**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 quarterly period ended September 30, 2005** |
| ** **                                            | ** ** | ** **                                                                                    |
| **o**                                                 | ** ** | **Transition Report  Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |

 

**For the transitionperiodfrom                   to                   **

 

**Commission filenumber: 000-17287**

 

**Outdoor Channel Holdings,Inc.**

(Exact name of Registrant as specified inits charter)

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

 

**43445 Business ParkDrive, Suite 113**

**Temecula, California92590**

(Address and zip code of principalexecutive offices)

 

**(951) 699-4749**

(Issuer’s telephone number, including areacode)

 

 

(Former name, former address and formerfiscal year, if changed since last report)

 

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.  ý Yes    o No

 

Indicate by check mark whether theregistrant is an accelerated filer (as defined in Rule 12b-2 of the ExchangeAct).  o Yes     ý No

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes     ý No

 

Indicate the number of shares outstandingof each of the issuer’s classes of common stock, as of the latest practicabledate:

 
| **Class**                       | ** ** | **Number of Shares Outstanding at November 11, 2005** |
|---------------------------------|------------|-------------------------------------------------------|
| Common  Stock, $0.001 par value |       | 24,303,413                                            |

 

 

----

 

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

**Quarterly Report on Form10-Q**

**For The Period EndedSeptember 30, 2005**

 

**Table of Contents**

 
|           | **Part I. Financial Information**                                                                                           |   |
|----------------|-----------------------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                                        |   |
| **Item  1.**   | Financial  Statements                                                                                                       |   |
|           |                                                                                                                        |   |
|           | Condensed Consolidated  Balance Sheets at September 30, 2005 (Unaudited) and December 31, 2004                              |   |
|           |                                                                                                                        |   |
|           | Unaudited Condensed  Consolidated Statements of Operations for the Three and Nine Months Ended  September 30, 2005 and 2004 |   |
|           |                                                                                                                        |   |
|           | Unaudited Condensed  Consolidated Statement of Stockholders’ Equity for the Nine Months Ended  September 30, 2005      |   |
|           |                                                                                                                        |   |
|           | Unaudited Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended  September 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** |                                                                                                                        |

 

* * *

 

2

----

 

**PART I—FINANCIAL INFORMATION**

 

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

 

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

**Condensed ConsolidatedBalance Sheets**

(In thousands, except per share data)

 
| ** **                                                                                                  | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                                                                  | ** ** | **(Unaudited)**         | ** ** | ** **             | ** ** |
| **Assets**                                                                                                  |       |                    |       |                   |       |
| Current assets:                                                                                             |       |                    |       |                   |       |
| Cash and cash  equivalents                                                                                  |       | $                       | 29,775     |                   | $          | 13,105 |   |
| Investment in  available-for-sale securities                                                                |       | 21,923                  |       | 741                    |       |
| Accounts receivable, net  of allowance for doubtful accounts of $275 and $207                               |       | 5,317                   |       | 4,848                  |       |
| Income tax refund  receivable                                                                               |       | 3,477                   |       | 2,291                  |       |
| Prepaid programming  costs                                                                                  |       | 3,121                   |       | 606                    |       |
| Deferred tax assets, net                                                                                    |       | 76                      |       | —                 |       |
| Other current assets                                                                                        |       | 1,003                   |       | 135                    |       |
| Total current assets                                                                                        |       | 64,692                  |       | 21,726                 |       |
|                                                                                                        |       |                    |       |                   |       |
| Property, plant and  equipment at cost, net:                                                                |       |                    |       |                   |       |
| Membership division                                                                                         |       | 3,615                   |       | 3,527                  |       |
| Outdoor Channel  equipment and improvements                                                                 |       | 9,957                   |       | 3,199                  |       |
| Property, plant and  equipment, net                                                                         |       | 13,572                  |       | 6,726                  |       |
| Amortizable intangible  assets                                                                              |       | 1,519                   |       | 1,939                  |       |
| Goodwill                                                                                                    |       | 43,668                  |       | 43,668                 |       |
| Other non-amortizable  intangible assets                                                                    |       | 10,573                  |       | 10,573                 |       |
| Deferred tax assets, net                                                                                    |       | 11,939                  |       | 14,863                 |       |
| Deposits and other  assets                                                                                  |       | 186                     |       | 174                    |       |
| Totals                                                                                                      |       | $                       | 146,149    |                   | $          | 99,669 |   |
|                                                                                                        |       |                    |       |                   |       |
| **Liabilities and Stockholders’ Equity**                                                               |       |                    |       |                   |       |
|                                                                                                        |       |                    |       |                   |       |
| Current liabilities:                                                                                        |       |                    |       |                   |       |
| Accounts payable and  accrued expenses                                                                      |       | $                       | 3,493      |                   | $          | 3,705 |   |
| Accrued severance  payments                                                                                 |       | 18                      |       | 28                     |       |
| Current portion of  capital lease obligations                                                               |       | 16                      |       | 26                     |       |
| Deferred tax  liabilities, net                                                                              |       | —                  |       | 494                    |       |
| Current portion of  deferred revenue                                                                        |       | 257                     |       | 370                    |       |
| Customer deposits                                                                                           |       | 86                      |       | 61                     |       |
| Total current  liabilities                                                                                  |       | 3,870                   |       | 4,684                  |       |
|                                                                                                        |       |                    |       |                   |       |
| Accrued severance  payments, net of current portion                                                         |       | 21                      |       | 37                     |       |
| Capital lease  obligations, net of current portion                                                          |       | —                  |       | 9                      |       |
| Deferred revenue, net of  current portion                                                                   |       | 1,157                   |       | 1,145                  |       |
| Deferred satellite rent  obligations                                                                        |       | 298                     |       | 312                    |       |
| Total liabilities                                                                                           |       | 5,346                   |       | 6,187                  |       |
|                                                                                                        |       |                    |       |                   |       |
| Commitments and  contingencies                                                                              |       |                    |       |                   |       |
| Stockholders’ equity:                                                                                  |       |                    |       |                   |       |
| Preferred stock; 25,000  shares authorized; none issued                                                     |       | —                  |       | —                 |       |
| Common stock, $0.001 par  value; 75,000 shares authorized: 24,305 and 18,394 shares issued and  outstanding |       | 24                      |       | 18                     |       |
| Additional paid-in  capital                                                                                 |       | 158,543                 |       | 111,912                |       |
| Deferred compensation                                                                                       |       | (1,643                  | )          | (1,034                 | )          |
| Accumulated other  comprehensive income                                                                     |       | 49                      |       | 43                     |       |
| Accumulated deficit                                                                                         |       | (16,170                 | )          | (17,457                | )          |
| Total stockholders’  equity                                                                            |       | 140,803                 |       | 93,482                 |       |
| Totals                                                                                                      |       | $                       | 146,149    |                   | $          | 99,669 |   |

 

See Notes to Unaudited CondensedConsolidated Financial Statements.

 

3

----

 

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

**Unaudited CondensedConsolidated Statements of Operations**

(In thousands, except per share data)

 
| ** **                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                     |       |                                  |       |                                 |       |   |   |   |   |
| Advertising                                                   |       | $                                     | 5,657      |                                 | $          | 5,723 |   | $ | 16,173 |   | $ | 15,886 |   |
| Subscriber fees                                               |       | 3,846                                 |       | 3,450                                |       | 11,382 |   | 9,830 |   |
| Membership income                                             |       | 1,901                                 |       | 1,776                                |       | 3,924 |   | 3,995 |   |
|                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Total revenues                                                |       | 11,404                                |       | 10,949                               |       | 31,479 |   | 29,711 |   |
|                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Expenses:                                                     |       |                                  |       |                                 |       |   |   |   |   |
| Satellite transmission  fees                                  |       | 617                                   |       | 582                                  |       | 1,866 |   | 1,759 |   |
| Advertising                                                   |       | 1,912                                 |       | 1,477                                |       | 5,668 |   | 4,282 |   |
| Programming                                                   |       | 2,315                                 |       | 933                                  |       | 3,367 |   | 2,223 |   |
| Non-cash compensation  expense from exchange of stock options |       | —                                |       | 47,983                               |       | — |   | 47,983 |   |
| Selling, general and  administrative                          |       | 6,299                                 |       | 5,696                                |       | 18,752 |   | 15,166 |   |
|                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Total expenses                                                |       | 11,143                                |       | 56,671                               |       | 29,653 |   | 71,413 |   |
|                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Income (loss) from  operations                                |       | 261                                   |       | (45,722                              | )          | 1,826 |   | (41,702 | ) |
|                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Other income, net                                             |       | 396                                   |       | 34                                   |       | 486 |   | 93 |   |
|                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Income (loss) before  income taxes and minority interest      |       | 657                                   |       | (45,688                              | )          | 2,312 |   | (41,609 | ) |
|                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Income tax provision  (benefit)                               |       | 334                                   |       | (18,176                              | )          | 1,025 |   | (16,543 | ) |
|                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Income (loss) before  minority interest                       |       | 323                                   |       | (27,512                              | )          | 1,287 |   | (25,066 | ) |
|                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Minority interest in net  income of consolidated subsidiary   |       | —                                |       | 193                                  |       | — |   | 682 |   |
|                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Net income (loss)                                             |       | $                                     | 323        |                                 | $          | (27,705 | ) | $ | 1,287 |   | $ | (25,748 | ) |
|                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Earnings (loss) per  common share:                            |       |                                  |       |                                 |       |   |   |   |   |
| Basic                                                         |       | $                                     | 0.01       |                                 | $          | (1.75 | ) | $ | 0.06 |   | $ | (1.69 | ) |
| Diluted                                                       |       | $                                     | 0.01       |                                 | $          | (1.75 | ) | $ | 0.05 |   | $ | (1.69 | ) |
|                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average number  of common shares outstanding:        |       |                                  |       |                                 |       |   |   |   |   |
| Basic                                                         |       | 24,236                                |       | 15,789                               |       | 20,444 |   | 15,238 |   |
| Diluted                                                       |       | 27,658                                |       | 15,789                               |       | 23,672 |   | 15,238 |   |

