  income                                                 |       | 943      |       | 120      |       | 68       |       |
|                                                          |       |     |       |     |       |     |       |
| Income  (loss) before income taxes and minority interest      |       | 4,192    |       | (39,424  | )          | 7,653    |       |
|                                                          |       |     |       |     |       |     |       |
| Income  tax provision (benefit)                               |       | 1,699    |       | (15,946  | )          | 3,162    |       |
|                                                          |       |     |       |     |       |     |       |
| Income  (loss) before minority interest                       |       | 2,493    |       | (23,478  | )          | 4,491    |       |
|                                                          |       |     |       |     |       |     |       |
| Minority  interest in net income of consolidated subsidiary   |       | —   |       | 682      |       | 897      |       |
|                                                          |       |     |       |     |       |     |       |
| Net  income (loss)                                            |       | $        | 2,493      |     | $          | (24,160  | )          | $ | 3,594 |   |
|                                                          |       |     |       |     |       |     |       |
| Earnings  (loss) per common share:                            |       |     |       |     |       |     |       |
| Basic                                                         |       | $        | 0.12       |     | $          | (1.51    | )          | $ | 0.26 |   |
| Diluted                                                       |       | $        | 0.10       |     | $          | (1.51    | )          | $ | 0.19 |   |
|                                                          |       |     |       |     |       |     |       |
| Weighted  average number of common shares outstanding:        |       |     |       |     |       |     |       |
| Basic                                                         |       | 21,423   |       | 15,998   |       | 13,824   |       |
| Diluted                                                       |       | 24,732   |       | 15,998   |       | 14,768   |       |

 

See Notes to Consolidated FinancialStatements

 

42

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**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES**

**Consolidated Statements of Stockholders’ Equity**

**For the Years Ended December 31, 2005, 2004 and 2003**

(In thousands)

 
| ** **                                                                                                      | ** ** | **Common Stock** | ** ** | **Common  Stock  Subscriptions** | ** ** | **Treasury**   | ** ** | **Additional  Paid-in** | ** ** | **Deferred** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Retained  Earnings  (Accumulated** | ** ** | ** **   | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------------|------------|----------------------------------|------------|----------------|------------|-------------------------|------------|--------------|------------|-----------------------------------------------|------------|--------------------------------------|------------|--------------|------------|
| ** **                                                                                                      | ** ** | **Shares**       | ** ** | **Amount**                       | ** ** | **Receivable** | ** ** | **Stock**               | ** ** | **Capital**  | ** ** | **Compensation**                              | ** ** | **(Loss)**                           | ** ** | **Deficit)** | ** ** | **Total** | ** ** |
| Balance, January 1, 2003                                                                                        |       | 5,369            |       | $                                | 107        |           | $          | (262                    | )          | $            | (400       | )                                             | $          | 3,604                                |       | $            | —     |   | $ | 4 |   | $ | 3,109 |   | $ | 6,162 |   |
|                                                                                                            |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |
| Comprehensive Income:                                                                                           |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |
| Net income                                                                                                      |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       | 3,594        |       | 3,594 |   |
| Effect of change in fair value of  available-for-sale securities, net of deferred taxes of $20                  |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       | 30                                   |       |         |       | 30 |   |
| Total comprehensive income                                                                                      |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       | 3,624 |   |
|                                                                                                            |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |
| Subscriptions receivable paid through  provision of services and in cash                                        |       |             |       |                             |       | 232            |       |                    |       |         |       |                                          |       |                                 |       |         |       | 232 |   |
|                                                                                                            |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |
| Tax benefit from exercise of  non-qualified stock options and deferred compensation                             |       |             |       |                             |       |           |       |                    |       | 2,064        |       |                                          |       |                                 |       |         |       | 2,064 |   |
|                                                                                                            |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |
| Common stock issued upon exercise of  stock options for cash, provision of services and offset of notes payable |       | 384              |       | 8                                |       |           |       |                    |       | 928          |       |                                          |       |                                 |       |         |       | 936 |   |
|                                                                                                            |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |
| Common stock issued to former  officer/director for payment of deferred compensation                            |       | 134              |       | 3                                |       |           |       |                    |       | 172          |       |                                          |       |                                 |       |         |       | 175 |   |
|                                                                                                            |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |
| Balance, December 31, 2003                                                                                      |       | 5,887            |       | $                                | 118        |           | $          | (30                     | )          | $            | (400       | )                                             | $          | 6,768                                |       | $            | —     |   | $ | 34 |   | $ | 6,703 |   | $ | 13,193 |   |

 

43

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| ** **                                                                                    | ** ** | **Common Stock** | ** ** | **Common  Stock  Subscriptions** | ** ** | **Treasury**   | ** ** | **Additional  Paid-in** | ** ** | **Deferred** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Retained  Earnings  (Accumulated** | ** ** | ** **   | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------|------------|----------------------------------|------------|----------------|------------|-------------------------|------------|--------------|------------|-----------------------------------------------|------------|--------------------------------------|------------|--------------|------------|
| ** **                                                                                    | ** ** | **Shares**       | ** ** | **Amount**                       | ** ** | **Receivable** | ** ** | **Stock**               | ** ** | **Capital**  | ** ** | **Compensation**                              | ** ** | **(Loss)**                           | ** ** | **Deficit)** | ** ** | **Total** | ** ** |
| Balance, December 31, 2003                                                                    |       | 5,887            |       | $                                | 118        |           | $          | (30                     | )          | $            | (400       | )                                             | $          | 6,768                                |       | $            | —     |   | $ | 34 |   | $ | 6,703 |   | $ | 13,193 |   |
|                                                                                          |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |
| Comprehensive Income:                                                                         |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       | (24,160      | )          | (24,160 | ) |
| Net loss                                                                                      |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |
| Effect of change in fair value of  available-for-sale securities, net of deferred taxes of $4 |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       | 9                                    |       |         |       | 9 |   |
| Total comprehensive income                                                                    |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       | (24,151 | ) |
|                                                                                          |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |
| Effect of 5 for 2 split and change in  par value                                              |       | 8,830            |       | (103                             | )          |           |       |                    |       | 103          |       |                                          |       |                                 |       |         |       | — |   |
|                                                                                          |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |
| Common stock issued upon exercise of  stock options                                           |       | 723              |       |                             |       |           |       |                    |       | 1,285        |       |                                          |       |                                 |       |         |       | 1,285 |   |
|                                                                                          |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |
| Stock subscriptions paid                                                                      |       |             |       |                             |       | 30             |       |                    |       |         |       |                                          |       |                                 |       |         |       | 30 |   |
|                                                                                          |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |
| Issuance of restricted stock to  employees for services to be rendered                        |       | 75               |       |                             |       |           |       |                    |       | 1,043        |       | (1,043                                        | )          |                                 |       |         |       | — |   |
|                                                                                          |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |
| Amortization of deferred compensation                                                         |       |             |       |                             |       |           |       |                    |       |         |       | 9                                             |       |                                 |       |         |       | 9 |   |
|                                                                                          |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |
| Stock exchanged for stock of subsidiary                                                       |       | 3,070            |       | 3                                |       |           |       |                    |       | 54,100       |       |                                          |       |                                 |       |         |       | 54,103 |   |
|                                                                                          |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |
| Effect of exchange of stock options for  stock options of subsidiary                          |       |             |       |                             |       |           |       |                    |       | 47,983       |       |                                          |       |                                 |       |         |       | 47,983 |   |
|                                                                                          |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |
| Tax benefit from exercise of stock  options                                                   |       |             |       |                             |       |           |       |                    |       | 1,030        |       |                                          |       |                                 |       |         |       | 1,030 |   |
|                                                                                          |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |
| Retirement of treasury stock                                                                  |       | (191             | )          |                             |       |           |       | 400                     |       | (400         | )          |                                          |       |                                 |       |         |       | — |   |
|                                                                                          |       |             |       |                             |       |           |       |                    |       |         |       |                                          |       |                                 |       |         |       |   |   |
| Balance, December 31, 2004                                                                    |       | 18,394           |       | $                                | 18         |           | $          | —                  |       | $            | —     |                                          | $          | 111,912                              |       | $            | (1,034     | ) | $ | 43 |   | $ | (17,457 | ) | $ | 93,482 |   |

 

44

----

** **
| ** **                                                                                      | ** ** | **Common Stock** | ** ** | **Common  Stock  Subscriptions** | ** ** | **Treasury**   | ** ** | **Additional  Paid-in** | ** ** | **Deferred** | ** ** | **Accumulated   Other  Comprehensive  Income** | ** ** | **Retained  Earnings  (Accumulated** | ** ** | ** **   | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------|------------|----------------------------------|------------|----------------|------------|-------------------------|------------|--------------|------------|------------------------------------------------|------------|--------------------------------------|------------|--------------|------------|
| ** **                                                                                      | ** ** | **Shares**       | ** ** | **Amount**                       | ** ** | **Receivable** | ** ** | **Stock**               | ** ** | **Capital**  | ** ** | **Compensation**                               | ** ** | **(Loss)**                           | ** ** | **Deficit)** | ** ** | **Total** | ** ** |
| Balance, December 31, 2004                                                                      |       | 18,394           |       | $                                | 18         |           | $          | —                  |       | $            | —     |                                           | $          | 111,912                              |       | $            | (1,034     | ) | $ | 43 |   | $ | (17,457 | ) | $ | 93,482 |   |
|                                                                                            |       |             |       |                             |       |           |       |                    |       |         |       |                                           |       |                                 |       |         |       |   |   |
| Comprehensive Income:                                                                           |       |             |       |                             |       |           |       |                    |       |         |       |                                           |       |                                 |       |         |       |   |   |
| Net income                                                                                      |       |             |       |                             |       |           |       |                    |       |         |       |                                           |       |                                 |       | 2,493        |       | 2,493 |   |
| Effect of change in fair value of  available-for-sale securities, net of deferred taxes of ($7) |       |             |       |                             |       |           |       |                    |       |         |       |                                           |       | (7                                   | )          |         |       | (7 | ) |
| Impact of cash flow hedge                                                                       |       |             |       |                             |       |           |       |                    |       |         |       |                                           |       | (72                                  | )          |         |       | (72 | ) |
| Total comprehensive income                                                                      |       |             |       |                             |       |           |       |                    |       |         |       |                                           |       |                                 |       |         |       | 2,414 |   |
|                                                                                            |       |             |       |                             |       |           |       |                    |       |         |       |                                           |       |                                 |       |         |       |   |   |
| Common stock issued upon exercise of  stock options                                             |       | 2,448            |       | 2                                |       |           |       |                    |       | 2,732        |       |                                           |       |                                 |       |         |       | 2,734 |   |
|                                                                                            |       |             |       |                             |       |           |       |                    |       |         |       |                                           |       |                                 |       |         |       |   |   |
| Issuance of restricted stock to  employees for services to be rendered, net of forfeited shares |       | 67               |       |                             |       |           |       |                    |       | 861          |       | (861                                           | )          |                                 |       |         |       | — |   |
|                                                                                            |       |             |       |                             |       |           |       |                    |       |         |       |                                           |       |                                 |       |         |       |   |   |
| Common stock issued upon sale to public,  net of offering costs of $1,066                       |       | 3,500            |       | 4                                |       |           |       |                    |       | 43,346       |       |                                           |       |                                 |       |         |       | 43,350 |   |
|                                                                                            |       |             |       |                             |       |           |       |                    |       |         |       |                                           |       |                                 |       |         |       |   |   |
| Amortization of deferred compensation                                                           |       |             |       |                             |       |           |       |                    |       |         |       | 375                                            |       |                                 |       |         |       | 375 |   |
|                                                                                            |       |             |       |                             |       |           |       |                    |       |         |       |                                           |       |                                 |       |         |       |   |   |
| Change in estimate of tax benefit from  exercise of stock options                               |       |             |       |                             |       |           |       |                    |       | (1,027       | )          |                                           |       |                                 |       |         |       | (1,027 | ) |
|                                                                                            |       |             |       |                             |       |           |       |                    |       |         |       |                                           |       |                                 |       |         |       |   |   |
| Tax benefit from exercise of stock  options                                                     |       |             |       |                             |       |           |       |                    |       | 868          |       |                                           |       |                                 |       |         |       | 868 |   |
|                                                                                            |       |             |       |                             |       |           |       |                    |       |         |       |                                           |       |                                 |       |         |       |   |   |
| Tax benefit from vesting of restricted  stock                                                   |       |             |       |                             |       |           |       |                    |       | 8            |       |                                           |       |                                 |       |         |       | 8 |   |
|                                                                                            |       |             |       |                             |       |           |       |                    |       |         |       |                                           |       |                                 |       |         |       |   |   |
| Balance, December 31, 2005                                                                      |       | 24,409           |       | $                                | 24         |           | $          | —                  |       | $            | —     |                                           | $          | 158,700                              |       | $            | (1,520     | ) | $ | (36 | ) | $ | (14,964 | ) | $ | 142,204 |   |

 

See Notes to Consolidated FinancialStatements

 

45

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**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES**

