**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.20549**

 

**FORM 10-Q**

(Mark One)

 

| **ý** | ** ** | **Quarterly Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|------------|------------|----------------------------------------------------------------------------------------------|

 

**For the quarterlyperiod ended June 30, 2005**

 

| **o** | ** ** | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|-------|------------|-----------------------------------------------------------------------------------------------|

 

**For the transitionperiodfrom                   to                   **

 

Commission file number: **000-17287**

 

**Outdoor Channel Holdings,Inc.**

(Exact name of Registrant as specified inits charter)

 

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

 

**43445 Business ParkDrive, Suite 113**

**Temecula, California92590**

(Address and zip code of principalexecutive offices)

 

**(951) 699-4749**

(Issuer’s telephone number, including areacode)

 

                                       (Formername, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 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.  ý Yes    o No

 

Indicate by check mark whether the registrant is an acceleratedfiler (as defined in Rule 12b-2 of the Exchange Act).  o Yes     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 August 8, 2005** |
|--------------------------------|--------|-----------------------------------------------------|
| Common Stock, $0.001 par value |   | 24,290, 913                                         |

 

 

 

 

----

 

 

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

**Quarterly Report on Form10-Q**

**For The Period Ended June30, 2005**

 

**Table of Contents**

 
|                               |                                                                                                                 |
|------------------------------------|----------------------------------------------------------------------------------------------------------------------|
| **Part I.  Financial Information** |                                                                                                                 |
|                               |                                                                                                                 |   |
| **Item  1.**                       | Financial  Statements                                                                                                |   |
|                               |                                                                                                                 |   |
|                               | Condensed Consolidated Balance Sheets at June 30, 2005  (Unaudited) and December 31, 2004                            |   |
|                               |                                                                                                                 |   |
|                               | Unaudited Condensed Consolidated Statements of  Operations for the Three and Six Months Ended June 30, 2005 and 2004 |   |
|                               |                                                                                                                 |   |
|                               | Unaudited Condensed Consolidated Statement of Stockholders’  Equity for the Six Months Ended June 30, 2005      |   |
|                               |                                                                                                                 |   |
|                               | Unaudited  Condensed Consolidated Statements of Cash Flows for the Six Months Ended                                  |   |
|                               | June 30,  2005 and 2004                                                                                              |   |
|                               |                                                                                                                 |   |
|                               | Notes to Unaudited Condensed Consolidated Financial  Statements                                                      |   |
|                               |                                                                                                                 |   |
| **Item 2.**                        | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                          |   |
|                               |                                                                                                                 |   |
|                               | Recent Accounting Developments                                                                                       |   |
|                               |                                                                                                                 |   |
|                               | Risks and Uncertainties                                                                                              |   |
|                               |                                                                                                                 |   |
| **Item 3.**                        | Quantitative  and Qualitative Disclosures About Market Risk                                                          |   |
|                               |                                                                                                                 |   |
| **Item 4.**                        | Controls  and Procedures                                                                                             |   |
|                               |                                                                                                                 |   |
| **Part  II. Other Information**    |                                                                                                                 |
|                               |                                                                                                                 |   |
| **Item 1.**                        | Legal  Proceedings                                                                                                   |   |
|                               |                                                                                                                 |   |
| **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**                     |                                                                                                                 |
|                                    |                                                                                                                      |  |  |

 

 

* * *

 

1

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**PART I—FINANCIALINFORMATION**

 

**ITEM 1.  Financial Statements.**

 

 

 

2

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

**Condensed ConsolidatedBalance Sheets**

(In thousands, except per share data)

 
| ** **                                                                                                 | ** ** | **June 30,**    | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                                                 | ** ** | **2005**        | ** ** | **2004**         | ** ** |
| ** **                                                                                                 | ** ** | **(Unaudited)** | ** ** | ** **       | ** ** |
| **Assets**                                                                                                 |       |            |       |             |       |
| Current assets:                                                                                            |       |            |       |             |       |
| Cash and cash equivalents                                                                                  |       | $               | 9,007      |             | $          | 13,105 |   |
| Investment in available-for-sale  securities                                                               |       | 726             |       | 741              |       |
| Accounts receivable, net of  allowance for doubtful accounts of $347 and $207                              |       | 5,075           |       | 4,848            |       |
| Income tax refund receivable                                                                               |       | 1,919           |       | 2,291            |       |
| Prepaid programming costs                                                                                  |       | 2,606           |       | 606              |       |
| Prepaid offering costs                                                                                     |       | 902             |       | —           |       |
| Other current assets                                                                                       |       | 1,559           |       | 135              |       |
| Total current assets                                                                                       |       | 21,794          |       | 21,726           |       |
|                                                                                                       |       |            |       |             |       |
| Property, plant and equipment at cost, net:                                                                |       |            |       |             |       |
| Membership division                                                                                        |       | 3,562           |       | 3,527            |       |
| Outdoor Channel equipment and  improvements                                                                |       | 5,743           |       | 3,199            |       |
| Property, plant and equipment,  net                                                                        |       | 9,305           |       | 6,726            |       |
| Amortizable intangible assets                                                                              |       | 1,660           |       | 1,939            |       |
| Deferred tax assets, net                                                                                   |       | 14,875          |       | 14,863           |       |
| Goodwill                                                                                                   |       | 43,668          |       | 43,668           |       |
| Other non-amortizable intangible assets                                                                    |       | 10,573          |       | 10,573           |       |
| Deposits and other assets                                                                                  |       | 267             |       | 174              |       |
| Totals                                                                                                     |       | $               | 102,142    |             | $          | 99,669 |   |
|                                                                                                       |       |            |       |             |       |
| **Liabilities and  Stockholders’ Equity**                                                             |       |            |       |             |       |
|                                                                                                       |       |            |       |             |       |
| Current liabilities:                                                                                       |       |            |       |             |       |
| Accounts payable and accrued  expenses                                                                     |       | $               | 3,289      |             | $          | 3,705 |   |
| Accrued severance payments                                                                                 |       | 18              |       | 28               |       |
| Current portion of capital lease  obligations                                                              |       | 22              |       | 26               |       |
| Deferred tax liabilities, net                                                                              |       | 494             |       | 494              |       |
| Current portion of deferred  revenue                                                                       |       | 387             |       | 370              |       |
| Customer deposits                                                                                          |       | 1,003           |       | 61               |       |
| Total current liabilities                                                                                  |       | 5,213           |       | 4,684            |       |
|                                                                                                       |       |            |       |             |       |
| Accrued severance payments, net of current portion                                                         |       | 25              |       | 37               |       |
| Capital lease obligations, net of current portion                                                          |       | —          |       | 9                |       |
| Deferred revenue, net of current portion                                                                   |       | 1,228           |       | 1,145            |       |
| Deferred satellite rent obligations                                                                        |       | 301             |       | 312              |       |
| Total liabilities                                                                                          |       | 6,767           |       | 6,187            |       |
|                                                                                                       |       |            |       |             |       |
| Commitments and contingencies                                                                              |       |            |       |             |       |
| Stockholders’ equity:                                                                                 |       |            |       |             |       |
| Preferred stock; 25,000 shares  authorized; none issued                                                    |       | —          |       | —           |       |
| Common stock, $0.001 par value;  75,000 shares authorized: 18,660 and 18,394 shares issued and outstanding |       | 18              |       | 18               |       |
| Additional paid-in capital                                                                                 |       | 113,797         |       | 111,912          |       |
| Deferred compensation                                                                                      |       | (1,983          | )          | (1,034           | )          |
| Accumulated other comprehensive  income                                                                    |       | 36              |       | 43               |       |
| Accumulated deficit                                                                                        |       | (16,493         | )          | (17,457          | )          |
| Total stockholders’ equity                                                                            |       | 95,375          |       | 93,482           |       |
| Totals                                                                                                     |       | $               | 102,142    |             | $          | 99,669 |   |
|                                                                                                            |            |                 |            |                  |            |  |  |  |  |

 

 

See Notes to Unaudited Condensed Consolidated FinancialStatements.

** **

 

3

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** **

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

**Unaudited CondensedConsolidated Statements of Operations**

(In thousands, except per share data)

 
| ** **                                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                 | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** |
| ** **                                                 | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                  |       |                   |       |                 |       |   |   |   |   |
| Advertising                                                |       | $                      | 5,257      |                 | $          | 5,352 |   | $ | 10,516 |   | $ | 10,164 |   |
| Subscriber fees                                            |       | 3,894                  |       | 3,219                |       | 7,536 |   | 6,380 |   |
| Membership income                                          |       | 863                    |       | 986                  |       | 2,023 |   | 2,218 |   |
|                                                       |       |                   |       |                 |       |   |   |   |   |
| Total revenues                                             |       | 10,014                 |       | 9,557                |       | 20,075 |   | 18,762 |   |
|                                                       |       |                   |       |                 |       |   |   |   |   |
| Expenses:                                                  |       |                   |       |                 |       |   |   |   |   |
| Satellite transmission fees                                |       | 616                    |       | 586                  |       | 1,249 |   | 1,177 |   |
| Advertising                                                |       | 2,062                  |       | 1,491                |       | 3,756 |   | 2,805 |   |
| Programming                                                |       | 531                    |       | 895                  |       | 1,052 |   | 1,290 |   |
| Selling, general and  administrative                       |       | 5,967                  |       | 4,840                |       | 12,453 |   | 9,470 |   |
|                                                       |       |                   |       |                 |       |   |   |   |   |
| Total expenses                                             |       | 9,176                  |       | 7,812                |       | 18,510 |   | 14,742 |   |
|                                                       |       |                   |       |                 |       |   |   |   |   |
| Income from operations                                     |       | 838                    |       | 1,745                |       | 1,565 |   | 4,020 |   |
|                                                       |       |                   |       |                 |       |   |   |   |   |
| Other income, net                                          |       | 38                     |       | 30                   |       | 90 |   | 59 |   |
|                                                       |       |                   |       |                 |       |   |   |   |   |
| Income before income taxes and minority interest           |       | 876                    |       | 1,775                |       | 1,655 |   | 4,079 |   |
|                                                       |       |                   |       |                 |       |   |   |   |   |
| Income tax provision                                       |       | 364                    |       | 704                  |       | 691 |   | 1,633 |   |
|                                                       |       |                   |       |                 |       |   |   |   |   |
| Income before minority interest                            |       | 512                    |       | 1,071                |       | 964 |   | 2,446 |   |
|                                                       |       |                   |       |                 |       |   |   |   |   |
| Minority interest in net income of consolidated subsidiary |       | —                 |       | 227                  |       | — |   | 489 |   |
|                                                       |       |                   |       |                 |       |   |   |   |   |
| Net income                                                 |       | $                      | 512        |                 | $          | 844 |   | $ | 964 |   | $ | 1,957 |   |
|                                                       |       |                   |       |                 |       |   |   |   |   |
| Earnings per common share:                                 |       |                   |       |                 |       |   |   |   |   |
| Basic                                                      |       | $                      | 0.03       |                 | $          | 0.06 |   | $ | 0.05 |   | $ | 0.13 |   |
| Diluted                                                    |       | $                      | 0.02       |                 | $          | 0.04 |   | $ | 0.04 |   | $ | 0.10 |   |
|                                                       |       |                   |       |                 |       |   |   |   |   |
| Weighted average number of common shares outstanding:      |       |                   |       |                 |       |   |   |   |   |
| Basic                                                      |       | 18,558                 |       | 15,053               |       | 18,516 |   | 14,960 |   |
| Diluted                                                    |       | 22,513                 |       | 15,593               |       | 22,453 |   | 15,556 |   |

 

 

See Notes to Unaudited Condensed Consolidated FinancialStatements.

