**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM10-Q**

 

**(Mark One)**

 

| **ý** | ** ** | **Quarterly Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|------------|------------|-----------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                    |
| ** ** | ** ** | **For  the quarterly period ended March 31, 2006**                                            |
| ** ** | ** ** | ** **                                                                                    |
| **o**      | ** ** | **Transition Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |

 

**For thetransition periodfrom                   to**

 

**Commissionfile number: 000-17287**

 

**OutdoorChannel Holdings, Inc.**

(Exact name of Registrantas specified in its charter)

 

| **Delaware**                       | ** ** | **33-0074499**                        |
|------------------------------------|------------|---------------------------------------|
| (State or other  Jurisdiction      |       | (IRS Employer  Identification Number) |
| of incorporation or  organization) |       |                                  |

 

**43445Business Park Drive, Suite 113**

**Temecula,California 92590**

(Address and zip code ofprincipal executive offices)

 

**(951) 699-4749**

(Issuer’s telephonenumber, including area code)

 

 

(Former name, formeraddress and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  ýYes     o No

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  oYes     ý No

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date:

 
| **Class**                       | ** ** | **Number  of Shares Outstanding at April 30, 2006** |
|---------------------------------|------------|-----------------------------------------------------|
| Common Stock, $0.001  par value |       | 24,600,794                                          |

 

 

----

 

**OUTDOORCHANNEL HOLDINGS, INC. AND SUBSIDIARIES**

**QuarterlyReport on Form 10-Q**

**For ThePeriod Ended March 31, 2006**

 

**Table ofContents**

 
|           | **Part I. Financial Information**                                                                                        |   |
|----------------|--------------------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                                     |   |
| **Item 1.**    | Financial  Statements                                                                                                    |   |
|           |                                                                                                                     |   |
|           | Condensed  Consolidated Balance Sheets at March 31, 2006 (Unaudited) and December 31,  2005                              |   |
|           |                                                                                                                     |   |
|           | Unaudited  Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2006 and 2005       |   |
|           |                                                                                                                     |   |
|           | Unaudited  Condensed Consolidated Statement of Stockholders’ Equity for the Three Months  Ended March 31, 2006 |   |
|           |                                                                                                                     |   |
|           | Unaudited  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005       |   |
|           |                                                                                                                     |   |
|           | Notes  to Unaudited Condensed Consolidated Financial Statements                                                          |   |
|           |                                                                                                                     |   |
| **Item 2.**    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                              |   |
|           |                                                                                                                     |   |
|           | Recent  Accounting Developments                                                                                          |   |
|           |                                                                                                                     |   |
| **Item 3.**    | Quantitative  and Qualitative Disclosures About Market Risk                                                              |   |
|           |                                                                                                                     |   |
| **Item 4.**    | Controls  and Procedures                                                                                                 |   |
|           |                                                                                                                     |   |
|           | **Part II. Other Information**                                                                                           |   |
|           |                                                                                                                     |   |
| **Item 1.**    | Legal  Proceedings                                                                                                       |   |
|           |                                                                                                                     |   |
| **Item 1A.**   | Risk Factors                                                                                                             |   |
|           |                                                                                                                     |   |
| **Item 2.**    | Unregistered  Sales of Equity Securities and Use of Proceeds                                                             |   |
|           |                                                                                                                     |   |
| **Item 3.**    | Defaults  Upon Senior Securities                                                                                         |   |
|           |                                                                                                                     |   |
| **Item 4.**    | Submission  of Matters to a Vote of Security Holders                                                                     |   |
|           |                                                                                                                     |   |
| **Item 5.**    | Other  Information                                                                                                       |   |
|           |                                                                                                                     |   |
| **Item  6.**   | Exhibits                                                                                                                 |   |
|           |                                                                                                                     |   |
| **Signatures** |                                                                                                                     |

 

* * *

 

2

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**PART I—FINANCIAL INFORMATION**

 

**ITEM 1.****  Financial Statements.**

 

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

**Condensed Consolidated Balance Sheets**

(In thousands, except pershare data)

 
| ** **                                                                                                  | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                                                                                  | ** ** | **(Unaudited)**     | ** ** | ** **             | ** ** |
| **Assets**                                                                                                  | ** ** | ** **          | ** ** | ** **             | ** ** |
| Current assets:                                                                                             |       |                |       |                   |       |
| Cash and cash  equivalents                                                                                  |       | $                   | 19,594     |                   | $          | 18,276 |   |
| Investment in  available-for-sale securities                                                                |       | 37,349              |       | 38,830                 |       |
| Accounts  receivable, net of allowance for doubtful accounts of $350 and $275                               |       | 6,813               |       | 5,320                  |       |
| Income tax  refund receivable                                                                               |       | 3,843               |       | 3,843                  |       |
| Deferred tax  assets, net                                                                                   |       | 1,456               |       | 1,015                  |       |
| Prepaid  programming costs                                                                                  |       | 2,575               |       | 2,381                  |       |
| Other current  assets                                                                                       |       | 1,077               |       | 689                    |       |
| Total current  assets                                                                                       |       | 72,707              |       | 70,354                 |       |
|                                                                                                        |       |                |       |                   |       |
| Property, plant and equipment at cost, net:                                                                 |       |                |       |                   |       |
| Membership  division                                                                                        |       | 3,467               |       | 3,526                  |       |
| Outdoor Channel  equipment and improvements                                                                 |       | 12,935              |       | 12,097                 |       |
| Property, plant  and equipment, net                                                                         |       | 16,402              |       | 15,623                 |       |
| Amortizable intangible assets                                                                               |       | 1,240               |       | 1,380                  |       |
| Goodwill                                                                                                    |       | 44,457              |       | 44,457                 |       |
| Other non-amortizable intangible assets                                                                     |       | 10,573              |       | 10,573                 |       |
| Deferred tax assets, net                                                                                    |       | 9,356               |       | 9,230                  |       |
| Derivative instruments                                                                                      |       | 7                   |       | —                 |       |
| Deposits and other assets                                                                                   |       | 671                 |       | 605                    |       |
| Totals                                                                                                      |       | $                   | 155,413    |                   | $          | 152,222 |   |
|                                                                                                        |       |                |       |                   |       |
| **Liabilities  and Stockholders’ Equity**                                                              | ** ** | ** **          | ** ** | ** **             | ** ** |
| Current liabilities:                                                                                        |       |                |       |                   |       |
| Accounts payable  and accrued expenses                                                                      |       | $                   | 3,502      |                   | $          | 2,864 |   |
| Accrued  severance payments                                                                                 |       | 18                  |       | 18                     |       |
| Current portion  of long-term debt and capital lease obligations                                            |       | 701                 |       | 708                    |       |
| Current portion  of deferred revenue                                                                        |       | 1,102               |       | 422                    |       |
| Customer  deposits                                                                                          |       | 641                 |       | 159                    |       |
| Total current  liabilities                                                                                  |       | 5,964               |       | 4,171                  |       |
|                                                                                                        |       |                |       |                   |       |
| Accrued severance payments, net of current portion                                                          |       | 12                  |       | 16                     |       |
| Long-term debt and capital lease obligations, net of  current portion                                       |       | 4,018               |       | 4,193                  |       |
| Deferred revenue, net of current portion                                                                    |       | 1,250               |       | 1,271                  |       |
| Derivative instruments                                                                                      |       | —              |       | 72                     |       |
| Deferred satellite rent obligations                                                                         |       | 307                 |       | 295                    |       |
| Total  liabilities                                                                                          |       | 11,551              |       | 10,018                 |       |
|                                                                                                        |       |                |       |                   |       |
| Commitments and contingencies                                                                               |       |                |       |                   |       |
| Stockholders’ equity:                                                                                  |       |                |       |                   |       |
| Preferred stock;  25,000 shares authorized; none issued                                                     |       | —              |       | —                 |       |
| Common stock,  $0.001 par value; 75,000 shares authorized: 24,577 and 24,409 shares issued  and outstanding |       | 25                  |       | 24                     |       |
| Additional  paid-in capital                                                                                 |       | 158,828             |       | 158,700                |       |
| Deferred  compensation                                                                                      |       | —              |       | (1,520                 | )          |
| Accumulated  other comprehensive income (loss):                                                             |       |                |       |                   |       |
| Net unrealized  gains (losses) on derivative instruments                                                    |       | 7                   |       | (72                    | )          |
| Net unrealized  gains on available-for-sale securities                                                      |       | 48                  |       | 36                     |       |
| Total  accumulated other comprehensive income (loss)                                                        |       | 55                  |       | (36                    | )          |
| Accumulated  deficit                                                                                        |       | (15,046             | )          | (14,964                | )          |
| Total  stockholders’ equity                                                                            |       | 143,862             |       | 142,204                |       |
| Totals                                                                                                      |       | $                   | 155,413    |                   | $          | 152,222 |   |

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

3

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**OUTDOORCHANNEL HOLDINGS, INC. AND SUBSIDIARIES**

**Unaudited Condensed Consolidated Statements of Operations**

(In thousands, except pershare data)

 
| ** **                                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                             | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| Revenues:                                              |       |                              |       |   |   |
| Advertising                                            |       | $                                 | 5,685      |   | $ | 5,259 |   |
| Subscriber fees                                        |       | 4,383                             |       | 3,642 |   |
| Membership  income                                     |       | 1,221                             |       | 1,160 |   |
|                                                   |       |                              |       |   |   |
| Total revenues                                         |       | 11,289                            |       | 10,061 |   |
|                                                   |       |                              |       |   |   |
| Expenses:                                              |       |                              |       |   |   |
| Satellite  transmission fees                           |       | 638                               |       | 633 |   |
| Advertising                                            |       | 2,162                             |       | 1,694 |   |
| Programming                                            |       | 1,544                             |       | 521 |   |
| Selling, general  and administrative                   |       | 7,506                             |       | 6,486 |   |
|                                                   |       |                              |       |   |   |
| Total expenses                                         |       | 11,850                            |       | 9,334 |   |
|                                                   |       |                              |       |   |   |
| Income (loss) from operations                          |       | (561                              | )          | 727 |   |
|                                                   |       |                              |       |   |   |
| Interest expense                                       |       | 78                                |       | 1 |   |
| Other income, net                                      |       | 623                               |       | 53 |   |
|                                                   |       |                              |       |   |   |
| Income (loss) before income taxes                      |       | (16                               | )          | 779 |   |
|                                                   |       |                              |       |   |   |
| Income tax provision                                   |       | 66                                |       | 327 |   |
|                                                   |       |                              |       |   |   |
| Net income (loss)                                      |       | $                                 | (82        | ) | $ | 452 |   |
|                                                   |       |                              |       |   |   |
| Earnings (loss) per common share:                      |       |                              |       |   |   |
| Basic                                                  |       | $                                 | 0.00       |   | $ | 0.02 |   |
| Diluted                                                |       | $                                 | 0.00       |   | $ | 0.02 |   |
|                                                   |       |                              |       |   |   |
| Weighted average number of common shares  outstanding: |       |                              |       |   |   |
| Basic                                                  |       | 24,462                            |       | 18,474 |   |
| Diluted                                                |       | 24,462                            |       | 22,397 |   |