**Consolidated Statementsof Cash Flows**

**Years Ended December 31, 2005, 2004 and 2003**

(In thousands)

 
| ** **                                                                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Operating activities:                                                                           |       |     |       |     |       |     |       |
| Net income (loss)                                                                               |       | $        | 2,493      |     | $          | (24,160  | )          | $ | 3,594 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities:       |       |     |       |     |       |     |       |
| Depreciation and amortization                                                                   |       | 2,234    |       | 1,259    |       | 880      |       |
| Provision for doubtful accounts                                                                 |       | 214      |       | 164      |       | 327      |       |
| Costs of services offset against subscription  receivable                                       |       | —   |       | —   |       | 251      |       |
| Realized gain on sale of available-for-sale  securities                                         |       | —   |       | (34      | )          | (13      | )          |
| Minority interest in net income of  consolidated subsidiary                                     |       | —   |       | 682      |       | 897      |       |
| Tax benefit from exercise of stock options  and issuance of shares to pay deferred compensation |       | —   |       | 1,030    |       | 2,064    |       |
| Deferred tax provision (benefit), net                                                           |       | 3,190    |       | (17,619  | )          | 70       |       |
| Compensation expense from exchange of stock  options                                            |       | —   |       | 47,983   |       | —   |       |
| Amortization of deferred compensation                                                           |       | 375      |       | 9        |       | —   |       |
| Changes in operating assets and  liabilities:                                                   |       |     |       |     |       |     |       |
| Accounts receivable                                                                             |       | (686     | )          | (1,215   | )          | (1,651   | )          |
| Income tax refund receivable                                                                    |       | (1,552   | )          | (1,126   | )          | —   |       |
| Prepaid programming costs                                                                       |       | (1,775   | )          | (606     | )          | —   |       |
| Other current assets                                                                            |       | (554     | )          | 314      |       | (1,514   | )          |
| Deposits and other assets                                                                       |       | (444     | )          | (133     | )          | 155      |       |
| Accounts payable and accrued expenses                                                           |       | (841     | )          | 1,914    |       | 874      |       |
| Customer deposits                                                                               |       | 98       |       | 61       |       | —   |       |
| Accrued severance payments                                                                      |       | (31      | )          | (291     | )          | —   |       |
| Deferred revenue                                                                                |       | 178      |       | (119     | )          | 324      |       |
| Deferred satellite rent obligations                                                             |       | (17      | )          | (68      | )          | (68      | )          |
| Net cash provided by operating activities                                                       |       | 2,882    |       | 8,045    |       | 6,190    |       |
|                                                                                            |       |     |       |     |       |     |       |
| Investing activities:                                                                           |       |     |       |     |       |     |       |
| Purchases of property, plant and equipment                                                      |       | (10,559  | )          | (2,549   | )          | (1,924   | )          |
| Purchases of available-for-sale securities                                                      |       | (64,652  | )          | (255     | )          | (443     | )          |
| Proceeds from sale of available-for-sale  securities                                            |       | 26,550   |       | 85       |       | 36       |       |
| Costs related to acquisition of minority  interest                                              |       | —   |       | (593     | )          | —   |       |
| Proceeds from notes receivable                                                                  |       | —   |       | —   |       | 36       |       |
| Net cash used in investing activities                                                           |       | (48,661  | )          | (3,312   | )          | (2,295   | )          |
|                                                                                            |       |     |       |     |       |     |       |
| Financing activities:                                                                           |       |     |       |     |       |     |       |
| Net payments of stockholder loans                                                               |       | —   |       | —   |       | (15      | )          |
| Principal payments on long-term debt and  capital leases                                        |       | (84      | )          | (157     | )          | (182     | )          |
| Proceeds from issuance of long-term debt                                                        |       | 4,950    |       |     |       |     |       |
| Proceeds from exercise of stock options                                                         |       | 2,734    |       | 1,285    |       | 268      |       |
| Proceeds from common stock subscriptions  receivable                                            |       | —   |       | 30       |       | —   |       |
| Proceeds from the sale of common stock, net  of offering costs                                  |       | 43,350   |       | —   |       | —   |       |
| Net cash provided by financing activities                                                       |       | 50,950   |       | 1,158    |       | 71       |       |
|                                                                                            |       |     |       |     |       |     |       |
| Net increase in cash and cash equivalents                                                       |       | 5,171    |       | 5,891    |       | 3,966    |       |
|                                                                                            |       |     |       |     |       |     |       |
| Cash and cash equivalents, beginning of  year                                                   |       | 13,105   |       | 7,214    |       | 3,248    |       |
|                                                                                            |       |     |       |     |       |     |       |
| Cash and cash equivalents, end of year                                                          |       | $        | 18,276     |     | $          | 13,105   |       | $ | 7,214 |   |

 

46

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| ** **                                                                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Supplemental disclosure of cash flow  information:                                            |       |     |       |     |       |     |       |
|                                                                                          |       |     |       |     |       |     |       |
| Interest paid                                                                                 |       | $        | 45         |     | $          | 5        |       | $ | 42 |   |
|                                                                                          |       |     |       |     |       |     |       |   |   |   |
| Income taxes paid                                                                             |       | $        | 123        |     | $          | 1,139    |       | $ | 2,083 |   |
|                                                                                          |       |     |       |     |       |     |       |
| Supplemental disclosures of non-cash  investing and financing activities:                     |       |     |       |     |       |     |       |
|                                                                                          |       |     |       |     |       |     |       |
| Issuance of restricted stock to employees  for services rendered                              |       | $        | 861        |     | $          | 1,043    |       | $ | — |   |
|                                                                                          |       |     |       |     |       |     |       |
| Retirement of treasury stock                                                                  |       | $        | —     |     | $          | 400      |       | $ | — |   |
|                                                                                          |       |     |       |     |       |     |       |   |   |   |
| Fair value of common stock issued to  acquire minority interest in subsidiary                 |       | $        | —     |     | $          | 49,853   |       | $ | — |   |
|                                                                                          |       |     |       |     |       |     |       |   |   |   |
| Effect of net increase in fair value of  available-for-sale securities, net of deferred taxes |       | $        | (7         | )        | $          | 9        |       | $ | 30 |   |
|                                                                                          |       |     |       |     |       |     |       |   |   |   |
| Exchange of stock options for non-employee  stock options of subsidiary                       |       | $        | —     |     | $          | 4,250    |       | $ | — |   |
|                                                                                          |       |     |       |     |       |     |       |   |   |   |
| Note receivable from stockholder offset  against accrued bonus                                |       | $        | —     |     | $          | —   |       | $ | 45 |   |
|                                                                                          |       |     |       |     |       |     |       |   |   |   |
| Receivable from exercise of stock options  offset against loan from stockholders              |       | $        | —     |     | $          | —   |       | $ | 623 |   |
|                                                                                          |       |     |       |     |       |     |       |   |   |   |
| Common stock issued to former  officer/director for payment of deferred compensation          |       | $        | —     |     | $          | —   |       | $ | 175 |   |
|                                                                                               |            |          |            |          |            |          |            |  |  |  |  |  |  |

 

See Notes to Consolidated FinancialStatements.

 

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**OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES**

**Notes to ConsolidatedFinancial Statements**

(In thousands, except per share data)

 

**Note 1 - Organization andBusiness**

 

Description of Operations

 

Outdoor Channel Holdings, Inc. or “OutdoorChannel Holdings,” is incorporated under the laws of the State of Delaware. Collectively,with its subsidiaries, the terms “we,” “us,” “our” and the “Company” refer toOutdoor Channel Holdings, Inc. as a combined entity, except where noted orwhere the context makes clear the reference is only to Outdoor ChannelHoldings, Inc. or one of our subsidiaries. The Company acquired the remaining17.6% minority interest in our subsidiary, The Outdoor Channel, Inc. (“TOC”),which it did not previously hold, on September 8, 2004. TOC operates The OutdoorChannel, which is a national television network devoted to traditional outdooractivities, such as hunting, fishing and shooting sports, as well as off-roadmotor sports and other related lifestyle programming. TOC also operates OutdoorChannel 2 HD, which also is a national television network with similarprogramming as TOC’s but is produced utilizing high definition technology.

 

Our revenues include advertising fees fromadvertisements aired on The Outdoor Channel, including fees paid by outside producersto purchase advertising time in connection with the airing of their programs onThe Outdoor Channel, and from advertisements in “Gold Prospectors &Treasure Hunters in the Great Outdoors” magazine; subscriber fees paid by cableand satellite service providers that air The Outdoor Channel; membership feesfrom members in both LDMA-AU, Inc. (“Lost Dutchman’s”) and Gold Prospector’sAssociation of America, LLC (“GPAA”); and other income including products andservices related to gold prospecting, gold expositions, expeditions andoutings.

 

Other business activities consist of thepromotion and sale of a gold prospecting expedition to our Cripple Riverproperty located near Nome, Alaska, and the sale of memberships in LostDutchman’s which entitle members to engage in gold prospecting on our Arizona,California, Colorado, Georgia, Michigan, North Carolina, Oregon, and SouthCarolina properties. We have signed an agreement with another organization forthe mutual use of these and other properties.

 

Outdoor Channel Holdings also wholly-owns43455 BPD, LLC which owns the building housing our broadcast facility.

 

**Note 2 - Summary ofSignificant Accounting Policies**

 

Principles of Consolidation

 

The consolidated financial statementsinclude the accounts of Outdoor Channel Holdings and its subsidiaries, GoldProspector’s Association of America, Inc., Lost Dutchman’s, 43455 BPD, LLC,GPAA and TOC. All material intercompany accounts and transactions have beeneliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates, judgments and assumptions. Webelieve that our estimates, judgments and assumptions made when accounting foritems and matters such as customer retention patterns, allowance for bad debts,useful lives of assets, asset valuations including cash flow projections,recoverability of assets, potential unasserted claims under contractualobligations, income taxes, reserves and other provisions and contingencies arereasonable, based on information available at the time they are made. Theseestimates, judgments and assumptions can affect reported amounts of assets andliabilities as of the dates of the consolidated balance sheet and reportedamount of revenues and expenses for the periods presented. Accordingly, actualresults could materially differ from those estimates.

 

Cash and Cash Equivalents

 

We consider all highly-liquid investmentswith maturities of three months or less when acquired to be cash equivalents.

 

Subscriber Acquisition Fees

 

Subscriber acquisition fees are paid toobtain carriage on certain pay television distributors’ systems. Under certainof these agreements with pay television distributors, TOC is obligated to paysubscriber acquisition fees to the pay television distributors if they meetdefined criteria for the provision of additional carriage for The OutdoorChannel on the pay television distributors’ systems. Such costs are accruedwhen TOC receives verification that the distributors have met the contractualcriteria and have provided the additional carriage.

 

48

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Subscriber Acquisition Fees (concluded)

 

Subscriber acquisition fees are amortizedover the contractual period that the pay television distributor is required tocarry the newly acquired TOC subscriber as a reduction of the subscriber feerevenue the pay television distributor is obligated to pay us. If theamortization expense exceeds the subscriber fee revenue recognized on a perdistributor basis, the excess amortization is included as a component ofselling, general and administrative expenses. We assess the recoverability of these costs periodically by comparingthe net carrying amount of the subscriber acquisition fees to the estimates offuture subscriber fees and advertising revenues. We also assess therecoverability when events such as changes in distributor relationships occuror other indicators suggest impairment.

 

PrepaidProgramming Costs

 

We produce a portion of the programming we air on our channels in-houseas opposed to acquiring the programming from third party producers. The cost ofproduction is expensed when the show airs. As such, at year-end we have incurredcosts for programming that is yet to air. These costs are accumulated on thebalance sheet as “Prepaid programming costs.” Costs of specific shows will becharged to programming expense based on anticipated airings, when the programairs and the related advertising revenue is recognized.

 

Property and Equipment

 

Property and equipment arestated at historical cost. Depreciation of equipment is calculated using thestraight-line method over the estimated useful lives of the assets which range from 5 to 15 years.

 

Amortizable Intangible Assets

 

Costs of customer relationships acquiredin the Company’s acquisition of the minority interest in TOC are beingamortized over a period of either 3 or 4 years. TOC has the exclusive right tothe trademark The Outdoor Channel. The costs of acquiring the trademark arebeing amortized on a straight-line basis over an estimated useful life of 15years.

 

Impairment of Certain Long-Lived Assets

 

The impairment of long-lived assets withfinite lives such as property and equipment, customer relationships andtrademarks, is recognized when events or changes in circumstances indicate thatthe undiscounted cash flows estimated to be generated by such assets are lessthan their carrying value and, accordingly, all or a portion of such carryingvalue may not be recoverable. Impairment losses are then measured by comparingthe fair value of assets to their carrying amounts. We did not record anycharges for the impairment of long-lived assets in 2005, 2004 or 2003.

 

Goodwill and Other Intangible Assets notSubject to Amortization

 

Goodwill represents the excess of costover the fair value of net assets of an acquired business. Under Statement ofFinancial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”(“SFAS 142”), goodwill is deemed to have an indefinite life and is not subjectto amortization over an estimated finite useful life but is tested forimpairment annually under a two-step approach, or more frequently, if events orchanges in circumstances indicate that the asset might be impaired.

 

Impairment is assessed at the “reportingunit” level by applying a fair value-based test. A reporting unit is defined asthe same as, or one level below the operating segment level as described inStatement of Financial Accounting Standards No. 131, “Disclosures aboutSegments of an Enterprise and Related Information” (“SFAS 131”). Under thetwo-step approach, the carrying amount of the reporting unit is compared withits fair value. If the carrying amount of the reporting unit exceeds its fairvalue, the “implied” fair value (as defined in SFAS 142) of the reporting unit’sgoodwill is compared with its carrying amount to measure the amount of theimpairment loss, if any. When the carrying amount of the reporting unit’s goodwillexceeds the implied fair value of the goodwill, an impairment loss isrecognized in an amount equal to the excess.

 

49

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The cost allocated to the acquisition ofmultiple system operator relationships is an intangible asset that is alsodeemed to have an indefinite life and, accordingly, is not subject toamortization under SFAS 142. We are required to evaluate the remaining usefullife of these relationships each reporting period to determine whether circumstancescontinue to support an indefinite useful life. If we determine the life is nolonger indefinite, we will begin to amortize the costs of these multiple systemoperator relationships over their remaining lives. In addition, such costsshall be tested for impairment annually or more frequently if circumstancesindicate that the asset might be impaired. The impairment test shall consist ofa comparison of the fair value of the asset with its carrying amount. If thecarrying amount exceeds its fair value, an impairment loss shall be recognizedin an amount equal to that excess. As required by SFAS 142, we completed ourannual impairment tests for goodwill and other assets not subject to amortizationat the end of 2005 and 2004 (we had no assets subject to such testing at theend of 2003) and determined that there was no impairment.