 

 

 

4

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

**Unaudited CondensedConsolidated Statement of Stockholders’ Equity**

**For the Six Months Ended June30, 2005**

(In thousands)

 
| ** **                                                                                    | ** ** | ** **          | ** ** | ** **       | ** ** | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | ** **       | ** ** | **Accumulated** | ** ** | ** **  | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------|------------|-------------|------------|--------------|------------|-------------------|------------|------------------|------------|-----------------|------------|-------------|------------|------------|------------|
| ** **                                                                                    | ** ** | ** **          | ** ** | ** **       | ** ** | ** **  | ** ** | ** **   | ** ** | **Additional**    | ** ** | ** **       | ** ** | **Other**       | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                                                                                    | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Deferred** | ** ** | **Comprehensive** | ** ** | **Acumulated**   | ** ** | ** **      | ** ** |
| ** **                                                                                    | ** ** | **Shares**          | ** ** | **Amount**       | ** ** | **Shares**  | ** ** | **Amount**   | ** ** | **Capital**       | ** ** | **Compensation** | ** ** | **Income**      | ** ** | **Deficit** | ** ** | **Total**  | ** ** |
| Balance, January 1, 2005                                                                      |       | —              |       | $                | —     |        | 18,394     |         | $          | 18                |       | $                | 111,912    |            | $          | (1,034      | )          | $          | 43         |   | $ | (17,457 | ) | $ | 93,482 |   |
|                                                                                          |       |                |       |             |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Comprehensive income:                                                                         |       |                |       |             |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Net income                                                                                    |       |                |       |             |       |        |       |         |       |              |       |             |       |            |       | 964         |       | 964        |       |
| Effect of change in fair value of available-for-sale securities,  net of deferred taxes of $7 |       |                |       |             |       |        |       |         |       |              |       |             |       | (7              | )          |        |       | (7         | )          |
| Total comprehensive income                                                                    |       |                |       |             |       |        |       |         |       |              |       |             |       |            |       |        |       | 957        |       |
|                                                                                          |       |                |       |             |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Common stock issued upon exercise of stock options                                            |       |                |       |             |       | 194         |       |         |       | 408               |       |             |       |            |       |        |       | 408        |       |
|                                                                                          |       |                |       |             |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Issuance of restricted stock to employees for services to be  rendered                        |       |                |       |             |       | 72          |       |         |       | 1,084             |       | (1,084           | )          |            |       |        |       | —     |       |
|                                                                                          |       |                |       |             |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Amortization of deferred compensation                                                         |       |                |       |             |       |        |       |         |       |              |       | 135              |       |            |       |        |       | 135        |       |
|                                                                                          |       |                |       |             |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Tax benefit from exercise of non-qualified stock options                                      |       |                |       |             |       |        |       |         |       | 393               |       |             |       |            |       |        |       | 393        |       |
|                                                                                          |       |                |       |             |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Balance, June 30, 2005                                                                        |       | —              |       | $                | —     |        | 18,660     |         | $          | 18                |       | $                | 113,797    |            | $          | (1,983      | )          | $          | 36         |   | $ | (16,493 | ) | $ | 95,375 |   |
|                                                                                               |            |                     |            |                  |            |             |            |              |            |                   |            |                  |            |                 |            |             |            |            |            |  |  |  |  |  |  |  |  |  |  |  |

 

See Notes to Unaudited Condensed Consolidated FinancialStatements.

** **

 

5

----

 

** **

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

**Unaudited CondensedConsolidated Statements of Cash Flows**

(In thousands)

 
| ** **                                                                                               | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                               | ** ** | **June 30,**         | ** ** |
| ** **                                                                                               | ** ** | **2005**             | ** ** | **2004** | ** ** |
| Operating activities:                                                                                    |       |                 |       |   |   |
| Net income                                                                                               |       | $                    | 964        |   | $ | 1,957 |   |
| Adjustments to reconcile net  income to net cash provided by (used in) operating activities:             |       |                 |       |   |   |
| Depreciation and amortization                                                                            |       | 1,073                |       | 598 |   |
| Provision for doubtful accounts                                                                          |       | 140                  |       | — |   |
| Realized gain on sale of  available-for-sale securities                                                  |       | —               |       | (34 | ) |
| Minority interest in net income  of consolidated subsidiary                                              |       | —               |       | 489 |   |
| Deferred tax provision                                                                                   |       | (6                   | )     | — |   |
| Amortization of deferred compensation                                                                    |       | 135                  |       | — |   |
| Cash provided by (used in)  changes in operating assets and liabilities:                                 |       |                 |       |   |   |
| Accounts receivable                                                                                      |       | (367                 | )          | (475 | ) |
| Income tax refund receivable                                                                             |       | 767                  |       | 489 |   |
| Prepaid programming costs                                                                                |       | (2,000               | )          | — |   |
| Other current assets                                                                                     |       | (1,424               | )          | 26 |   |
| Deposits and other assets                                                                                |       | (93                  | )          | (673 | ) |
| Accounts payable and accrued  expenses                                                                   |       | (416                 | )          | 232 |   |
| Accrued severance payments                                                                               |       | (22                  | )          | (214 | ) |
| Deferred revenue                                                                                         |       | 100                  |       | (470 | ) |
| Customer deposits                                                                                        |       | 942                  |       | 749 |   |
| Deferred satellite rent  obligations                                                                     |       | (11                  | )          | (34 | ) |
| Net cash provided by (used in)  operating activities                                                     |       | (218                 | )          | 2,640 |   |
|                                                                                                     |       |                 |       |   |   |
| Investing activities:                                                                                    |       |                 |       |   |   |
| Purchases of property, plant and  equipment                                                              |       | (3,373               | )          | (966 | ) |
| Purchases of available-for-sale  securities                                                              |       | —               |       | (256 | ) |
| Proceeds from sale of  available-for-sale securities                                                     |       | —               |       | 85 |   |
| Net cash used in financing  activities                                                                   |       | (3,373               | )          | (1,137 | ) |
|                                                                                                     |       |                 |       |   |   |
| Financing activities:                                                                                    |       |                 |       |   |   |
| Principal payments on notes  payable and capital leases                                                  |       | (13                  | )          | (144 | ) |
| Proceeds from exercise of stock  options                                                                 |       | 408                  |       | 1,011 |   |
| Prepaid offering costs                                                                                   |       | (902                 | )          | — |   |
| Proceeds from common stock  subscriptions receivable                                                     |       | —               |       | 30 |   |
| Net cash (used in) provided by  financing activities                                                     |       | (507                 | )          | 897 |   |
| Net increase (decrease) in cash  and cash equivalents                                                    |       | (4,098               | )          | 2,400 |   |
| Cash and cash equivalents, beginning of period                                                           |       | 13,105               |       | 7,214 |   |
| Cash and cash equivalents, end of period                                                                 |       | $                    | 9,007      |   | $ | 9,614 |   |
|                                                                                                     |       |                 |       |   |   |
| Supplemental disclosure of cash flow information:                                                        |       |                 |       |   |   |
|                                                                                                     |       |                 |       |   |   |
| Income taxes paid                                                                                        |       | $                    | 5          |   | $ | 1,139 |   |
|                                                                                                     |       |                 |       |   |   |
| 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 |       | $                    | (7         | ) | $ | — |   |

 

See Notes to Unaudited Condensed Consolidated FinancialStatements.

 

 

6

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

**Notes to UnauditedCondensed Consolidated Financial Statements**

(In thousands, except per share data)

 

 

**NOTE 1—ORGANIZATION AND BUSINESS**

 

**Description of Operations**

 

Outdoor Channel Holdings, Inc. (“OutdoorChannel Holdings,” or collectively with its subsidiaries, the “Company”) wasreincorporated under the laws of the State of Delaware on September 14, 2004.Originally Outdoor Channel Holdings was incorporated under the name GlobalResources, Inc., an Alaska corporation, and was subsequently re-named GlobalOutdoors, Inc. In 2003, the name was changed to Outdoor Channel Holdings, Inc.The Company acquired the remaining 17.6% minority interest in The OutdoorChannel, Inc. (“TOC”), which it did not previously hold, on September 8, 2004.TOC operates The Outdoor Channel which is a national television network devotedto traditional outdoor activities, such as hunting, fishing and shootingsports, as well as off-road motor sports and other related lifestyleprogramming.

 

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

 

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

 

 

**NOTE 2—UNAUDITED INTERIM FINANCIAL STATEMENTS**

 

In the opinion of management, theaccompanying unaudited condensed consolidated financial statements reflect alladjustments, consisting of normal recurring adjustments, necessary to presentfairly the financial position of the Company as of June 30, 2005 and itsresults of operations and cash flows for the three and/or six months ended June30, 2005 and 2004. Information included in the consolidated balance sheet, asof December 31, 2004 has been derived from, and certain terms used herein aredefined in the audited financial statements of the Company as of December 31,2004 (the “Audited Financial Statements”) included in the Company’s AnnualReport on Form 10-K/A (the “10-K/A”) for the year ended December 31, 2004 thatwas previously filed with the Securities and Exchange Commission (the “SEC”).Pursuant to the rules and regulations of the SEC, certain information anddisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted from these financial statements unlesssignificant changes have taken place since the end of the most recent fiscalyear. Accordingly, these unaudited condensed consolidated financial statementsshould be read in conjunction with the Audited Financial Statements and theother information also included in the 10-K/A.

 

Certain amounts in the 2004 unauditedcondensed consolidated financial statements have been reclassified to conformto the 2005 presentation.

 

The results of the Company’s operationsfor the three and six months ended June 30, 2005 are not necessarily indicativeof the results of operations for the full year ending December 31, 2005.

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectreported amounts of assets and liabilities as of the dates of the condensedconsolidated balance sheets and reported amount of revenues and expenses forthe periods presented. Accordingly, actual results could materially differ fromthose estimates.

 

 

 

7

----

 

 

**NOTE 3—EARNINGS PER SHARE**

 

Effective September 15, 2004 the Companyeffected a 5 for 2 split of its common stock in connection with itsreincorporation in Delaware. All share and per share data has been adjustedwhere appropriate to reflect this stock split. In addition, the par value ofthe Company’s common stock was changed from $0.02 to $0.001 per share.

 

The Company has presented “basic” and “diluted”earnings per common share in the accompanying unaudited condensed consolidatedstatements of operations in accordance with the provisions of Statement ofFinancial Accounting Standards No. 128, “Earnings Per Share” (“SFAS 128”). Basicearnings per common share is calculated by dividing net income by the weightedaverage number of common shares outstanding during each period. The calculationof diluted earnings per common share is similar to that of basic earnings percommon share, except that the denominator is increased to include the number ofadditional common shares that would have been outstanding if all potentiallydilutive common shares of the Company and TOC, prior to the acquisition of theremaining minority interest in TOC, were issued during the period if any suchissuances have a dilutive effect.

 

The computation of diluted earnings pershare takes into account the effects on the weighted average number of commonshares outstanding of the assumed exercise of all of the outstanding stockoptions of Outdoor Channel Holdings for the three and six months ended June 30,2005 and 2004 and TOC for the three and six months ended June 30, 2004,adjusted for the application of the treasury stock method. The computation ofdiluted earnings per share for the three and six months ended June 30, 2004also takes into account the reduction in net income applicable to common stockattributable to the increase in the minority interest (approximately 17.5% to33.1%) in the net income of TOC that results from the assumed exercise of allof TOC’s outstanding stock options. The number of shares potentially issuableby the Company at June 30, 2005 and 2004 upon the exercise of stock optionsthat were not included in the computation of net earnings per common sharebecause they were anti-dilutive totaled 110 and 25, respectively.