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

4

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**OUTDOORCHANNEL HOLDINGS, INC. AND SUBSIDIARIES**

**Unaudited Condensed Consolidated Statement of Stockholders’Equity**

**For theThree Months Ended March 31, 2006**

(In thousands)

 
| ** **                                                                                        | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Deferred** | ** ** | **Accumulated Other  Comprehensive** | ** ** | **Accumulated**   | ** ** | ** **  | ** ** |      |
|---------------------------------------------------------------------------------------------------|------------|------------------|------------|-------------------------|------------|--------------|------------|--------------------------------------|------------|-------------------|------------|-------------|------------|-----------|
| ** **                                                                                        | ** ** | **Shares**       | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Compensation**                     | ** ** | **Income (Loss)** | ** ** | **Deficit** | ** ** | **Total** | ** ** |   |
| Balance, January  1, 2006                                                                         |       | 24,409           |       | $                       | 24         |         | $          | 158,700                              |       | $                 | (1,520     | )           | $          | (36       | ) | $ | (14,964 | ) | $ | 142,204 |   |
|                                                                                              |       |             |       |                    |       |         |       |                                 |       |              |       |        |       |      |   |   |
| Comprehensive  Income:                                                                            |       |             |       |                    |       |         |       |                                 |       |              |       |        |       |      |   |   |
| Net loss                                                                                          |       |             |       |                    |       |         |       |                                 |       |              |       | (82         | )          | (82       | ) |   |
| Effect of change  in fair value of available-for-sale securities, net of deferred taxes of  ($19) |       |             |       |                    |       |         |       |                                 |       | 12                |       |        |       | 12        |   |   |
| Impact of cash  flow hedge                                                                        |       |             |       |                    |       |         |       |                                 |       | 79                |       |        |       | 79        |   |   |
| Total  comprehensive income                                                                       |       |             |       |                    |       |         |       |                                 |       |              |       |        |       | 9         |   |   |
|                                                                                              |       |             |       |                    |       |         |       |                                 |       |              |       |        |       |      |   |   |
| Reclassification  of deferred compensation upon adoption of SFAS 123R                             |       |             |       |                    |       | (1,520       | )          | 1,520                                |       |              |       |        |       |      |   |   |
|                                                                                              |       |             |       |                    |       |         |       |                                 |       |              |       |        |       |      |   |   |
| Common stock  issued upon exercise of stock options                                               |       | 174              |       | 1                       |       | 182          |       |                                 |       |              |       |        |       | 183       |   |   |
|                                                                                              |       |             |       |                    |       |         |       |                                 |       |              |       |        |       |      |   |   |
| Forfeited  restricted shares                                                                      |       | (6               | )          |                    |       |         |       |                                 |       |              |       |        |       |      |   |   |
|                                                                                              |       |             |       |                    |       |         |       |                                 |       |              |       |        |       |      |   |   |
| Stock-based  employee compensation expense                                                        |       |             |       |                    |       | 815          |       |                                 |       |              |       |        |       | 815       |   |   |
|                                                                                              |       |             |       |                    |       |         |       |                                 |       |              |       |        |       |      |   |   |
| Tax benefit from  exercise of stock options                                                       |       |             |       |                    |       | 651          |       |                                 |       |              |       |        |       | 651       |   |   |
|                                                                                              |       |             |       |                    |       |         |       |                                 |       |              |       |        |       |      |   |   |
| Balance, March  31, 2006                                                                          |       | 24,577           |       | $                       | 25         |         | $          | 158,828                              |       | $                 | —     |        | $          | 55        |   | $ | (15,046 | ) | $ | 143,862 |   |
|                                                                                                   |            |                  |            |                         |            |              |            |                                      |            |                   |            |             |            |           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

5

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**OUTDOORCHANNEL HOLDINGS, INC. AND SUBSIDIARIES**

**Unaudited Condensed Consolidated Statements of Cash Flows**

(In thousands)

 
| ** **                                                                                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| Operating activities:                                                                                     |       |                              |       |   |   |
| Net income  (loss)                                                                                        |       | $                                 | (82        | ) | $ | 452 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities:      |       |                              |       |   |   |
| Depreciation and  amortization                                                                            |       | 552                               |       | 575 |   |
| Provision for  doubtful accounts                                                                          |       | 67                                |       | 9 |   |
| Stock-based  employee compensation                                                                        |       | 815                               |       | 52 |   |
| Deferred tax  provision, net                                                                              |       | 66                                |       |   |   |
|                                                                                                      |       |                              |       |   |   |
| Changes in  operating assets and liabilities:                                                             |       |                              |       |   |   |
| Accounts  receivable                                                                                      |       | (1,560                            | )          | 221 |   |
| Income tax  refund receivable                                                                             |       | —                            |       | 326 |   |
| Prepaid  programming costs                                                                                |       | (194                              | )          | (548 | ) |
| Other current  assets                                                                                     |       | (388                              | )          | (828 | ) |
| Deposits and  other assets                                                                                |       | (69                               | )          | (82 | ) |
| Accounts payable  and accrued expenses                                                                    |       | 638                               |       | (1,241 | ) |
| Deferred revenue                                                                                          |       | 659                               |       | 20 |   |
| Customer  deposits                                                                                        |       | 482                               |       | 625 |   |
| Accrued  severance payments                                                                               |       | (4                                | )          | (20 | ) |
| Deferred  satellite rent obligations                                                                      |       | 12                                |       | (8 | ) |
| Net cash  provided by (used in) operating activities                                                      |       | 994                               |       | (447 | ) |
|                                                                                                      |       |                              |       |   |   |
| Investing activities:                                                                                     |       |                              |       |   |   |
| Purchases of  property, plant and equipment                                                               |       | (1,189                            | )          | (1,668 | ) |
| Purchases of  available-for-sale securities                                                               |       | (32,638                           | )          | — |   |
| Proceeds from  sale of available-for-sale securities                                                      |       | 34,150                            |       | — |   |
| Net cash  provided by (used in) investing activities                                                      |       | 323                               |       | (1,668 | ) |
|                                                                                                      |       |                              |       |   |   |
| Financing activities:                                                                                     |       |                              |       |   |   |
| Principal  payments on long-term debt and capital leases                                                  |       | (182                              | )          | (6 | ) |
| Proceeds from  exercise of stock options                                                                  |       | 183                               |       | 170 |   |
| Net cash  provided by financing activities                                                                |       | 1                                 |       | 164 |   |
| Net increase  (decrease) in cash and cash equivalents                                                     |       | 1,318                             |       | (1,951 | ) |
| Cash and cash  equivalents, beginning of period                                                           |       | 18,276                            |       | 13,105 |   |
| Cash and cash  equivalents, end of period                                                                 |       | $                                 | 19,594     |   | $ | 11,154 |   |
|                                                                                                      |       |                              |       |   |   |
| Supplemental disclosure of cash flow information:                                                         |       |                              |       |   |   |
|                                                                                                      |       |                              |       |   |   |
| Interest paid                                                                                             |       | $                                 | 78         |   | $ | — |   |
|                                                                                                      |       |                              |       |   |   |
| Income taxes  paid                                                                                        |       | $                                 | —     |   | $ | 5 |   |
|                                                                                                      |       |                              |       |   |   |
| Supplemental disclosures of non-cash investing and  financing activities:                                 |       |                              |       |   |   |
|                                                                                                      |       |                              |       |   |   |
| Effect of net  increase (decrease) in fair value of available-for-sale securities, net of  deferred taxes |       | $                                 | 12         |   | $ | (32 | ) |
|                                                                                                      |       |                              |       |   |   |
| Effect of net  increase in fair value of cash flow hedge                                                  |       | $                                 | 79         |   | $ | — |   |

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

6

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**OUTDOORCHANNEL HOLDINGS, INC. AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated FinancialStatements**

(In thousands, except pershare data)

 

**NOTE 1—ORGANIZATION AND BUSINESS**

 

**Description of Operations**

 

Outdoor Channel Holdings, Inc. or “Outdoor Channel Holdings,” isincorporated under the laws of the State of Delaware. Collectively, with itssubsidiaries, the terms “we,” “us,” “our” and the “Company” refer to OutdoorChannel Holdings, Inc. as a combined entity, except where noted or where thecontext makes clear the reference is only to Outdoor Channel Holdings, Inc. orone of our subsidiaries. The Company acquired the remaining 17.6% minorityinterest in our subsidiary, The Outdoor Channel, Inc. (“TOC”), which it did notpreviously hold, on September 8, 2004. TOC operates The Outdoor Channel, whichis a national television network devoted to traditional outdoor activities,such as hunting, fishing and shooting sports, as well as off-road motor sportsand other related lifestyle programming. TOC also operates Outdoor Channel 2HD, which also is a national television network with similar programming as TOC’sbut is produced and aired utilizing high definition technology.

 

Our revenues include advertising fees from advertisements aired on TheOutdoor Channel, including fees paid by outside producers to purchaseadvertising time in connection with the airing of their programs on The OutdoorChannel, and from advertisements in “Gold Prospectors & Treasure Hunters inthe Great Outdoors” magazine; subscriber fees paid by cable and satelliteservice providers that air The Outdoor Channel; membership fees from members inboth LDMA-AU, Inc. (“Lost Dutchman’s”) and Gold Prospector’s Association ofAmerica, LLC (“GPAA”) and other income including products and services relatedto gold prospecting, gold expositions, expeditions and outings.

 

Other business activities consist of the promotion and sale of a goldprospecting expedition to our Cripple River property located near Nome, Alaska,and the sale of memberships in Lost Dutchman’s that entitle members to engagein gold prospecting on our Arizona, California, Colorado, Georgia, Michigan,North Carolina, Oregon, and South Carolina properties. We have signed anagreement with another organization for the mutual use of these and otherproperties.

 

Outdoor Channel Holdings also wholly owns 43455 BPD, LLC that owns thebuilding housing our broadcast facility.

 

**NOTE 2—UNAUDITED INTERIM FINANCIALSTATEMENTS**

 

In the opinion of management, the accompanying unaudited condensedconsolidated financial statements reflect all adjustments, consisting of normalrecurring adjustments, necessary to present fairly the financial position ofthe Company as of March 31, 2006 and its results of operations and cash flowsfor the three months ended March 31, 2006 and 2005. Information included in theconsolidated balance sheet as of December 31, 2005 has been derived from, andcertain terms used herein are defined in, the audited financial statements ofthe Company as of December 31, 2005 (the “Audited Financial Statements”)included in the Company’s Annual Report on Form 10-K (the “10-K”) for the yearended December 31, 2005 that was previously filed with the Securities andExchange Commission (the “SEC”). Pursuant to the rules and regulations of theSEC, certain information and disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted from thesefinancial statements unless significant changes have taken place since the endof the most recent fiscal year. Accordingly, these unaudited condensedconsolidated financial statements should be read in conjunction with theAudited Financial Statements and the other information also included in the10-K.

 

The results of the Company’s operations for the three months endedMarch 31, 2006 are not necessarily indicative of the results of operations forthe full year ending December 31, 2006.

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect reported amounts of assetsand liabilities as of the dates of the condensed consolidated balance sheetsand reported amount of revenues and expenses for the periods presented.Accordingly, actual results could materially differ from those estimates.

 

**NOTE 3— STOCK INCENTIVE PLANS**

 

Effective January 1, 2006, we adopted Statement of Financial AccountingStandards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). We haveelected to use the modified prospective transition method. This method requirescompensation cost to be recognized in the financial statements over the serviceperiod for the fair value of all awards (including awards to employees) grantedafter the date of adoption as well as for existing awards for which therequisite service had not been rendered as of the date of adoption and requiresthat prior periods not be restated. Our stock incentive plans provide for thegranting of qualified and nonqualified options, restricted stock and stockappreciation rights (“SARs”) to our officers, directors and employees.Outstanding options are generally exercisable from 90 days to four years afterthe date of the grant and expire no more than ten years after the grant. Wesatisfy the exercise of

 

7

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options and awards of restricted stock by issuing previously unissuedcommon shares. Currently we have not awarded any SARs. Prior to the adoption ofSFAS 123R, we used the intrinsic value method to account for stock optionsgranted to employees and made no charges against earnings with respect to thoseoptions at the date of grant since our employee options had exercise pricesthat were equal to the market price, however, as explained in the 10-K, we didrecognize a charge in the third quarter of 2004 when we issued fully-vestedoptions to purchase shares in Outdoor Channel Holdings in exchange forfully-vested options held by employees of TOC on September 8, 2004. SFAS 123Rrequires that we elect an approved method to calculate the historical pool ofwindfall tax benefits upon adoption of SFAS 123R within one year of itsadoption. As of March 31, 2006, we have not made that election.

 

For the three months ended March 31, 2006, the adoption of SFAS 123Rreduced income (loss) from operations by $713, reduced net income (loss) by$490 and reduced earnings (loss) per basic and diluted share by $0.02 and$0.02, respectively. The adoption of SFAS 123R did not have a material effecton the condensed consolidated statement of cash flows for the three monthsended March 31, 2006.

 

The weighted average fair value of employee stock options granted by usin the three months ended March 31, 2006 was estimated to be $4.48 per shareusing the Black-Scholes option pricing model with the following assumptions:

 
| ** **                  | ** ** | **Three Months Ended  March 31, 2006** | ** ** |
|-----------------------------|------------|----------------------------------------|------------|
| Risk-free interest rate     |       | 4.2 - 4.6%                             |       |
| Dividend yield              |       | 0%                                     |       |
| Expected life of the option |       | 4.4 yrs.                               |       |
| Volatility factor           |       | 28.5 – 31.5%                      |       |

 

Expected volatilities are based on historical volatility of theCompany’s stock, and other factors. The Company uses historical experience withexercise and post-vesting employment termination behavior to determinethe options’ expected life. The expected life represents the period of timethat options granted are expected to be outstanding. The risk-free rate isbased on the U.S. Treasury rate with a maturity date corresponding to theoptions’ expected life.