 

Derivative Instruments and Certain HedgingActivity

 

We account for derivatives and hedgingactivity under Statement of Financial Accounting Standards No. 133 (“SFAS 133”)“Accounting for Derivative Instruments and Certain Hedging Activities” andStatement of Financial Accounting Standards No. 138 (“SFAS 138”) “Accountingfor Derivative Instruments and Certain Hedging Activity, an amendment of SFASNo. 133.”  All derivatives are recognizedon the balance sheet at their fair value. On the date we enter into a derivative contract, we designate thederivative as a hedge of the variability of cash flows to be paid related to arecognized liability (“cash flow hedge”). We formally document all relationships between hedging instruments andhedged items, as well as the risk-management objective and strategy forundertaking various hedge transactions. This process includes linking all derivatives that are designated ascash flow hedges to specific liabilities on the balance sheet.  We also formally assess, both at the hedge’sinception and on an ongoing basis, whether the derivatives that are used inhedging transactions are highly effective in offsetting changes in cash flowsof hedged items.  When it is determinedthat a derivative is not highly effective as a hedge or that it has ceased tobe a highly effective hedge, we discontinue hedge accounting prospectively.

 

Advertising

 

We expense the cost of advertising andpromotions as incurred.

 

Revenue Recognition

 

We generate revenues from sales oftelevision and print advertising, from cable and satellite subscriber fees,from membership fees and from sales of related products and services.

 

TOC’s advertising revenues are recognizedwhen the advertisement is aired and the collectibility of fees is reasonablyassured. Advertising revenues from advertisements in our bi-monthly magazineare recognized when the magazine is distributed. Subscriber fees for TheOutdoor Channel are recognized in the period the programming is aired by thedistributor.

 

Broadcast and national television networkadvertising contracts may guarantee the advertiser a minimum audience for itsadvertisements over the term of the contracts. We provide the advertiser withadditional advertising time if we do not deliver the guaranteed audience size.The amount of additional advertising time is generally based upon thepercentage of shortfall in audience size. This requires us to make estimates ofthe audience size that will be delivered throughout the terms of the contracts.We base our estimate of audience size on information provided by ratingsservices and our historical experience. If we determine we will not deliver theguaranteed audience, an accrual for “make-good” advertisements is recorded as areduction of revenue. The estimated make-good accrual is adjusted throughoutthe terms of the advertising contracts.

 

Lost Dutchman’s memberships arecontractual arrangements that provide members with prospecting and mineralrights and the use of land and facilities for camping and recreational vehicleparking. Lost Dutchman’s memberships sold by the Company generally have paymentterms that provide for a down payment and monthly installments and arenon-interest bearing and unsecured. Revenues are generally recognized on astraight-line basis over the estimated average life (7 years) of

 

50

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the Lost Dutchman’s membership. We sellGPAA memberships for one to four years and it also offers a GPAA lifetimemembership (“Gold Life”). The majority of the memberships are for one year.Multi-year GPAA membership revenues are recognized on a straight-line basisover the life of a membership or an estimated life of 15 years for a lifetimemembership. Merchandise sales for GPAA are recognized as sales when the productis shipped and collection of the receivable is probable. Merchandise sales forGPAA are included in the “Membership income” revenue category.

 

We do not record any receivables arisingunder these contracts or memberships. Accordingly, revenues recognized do notexceed the total of the cash payments received and cash received in excess ofrevenue earned is recorded as deferred revenue. Revenues from the expeditionsare recognized when they are taken in June through August each year. Revenuesfrom outings and gold expositions are recognized at the time of the event.

 

We maintain an allowance for doubtfulaccounts for estimated losses that may arise if any of our customers are unableto make required payments. Management specifically analyzes the age of customerbalances, historical bad debt experience, customer credit-worthiness and tradepublications regarding the financial health of our larger customers and changesin customer payment terms when making estimates of the uncollectability of ourtrade accounts receivable balances. If we determine that the financialcondition of any of our customers deteriorated or improved, whether due tocustomer specific or general economic conditions, we make appropriateadjustments to the allowance.

 

Income Taxes

 

We account for income taxes pursuant tothe asset and liability method which requires deferred income tax assets andliabilities to be computed for temporary differences between the financialstatement and tax bases of assets and liabilities that will result in taxableor deductible amounts in the future based on enacted laws and rates applicableto the periods in which the temporary differences are expected to affecttaxable income. Valuation allowances are established when necessary to reducedeferred tax assets to the amounts expected to be realized. The income taxprovision is the tax payable or refundable for the period plus or minus thechange during the period in deferred tax assets and liabilities. Tax benefitsarising from the exercise of stock options and the issuance of common shares topay deferred compensation are recorded as additional paid-in capital in theperiod the benefits are earned or realized.

 

Earnings (Loss) Per Share

 

Effective September 15, 2004, we effecteda 5 for 2 split of our common stock in connection with our reincorporation inDelaware. All share and per share data has been adjusted where appropriate toreflect this stock split. In addition, the par value of our common stock waschanged from $0.02 to $0.001 per share.

 

We have presented “basic” and “diluted”earnings (loss) per common share in the accompanying consolidated statements ofoperations in accordance with the provisions of Statement of Financial AccountingStandards No. 128, “Earnings Per Share”(“SFAS 128”). Basic earnings (loss) per common share is calculated bydividing net income (loss) by the weighted average number of common sharesoutstanding during each period. The calculation of diluted earnings (loss) percommon share is similar to that of basic earnings (loss) per common share,except that the denominator is increased to include the number of additionalcommon shares that would have been outstanding if all potentially dilutivecommon shares of the Company were issued during the period if any suchissuances would have had a dilutive effect.

 

The computation of diluted earnings pershare takes into account the effects on the weighted average number of commonshares outstanding of the assumed exercise of the outstanding stock options ofthe Company for the years ended December 31, 2005 and 2003, adjusted for theapplication of the treasury stock method. The computation of diluted loss percommon share for the year ended December 31, 2004 does not take into accounteither (i) the outstanding stock options of the Company because the effect oftheir assumed exercise would be anti-dilutive; or (ii) the increase in the netloss attributable to the increase in minority interest in the net income of TOCthat results from the assumed exercise of all of TOC’s outstanding stockoptions prior to the exchange of those options for our options on September 8,2004 because the effects of the assumed exercise of TOC stock options were notmaterial. The computation of diluted earnings per share for 2003 takes intoaccount the reduction in net income applicable to common stock attributable tothe increase in the minority interest (from approximately 13% to 33%) in thenet income of TOC that results from the assumed exercise of its outstandingstock options.  The greatest number ofshares potentially issuable by us upon the exercise of stock options in anyquarter during 2005, 2004 and 2003 that was not reflected in the weightedaverage number of common shares used in the computation of diluted earnings(loss) per share because their effect would have been anti-dilutive totaled965, 5,630 and 725, respectively.

 

51

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The following table summarizes thecalculation of the weighted average common shares outstanding for basic anddiluted earnings per share for the years ended December 31, 2005, 2004 and2003:

** **
| ** **                                                                                                                                                         | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Numerators:                                                                                                                                                        |       |     |       |     |       |     |       |
| Net income (loss) —basic                                                                                                                                      |       | $        | 2,493      |     | $          | (24,160  | )          | $ | 3,594 |   |
| Deduct increase in minority interest  attributable to assumed exercise of dilutive stock options of TOC (see Note  11)                                             |       | —   |       | —   |       | (777     | )          |
| Net income (loss) — diluted                                                                                                                                   |       | $        | 2,493      |     | $          | (24,160  | )          | $ | 2,817 |   |
|                                                                                                                                                               |       |     |       |     |       |     |       |
| Denominators:                                                                                                                                                      |       |     |       |     |       |     |       |
| Weighted average common shares outstanding—basic                                                                                                              |       | 21,423   |       | 15,998   |       | 13,824   |       |
|                                                                                                                                                               |       |     |       |     |       |     |       |
| Dilutive effect of potentially issuable  common shares upon exercise of stock options of the Company as adjusted for  the application of the treasury stock method |       | 3,309    |       | —   |       | 944      |       |
| Diluted weighted average common shares  outstanding —diluted                                                                                                  |       | 24,732   |       | 15,998   |       | 14,768   |       |

 

Treasury Stock

 

We adopted the treasury stock method inaccounting for TOC’s investment in Outdoor Channel Holdings. This was inaccordance with ARB No. 51 “Consolidated Financial Statements”, which providesthat in consolidation the cost of an investment in a parent’s common stock istreated as a cost of treasury shares. The weighted average number of commonshares outstanding was adjusted to reflect TOC’s minority stockholders’ownership percentage of treasury shares.

 

Subsequent to the acquisition of theminority interest in TOC, all common shares of Outdoor Channel Holdings ownedby TOC were retired.

 

Stock Options

 

Statement of Financial AccountingStandards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”),provides for the use of a fair value based method of accounting for employeestock compensation. However, SFAS 123 also allows an entity to continue tomeasure compensation cost for stock options granted to employees using theintrinsic value method of accounting prescribed by Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), whichonly requires charges to compensation expense for the excess, if any, of thefair value of the underlying stock at the date a stock option is granted (or atan appropriate subsequent measurement date) over the amount the employee mustpay to acquire the stock, if such amounts differ materially. We have elected tocontinue to account for employee stock options using the intrinsic value methodunder APB 25. By making that election, we are required by SFAS 123 andStatement of Financial Accounting Standards No. 148, “Accounting forStock-Based Compensation - Transition and Disclosure” to provide pro formadisclosures of net income (loss) and earnings (loss) per share as if a fairvalue based method of accounting had been applied.

 

52

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Our historical net income (loss) andearnings (loss) per common share and pro forma net income (loss) and pro formaearnings (loss) per common share assuming compensation cost had been determinedfor 2005, 2004 and 2003 based on the fair value at the grant date for allawards by us, using the Black-Scholes option pricing model consistent with theprovisions of SFAS 123, and amortized ratably over the vesting period are setforth below:

 
| ** **                                                                                                                               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income (loss):                                                                                                                       |       |     |       |     |       |     |       |
| As reported                                                                                                                              |       | $        | 2,493      |     | $          | (24,160  | )          | $ | 3,594 |   |
| Add: Stock-based employee compensation expense  included in reported net loss, net of tax effects*                                       |       | —   |       | 28,885   |       | —   |       |
| Deduct: Stock-based employee compensation  expense assuming a fair value based method had been used for all awards, net  of tax effects* |       | (1,729   | )          | (2,623   | )          | (311     | )          |
|                                                                                                                                     |       |     |       |     |       |     |       |
| Pro forma – basic and diluted                                                                                                       |       | $        | 764        |     | $          | 2,102    |       | $ | 3,283 |   |
|                                                                                                                                     |       |     |       |     |       |     |       |
| Basic earnings (loss) per share:                                                                                                         |       |     |       |     |       |     |       |
| As reported                                                                                                                              |       | $        | 0.12       |     | $          | (1.51    | )          | $ | 0.26 |   |
| Pro forma                                                                                                                                |       | $        | 0.04       |     | $          | 0.13     |       | $ | 0.24 |   |
| Diluted earnings (loss) per common share:                                                                                                |       |     |       |     |       |     |       |
| As reported                                                                                                                              |       | $        | 0.10       |     | $          | (1.51    | )          | $ | 0.19 |   |
| Pro forma                                                                                                                                |       | $        | 0.03       |     | $          | 0.13     |       | $ | 0.17 |   |

 

----

*See Note 3

 

As a result of amendments of SFAS 123, wewill be required to charge the fair value of all employee stock options as ofthe date of grant to expense over the vesting period beginning with our fiscalquarter ending March 31, 2006. We expect the adoption of SFAS 123 (R) willrequire us to record additional compensation expense which could have amaterial adverse impact on our historical financial statements in periodssubsequent to adoption.

 

In accordance with the provisions of SFAS123, all other issuances of common stock, stock options, warrants or otherequity instruments to employees and non-employees as the consideration forgoods or services received by the Company are accounted for based on the fairvalue of the equity instruments issued (unless the fair value of theconsideration received can be more reliably measured). Generally, the fairvalue of any options, warrants or similar equity instruments issued isestimated based on the Black-Scholes option-pricing model.

 

Additional Required Pro Forma DisclosuresRelated to Employee Stock Options

 

The fair value of each option granted byus in 2005, 2004 and 2003 was estimated on the date of grant using theBlack-Scholes options pricing model with the following assumptions:

 
| ** **                  | ** ** | **2005**       | ** ** | **2004**         | ** ** | **2003**    | ** ** |
|-----------------------------|------------|----------------|------------|------------------|------------|-------------|------------|
| Risk-free interest rate     |       | 3.7 - 4.2%     |       | 1.7 - 4.2%       |       | 2.3 - 3.3%  |       |
| Dividend yield              |       | 0%             |       | 0%               |       | 0%          |       |
| Expected life of the option |       | 3.8 - 5.1 yrs. |       | 3 mos. - 10 yrs. |       | 5 - 10 yrs. |       |
| Volatility factor           |       | 37.7%          |       | 41.7 – 79.0 | %          | 77.0%       |       |

 

Sale or Issuance of Stock by Subsidiary

 

We recognize non-operating gains fromsales or issuances of common stock by our subsidiaries directly to thirdparties where the Company’s ownership percentage in the subsidiaries is reducedby the issuance of such stock and the amount received per share is more thanthe Company’s carrying amount per share.