 

The following table summarizes thecalculation of net income and the weighted average common shares outstandingfor basic and diluted earnings per share for the three and six months endedJune 30, 2005 and 2004:

 
| ** **                                                                                                                                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                         | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** |
| ** **                                                                                                                                                         | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Numerators:                                                                                                                                                        |       |                   |       |                 |       |   |   |   |   |
| Net income—basic                                                                                                                                              |       | $                      | 512        |                 | $          | 844 |   | $ | 964 |   | $ | 1,957 |   |
| Deduct increase in minority  interest                                                                                                                              |       |                   |       |                 |       |   |   |   |   |
| attributable to assumed exercise of  dilutive stock options of TOC                                                                                                 |       | —                 |       | (196                 | )          | — |   | (421 | ) |
| Net income—diluted                                                                                                                                            |       | $                      | 512        |                 | $          | 648 |   | $ | 964 |   | $ | 1,536 |   |
|                                                                                                                                                               |       |                   |       |                 |       |   |   |   |   |
| Denominators:                                                                                                                                                      |       |                   |       |                 |       |   |   |   |   |
| Weighted average common shares outstanding—basic                                                                                                              |       | 18,558                 |       | 15,053               |       | 18,516 |   | 14,960 |   |
| 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 |       | 3.955                  |       | 540                  |       | 3,937 |   | 596 |   |
| Diluted weighted average common shares  outstanding                                                                                                                |       | 22,513                 |       | 15,593               |       | 22,453 |   | 15,556 |   |
|                                                                                                                                                                    |            |                        |            |                      |            |  |  |  |  |  |  |  |  |  |

 

 

 

8

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**NOTE 4—PRO FORMA EFFECTS OF STOCK OPTIONS**

 

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

 

The Company’s historical net income andearnings per common share and pro forma net income and earnings per commonshare assuming compensation cost had been determined for the three and sixmonths ended June 30, 2005 and 2004 based on the fair value at the grant datefor all awards by the Company using the Black-Scholes option pricing modelconsistent with the provisions of SFAS 123, and amortized ratably or over thevesting period, are set forth below:

 
| ** **                                                                                                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                                              | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** |
| ** **                                                                                                                              | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income:                                                                                                                             |       |                   |       |                 |       |   |   |   |   |
| As reported                                                                                                                             |       | $                      | 512        |                 | $          | 844 |   | $ | 964 |   | $ | 1,957 |   |
| Deduct: Stock-based employee  compensation expense assuming a fair value based method had been used for all  awards, net of tax effects |       | (432                   | )          | (456                 | )          | (829 | ) | (912 | ) |
|                                                                                                                                    |       |                   |       |                 |       |   |   |   |   |
| Pro forma - basic                                                                                                                       |       | $                      | 80         |                 | $          | 388 |   | $ | 135 |   | $ | 1,045 |   |
| Pro forma - diluted                                                                                                                     |       | $                      | 80         |                 | $          | 192 |   | $ | 135 |   | $ | 624 |   |
|                                                                                                                                    |       |                   |       |                 |       |   |   |   |   |
| Basic earnings per share:                                                                                                               |       |                   |       |                 |       |   |   |   |   |
| As reported                                                                                                                             |       | $                      | 0.03       |                 | $          | 0.06 |   | $ | 0.05 |   | $ | 0.13 |   |
| Pro forma                                                                                                                               |       | $                      | 0.00       |                 | $          | 0.03 |   | $ | 0.01 |   | $ | 0.07 |   |
| Diluted earnings per common share:                                                                                                      |       |                   |       |                 |       |   |   |   |   |
| As reported                                                                                                                             |       | $                      | 0.02       |                 | $          | 0.04 |   | $ | 0.04 |   | $ | 0.10 |   |
| Pro forma                                                                                                                               |       | $                      | 0.00       |                 | $          | 0.01 |   | $ | 0.01 |   | $ | 0.04 |   |

 

 

The fair value of each option granted bythe Company in the six months ended June 30, 2005 and the year ended December31, 2004 was estimated on the date of grant using the Black-Scholes optionpricing model with the following assumptions:

 

| ** **                  | ** ** | **Six Months Ended** | ** ** | **Year Ended**        | ** ** |
|-----------------------------|------------|----------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **June 30, 2005**    | ** ** | **December 31, 2004** | ** ** |
| Risk-free interest rate     |       | 3.7 - 4.2%           |       | 1.7 - 4.2%            |       |
| Dividend yield              |       | 0%                   |       | 0%                    |       |
| Expected life of the option |       | 3.8 - 5.1 yrs.       |       | 3 mos. - 10 yrs.      |       |
| Volatility factor           |       | 37.7%                |       | 41.7 - 79%            |       |

 

As a result of amendments to SFAS 123, theCompany will be required to charge the fair value of employee stock options asof the date of grant to expense over the vesting period beginning with itsfiscal quarter ending March 31, 2006.

 

 

9

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**NOTE 5—EQUITY TRANSACTIONS**

 

**Issuances of Common Stock by the Company**

 

During the six months ended June 30, 2005,the Company received cash proceeds of approximately $408 from the exercise ofoptions for the purchase of 194 shares of common stock. Also during the sixmonths ended June 30, 2005, the Company issued employees 72 shares ofrestricted stock. The rights to these shares vest over a three year period.Based on the closing market price on the day before the grant of $14.95 pershare, the value of the stock was $1,084. This amount has been included indeferred compensation as an offset to stockholders’ equity and will beamortized to compensation expense as the rights to the restricted stock vest.

 

**Outdoor Channel Holdings, Inc. Stock Option Plans**

 

Descriptions of Outdoor Channel Holdings’stock option plans are included in Note 9 of the Company’s Annual Report onForm 10-K/A for the year ended December 31, 2004. A summary of the status ofthe options granted under Outdoor Channel Holdings’ stock option plans andoutside of those plans as of June 30, 2005 and the changes in optionsoutstanding during the six months then ended is presented in the table thatfollows:

 

| ** **                           | ** ** | **As of June 30, 2005** | ** ** |
|--------------------------------------|------------|-------------------------|------------|
| ** **                           | ** ** | ** **              | ** ** | **Weighted** | ** ** |
| ** **                           | ** ** | ** **              | ** ** | **Average** | ** ** |
| ** **                           | ** ** | ** **              | ** ** | **Exercise** | ** ** |
| ** **                           | ** ** | **Shares**              | ** ** | **Price** | ** ** |
| Outstanding at beginning of period   |       | 5,630                   |       | $ | 4.12 |   |
| Options granted                      |       | 385                     |       | 14.60 |   |
| Options exercised                    |       | (194                    | )          | 2.11 |   |
| Options canceled or expired          |       | (3                      | )          | 6.14 |   |
|                                 |       |                    |       |   |   |
| Options outstanding at end of period |       | 5,818                   |       | $ | 4.88 |   |

 

**NOTE 6—RELATED PARTY TRANSACTIONS**

 

The Company is leasing its administrativefacilities from Musk Ox Properties, LP, which in turn is owned by Messrs. PerryT. Massie and Thomas H. Massie, principal stockholders and officers of theCompany. The lease agreements currently require monthly rent paymentsaggregating approximately $21. These lease agreements expire on December 31,2005. Rent expense paid to Musk Ox Properties, LP totaled approximately $63 and$61 in the three months ended June 30, 2005 and 2004, respectively, andapproximately $126 and $122 in the six months ended June 30, 2005 and 2004,respectively.

 

 

**NOTE 7—SEGMENT INFORMATION**

 

Pursuant to the Provisions of Statement ofFinancial Accounting Standards No. 131, “Disclosures About Segments of anEnterprise and Related Information” (“SFAS 131”), the Company reports segmentinformation in the same format as reviewed by the Company’s Chief OperatingDecision Maker (the “CODM”). The Company segregates its business activitiesinto TOC and the Membership Division. TOC is a separate business activity thatbroadcasts television programming on The Outdoor Channel 24 hours a day, sevendays a week. TOC generates revenue from advertising fees (which include feespaid by outside producers to purchase advertising time in connection with theairing of their programs on The Outdoor Channel) and subscriber fees. LostDutchman’s and GPAA membership sales and related activities are reported in theMembership Division. The Membership Division also includes magazine sales, thesale of products and services related to gold prospecting, gold expositions,expeditions and outings. Intersegment sales amounted to approximately $149 ineach of the three months ended June 30, 2005 and 2004 and $298 in each of thesix months ended June 30, 2005 and 2004.

 

 

10

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**NOTE 7—SEGMENT INFORMATION (Concluded)**

 

          Informationwith respect to these reportable segments as of and for the three and sixmonths ended June 30, 2005 and 2004 follows:

 
| ** **             | ** ** | ** **   | ** ** | **Income (Loss)**     | ** ** | ** ** | ** ** | ** **       | ** ** | **Additions to** | ** ** |
|------------------------|------------|--------------|------------|-----------------------|------------|------------|------------|------------------|------------|------------------|------------|
| **As of and for the**  | ** ** | ** **   | ** ** | **Before Income**     | ** ** | ** ** | ** ** | **Depreciation** | ** ** | **Property,**    | ** ** |
| **Three Months Ended** | ** ** | ** **   | ** ** | **Taxes and**         | ** ** | **Total**  | ** ** | **and**          | ** ** | **Plant and**    | ** ** |
| **June 30, 2005**      | ** ** | **Revenues** | ** ** | **Minority Interest** | ** ** | **Assets** | ** ** | **Amortization** | ** ** | **Improvements** | ** ** |
|                   |       |         |       |                  |       |       |       |             |       |             |       |
| TOC                    |       | $            | 8,994      |                  | $          | 1,709      |       | $                | 23,296     |             | $          | 285 |   | $ | 1,673 |   |
| Membership Division    |       | 1,020        |       | (173                  | )          | 5,929      |       | 78               |       | 32               |       |
| Subtotals of Segments  |       | 10,014       |       | 1,536                 |       | 29,225     |       | 363              |       | 1,705            |       |
| Corporate*             |       | —       |       | (660                  | )          | 72,917     |       | 136              |       | —           |       |
| Totals                 |       | $            | 10,014     |                  | $          | 876        |       | $                | 102,142    |             | $          | 499 |   | $ | 1,705 |   |
|                   |       |         |       |                  |       |       |       |             |       |             |       |
| **June 30, 2004**      |       |         |       |                  |       |       |       |             |       |             |       |
| TOC                    |       | $            | 8,402      |                  | $          | 2,064      |       | $                | 17,260     |             | $          | 213 |   | $ | 192 |   |
| Membership Division    |       | 1,155        |       | 25                    |       | 6,613      |       | 86               |       | 348              |       |
| Subtotals of Segments  |       | 9,557        |       | 2,089                 |       | 23,873     |       | 299              |       | 540              |       |
| Corporate*             |       | —       |       | (314                  | )          | —     |       | —           |       | —           |       |
| Totals                 |       | $            | 9,557      |                  | $          | 1,775      |       | $                | 23,873     |             | $          | 299 |   | $ | 540 |   |
|                   |       |         |       |                  |       |       |       |             |       |             |       |
| **As of and for the**  |       |         |       |                  |       |       |       |             |       |             |       |
| **Six Months Ended**   |       |         |       |                  |       |       |       |             |       |             |       |
| **June 30, 2005**      |       |         |       |                  |       |       |       |             |       |             |       |
| TOC                    |       | $            | 17,751     |                  | $          | 2,981      |       | $                | 23,296     |             | $          | 645 |   | $ | 3,185 |   |
| Membership Division    |       | 2,324        |       | (114                  | )          | 5,929      |       | 156              |       | 188              |       |
| Subtotals of Segments  |       | 20,075       |       | 2,867                 |       | 29,225     |       | 801              |       | 3,373            |       |
| Corporate*             |       | —       |       | (1,212                | )          | 72,917     |       | 272              |       | —           |       |
| Totals                 |       | $            | 20,075     |                  | $          | 1,655      |       | $                | 102,142    |             | $          | 1,073 |   | $ | 3,373 |   |
|                   |       |         |       |                  |       |       |       |             |       |             |       |
| **June 30, 2004**      |       |         |       |                  |       |       |       |             |       |             |       |
| TOC                    |       | $            | 16,282     |                  | $          | 4,471      |       | $                | 17,260     |             | $          | 426 |   | $ | 504 |   |
| Membership Division    |       | 2,480        |       | 172                   |       | 6,613      |       | 172              |       | 462              |       |
| Subtotals of Segments  |       | 18,762       |       | 4,643                 |       | 23,873     |       | 598              |       | 966              |       |
| Corporate*             |       | —       |       | (564                  | )          | —     |       | —           |       | —           |       |
| Totals                 |       | $            | 18,762     |                  | $          | 4,079      |       | $                | 23,873     |             | $          | 598 |   | $ | 966 |   |
|                        |            |              |            |                       |            |            |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |

 

----

*The Company captures corporate overheadthat is applicable to both segments, but not directly related to operations ina separate business unit, as “Corporate.” The expenses allocated to Corporateconsisted primarily of: professional fees including public relations,accounting and legal fees, taxes associated with being incorporated inDelaware, board fees, and other corporate fees not associated with either TOC orthe Membership division. Corporate assets consisted primarily of goodwill, netdeferred tax assets, intangible assets and other assets such as prepaidoffering costs.

 

 

**NOTE 8—SUBSEQUENT EVENTS**

 

On July 1, 2005, the Company completed apublic offering of its common stock, whereby we sold 3,500 shares of commonstock and received net proceeds of $44,415 prior to offering costs. Inaddition, certain selling stockholders exercised options to buy 1,688 shares ofcommon stock which were resold in the public offering. On July 13, 2005, theunderwriters exercised their over-allotment option from certain sellingstockholders, whereby options to buy an additional 442 shares of common stockwere exercised. The Company received $2,162 in aggregate from the exercise ofthese options.

 

* * *

** **

** **

 

11

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**ITEM 2.****                 ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS.**

 

 

**Safe Harbor Statement**

 

The information contained in this reportmay include forward-looking statements. The Company’s actual results coulddiffer materially from those discussed in any forward-looking statements. Thestatements contained in this report that are not historical are “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended (the “Securities Act”), and Section 21E of the Securities Exchange Actof 1934, as amended (the “Exchange Act”), including statements, withoutlimitation, regarding our expectations, beliefs, intentions or strategiesregarding the future. We intend that such forward-looking statements be subjectto the safe-harbor provisions contained in those sections. Such forward-lookingstatements relate to, among other things: (1) expected revenue and earningsgrowth and changes in mix; (2) anticipated expenses including advertising,programming, personnel and others; (3) Nielsen Media Research, which we referto as Nielsen, estimates regarding total households and cable and satellitehomes subscribing to and viewers (ratings) of The Outdoor Channel; and (4)other matters. We undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

 

These statements involve significant risksand uncertainties and are qualified by important factors that could cause ouractual results to differ materially from those reflected by the forward-lookingstatements. Such factors include but are not limited to risks and uncertaintieswhich are discussed below under the caption “Risks and Uncertainties” and otherrisks and uncertainties discussed elsewhere in this report. In assessingforward-looking statements contained herein, readers are urged to readcarefully all cautionary statements contained in this Form 10-Q and in ourother filings with the Securities and Exchange Commission. For theseforward-looking statements, we claim the protection of the safe harbor forforward-looking statements in Section 27A of the Securities Act and Section 21Eof the Exchange Act.

 

**General**

 

Outdoor Channel Holdings, Inc. (which werefer to as “Outdoor Channel Holdings” or collectively with its subsidiaries,the “Company”), through its indirect wholly-owned subsidiary The OutdoorChannel, Inc. (“TOC”), owns and operates 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 related life style programming. The Company also ownsand operates related businesses which serve the interests of The OutdoorChannel’s viewers and other outdoor enthusiasts. These related businessesinclude: LDMA-AU, Inc. (“Lost Dutchman’s”) and Gold Prospector’s Association ofAmerica, LLC. (“GPAA”). Lost Dutchman’s is a national gold prospectingcampground club with approximately 6,700 members and properties in Arizona,California, Colorado, Georgia, Michigan, North Carolina, Oregon and SouthCarolina. We believe GPAA is one of the largest gold prospecting clubs in theworld with approximately 32,300 active members. GPAA is the publisher of the “GoldProspectors & Treasure Hunters in the Great Outdoors” magazine and owner ofa 2,300 acre property near Nome, Alaska used to provide an annual expeditionfor a fee to its members.

 

The Company’s revenues include (1)advertising fees from advertisements aired on The Outdoor Channel and fromadvertisements in “Gold Prospectors & Treasure Hunters in the GreatOutdoors” magazine; (2) subscriber fees paid by cable and satellite serviceproviders that air The Outdoor Channel; and (3) membership fees from members inboth Lost Dutchman’s and GPAA and other income including magazine sales,products and services related to gold prospecting, gold expositions,expeditions and outings. Advertising fees include fees paid by third-partyprogrammers to purchase advertising time in connection with the airing of theirprograms on The Outdoor Channel.

 

**Recent AccountingDevelopments**

 

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards No.123 (R) (“SFAS 123 (R)”). “Share-Based Payment” which establishes standards forthe accounting for transactions in which an entity exchanges its equityinstruments for goods or services and focuses primarily on accounting fortransactions in which an entity obtains employee services in share-basedpayment transactions. SFAS 123 (R) requires that the fair value of such equityinstruments, including all options granted to employees, be recognized asexpense in the historical financial statements as services are performed. Priorto SFAS 123 (R), only certain pro forma disclosures of fair value wererequired. SFAS 123 (R) shall be effective for issuers as of the beginning ofthe first annual reporting period that begins after December 15, 2005. TheCompany intends to adopt the standards of SFAS No. 123 (R) effective January 1,2006. Since the Company has used the intrinsic value method to account forstock options, the adoption of SFAS 123 (R) is expected to have a materialimpact on the financial statements of Outdoor Channel Holdings, Inc.

 

 

12

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The FASB had issued certain otheraccounting pronouncements as of June 30, 2005 that will become effective insubsequent periods; however, management of the Company does not believe thatany of those pronouncements would have significantly affected the Company’sfinancial accounting measurements or disclosures had they been in effect duringthe three and six months ended June 30, 2005.

 

 

**Comparison of Operating Results for the ThreeMonths Ended****June 30****, 2005 and June****30****, 2004**

 

          The following table discloses certainfinancial information for the periods presented, expressed in terms of dollars,dollar change, percentage change and as a percent of total revenue (all dollaramounts are in thousands):

 
| ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** | **% of Total Revenue** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------------------|------------|
| ** **                                                  | ** ** | **2005**   | ** ** | **2004**   | ** ** | **$**      | ** ** | **%**                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                   |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Advertising                                                 |       | $          | 5,257      |       | $          | 5,352      |       | $                      | (95        | ) | (1.8 | )% | 52.5 | % | 56.0 | % |
| Subscriber fees                                             |       | 3,894      |       | 3,219      |       | 675        |       | 21.0                   |       | 38.9 |   | 33.7 |   |
| Membership income                                           |       | 863        |       | 986        |       | (123       | )          | (12.5                  | )          | 8.6 |   | 10.3 |   |
| Total revenues                                              |       | 10,014     |       | 9,557      |       | 457        |       | 4.8                    |       | 100.0 |   | 100.0 |   |
|                                                        |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Expenses:                                                   |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Satellite transmission fees                                 |       | 616        |       | 586        |       | 30         |       | 5.1                    |       | 6.1 |   | 6.1 |   |
| Advertising                                                 |       | 2,062      |       | 1,491      |       | 571        |       | 38.3                   |       | 20.6 |   | 15.6 |   |
| Programming                                                 |       | 531        |       | 895        |       | (364       | )          | (40.7                  | )          | 5.3 |   | 9.4 |   |
| Selling, general and  administrative                        |       | 5,967      |       | 4,840      |       | 1,127      |       | 23.3                   |       | 59.6 |   | 50.6 |   |
| Total expenses                                              |       | 9,176      |       | 7,812      |       | 1,364      |       | 17.5                   |       | 91.6 |   | 81.7 |   |
|                                                        |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income from operations                                      |       | 838        |       | 1,745      |       | (907       | )          | (52.0                  | )          | 8.4 |   | 18.3 |   |
|                                                        |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Other income, net                                           |       | 38         |       | 30         |       | 8          |       | 26.7                   |       | 0.3 |   | 0.3 |   |
|                                                        |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income before income taxes and  minority interest           |       | 876        |       | 1,775      |       | (899       | )          | (50.6                  | )          | 8.7 |   | 18.6 |   |
|                                                        |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income tax provision                                        |       | 364        |       | 704        |       | (340       | )          | (48.3                  | )          | 3.6 |   | 7.4 |   |
|                                                        |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income before minority interest                             |       | 512        |       | 1,071      |       | (559       | )          | (52.2                  | )          | 5.1 |   | 11.2 |   |
|                                                        |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Minority interest in net income  of consolidated subsidiary |       | —     |       | 227        |       | (227       | )          | (100.0                 | )          | — |   | 2.4 |   |
|                                                        |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Net income                                                  |       | $          | 512        |       | $          | 844        |       | $                      | (332       | ) | (39.3 | )% | 5.1 | % | 8.8 | % |
|                                                             |            |            |            |            |            |            |            |                        |            |  |  |  |  |  |  |  |  |

 

** **

 

13

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**Comparison of Operating Results for the Six MonthsEnded June****30****, 2005 and June****30****, 2004**

 

          The following table discloses certainfinancial information for the periods presented, expressed in terms of dollars,dollar change, percentage change and as a percent of total revenue (all dollaramounts are in thousands):