 

Our historical net income and earnings per common share and pro formanet income and earnings per common share assuming compensation cost had beendetermined for the three months ended March 31, 2005 based on the fair valueinstead of the intrinsic value at the grant date for all awards by us to ouremployees, using the Black-Scholes option pricing model consistent with theprovisions of SFAS 123R, and amortized ratably over the vesting period, are setforth below:

 
| ** **                                                                                                                              | ** ** | **Three Months  Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                              | ** ** | **2005**                          | ** ** |
| Net income:                                                                                                                             |       |                              |       |
| As reported                                                                                                                             |       | $                                 | 452        |   |
| Deduct:  Stock-based employee compensation expense assuming a fair value-based method  had been used for all awards, net of tax effects |       | (397                              | )          |
|                                                                                                                                    |       |                              |       |
| Pro forma –  basic and diluted                                                                                                     |       | $                                 | 55         |   |
|                                                                                                                                    |       |                              |       |
| Basic earnings per share:                                                                                                               |       |                              |       |
| As reported                                                                                                                             |       | $                                 | 0.02       |   |
| Pro forma                                                                                                                               |       | $                                 | 0.00       |   |
| Diluted earnings per common share:                                                                                                      |       |                              |       |
| As reported                                                                                                                             |       | $                                 | 0.02       |   |
| Pro forma                                                                                                                               |       | $                                 | 0.00       |   |

 

The fair value of each option granted by us in the three months endedMarch 31, 2005 was estimated on the date of grant using the Black-Scholesoption pricing model with the following assumptions:

 
| ** **                  | ** ** | **Three Months Ended  March 31, 2005** | ** ** |
|-----------------------------|------------|----------------------------------------|------------|
| Risk-free interest rate     |       | 4%                                     |       |
| Dividend yield              |       | 0%                                     |       |
| Expected life of the option |       | 10 yrs.                                |       |
| Volatility factor           |       | 79%                                    |       |

 

In accordance with the provisions of SFAS 123R, all other issuances ofcommon stock, stock options, warrants or other equity instruments to employeesand non-employees as the consideration for goods or services received by theCompany are accounted for based on the fair value of the equity instrumentsissued (unless the fair value of the consideration received can be morereliably measured). Generally, the fair value of any options, warrants orsimilar equity instruments issued is estimated based on the Black-Scholesoption-pricing model.

 

8

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**NOTE 4—EARNINGS PER SHARE**

 

We have presented “basic” and “diluted” earnings (loss) per commonshare in the accompanying condensed consolidated statements of operations inaccordance with the provisions of Statement of Financial Accounting StandardsNo. 128, “Earnings Per Share” (“SFAS 128”). Basic earnings (loss) per commonshare is calculated by dividing net income (loss) by the weighted averagenumber of common shares outstanding during each period. The calculation ofdiluted earnings (loss) per common share is similar to that of basic earningsper common share, except that the denominator is increased to include thenumber of additional common shares that would have been outstanding if allpotentially dilutive common shares of the Company were issued during the periodif any such issuances would have had a dilutive effect.

 

For the three months ended March 31, 2006, the computation of dilutedloss per common share does not take into account any of our outstanding stockoptions because the effect of their assumed exercise would beanti-dilutive.  For the three monthsended March 31, 2005, the computation of diluted earnings per common sharetakes into account the effects on the weighted average number of common sharesoutstanding of the assumed exercise of the outstanding stock options of theCompany, adjusted for the application of the treasury stock method. Thenumber of shares potentially issuable by the Company at March 31, 2006 and 2005upon the exercise of stock options that were not included in the computation ofnet earnings (loss) per common share because they were anti-dilutive totaled3,437 and 25, respectively.

 

The following table summarizes the calculation of net income (loss) andthe weighted average common shares outstanding for basic and diluted earnings(loss) per common share for the three months ended March 31, 2006 and 2005:

 
| ** **                                                                                                                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                                         | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| Numerators:                                                                                                                                                        |       |                              |       |   |   |
| Net income  (loss)—basic                                                                                                                                      |       | $                                 | (82        | ) | $ | 452 |   |
|                                                                                                                                                               |       |                              |       |   |   |
| Denominators:                                                                                                                                                      |       |                              |       |   |   |
| Weighted average  common shares outstanding—basic                                                                                                             |       | 24,462                            |       | 18,474 |   |
| 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 |       | —                            |       | 3,923 |   |
| Diluted weighted  average common shares outstanding                                                                                                                |       | 24,462                            |       | 22,397 |   |
|                                                                                                                                                                    |            |                                   |            |  |  |  |  |

 

**NOTE 5—EQUITY TRANSACTIONS**

 

**Issuances of Common Stock by theCompany**

 

During the three months ended March 31, 2006 and 2005, we received cashproceeds of approximately $183 and $170 from the exercise of options for thepurchase of 174 and 125 shares of common stock, respectively.

 

During the three months ended March 31, 2006, a total of 6 shares ofrestricted stock have been cancelled due to employee turnover. As of March 31,2006, we have 121 shares of restricted stock outstanding and $1,418 of expense,with respect to non-vested restricted stock awards, has yet to be recognizedand will be amortized as compensation expense over the employees’ remainingrequisite service periods.

 

9

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**Outdoor Channel Holdings, Inc. StockOption Plans**

 

Descriptions of Outdoor Channel Holdings’ stock option plans areincluded in Note 11 of the Company’s Annual Report on Form 10-K for the yearended December 31, 2005. A summary of the status of the options granted underOutdoor Channel Holdings’ stock option plans and outside of those plans as of March31, 2006 and the changes in options outstanding during the three months thenended is presented in the table that follows:

 
| ** **                           | ** ** | **Shares** | ** ** | **Weighted-average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Aggregate Intrinsic  Value** | ** ** |
|--------------------------------------|------------|------------|------------|--------------------------------------|------------|---------------------------------------------------|------------|--------------------------------|------------|
| Outstanding at beginning of period   |       | 3,564      |       | $                                    | 7.31       |                                              |       |                           |       |   |
| Options granted                      |       | 60         |       | 14.26                                |       |                                              |       |                           |       |
| Options exercised                    |       | (174       | )          | 1.05                                 |       |                                              |       |                           |       |
| Options canceled or expired          |       | (13        | )          | 11.85                                |       |                                              |       |                           |       |
| Options outstanding at end of period |       | 3,437      |       | $                                    | 7.73       |                                              | 3.6 years  |                           | $          | 14,076 |   |
|                                 |       |       |       |                                 |       |                                              |       |                           |       |
| Options exercisable at end of period |       | 2,395      |       | $                                    | 5.82       |                                              | 3.0 years  |                           | $          | 13,945 |   |

 

The weighted-average grant-date fair value of options granted duringthe three months ended March 31, 2006 was $4.48.  The total intrinsic value of stock optionsexercised during the three months ended March 31, 2006 was $1,754.

 

A summary of the status of Outdoor Channel Holdings’ non-vested restrictedshares as of March 31, 2006 and the changes in restricted shares outstandingduring the three months then ended is presented in the table that follows:

 
| ** **                                     | ** ** | **Shares** | ** ** | **Weighted-Average  Grant Date  Fair Value** | ** ** |
|------------------------------------------------|------------|------------|------------|----------------------------------------------|------------|
| Non-vested shares at beginning of period       |       | 127        |       | $                                            | 14.43      |   |
| Granted                                        |       | —     |       | —                                       |       |
| Vested                                         |       | —     |       | —                                       |       |
| Canceled                                       |       | (6         | )          | 14.95                                        |       |
|                                           |       |       |       |                                         |       |
| Non-vested shares outstanding at end of period |       | 121        |       | $                                            | 14.14      |   |

 

As of March 31, 2006, $7,589 of expense with respect to non-vested share-basedarrangements has yet to be recognized which is expected to be recognized over aweighted average period of 1.9 years.

 

**NOTE 6—RELATED PARTY TRANSACTIONS**

 

We lease our administrative facilities from Musk Ox Properties, LP,which in turn is owned by Messrs. Perry T. Massie and Thomas H. Massie,principal stockholders, directors and officers of the Company. In December2005, the lease agreements were consolidated into one lease. The new leaseagreement has a five-year term, expiring on December 31, 2010, with 2 five-yearrenewal options at our discretion. Monthly rent payments are $29 with a 3% peryear escalator clause. Rent expense paid to Musk Ox Properties, LP totaledapproximately $87 and $63 in the three months ended March 31, 2006 and 2005,respectively.

 

 

**NOTE 7—SEGMENT INFORMATION**

 

Pursuant to the Provisions of Statement of Financial AccountingStandards No. 131, “Disclosures About Segments of an Enterprise and RelatedInformation” (“SFAS 131”), we report segment information in the same format asreviewed by our Chief Operating Decision Maker (the “CODM”). We segregate ourbusiness activities into TOC and the Membership Division. TOC is a separatebusiness activity that broadcasts television programming on The Outdoor Channel24 hours a day, seven days a week. TOC generates revenue from advertising fees(which include fees paid by outside producers to purchase advertising time inconnection with the airing of their programs on The Outdoor Channel) andsubscriber fees. Lost Dutchman’s and GPAA membership sales and relatedactivities are reported in the Membership Division. The Membership Divisionalso includes magazine sales, the sale of products and services related to goldprospecting, gold expositions, expeditions and outings. Intersegment salesamounted to $149 in each of the three months ended March 31, 2006 and 2005.

 

10

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Information with respect to these reportable segments as of and for thethree months ended March 31, 2006 and 2005 is as follows:

 
| ** **                                                | ** ** | **Revenues** | ** ** | **Income (Loss)  Before Income  Taxes** | ** ** | **Total  Assets** | ** ** | **Depreciation  and  Amortization** | ** ** | **Additions to  Property,  Plant and  Improvements** | ** ** |
|-----------------------------------------------------------|------------|--------------|------------|-----------------------------------------|------------|-------------------|------------|-------------------------------------|------------|------------------------------------------------------|------------|
| **As of  and for the Three Months Ended: March 31, 2006** | ** ** | ** **   | ** ** | ** **                              | ** ** | ** **        | ** ** | ** **                          | ** ** | ** **                                           | ** ** |
| TOC                                                       |       | $            | 9,910      |                                    | $          | 814               |       | $                                   | 25,555     |                                                 | $          | 345 |   | $ | 1,177 |   |
| Membership Division                                       |       | 1,379        |       | 189                                     |       | 5,854             |       | 71                                  |       | 12                                                   |       |
| Subtotals of  Segments                                    |       | 11,289       |       | 1,003                                   |       | 31,409            |       | 416                                 |       | 1,189                                                |       |
| Corporate*                                                |       | —       |       | (1,019                                  | )          | 124,004           |       | 136                                 |       | —                                               |       |
| Totals                                                    |       | $            | 11,289     |                                    | $          | (16               | )          | $                                   | 155,413    |                                                 | $          | 552 |   | $ | 1,189 |   |
|                                                      |       |         |       |                                    |       |              |       |                                |       |                                                 |       |
| **March 31, 2005**                                        | ** ** | ** **   | ** ** | ** **                              | ** ** | ** **        | ** ** | ** **                          | ** ** | ** **                                           | ** ** |
| TOC                                                       |       | $            | 8,757      |                                    | $          | 1,272             |       | $                                   | 21,797     |                                                 | $          | 361 |   | $ | 1,511 |   |
| Membership Division                                       |       | 1,304        |       | 59                                      |       | 4,979             |       | 78                                  |       | 157                                                  |       |
| Subtotals of  Segments                                    |       | 10,061       |       | 1,331                                   |       | 26,776            |       | 439                                 |       | 1,668                                                |       |
| Corporate*                                                |       | —       |       | (552                                    | )          | 73,520            |       | 136                                 |       | —                                               |       |
| Totals                                                    |       | $            | 10,061     |                                    | $          | 779               |       | $                                   | 100,296    |                                                 | $          | 575 |   | $ | 1,668 |   |

 

----

*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 cash, available-for-sale securities, goodwill,net deferred tax assets and intangible assets.

 

**NOTE 8—INVESTMENT INAVAILABLE-FOR-SALE SECURITIES**

 

The Company’s short term investments in marketable debt and equitysecurities are classified as available-for-sale and are recorded at fair valueat the end of each period. Gross realized gains and losses on sales of thesesecurities during the three months ended March 31, 2006 and 2005 and allamounts related to such investments prior to the three months ended March 31,2006 and the year ended December 31, 2005 were not material. Also included ininvestments in available-for-sale securities at March 31, 2006 and December 31,2005 are investments in commercial paper 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 with enhancedyields. However, we believe we have the ability to quickly liquidate them attheir original cost, although there is no guaranty, and, accordingly, they arecarried at cost, which approximates fair value, and classified as currentassets. All income generated from these investments is recorded as interestincome. We had unrealized net holding gains on marketable equity securities atMarch 31, 2006 and December 31, 2005 of $48 and $36, respectively, thatare in “accumulated other comprehensive income”.