 

See Notes to Unaudited CondensedConsolidated Financial Statements.

 

4

----

 

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

**Unaudited CondensedConsolidated Statement of Stockholders’ Equity**

**For the Nine Months EndedSeptember 30, 2005**

(In thousands)

 
| ** **                                                                                      | ** ** | ** **          | ** ** | ** **       | ** ** | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | ** **       | ** ** | **Accumulated** | ** ** | ** **  | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------|------------|-------------|------------|--------------|------------|-------------------|------------|------------------|------------|-----------------|------------|-------------|------------|------------|------------|
| ** **                                                                                      | ** ** | ** **          | ** ** | ** **       | ** ** | ** **  | ** ** | ** **   | ** ** | **Additional**    | ** ** | ** **       | ** ** | **Other**       | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                                                                                      | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Deferred** | ** ** | **Comprehensive** | ** ** | **Accumulated**  | ** ** | ** **      | ** ** |
| ** **                                                                                      | ** ** | **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                                                                                      |       |                |       |             |       |        |       |         |       |              |       |             |       |            |       | 1,287       |       | 1,287      |       |
| Effect of change in fair value of available-for-sale securities,  net of deferred taxes of $2   |       |                |       |             |       |        |       |         |       |              |       |             |       | 6               |       |        |       | 6          |       |
| Total comprehensive income                                                                      |       |                |       |             |       |        |       |         |       |              |       |             |       |            |       |        |       | 1,293      |       |
|                                                                                            |       |                |       |             |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Common stock issued upon exercise of stock options                                              |       |                |       |             |       | 2,341       |       | 2            |       | 2,629             |       |             |       |            |       |        |       | 2,631      |       |
|                                                                                            |       |                |       |             |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Issuance of restricted stock to employees for services to be  rendered, net of forfeited shares |       |                |       |             |       | 70          |       |         |       | 861               |       | (861             | )          |            |       |        |       | —     |       |
|                                                                                            |       |                |       |             |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Common stock issued upon sale to public, net of offering cost of  $1,066                        |       |                |       |             |       | 3,500       |       | 4            |       | 43,346            |       |             |       |            |       |        |       | 43,350     |       |
|                                                                                            |       |                |       |             |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Amortization of deferred compensation                                                           |       |                |       |             |       |        |       |         |       |              |       | 252              |       |            |       |        |       | 252        |       |
|                                                                                            |       |                |       |             |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Change in estimate on tax benefit from exercise of stock options                                |       |                |       |             |       |        |       |         |       | (864              | )          |             |       |            |       |        |       | (864       | )          |
|                                                                                            |       |                |       |             |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Tax benefit from exercise of stock options                                                      |       |                |       |             |       |        |       |         |       | 659               |       |             |       |            |       |        |       | 659        |       |
|                                                                                            |       |                |       |             |       |        |       |         |       |              |       |             |       |            |       |        |       |       |       |
| Balance, September 30, 2005                                                                     |       | —              |       | $                | —     |        | 24,305     |         | $          | 24                |       | $                | 158,543    |            | $          | (1,643      | )          | $          | 49         |   | $ | (16,170 | ) | $ | 140,803 |   |
|                                                                                                 |            |                     |            |                  |            |             |            |              |            |                   |            |                  |            |                 |            |             |            |            |            |  |  |  |  |  |  |  |  |

 

See Notes to Unaudited CondensedConsolidated Financial Statements.

 

5

----

 

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

**Unaudited CondensedConsolidated Statements of Cash Flows**

(In thousands)

 
| ** **                                                                                          | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Operating activities:                                                                               |       |                                 |       |   |   |
| Net income (loss)                                                                                   |       | $                                    | 1,287      |   | $ | (25,748 | ) |
| Adjustments to reconcile  net income (loss) to net cash provided by (used in) operating activities: |       |                                 |       |   |   |
| Depreciation and  amortization                                                                      |       | 1,643                                |       | 896 |   |
| Provision for doubtful  accounts                                                                    |       | 132                                  |       | — |   |
| Realized gain on sale of  available-for-sale securities                                             |       | —                               |       | (34 | ) |
| Minority interest in net  income of consolidated subsidiary                                         |       | —                               |       | 682 |   |
| Tax benefit from  exercise of stock options                                                         |       | —                               |       | 466 |   |
| Deferred tax provision                                                                              |       | 2,368                                |       | (19,097 | ) |
| Compensation expense  from exchange of stock options                                                |       | —                               |       | 47,983 |   |
| Amortization of deferred  compensation                                                              |       | 252                                  |       | — |   |
| Changes in operating assets  and liabilities:                                                       |       |                                 |       |   |   |
| Accounts receivable                                                                                 |       | (601                                 | )          | (315 | ) |
| Income tax refund  receivable                                                                       |       | (1,391                               | )          | 945 |   |
| Prepaid programming  costs                                                                          |       | (2,515                               | )          | — |   |
| Other current assets                                                                                |       | (868                                 | )          | 152 |   |
| Deposits and other  assets                                                                          |       | (11                                  | )          | (17 | ) |
| Accounts payable and  accrued expenses                                                              |       | (212                                 | )          | 749 |   |
| Accrued severance  payments                                                                         |       | (26                                  | )          | (268 | ) |
| Deferred revenue                                                                                    |       | (102                                 | )          | (462 | ) |
| Customer deposits                                                                                   |       | 25                                   |       | — |   |
| Deferred satellite rent  obligations                                                                |       | (14                                  | )          | (51 | ) |
| Net cash provided by  (used in) by operating activities                                             |       | (33                                  | )          | 5,881 |   |
|                                                                                                |       |                                 |       |   |   |
| Investing activities:                                                                               |       |                                 |       |   |   |
| Purchases of property,  plant and equipment                                                         |       | (8,069                               | )          | (1,631 | ) |
| Purchases of  available-for-sale securities                                                         |       | (21,190                              | )          | (256 | ) |
| Proceeds from sale of  available-for-sale securities                                                |       | —                               |       | 85 |   |
| Cost related to  acquisition of minority interest                                                   |       | —                               |       | (593 | ) |
| Net cash used in  investing activities                                                              |       | (29,259                              | )          | (2,395 | ) |
| Financing activities:                                                                               |       |                                 |       |   |   |
| Principal payments on  notes payable and capital leases                                             |       | (19                                  | )          | (151 | ) |
| Proceeds from exercise  of stock options                                                            |       | 2,631                                |       | 1,102 |   |
| Proceeds from common  stock subscriptions receivable                                                |       | —                               |       | 30 |   |
| Proceeds from the sale  of common stock, net of offering costs                                      |       | 43,350                               |       | — |   |
| Net cash provided by  financing activities                                                          |       | 45,962                               |       | 981 |   |
| Net increase in cash and  cash equivalents                                                          |       | 16,670                               |       | 4,467 |   |
| Cash and cash  equivalents, beginning of period                                                     |       | 13,105                               |       | 7,214 |   |
| Cash and cash  equivalents, end of period                                                           |       | $                                    | 29,775     |   | $ | 11,681 |   |
|                                                                                                |       |                                 |       |   |   |
| Supplemental disclosure  of cash flow information:                                                  |       |                                 |       |   |   |
|                                                                                                |       |                                 |       |   |   |
| Income taxes paid                                                                                   |       | $                                    | 108        |   | $ | 1,139 |   |
|                                                                                                |       |                                 |       |   |   |
| Supplemental disclosures  of non-cash investing and financing activities:                           |       |                                 |       |   |   |
|                                                                                                |       |                                 |       |   |   |
| Retirement of treasury  stock                                                                       |       | $                                    | —     |   | $ | 400 |   |
| Fair value of common  stock issued to acquire minority interest in subsidiary                       |       | $                                    | —     |   | $ | 46,062 |   |
| Effect of net increase  in fair value of available-for-sale securities, net of deferred taxes       |       | $                                    | 6          |   | $ | — |   |
| Exchange of stock  options for non-employee stock options of subsidiary                             |       | $                                    | —     |   | $ | 4,250 |   |
|                                                                                                     |            |                                      |            |  |  |  |  |  |

 

See Notes to Unaudited CondensedConsolidated Financial Statements.