** **
| ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** | **% of Total Revenue** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------------------|------------|
| ** **                                                  | ** ** | **2005**   | ** ** | **2004**   | ** ** | **$**      | ** ** | **%**                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                   |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Advertising                                                 |       | $          | 10,516     |       | $          | 10,164     |       | $                      | 352        |   | 3.5 | % | 52.4 | % | 54.2 | % |
| Subscriber fees                                             |       | 7,536      |       | 6,380      |       | 1,156      |       | 18.1                   |       | 37.5 |   | 34.0 |   |
| Membership income                                           |       | 2,023      |       | 2,218      |       | (195       | )          | (8.8                   | )          | 10.1 |   | 11.8 |   |
| Total revenues                                              |       | 20,075     |       | 18,762     |       | 1,313      |       | 7.0                    |       | 100.0 |   | 100.0 |   |
|                                                        |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Expenses:                                                   |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Satellite transmission fees                                 |       | 1,249      |       | 1,177      |       | 72         |       | 6.1                    |       | 6.2 |   | 6.3 |   |
| Advertising                                                 |       | 3,756      |       | 2,805      |       | 951        |       | 33.9                   |       | 18.7 |   | 14.9 |   |
| Programming                                                 |       | 1,052      |       | 1,290      |       | (238       | )          | (18.4                  | )          | 5.3 |   | 6.9 |   |
| Selling, general and  administrative                        |       | 12,453     |       | 9,470      |       | 2,983      |       | 31.5                   |       | 62.0 |   | 50.5 |   |
| Total expenses                                              |       | 18,510     |       | 14,742     |       | 3,768      |       | 25.6                   |       | 92.2 |   | 78.6 |   |
|                                                        |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income from operations                                      |       | 1,565      |       | 4,020      |       | (2,455     | )          | (61.1                  | )          | 7.8 |   | 21.4 |   |
|                                                        |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Other income, net                                           |       | 90         |       | 59         |       | 31         |       | 52.5                   |       | 0.4 |   | 0.3 |   |
|                                                        |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income before income taxes and  minority interest           |       | 1,655      |       | 4,079      |       | (2,424     | )          | (59.4                  | )          | 8.2 |   | 21.7 |   |
|                                                        |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income tax provision                                        |       | 691        |       | 1,633      |       | (942       | )          | (57.7                  | )          | 3.4 |   | 8.7 |   |
|                                                        |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income before minority interest                             |       | 964        |       | 2,446      |       | (1,482     | )          | (60.6                  | )          | 4.8 |   | 13.0 |   |
|                                                        |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Minority interest in net income  of consolidated subsidiary |       | —     |       | 489        |       | (489       | )          | (100.0                 | )          | — |   | 2.6 |   |
|                                                        |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Net income                                                  |       | $          | 964        |       | $          | 1,957      |       | $                      | (993       | ) | (50.7 | )% | 4.8 | % | 10.4 | % |
|                                                             |            |            |            |            |            |            |            |                        |            |  |  |  |  |  |  |  |  |

 

 

**Revenues**

 

Our revenues include revenues from (1)advertising fees; (2) subscriber fees; and (3) membership income. Advertisingrevenue is generated from the sale of advertising time on The Outdoor Channel includingadvertisements shown during a program (also known as short-form advertising) andinfomercials in which the advertisement is the program itself (also known aslong-form advertising) and from the sale of advertising space in publicationssuch as the “Gold Prospectors & Treasure Hunters in the Great Outdoors”magazine. For the three months ended June 30, 2005 and 2004, The OutdoorChannel generated approximately 97.0% and 96.9% of our advertising revenue,respectively. For the six months ended June 30, 2005 and 2004, The OutdoorChannel generated approximately 97.1% and 97.4% of our advertising revenue,respectively. Subscriber fees are solely related to The Outdoor Channel.Membership income is generated by our activities other than the operation ofThe Outdoor Channel and includes membership sales, magazine sales, merchandisesales, and sponsored outings and expeditions in connection with GPAA and LostDutchman’s.

 

Total revenues for the three months ended June30, 2005 were $10,014,000, an increase of $457,000, or 4.8%, compared torevenues of $9,557,000 for the three months ended June 30, 2004. Total revenuesfor the six months ended June 30, 2005 were $20,075,000, an increase of $1,313,000,or 7.0%, compared to revenues of $18,762,000 for the six months ended June 30,2004. The net increases were the result of changes in several items comprisingrevenue as discussed below.

 

Advertising revenue for the three monthsended June 30, 2005 was $5,257,000, a decrease of $95,000 or 1.8% compared to $5,352,000for the three months ended June 30, 2004. Advertising revenue for the sixmonths ended June 30, 2005 was $10,516,000, an increase of $352,000 or 3.5%compared to $10,164,000 for the six months ended June 30, 2004. The decline inadvertising revenue for the three months ended June 30, 2005 principallyreflects our decision to use some 

 

 

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infomercial inventory for a program produced internally thatintroduces The Outdoor Channel viewers to Outdoor Channel 2 HD. As a result wedid not earn any revenue from this inventory of time. The increase inadvertising revenue for the six months ended June 30, 2005 reflects our abilityto demonstrate the value of short-form advertising on The Outdoor Channel tonational advertisers and thus sell a larger percentage of our advertisinginventory to these accounts, generally at higher prices.

 

For June of 2005, Nielsen estimated thatThe Outdoor Channel had 24.6 million viewers, down from 26.0 million for thesame period a year ago. (Nielsen revises this estimate each month and forAugust, Nielsen increased its estimate to approximately 25.2 millionsubscribers). Despite the decrease in Nielsen’s universe estimate in the firsthalf of 2005 as compared to Nielsen’s universe estimate in the first half of2004, we were able to increase our effective rates realized on our advertisingtime on The Outdoor Channel during the first quarter of 2005 and then maintainthe effective advertising rates during the second quarter of 2005.

 

Subscriber fees for the three months endedJune 30, 2005 were $3,894,000, an increase of $675,000 or 21.0% compared to$3,219,000 for the three months ended June 30, 2004. Subscriber fees for thesix months ended June 30, 2005 were $7,536,000, an increase of $1,156,000 or18.1% compared to $6,380,000 for the six months ended June 30, 2004. Theincrease in subscriber fees for the period was primarily due to: an increasednumber of paying subscribers compared to the same periods a year ago, both fromnew affiliates and from existing distributors such as National Cable TelevisionCooperative (“NCTC”), DIRECTV, Comcast, DISH Network and Charter, andcontractual subscriber fee rate increases with existing service providers carryingThe Outdoor Channel.

 

Membership income for the three monthsended June 30, 2005 was $863,000, a decrease of $123,000 or 12.5% compared to $986,000for the three months ended June 30, 2005. Membership income for the six monthsended June 30, 2005 was $2,023,000, a decrease of $195,000 or 8.8% compared to$2,218,000 for the six months ended June 30, 2004. The decline is principally aresult of timing of our LDMA membership sales relative to revenue recognitionof these sales and also a reduction in our GPAA membership renewal rate in thefirst half of 2005 compared to the first half of 2004.

 

**          Expenses**

 

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

 

Total expenses for the three months ended June30, 2005 were $9,176,000, an increase of $1,364,000, or 17.5%, compared to $7,812,000for the three months ended June 30, 2004. As a percentage of revenues, totalexpenses were 91.6% and 81.7% in the three months ended June 30, 2005 and 2004,respectively. Total expenses for the six months ended June 30, 2005 were $18,510,000,an increase of $3,768,000, or 25.6%, compared to $14,742,000 for the six monthsended June 30, 2004. As a percentage of revenues, total expenses were 92.2% and78.6% in the six months ended June 30, 2005 and 2004, respectively. Theincrease in expenses was due to several factors, such as increased corporatecosts including: (1) amortization of intangible assets; (2) costs associated withcompliance with Sarbanes-Oxley Act of 2002; and (3) costs associated withincorporation in Delaware and listing on Nasdaq National Market, to which theCompany became subject as of September 2004. The increase is also attributableto increased personnel costs, costs associated with the launch of our secondchannel, Outdoor Channel 2 HD, marketing and promotion costs incurred tosupport the growth of the number of subscribers of The Outdoor Channel, andother items more fully described as follows.

 

Satellite transmission fees for the threemonths ended June 30, 2005 were $616,000, an increase of $30,000, or 5.1%,compared to $586,000 for the three months ended June 30, 2004. Satellitetransmission fees for the six months ended June 30, 2005 were $1,249,000, anincrease of $72,000, or 6.1%, compared to $1,177,000 for the six months endedJune 30, 2004. This increase reflects an additional charge for the back-upsatellite capability negotiated with our satellite provider during the fourthquarter of 2004. We are scheduled for a price increase in satellitetransmission fees starting October 2005 amounting to $5,000 per month. However,we currently have plans to build our own broadcast facility during 2005 that weanticipate should be operational before the end of 2005 which is expected toreduce direct satellite transmission fees resulting in an approximate savingsof $12,000 per month.

 

Advertising expenses for the three monthsended June 30, 2005 were $2,062,000, an increase of $571,000 or 38.3% comparedto $1,491,000 for the three months ended June 30, 2004. Advertising expensesfor the six months ended June 30, 2005 were $3,756,000, an increase of $951,000or 33.9% compared to $2,805,000 for the six months ended June 30, 2004. Theincrease in advertising expenses is principally a result of our increasedspending on consumer and trade industry awareness campaigns designed to builddemand for The Outdoor Channel and for Outdoor Channel 2 HD. We plan oncontinuing to spend on these awareness programs, and when expressed as apercentage of revenues, we are trending at higher rates than 2004.

 

 

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Programming expenses for the three monthsended June 30, 2005 were $531,000, a decrease of $364,000 or 40.7% compared to$895,000 for the three months ended June 30, 2004. Programming expenses for thesix months ended June 30, 2005 were $1,052,000, a decrease of $238,000 or 18.4%compared to $1,290,000 for the six months ended June 30, 2004. Thedecreases are principally a result from our decision to not produce in 2005 aspecial that we had produced and aired in 2004.Furthercontributing to the decreases was our decision to postpone until the secondhalf of 2005 the airing of the 2005 season of one program that in 2004 we hadaired in the first half.

 

Our policy is to charge costs of specificshows to programming expense over the expected airing period beginning when theprogram first airs. Much of the cost of programming has been recorded asprepaid programming costs in anticipation of airing the programs in the thirdand fourth quarter of 2005 on The Outdoor Channel or corresponding with thefull launch of Outdoor Channel 2 HD. A substantial portion of the prepaidprogramming costs will be charged to expense in these quarters. Programmingexpenses are expected to increase as a percentage of revenue as we pursue ourstrategy to produce or own more programming in-house as opposed to contractingwith third party producers. As a result, we believe we will control more of ourprograms’ quality, advertising inventory and potential to re-package ourprogramming for other use such as international licensing and production ofDVDs for retail distribution.

 

Selling, general and administrativeexpenses for the three months ended June 30, 2005 were $5,967,000, an increaseof $1,127,000 or 23.3% compared to $4,840,000 for the three months ended June30, 2004. As a percent of revenues, selling, general and administrativeexpenses were 59.6% and 50.6% at June 30, 2005 and 2004, respectively. Selling,general and administrative expenses for the six months ended June 30, 2005 were$12,453,000, an increase of $2,983,000 or 31.5% compared to $9,470,000 for thesix months ended June 30, 2004. As a percent of revenues, selling, general andadministrative expenses were 62.0% and 50.5% at June 30, 2005 and 2004,respectively. The increase was primarily due to the increase in the number ofemployees from 123 at the end of June 2004 to 142 by the end of June 2005. Weopened our New York City advertising sales office with a resultant expense in2005 that did not exist in the same period a year ago. It currently has a staffof three employees. We have also added an executive to our management team whoholds the position of General Counsel. Others have been added in alldepartments to support our launch of a second channel—Outdoor Channel 2 HD, andto support our increased efforts of providing more of our shows in-house. Wealso experienced increased travel and related costs associated with our largeradvertising sales staff, support of our service providers and the promotion ofThe Outdoor Channel and Outdoor Channel 2 HD through a stronger presence attrade shows, conferences and seminars. Depreciation and small equipmentpurchases have increased as a result of pre-launch activity of Outdoor Channel2 HD. Also included in selling, general and administrative costs isamortization of intangible assets created as part of the acquisition inSeptember 2004 of the remaining minority interest of TOC we did not alreadyown. These expenses did not exist in the first half of 2004.