 

The investment in available-for-sale securities is as follows:

 
| ** **                           | ** ** | **As of  March 31, 2006** | ** ** | **As of  December 31, 2005** | ** ** |
|--------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| Auction rate securities              |       | $                         | 33,500     |                         | $          | 38,000 |   |
| Commercial paper                     |       | 2,989                     |       | —                       |       |
| Equities                             |       | 860                       |       | 830                          |       |
| Total  available-for-sale securities |       | $                         | 37,349     |                         | $          | 38,830 |   |

 

**NOTE 9—INCOME TAX PROVISION**

 

The income tax provision reflected in the accompanying unauditedcondensed consolidated statement of operations for the three months ended March31, 2006 is different than that computed based on the applicable statutoryFederal income tax rate of 34%. That portion of the current year SFAS 123Rcompensation expense relating to qualified incentive stock options, or ISOs, isrecognized for financial statement purposes but is generally not deductible fortax purposes and thus is treated as a permanent difference between the two. Werecognized a charge of $151,000 related to ISOs under SFAS 123R compensationexpense. Because of this, and along with the effects of certain other incometax adjustments, we recorded positive taxable income resulting in income taxexpense despite the financial statement loss.

 

**NOTE 10—SUBSEQUENT EVENTS**

 

On May 9, 2006, we received notice from the bank servicing our debt thatit has given us a waiver of a covenant violation as of March 31, 2006 relatingto our two term loans and our revolving line-of-credit facility requiringprofitability of greater than $250,000 each fiscal quarter.  In addition, the bank modified such covenantto exclude the non-cash compensation expense relating to SFAS 123R whencalculating the profitability under this covenant.

 

* * *

 

11

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**ITEM 2.****     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS.**

 

**Safe Harbor Statement**

 

The information contained in this report may includeforward-looking statements. Our actual results could differ materially fromthose discussed in any forward-looking statements. The statements contained inthis report that are not historical are “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933, as amended (the “SecuritiesAct”), and Section 21E of the Securities Exchange Act of 1934, as amended(the “Exchange Act”), including statements, without limitation, regarding ourexpectations, beliefs, intentions or strategies regarding the future. We intendthat such forward-looking statements be subject to the safe-harbor provisionscontained in those sections. Such forward-looking statements relate to, amongother things: (1) increased subscriber growth; (2) expected revenue andearnings growth and changes in mix; (3) anticipated expenses includingadvertising, programming, personnel and others; (4) Nielsen MediaResearch, which we refer to as Nielsen, estimates regarding total householdsand cable and satellite homes subscribing to and viewers (ratings) of TheOutdoor Channel; and (5) more control over our programming. We undertakeno obligation to publicly update or revise any forward-looking statements,whether as a result of new information, future events or otherwise.

 

These statements involve significant risks and uncertainties and arequalified by important factors that could cause our actual results to differmaterially from those reflected by the forward-looking statements. Such factorsinclude but are not limited to risks and uncertainties which are included inPart II, Item 1A Risk Factors below and other risks and uncertainties discussedelsewhere in this report. In assessing forward-looking statements contained herein,readers are urged to read carefully all cautionary statements contained in thisForm 10-Q and in our other filings with the Securities and ExchangeCommission. For these forward-looking statements, we claim the protection ofthe safe harbor for forward-looking statements in Section 27A of theSecurities Act and Section 21E of the Exchange Act.

 

**General**

 

Through our indirect wholly owned subsidiary, The OutdoorChannel, Inc. or TOC, we own and operate The Outdoor Channel which is anational television network devoted primarily to traditional outdooractivities, such as hunting, fishing and shooting sports, as well as off-roadmotor sports and other outdoor related lifestyle programming. We also own andoperate related businesses which serve the interests of The Outdoor Channel’sviewers and other outdoor enthusiasts. These related businesses include:LDMA-AU, Inc., which we refer to as Lost Dutchman’s, and Gold Prospector’sAssociation of America, LLC, which we refer to as GPAA. Lost Dutchman’s is anational gold prospecting campground club with properties in Arizona,California, Colorado, Georgia, Michigan, North Carolina, Oregon and SouthCarolina. 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 revenues include (1) advertising fees from advertisementsaired on The Outdoor Channel and from advertisements in*Gold Prospector & Treasure Hunters in theGreat Outdoors* magazine; (2) subscriber fees paid by cable andsatellite service providers that air The Outdoor Channel; and(3) membership fees from members in both Lost Dutchman’s and GPAA andother income including magazine sales, products and services related to goldprospecting, gold expositions, expeditions and outings. Advertising feesinclude fees paid by third-party programmers to purchase advertising time inconnection with the airing of their programs on The Outdoor Channel.

 

**RecentAccounting Developments**

 

In December 2004, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards No. 123 (revised 2004)(“SFAS 123R”) “Share-Based Payment” which revised the standards for theaccounting for transactions in which an entity exchanges its equity instrumentsfor goods or services and focuses primarily on accounting for transactions inwhich an entity obtains employee services in share-based payment transactions.SFAS 123R 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 123R, only certain pro forma disclosures of fair value were required.SFAS 123R shall be effective for issuers as of the beginning of the firstannual reporting period that begins after December 15, 2005. Accordingly,we adopted the provisions of SFAS No. 123R effective January 1, 2006.Prior to adoption, we used the intrinsic value method to account for employeestock options.

 

The FASB had issued certain other accounting pronouncements as ofMarch 31, 2006 that will become effective in subsequent periods; however,our management does not believe that any of those pronouncements would havesignificantly affected our financial accounting measurements or disclosures hadthey been in effect during the three months ended March 31, 2006.

 

12

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**Comparison of Operating Results forthe Three Months Ended March 31, 2006 and March 31, 2005**

 

The following table discloses certain financial information for theperiods presented, expressed in terms of dollars, dollar change, percentagechange and as a percent of total revenue (all dollar amounts are in thousands):

 
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** | **% of Total Revenue** | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------------------|------------|
| ** **                           | ** ** | **2006**   | ** ** | **2005**   | ** ** | **$**      | ** ** | **%**                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                            |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Advertising                          |       | $          | 5,685      |       | $          | 5,259      |       | $                      | 426        |   | 8.1 | % | 50.4 | % | 52.3 | % |
| Subscriber fees                      |       | 4,383      |       | 3,642      |       | 741        |       | 20.3                   |       | 38.8 |   | 36.2 |   |
| Membership  income                   |       | 1,221      |       | 1,160      |       | 61         |       | 5.3                    |       | 10.8 |   | 11.5 |   |
| Total revenues                       |       | 11,289     |       | 10,061     |       | 1,228      |       | 12.2                   |       | 100.0 |   | 100.0 |   |
|                                 |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Expenses:                            |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Satellite  transmission fees         |       | 638        |       | 633        |       | 5          |       | 0.8                    |       | 5.6 |   | 6.3 |   |
| Advertising                          |       | 2,162      |       | 1,694      |       | 468        |       | 27.6                   |       | 19.1 |   | 16.8 |   |
| Programming                          |       | 1,544      |       | 521        |       | 1,023      |       | 196.4                  |       | 13.7 |   | 5.2 |   |
| Selling, general  and administrative |       | 7,506      |       | 6,486      |       | 1,020      |       | 15.7                   |       | 66.5 |   | 64.5 |   |
| Total expenses                       |       | 11,850     |       | 9,334      |       | 2,516      |       | 27.0                   |       | 104.9 |   | 92.8 |   |
|                                 |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income (loss) from operations        |       | (561       | )          | 727        |       | (1,288     | )          | (177.2                 | )          | (4.9 | ) | 7.2 |   |
|                                 |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Interest expense                     |       | 78         |       | 1          |       | 77         |       | NMF                    |       | 0.7 |   | — |   |
|                                 |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Other income, net                    |       | 623        |       | 53         |       | 570        |       | NMF                    |       | 5.5 |   | 0.5 |   |
|                                 |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income (loss) before income taxes    |       | (16        | )          | 779        |       | (795       | )          | NMF                    |       | (0.1 | ) | 7.7 |   |
|                                 |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income tax provision                 |       | 66         |       | 327        |       | (261       | )          | NMF                    |       | 0.6 |   | 3.2 |   |
|                                 |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Net income (loss)                    |       | $          | (82        | )          | $          | 452        |       | $                      | (534       | ) | NMF | % | (0.7 | )% | 4.5 | % |

 

***NMF – NotMeaningful***

 

**Revenues**

 

Our revenues include revenues from (1) advertising fees;(2) subscriber fees; and (3) membership income. Advertising revenueis generated from the sale of advertising time on The Outdoor Channel includingadvertisements shown during a program (also known asshort-form advertising) and infomercials in which the advertisement is theprogram itself (also known as long-form advertising) and from the sale ofadvertising space in publications such as the*Gold Prospectors & 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 three months endedMarch 31, 2006 and 2005, The Outdoor Channel generated approximately 97.2%and 97.3% of our advertising revenue, respectively. Subscriber fees are solelyrelated to The Outdoor Channel. Membership income is generated by ouractivities other than the operation of The Outdoor Channel and includesmembership sales, magazine sales, merchandise sales, and sponsored outings andexpeditions in connection with GPAA and Lost Dutchman’s.

 

Total revenues for the three months ended March 31, 2006 were$11,289,000, an increase of $1,228,000, or 12.2%, compared to revenues of$10,061,000 for the three months ended March 31, 2005. The net increaseswere the result of changes in several items comprising revenue as discussedbelow.

 

Advertising revenue for the three months ended March 31, 2006 was$5,685,000, an increase of $426,000 or 8.1% compared to $5,259,000 for thethree months ended March 31, 2005. For March 2006, Nielsen estimatedthat The Outdoor Channel had 26.2 million viewers compared to 24.4 million forthe same period a year ago. (Nielsen revises this estimate each month and forMay 2006, Nielsen increased its estimate to approximately 26.7 millionsubscribers). The increase in advertising revenue for the three months endedMarch 31, 2006 reflects a larger percentage of ourshort-form advertising inventory being sold to national and endemicadvertisers, generally at higher rates, than inventory being sold to directresponse advertisers or long-form (infomercial) advertisers.

 

Subscriber fees for the three months ended March 31, 2006 were$4,383,000, an increase of $741,000 or 20.3% compared to $3,642,000 for thethree months ended March 31, 2005. The increase in subscriber fees for theperiod was primarily due to an increased number of paying subscribers both fromnew affiliates and from existing distributors and contractual subscriber feerate

 

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increases with existing service providers carrying The Outdoor Channel.Most notable growth when comparing the respective quarterly results came fromDirecTV, Time Warner, Comcast and Cox in addition to Cablevision which did notcarry The Outdoor Channel in the first quarter of 2005. Principally weattribute the growth to the popularity of our programming as consumers continueto request our channel.

 

We plan to accelerate our subscriber growth utilizing various meansincluding deployment of subscriber acquisition or launch support fees. Suchfees are capitalized and amortized over the period that the pay televisiondistributor is required to carry the newly acquired TOC subscriber. To theextent revenue is associated with the incremental subscribers, the amortizationis charged to offset the related revenue. Any excess of launch supportamortization over the related subscriber fee revenue is charged to expense. Asa result, we anticipate that subscriber fee revenue, net of amortization oflaunch fees, may not increase over the foreseeable future as we deploythis strategy and, in fact, due to contractual volume discounts, subscriber feerevenue could actually decrease over the new or remaining contract lives.

 

Membership income for the three months ended March 31, 2006 was $1,221,000,an increase of $61,000 or 5.3% compared to $1,160,000 for the three monthsended March 31, 2005. We believe that the recent surge in gold prices hasreflected itself in renewed interest by the consuming public that led to ourincreased activity in 2006. Given that, we do not expect significant changes inthe balance from year-to-year in the near term.

 

**Expenses**

 

Expenses consist of the cost of (1) satellite transmission fees;(2) advertising; (3) programming; and (4) selling, general andadministrative expenses.

 

Total expenses for the three months ended March 31, 2006 were$11,850,000, an increase of $2,516,000 or 27.0%, compared to $9,334,000 for thethree months ended March 31, 2005. As a percentage of revenues, totalexpenses were 104.9% and 92.8% in the three months ended March 31, 2006and 2005, respectively. The increase in expenses was due to several factors,including an aggressive campaign that is part of our strategic plan to supportcontinued subscriber growth that we conducted during the first quarter, whichincluded full-page newspaper ads in targeted regions and the launch ofwww.IWantMyOutdoorChannel.com. This campaign, along with other ongoing effortsrelated to carriage agreement negotiations, resulted in additional firstquarter expenses of approximately $750,000. In addition, programming costsincreased as a result of the launch of our second channel, Outdoor Channel 2HD, at the beginning of the third quarter of 2005 and other items more fullydescribed as follows.