 

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 ANDBUSINESS**

 

**Description of Operations**

 

Outdoor Channel Holdings, Inc. (“OutdoorChannel Holdings,” or collectively with its subsidiaries, the “Company”) isincorporated under the laws of the State of Delaware. The Company acquired theremaining 17.6% minority interest in its subsidiary, The Outdoor Channel, Inc.(“TOC”), which it did not previously hold, on September 8, 2004. TOC operatesThe Outdoor Channel, which is a national television network devoted totraditional outdoor activities, such as hunting, fishing and shooting sports,as well as off-road motor sports and other related lifestyle programming. TOCalso operates Outdoor Channel 2 HD, which also is a national television networkwith similar programming produced utilizing high definition technology.

 

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 these and other properties.

 

Outdoor Channel Holdingsalso wholly owns 43455 BPD, LLC which owns the Company’s broadcast facility.

 

**NOTE 2—UNAUDITED INTERIMFINANCIAL 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 September 30, 2005 and itsresults of operations and cash flows for the three and/or nine months endedSeptember 30, 2005 and 2004. Information included in the consolidated balancesheet, as of December 31, 2004 has been derived from, and certain terms usedherein are defined in, the audited financial statements of the Company as ofDecember 31, 2004 (the “Audited Financial Statements”) included in the Company’sAnnual Report on Form 10-K/A (the “10-K/A”) for the year ended December 31,2004 that was previously filed with the Securities and Exchange Commission (the“SEC”). Pursuant to the rules and regulations of the SEC, certain informationand disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted from these financial statementsunless significant changes have taken place since the end of the most recentfiscal year. Accordingly, these unaudited condensed consolidated financialstatements should be read in conjunction with the Audited Financial Statementsand the other 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 nine months ended September 30, 2005 are not necessarilyindicative of 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.

 

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**NOTE 3—EARNINGS PER SHARE**

 

Effective September 15,2004 the Company effected a 5 for 2 split of its common stock in connectionwith its reincorporation in Delaware. All share and per share data has beenadjusted where appropriate to reflect this stock split. In addition, the parvalue of the 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”).Basic earnings per common share is calculated by dividing net income by theweighted average number of common shares outstanding during each period. Thecalculation of diluted earnings per common share is similar to that of basicearnings per common share, except that the denominator is increased to includethe number of additional common shares that would have been outstanding if allpotentially dilutive common shares of the Company were issued during the periodif any such issuances have a dilutive effect.

 

The computation of diluted earnings percommon share takes into account the effects on the weighted average number ofcommon shares outstanding of the assumed exercise of the outstanding stockoptions of the Company for the three and nine months ended September 30, 2005,adjusted for the application of the treasury stock method.  The computation of diluted loss per commonshare for the three and nine months ended September 30, 2004 does not take intoaccount either (i) the outstanding stock options of the Company because theeffect of their assumed exercise would be anti-dilutive; or (ii) the increasein the net loss attributable to the increase in the minority interest in thenet income of TOC that results from the assumed exercise of all of TOC’soutstanding stock options prior to the exchange of those options for Companyoptions on September 8, 2004 because the effects of the assumed exercise of TOCstock options were not material. The number of shares potentially issuable bythe Company at September 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 410 and 5,643, respectively.

 

The following table summarizes the calculationof net income and the weighted average common shares outstanding for basic anddiluted earnings per share for the three and nine months ended September 30,2005 and 2004:

 
| ** **                                                                                                                                                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                                         | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Numerators:                                                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Net income (loss) —basic                                                                                                                                      |       | $                                     | 323        |                                 | $          | (27,705 | ) | $ | 1,287 |   | $ | (25,748 | ) |
|                                                                                                                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Denominators:                                                                                                                                                      |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average common  shares outstanding—basic                                                                                                             |       | 24,236                                |       | 15,789                               |       | 20,444 |   | 15,238 |   |
| 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 |       | 3,422                                 |       | —                               |       | 3,228 |   | — |   |
| Diluted weighted average  common shares outstanding                                                                                                                |       | 27,658                                |       | 15,789                               |       | 23,672 |   | 15,238 |   |
|                                                                                                                                                                    |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |

 

**NOTE 4—PRO FORMA EFFECTSOF 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 (loss) and earnings (loss) per share as if a fairvalue based method of accounting had been applied.

 

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The Company’s historical net income (loss)and earnings (loss) per common share and pro forma net income (loss) andearnings (loss) per common share assuming compensation cost had been determinedfor the three and nine months ended September 30, 2005 and 2004 based on thefair value at the grant date for all awards by the Company using theBlack-Scholes option pricing model consistent with the provisions of SFAS 123,and amortized ratably over the vesting period, are set forth below:

 
| ** **                                                                                                                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss):                                                                                                                      |       |                                  |       |                                 |       |   |   |   |   |
| As reported                                                                                                                             |       | $                                     | 323        |                                 | $          | (27,705 | ) | $ | 1,287 |   | $ | (25,748 | ) |
| Add: Stock-based  employee compensation expense included in reported net loss, net of tax  effects*                                     |       | —                                |       | 28,885                               |       | — |   | 28,885 |   |
| Deduct: Stock-based  employee compensation expense assuming a fair value based method had been  used for all awards, net of tax effects |       | (456                                  | )          | (478                                 | )          | (1,285 | ) | (1,390 | ) |
|                                                                                                                                    |       |                                  |       |                                 |       |   |   |   |   |
| Pro forma - basic                                                                                                                       |       | $                                     | (133       | )                                    | $          | 702 |   | $ | 2 |   | $ | 1,747 |   |
| Pro forma - diluted                                                                                                                     |       | $                                     | (133       | )                                    | $          | 702 |   | $ | 2 |   | $ | 1,747 |   |
|                                                                                                                                    |       |                                  |       |                                 |       |   |   |   |   |
| Basic earnings (loss)  per share:                                                                                                       |       |                                  |       |                                 |       |   |   |   |   |
| As reported                                                                                                                             |       | $                                     | 0.01       |                                 | $          | (1.75 | ) | $ | 0.06 |   | $ | (1.69 | ) |
| Pro forma                                                                                                                               |       | $                                     | (0.01      | )                                    | $          | 0.04 |   | $ | 0.00 |   | $ | 0.11 |   |
| Diluted earnings (loss)  per common share:                                                                                              |       |                                  |       |                                 |       |   |   |   |   |
| As reported                                                                                                                             |       | $                                     | 0.01       |                                 | $          | (1.75 | ) | $ | 0.05 |   | $ | (1.69 | ) |
| Pro forma                                                                                                                               |       | $                                     | (0.00      | )                                    | $          | 0.04 |   | $ | 0.00 |   | $ | 0.11 |   |
|                                                                                                                                         |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |

 

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*See Note 3

 

The fair value of each option granted bythe Company in the nine months ended September 30, 2005 and the year endedDecember 31, 2004 was estimated on the date of grant using the Black-Scholesoption pricing model with the following assumptions:

 
| ** **                  | ** ** | **Nine Months Ended  September 30, 2005** | ** ** | **Year Ended  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 – 79.0%                 |       |

 

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. The adoption of SFAS 123 (R) is expectedto have a material impact on the financial statements of Outdoor ChannelHoldings, Inc.