 

**Income from Operations**

 

Income from operations for the threemonths ended June 30, 2005 was $838,000, a decrease of $907,000 or 52.0%compared to $1,745,000 for the three months ended June 30, 2004. As a percentof revenues, income from operations was 8.4% and 18.3%, respectively. Incomefrom operations for the six months ended June 30, 2005 was $1,565,000, adecrease of $2,455,000 or 61.1% compared to $4,020,000 for the six months endedJune 30, 2004. As a percent of revenues, income from operations was 7.8% and21.4%, respectively. As we continue to strive to drive growth of our subscriberbase and as we launch Outdoor Channel 2 HD, we will incur increased expensessuch as programming, marketing, and advertising as well as start-up andoperating costs in 2005 that are unlikely to be immediately offset by revenues.As a result, we anticipate our operating margins will be negatively impactedfor the foreseeable future. There can be no assurance that these strategieswill be successful.

 

**Other Income, Net**

 

Other income, net for the three monthsended June 30, 2005 was $38,000, an increase of $8,000 or 26.7% compared to$30,000 for the three months ended June 30, 2004. Other income, net for the sixmonths ended June 30, 2005 was $90,000, an increase of $31,000 or 52.5%compared to $59,000 for the six months ended June 30, 2004. This improvementwas primarily due to increased dividends and interest earned on our investmentin available-for-sale securities and cash balances.

 

**Income Before IncomeTaxes and Minority Interest in Net Income of Consolidated Subsidiary**

 

Income before income taxes and minorityinterest decreased as a percentage of revenues to 8.7% for the three monthsended June 30, 2005 compared to 18.6% for the three months ended June 30, 2004.Income before income taxes and minority interest decreased as a percentage ofrevenues to 8.2% for the six months ended June 30, 2005 compared to 21.7% forthe six months ended June 30, 2004.

 

 

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The TOC segment’s income before incometaxes and minority interest expressed as a percentage of revenue decreased to19.0% for the three months ended June 30, 2005, compared to 24.6% for the threemonths ended June 30, 2004. The TOC segment’s income before income taxes andminority interest expressed as a percentage of revenue decreased to 16.8% forthe six months ended June 30, 2005, compared to 27.5% for the six months endedJune 30, 2004. The decrease was due mainly to the growth of our advertising,personnel and travel related expenses. As noted, we have increased our staff insupport of the launch of our second channel, Outdoor Channel 2 HD and inpursuit of growing the subscriber base of The Outdoor Channel.

 

The Membership Division segment’s incomebefore income taxes and minority interest expressed as a percentage of revenuesdecreased to a loss of 17.0% for the three months ended June 30, 2005 comparedto an income of 2.2% for the three months ended June 30, 2004. The MembershipDivision segment’s income before income taxes and minority interest expressedas a percentage of revenues decreased to a loss of 4.9% for the six monthsended June 30, 2005 compared to an income of 6.9% for the six months ended June30, 2004. This decrease principally reflects the combined effects of thedecline in revenue of the Membership Division of approximately $135,000 and$156,000 and the increase in expenses of $63,000 and $130,000 in the three andsix months ended June 30, 2005 and 2004, respectively. The reduction isprincipally a result of timing of our LDMA membership sales relative to revenuerecognition of these sales and a reduction of our GPAA membership renewal rate.Further, we held five gold shows in the first quarter of this year compared tofour last year which increased our overall expense. We did not realize as muchrevenue per show as last year as we held shows in areas we have never beenbefore or have not been to for sometime. Often it takes a year or two for showsheld in new areas to gain momentum. Our Denver show was negatively impacted byheavy snow fall which kept attendance down.

 

Corporate incurred a loss before incometaxes and minority interest for the three months ended June 30, 2005 amountingto $660,000, an increase of $346,000 or 110.2% compared to a loss of $314,000for the three months ended June 30, 2004. Corporate incurred a loss beforeincome taxes and minority interest for the six months ended June 30, 2005amounting to $1,212,000, an increase of $648,000 or 114.9% compared to $564,000for the six months ended June 30, 2004. The expenses allocated to Corporateinclude: professional fees such as public relations, accounting and legal fees,amortization of intangibles, business insurance, board of directors fees andexpenses and an allocation of corporate officers’ payroll and related expenses.The increase in the expenses of Corporate is principally related to accountingservices incurred in positioning the Company to be in compliance with therequirements of the Sarbanes-Oxley Act of 2002, taxes associated with beingincorporated in Delaware, listing fees of Nasdaq National Market andamortization of the intangible assets related to the acquisition of theminority interest of TOC. Increased board fees also contribute to the increaseof expenses reflecting the increase in the number of independent board membersfrom two in the first half of 2004 to five in the first half of 2005.

 

**Income Tax****Provision**

 

Income tax provision for the three monthsended June 30, 2005 was $364,000, a decrease of $340,000 or 48.3% as comparedto $704,000 for the three months ended June 30, 2004. Income tax provision forthe six months ended June 30, 2005 was $691,000, a decrease of $942,000 or57.7% as compared to $1,633,000 for the six months ended June 30, 2004. Thedecrease was principally due to the Company earning less taxable income in thefirst half of 2005 as compared to the first half of 2004. The effective incometax rate was approximately 41.6% and 39.7% for the three months ended June 30,2005 and 2004, respectively. The effective income tax rate was approximately41.8% and 40.0% for the six months ended June 30, 2005 and 2004, respectively.

 

**Minority Interest in NetIncome of Consolidated Subsidiary**

 

Minority interest for the three and sixmonths ended June 30, 2004 was $227,000 and $489,000, respectively. Minorityinterest was eliminated in September 2004 as a result of our acquisition of theremaining minority interest in TOC we did not already own. Therefore, there wasno minority interest for the three and six months ended June 30, 2005.

 

**Net Income**

 

Net income for the three months ended June30, 2005 was $512,000 a decrease of $332,000 or 39.3% compared to $844,000 forthe three months ended June 30, 2004. Net income for the six months ended June30, 2005 was $964,000 a decrease of $993,000 or 50.7% compared to $1,957,000for the six months ended June 30, 2004. The decrease was due to reasons statedabove.

 

**Liquidity and Capital Resources**

 

We used $218,000 of cash in our operatingactivities in the six months ended June 30, 2005, compared to the cash providedby operating activities of $2,640,000 in the six months ended June 30, 2004 andhad a cash and cash equivalents 

 

 

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balance of $9,007,000 at June 30, 2005, which was a decrease of$4,098,000 from the balance of $13,105,000 at December 31, 2004. Net workingcapital decreased to $16,581,000 at June 30, 2005, compared to $17,042,000 atDecember 31, 2004.

 

Net cash used in investing activities was$3,373,000 in the six months ended June 30, 2005 compared to $1,137,000 for thesix months ended June 30, 2004. The increase in cash used in investingactivities was primarily related to additional capital expenditures to buildour inventory of cameras and edit equipment to support our increased efforts toproduce more of our programming in-house as opposed to licensing suchprogramming from third parties and in particular to increase our HD camera andediting equipment. Also included in capital expenditures is “construction inprogress” and equipment related to the build-out of our new broadcast facilitydescribed below.

 

We used $507,000 of cash in our financingactivities in the six months ended June 30, 2005 compared to the cash providedby financing activities of $897,000 for the six months ended June 30, 2004. Thecash used by financing activities in 2005 was primarily for prepaid costs forour public offering completed on July 1, 2005 partially offset by the proceedsfrom the exercise of stock options. The cash from financing activities in 2004was primarily a result of the exercise of employee and service provider stockoptions from our 1995 incentive stock option plan. More options from this planwere eligible for exercise in 2004 than in the comparable period in 2005.

 

During 2004, the Company entered into acredit facility providing for a revolving line of credit of up to $5,000,000 ofavailable borrowings. The borrowings under the credit facility are secured byaccounts receivable, instruments, documents, chattel paper, generalintangibles, contract rights, investment property, certificates of deposit,deposit accounts, letter of credit rights, inventory, and equipment. The creditfacility matures on September 5, 2005 and contains customary financial andother covenants and restrictions including a change of control provision. As ofJune 30, 2005 and as of the date of this report, the Company did not have anyamounts outstanding under the credit facility.

 

Driven by a need to increase office space,we reassessed our facilities including floor space utilization, master controlequipment, uplink equipment, and other needs during the year ended December 31,2004. On February 22, 2005 we announced our intention to purchase a 28,000square foot building in Temecula, California for approximately $2.6 million andhave executed a Purchase and Sale Agreement and Escrow Instructions to completethe purchase later this year. We have entered into a lease agreement for thisproperty whereby we are leasing the premises until the expected closing. Thisbuilding is planned to house our broadcast facility including our mastercontrol, our uplink satellite dish and various programming personnel. Wecurrently estimate that capital expenditures to complete the build-outincluding updated equipment could exceed $8 million. While the Company believesthat such estimated capital expenditures can be funded from its cash on hand orcash from operations, the Company is currently exploring long-term debtfinancing and other alternatives with regard to the possible funding of aportion of these estimated capital expenditures. As of the date of the filingof this report, the Company has not obtained any actual commitments with regardto such financing.

 

On July 1, 2005, the Company completed apublic offering of its common stock, whereby we sold 3,500,000 shares of commonstock and received net proceeds of $44,415,000 prior to offering costs. Inaddition, certain selling stockholders exercised options to buy 1,688,000shares of common stock which were resold in the public offering. On July 13,2005, the underwriters exercised their over-allotment option from certainselling stockholders, whereby options to buy an additional 442,000 shares ofcommon stock were exercised. The Company received $2,162,000 in aggregate fromthe exercise of these options.

 

As of June 30, 2005, the Company hadsufficient cash on hand and generated sufficient cash flow from operations tomeet its short-term cash flow requirements. Management believes that theCompany’s existing cash resources at June 30, 2005, the proceeds from theoffering on July 1, 2005 and anticipated cash flows from operations will besufficient to fund the Company’s operations at current levels and anticipatedcapital requirements through at least July 1, 2006. To the extent that suchamounts are insufficient to finance the Company’s working capital requirementsor the Company’s desire to expand operations beyond current levels, the Companycould seek additional financing. There can be no assurance that equity or debtfinancing will be available if needed or, if available, will be on termsfavorable to the Company or its stockholders.

 

**Risk and Uncertainties**

 

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 affect theCompany’s business, financial condition and future operating results and shouldbe read in conjunction with the risks and uncertainties contained in theCompany’s other filings with the Securities and Exchange Commission. Any forward-lookingstatements made by the Company are made with the intention of obtaining thebenefits of the “safe harbor” provisions of the Securities Litigation ReformAct and a number of factors, including, but not limited to those discussedbelow, could cause the Company’s actual results and experiences to differmaterially from the anticipated results or expectations expressed in anyforward-looking statements.

 

 

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*** ***

*Wemay not be able to grow our subscriber base, and as a result our revenues andprofitability may not increase.*

 

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 The Outdoor Channel, overall growth incable and satellite subscribers, the popularity of our programming, our abilityto negotiate new carriage agreements and maintain existing distribution, andother factors that are beyond our control. There can be no assurance that wewill be able to maintain or increase the subscriber base of The Outdoor Channelon cable and satellite systems or that such carriage will not decrease as aresult of a number of factors. If we are unable to grow our subscriber base,our subscriber and advertising revenues may not increase and could decrease.