 

Satellite transmission fees for the three months ended March 31,2006 were $638,000, an increase of $5,000, or 0.8%, compared to $633,000 forthe three months ended March 31, 2005. The noted change reflects therelative fixed nature of our contracts for uplink and transmission of oursignals.

 

Advertising expenses for the three months ended March 31, 2006were $2,162,000, an increase of $468,000 or 27.6% compared to $1,694,000 forthe three months ended March 31, 2005. The increase was due principally tothe aggressive campaign that is part our strategic plan to support continuedsubscriber growth that we conducted during the first quarter, which includedfull-page newspaper ads in targeted regions and the launch ofwww.IWantMyOutdoorChannel.com.

 

Programming expenses for the three months ended March 31, 2006were $1,544,000, an increase of $1,023,000 or 196.4% compared to $521,000 forthe three months ended March 31, 2005. The increase is principally aresult of our decision to launch our second channel, Outdoor Channel 2 HD, onJuly 1, 2005. We incurred minimal programming costs relative to thischannel in the first quarter of 2005 as most of such costs incurred at thattime were charged to prepaid programming expense in anticipation of its launchin the second half of 2005. During the first quarter of 2006, Outdoor Channel 2HD was fully-programmed.

 

Our policy is to charge costs of specific shows to programming expenseover the expected airing period beginning when the program first airs. The costof programming is generally first recorded as prepaid programming costs and isthen charged to programming expense based on the anticipated airing schedule.If the anticipated airing schedule changes, the timing and amount of thecharge to expense is adjusted accordingly. Programming expenses are expected toincrease as a percentage of revenue as we pursue our strategy to produce, oracquire, more programming in-house as opposed to selling the air time to thirdparty producers. As a result, we believe we will control more of our programs’quality, advertising inventory, sponsorship opportunities and the potential tore-package our programming for other uses such as video-on-demand,international licensing and production of DVDs for retail distribution.

 

Selling, general and administrative expenses for the three months endedMarch 31, 2006 were $7,506,000, an increase of $1,020,000 or 15.7%compared to $6,486,000 for the three months ended March 31, 2005. As apercentage of revenues, selling, general and administrative expenses were 66.5%and 64.5% in the three months ended March 31, 2006 and 2005,respectively.  The increase was primarilyattributable to the adoption of SFAS 123R as of January 1, 2006 which now requiresus to charge the fair value of stock options we have issued to our employeesover the vesting period to compensation expense which we did not have to recordin 2005. The charge in the three months ended March 31, 2006 amounted to$713,000. Restricted stock issued to employees in June and July of

 

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2005 resulted in a charge of $66,000. The remainder of the increase inselling, general and administrative fees related primarily to increased legalfees incurred as a result of our ongoing efforts related to our carriage agreementnegotiations and to other operating costs.

 

We anticipate that selling, general and administrative costs willcontinue to increase over the foreseeable future both in dollars and whenexpressed as a percent of revenue as we continue to work to gain increaseddistribution of both channels including increases from the recognition ofamortization of subscriber acquisition fees, also referred to as launch supportfees, in excess of the related subscriber revenue, and as a result of theadoption of SFAS 123R as well as other corporate expenses.

 

**Income (Loss) from Operations**

 

Income (loss) from operations for the three months ended March 31,2006 was a loss of $561,000, a decrease of $1,288,000 compared to income of$727,000 for the three months ended March 31, 2005. As discussed above,this decrease is primarily a result of the increased compensation expenseresulting from the adoption of SFAS 123R, the increased expenses relating tothe aggressive campaign conducted during the first quarter that is part of ourstrategic plan to support continued subscriber growth and the increased legalfees relating to our carriage agreements. As we continue to strive to drive growth of our subscriber baseincluding the ongoing and planned payment of launch support, and as we furtherdevelop our second channel, Outdoor Channel 2 HD, we will incur increasedexpenses such as programming, marketing and advertising that are unlikely to beimmediately offset by revenues. As a result, we anticipate our operatingmargins will be negatively impacted for the foreseeable future. There can be noassurance that these strategies will be successful.

 

**Interest Expense**

 

Interest expense for the three months ended March 31, 2006 was$78,000, an increase of $77,000 compared to $1,000 for the three months endedMarch 31, 2005. This is attributable to having obtained two term loans inNovember 2005 with original aggregate principal amount of $4,950,000 witheffective fixed interest rates of 6.59% and 6.35%.

 

**Other Income, Net**

 

Other income, net for the three months ended March 31, 2006 was$623,000, an increase of $570,000 compared to $53,000 for the three monthsended March 31, 2005. This improvement was primarily due to increaseddividends and interest earned on our increased investment in available-for-salesecurities and cash and cash equivalent balances.

 

**Income (Loss) Before Income Taxes**

 

Income (loss) before income taxes as a percentage of revenues was(0.1%) for the three months ended March 31, 2006 compared to 7.7% for thethree months ended March 31, 2005.

 

The TOC segment’s income before income taxes decreased to $814,000 forthe three months ended March 31, 2006 from $1,272,000 for the three monthsended March 31, 2005. Expressed as a percentage of revenue, the TOCsegment’s income before income taxes decreased to 8.2% for the three monthsended March 31, 2006, compared to 14.5% for the three months endedMarch 31, 2005. The decrease was due mainly to an aggressive campaign weconducted during the first quarter of 2006 that is part our strategic plan tosupport continued subscriber growth. Contributing to the decline was theadoption of SFAS 123R whereby the TOC segment recognized $167,000 ofcompensation expense (1.7% of segment revenue) that it did not have in the sameperiod in 2005.

Also, programming costs increased as a result of having launched oursecond channel, Outdoor Channel 2 HD, at the beginning of the third quarter of2005 thus related costs were incurred in the first quarter of 2006 that werenot incurred in the same period in 2005.

 

The Membership Division segment’s income before income taxes increasedto $189,000 for the three months ended March 31, 2006 from $59,000 for thethree months ended March 31, 2005. Expressed as a percentage of revenues,the Membership Division segment’s income before income taxes increased to 13.7%for the three months ended March 31, 2006 compared to 4.5% for the threemonths ended March 31, 2005. The increase is principally a result of arenewed interest in gold prospecting which we believe is partially driven byrising gold prices. Revenue increased $75,000 or 5.8%. Also contributing to theimproving segment margins is a decrease in personnel by a few persons with thecommensurate savings of payroll, payroll related expenses and travel costs.

 

Corporate incurred a loss before income taxes for the three monthsended March 31, 2006 amounting to $1,019,000, an increase of $467,000compared to a loss of $552,000 for the three months ended March 31, 2005.The expenses allocated to Corporate include: professional fees such as publicrelations, accounting and legal fees, amortization of intangibles, businessinsurance, board of directors fees and expenses and an allocation of corporateofficers’ payroll and related expenses. Effective January 1, 2006, weprospectively adopted SFAS 123R and Corporate incurred a charge to compensationexpense of $517,000.

 

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**Income Tax Provision**

 

Income tax provision for the three months ended March 31, 2006 was$66,000, a decrease of $261,000 as compared to $327,000 for the three monthsended March 31, 2005. The decrease was principally due to the Companyincurring a loss in the three months ended March 31, 2006 as compared to incomefor the three months ended March 31, 2005. Many of our options arequalified incentive stock options or ISOs. That portion of the current yearSFAS 123R compensation expense relating to ISOs is recognized for financialstatement purposes but is generally not deductible for tax purposes and thus istreated as a permanent difference between the two. We recognized a charge of$151,000 related to ISOs under SFAS 123R compensation expense. Because of this,and along with the effects of certain other income tax adjustments, we recordedpositive taxable income resulting in income tax expense despite the financialstatement loss. The effective income tax rate for the three months ended March31, 2006 is not meaningful. For the three months ended March 31, 2005, theeffective income tax was approximately 42.0%.

 

**Net Income (Loss)**

 

Net income (loss) for the three months ended March 31, 2006 was($82,000), a decrease of $534,000 compared to $452,000 for the three monthsended March 31, 2005. The decrease was due to the reasons stated above.

 

**Liquidity and Capital Resources**

 

We generated $994,000 of cash in our operating activities in the threemonths ended March 31, 2006, compared to cash used in operating activities of$447,000 in the three months ended March 31, 2005 and had a cash and cashequivalent balance of $19,594,000 at March 31, 2006, an increase of $1,318,000from the balance of $18,276,000 at December 31, 2005. We also hadshort-term investments classified as available-for-sale securities of$37,349,000 at March 31, 2006, a decrease of $1,481,000 from the balance of$38,830,000 at December 31, 2005. The investments at March 31, 2006 werecomprised almost entirely of auction rate securities ($33,500,000) withinterest rates that generally reset every 28 days. The auction ratesecurities have long-term maturity dates and provide us with enhancedyields. commercial paper ($2,989,000) and various equity securities($860,000) make up the remainder of the March 31, 2006 balance. We believe wehave the ability to quickly liquidate the auction rate securities andcommercial paper at their original cost although there is no guaranty we wouldbe able to do so. Net working capital increased to $66,743,000 atMarch 31, 2006, compared to $66,183,000 at December 31, 2005.

 

Net cash provided by investing activities was $323,000 in the threemonths ended March 31, 2006 compared to cash used of $1,668,000 for the threemonths ended March 31, 2005. The increase in cash provided by investingactivities was related principally to the net difference of sales and purchasesof short-term auction rate securities which did not exist in the first quarterof 2005 partially offset by a decrease in capital expenditures on “constructionin progress” and equipment related to the build-out of our new broadcastfacility as further discussed below. Additional capital expenditures were forfixed asset replacements.

 

Cash provided by financing activities was $1,000 in the three monthsended March 31, 2006 compared to $164,000 for the three months ended March 31,2005. The cash provided by financing activities in the three months ended March31, 2006 was the exercise of stock options, offset by principal payments onoutstanding debt. The cash provided by financing activities in the three monthsended March 31, 2005 was from the exercise of employee and service providerstock options from our 1995 incentive stock option plan.

 

On November 2, 2005, we renewed our revolving line of creditagreement (the “revolver”) with U.S. Bank N.A. (the “Bank”), extending thematurity date to September 7, 2007 and increasing the total amount whichcan be drawn upon under the revolver from $5,000,000 to $8,000,000. Therevolver provides that the interest rate shall be LIBOR plus 1.25%. Therevolver is collateralized by substantially all of our assets. This creditfacility contains customary financial and other covenants and restrictions, asamended on November 2, 2005, including a change of control provision. Asof March 31, 2006 and as of the date of this report, we did not have anyamounts outstanding under this credit facility.

 

On November 2, 2005, we obtained a $1,950,000 mortgage loan fromthe Bank on our recently purchased building that houses our broadcast facilitylocated in Temecula, California which has a 10 year term loan with a 25 yearamortization schedule. This loan carries a variable interest rate of LIBOR plus1.35%. This loan is secured primarily by a Deed of Trust on the property and isalso secondarily secured by the same assets as the revolver. It also containscustomary financial and other covenants and restrictions including a change ofcontrol provision. On November 7, 2005, we entered into an interest rateswap agreement with the Bank to reduce the potential impact of increasinginterest rates and effectively fixed the interest rate on this loan at 6.59%.

 

On November 2, 2005, we obtained a $3,000,000, five year fullyamortizing term loan. This loan carries a variable interest rate of LIBOR plus1.35%. This term loan is secured by the same assets as the revolver andcontains customary financial and other covenants and restrictions including achange of control provision. On November 7, 2005, we entered into aninterest rate swap agreement with the Bank to reduce the potential impact ofincreasing interest rates and effectively fixed the interest rate on this termloan at 6.35%.

 

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Driven by a need to increase office space, we reassessed our facilitiesincluding floor space utilization, master control equipment, uplink equipment,and other needs during the year ended December 31, 2004. OnFebruary 22, 2005, we announced our intention to purchase a 28,000 squarefoot building in Temecula, California for approximately $2.6 million. Wecompleted the purchase during the third quarter of 2005. We have beencompleting the building improvements since that time and as of March 31, 2006are nearly complete. We estimated that aggregate capital expenditures tocomplete the build-out including updated equipment could exceed $8 million. Asof March 31, 2006, we have spent approximately $6 million on such upgrades,and we expect to spend less than $1 million to complete the project prior tothe end of 2006. Effective April 1, 2006, we have placed the building and mostof the capital expenditures incurred to date “in-service”. In addition to theremaining capital expenditures relating to this building, we also expect tohave other capital expenditures of approximately $2 million for the year endedDecember 31, 2006.