 

53

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Investments

 

Pursuant to Statement of FinancialAccounting Standards No. 115, “Accountingfor Certain Investments in Debt and Equity Securities”*,* our investments in marketable debtand equity securities have been classified as available-for-sale securitiesand, accordingly, are valued at fair value at the end of each period. Any materialunrealized holding gains and losses arising from such valuation are excludedfrom net income and reported, net of applicable income taxes, in othercomprehensive income. Accumulated net unrealized holding gains and losses areincluded at the end of each year in accumulated other comprehensive incomewhich is a separate component of stockholders’ equity.

 

Reclassifications

 

Certain amounts in the 2003 and 2004consolidated financial statements have been reclassified to conform to the 2005presentations.

 

**Note 3 —Acquisition of Minority Interest in The Outdoor Channel, Inc.**

 

On September 8, 2004, we announcedthe completion of the acquisition of the remaining 17.6% minority interest inTOC by Outdoor Channel Holdings through (i) the merger of TOC with anewly-formed, wholly-owned subsidiary of Outdoor Channel Holdings, with TOCbeing the surviving corporation, and (ii) the exchange of each share ofTOC common stock not previously held by Outdoor Channel Holdings or itssubsidiaries for 0.65 shares of Outdoor Channel Holdings’ common stock. Inaddition, each outstanding option to purchase one share of TOC common stock wasexchanged for an option to purchase 0.65 shares of Outdoor ChannelHoldings’ common stock.

 

Based on the exchange ratio, the 5 for 2 splitas explained in Note 2 and the capitalization of TOC, Outdoor ChannelHoldings issued 3,070 shares of our common stock as well as options topurchase 4,012 additional shares on September 8, 2004.

 

As previously disclosed by us, in October2004, we received notice from a TOC stockholder that the stockholder wasexercising dissenters’ rights with respect to 144 previously outstanding TOCcommon shares. The dissenter submitted a written demand that TOC repurchase thedissenter’s shares. On March 8, 2005, the dissenter withdrew this demandand accepted 233 common shares of the Company in exchange for his 144 commonshares of TOC. The number of sharesexchanged reflects the exchange ratio. For accounting purposes,the dissenter’s shares have been deemed to have been exchanged as ofSeptember 8, 2004 and the cost of those shares has been recorded asadditional goodwill as shown below.

 

The acquisition of all of the 17.6%minority interest in TOC was accounted for using the purchase method ofaccounting. The cost of acquiring the minority interest included the aggregatefair value of the common shares of Outdoor Channel Holdings issued in exchangefor common shares of TOC and certain other direct costs. The acquisition costwas allocated based on the fair value of the assets of TOC that were acquiredand liabilities that were assumed, including intangible assets that arose fromcontractual or other legal rights or met certain other recognition criteriathat underlie the approximate 17.6% minority interest that was acquired. Theexcess of the cost of the minority interest over the fair value of theunderlying interest in the net identifiable assets acquired was allocated togoodwill. In addition, in accordance with the

 

54

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provisions of Statement of FinancialAccounting Standards No. 109, “Accounting for Income Taxes” the taxeffects of the intangible assets have been treated as additional consideration.This additional consideration has also been allocated to goodwill.

 

The cost of the acquisition of theminority interest in TOC by Outdoor Channel Holdings was $54,985 based on theissuance at the closing of 3,070 shares of Outdoor Channel Holdings’common stock (including the former dissenter’s shares) and the average closingprice of $16.24 per share for a specified period before and afterApril 20, 2004, the last trading day before the public announcement of thematerial terms of the acquisition plus the assumption of 325 fully-vestedoptions held by a former employee of TOC with an intrinsic value of $4,250 pluscertain other costs including income tax effects. Based on the analysis of thefair value of the assets that were acquired and liabilities that were assumed,the acquisition costs of $54,985 were allocated primarily to intangible assetsas follows:

 
| ** **                                               | ** ** | ** **     | ** ** | **Estimated**   | ** ** |
|----------------------------------------------------------|------------|----------------|------------|-----------------|------------|
| ** **                                               | ** ** | **Allocation** | ** ** | **Useful Life** | ** ** |
|                                                     |       |           |       |            |       |
| Multiple system operators relationships                  |       | $              | 10,573     |            | Indefinite |   |
| Advertising customer relationships:                      |       |           |       |            |       |
| Short form                                               |       | 1,351          |       | 4 years    |       |
| Long form                                                |       | 621            |       | 3 years    |       |
|                                                     |       |           |       |            |       |
| Total identifiable intangible assets                     |       | 12,545         |       |            |       |
| Goodwill                                                 |       | 44,457         |       | Indefinite      |       |
| Deferred tax liability associated with intangible assets |       | (5,001         | )          |            |       |
| Minority interest in subsidiary                          |       | 2,984          |       |            |       |
|                                                     |       |           |       |            |       |
| Aggregate purchase price                                 |       | $              | 54,985     |            |       |   |

 

The exchange of vested options by OutdoorChannel Holdings for vested options of TOC resulted in a charge to operationsin the consolidated statement of operations on September 8, 2004 equal tothe intrinsic value of the options issued on that date and a credit for therelated income tax benefit. Outdoor Channel Holdings issued fully-vestedoptions to purchase 3,687 shares in exchange for fully-vested optionsheld by employees of TOC on September 8, 2004. On that day, the marketprice of one share of common stock of Outdoor Channel Holdings was $14.00. As aresult, the Company incurred a non-cash, non-recurring charge to operatingexpenses of $47,983 and recognized an income tax benefit of $19,098 or a netcharge of $28,885.

 

Summarized unaudited pro formainformation, assuming this acquisition occurred at the beginning of therespective years ended December 31, 2004 and 2003 follows:

 
| ** **          | ** ** | **For the Years Ended** | ** ** |
|---------------------|------------|-------------------------|------------|
| ** **          | ** ** | **December 31,**   | ** ** |
| ** **          | ** ** | **2004**                | ** ** | **2003** | ** ** |
|                |       |                    |       |   |   |
| Net revenues        |       | $                       | 39,954     |   | $ | 31,688 |   |
| Net income          |       | $                       | 4,862      |   | $ | 3,946 |   |
| Earnings per share: |       |                    |       |   |   |
| Basic               |       | $                       | 0.27       |   | $ | 0.23 |   |
| Diluted             |       | $                       | 0.22       |   | $ | 0.19 |   |

 

The acquisition had no affect on netrevenues. The pro forma net income (loss) and the related per share amounts(i) include primarily the effects of additional amortization related tocertain intangible assets recorded, the elimination of the

 

55

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minority interest and the additionalshares issued by Outdoor Channel Holdings and (ii) exclude the non-recurringnet charge of $28,885 attributable to the exchange of options.

 

**Note 4 - Revenue To BeEarned Upon Collection**

 

As of December 31, 2005, the approximatescheduled payments to be recognized as revenue, assuming such amounts arecollected in future years from existing Lost Dutchman’s sales contracts, are asfollows:

 

| **Years Ending   December 31,** | ** ** | **Amount** | ** ** |
|---------------------------------|------------|------------|------------|
| 2006                            |       | $          | 2,542      |   |
| 2007                            |       | 1,929      |       |
| 2008                            |       | 1,774      |       |
| 2009                            |       | 1,219      |       |
| 2010                            |       | 731        |       |
| Thereafter                      |       | 239        |       |
| Total                           |       | $          | 8,434      |   |

 

**Note 5 – SubscriberAcquisition Fees**

 

Subscriber acquisition fees, which areincluded in other assets as of December 31, 2005, are comprised of thefollowing:

 
| Subscriber acquisition fees, at cost |   | $   | 407 |   |
|--------------------------------------|--------|-----|-----|--------|
| Accumulated amortization             |   | (13 | )   |
| Subscriber acquisition fees, net     |   | $   | 394 |   |

 

Of the net balance at December 31, 2005,we expect $340 will be recognized as a reduction of subscriber fee revenue and$54 will be recognized as subscriber acquisition fee amortization expense infuture periods. For the year ended December 31, 2005, $12 was charged torevenue and $1 was charged to expense. We expect to amortize the net balance as of December 31, 2005 asfollows:

 

| **Years Ending  December 31,** | ** ** | **Amount** | ** ** |
|--------------------------------|------------|------------|------------|
| 2006                           |       | $          | 81         |   |
| 2007                           |       | 81         |       |
| 2008                           |       | 81         |       |
| 2009                           |       | 81         |       |
| 2010                           |       | 70         |       |
| Total  amortization            |       | $          | 394        |   |

 

For the year ended December 31, 2005, wemade cash payments of $407 relating to current subscriber acquisition feeobligations.

 

**NOTE 6—INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES**

 

The Company’s short-term investments in marketable debt and equity securitiesare classified as available-for-sale and are recorded at fair value at the endof each period. Gross realized gains and losses on sales of securities during2005 and all amounts related to such investments prior to the year ended December 31, 2005 were not material. Included in investments inavailable-for-sale securities at December 31, 2005 are equity investments and auction rate securities withshort-term interest rates that generally can be reset every 28 days. Theauction rate securities have long-term maturity dates and provide us withenhanced yields. However, we believe we have the ability to quickly liquidatethem at their original cost, although there is no guaranty, and, accordingly,they are carried at cost, which approximates market value, and classified ascurrent assets. All income generated from these investments is recorded asinterest income. We had unrealized net holding gains (losses) on marketableequity securities at December 31, 2005 and 2004 of $36 and ($43), respectively, that are inaccumulated other comprehensive income.

 

Theinvestments in marketable equity securities available-for-sale securities is asfollows:

 

56

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| ** **               | ** ** | **As of December 31,** | ** ** |
|--------------------------|------------|-----------------------------|------------|
| ** **               | ** ** | **2005**                    | ** ** | **2004** | ** ** |
|                     |       |                        |       |   |   |
| Auction rate securities  |       | $                           | 38,000     |   | $ | — |   |
| Equities                 |       | 830                         |       | 741 |   |
| Total current securities |       | $                           | 38,830     |   | $ | 741 |   |

 

**Note 7 - Property, Plantand Equipment and Amortizable Intangible Assets**

 

Property, plant and equipment at December31, 2005 and 2004 consist of the following:

 
| ** **                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Membership division:          |       |     |       |     |       |
| Land                          |       | $        | 2,480      |     | $          | 2,480 |   |
| Equipment                     |       | 1,376    |       | 1,240    |       |
| Buildings and improvements    |       | 1,544    |       | 1,472    |       |
| Furniture and fixtures        |       | 63       |       | 62       |       |
| Vehicles                      |       | 1,447    |       | 1,325    |       |
| Leasehold improvements        |       | 89       |       | 86       |       |
|                          |       | 6,999    |       | 6,665    |       |
| Less accumulated depreciation |       | (3,473   | )          | (3,138   | )          |
| Subtotals                     |       | 3,526    |       | 3,527    |       |
|                          |       |     |       |     |       |
| Outdoor Channel:              |       |     |       |     |       |
| Land                          |       | 600      |       | —   |       |
| Buildings and improvements    |       | 2,073    |       | —   |       |
| Equipment                     |       | 6,143    |       | 4,543    |       |
| Furniture and fixtures        |       | 102      |       | 158      |       |
| Vehicles                      |       | 621      |       | 251      |       |
| Leasehold improvements        |       | 412      |       | 556      |       |
| Video library                 |       | 211      |       | 211      |       |
| Construction in progress      |       | 4,878    |       | —   |       |
|                          |       | 15,040   |       | 5,719    |       |
| Less accumulated depreciation |       | (2,943   | )          | (2,520   | )          |
| Subtotals                     |       | 12,097   |       | 3,199    |       |
|                          |       |     |       |     |       |
| Totals                        |       | $        | 15,623     |     | $          | 6,726 |   |

 

57

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Amortizableintangible assets as of December 31, 2005 and 2004 are summarized as follows:

 
| ** **                           | ** ** | **2005**                                     | ** ** |
|--------------------------------------|------------|----------------------------------------------|------------|
| ** **                           | ** ** | **Advertising Customer  Relationships** | ** ** | **Trademark** | ** ** | **Total  Amortizable  Intangibles** | ** ** |
|                                 |       |                                         |       |   |   |   |   |
| Residual value                       |       | $                                            | —     |   | $ | — |   | $ | — |   |
| Weighted average amortization period |       | 3.7 years                                    |       | 15 years |   | 4.8 years |   |
| Gross carrying amount                |       | $                                            | 1,972      |   | $ | 219 |   | $ | 2,191 |   |
| Less accumulated amortization        |       | $                                            | 681        |   | $ | 130 |   | $ | 811 |   |
| Net book value                       |       | $                                            | 1,291      |   | $ | 89 |   | $ | 1,380 |   |

 
| ** **                           | ** ** | **2004**                                 | ** ** |
|--------------------------------------|------------|------------------------------------------|------------|
| ** **                           | ** ** | **Advertising  Customer  Relationships** | ** ** | **Trademark** | ** ** | **Total  Amortizable  Intangibles** | ** ** |
|                                 |       |                                     |       |   |   |   |   |   |   |   |
| Residual value                       |       | $                                        | —     |   | $ | — |   | $ | — |   |
| Weighted average amortization period |       | 3.7 years                                |       | 15 years |   |   |   |
| Gross carrying amount                |       | $                                        | 1,972      |   | $ | 219 |   | $ | 2,191 |   |
| Less accumulated amortization        |       |                                     | 136        |   |   | 116 |   |   | 252 |   |
| Net book value                       |       | $                                        | 1,836      |   | $ | 103 |   | $ | 1,939 |   |

 

As ofDecember 31, 2005, the weighted average remaining useful economic lives of theadvertising customer relationships, trademark and total amortizable intangiblesare 2.6 years, 6 years and 2.7 years, respectively.  