 

*Ifwe offer increased launch support fees or other incentives to service providersin order to 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. If weare unable to increase the number of our subscribers on a cost-effective basis,or if the benefits of doing so do not materialize, our business and operatingresults would be harmed. In particular, if we make any upfront cash payments toservice providers for an increase in our subscriber base, our cash flow couldbe adversely impacted, and we may incur negative cash flow for some time. Inaddition, if we were to make such upfront cash payments or provide otherincentives to service providers, we expect to amortize such amounts ratably overthe term of the agreements with the service providers. However, if a serviceprovider terminates any such agreement prior to the expiration of the term ofsuch agreement, then under current accounting rules we may incur a largeexpense in that quarter in which the agreement is terminated equal to theremaining un-amortized amounts and our operating results could accordingly beadversely affected.

 

*If, in our attempt to increase our number ofsubscribers, we structure launch support fees with one service provider in away that would require us to offer the same support or incentives to all otherservice providers, our operating results may 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 favored nation”clauses. If, in our attempt to increase our number of subscribers, we structurelaunch support fees to effectively offer more favorable terms to any serviceprovider, these clauses may require us to reduce the effective subscriber feerates that we receive from other service providers, and this could negativelyaffect our operating results.

 

*IfThe Outdoor Channel is placed in unpopular program packages by cable orsatellite service providers, or if service fees are increased for oursubscribers, the number of viewers of The Outdoor Channel may decline whichcould harm our business and operating results.*

 

We do not control the cable channels withwhich The Outdoor Channel is packaged by cable or satellite service providers.The placement by a cable or satellite service provider of The Outdoor Channelin an unpopular program package could reduce or impair the growth of the numberof our viewers and subscriber fees paid by service providers to us. Inaddition, we do not set the prices charged by cable and satellite serviceproviders to their subscribers when The Outdoor Channel is packaged with othertelevision channels. The prices for the channel packages in which The OutdoorChannel is bundled may be set too high to appeal to individuals who mightotherwise be interested in our network. Further, if The Outdoor Channel isbundled by service providers with networks that do not appeal to our viewers oris moved to packages with fewer subscribers, we may lose viewers. These factorsmay reduce the number of viewers of The Outdoor Channel, which in turn wouldreduce our subscriber fees and advertising revenue.

 

*Cable and satellite service providers coulddiscontinue or refrain from carrying The Outdoor Channel, which could reducethe number of viewers and harm our operating 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 

 

 

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digital, expanded digital or specialty tiers, and in whichgeographic markets The Outdoor Channel will be offered, we have no assurancethat The Outdoor Channel will be carried and available to viewers of anyparticular MSO or to all satellite subscribers. If cable and satellite serviceproviders discontinue or refrain from carrying The Outdoor Channel, this couldreduce the number of viewers and harm our operating results.

 

*Wemay not be able to effectively manage our future growth, and our growth may notcontinue, which may substantially harm our business and prospects.*

 

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 appropriateinfrastructure, such as facilities, information technology systems and otherequipment to support a growing organization; hiring and training newmanagement, sales and marketing, production, and other personnel and thediversion of management’s attention and resources from critical areas andexisting projects; and implementing systems and procedures to successfullymanage growth, such as monitoring operations, controlling costs, maintainingeffective quality and service, and implementing and maintaining adequateinternal controls. Although we have recently upgraded our Temecula, Californiaproduction facility, we expect that additional expenditures will be required aswe continue to upgrade our facilities and to begin transmitting our channelfrom our facilities directly. In particular, we have signed an agreement topurchase a building near our current headquarters and are currently buildingout this property primarily for use as our broadcast facility in the future. Wecould incur cost overruns, delays and other difficulties with thisconstruction. In addition, moving our broadcast facility and some of ourpersonnel into this new facility could be disruptive to our operations. Wecannot assure you that we will be able to successfully manage our growth, thatfuture growth will occur or that we will be successful in managing our businessobjectives. We can provide no assurance that our profitability or revenues willnot be harmed by future changes in our business. Our operating results could beharmed if such growth does not occur, or is slower or less profitable thanprojected.

 

*We may not be able to secure national advertisingaccounts, and as a result, our revenues and profitability may be negativelyimpacted.*

 

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 companies and other media. We cannot assure youthat our sponsors will pay advertising rates for commercial air time at levelssufficient for us to make a profit or that we will be able to attract newadvertising sponsors or increase advertising revenues. If we are unable toattract national advertising accounts in sufficient quantities, our revenuesand profitability may be harmed.

 

*Wemay be required to pay additional state 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 recentlydetermined that we may have state income tax liability in the eight statesother than California in which our gold prospecting properties are located.Although we expect in the near future to gather sufficient information toenable us to apportion our income to such states and file income tax returns inthose states for past years, we can offer no assurances as to when we will beable to file state income tax returns in those states where we may haveoutstanding, current and future tax liabilities. In general, we believe anyincome taxes that we may be required to pay to states other than Californiawill be partially offset by a refund from the State of California for incometax amounts 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 fromCalifornia for taxes previously paid, and we cannot predict when we wouldreceive any such refund. In addition, because each state to which we may oweoutstanding income taxes has a different methodology for calculating tax owedand a different tax rate, our aggregate state income tax liability could begreater than what we have paid to California in prior years. Our aggregatestate income tax liability, on which we may owe accrued interest and penalties,could be material to our results of operations.

 

*If we fail to develop and distribute popularprograms, our viewership would likely decline, which could cause advertisingand 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 

 

 

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popular shows that maintain or increase our current number ofviewers, 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 fee andadvertising revenue.

 

*Changesin the methodology used by Nielsen to estimate our subscriber base ortelevision ratings, or inaccuracies in such estimates, could cause ouradvertising revenue to 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.

 

*Expenses relating to programming costs aregenerally increasing and a number of factors can cause cost overruns anddelays, and our operating results may be adversely impacted if we are not ableto successfully recover the costs of developing and acquiring new programming.*

 

The average cost of programming hasincreased recently for the cable industry and such increases may continue. Weplan 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. Factors suchas labor disputes, death or disability of key spokespersons or program hosts,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 March 2005, we began transmitting anall new, all native high definition network called Outdoor Channel 2 HD. Aformal consumer marketing campaign was initiated in July 2005. 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 distribution agreements with cable and satellite service providers.There can be no assurance that such agreements can be made, and if they aremade, that they will be on terms favorable to us or that they will not requireus to grant periods of free service and/or marketing commitments to encouragecarriage. The public may not adopt HD consumer television equipment in numberssufficient to allow profits for an advertiser-supported service. Bandwidthconstraints may keep Outdoor Channel 2 HD from achieving sufficientdistribution from service providers to reach profitability. Competition forquality HD content may increase the costs of programming for Outdoor Channel 2HD beyond our control or expectations. All of these factors, combined orseparately, could increase costs or restrain revenue and adversely affect ouroperating results.

 

*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 basicand pay cable television networks, including the Outdoor Life Network, SpikeTV, ESPN2 and others. If these or other competitors, many of which havesubstantially greater financial and operational resources than us,significantly expand their operations with respect to outdoor-relatedprogramming or their market penetration, our business could be harmed. Inaddition, certain technological advances, including the deployment of fiber opticcable, which are already substantially underway, are expected to allow cablesystems to greatly expand their current channel capacity, which could diluteour market share and lead to increased competition for viewers from existing ornew programming services.

 

We also compete with television networkcompanies that generally have large subscriber bases and significantinvestments in, and access to, competitive programming sources. In some cases,we compete with cable and satellite service providers that have the financialand technological resources to create and distribute their own televisionnetworks, such as the Outdoor Life Network, which is owned and operated byComcast. In order to compete for subscribers, we may pay either launch fees ormarketing support or both for carriage in certain circumstances in the future,which may require significant cash expenditures, harming our operating resultsand margins. We may also issue our securities from time to time in connectionwith our attempts for broader distribution of The Outdoor Channel and thenumber of such securities could be 

 

 

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significant. We compete for advertising sales with other paytelevision networks, broadcast networks, and local over-the-air televisionstations. We also compete for advertising sales with satellite and broadcastradio and the print media. We compete with other cable television networks forsubscriber fees from, and affiliation agreements with, cable and satelliteservice providers. Actions by the Federal Communications Commission, which werefer to as the FCC, and the courts have removed certain of the impediments toentry by local telephone companies into the video programming distributionbusiness, and other impediments could be eliminated or modified in the future.These local telephone companies may distribute programming that is competitivewith the programming provided by us to cable operators.

 

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

 

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 distribution and bargaining power to negotiate less favorable termsof 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 and satelliteservice provider customers and their subscribers within the time periodsadvertised. We recently negotiated for back-up capability with our satelliteprovider on an in-orbit spare satellite, which provides us carriage on theback-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 our revenuesand profits.

 

*Natural disasters and other events beyond ourcontrol 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 us forlosses that may occur. Despite any precautions we may take, the occurrence of anatural disaster or other unanticipated problems at our facilities could resultin interruptions in our services. Interruptions in our service could harm ourreputation and reduce our revenues and profits.

 

*Our operating results may vary significantly, andhistorical comparisons of our operating results are**not necessarily meaningful andshould not be relied upon as an indicator of future performance.*

 

Our operations are influenced by manyfactors. These factors may cause our financial results to vary significantly inthe future and our operating results may not meet the expectations ofsecurities analysts or investors. If this occurs, the price of our stock maydecline. Factors that can cause our results to fluctuate include, but are notlimited to:

 

•    carriage decisions ofcable and satellite service providers; 

 

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

 

•    changes in the growthrate of cable and satellite subscribers; 

 

 

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

 

•    seasonal trends in viewerinterests and activities; 

 

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

 

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

 

•    our ability to 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, ourfailure to meet revenue expectations would seriously harm our business,operating results, financial condition and cash flows. Further, anunanticipated decline in revenue for a particular calendar quarter maydisproportionately affect our profitability because our expenses would remainrelatively fixed and would not decrease correspondingly.

 

*Seasonalincreases or decreases in advertising revenue may negatively affect ourbusiness.*

 

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 with revenuerecognition.

 

*We may be unable to access capital on acceptableterms 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. We cannot assure you that additionalcapital, if required, will be available on acceptable terms, or at all. If weare unable to obtain additional capital, our current business strategies andplans and ability to fund future operations may be harmed.

 

*Wemay not be able to attract and retain 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, orWilliam A. Owen, our Chief Financial Officer, or Andrew J. Dale, the ChiefExecutive Officer and Co-President of The Outdoor Channel, Inc., or Thomas E.Hornish, our General Counsel, could adversely impact our business. To attractand retain qualified personnel, we may be required to grant large option orother stock-based incentive awards, which may be highly dilutive to existingstockholders. We may also be required to pay significant base salaries and cashbonuses to attract and retain these individuals, which payments could harm ouroperating results. If we are not able to attract and retain the necessary personnelwe may not be able to implement our business plan.

 

 

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* *

*New video recording technologies may reduce ouradvertising 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 to circumventconditional access technologies. However, theft of cable and satelliteprogramming has been widely reported, and the access or “smart” cards used incable and satellite service providers’ conditional access systems have beencompromised and could be further compromised in the future. When conditionalaccess systems are compromised, we do not receive the potential subscriber feerevenues from the cable and satellite service providers. Further, measures thatcould be taken by cable and satellite service providers to limit such theft arenot under our control. Piracy of our copyrighted materials could reduce ourrevenue from subscriber fees and advertising and negatively affect our businessand 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 80% 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 ordefending against third party claims can be costly and time consuming. If weare unable to protect our portfolio of trademarks, service marks, copyrightedmaterial and characters, trade names and other intellectual property rights,our business and our ability to compete could be harmed.