 

Because of our net loss of $82,000 for the three months ended March 31,2006, we were in violation as of March 31, 2006 of a covenant relating to ourtwo term loans and our revolving line-of-credit facility requiringprofitability of greater than $250,000 each fiscal quarter. On May 9, 2006, wereceived notice from the bank servicing our debt that it has given us a waiverof this covenant violation.  In addition,the bank modified such covenant to exclude the non-cash compensation expenserelating to SFAS 123R when calculating the profitability under thiscovenant.  Because of this modification,we currently anticipate to be in compliance with such covenant for at least thenext 12 months.

 

As of March 31, 2006, we had sufficient cash on hand and had beengenerating sufficient cash flow from operations to meet our short-term cashflow requirements. Management believes that our anticipated cash flows from operatingactivity along with our existing cash resources including cash on-hand,available-for-sale securities and access to the revolver, will be sufficient tofund our operations at current levels and anticipated capital requirementsthrough at least June 1, 2007. To the extent that such amounts areinsufficient to finance our working capital requirements or our desire toexpand operations beyond current levels, we could seek additional financing.There can be no assurance that equity or debt financing will be available ifneeded or, if available, will be on terms favorable to us.

 

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**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

At March 31, 2006 and December 31, 2005, our investment portfolioincluded fixed-income securities of $37,349,000 and $38,830,000, respectively.These securities are subject to interest rate risk and will decline in value ifinterest rates increase. However, due to the short duration of our investmentportfolio, an immediate 10% change in interest rates would have no materialimpact on our financial condition, operating results or cash flows. Declines ininterest rates over time will, however, reduce our interest income whileincreases in interest rates over time may increase our interest expense.

 

We do not have a significant level of transactions denominated incurrencies other than U.S. dollars and as a result we have very limited foreigncurrency exchange rate risk. The effect of an immediate 10% change in foreignexchange rates would have no material impact on our financial condition,operating results or cash flows.

 

As of March 31, 2006 and as of the date of this report, we hadaggregate outstanding borrowings of approximately $4,719,000 and $4,601,000,respectively. The rates of interest on our currently outstanding debt are fixedwhile the rate of interest on our line-of-credit is variable, but we currentlyhave no outstanding balance under this credit facility. Because of thesereasons, an immediate 10% change in interest rates would have no material,immediate impact on our financial condition, operating results or cash flows.

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

*Evaluation of disclosure controlsand procedures.* We maintain disclosure controls andprocedures designed to provide reasonable assurance of achieving the objectivethat information in our Exchange Act reports is recorded, processed, summarizedand reported within the time periods specified and pursuant to the regulationsof the Securities and Exchange Commission. Disclosure controls and procedures,as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, includecontrols and procedures designed to ensure the information required to bedisclosed by us in the reports we file or submit under the Exchange Act isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure. It should be noted that our system of controls,however well designed and operated, can provide only reasonable, and notabsolute, assurance that the objectives of the system are met.

 

Our management, with the participation of our Chief Executive Officerand Chief Financial Officer, evaluated the effectiveness of our disclosurecontrols and procedures as of March 31, 2006, the end of the period covered bythis report, and concluded that our disclosure controls and procedures wereeffective as of March 31, 2006.

 

*Changes in internal control overfinancial reporting.* During the three months ended March 31,2006, 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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**PART II—OTHER INFORMATION**

 

**ITEM 1.****                Legal Proceedings.**

 

None.

 

**ITEM 1A.****             Risk Factors.**

 

The Company’s business and operations aresubject to a number of risks and uncertainties, and the following list shouldnot be considered to be a definitive list of all factors that may affectthe Company’s business, financial condition and future operating results andshould be read in conjunction with the risks and uncertainties, including riskfactors, contained in our other filings with the Securities and ExchangeCommission. Any forward-looking statements made by the Company are made withthe intention of obtaining the benefits of the “safe harbor” provisions of theSecurities Litigation Reform Act and a number of factors, including, butnot limited to those discussed below, could cause our actual results andexperiences to differ materially from the anticipated results or expectationsexpressed in any forward-looking statements.

 

**Wemay not be able to grow our subscriber base at a sufficient rate to offsetplanned increased costs or at all, and as a result our revenues andprofitability may not increase and could decrease.**

** **

A major component of our growth strategyis based on increasing the number of subscribers to our channels. Growing oursubscriber base depends upon many factors, such as the success of our marketingefforts in driving consumer demand for our channels; overall growth in cableand satellite subscribers; the popularity of our programming; our ability tonegotiate new carriage agreements, or amendments to current carriageagreements, and maintain existing distribution; plus other factors that arebeyond our control. There can be no assurance that we will be able to maintainor increase the subscriber base of our channels on cable and satellite systemsor that our current carriage will not decrease as a result of a number offactors. In particular, negotiations for new carriage agreements, or amendmentsto current carriage agreements, are lengthy and complex, and we are not able topredict with any accuracy when such increases in our subscriber basemay occur, if at all. If we are unable to grow our subscriber base, oursubscriber and advertising revenues may not increase and could decrease.In addition, as we plan and prepare for such projected growth in our subscriberbase, we plan to increase our expenses accordingly. If we are not able toincrease our revenue to offset these increased expenses, our profitabilitycould decrease.

 

**If we offerincreased launch support fees or other incentives to service providers in orderto grow our subscriber base, our operating results may be harmed.**

** **

Although we currently have plans toincrease our marketing and sales efforts in an attempt to increase the numberof our subscribers, we may not be able to do so economically or at all. Ifwe are unable to increase the number of our subscribers on a cost-effectivebasis, or if the benefits of doing so do not materialize, our business andoperating results would be harmed. In particular, if we make any upfront cashpayments to service providers for an increase in our subscriber base, our cashflow could be adversely impacted, and we may incur negative cash flow forsome time. In addition, if we were to make such upfront cash payments orprovide other incentives to service providers, we expect to amortize suchamounts ratably over the term of the agreements with the service providers.However, if a service provider terminates any such agreement prior to theexpiration 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.

 

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**If, in ourattempt to increase our number of subscribers, we structure launch support feeswith one service provider in a way that would require us to offer the samesupport or incentives to all other service providers, our operating resultsmay be harmed.**

** **

Many of our existing agreements with cableand satellite service providers contain “most favored nation” clauses. Theseclauses typically provide that if we enter into an agreement with anotherservice provider on more favorable terms, these terms must be offered to theexisting service provider, subject to some exceptions and conditions. Futureagreements with service providers may also contain similar “most favorednation” clauses. If, in our attempt to increase our number of subscribers, westructure launch support fees to effectively offer more favorable terms to anyservice provider, these clauses may require us to reduce the effectivesubscriber fee rates that we receive from other service providers, and thiscould negatively affect our operating results.

 

**If ourchannels are placed in unpopular program packages by cable or satellite serviceproviders, or if service fees are increased for our subscribers, the number ofviewers of our channels may decline which could harm our business andoperating results.**

** **

We do not control the channels with whichour channels are packaged by cable or satellite service providers. Theplacement by a cable or satellite service provider of our channels in unpopularprogram package could reduce or impair the growth of the number of our viewersand subscriber fees paid by service providers to us. In addition, we do not setthe prices charged by cable and satellite service providers to theirsubscribers when our channels are packaged with other television channels. Theprices for the channel packages in which our channels are bundled may beset too high to appeal to individuals who might otherwise be interested in ournetworks. Further, if our channels are bundled by service providers withnetworks that do not appeal to our viewers or is moved to packages with fewersubscribers, we may lose viewers. These factors may reduce the numberof viewers of our channel, which in turn would reduce our subscriber fees andadvertising revenue.

 

**Cable andsatellite service providers could discontinue or refrain from carrying TheOutdoor Channel, which could reduce the number of viewers and harm ouroperating results.**

** **

The success of The Outdoor Channel isdependent, in part, on our ability to enter into new carriage agreements andmaintain existing agreements with, and carriage by, satellite systems andmultiple system operators’, which we refer to as MSOs, affiliated regional orindividual cable systems. Although we have relationships or agreements withmost of the largest MSOs and satellite service providers, execution of anagreement with an MSO does not ensure that its affiliated regional orindividual cable systems will carry The Outdoor Channel. Under our currentagreements, 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.

 

**Wemay not be able to effectively manage our future growth, and our growthmay not continue, which may substantially harm our business andprospects.**

** **

We have undergone rapid and significantgrowth in revenue and subscribers over the last several years, and ourstrategic objectives include not only further developing and enhancing ourexisting business, but also expanding our in-house production capabilities.There are risks inherent in rapid growth and the pursuit of new strategicobjectives, including among others: investment and development of appropriate 

 

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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 channel fromour facilities directly. In particular, we have purchased a building near ourcurrent headquarters and are currently building out this property primarily foruse 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.

 

**Wemay not be able to secure national advertising accounts, and as a result,our revenues and profitability may be negatively impacted.**

** **

Our ability to secure national advertisingaccounts, which generally pay higher advertising rates, depends upon the sizeof our audience, the popularity of our programming and the demographics of ourviewers, as well as strategies taken by our competitors, strategies taken byadvertisers and the relative bargaining power of advertisers. Competition fornational advertising accounts and related advertising expenditures is intense.We face competition for such advertising expenditures from a variety ofsources, including other cable network companies and other media. We cannotassure you that our sponsors will pay advertising rates for commercial air timeat levels sufficient for us to make a profit or that we will be able to attractnew advertising sponsors or increase advertising revenues. If we are unable toattract national advertising accounts in sufficient quantities, our revenuesand profitability may be harmed.

 

**We may be required to pay additionalstate income taxes for past years.**

** **

We are required to pay income taxes invarious states in which we conduct our business operations. In the past, wehave paid state income taxes only in California (where our headquarters islocated) and have not paid income taxes to any other state. We have determinedthat we may have state income tax liability in the eight states other thanCalifornia in which our gold prospecting properties are located. Although weexpect in the near future to gather sufficient information to enable us toapportion our income to such states and file income tax returns in those statesfor past years, we can offer no assurances as to when we will be able to filestate income tax returns in those states where we may have outstanding,current and future tax liabilities. In general, we believe any income taxesthat we may be required to pay to states other than California will bepartially offset by a refund from the State of California for income taxamounts we have overpaid to California in past years. We may, however, belimited as to the number of years for which we can receive a refund from Californiafor taxes previously paid, and we cannot predict when we would receive any suchrefund. In addition, because each state to which we may owe outstandingincome taxes has a different methodology for calculating tax owed and adifferent tax rate, our aggregate state income tax liability could be greaterthan what we have paid to California in prior years. Our aggregate state incometax liability, on which we may owe accrued interest and penalties, couldbe material to our results of operations.

 

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**Expensesrelating to programming costs are generally increasing and a number of factorscan cause cost overruns and delays, and our operating results may beadversely impacted if we are not able to successfully recover the costs ofdeveloping and acquiring new programming.**

** **

The average cost of programming hasincreased recently for the cable industry and such increases may continue.We plan to build our programming library through the acquisition of long-termbroadcasting rights from third party producers, in-house production andoutright acquisition of programming, and this may lead to increases in ourprogramming costs. The development, production and editing of televisionprogramming requires a significant amount of capital and there are substantialfinancial risks inherent in developing and producing television programs.Actual programming and production costs may exceed their budgets. Factorssuch as labor disputes, death or disability of key spokespersons or programhosts, damage to film negatives, master tapes and recordings or adverse weatherconditions may cause cost overruns and delay or prevent completion of aproject. If we are not able to successfully recover the costs of developing oracquiring programming through increased revenues, whether the programming isproduced by us or acquired from third-party producers, our business andoperating results will be harmed.

 

**Ouroperating results may be negatively impacted if our Outdoor Channel 2 HDnetwork is not as successful as we anticipate.**

** **

In July 2005, we launched an all new,all native high definition network called Outdoor Channel 2 HD. There can be noassurance that Outdoor Channel 2 HD will not incur unexpected costs andexpenses. Distribution of Outdoor Channel 2 HD will depend on successfullyexecuting new or amended distribution agreements with cable and satelliteservice providers. There can be no assurance that such agreements can be made,and if they are made, that they will be on terms favorable to us or that theywill not require us to grant periods of free service and/or marketingcommitments to encourage carriage. The public may not adopt HD consumertelevision equipment in numbers sufficient to allow profits for anadvertiser-supported service. Bandwidth constraints may keep OutdoorChannel 2 HD from achieving sufficient distribution from service providers toreach profitability. Competition for quality HD content may increase thecosts 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.