 

For theyears ended December 31, 2005, 2004 and 2003, we incurred amortization expenseas follows: 

 

| ** ** | ** ** | **Advertising  Customer  Relationships** | ** ** | **Trademark** | ** ** | **Total  Amortizable  Intangibles** | ** ** |
|------------|------------|------------------------------------------|------------|---------------|------------|-------------------------------------|------------|
|       |       |                                     |       |          |       |                                |       |
| 2005       |       | $                                        | 545        |          | $          | 14                                  |       | $ | 559 |   |
| 2004       |       | 136                                      |       | 14            |       | 150                                 |       |
| 2003       |       |                                     |       | 14            |       | 14                                  |       |
|            |            |                                          |            |               |            |                                     |            |  |  |  |

 

Theestimated aggregate amortization expense for the years subsequent to December31, 2005 for advertising customer relationships and trademark are as follows:

 

| **Years Ending  December 31,** | ** ** | **Total  Amortizable  Intangibles** | ** ** |
|--------------------------------|------------|-------------------------------------|------------|
|                           |       |                                |       |
| 2006                           |       | $                                   | 559        |   |
| 2007                           |       | 507                                 |       |
| 2008                           |       | 267                                 |       |
| 2009                           |       | 14                                  |       |
| 2010                           |       | 14                                  |       |
| Thereafter                     |       | 19                                  |       |
| Total                          |       | $                                   | 1,380      |   |

 

**Note 8 – Long-Term Debt,Capital Lease Obligations and Lines of Credit**

 

Bank Lines of Credit

 

On November 2, 2005, we renewed therevolving line of credit agreement (the “revolver”) with U.S. Bank N.A. (the “Bank”)we obtained in September 2004, extending the maturity date from September 5,2005 to September 7, 2007 and increasing the total amount which can be drawnupon under the revolver from $5,000 to $8,000. The revolver provides thatthe interest rate shall be LIBOR plus 1.25%. The revolver is collateralized bysubstantially all of our assets. This credit facility contains customaryfinancial and other covenants and restrictions, as amended on November 2, 2005,including a change of control provision. As of December 31, 2005, we did nothave any outstanding borrowings under this revolver.

 

Long-Term Debt and Capital LeaseObligations

 

On November2, 2005, we obtained a $1,950 mortgage loan from the Bank which has a 10 yearterm with a 25 year amortization schedule. This loan carries a variableinterest rate of LIBOR plus 1.35%. This loan is secured primarily by a Deed ofTrust on our recently purchased broadcast facility located in Temecula,California and is also secondarily secured by the same assets as the revolver.It also contains customary financial and other covenants and restrictionsincluding a change of control provision.

 

On November7, 2005, we entered into an interest rate swap agreement with the Bank toreduce the potential impact of increasing interest rates on the floating ratelong-term mortgage note and effectively fixed the interest rate on this loan at6.59%.  The notional principal amount isreduced by $7 per month through September 5, 2015 with the balance of the noteamounting to****$1,190 due on that date. Weexpect the cash flows related to the swap to be highly effective in offsettingthe changes in cash flows of the variable rate debt.  The fair value of the interest rate swapcontract was recorded as a liability of $54 as of December 31, 2005. The changein such amount is also reflected in other comprehensive income (loss) as wehave designated the contract as a cash flow hedge.

 

On November2, 2005, we obtained a $3,000, five year, fully amortizing term loan. This termloan carries a variable interest rate of LIBOR plus 1.35%. This term loan issecured by the same assets as the revolver and contains customary financial andother covenants and restrictions including a change of control provision. OnNovember 7, 2005, we entered into an interest rate swap agreement with the Bankto reduce the potential impact of increasing interest rates on the floatingrate long-term note and effectively fixed the interest rate on this term loanat 6.35%. The notional principal amount is reduced by $52 per month untilretired on September 5, 2010. The fair value of the interest rate swap contractwas a liability of $18 as of December 31, 2005. The change in such amount isalso reflected in other comprehensive income (loss) as we have designated thecontract as a cash flow hedge.

 

58

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Long-term debt and capital leaseobligations at December 31, 2005 and 2004 consist of the following:

 
| ** **                                                                                                                                                                                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Note payable to a bank, payable in monthly  installments of $7 plus interest, calculated at an adjustable rate of 6.59%  at December 31, 2005, due August 2015, secured by real estate                                         |       | $        | 1,944      |     | $          | — |   |
| Note payable to a bank, payable in monthly  installments of $52 plus interest, calculated at an adjustable rate of 6.35%  at December 31, 2005, due September 2010, secured by substantially all of the  Company’s assets |       | 2,948    |       | —   |       |
| Capital lease obligations                                                                                                                                                                                                      |       | 9        |       | 35       |       |
| Totals                                                                                                                                                                                                                         |       | 4,901    |       | 35       |       |
| Less current portion                                                                                                                                                                                                           |       | 708      |       | 26       |       |
| Long-term portion                                                                                                                                                                                                              |       | $        | 4,193      |     | $          | 9 |   |

 

The requiredannual principal payments on long-term debt and capital leases are as follows:

 

| **Years  Ending   December 31,** | ** ** | **Amount** | ** ** |
|----------------------------------|------------|------------|------------|
| 2006                             |       | $          | 708        |   |
| 2007                             |       | 699        |       |
| 2008                             |       | 699        |       |
| 2009                             |       | 699        |       |
| 2010                             |       | 543        |       |
| Thereafter                       |       | 1,553      |       |
| Total                            |       | $          | 4,901      |   |

 

**Note 9 – Commitments andContingencies**

 

We, from time to time, are involved inlitigation as both plaintiff and defendant arising in the ordinary course ofbusiness. In the opinion of management, the results of any pending litigationshould not have a material adverse effect on our consolidated financialposition or operating results.

 

Financial instruments that potentiallysubject us to concentrations of credit risk consist principally of temporarycash investments, available-for-sale securities, and accounts receivable. Wereduce credit risk by placing our temporary cash investments with majorfinancial institutions with high credit ratings. At December 31, 2005, we hadcash and cash equivalents of approximately $18,324 with major financialinstitutions in certain investment accounts which were not covered by theFederal Deposit Insurance Corporation.

 

We reduce credit risk related to accountsreceivable by routinely assessing the financial strength of our customers. Wemaintain an allowance for doubtful accounts based on the credit risk ofspecific customers, historical trends and other information that managementbelieves will adequately provide for credit losses.

 

Changes in our allowance for doubtful accountswere as follows:

 
| ** **                   | ** ** | **Balance at**   | ** ** | **Additions**       | ** ** | ** **     | ** ** | **Balance**      | ** ** |
|------------------------------|------------|------------------|------------|---------------------|------------|----------------|------------|------------------|------------|
| ** **                   | ** ** | **Beginning**    | ** ** | **Charged**         | ** ** | ** **     | ** ** | **at End**  | ** ** |
| ** **                   | ** ** | **of Year** | ** ** | **to Expense** | ** ** | **Deductions** | ** ** | **of Year** | ** ** |
|                         |       |             |       |                |       |           |       |             |       |
| Year-ended December 31, 2005 |       | $                | 207        |                | $          | 214            |       | $                | (146       | ) | $ | 275 |   |
| Year-ended December 31, 2004 |       | 234              |       | 164                 |       | (191           | )          | 207              |       |
| Year-ended December 31, 2003 |       | 154              |       | 327                 |       | (247           | )          | 234              |       |
|                              |            |                  |            |                     |            |                |            |                  |            |  |  |  |  |

 

During 2005, we exercised our option toextend our contract to sponsor a driver in 16 professional car races to be heldduring 2006. As amended, the contract calls for a total sponsorship price of$1,400 for the 16 races. As additional compensation, we had agreed to air anumber of 30 second advertisements for associate sponsors. The aggregatecommitment is for $500 worth of advertising per year that the agreement is inforce which will be based on our prevailing rates at the time of the airings.We may, at our option, elect to extend the relationship for the 2007 seasonwith certain cost escalators.

 

59

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As of December 31, 2005, our advertising,research, talent, programming commitments, estimated to be approximately$2,464, $1,231, $1,312 and $7,931, respectively, or $12,938 in the aggregate.Such fees are payable over several years, as part of the normal course ofbusiness as follows:

 

| **Years  Ending   December 31,** | ** ** | **Amount** | ** ** |
|----------------------------------|------------|------------|------------|
| 2006                             |       | $          | 7,716      |   |
| 2007                             |       | 3,961      |       |
| 2008                             |       | 1,261      |       |
| Total                            |       | $          | 12,938     |   |

 

We have enteredinto a construction contract with a general contractor to complete thebuild-out of our broadcast facility.  Theaggregate contract amount, plus change orders, totals $3,729.  As of the latest invoice received by us in2005, the contractor had completed $2,744 worth of the contract, and invoicedus for $2,470.  The balance of $1,259includes a 10% retention and represents our commitment to the contractor.

 

Operating Leases

 

We lease facilities and equipment,including access to satellites for television transmission, undernon-cancelable operating leases that expire at various dates through 2012.Generally, the most significant leases are satellite leases that require escalatingrental payments. Rent expense is recognized on a straight-line basis over eachlease term. The excess of the expense accrued over the amounts currentlypayable is reflected as deferred satellite rent obligations in the accompanyingconsolidated balance sheets.

 

We lease our administrative facilitiesfrom Musk Ox Properties, LP, which in turn is owned by Messrs. Perry T. Massieand Thomas H. Massie, principal stockholders and officers of the Company. InDecember 2005, the lease agreements were renewed for a five-year term with 2five-year renewal options, at our discretion. Monthly rental payments are $29 with a 3% per year escalator clause.

 

Rent expense, including rent paid to MuskOx Properties, LP, aggregated to approximately $2,962, $2,604 and $2,668 in theyears ended December 31, 2005, 2004 and 2003, respectively.

 

Total rental commitments under theoperating lease agreements described above for years ending subsequent toDecember 31, 2005 are as follows:

 

| **Years  Ending   December 31,** | ** ** | **Amount** | ** ** |
|----------------------------------|------------|------------|------------|
| 2006                             |       | $          | 2,703      |   |
| 2007                             |       | 2,615      |       |
| 2008                             |       | 2,311      |       |
| 2009                             |       | 2,097      |       |
| 2010                             |       | 2,109      |       |
| Thereafter                       |       | 2,100      |       |
| Total                            |       | $          | 13,935     |   |

 

Capital Leases

 

We lease certain equipment under capitalleases which expire on various dates in 2006. At December 31, 2005, our futureminimum lease payments under these leases aggregated to $9, payable in 2006 andare included in the current portion of notes payable and capital leaseobligations in the accompanying consolidated balance sheets (see Note 8).

 

60

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**Note 10 - Income Taxes**

 

The components of the provision (benefit)for income taxes for the years ended December 31, 2005, 2004 and 2003 were asfollows:

 
| ** **     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------|------------|----------|------------|----------|------------|----------|------------|
| Current:       |       |     |       |     |       |     |       |
| Federal        |       | $        | (1,558     | )        | $          | 1,216    |       | $ | 2,410 |   |
| State          |       | 67       |       | 457      |       | 682      |       |
| Total current  |       | (1,491   | )          | 1,673    |       | 3,092    |       |
|           |       |     |       |     |       |     |       |
| Deferred:      |       |     |       |     |       |     |       |
| Federal        |       | 2,877    |       | (13,512  | )          | 58       |       |
| State          |       | 313      |       | (4,107   | )          | 12       |       |
| Total deferred |       | 3,190    |       | (17,619  | )          | 70       |       |
| Totals         |       | $        | 1,699      |     | $          | (15,946  | )          | $ | 3,162 |   |

 

The tax effects of the temporarydifferences that give rise to significant portions of the deferred tax assetsand deferred tax liabilities as of December 31, 2005 and 2004 were related tothe following:

 
| ** **                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:            |       |     |       |     |       |
| Net operating loss              |       | $        | 7,486      |     | $          | — |   |
| Stock option expense            |       | 6,801    |       | 18,178   |       |
| Deferred revenues               |       | 600      |       | 371      |       |
| Deferred rent                   |       | 117      |       | 124      |       |
| Current state taxes             |       | —   |       | 77       |       |
| Provision for doubtful accounts |       | 110      |       | 82       |       |
| Other accrued liabilities       |       | 44       |       | 57       |       |
| Alternative minimum tax credit  |       | 113      |       |     |       |
| Other                           |       | 29       |       | 6        |       |
|                            |       | 15,300   |       | 18,895   |       |
| Deferred tax liabilities:       |       |     |       |     |       |
| Fixed assets                    |       | (251     | )          | (345     | )          |
| Intangible assets               |       | (4,726   | )          | (4,946   | )          |
| Other                           |       | (78      | )          | (24      | )          |
|                            |       | (5,055   | )          | (5,315   | )          |
| Deferred tax assets, net        |       | $        | 10,245     |     | $          | 13,580 |   |

 

The provision (benefit) for income taxesreflected in the accompanying consolidated statements of operations aredifferent than those computed based on the applicable statutory Federal incometax rate of 34% in 2005, 2004 and 2003 as shown below:

 
| ** **                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal income tax provision (benefit) at  statutory income tax rate |       | $        | 1,425      |     | $          | (13,532  | )          | $ | 2,581 |   |
| State taxes, net of federal benefit                                  |       | 251      |       | (2,197   | )          | 458      |       |
| Non-deductible expense                                               |       | 35       |       | 38       |       | 63       |       |
| Deferred compensation                                                |       | —   |       | (198     | )          | —   |       |
| Other                                                                |       | (12      | )          | (57      | )          | 60       |       |
| Income tax provision (benefit)                                       |       | $        | 1,699      |     | $          | (15,946  | )          | $ | 3,162 |   |

 

As of December 31, 2005, we have a federalnet operating loss carry forward of approximately $17,500 after expected carryback and a California net operating loss carry forward of approximately$22,100. Both expire in 2025.

 

61

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**Note 11 - EquityTransactions**

 

Preferred Stock

 

As of December 31, 2005 and 2004, we wereauthorized to issue up to 25,000 shares of preferred stock, $0.001 par valueper share in one or more series with designations, rights and preferences asdetermined by our Board of Directors, respectively.