 

**NOTE 5—EQUITYTRANSACTIONS**

 

**Issuances of Common Stockby the Company**

 

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 $43,350. In addition, certain sellingstockholders exercised options to buy 1,688 shares of common stock which wereresold in the public offering. On July 13, 2005, the underwriters exercisedtheir over-allotment option granted by certain selling stockholders, andpurchased an additional 442 shares of common stock. The shares sold by theselling stockholders were purchased immediately before the sale through theexercise of options they held to buy common shares from the Company. The Companyreceived $2,168 in the aggregate from the exercise of these options. During thenine months ended September 30, 2005, the Company also received cash proceedsof approximately $463 from the exercise of other options for the purchase of211 shares of common stock.

 

9

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During the nine months ended September 30,2005, the Company issued to employees an aggregate of 75 shares of restrictedstock on two separate dates. The rights to these shares vest over a three yearperiod. Based on the closing market prices on the day before these grants of$14.95 and $13.38 per share, the fair value of the stock was $1,103 but theaggregate charge to be incurred over the vesting period amounts to $861 representingthe fair value net of  an estimatedemployee turnover rate and has been included in deferred compensation as anoffset to stockholders’ equity.  Thebalance will be amortized to compensation expense as the rights to therestricted stock vest. The Company recorded a charge for these shares of $72and $95 for the three and nine months ended September 30, 2005,respectively.  For the restricted sharesissued in 2004, the Company recorded a charge of $52 and $156 for the samerespective periods.  As of September 30,2005, a total of 5 shares of restricted stock have been cancelled due toemployee turnover.

 

**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 on Form10-K/A for the year ended December 31, 2004. A summary of the status of theoptions granted under Outdoor Channel Holdings’ stock option plans and outsideof those plans as of September 30, 2005 and the changes in options outstandingduring the nine months then ended is presented in the table that follows:

 
| ** **                            | ** ** | **As of September 30,  2005** | ** ** |
|---------------------------------------|------------|-------------------------------|------------|
| ** **                            | ** ** | **Shares**                    | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding at beginning  of period   |       | 5,630                         |       | $ | 4.12 |   |
| Options granted                       |       | 385                           |       | 14.60 |   |
| Options exercised                     |       | (2,341                        | )          | 1.12 |   |
| Options canceled or  expired          |       | (3                            | )          | 6.14 |   |
|                                  |       |                          |       |   |   |
| Options outstanding at  end of period |       | 3,671                         |       | $ | 7.13 |   |

 

**NOTE 6—RELATED PARTYTRANSACTIONS**

 

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 September 30, 2005 and 2004, respectively, andapproximately $189 and $183 in the nine months ended September 30, 2005 and2004, respectively. The Company has engaged a third party to determine fairmarket lease rates for the facility in anticipation of renewing the leaseagreements for another two-year period.

 

**NOTE 7—SEGMENTINFORMATION**

 

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 September 30, 2005 and 2004 and $446 in each ofthe nine months ended September 30, 2005 and 2004.

 

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Information with respect to thesereportable segments as of and for the three and nine months ended September 30,2005 and 2004 follows:

 
| ** **                                                   | ** ** | **Revenues** | ** ** | **Income (Loss)  Before Income  Taxes and  Minority Interest** | ** ** | **Total  Assets** | ** ** | **Depreciation  and  Amortization** | ** ** | **Additions to  Property,  Plant and  Improvements** | ** ** |
|--------------------------------------------------------------|------------|--------------|------------|----------------------------------------------------------------|------------|-------------------|------------|-------------------------------------|------------|------------------------------------------------------|------------|
| **As of and for the  Three Months Ended September 30, 2005** |       |         |       |                                                           |       |              |       |                                |       |                                                 |       |
| TOC                                                          |       | $            | 9,309      |                                                           | $          | 534               |       | $                                   | 24,538     |                                                 | $          | 355 |   | $ | 4,567 |   |
| Membership Division                                          |       | 2,095        |       | 428                                                            |       | 6,186             |       | 78                                  |       | 129                                                  |       |
| Subtotals of Segments                                        |       | 11,404       |       | 962                                                            |       | 30,724            |       | 433                                 |       | 4,696                                                |       |
| Corporate*                                                   |       | —       |       | (305                                                           | )          | 115,425           |       | 136                                 |       | —                                               |       |
| Totals                                                       |       | $            | 11,404     |                                                           | $          | 657               |       | $                                   | 146,149    |                                                 | $          | 569 |   | $ | 4,696 |   |
|                                                         |       |         |       |                                                           |       |              |       |                                |       |                                                 |       |
| **September  30, 2004**                                      |       |         |       |                                                           |       |              |       |                                |       |                                                 |       |
| TOC                                                          |       | $            | 9,022      |                                                           | $          | 2,463             |       | $                                   | 19,374     |                                                 | $          | 213 |   | $ | 581 |   |
| Membership Division                                          |       | 1,927        |       | 306                                                            |       | 4,400             |       | 86                                  |       | 84                                                   |       |
| Subtotals of Segments                                        |       | 10,949       |       | 2,769                                                          |       | 23,774            |       | 299                                 |       | 665                                                  |       |
| Corporate*                                                   |       | —       |       | (48,457                                                        | )          | 67,734            |       | —                              |       | —                                               |       |
| Totals                                                       |       | $            | 10,949     |                                                           | $          | (45,688           | )          | $                                   | 91,508     |                                                 | $          | 299 |   | $ | 665 |   |
| ** **                                                   |       |         |       |                                                           |       |              |       |                                |       |                                                 |       |
| **As of and for the  Nine Months Ended**                     |       |         |       |                                                           |       |              |       |                                |       |                                                 |       |
| **September  30, 2005**                                      |       |         |       |                                                           |       |              |       |                                |       |                                                 |       |
| TOC                                                          |       | $            | 27,061     |                                                           | $          | 3,515             |       | $                                   | 24,538     |                                                 | $          | 1,000 |   | $ | 7,752 |   |
| Membership Division                                          |       | 4,418        |       | 314                                                            |       | 6,186             |       | 235                                 |       | 317                                                  |       |
| Subtotals of Segments                                        |       | 31,479       |       | 3,829                                                          |       | 30,724            |       | 1,235                               |       | 8,069                                                |       |
| Corporate*                                                   |       | —       |       | (1,517                                                         | )          | 115,425           |       | 408                                 |       | —                                               |       |
| Totals                                                       |       | $            | 31,479     |                                                           | $          | 2,312             |       | $                                   | 146,149    |                                                 | $          | 1,643 |   | $ | 8,069 |   |
|                                                         |       |         |       |                                                           |       |              |       |                                |       |                                                 |       |
| **September  30, 2004**                                      |       |         |       |                                                           |       |              |       |                                |       |                                                 |       |
| TOC                                                          |       | $            | 25,304     |                                                           | $          | 6,931             |       | $                                   | 19,374     |                                                 | $          | 639 |   | $ | 1,081 |   |
| Membership Division                                          |       | 4,407        |       | 482                                                            |       | 4,400             |       | 257                                 |       | 550                                                  |       |
| Subtotals of Segments                                        |       | 29,711       |       | 7,413                                                          |       | 23,774            |       | 896                                 |       | 1,631                                                |       |
| Corporate*                                                   |       | —       |       | (49,022                                                        | )          | 67,734            |       | —                              |       | —                                               |       |
| Totals                                                       |       | $            | 29,711     |                                                           | $          | (41,609           | )          | $                                   | 91,508     |                                                 | $          | 896 |   | $ | 1,631 |   |

 

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*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 directly witheither TOC or the Membership division. Corporate assets consisted primarily ofgoodwill, net deferred tax assets and intangible assets.

 

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

 

The Company’s short term investments areclassified as available-for-sale and are recorded at fair value. Gross realizedgains and losses on sales of securities during 2004 were not material. Includedin short-term available-for-sale investments are auction rate securities ownedby the Company that generally reset every 28 days.

 
| The investment in  available-for-sale securities at September 30, 2005 is comprised as follows: |   |   |         |
|-------------------------------------------------------------------------------------------------|--------|--------|--------------|
| Auction rate securities                                                                         |   | $      | 21,190       |   |
| Equities                                                                                        |   | 733    |         |
| Total current securities                                                                        |   | $      |  21,923 |   |

 

The change in net unrealized securitiesgains (losses) recognized in other comprehensive income includes unrealizedgains (losses) that arose from changes in market value of securities that wereheld during the period. The unrealized gain (loss) associated with investmentswas not significant for either period presented.