 

*We mayface intellectual property infringement claims that could be time-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 damages tothe 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 ofour existing 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 approximately 52.8% ofour outstanding 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, even when achange may be in the best interests of stockholders. In addition, the interestsof these stockholders may not always coincide with our interests as a companyor the interests of other stockholders. Accordingly, these stockholders couldcause us to enter into transactions or agreements that you would not approve.

 

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

 

Provisions of Delaware law, ourcertificate of incorporation and bylaws could discourage, delay or prevent amerger, acquisition or other change in control that stockholders may considerfavorable, including transactions in which you might otherwise receive apremium for your shares. These provisions also could limit the price thatinvestors might be willing to 

 

 

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pay in the future for shares of our common stock, therebydepressing the market price of our common stock. Furthermore, these provisionscould prevent attempts by our stockholders to replace or remove our management.These provisions:

 

•    allow the authorizednumber of 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;

 

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

 

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

 

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

 

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

 

•    except as provided bylaw, 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 or bylaws.

 

In addition, because we are incorporatedin Delaware, we are governed by the provisions of Section 203 of the DelawareGeneral Corporation Law, which may, unless certain criteria are met, prohibitlarge stockholders, in particular those owning 15% or more of our outstandingvoting stock, from merging or combining with us for a prescribed period oftime.

 

*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 be requiredto 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 expenditures toimplement new technologies, or, if we fail to do so, may face significant newchallenges due to technological advances adopted by competitors, which in turncould result in harming our business and operating results.

 

*The cableand satellite television industry is subject to substantial governmentalregulation for which compliance may be expensive, time consuming and may exposeus to substantial compliance costs and penalties 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.

 

The Cable Television Consumer Protectionand Competition Act of 1992, to which we refer to as the 1992 Cable Act,precludes video programmers affiliated with cable companies from favoring theiraffiliated cable operators over competitors and requires such programmers tosell their programming to other multi-channel video distributors. Thisprovision benefits independent programmers such as us by limiting the abilityof vertically integrated cable programmers to offer exclusive programmingarrangements to cable companies. This provision was scheduled to expire inOctober 2002. However, the FCC deferred the expiration date to October 2007unless the FCC then determines that another extension is necessary to protectcompetition and diversity. If this provision expires, it could have an adverseeffect on our ability to obtain carriage by service providers.

 

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 generally providedfor mandatory carriage by cable systems of all local full-power commercialtelevision broadcast signals selecting must-carry rights and, depending on acable system’s channel capacity, non-commercial television broadcast signals.Such statutorily mandated carriage of broadcast stations, coupled with theprovisions of the Cable 

 

 

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Communications Policy Act of 1984, which require cable televisionsystems with 36 or more “activated” channels to reserve a percentage of suchchannels for commercial use by unaffiliated third parties and permit franchiseauthorities to require the cable operator to provide channel capacity,equipment and facilities for public, educational and government accesschannels, could reduce carriage of The Outdoor Channel by limiting its carriagein cable systems with limited channel capacity. In 2001, the FCC adopted rulesrelating to the cable carriage of digital television signals. Among otherthings, the rules clarify that a digital-only television station can assert aright to analog or digital carriage on a cable system. The FCC initiated afurther proceeding to determine whether television broadcasters may assert therights to carriage of both analog and digital signals during the transition todigital television and to carriage of all digital signals. On February 10,2005, the FCC decided that television broadcasters do not have such additionalmust-carry rights. Broadcasters have appealed to the FCC this decision and areseeking legislative change. The imposition of such additional must-carryregulation, in conjunction with the current limited cable system channel capacity,would make it likely that cable operators will be forced to drop some cableprogramming services and could reduce carriage of The Outdoor Channel.

 

If we distribute television programmingthrough other types of media, we may be required to obtain federal, state andlocal licenses or other authorizations to offer such services. We may not beable to obtain licenses or authorizations in a timely manner, or at all, orconditions could be imposed upon licenses and authorizations that may not befavorable 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, amongother 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, 2004observed that such packaging would increase the cost of programming toconsumers and injure programmers. If, in response to any rate or othergovernment regulation, cable system operators implement channel offeringstructures that require subscribers to affirmatively choose to pay a separatefee to receive The Outdoor Channel network, either by itself or in combinationwith a limited number of other channels, the number of viewers for The OutdoorChannel could be reduced.

 

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, deregulationor 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 and regulations concerning zoning, development and other utilization oftheir properties. We cannot predict what impact current or future regulationsmay have on these businesses. In addition, failure to maintain required permitsor 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.

 

*Changes incorporate governance and securities disclosure and compliance practices haveincreased and may continue to increase our legal compliance and financialreporting costs.*

 

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 to increase, ourlegal compliance and financial reporting costs.

 

*Failure toachieve and maintain effective internal controls in accordance with Section 404of the Sarbanes-Oxley Act could have a material adverse effect on our businessand stock price.*

 

We are beginning the processes necessaryto satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, whichrequires an annual management assessment of the effectiveness of internalcontrols over financial reporting and an opinion by our independent registeredpublic accounting firm addressing the assessment. During the course of ourtesting we may 

 

 

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identify deficiencies which we may not be able to remediate intime to meet the deadline for compliance with the requirements of Section 404.In addition, if we fail to maintain the adequacy of our internal controls, assuch standards are modified, supplemented or amended from time to time, we maynot be able to ensure that we can conclude on an ongoing basis that we haveeffective internal controls over financial reporting in accordance with Section404. Effective internal controls are necessary for us to produce reliablefinancial reports and are important in the prevention of financial fraud. If wecannot produce reliable financial reports or prevent fraud, our business andoperating results could be harmed, investors could lose confidence in ourreported financial information and our stock price could decrease.

 

*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 assets consistsof goodwill and other indefinite-lived intangible assets. In accordance withStatements of Financial Accounting Standards No. 142, “Goodwill and OtherIntangible Assets”, or SFAS 142, we test goodwill and other indefinite-livedintangible assets for impairment during the fourth quarter of each year, and onan interim date if factors or indicators become apparent that would require aninterim test. A significant downward revision in the present value of estimatedfuture cash flows for a reporting unit could result in an impairment ofgoodwill or other indefinite-lived intangibles under SFAS 142 and a non-cashcharge would be required. Such a charge could have a significant effect on ourreported net earnings.

 

*Changes tofinancial accounting standards may affect our reported operating results.*

 

We prepare our financial statements toconform with GAAP, which are subject to interpretations by the FinancialAccounting Standards Board, the Securities and Exchange Commission and variousbodies formed to interpret and create appropriate accounting policies. A changein those policies can have a significant effect on our reported results and mayeven affect our reporting of transactions completed before a change isannounced. Accounting policies affecting many other aspects of our business,including rules relating to business combinations and employee stock optiongrants have recently been revised or are under review. Changes to those rulesor the questioning of current practices may adversely affect our reportedfinancial results or the way we conduct our business. In addition, ourpreparation of financial statements in accordance with GAAP requires that wemake estimates and assumptions that affect the recorded amounts of assets andliabilities, disclosure of those assets and liabilities at the date of thefinancial statements and the recorded amounts of expenses during the reportingperiod. A change in the facts and circumstances surrounding those estimatescould result in a change to our estimates and could impact our future operatingresults.

 

*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 issueup to 25,000,000 shares of preferred stock. The issuance of any preferred stockcould adversely affect the rights of the holders of shares of our common stock,and therefore reduce the value of such shares. No assurance can be given thatwe will not issue shares of preferred stock in the future.

 

*We do notexpect to pay dividends in the foreseeable future.*

 

Wedo not anticipate paying cash dividends on our common stock in the foreseeablefuture. Any payment of cash dividends will also depend on our financialcondition, operating results, capital requirements and other factors and willbe at the discretion of our board of directors. Furthermore, we may in thefuture become subject to contractual restrictions on or prohibitions against,the payment of dividends.

 

 

 

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** **

**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

At June 30, 2005 and December 31, 2004,our investment portfolio included fixed-income securities of $726,000 and$741,000, respectively. These securities are subject to interest rate risk andwill decline in value if interest rates increase. However, due to the shortduration of our investment portfolio, an immediate 10% change in interest rateswould have no material impact on our financial condition, operating results orcash flows. Declines in interest rates over time will, however, reduce ourinterest income while increases in interest rates over time may increase ourinterest expense.

 

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

 

We do not have any outstanding borrowingson our line-of-credit and as a result an immediate 10% change in interest rateswould have no material impact on our financial condition, operating results orcash flows.

 

**ITEM 4. CONTROLS ANDPROCEDURES**

 

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 ofour Chief Executive Officer and Chief Financial Officer, evaluated theeffectiveness of our disclosure controls and procedures as of June 30, 2005,the end of the period covered by this report, and concluded that our disclosurecontrols and procedures were effective as of June 30, 2005.

 

During the fiscal quarter ended June 30,2005, there was no change in our internal control over financial reporting thatmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting other than the remedial action we took toaddress the material weakness in our internal control over financial reportingwith respect to accounting for complex and non-standard transactions. As we previously disclosed in our Form10-Q, as amended, for the quarter ended March 31, 2005, we engaged additionalresources to advise our management on the financial reporting and accountingtreatment of such transactions as theremedial action. 

 

 

 

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**PART II—OTHER INFORMATION**

 

**ITEM 1.  LegalProceedings.**

 

                                None

 

**ITEM 2.  Unregistered Sales of Equity Securities andUse of Proceeds.**

 

                                None

 

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

 

                                None

 

**ITEM 4.  Submission of Matters to a Vote of SecurityHolders.**

 

                                None

 

**ITEM 5.  OtherInformation**

 

                                None

 

**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                  |       |            | Specimen stock certificate for shares of common  stock of the Company. |
| 10.1                 |       |            | Selling Stockholders Registration Rights Agreement,  dated as of June 27, 2005, among Outdoor Channel Holdings, Inc. and the  selling stockholders who are a party (filed as Exhibit 10.1 to the  Company’s current report on Form 8-K filed on June 28, 2005 and  incorporated herein by reference) |
| 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 |

----

 

*                       Pursuantto Commission Release No. 33-8238, this certification will betreated as “accompanying” this QuarterlyReport on Form 10-Q and not“filed”as part of such report for purposes of Section 18 of the Securities ExchangeAct of 1934, as amended, or otherwise subject to the liability of Section 18 ofthe Securities Exchange Act of 1934, as amended, and this certification willnot be deemed to be incorporated by reference into any filing under the SecuritiesAct of 1933, as amended, or the Securities Exchange Act of 1934, as amended,except to the extent that the registrant specifically incorporates it byreference.

 

** **

 

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**SIGNATURES**

 

          Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| ** ** | **OUTDOOR CHANNEL HOLDINGS, INC.**                                                             |
|------------|------------------------------------------------------------------------------------------------|
|       |                                                                                           |
|       | /s/ William A. Owen                                                                            |   |
| ** ** | **William A. Owen**                                                                            |
|       | Authorized Officer, Chief Financial Officer and Controller  (Principal and Accounting Officer) |
|       | Date: August 12, 2005                                                                          |

 

 

 

 

 

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