 

Changes in Common Stock SubscriptionsReceivable by the Company

 

As of January 1, 2003, we had outstandingsubscriptions receivable of $262. During 2003, we paid bonuses to certainstockholders, who are also employees, totaling $251 by converting subscriptionsreceivable for common stock of $196 and accrued interest on the receivables of$55. Subscriptions receivable were also reduced by cash payments of $36 in 2003and, as a result, the balance of subscriptions receivable was reduced to $30 asof December 31, 2003, which was paid in January 2004.

 

Issuances of Common Stock by the Company

 

During 2003, we issued 336 shares ofcommon stock valued at $175 to a former Officer/Director for the payment ofdeferred compensation (see Note 12).

 

During 2003, we (i) received cash proceedsof $268 from the exercise of options for the purchase of 247 shares of commonstock; (ii) offset the $623 due from the exercise of options for the purchaseof 663 shares at $0.90 per share against the balance of all stockholder loanspayable by us to the holder of the options; and (iii) offset the $45 due fromthe exercise of options for the purchase of 50 shares of common stock at $0.90per share against the balance of a bonus payable to the employee.

 

During 2004, we received cash proceeds ofapproximately $1,285 from the exercise of options for the purchase of 723shares of our common stock and options for the purchase of 18 shares of TOCcommon stock which were exercised prior to the merger under TOC’s stock optionplan. The TOC stock option plan was assumed in conjunction with our acquisitionof the remaining 17.6 % minority interest in TOC (see Note 3).

 

Also during 2004, we issued an employee 75shares of restricted common stock. The rights to these shares vest over a fiveyear period. Based on the closing market price on the day before the grant of$13.90 per share, the value of the stock was $1,043. This amount has beenincluded in deferred compensation as an offset to stockholders’ equity and willbe amortized to compensation expense as the rights to the restricted stockvest. We recorded charges for these shares of $208 and $9 in 2005 and 2004, respectively.

 

On July 1, 2005, we completed a publicoffering of our common stock, whereby we sold 3,500 shares of common stock andreceived net proceeds of $43,350. In addition, certain selling stockholdersexercised options to buy 1,688 shares of common stock which were resold in thepublic offering. On July 13, 2005, the underwriters exercised theirover-allotment option granted by certain selling stockholders, and purchased anadditional 442 shares of common stock. The shares sold by the selling stockholderswere purchased immediately before the sale through the exercise of options theyheld to buy common shares from us. We received $2,168 in the aggregate from theexercise of these options. During 2005, we also received cash proceeds ofapproximately $566 from the exercise of other options for the purchase of 318shares of common stock.

 

During 2005, we issued to employees anaggregate of 75 shares of restricted stock on two separate dates. The rights tothese shares vest over a three year period. The fair value of the stock was$1,103 based on the respective closing market prices of $14.95 and $13.38 pershare on the day before the shares were granted The aggregate charge to beincurred over the vesting period amounts to $861 representing the fair valuenet of the effect of an estimated employee turnover rate and has beenincluded in deferred compensation as an offset to stockholders’equity. The balance will be amortized to compensation expense as therights to the restricted stock vest. We recorded a charge for these shares of$167 for the year ended December 31, 2005.  A total of 8 shares of restricted stock havebeen cancelled due to employee turnover as of December 31, 2005.

 

62

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The Company’s Stock Option Plans

 

We have had five stock option plans: StockOption Plan 1 (“Plan 1”), Stock Option Plan 2 (“Plan 2”), 1995 Stock OptionPlan (the “1995 Plan”), Long-Term Incentive Plan (the “LTIP Plan”), andNon-Employee Director Stock Option Plan (the “NEDSOP” Plan). During 2003, allholders of options under Plan 1 and Plan 2 exercised all of the outstandingoptions under those two plans. No more options may be granted under either ofthose two plans. In addition, on September 8, 2004, TOC’s 1997 Stock OptionPlan (the “1997 Plan”) was assumed by Outdoor Channel Holdings. No more optionscan be issued under this plan. We also may grant stock options that are notcovered under any of the stock option plans. As of December 31, 2005, we had anaggregate of 6,624 shares of our common stock reserved for issuance under ourvarious stock option/long-term incentive plans including 465 options grantedoutside of the plans, of which 3,564 shares are subject to outstanding options,127 are issued as restricted common stock and 2,933 shares are available forfuture grants. Options and stock grants are subject to terms and conditions asdetermined by our Board of Directors. Stock option grants are generallyexercisable in increments of 25% during each year of employment beginning threemonths to one year from the date of grant. Generally, stock options expire fiveyears from the date of grant. Options issued under our NEDSOP plan aregenerally exercisable 40% after the first 3 months of service and 20% on thefirst anniversary of appointment and each anniversary thereafter until 100% arevested.

 

A summary of the status of options grantedunder the five stock option plans and outside of those plans as of December 31,2005, 2004 and 2003 and changes in options outstanding during the years thenended is presented in the table that follows: 

** **
| ** **                                                | ** ** | **2005**            | ** ** | **2004**                               | ** ** | **2003**            | ** ** |
|-----------------------------------------------------------|------------|---------------------|------------|----------------------------------------|------------|---------------------|------------|
| ** **                                                | ** ** | **Shares**          | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares**          | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| ** **                                                | ** ** | **(in  thousands)** | ** ** | ** **                             | ** ** | **(in  thousands)** | ** ** | ** ** | ** ** | **(in  thousands)** | ** ** | ** ** | ** ** |
| Outstanding at beginning of year                          |       | 5,630               |       | $                                      | 4.12       |                | 1,648      |   | $ | 6.57 |   | 1,751 |   | $ | 1.43 |   |
|                                                      |       |                |       |                                   |       |                |       |   |   |   |   |   |   |
| Options granted                                           |       | 385                 |       | 14.60                                  |       | 705                 |       | 13.88 |   | 863 |   | 10.78 |   |
|                                                      |       |                |       |                                   |       |                |       |   |   |   |   |   |   |
| Options granted in exchange for TOC options  (see Note 3) |       | —              |       | —                                 |       | 4,012               |       | 0.98 |   | — |   | — |   |
|                                                      |       |                |       |                                   |       |                |       |   |   |   |   |   |   |
| Options exercised                                         |       | (2,448              | )          | 1.12                                   |       | (723                | )          | 1.77 |   | (960 | ) | 0.98 |   |
|                                                      |       |                |       |                                   |       |                |       |   |   |   |   |   |   |
| Options canceled or expired                               |       | (3                  | )          | 6.14                                   |       | (12                 | )          | 5.71 |   | (6 | ) | 1.74 |   |
|                                                      |       |                |       |                                   |       |                |       |   |   |   |   |   |   |
| Outstanding at end of year                                |       | 3,564               |       | $                                      | 7.31       |                | 5,630      |   | $ | 4.12 |   | 1,648 |   | $ | 6.57 |   |

 
| ** **                                                                                                                                                                         | ** ** | **2005**       | ** ** | **2004**       | ** ** | **2003**       | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|
|                                                                                                                                                                               |       |           |       |           |       |           |       |
| Option price range at end of year                                                                                                                                                  |       | $0.92 - $15.75 |       | $0.92 - $15.75 |       | $1.20 - $12.50 |       |
|                                                                                                                                                                               |       |           |       |           |       |           |       |
| Options available for grant at end of year                                                                                                                                         |       | 2,918          |       | 3,370          |       | —         |       |
|                                                                                                                                                                               |       |           |       |           |       |           |       |
| Weighted-average fair value of 385; 705;  and 863 options granted during 2005, 2004 and 2003, respectively, with an  exercise price equal to the market price at the date of grant |       | $ 5.48    |       | $ 8.21    |       | $ 7.20    |       |
|                                                                                                                                                                               |       |           |       |           |       |           |       |
| Weighted-average fair value of 4,012  options granted during 2004 with an exercise price less than the market price  at the date of grant                                          |       |           |       | $ 13.08   |       |           |       |

 

63

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The Company’s Stock Option Plans(continued)

 

The following table summarizes informationabout stock options outstanding at December 31, 2005, all of which are at fixedprices:

 
| ** **                      | ** ** | ** **              | ** ** | **Options Outstanding**            | ** ** | **Options Exercisable** | ** ** |
|---------------------------------|------------|-------------------------|------------|------------------------------------|------------|-------------------------|------------|
| ** **                      | ** ** | ** **              | ** ** | **Weighted Average**               | ** ** | ** **              | ** ** | **Weighted** | ** ** |
| **Range  of   Exercise Prices** | ** ** | **Number  Outstanding** | ** ** | **Remaining   Contractual   Life** | ** ** | **Exercise   Price**    | ** ** | **Number   Exercisable** | ** ** | **Average   Exercise   Price** | ** ** |
| ** **                      | ** ** | **(in thousands)**      | ** ** | ** **                         | ** ** | ** **              | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
|                            |       |                    |       |                               |       |                    |       |   |   |   |   |
| $0.92 - $1.54                   |       |                    | 1,604      |                               | 1.9 years  |                    | $          | 0.95 |   | 1,604 |   | $ | 0.95 |   |
| $3.20 - $4.60                   |       |                    | 114        |                               | 1.3 years  |                    | $          | 3.66 |   | 103 |   | $ | 3.60 |   |
| $6.14 - $11.60                  |       |                    | 631        |                               | 2.9 years  |                    | $          | 11.33 |   | 328 |   | $ | 11.54 |   |
| $12.50 - $15.75                 |       |                    | 1,215      |                               | 6.9 years  |                    | $          | 13.96 |   | 458 |   | $ | 13.54 |   |
|                            |       |                    | 3,564      |                               |       |                    | $          | 7.31 |   | 2,493 |   | $ | 4.77 |   |

 

Changes in Outstanding Common Shares ofTOC and Shares Owned by the Company

 

The changes in the number of outstandingcommon shares of TOC and the changes in the number of shares and the percentageowned by us during 2004 and 2003 are summarized below:

 
| ** **                      | ** ** | **Common Shares** | ** ** | ** **               | ** ** |
|---------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **                      | ** ** | **Outstanding**   | ** ** | **Owned by the Company** | ** ** |
| ** **                      | ** ** | **of TOC**        | ** ** | **Shares**               | ** ** | **Percent** | ** ** |
|                            |       |              |       |                     |       |   |   |
| Balance January 1, 2003         |       | 10,542            |       | 8,818                    |       | 83.6 | % |
|                            |       |              |       |                     |       |   |   |
| Effect of shares issued by TOC  |       | 126               |       | —                   |       |   |   |
|                            |       |              |       |                     |       |   |   |
| Balance December 31, 2003       |       | 10,668            |       | 8,818                    |       | 82.7 | % |
|                            |       |              |       |                     |       |   |   |
| Effects of shares issued by TOC |       | 40                |       | —                   |       |   |   |
|                            |       |              |       |                     |       |   |   |
| Balance September 8, 2004       |       | 10,708            |       | 8,818                    |       | 82.4 | % |

 

During 2003, TOC issued 126 shares to aformer director upon his election to take payment of deferred compensation inthe form of common stock of the Company and TOC (see Note 12). We did notrecord a gain or loss during 2003 because the price of the common stock issuedapproximated the carrying value of our investment in the subsidiary. Thisissuance in 2003 caused an increase in minority interest of $142.

 

During 2004, TOC issued 18 shares inconnection with employees exercising options under its 1997 Plan. Further, TOCissued 22 shares to directors owed for services rendered prior to 2000.

 

TOC’s Stock Option Plan

 

Under the 1997 Plan, TOC could grantincentive and non-qualified stock options to its employees, directors,consultants and service providers to purchase up to an aggregate of 3,000shares of its common stock at an exercise price determined by the administratorsubject to one of the following: (a) the exercise price of an incentive optioncould not be less than 100% of the fair market value of the common stock at thedate of the grant; and (b) the exercise price of a non-qualified option couldnot be less than 85% of the fair market value of the common stock at the dateof the grant.

 

64

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A summary of the status of TOC’s 1997 Planat December 31, 2004 and 2003 and changes during the years then ended ispresented in the table below:

 
| ** **                                          | ** ** | **2004**            | ** ** | **2003**                            | ** ** |
|-----------------------------------------------------|------------|---------------------|------------|-------------------------------------|------------|
| ** **                                          | ** ** | **Shares**          | ** ** | **Weighted Average Exercise Price** | ** ** | **Shares** | ** ** | **Weighted Average Exercise Price** | ** ** |
| ** **                                          | ** ** | **(in  thousands)** | ** ** | ** **                          | ** ** | **(in  thousands)** | ** ** | ** ** | ** ** |
| Options outstanding at beginning of year            |       | 2,487               |       | $                                   | 1.60       |   | 2,492 |   | $ | 1.59 |   |
|                                                |       |                |       |                                |       |   |   |   |   |
| Options exercised                                   |       | (18                 | )          | 1.83                                |       | — |   | — |   |
|                                                |       |                |       |                                |       |   |   |   |   |
| Options cancelled                                   |       | —              |       | —                              |       | (5 | ) | 1.50 |   |
|                                                |       |                |       |                                |       |   |   |   |   |
| Options exchanged for Company options (see  Note 3) |       | (2,469              | )          | 1.59                                |       | — |   | — |   |
|                                                |       |                |       |                                |       |   |   |   |   |
| Options outstanding at end of year                  |       | —              |       | —                              |       | 2,487 |   | $ | 1.60 |   |
|                                                |       |                |       |                                |       |   |   |   |   |
| Option price range at end of year                   |       | —              |       |                                |       | $1.50-$5.00 |   |   |   |
|                                                |       |                |       |                                |       |   |   |   |   |
| Options available for grant at end of year          |       | —              |       |                                |       | 505 |   |   |   |
|                                                     |            |                     |            |                                     |            |  |  |  |  |  |  |

 

**Note 12 - Related PartyTransactions**

 

We had an agreement with a formerdirector, who was also one of our officers, pursuant to which a portion of theofficer’s compensation, prior to 2002, had been paid in cash and the remainderwas deferred. The deferred portion was payable by us in cash or shares of thecommon stock of the Company and/or TOC at a future date, at the election of thedirector. If payments were in the form of shares, such payments were to bebased on the market value of the shares at the time the services were rendered.During 2003, the director/officer left us at which time he elected to receiveshares as compensation. Deferred compensation under the agreement totaled $318.The Company and TOC issued 336 and 126 shares, respectively, to satisfy theirobligations to the director (see Note 11). Additionally, we incurred $625 inseverance costs, including related legal fees, in connection with hisresignation.