 

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**NOTE 9—SUBSEQUENT EVENTS**

 

On November 2, 2005, the Company renewedits revolving line of credit agreement (the “revolver”) with U.S. Bank N.A.(the “Bank”), extending the maturity date to September 7, 2007 and increasingthe total amount which can be drawn upon under the revolver  to $8,000. The revolver provides that theinterest rate shall be LIBOR plus 1.25%. The revolver is collateralized by substantiallyall of the Company’s assets. This credit facility contains customary financialand other covenants and restrictions, as amended on November 2, 2005, includinga change of control provision. As of September 30, 2005, the Company did nothave any outstanding borrowings under this revolver.

 

On November 2, 2005, the Company obtaineda $1,950 mortgage loan from the Bank on its recently purchased broadcastfacility located in Temecula, California which has a 10 year term with a 25year amortization schedule. This loan carries a variable interest rate of LIBORplus 1.35%. This loan is secured primarily by a Deed of Trust on the propertyand is also secondarily secured by the same assets as the revolver. It alsocontains customary financial and other covenants and restrictions including achange of control provision. On November 7, 2005, the Company entered into aninterest rate swap agreement with its bank to reduce the potential impact ofincreasing interest rates and effectively fixed the interest rate on this loanat 6.59%.

 

On November 2, 2005, the Company obtaineda $3,000, five year fully amortizing term loan. This term loan carries avariable interest rate of LIBOR plus 1.35%. This term loan is secured by thesame assets as the revolver and contains customary financial and othercovenants and restrictions including a change of control provision. On November7, 2005, the Company entered into an interest rate swap agreement with the Bankto reduce the potential impact of increasing interest rates and effectivelyfixed the interest rate on this term loan at 6.35%. The proceeds from this loanare principally to be used for the leasehold improvements and the purchase ofequipment related to our broadcast facility.

 

* * *

 

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**ITEM 2.****     ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND 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) future performance that mayresult from the taking of strategic initiatives; (2) expected revenue andearnings growth and changes in mix; (3) anticipated expenses includingadvertising, programming, personnel and others; (4) Nielsen Media Research,which we refer to as Nielsen, estimates regarding total households and cableand satellite homes subscribing to and viewers (ratings) of The OutdoorChannel; and (5) other matters. We undertake no obligation to publicly updateor revise any forward-looking statements, whether as a result of newinformation, future events 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 these forward-lookingstatements, we claim the protection of the safe harbor for forward-lookingstatements in Section 27A of the Securities Act and Section 21E of the ExchangeAct.

 

**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 lifestyle programming. The Company also owns andoperates related businesses which serve the interests of The Outdoor Channel’sviewers and other outdoor enthusiasts. These related businesses include:LDMA-AU, Inc. (“Lost Dutchman’s”) and Gold Prospector’s Association of America,LLC. (“GPAA”). Lost Dutchman’s is a national gold prospecting campground clubwith approximately 6,850 members and properties in Arizona, California,Colorado, Georgia, Michigan, North Carolina, Oregon and South Carolina. Webelieve GPAA is one of the largest gold prospecting clubs in the world withapproximately 31,700 active members. GPAA is the publisher of the “GoldProspectors & Treasure Hunters in the Great Outdoors” magazine and hasrights to a 2,300 acre property near Nome, Alaska used to provide an annualexpedition for a fee to its members.

 

Outdoor Channel Holdingsalso wholly owns 43455 BPD, LLC which owns our broadcast facility.

 

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.

 

During the latter part of 2004, we decidedto pursue strategic initiatives to increase our long-term profitability. Suchinitiatives included growing The Outdoor Channel’s subscriber base, bydeveloping a second network — Outdoor Channel 2 HDSM, opening a newadvertising sales office in New York, producing more programming in-house andpurchasing a new building to house our new state of the art broadcast facility.Although we anticipate these initiatives will increase our costs in the nearterm, we believe such strategic pursuits will ultimately enhance our overallperformance.

 

In some of the following period-to-periodcomparisons, the Company has specifically noted, and at times excluded theSeptember 2004 non-cash, non-recurring compensation expense of $47,983,000incurred by the Company and the related tax benefit of $19,098,000 as theresult of the assumption of TOC options in connection with the acquisition ofthe minority interest in TOC because it believes quantifying the effects ofthis charge provides a better understanding of the Company’s results ofoperations. The Company’s management also believes that disclosure of itsresults in this manner, when presented in conjunction with the correspondingGAAP measures, provides useful information to investors and others inidentifying and understanding the Company’s operating performance for theperiods presented.

 

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**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 were requiredfor employee options.  The Company willadopt the standards of SFAS No. 123 (R) effective January 1, 2006. Since theCompany has used the intrinsic value method to account for stock options, theadoption of SFAS 123 (R) is expected to have a material impact on the financialstatements of Outdoor Channel Holdings, Inc.

 

The FASB had issued certain otheraccounting pronouncements as of September 30, 2005 that will become effectivein subsequent 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 nine months ended September 30, 2005.

 

**Comparison of OperatingResults for the Three Months Ended****September30****, 2005and September****30****, 2004**

 

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

 
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** | **% of Total Revenue** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------------------|------------|
| ** **                                                    | ** ** | **2005**   | ** ** | **2004**   | ** ** | **$**      | ** ** | **%**                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                     |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Advertising                                                   |       | $          | 5,657      |       | $          | 5,723      |       | $                      | (66        | ) | (1.2 | )% | 49.6 | % | 52.3 | % |
| Subscriber fees                                               |       | 3,846      |       | 3,450      |       | 396        |       | 11.5                   |       | 33.7 |   | 31.5 |   |
| Membership income                                             |       | 1,901      |       | 1,776      |       | 125        |       | 7.0                    |       | 16.7 |   | 16.2 |   |
| Total revenues                                                |       | 11,404     |       | 10,949     |       | 455        |       | 4.2                    |       | 100.0 |   | 100.0 |   |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Expenses:                                                     |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Satellite transmission  fees                                  |       | 617        |       | 582        |       | 35         |       | 6.0                    |       | 5.4 |   | 5.3 |   |
| Advertising                                                   |       | 1,912      |       | 1,477      |       | 435        |       | 29.5                   |       | 16.8 |   | 13.5 |   |
| Programming                                                   |       | 2,315      |       | 933        |       | 1,382      |       | 148.1                  |       | 20.3 |   | 8.6 |   |
| Non-cash compensation  expense from exchange of stock options |       | —     |       | 47,983     |       | (47,983    | )          | (100.0                 | )          | — |   | 438.2 |   |
| Selling, general and  administrative                          |       | 6,299      |       | 5,696      |       | 603        |       | 10.6                   |       | 55.2 |   | 52.0 |   |
| Total expenses                                                |       | 11,143     |       | 56,671     |       | (45,528    | )          | (80.3                  | )          | 97.7 |   | 517.6 |   |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income (loss) from  operations                                |       | 261        |       | (45,722    | )          | 45,983     |       | NMF                    |       | 2.3 |   | (417.6 | ) |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Other income, net                                             |       | 396        |       | 34         |       | 362        |       | 1,064.7                |       | 3.5 |   | 0.3 |   |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income (loss) before  income taxes and minority interest      |       | 657        |       | (45,688    | )          | 46,345     |       | NMF                    |       | 5.8 |   | (417.3 | ) |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income tax provision  (benefit)                               |       | 334        |       | (18,176    | )          | 18,510     |       | NMF                    |       | 3.0 |   | (166.0 | ) |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income (loss) before  minority interest                       |       | 323        |       | (27,512    | )          | 27,835     |       | NMF                    |       | 2.8 |   | (251.3 | ) |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Minority interest in net  income of consolidated subsidiary   |       | —     |       | 193        |       | (193       | )          | (100.0                 | )          | — |   | 1.8 |   |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Net income (loss)                                             |       | $          | 323        |       | $          | (27,705    | )          | $                      | 28,028     |   | NMF | % | 2.8 | % | (253.1 | )% |

 

----

***NMF– Not Meaningful***

 

14

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**Comparison of OperatingResults for the Nine Months Ended September****30****, 2005 and September****30****, 2004**

 