 

**Ouroperating results may vary significantly, and historical comparisons ofour operating results are not necessarily meaningful and should not be reliedupon as an indicator of future performance.**

** **

Our operations are influenced by manyfactors. These factors may cause our financial results to varysignificantly in the future and our operating results may not meet theexpectations of securities analysts or investors. If this occurs, the price ofour stock may decline. Factors that can cause our results to fluctuateinclude, but are not limited to:

 

•  carriage decisions of cableand satellite service providers;

•  demand for advertising,advertising rates and offerings of competing media;

•  changes in the growth rateof cable and satellite subscribers;

•  cable and satellite serviceproviders’ capital and marketing expenditures and their impact on programmingofferings and penetration;

•  seasonal trends in viewerinterests and activities;

•  pricing, service, marketingand acquisition decisions that could reduce revenues and impair quarterlyfinancial results;

•  the mix of cable televisionand satellite-delivered programming products and services sold and thedistribution channels for those products and services;

 

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•  our ability to reactquickly to changing consumer trends;

•  specific economicconditions in the cable television and related industries; and

•  changing regulatoryrequirements.

 

Due to the foregoing and other factors,many of which are beyond our control, our revenue and operating results varyfrom period to period and are difficult to forecast. Our expense levels arebased in significant part on our expectations of future revenue.Therefore, our failure to meet revenue expectations would seriously harm ourbusiness, operating results, financial condition and cash flows. Further, anunanticipated decline in revenue for a particular calendar quartermay disproportionately affect our profitability because our expenses wouldremain relatively fixed and would not decrease correspondingly.

 

**Changes tofinancial accounting standards or our accounting estimates may affect ourreported operating results.**

** **

We prepare our financial statements toconform with generally accepted accounting principles (“GAAP”), which aresubject to interpretations by the Financial Accounting Standards Board, theSecurities and Exchange Commission and various bodies formed to interpret andcreate appropriate accounting policies. A change in those policies can have asignificant effect on our reported results and may even affect ourreporting of transactions completed before a change is announced. Accountingpolicies affecting many other aspects of our business, including rules relatingto business combinations and employee stock option grants, have recently beenrevised or are under review. Changes to those rules or the questioning ofcurrent practices may adversely affect our reported financial results orthe way we conduct our business. In addition, our preparation of financialstatements in accordance with GAAP requires that we make estimates, judgmentsand assumptions 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 failto develop and distribute popular programs, our viewership would likelydecline, which could cause advertising and subscriber fee revenues to decrease.**

** **

Our operating results depend significantlyupon the generation of advertising revenue. Our ability to generate advertisingrevenues is largely dependent on our Nielsen ratings, which estimates thenumber of viewers of The Outdoor Channel, and this directly impacts the levelof interest of advertisers and rates we are able to charge. If we fail toprogram popular shows that maintain or increase our current number of viewers,our Nielsen ratings could decline, which in turn could cause our advertisingrevenue to decline and adversely impact our business and operating results. Inaddition, if we fail to program popular shows the number of subscribers to ourchannel may also decrease, resulting in a decrease in our subscriber feeand advertising revenue.

 

**Changes inthe methodology used by Nielsen to estimate our subscriber base or televisionratings, or inaccuracies in such estimates, could cause our advertising revenueto decrease.**

** **

Our ability to sell advertising is largelydependent on television ratings and our subscriber base estimated by Nielsen.We do not control the methodology used by Nielsen for these estimates. IfNielsen modifies its methodology or changes the statistical sample it uses forthese estimates, such as the demographic characteristics of the households, ourratings could be negatively affected resulting in a decrease in our advertisingrevenue.

 

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**The market in which we operate is highlycompetitive, and we may not be able to compete effectively, particularlyagainst competitors with greater financial resources, brand recognition,marketplace presence and relationships with service providers.**

 

We compete for viewers with other paycable television and broadcast networks, including OLN, Spike TV, ESPN2 andothers. If these or other competitors, many of which have substantially greaterfinancial and operational resources than us, significantly expand theiroperations with respect to outdoor-related programming or their marketpenetration, our business could be harmed. In addition, certain technologicaladvances, including the deployment of fiber optic cable, which are alreadysubstantially underway, are expected to allow cable systems to greatly expandtheir current channel capacity, which could dilute our market share and lead toincreased competition for viewers from existing or new programming services.

 

We also compete with television network companiesthat generally have large subscriber bases and significant investments in, andaccess to, competitive programming sources. In some cases, we compete withcable and satellite service providers that have the financial and technologicalresources to create and distribute their own television networks, such as OLN,which is owned and operated by Comcast. In order to compete for subscribers, wemay pay either launch fees or marketing support or both for carriage incertain circumstances in the future, which may require significant cashexpenditures, harming our operating results and margins. We may also issueour securities from time to time in connection with our attempts for broaderdistribution of The Outdoor Channel and the number of such securities could besignificant. We compete for advertising sales with other pay televisionnetworks, broadcast networks, and local over-the-air television stations. Wealso compete for advertising sales with satellite and broadcast radio and theprint media. We compete with other cable television networks for subscriberfees from, and affiliation agreements with, cable and satellite serviceproviders. Actions by the Federal Communications Commission, which we refer toas the FCC, and the courts have removed certain of the impediments to entry bylocal telephone companies into the video programming distribution business, andother impediments could be eliminated or modified in the future. These localtelephone companies may distribute programming that is competitive withthe programming provided by us to cable operators.

 

**Changes in corporate governance andsecurities disclosure and compliance practices have increased andmay continue to increase our legal compliance and financial reportingcosts.**

 

The Sarbanes-Oxley Act of 2002 required usto change or supplement some of our corporate governance and securitiesdisclosure and compliance practices. The Securities and Exchange Commission andNasdaq have revised, and continue to revise, their regulations and listingstandards. These developments have increased, and may continue toincrease, our legal compliance and financial reporting costs.

 

**Wemay not be able to attract new, or retain existing, members in our cluborganizations, and as a result our revenues and profitability may beharmed.**

** **

Our ability to attract new members andretain existing members in our club organizations, GPAA and Lost Dutchman’s,depends, in part, upon our marketing efforts, including our programming on TheOutdoor Channel and such other efforts as direct mail campaigns, continuedsponsorship of expositions dedicated to gold prospecting, treasure hunting andrelated interests around the country and introductory outings held at ourcampsites. We cannot assure you that we will successfully attract new membersor retain existing members. A decline in membership in our club organizationscould harm our business and operating results.

 

**Consolidation among cable and satellitedistributors may harm our business.**

** **

Cable and satellite operators continue toconsolidate, making The Outdoor Channel increasingly dependent on feweroperators. If these operators fail to carry The Outdoor Channel, use theirincreased 

 

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distribution and bargaining power to negotiate less favorableterms of carriage or to obtain additional volume discounts, our business andoperating results would suffer.

 

**Thesatellite infrastructure that we use may fail or be preempted by anothersignal, which could impair our ability to deliver programming to our cable andsatellite service providers.**

** **

Our ability to deliver programming toservice providers, and their subscribers, is dependent upon the satelliteequipment and software that we use to work properly to distribute ourprogramming. If this satellite system fails, or a signal with a higher priorityreplaces our signal, which is determined by our agreement with the owner of thesatellite, we may not be able to deliver programming to our cable andsatellite service provider customers and their subscribers within the timeperiods advertised. We have negotiated for back-up capability with oursatellite provider on an in-orbit spare satellite, which provides us carriageon the back-up satellite in the event that catastrophic failure occurs on the primarysatellite. Our contract provides that our main signal is subject to preemptionand until the back-up satellite is in position, we could lose our signal for aperiod of time. A loss of our signal could harm our reputation and reduce ourrevenues and profits.

 

**Natural disasters and other events beyondour control could interrupt our signal.**

** **

Our systems and operations may bevulnerable to damage or interruption from earthquakes, floods, fires, powerloss, telecommunication failures and similar events. They also could be subjectto break-ins, sabotage and intentional acts of vandalism. Since our productionfacilities for The Outdoor Channel are all located in Temecula, California, theresults of such events could be particularly disruptive because we do not havereadily available alternative facilities from which to conduct our business.Our business interruption insurance may not be sufficient to compensate usfor losses that may occur. Despite any precautions we may take, theoccurrence of a natural disaster or other unanticipated problems at ourfacilities could result in interruptions in our services. Interruptions in ourservice could harm our reputation and reduce our revenues and profits.

 

**Seasonal increases or decreases inadvertising revenue may negatively affect our business.**

** **

Seasonal trends are likely to affect ourviewership, and consequently, could cause fluctuations in our advertisingrevenues. Our business reflects seasonal patterns of advertising expenditures,which is common in the broadcast industry. For this reason, fluctuations in ourrevenues and net income could occur from period to period depending upon theavailability of advertising revenues. Due, in part, to these seasonalityfactors, the results of any one quarter are not necessarily indicative ofresults for future periods, and our cash flows may not correlate withrevenue recognition.

 

**We may be unable to access capital onacceptable terms to fund our future operations.**

** **

Our future capital requirements willdepend on numerous factors, including the success of our efforts to increaseadvertising revenues, the amount of resources devoted to increasingdistribution of The Outdoor Channel, and acquiring and producing programmingfor The Outdoor Channel. As a result, we could be required to raise substantialadditional capital through debt or equity financing. To the extent that weraise additional capital through the sale of equity or convertible debtsecurities, the issuance of such securities could result in dilution toexisting stockholders. If we raise additional capital through the issuance ofdebt securities, the debt securities would have rights, preferences andprivileges senior to holders of common stock and the terms of such debt couldimpose restrictions on our operations. In November 2005, we entered intoan aggregate of up to thirteen million dollars in debt financing from acommercial bank. We cannot assure you that additional capital, if required,will be available on acceptable terms, or at all. If we are unable to obtainadditional capital, our current business strategies and plans and ability tofund future operations may be harmed.

 

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**We may not be able to attract andretain key personnel.**

** **

Our success depends to a significantdegree upon the continued contributions of the principal members of our sales,marketing, production and management personnel, many of whom would be difficultto replace. None of our employees are under contract and all of our employeesare “at-will.” Any of our officers or key employees could leave at any time,and we do not have “key person” life insurance policies covering any of ouremployees. The competition for qualified personnel has been strong in ourindustry. This competition could make it more difficult to retain our keypersonnel and to recruit new highly qualified personnel. The loss of Perry T.Massie, our President and Chief Executive Officer and Co-President of TheOutdoor Channel, Inc., or Thomas H. Massie, our Executive Vice President,or William A. Owen, our Chief Financial Officer, or Andrew J. Dale, the ChiefExecutive Officer and Co-President of The Outdoor Channel, Inc., or ThomasE. Hornish, our General Counsel, could adversely impact our business. Toattract and retain qualified personnel, we may be required to grant largeoption or other stock-based incentive awards, which may be highly dilutiveto existing stockholders. We may also be required to pay significant basesalaries and cash bonuses to attract and retain these individuals, whichpayments could harm our operating results. If we are not able to attract andretain the necessary personnel we may not be able to implement ourbusiness plan.

 

**New video recording technologiesmay reduce our advertising revenue.**

** **

A number of new personal video recorders,such as TiVo® in the United States, have emerged in recent years. Theserecorders often contain features allowing viewers to watch pre-recordedprograms without watching advertising. The effect of these recorders on viewingpatterns and exposure to advertising could harm our operations and results ifour advertisers reduce the advertising rates they are willing to pay becausethey believe television advertisements are less effective with thesetechnologies.

 

**Cable andsatellite television programming signals have been stolen or could be stolen inthe future, which reduces our potential revenue from subscriber fees andadvertising.**

** **

The delivery of subscription programmingrequires the use of conditional access technology to limit access toprogramming to only those who subscribe to programming and are authorized toview it. Conditional access systems use, among other things, encryptiontechnology to protect the transmitted signal from unauthorized access. It isillegal to create, sell or otherwise distribute software or devices tocircumvent conditional access technologies. However, theft of cable andsatellite programming has been widely reported, and the access or “smart” cardsused in cable and satellite service providers’ conditional access systems havebeen compromised and could be further compromised in the future. Whenconditional access systems are compromised, we do not receive the potentialsubscriber fee revenues from the cable and satellite service providers.Further, measures that could be taken by cable and satellite service providersto limit such theft are not under our control. Piracy of our copyrightedmaterials could reduce our revenue from subscriber fees and advertising andnegatively affect our business and operating results.

 

**Because weexpect to become increasingly dependent upon our intellectual property rights,our inability to protect those rights could negatively impact our ability tocompete.**

** **

We currently license approximately 78% ofprograms we air on The Outdoor Channel from third-party television and filmproducers. In order to build a library of programs and programming distributionrights, we must obtain all of the necessary rights, releases and consents fromthe parties involved in developing a project or from the owners of the rightsin a completed program. There can be no assurance that we will be able toobtain the necessary rights on acceptable terms, or at all, or properlymaintain and document such rights. In addition, protecting our intellectualproperty rights by pursuing those who infringe or dilute our rights can becostly and time consuming. If we are unable to protect our portfolio oftrademarks, service marks, copyrighted material and characters, trade names andother intellectual property rights, our business and our ability to competecould be harmed.