 

We lease our administrative facilitiesfrom Musk Ox Properties, LP, which in turn is owned by Messrs. Perry T. Massieand Thomas H. Massie, principal stockholders and officers of the Company. Thelease agreements required monthly rent payments aggregating to approximately$21. These lease agreements expired on December 31, 2005. Rent expense totaledapproximately $251, $244 and $242 in 2005, 2004 and 2003, respectively.

 

In December 2005, the lease agreementswere consolidated into one lease.  Thenew lease agreement has a five-year term, expiring on December 31, 2010, with 2five-year renewal options at our discretion. Monthly rental payments are $29 with a 3% per year escalator clause.

 

Interest expense on stockholder loansaggregated to $20 in 2003. All stockholder loans were paid by June 2003.

 

65

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**Note 13 - SegmentInformation**

 

Pursuant to the Provisions of Statement ofFinancial Accounting Standards No. 131, “DisclosuresAbout Segments of an Enterprise and Related Information”**(“SFAS 131”), we report segmentinformation in the same format as reviewed by our Chief Operating DecisionMaker (the “CODM”). We segregate our business activities into TOC andMembership Division. TOC is a separate business activity that broadcaststelevision programming on The Outdoor Channel 24 hours a day, seven days aweek. TOC generates revenue from advertising fees (which include fees paid byoutside producers to purchase advertising time in connection with the airing oftheir programs on The Outdoor Channel) and subscriber fees. Lost Dutchman’s andGPAA membership sales and related activities are reported in the MembershipDivision. The Membership Division also includes magazine sales, the sale ofproducts and services related to gold prospecting, gold expositions, expeditionsand outings. Intersegment sales amounted to $595, $595 and $473 for 2005, 2004and 2003, respectively.

 

Information with respect to thesereportable segments for the years ended December 31, 2005, 2004 and 2003 is asfollows: 

 
| ** **            | ** ** | **Revenues** | ** ** | **Income (Loss)  Before Income  Taxes and  Minority   Interest** | ** ** | **Total  Assets** | ** ** | **Depreciation  and  Amortization** | ** ** | **Additions to  Property,  Plant and  Improvements** | ** ** |
|-----------------------|------------|--------------|------------|------------------------------------------------------------------|------------|-------------------|------------|-------------------------------------|------------|------------------------------------------------------|------------|
| **2005**              |       |         |       |                                                             |       |              |       |                                |       |                                                 |       |
| TOC                   |       | $            | 37,527     |                                                             | $          | 5,906             |       | $                                   | 23,364     |                                                 | $          | 1,347 |   | $ | 10,224 |   |
| Membership Division   |       | 5,381        |       | 280                                                              |       | 5,017             |       | 342                                 |       | 335                                                  |       |
|                  |       |         |       |                                                             |       |              |       |                                |       |                                                 |       |
| Subtotals of Segments |       | 42,908       |       | 6,186                                                            |       | 28,381            |       | 1,689                               |       | 10,559                                               |       |
| Corporate*            |       | —       |       | (1,994                                                           | )          | 123,841           |       | 545                                 |       | —                                               |       |
| Totals                |       | $            | 42,908     |                                                             | $          | 4,192             |       | $                                   | 152,222    |                                                 | $          | 2,234 |   | $ | 10,559 |   |
|                  |       |         |       |                                                             |       |              |       |                                |       |                                                 |       |
| **2004**              |       |         |       |                                                             |       |              |       |                                |       |                                                 |       |
| TOC                   |       | $            | 34,596     |                                                             | $          | 9,954             |       | $                                   | 21,872     |                                                 | $          | 779 |   | $ | 1,938 |   |
| Membership Division   |       | 5,358        |       | 354                                                              |       | 6,857             |       | 344                                 |       | 611                                                  |       |
| Subtotals of Segments |       | 39,954       |       | 10,308                                                           |       | 28,729            |       | 1,123                               |       | 2,549                                                |       |
| Corporate*            |       | —       |       | (49,732                                                          | )          | 70,940            |       | 136                                 |       | —                                               |       |
| Totals                |       | $            | 39,954     |                                                             | $          | (39,424           | )          | $                                   | 99,669     |                                                 | $          | 1,259 |   | $ | 2,549 |   |
|                  |       |         |       |                                                             |       |              |       |                                |       |                                                 |       |
| **2003**              |       |         |       |                                                             |       |              |       |                                |       |                                                 |       |
| TOC                   |       | $            | 26,835     |                                                             | $          | 9,315             |       | $                                   | 13,855     |                                                 | $          | 558 |   | $ | 1,274 |   |
| Membership Division   |       | 4,853        |       | (619                                                             | )          | 5,993             |       | 322                                 |       | 650                                                  |       |
| Subtotals of Segments |       | 31,688       |       | 8,696                                                            |       | 19,848            |       | 880                                 |       | 1,924                                                |       |
| Corporate*            |       | —       |       | (1,043                                                           | )          | —            |       | —                              |       | —                                               |       |
| Totals                |       | $            | 31,688     |                                                             | $          | 7,653             |       | $                                   | 19,848     |                                                 | $          | 880 |   | $ | 1,924 |   |

 

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* We capture corporate overhead that is applicable to both segments, butnot directly related to operations in a separate business unit, as “Corporate.”The expenses allocated to Corporate consisted primarily of professional feesincluding public relations, accounting and legal fees, taxes associated withbeing incorporated in Delaware, board fees, and other corporate fees notassociated directly with either TOC or the Membership division. Corporateassets consisted primarily of goodwill, net deferred tax assets and intangibleassets.

 

**Note 14 - Fair Value ofFinancial Instruments**

 

Our material financial instruments consistof cash and cash equivalents, investments in available-for-sale securities,accounts receivable, accounts payable, notes payable, capital lease obligationsand related party receivables and payables. The carrying amounts of ourfinancial instruments generally approximated their fair values at December 31,2005, 2004 and 2003.

 

66

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**Note 15 - 401(k) SavingsPlan**

 

We maintaina 401(k) Plan (the “401(k) Plan”). We are required to make matchingcontributions to the 401(k) Plan in the amount of 50% of the first 6% of wagesdeferred by each participating employee up to statutory maximums. During 2005,2004 and 2003, we incurred a total charge of approximately $124, $91 and $73for employer matching contributions, respectively.

 

**Note 16 -Accounts payable and accrued expenses**

 

Accountspayable and accrued expenses consist of the following:

 
| ** **                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |
| Trade accounts payable               |       | $        | 1,580      |     | $          | 2,274 |   |
| Accrued payroll and related expenses |       | 626      |       | 923      |       |
| Estimated make-good accrual          |       | 280      |       | 200      |       |
| Accrued expenses                     |       | 378      |       | 308      |       |
|                                 |       |     |       |     |       |
| Total                                |       | $        | 2,864      |     | $          | 3,705 |   |

 

**Note 17 – Quarterly Financial Information (Unaudited)**

 

| ** **                        | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **March 31**                | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| 2005                              |       |                             |       |   |   |   |   |   |   |
| Revenue                           |       | $                                | 10,061     |   | $ | 10,014 |   | $ | 11,404 |   | $ | 11,429 |   |
| Income from operations            |       | 727                              |       | 838 |   | 261 |   | 1,468 |   |
| Net income                        |       | 452                              |       | 512 |   | 323 |   | 1,206 |   |
| Earnings per common share:        |       |                             |       |   |   |   |   |   |   |
| Basic                             |       | $                                | 0.02       |   | $ | 0.03 |   | $ | 0.01 |   | $ | 0.05 |   |
| Diluted                           |       | $                                | 0.02       |   | $ | 0.02 |   | $ | 0.01 |   | $ | 0.05 |   |
|                              |       |                             |       |   |   |   |   |   |   |
| 2004                              |       |                             |       |   |   |   |   |   |   |
| Revenue                           |       | $                                | 9,220      |   | $ | 9,569 |   | $ | 10,965 |   | $ | 10,200 |   |
| Income (loss) from operations*    |       | 2,290                            |       | 1,757 |   | (45,706 | ) | 2,120 |   |
| Net income (loss)*                |       | 1,113                            |       | 844 |   | (27,705 | ) | 1,588 |   |
| Earnings (loss) per common share: |       |                             |       |   |   |   |   |   |   |
| Basic                             |       | $                                | 0.08       |   | $ | 0.06 |   | $ | (1.75 | ) | $ | 0.09 |   |
| Diluted                           |       | $                                | 0.06       |   | $ | 0.04 |   | $ | (1.75 | ) | $ | 0.07 |   |

 

All per share data has been adjusted toreflect the 5 for 2 split of our stock effective September 15, 2004 (see Note2).

 

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*The exchange of vested options by OutdoorChannel Holdings for vested options of TOC resulted in a charge to net incomein the consolidated statement of operations on September 8, 2004 equal to theintrinsic value of the options issued on that date and a credit for the incometax benefit. Outdoor Channel Holdings issued fully-vested options to purchaseapproximately 3,687 shares in exchange for fully-vested options of employees ofTOC on September 8, 2004. On that day, the market price of one share of commonstock of Outdoor Channel Holdings was $14.00. As a result, the Company incurreda non-cash, non-recurring charge to operating expenses of $47,983 andrecognized an income tax benefit of $19,098 or a net charge of $28,885.

 

* * *

 

67

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**ITEM 9.****                  ****CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND FINANCIAL DISCLOSURE.**

 

Not Applicable.

 

**ITEM 9A.****              ****CONTROLS AND PROCEDURES**

 

*Evaluation ofdisclosure controls and procedures.*  We maintain disclosurecontrols and procedures designed to provide reasonable assurance of achievingthe objective that information in our Exchange Act reports is recorded,processed, summarized and reported within the time periods specified andpursuant to the regulations of the Securities and Exchange Commission.Disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e)under the Exchange Act, include controls and procedures designed to ensure theinformation required to be disclosed by us in the reports we file or submitunder the Exchange Act is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosure. It shouldbe noted that our system of controls, however well designed and operated, canprovide only reasonable, and not absolute, assurance that the objectives of thesystem are met.

 

Our management, with the participation ofour Chief Executive Officer and Chief Financial Officer, evaluated theeffectiveness of our disclosure controls and procedures as of December 31,2005, the end of the period covered by this report, and concluded that ourdisclosure controls and procedures were effective as of December 31, 2005.

 

*Management’s reporton internal control over financial reporting. *Management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Rule 13a-15(f) of theExchange Act.  Our internal control overfinancial reporting includes those policies and procedures that(a) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and disposition of assets;(b) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expendituresare being made only in accordance with authorizations of management and thedirectors of the Company; and (c) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof our assets that could have a material effect on the financial statements.

 

Internal control over financial reportingis designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements prepared forexternal purposes in accordance with generally accepted accounting principles.Because of its inherent limitations, internal control over financial reportingmay not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periodsare subject to the risk that controls may become inadequate because of changesin conditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

 

Management conducted an evaluation of theeffectiveness of the registrant’s internal control over financial reporting asof December 31, 2005, based on the framework set forth in *Internal Control—Integrated Framework*issued by theCommittee of Sponsoring Organizations of the Treadway Commission.  Based on this evaluation, managementconcluded that our internal control over financial reporting was effective asof December 31, 2005.

 

Management’s assessment of theeffectiveness of internal control over financial reporting as ofDecember 31, 2005, has been audited by J.H. Cohn LLP, the independentregistered public accounting firm that audited our consolidated financialstatements, as stated in their report which is included in this report.

 

*Changes in internalcontrol over financial reporting.*  During the fiscal year ended December 31,2005, there was no change in our internal control over financial reporting thatmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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**Report of Independent Registered Public Accounting Firm**

 

Tothe Stockholders and Board of Directors

 

OutdoorChannel Holdings, Inc. and Subsidiaries

 

Wehave audited management’s assessment, included in Item 9A, Management’s Reporton Internal Control over Financial Reporting, that Outdoor Channel Holdings, Inc.and subsidiaries maintained effective internal control over financial reportingas of December 31, 2005 based on criteria established in “Internal Control- Integrated Framework” issued by the Committee of Sponsoring Organizations ofthe Treadway Commission. Outdoor Channel Holdings, Inc. and subsidiaries’management is responsible for maintaining effective internal control over financialreporting and for its assessment of the effectiveness of internal control overfinancial reporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith accounting principles generally accepted in the United States of America.A company’s internal control over financial reporting includes those policiesand procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with accounting principles generallyaccepted in the United States of America, and receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or disposition ofthe company’s assets that could have a material effect on the financialstatements.

 

Becauseof inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Inour opinion, management’s assessment that Outdoor Channel Holdings, Inc.and subsidiaries maintained effective internal control over financial reportingas of December 31, 2005, is fairly stated, in all material respects, basedon the criteria established in “Internal Control - Integrated Framework” issuedby the Committee of the Sponsoring Organizations of the Treadway Commission.Also, in our opinion, Outdoor Channel Holdings, Inc. and subsidiariesmaintained, in all material respects, effective internal control over financialreporting as of December 31, 2005, based on such criteria.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofOutdoor Channel Holdings, Inc. and subsidiaries as of December 31,2005 and 2004, and the related consolidated statements of operations,stockholders’ equity and cash flows for each of the years in the three-year periodended December 31, 2005, and our report dated March 9, 2006 expressed anunqualified opinion thereon.

 
| /s/ J.H. Cohn LLP     |   |
|-----------------------|--------|
|                  |
| San Diego, California |
| March 9, 2006    |

 

**ITEM 9B.****              ****OTHER INFORMATION**

 

Not Applicable.