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

 
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** | **% of Total Revenue** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------------------|------------|
| ** **                                                    | ** ** | **2005**   | ** ** | **2004**   | ** ** | **$**      | ** ** | **%**                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                     |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Advertising                                                   |       | $          | 16,173     |       | $          | 15,886     |       | $                      | 287        |   | 1.8 | % | 51.4 | % | 53.5 | % |
| Subscriber fees                                               |       | 11,382     |       | 9,830      |       | 1,552      |       | 15.8                   |       | 36.1 |   | 33.1 |   |
| Membership income                                             |       | 3,924      |       | 3,995      |       | (71        | )          | (1.8                   | )          | 12.5 |   | 13.4 |   |
| Total revenues                                                |       | 31,479     |       | 29,711     |       | 1,768      |       | 6.0                    |       | 100.0 |   | 100.0 |   |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Expenses:                                                     |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Satellite transmission  fees                                  |       | 1,866      |       | 1,759      |       | 107        |       | 6.1                    |       | 5.9 |   | 5.9 |   |
| Advertising                                                   |       | 5,668      |       | 4,282      |       | 1,386      |       | 32.4                   |       | 18.0 |   | 14.4 |   |
| Programming                                                   |       | 3,367      |       | 2,223      |       | 1,144      |       | 51.5                   |       | 10.7 |   | 7.5 |   |
| Non-cash compensation expense  from exchange of stock options |       | —     |       | 47,983     |       | (47,983    | )          | (100.0                 | )          | — |   | 161.5 |   |
| Selling, general and  administrative                          |       | 18,752     |       | 15,166     |       | 3,586      |       | 23.6                   |       | 59.6 |   | 51.1 |   |
| Total expenses                                                |       | 29,653     |       | 71,413     |       | (41,760    | )          | (58.5                  | )          | 94.2 |   | 240.4 |   |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income (loss) from  operations                                |       | 1,826      |       | (41,702    | )          | 43,528     |       | NMF                    |       | 5.8 |   | (140.4 | ) |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Other income, net                                             |       | 486        |       | 93         |       | 393        |       | 422.6                  |       | 1.5 |   | 0.3 |   |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income (loss) before  income taxes and minority interest      |       | 2,312      |       | (41,609    | )          | 43,921     |       | NMF                    |       | 7.3 |   | (140.1 | ) |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income tax provision  (benefit)                               |       | 1,025      |       | (16,543    | )          | 17,568     |       | NMF                    |       | 3.3 |   | (55.7 | ) |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income (loss) before  minority interest                       |       | 1,287      |       | (25,066    | )          | 26,353     |       | NMF                    |       | 4.0 |   | (84.4 | ) |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Minority interest in net  income of consolidated subsidiary   |       | —     |       | 682        |       | (682       | )          | (100.0                 | )          | — |   | 2.3 |   |
|                                                          |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Net income (loss)                                             |       | $          | 1,287      |       | $          | (25,748    | )          | $                      | 27,035     |   | NMF | % | 4.0 | % | (86.7 | )% |

 

----

***NMF– Not Meaningful***

 

**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 Channelincluding advertisements shown during a program (also known as short-formadvertising) and infomercials in which the advertisement is the program itself(also known as long-form advertising) and from the sale of advertising space inpublications such as the “Gold Prospectors & Treasure Hunters in the GreatOutdoors” magazine. Advertising revenue is also generated from fees paid bythird party programmers that purchase advertising time in connection with theairing of their programs on The Outdoor Channel. For the three months endedSeptember 30, 2005 and 2004, The Outdoor Channel generated approximately 97.0%and 97.4% of our advertising revenue, respectively. For the nine months endedSeptember 30, 2005 and 2004, The Outdoor Channel generated approximately 97.0%and 97.4% of our advertising revenue, respectively. Subscriber fees are solelyrelated to The Outdoor Channel. Membership income is generated by ouractivities other than the operation of The Outdoor Channel and includesmembership sales, magazine sales, merchandise sales, and sponsored outings andexpeditions in connection with GPAA and Lost Dutchman’s.

 

Total revenues for the three months endedSeptember 30, 2005 were $11,404,000, an increase of $455,000, or 4.2% comparedto revenues of $10,949,000 for the three months ended September 30, 2004. Totalrevenues for the nine months ended September 30, 2005 were $31,479,000, anincrease of $1,768,000, or 6.0%, compared to revenues of $29,711,000 for thenine months ended September 30, 2004. The net increases were the result ofchanges in several items comprising revenue as discussed below.

 

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Advertising revenue for the three monthsended September 30, 2005 was $5,657,000, a decrease of $66,000 or 1.2% comparedto $5,723,000 for the three months ended September 30, 2004. Advertisingrevenue for the nine months ended September 30, 2005 was $16,173,000, anincrease of $287,000 or 1.8% compared to $15,886,000 for the nine months endedSeptember 30, 2004. The decline in advertising revenue for the three monthsended September 30, 2005 principally reflects less than projected growth in ourNielsen Universe Estimate resulting in under delivery of households for ouradvertising clients. For September of 2005, Nielsen estimated that The OutdoorChannel had 25.6 million viewers, down from 26.2 million for the same period ayear ago. (Nielsen revises this estimate each month and for November, Nielsenincreased its estimate to approximately 25.7 million subscribers). Because ofthis under delivery, we record a liability, commonly referred to in the cableindustry and as we refer to it as “Make Good Liability,”  thereby reducing revenue we might otherwiserecognize and deferring it into the future when we air additional advertisingfor the client at no additional cost. The increase in advertising revenue forthe nine months ended September 30, 2005 reflects our ability to demonstratethe value of short-form advertising on The Outdoor Channel to nationaladvertisers and thus sell a larger percentage of our advertising inventory tothese accounts, generally at higher prices.

 

Subscriber fees for the three months endedSeptember 30, 2005 were $3,846,000, an increase of $396,000 or 11.5% comparedto $3,450,000 for the three months ended September 30, 2004. Subscriber feesfor the nine months ended September 30, 2005 were $11,382,000, an increase of$1,552,000 or 15.8% compared to $9,830,000 for the nine months ended September30, 2004. The increase in subscriber fees for the period was primarily due to:an increased number of paying subscribers compared to the same periods a yearago, both from new affiliates and from existing distributors and contractualsubscriber fee rate increases with existing service providers carrying TheOutdoor Channel. We plan to accelerate our subscriber growth utilizing variousmeans including deployment of launch support fees. Such fees are capitalizedand amortized over the life of the carriage agreement. To the extent revenue isassociated with the incremental subscribers, the amortization is charged tooffset the related revenue. Any excess of launch support amortization over therelated subscriber revenue is charged to expense. As a result, we anticipate thatsubscriber revenue, net of amortization of launch fees, may not increase overthe foreseeable future once we deploy this tactic and, in fact, due tocontractual volume discounts, could actually decrease over the new contractlives.

 

Membership income for the three monthsended September 30, 2005 was $1,901,000, an increase of $125,000 or 7.0%compared to $1,776,000 for the three months ended September 30, 2004.Membership income for the nine months ended September 30, 2005 was $3,924,000,a decrease of $71,000 or 1.8% compared to $3,995,000 for the nine months endedSeptember 30, 2004. The improvement of the third quarter over last yearprincipally reflects the increased participation of our gold prospectingexpedition to our Cripple River property located near Nome, Alaska.

 

**Expenses**

 

Expenses consist of the cost of (1)satellite transmission fees; (2) advertising; (3) programming; (4) compensationexpense from exchange of TOC stock options; and (5) selling, general andadministrative expenses.

 

Total expenses for the three months endedSeptember 30, 2005 were $11,143,000, a decrease of $45,528,000, or 80.3%,compared to $56,671,000 for the three months ended September 30, 2004. Totalexpenses for the nine months ended September 30, 2005 were $29,653,000, adecrease of $41,760,000 or 58.5%, compared to $71,413,000 for the nine monthsended September 30, 2004. As a percentage of revenues, total expenses were97.7% and 517.6% in the three months ended September 30, 2005 and 2004,respectively. As a percentage of revenues, total expenses were 94.2% and 240.4%in the nine months ended September 30, 2005 and 2004, respectively. Thedecrease in expenses was due to the non-recurring charge to compensationexpense incurred in September 2004 as a result of the issuance of options toTOC employees with an intrinsic value of $47,983,000 in accordance with theterms of the acquisition by the Company of substantially all of the remaining17.6% minority interest in TOC it did not already own. Otherwise total expensesincreased as illustrated when the non-cash, non-recurring compensation expenseof $47,983,000 incurred in September 2004 is excluded.

 

Total expenses, net of the compensationexpense from exchange of stock options, increased $2,455,000 or 28.3% and$6,223,000 or 26.6% for the three and nine months, respectively. As apercentage of revenues, total expenses, net of compensation expense fromexchange of stock options, were 97.7% and 79.3 % in the three months endedSeptember 30, 2005 and 2004, respectively. As a percentage of revenues, totalexpenses, net of compensation expense from exchange of stock options, were94.2% and 78.9% in the nine months ended September 30, 2005 and 2004,respectively.