 

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**Wemay face intellectual property infringement claims that could betime-consuming, costly to defend and result in our loss of significant rights.**

** **

Other parties may assert intellectualproperty infringement claims against us, and our products may infringe theintellectual property rights of third parties. From time to time, we receiveletters alleging infringement of intellectual property rights of others.Intellectual property litigation can be expensive and time-consuming and coulddivert management’s attention from our business. If there is a successful claimof infringement against us, we may be required to pay substantial damagesto the party claiming infringement or enter into royalty or license agreementsthat may not be available on acceptable or desirable terms, if at all. Ourfailure to license the proprietary rights on a timely basis would harm ourbusiness.

 

**Some of ourexisting stockholders can exert control over us and may not make decisionsthat are in the best interests of all stockholders.**

** **

Our current officers, directors andgreater than 5% stockholders together currently control greater than 50% of ouroutstanding common stock. As a result, these stockholders, acting together,would be able to exert significant influence over all matters requiringstockholder approval, including the election of directors and approval ofsignificant corporate transactions. In addition, this concentration ofownership may delay or prevent a change in control of our company, evenwhen a change may be in the best interests of stockholders. In addition,the interests of these stockholders may not always coincide with ourinterests as a company or the interests of other stockholders. Accordingly,these stockholders could cause us to enter into transactions or agreements thatyou would not approve.

 

**The market price of our common stock hasbeen and may continue to be subject to wide fluctuations.**

** **

Our stock has historically been andcontinues to be traded at relatively low volumes and therefore has been subjectto price volatility. Various factors contribute to the volatility of our stockprice, including, for example, low trading volume, quarterly variations in ourfinancial results, increased competition and general economic and marketconditions. While we cannot predict the individual effect that these factorsmay have on the market price of our common stock, these factors, eitherindividually or in the aggregate, could result in significant volatility in ourstock price during any given period of time. There can be no assurance that amore active trading market in our stock will develop. As a result, relativelysmall trades may have a significant impact on the price of our commonstock. Moreover, companies that have experienced volatility in the market priceof their stock often are subject to securities class action litigation. Ifwe were the subject of such litigation, it could result in substantial costsand divert management’s attention and resources.

 

**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.**

** **

Provisions of Delaware law, ourcertificate of incorporation and bylaws could discourage, delay or prevent amerger, acquisition or other change in control that stockholdersmay consider favorable, including transactions in which you mightotherwise receive a premium for your shares. These provisions also could limitthe price that investors might be willing to pay in the future for shares ofour 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 numberof directors to be changed only by resolution of our board of directors;

 

•  establish a classifiedboard of directors, providing that not all members of the board be elected atone time;

 

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•  require a 66 2¤3% stockholder vote to remove a director, and only for cause;

 

•  authorize our board of directorsto issue without stockholder approval blank check preferred stock that, ifissued, could operate as a “poison pill” to dilute the stock ownership of apotential hostile acquirer to prevent an acquisition that is not approved byour board of directors;

 

•  require that stockholderactions must be effected at a duly called stockholder meeting and prohibitstockholder action by written consent;

 

•  establish advance noticerequirements for stockholder nominations to our board of directors or forstockholder proposals that can be acted on at stockholder meetings;

 

•  except as provided by law,allow only our board of directors to call a special meeting of thestockholders; and

 

•  require a 66 2¤3% stockholder vote to amend our certificate of incorporation orbylaws.

 

In addition, because we are incorporatedin Delaware, we are governed by the provisions of Section 203 of theDelaware General Corporation Law, which may, unless certain criteria are met,prohibit large stockholders, in particular those owning 15% or more of ouroutstanding voting stock, from merging or combining with us for a prescribedperiod of time.

 

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

** **

The technologies used in the cable andsatellite television industry are rapidly evolving. Many technologies andtechnological standards are in development and have the potential tosignificantly transform the ways in which programming is created andtransmitted. In addition, under some of our MSO contracts, we may berequired to encrypt our signal. We cannot accurately predict the effects thatimplementing new technologies will have on our programming and broadcastingoperations. We may be required to incur substantial capital expendituresto implement new technologies, or, if we fail to do so, may facesignificant new challenges due to technological advances adopted bycompetitors, which in turn could result in harming our business and operatingresults.

 

**The cableand satellite television industry is subject to substantial governmentalregulation for which compliance may increase our costs and expose us topenalties for failure to comply.**

** **

The cable television industry is subjectto extensive legislation and regulation at the federal and local levels, and,in some instances, at the state level, and many aspects of such regulation arecurrently the subject of judicial proceedings and administrative or legislativeproposals. Similarly, the satellite television industry is subject to federalregulation. Operating in a regulated industry increases our cost of doingbusiness as a video programmer.

 

The Cable Television Consumer Protectionand Competition Act of 1992, to which we refer as the 1992 Cable Act, includesprovisions that preclude cable operators affiliated with video programmers fromfavoring their programmers over competitors. The 1992 Cable Act also precludessuch programmers from selling their programming exclusively to cable operators.These provisions potentially benefit independent programmers such as us bylimiting the ability of cable operators affiliated with programmers fromcarrying only programming in which they have an ownership interest and fromoffering exclusive programming arrangements. However, the United States Courtof Appeals for the District of Columbia Circuit vacated the FCC Rule limitingthe carriage of affiliated programmers by cable operators. Although the FCCissued further notices of proposed rulemaking in 2001 and 2005 addressing thisissue, it has not adopted new rules. The exclusivity provision is scheduled toexpire in October 2007 unless the FCC then determines that a furtherextension is necessary to protect competition and diversity. If theseprovisions of the 1992 Cable 

 

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Act expire or become no longer applicable, and if we are stillable to increase the number of subscribers to our channel, then the costs associatedwith doing so may increase significantly.

 

Regulatory carriage requirements alsocould reduce the number of channels available to carry The Outdoor Channel. The1992 Cable Act granted television broadcasters a choice of must-carry rights orretransmission consent rights. The rules adopted by the FCC generallyprovided for mandatory carriage by cable systems of all local full-powercommercial television broadcast signals selecting must-carry rights and,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 channelcapacity, would increase the likelihood that cable operators may be forcedto drop some cable programming services and could reduce carriage of TheOutdoor Channel.

 

The Telecommunications Act of 1996required the FCC to establish rules and an implementation schedule toensure that video programming is fully accessible to the hearing impairedthrough closed captioning. The rules adopted by the FCC requiresubstantial closed captioning over a six to ten year phase-in period, whichbegan in 2000, with only limited exemptions. As a result, we will continue toincur additional costs for closed captioning.

 

If we distribute television programmingthrough other types of media, we may be required to obtain federal, stateand local licenses or other authorizations to offer such services. Wemay not be able to obtain licenses or authorizations in a timely manner,or at all, or conditions could be imposed upon licenses and authorizations thatmay not be favorable to us.

 

In the future, any increased regulation ofrates, and in particular the rates for basic cable services, could, among otherthings, put downward pressure on the rates charged by cable programmingservices, and affect the ability or willingness of cable system operators toretain or to add The Outdoor Channel network on their cable systems. Inresponse to a request from the Committee on Energy and Commerce of the House ofRepresentatives, the FCC’s Media Bureau conducted a study in 2004 regarding,among other things, government-mandated a la carte or mini-tier packaging ofprogramming services in which each subscriber would purchase only thosechannels that he or she desired instead of the larger bundles of differentchannels as is typical today. The Media Bureau’s report on November 18,2004 observed that such packaging would increase the cost of programming toconsumers and injure programmers. On February 9, 2006, the Media Bureaureleased a further report which stated that the 2004 report was flawed andwhich concluded that a-la-carte sales could be in the best interests ofconsumers. Although the FCC cannot mandate a-al-carte sales, its endorsement ofthe 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 by Congress,or any rate or other government regulation, cable system operators implementchannel offerings that require subscribers to affirmatively choose to pay aseparate fee to receive The Outdoor Channel, either by itself or in combinationwith a limited number of other channels, the number of viewers for The OutdoorChannel could be reduced.

 

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The regulation of programming services,cable television systems and satellite licensees is subject to the politicalprocess and has been in constant flux over the past decade. Further materialchanges in the law and regulatory requirements are difficult to anticipate andour business may be harmed by future legislation, new regulation,deregulation or court decisions interpreting laws and regulations.

 

**We mustcomply with many local, state, federal and environmental regulations, for whichcompliance may be costly and may expose us to substantial penalties.**

** **

Our recreational outdoor activityentities, GPAA and Lost Dutchman’s, share the general risks of all outdoorrecreational activities such as personal injury, environmental compliance andreal estate and environmental regulation. In addition to the general cabletelevision industry regulations, we are also subject to various local, stateand federal regulations, including, without limitation, regulations promulgatedby federal and state environmental, health and labor agencies. Our prospectingclubs are subject to various local, state and federal statutes, ordinances, rules andregulations concerning zoning, development and other utilization of theirproperties. We cannot predict what impact current or future regulationsmay have on these businesses. In addition, failure to maintain requiredpermits or licenses, or to comply with applicable regulations, could result insubstantial fines or costs or revocation of our operating licenses, which wouldhave a material adverse effect on our business and operating results.

 

**If ourgoodwill or other indefinite-lived intangibles become impaired, we will berequired to take a non-cash charge which could have a significant effect on ourreported net earnings.**

** **

A significant portion of our assetsconsists of goodwill and other indefinite-lived intangible assets. Inaccordance with Statement of Financial Accounting Standards No. 142, “Goodwilland Other Intangible Assets”, or SFAS 142, we test goodwill and otherindefinite-lived intangible assets for impairment during the fourth quarter ofeach year, and on an interim date if factors or indicators become apparent thatwould require an interim test. A significant downward revision in the presentvalue of estimated future cash flows for a reporting unit could result in animpairment of goodwill or other indefinite-lived intangibles under SFAS 142 anda non-cash charge would be required. Such a charge could have a significanteffect on our reported net earnings.

 

**Futureissuance by us of preferred shares could adversely affect the holders ofexisting shares, and therefore reduce the value of existing shares.**

** **

We are authorized to issue up to25,000,000 shares of preferred stock. The issuance of any preferred stock couldadversely affect the rights of the holders of shares of our common stock, andtherefore reduce the value of such shares. No assurance can be given that wewill not issue shares of preferred stock in the future.

 

**We do not expect to pay dividends in theforeseeable future.**

** **

We do not anticipate paying cash dividendson our common stock in the foreseeable future. Any payment of cash dividendswill also depend on our financial condition, operating results, capitalrequirements and other factors and will be at the discretion of our board ofdirectors. Furthermore, we may in the future become subject to contractualrestrictions on, or prohibitions against, the payment of dividends.

 

**ITEM 2.****                Unregistered Sales of Equity Securities and Use of Proceeds.**

 

None.

 

**ITEM 3.****                Defaults Upon Senior Securities.**

 

None.

 

**ITEM 4.****                Submission of Matters to a Vote of Security Holders.**

 

None.

 

**ITEM 5.****                Other Information**

 

On May 9, 2006, we entered into a modification of our existing loanswith U.S. Bank N.A. to exclude the non-cash compensation expense relating toSFAS 123R when calculating the profitability under a covenant requiring profitabilityof greater than $250,000 each fiscal quarter.

 

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**ITEM 6.****                Exhibits**

 
| **Exhibit****Number** | ** ** | **Description** |
|-----------------------|------------|-----------------|
|                  |       |            |
| 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, 3.2 and 4.1 above to the Company’s  Form 10-Q for the period ended June 30, 2005 |
| 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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*       Pursuant to Commission Release No. 33-8238, this certification will be treatedas “accompanying” this Quarterly Report on Form 10-Q and not “filed” as part ofsuch report for purposes of Section 18 of the Securities Exchange Act of 1934,as amended, or otherwise subject to the liability of Section 18 of theSecurities Exchange Act of 1934, as amended, and this certification will not bedeemed to be incorporated by reference into any filing under the Securities Actof 1933, as amended, or the Securities Exchange Act of 1934, as amended, exceptto the extent that the registrant specifically incorporates it by reference.

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
| ** ** | **OUTDOOR CHANNEL HOLDINGS, INC.**                                                              |
|------------|-------------------------------------------------------------------------------------------------|
|       |                                                                                            |
|       | /s/ William A. Owen                                                                             |   |
| ** ** | **William A. Owen**                                                                             |
|       | Authorized Officer, Chief Financial Officer and  Controller  (Principal and Accounting Officer) |
|       | Date: May 10, 2006                                                                              |

 

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