 

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**PART III**

 

**ITEM 10.****               ****DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

Information required by Item 10 of Part IIIregarding our directors and executive officers is included in our ProxyStatement relating to our 2006 Annual Meeting of Stockholders, and isincorporated herein by reference. Information relating to our Code of Conductand Ethics and to compliance with Section 16(a) of the 1934 Act is setforth in our Proxy Statement relating to our 2006 Annual Meeting ofStockholders and is incorporated herein by reference.

 

**ITEM 11.****               ****EXECUTIVE COMPENSATION**

 

Information required by Item 11 of Part III isincluded in our Proxy Statement relating to our 2006 Annual Meeting ofStockholders and is incorporated herein by reference.

 

**ITEM 12.****              ****SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

Information required by Item 12 of Part III isincluded in our Proxy Statement relating to our 2006 Annual Meeting ofStockholders and is incorporated herein by reference.

 

**ITEM 13.****               ****CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

Information required by Item 13 of Part III isincluded in our Proxy Statement relating to our 2006 Annual Meeting ofStockholders and is incorporated herein by reference.

 

**ITEM 14.****               ****PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

Information required by Item 14 of Part III isincluded in our Proxy Statement relating our 2006 Annual Meeting ofStockholders and is incorporated herein by reference.

 

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**PART IV**

 

**ITEM 15.****              ****EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.**

 

**(a)****          ****The following documents are included as part ofthis Annual Report on Form 10-K.**

 

(1)           Financial Statements

 

Index to Financial Statements

Reports of Independent Registered PublicAccounting Firm

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Stockholders’Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

 

(2)           Financial Statement Schedules

 

Allschedules are omitted as the information is not required, is not material or isotherwise provided.

 

(3)           List of exhibits required by Item 601 of Regulation S-K. See part(b)below.

 

**(b)****          ****Exhibits**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                      |
| 2.1         |       | Amended and Restated Agreement and Plan  of Merger among The Outdoor Channel, Inc., Outdoor Channel Holdings, Inc. and  Gold Prospector’s Association of America, Inc. dated as of April 20, 2004, as  amended and restated as of May 12, 2004 (filed as Exhibit 2.1 to the  Company’s Current Report on Form 8-K filed on May 18, 2004 and incorporated  herein by reference). |
| 2.2         |       | Agreement and Plan of Merger between  Outdoor Channel Holdings, Inc., a Delaware corporation, and Outdoor Channel  Holdings, Inc., an Alaska corporation, dated as of September 8, 2004 (filed  as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on September  20, 2004 and incorporated herein by reference).                                                       |
| 3.1         |       | Certificate of Incorporation of Outdoor  Channel Holdings, Inc, a Delaware corporation (filed as Exhibit 3.1 to the  Company’s Current Report on Form 8-K filed on September 20, 2004 and  incorporated herein by reference).                                                                                                                                                        |
| 3.2         |       | By-Laws of Outdoor Channel Holdings,  Inc., a Delaware corporation (filed as Exhibit 3.2 to the Company’s Current  Report on Form 8-K filed on September 20, 2004 and incorporated herein by  reference).                                                                                                                                                                            |
| 4.1         |       | Instruments defining the rights of  security holders, including debentures (see exhibits 3.1 and 3.2 above).                                                                                                                                                                                                                                                                              |
| 10.1        |       | Letter of intent dated August 27, 1993,  regarding the proposed acquisition of Gold Prospector’s Association of  America, Inc. by the Company (filed as Exhibit 10.4 to the Company’s Form  10-Q for the quarter ended September 30, 1993 and incorporated herein by  reference).                                                                                               |
| 10.2        |       | Agreement and Plan of Reorganization  dated February 13, 1995, by and between the Registrant and Gold Prospector’s  Association of America, Inc. (filed as Exhibit B to the Company’s Form 8-K  dated February 13, 1995 and incorporated herein by reference).                                                                                                                  |
| 10.3*       |       | Form of Indemnification Agreement  between Outdoor Channel Holdings, Inc. and its directors and certain  executive officers (filed as Exhibit 10.1 to the Company’s Form 10-Q for the  quarter ended September 30, 2004 and incorporated herein by reference).                                                                                                                       |
| 10.4        |       | Revolving Credit Agreement and related  agreements by and between the Company and U.S. Bank N.A. dated September 30,  2004 (filed as Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended  September 30, 2004 and incorporated herein by reference).                                                                                                                        |
| 10.5*       |       | 1995 Stock Option Plan (filed as Exhibit  10.6 to the Company’s Form 10-KSB for the year ended December 31, 1995 and  incorporated herein by reference).                                                                                                                                                                                                                             |
| 10.6*       |       | Form of Stock Option Agreement pursuant  to the Company’s 1995 Stock Option Plan (filed as Exhibit 4.2 to the  Company’s Registration Statement on Form S-8 with respect to the shares  underlying such plan that was filed on November 12, 2004 and incorporated  herein by reference).                                                                                        |
| 10.7*       |       | The Outdoor Channel, Inc. 1997 Stock  Option Plan (filed as Exhibit 4.1 to the Company’s Registration Statement on  Form S-8 with respect to the shares underlying the options assumed by the  Company under such plan that was filed on November 12, 2004 and incorporated  herein by reference).                                                                                   |
| 10.8*       |       | Form of Stock Option Agreement pursuant  to The Outdoor Channel, Inc. 1997 Stock Option Plan (filed as Exhibit 4.2 to  the Company’s Registration Statement on Form S-8 with respect to the shares  underlying the options assumed by the Company under such plan that was filed  on November 12, 2004 and incorporated herein by reference).                                        |
| 10.9*       |       | Non-Statutory Stock Option Plan and  Agreement, dated as of November 13, 2003, by and between the Company and  William A. Owen, as amended (filed as Exhibit 4.1 to the Company’s  Registration Statement on Form S-8 with respect to the shares underlying such  plan that was filed on November 12, 2004 and incorporated herein by  reference).                                   |

 

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| 10.10* |   | Non-Employee Directors Stock Option  Plan, as amended (filed as Exhibit 4.1 to the Company’s Registration  Statement on Form S-8 with respect to the shares underlying such plan that  was filed on November 12, 2004 and incorporated herein by reference).                                                                                                 |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.11* |   | Form of Stock Option Agreement pursuant  to Non-Employee Directors Stock Option Plan (filed as Exhibit 10.13 to the  Company’s Form 10-KSB for the year ended December 31, 2003 and incorporated  herein by reference).                                                                                                                                      |
| 10.12* |   | 2004 Long-Term Incentive Plan (filed as  Exhibit 4.1 to the Company’s Registration Statement on Form S-8 with respect  to the shares underlying such plan that was filed on November 12, 2004 and  incorporated herein by reference).                                                                                                                        |
| 10.13* |   | Form of Stock Option Award Agreement  pursuant to 2004 Long-Term Incentive Plan (filed as Exhibit 99.1 to the  Company’s Form 8-K dated December 20, 2004 and incorporated herein by  reference).                                                                                                                                                            |
| 10.14* |   | Form of Restricted Shares Award  Agreement pursuant to 2004 Long-Term Incentive Plan (filed as Exhibit 99.2 to  the Company’s Form 8-K dated December 20, 2004 and incorporated herein by  reference).                                                                                                                                                       |
| 10.15  |   | Purchase and Sale Agreement and Escrow  Instructions by and between Temecula Enterprises, LLC, an Ohio limited  liability company and The Outdoor Channel, Inc., a Nevada corporation, dated  as of December 16, 2004 (filed as Exhibit 10.1 to the Company’s Form  10-Q/A for the quarter ended March 31, 2005 and incorporated herein by  reference). |
| 10.16* |   | Outdoor Channel Holdings, Inc. Executive  Annual Cash Bonus Plan effective April 21, 2005 (filed as Exhibit 10.2  to the Company’s Form 10-Q/A for the quarter ended March 31, 2005 and  incorporated herein by reference).                                                                                                                             |
| 10.17* |   | Selling Stockholders Registration Rights  Agreement, dated as of June 27, 2005, among Outdoor Channel Holdings,  Inc. and the selling stockholders who are a party (filed as Exhibit 10.1  to the Company’s current report on Form 8-K filed on June 28, 2005 and  incorporated herein by reference).                                         |
| 10.18  |   | Amendment to Loan Agreement and Note and  related agreements by and between the Company and U.S. Bank N.A. dated  October 18, 2005.                                                                                                                                                                                                                               |
| 10.19  |   | Term Loan Agreement and related  agreements by and between 43455 BPD, LLC and U.S. Bank N.A. dated as of  October 18, 2005.                                                                                                                                                                                                                                       |
| 10.20  |   | Term Loan Agreement and related  agreements by and between the Company and U.S. Bank N.A. dated as of October  18, 2005.                                                                                                                                                                                                                                          |
| 10.21* |   | Optionholders Registration Rights  Agreement by and among the Company, Ray V. Miller and Elizabeth J. Sanderson  dated as of December 5, 2005 (filed as Exhibit 10.1 to the Company’s current  report on Form 8-K filed on December 6, 2005 and incorporated herein by  reference).                                                                          |
| 10.22* |   | Lease by and between the Company and  Musk Ox Properties, L.P. dated as of January 1, 2006.                                                                                                                                                                                                                                                                       |
| 21.1   |   | Subsidiaries of Registrant                                                                                                                                                                                                                                                                                                                                        |
| 23.1   |   | Consent of J.H. Cohn LLP, Independent  Registered Public Accounting Firm                                                                                                                                                                                                                                                                                          |
| 24.1   |   | Power of Attorney (included on signature  page)                                                                                                                                                                                                                                                                                                                   |
| 31.1   |   | Certification by Chief Executive Officer                                                                                                                                                                                                                                                                                                                          |
| 31.2   |   | Certification by Chief Financial Officer                                                                                                                                                                                                                                                                                                                          |
| 32.1** |   | Section 1350 Certification by Chief  Executive Officer                                                                                                                                                                                                                                                                                                            |
| 32.2** |   | Section 1350 Certification by Chief  Financial Officer                                                                                                                                                                                                                                                                                                            |

 

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*             Designates a management contract or compensatory plan orarrangement.

**          Pursuant to Commission Release No. 33-8238, this certificationwill be treated as “accompanying” this Annual Report on Form 10-K and not “filed”as part of such report for purposes of Section 18 of the Securities ExchangeAct of 1934, as amended, or otherwise subject to the liability of Section 18 ofthe Securities Exchange Act of 1934, as amended, and this certification willnot be deemed to be incorporated by reference into any filing under theSecurities Act of 1933, as amended, or the Securities Exchange Act of 1934, asamended, except to the extent that the registrant specifically incorporates itby reference.

 

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**SIGNATURES**

 

Pursuant to the requirements of section 13or 15 (d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
| ** ** |   | **OUTDOOR CHANNEL  HOLDINGS, INC.** |
|------------|--------|-------------------------------------|
|       |   |                                |
|       |   | By:                                 | /s/ Perry T. Massie |   |
|       |   | Perry T. Massie, President          |
|       |   | Dated: March 16, 2006               |

 

**POWER OF ATTORNEY**

 

Know all men by these presents, that eachperson whose signature appears below constitutes and appoints Perry T. Massieor William A. Owen, his or her attorney-in-fact, with power of substitution inany and all capacities, to sign any amendments to this annual report on Form10-K, and to file the same with exhibits thereto, and other documents inconnection therewith, with the Securities and Exchange Commission, herebyratifying and confirming all that the attorney-in-fact or his or her substituteor substitutes may do or cause to be done by virtue hereof. This power of attorneymay be executed in multiple counterparts, each of which shall be deemed anoriginal, but which taken together shall constitute one instrument.

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 
| **Signature**              | ** ** | **Title**                           | ** ** | **Date**        |
|----------------------------|------------|-------------------------------------|------------|-----------------|
|                       |       |                                |       |            |
| /s/ Perry T. Massie        |       | Chief Executive Officer,            |       | March 16,  2006 |
| Perry T. Massie            |       | President and Chairman of the       |       |            |
|                       |       | Board (Principal Executive Officer) |       |            |
|                       |       |                                |       |            |
| /s/ William A. Owen        |       | Chief Financial Officer and         |       | March 16,  2006 |
| William A. Owen            |       | Controller (Principal Financial     |       |            |
|                       |       | and Accounting Officer)             |       |            |
|                       |       |                                |       |            |
| /s/ Thomas H. Massie       |       | Executive Vice President, Secretary |       | March 16,  2006 |
| Thomas H. Massie           |       | and Vice Chairman of the Board      |       |            |
|                       |       |                                |       |            |
| /s/ Jerry R. Berglund      |       | Director                            |       | March 16,  2006 |
| Jerry R. Berglund          |       |                                |       |            |
|                       |       |                                |       |            |
| /s/ David C. Merritt       |       | Director                            |       | March 16,  2006 |
| David C. Merritt           |       |                                |       |            |
|                       |       |                                |       |            |
| /s/ Ray V. Miller          |       | Director                            |       | March 16,  2006 |
| Ray V. Miller              |       |                                |       |            |
|                       |       |                                |       |            |
| /s/ Elizabeth J. Sanderson |       | Director                            |       | March 16,  2006 |
| Elizabeth J. Sanderson     |       |                                |       |            |
|                       |       |                                |       |            |
| /s/ T. Bahnson Stanley     |       | Director                            |       | March 16,  2006 |
| T. Bahnson Stanley         |       |                                |       |            |

 

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