 

The increase in these expenses was due toseveral factors, such as increased corporate costs including: (1) amortizationof intangible assets; (2) costs associated with compliance with Sarbanes-OxleyAct of 2002; and (3) costs associated with incorporation in Delaware andlisting on Nasdaq National Market, to which the Company became subject as ofSeptember 2004. Those increased costs will continue to be incurred becomingpart of our cost of doing business. The increase is also

 

16

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attributable to increased programming and personnel costs, costsassociated with the launch of our second channel, Outdoor Channel 2 HD,marketing and promotion costs and other items more fully described as follows.

 

Satellite transmission fees for the threemonths ended September 30, 2005 were $617,000, an increase of $35,000, or 6.0%,compared to $582,000 for the three months September 30, 2004. Satellitetransmission fees for the nine months ended September 30, 2005 were $1,866,000,an increase of $107,000, or 6.1%, compared to $1,759,000 for the nine monthsended September 30, 2004. This increase reflects an additional charge for theback-up satellite capability negotiated with our satellite provider during thefourth quarter of 2004.

 

Advertising expenses for the three monthsended September 30, 2005 were $1,912,000, an increase of $435,000 or 29.5%compared to $1,477,000 for the three months ended September 30, 2004.Advertising expenses for the nine months ended September 30, 2005 were$5,668,000, an increase of $1,386,000 or 32.4% compared to $4,282,000 for thenine months ended September 30, 2004. The increase in advertising expenses isprincipally a result of our increased spending on consumer and trade industryawareness campaigns designed to build demand for The Outdoor Channel and forOutdoor Channel 2 HD. We plan on continuing to spend on these awarenessprograms, and when expressed as a percentage of revenues, we are trending athigher rates than 2004.

 

Programming expenses for the three months endedSeptember 30, 2005 were $2,315,000, an increase of $1,382,000 or 148.1%compared to $933,000 for the three months ended September 30, 2004. Programmingexpenses for the nine months ended September 30, 2005 were $3,367,000, an increase of $1,144,000 or 51.5% compared to $2,223,000 for the nine monthsended September 30, 2004. The increase is principally a result fromour decision to launch our second channel, Outdoor Channel 2 HD, on July 1,2005. This channel is entirely programmed with shows produced in-house asopposed to the preponderance of third party production on our standarddefinition channel. We produced in excess of 40 shows plus numerous specialsin-house to air in the third and fourth quarters of 2005 and in some situationsagain in 2006. We aired 16 shows that were internally produced during  the third and fourth quarters of 2004.

 

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 corresponding with the full launch of Outdoor Channel2 HD. Many of these programs began airing during the third quarter of 2005, andwe anticipate re-airing the programs in the fourth quarter of 2005 and in somesituations re-airing the same programs on The Outdoor Channel in 2006. Asubstantial portion of the prepaid programming costs will be charged to expensein these quarters. Programming expenses are expected to increase as apercentage of revenue as we pursue our strategy to produce, or own, moreprogramming in-house as opposed to contracting with third party producers. As aresult, we believe we will control more of our programs’ quality, advertisinginventory and potential to re-package our programming for other use such asvideo-on-demand, international licensing and production of DVDs for retaildistribution.

 

Compensation expense from exchange ofstock options for the three and nine months ended September 30, 2004 was$47,983,000 and was incurred as a result of the issuance of 4,012,000 optionsto TOC option holders in accordance with the terms of the acquisition ofsubstantially all of the remaining 17.6% minority interest in TOC we did notalready own. This charge is both non-cash and non-recurring.

 

Selling, general and administrativeexpenses for the three months ended September 30, 2005 were $6,299,000, anincrease of $603,000 or 10.6% compared to $5,696,000 for the three months endedSeptember 30, 2004. As a percent of revenues, selling, general andadministrative expenses were 55.2% and 52.0% in the three months endedSeptember 30, 2005 and 2004, respectively. Selling, general and administrativeexpenses for the nine months ended September 30, 2005 were $18,752,000, anincrease of $3,586,000 or 23.6% compared to $15,166,000 for the nine monthsended September 30, 2004. As a percent of revenues, selling, general andadministrative expenses were 59.6% and 51.1% in the nine months ended September30, 2005 and 2004, respectively.

 

The increase was primarily due to theincrease in the number of employees from 127 at the end of September 2004 to142 by the end of September 2005. We opened our New York City advertising salesoffice with a resultant expense in 2005 that did not exist in the same period ayear ago. It currently has a staff of three employees. We have also added anexecutive to our management team who holds the position of General Counsel.Others have been added in all departments to support our launch of a secondchannel—Outdoor Channel 2 HD, and to support our increased efforts of providingmore of our shows in-house. We also experienced increased travel and relatedcosts associated with our larger advertising sales staff, support of ourservice providers and the promotion of The Outdoor Channel and Outdoor Channel2 HD through a stronger presence at trade shows, conferences and seminars.Depreciation and small equipment purchases have increased as a result ofpre-launch activity of Outdoor Channel 2 HD. Also included in selling, generaland administrative costs is amortization of intangible assets created as partof the acquisition in September 2004 of the remaining minority interest of TOCwe did not

 

17

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already own. These expenses did not exist in the first half of2004. We increased other corporate overhead expenses such as our activitysurrounding Sarbanes-Oxley compliance in 2005, fees for our listing on NasdaqNational Market and fees associated with incorporation in the state ofDelaware.

 

We anticipate that selling, general andadministrative costs will continue to climb over the foreseeable future both indollars and when expressed as a percent of revenue as we continue to work togain penetration of both channels including increases from the recognition oflaunch support fee amortization in excess of the related subscriber revenue,corporate spending on Sarbanes-Oxley compliance, fees to maintain our commonstock listing and improved communication with our stockholders, among othercorporate expenses.

 

**Income (Loss) fromOperations**

 

Income (loss) from operations for thethree months ended September 30, 2005 was $261,000, an increase of $45,983,000compared to ($45,722,000) for the three months ended September 30, 2004. As apercent of revenues, income from operations was 2.3% and (417.6%),respectively. Income (loss) from operations for the nine months ended September30, 2005 was $1,826,000, an increase of $43,528,000 compared to ($41,702,000)for the nine months ended September 30, 2004. As a percent of revenues, incomefrom operations was 5.8% and (140.4%), respectively. As we continue to striveto drive growth of our subscriber base including the planned payment of launchsupport and as we further develop our second channel, Outdoor Channel 2 HD, wewill incur increased expenses such as programming, marketing, and advertisingas well as start-up and operating costs in 2005 that are unlikely to beimmediately offset by revenues. As a result, we anticipate our operating marginswill be negatively impacted for the foreseeable future. There can be noassurance that these strategies will be successful.

 

As explained above, the non-cash,non-recurring compensation expense charge of $47,983,000 which resulted fromthe assumption of options in connection with the acquisition of the minorityinterest in TOC accounts for the majority of the loss from operations for thethree and nine months ended September 30, 2004. If we excluded this charge,income from operations for the three months ended September 30, 2004 would havebeen $2,261,000. As a percentage of revenue this adjusted total would have been20.7% for the three months ended September 30, 2004. If we excluded thischarge, income from operations for the nine months ended September 30, 2004would have been $6,281,000. As a percentage of revenue this adjusted totalwould have been 21.1% for the nine months ended September 30, 2004.

 

**Other Income, Net**

 

Other income, net for the three monthsended September 30, 2005 was $396,000, an increase of $362,000 compared to$34,000 for the three months ended September 30, 2004. Other income, net forthe nine months ended September 30, 2005 was $486,000, an increase of $393,000compared to $93,000 for the nine months ended September 30, 2004. Thisimprovement was primarily due to increased dividends and interest earned on ourincreased investment in available-for-sale securities and cash and cashequivalent balances that resulted from the sale, on July 1, 2005, of 3,500,000shares of common stock for net cash proceeds of $43,350,000 plus $2,631,000from the exercise of stock options during the nine months ended September 30,2005.

 

**Income (Loss) BeforeIncome Taxes and Minority Interest in Net Income of Consolidated Subsidiary**

 

Income (loss) before income taxes andminority interest increased as a percentage of revenues to 5.8% for the threemonths ended September 30, 2005 compared to (417.3%) for the three months endedSeptember 30, 2004. Income (loss) before income taxes and minority interest decreasedas a percentage of revenues to 7.3% for the nine months September 30, 2005compared to (140.1%) for the nine months ended September 30, 2004.

 

The TOC segment’s income before incometaxes and minority interest expressed as a percentage of revenue decreased to5.7% for the three months ended September 30, 2005, compared to 27.3% for thethree months ended September 30, 2004. The TOC segment’s income before incometaxes and minority interest expressed as a percentage of revenue decreased to13.0% for the nine months ended September 30, 2005, compared to 27.4% for thenine months ended September 30, 2004. The decrease was due mainly to the growthof our programming expenses and increased staff in support of the launch of oursecond channel, Outdoor Channel 2 HD, increased spending on advertising,personnel and travel/promotional related expenses as well as depreciationexpenses related to the deployment of additional equipment.

 

The Membership Division segment’s incomebefore income taxes and minority interest expressed as a percentage of revenuesincreased to 20.4% for the three months ended September 30, 2005 compared to15.9% for the three months ended September 30, 2004. The Membership Divisionsegment’s income before income taxes and minority interest expressed as apercentage of revenues decreased to 7.1% for the nine months ended September30, 2005 compared to 10.9% for the nine

 

18

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months ended September 30, 2004. The improvement in the thirdquarter’s results reflects the success of our annual Alaska trip driven byincreased number of participants. The results of this quarter did not overcomethe poorer results in the prior six months of 2005 when compared to 2004.

 

Corporate incurred a loss before incometaxes and minority interest for the three months ended September 30, 2005amounting to $305,000, a decrease of $48,152,000 compared to a loss of$48,457,000 for the three months ended September 30, 2004. Corporate incurred aloss before income taxes and minority interest for the nine months endedSeptember 30, 2005 amounting to $1,517,000, a decrease of $47,505,000 comparedto $49,022,000 for the nine months ended September 30, 2004. The expensesallocated to Corporate include: the non-cash, non-recurring charge of$47,983,000, professional fees such as public relations, accounting and legalfees, amortization of intangibles, business insurance, board of directors feesand expenses and an allocation of corporate officers’ payroll and relatedexpenses. The increase in the expenses of Corporate is principally related toaccounting services incurred in positioning the Company to be in compliancewith the requirements of the Sarbanes-Oxley Act of 2002, taxes associated withbeing incorporated 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 eight months of 2004 to five in 2005.

 

**Income Tax****Provision (Benefit)**

 

Income tax provision for the three monthsended September 30, 2005 was $334,000, an increase of $18,510,000 as comparedto a benefit of $18,176,000 for the three months ended September 30, 2004.Income tax provision for the nine months ended September 30, 2005 was$1,025,000, an increase of $17,568,000 as compared to a benefit of $16,543,000for the nine months ended September 30, 2004. The increase was principally dueto the Company earning taxable income in the 2005 periods as compared to a lossfor the 2004 periods. The effective income tax rate was approximately 50.8% and39.8% for the three months ended September 30, 2005 and 2004, respectively. Theeffective income tax rate was approximately 44.3% and 39.8% for the nine monthsended September 30, 2005 and 2004, respectively.  The increased effective income tax ratesexperienced in 2005 compared to 2004 are principally a result of increases in theestimated amount of expenditures not fully deductible and adjustments to thestate tax provision rate.

 

**Minority Interest in NetIncome of Consolidated Subsidiary**

 

Minority interest for the three and ninemonths ended September 30, 2004 was $193,000 and $682,000, respectively.Minority interest was eliminated in September 2004 as a result of ouracquisition of the remaining minority interest in TOC we did not already own.Therefore, there was no minority interest for the three and nine months endedSeptember 30, 2005.

 

**Net Income (Loss)**

 

Net income (loss) for the three monthsended September 30, 2005 was $323,000 an increase of $28,028,000 compared to($27,705,000) for the three months ended September 30, 2004. Net income (loss)for the nine months ended September 30, 2005 was $1,287,000 an increase of$27,035,000 compared to ($25,748,000) for the nine months ended September 30,2004. The increase was due to reasons stated above. Excluding the non-cash,non-recurring charge of $47,983,000, net of income tax benefit of $19,098,000,net income for the three months ended September 30, 2004 would have been$1,180,000 or 10.8% of revenue. Excluding the non-cash, non-recurring charge of$47,983,000, net of income tax benefit of $19,098,000, net income for the ninemonths ended September 30, 2004 would have been $3,137,000 or 10.6% of revenue.

 

**Liquidity and CapitalResources**

 

We used $33,000 of cash in our operatingactivities in the nine months ended September 30, 2005, compared to $5,881,000in the nine months ended September 30, 2004 and had cash and cash equivalentsbalance of $29,775,000 at September 30, 2005, which was an increase of$16,670,000 from the balance of $13,105,000 at December 31, 2004. Net workingcapital increased to $60,822,000 at September 30, 2005, compared to $17,042,000at December 31, 2004.

 

Net cash used in investing activities was$29,259,000 in the nine months ended September 30, 2005 compared to $2,395,000for the nine months ended September 30, 2004. The increase in cash used ininvesting activities was related to the purchase of (i) short term auction ratesecurities to enhance our returns on cash balances and (ii) capitalexpenditures on “construction in progress” and equipment related to thebuild-out of our new broadcast facility as further discussed below. Additionalcapital expenditures were to build our inventory of cameras and edit equipmentused to support our increased efforts to produce more of our programmingin-house as opposed to licensing such programming from third parties and inparticular to increase our HD camera and editing equipment.

 

Cash provided by financing activities inthe nine months ended September 30, 2005 was $45,962,000 compared to $981,000for the nine months ended September 30, 2004. The cash provided by financingactivities in 2005 was primarily from the completion, on July 1, 2005, of apublic offering of our common stock, whereby we sold 3,500,000 shares of commonstock and received net proceeds of $43,350,000. In addition, certain sellingstockholders exercised options to buy

 

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1,688,000 shares of common stock which were resold in the publicoffering. On July 13, 2005, the underwriters exercised their over-allotmentoption granted by certain selling stockholders and purchased an additional442,000 shares of common stock.  Theshares sold by the selling stockholders were purchased immediately before thesale through the exercise of options they held to buy common shares from theCompany. The Company received $2,168,000 in the aggregate from the exercise ofthese options. The Company also received cash proceeds of approximately$463,000 from the exercise of other options for the purchase of 211,000 sharesof common stock. The cash provided by financing activities in 2004 wasprimarily a result of the exercise of employee and service provider stockoptions from our 1995 incentive stock option plan.

 

The net proceeds from the public offeringare intended to be used to expand our marketing and sales efforts to increasethe number of subscribers to The Outdoor Channel and the purchase ofprogramming from third parties , increased internal production of programmingand for general corporate purposes.

 

On November 2, 2005, we renewed ourrevolving line of credit agreement (the “revolver”) with U.S. Bank N.A. (the “Bank”),extending the maturity date to September 7, 2007 and increasing the totalamount which can be drawn upon under the revolver  to $8,000,000. The revolver provides that theinterest rate shall be LIBOR plus 1.25%. The revolver is collateralized by substantiallyall of the Company’s assets. This credit facility contains customary financialand other covenants and restrictions, as amended on November 2, 2005, includinga change of control provision. As of September 30, 2005 and as of the date ofthis report, we did not have any amounts outstanding under this creditfacility.

 

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 andwe completed the purchase during the third quarter of 2005. We are in theprocess of completing improvements to this building which is planned to houseour broadcast facility including our master control, our uplink satellite dishand various programming personnel. We currently estimate that aggregate capitalexpenditures to complete the build-out including updated equipment could exceed$8 million. As of September 30, 2005 we have spent approximately $4.8 millionon such upgrades.

 

On November 2, 2005, we obtained a$1,950,000 mortgage loan from the Bank on our recently purchased broadcastfacility located in Temecula, California which has a 10 year term loan with a25 year amortization schedule. This loan carries a variable interest rate ofLIBOR plus 1.35%. This loan is secured primarily by a Deed of Trust on theproperty and is also secondarily secured by the same assets as the revolver. Italso contains customary financial and other covenants and restrictionsincluding a change of control provision. On November 7, 2005, we entered intoan interest rate swap agreement with the Bank to reduce the potential impact ofincreasing interest rates and effectively fixed the interest rate on this loanat 6.59%.

 

On November 2, 2005, we obtained into a$3,000,000, five year fully amortizing term loan. This loan carries a variableinterest rate of LIBOR plus 1.35%. This term loan is secured by the same assetsas the revolver and contains customary financial and other covenants andrestrictions including a change of control provision. On November 7, 2005, weentered into an interest rate swap agreement with the Bank to reduce thepotential impact of increasing interest rates and effectively fixed theinterest rate on this term loan at 6.35%.

 

As of September 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 including cash on-hand, various notesincluding the line-of-credit at September 30, 2005 and anticipated cash flowsfrom operations will be sufficient to fund the Company’s operations at currentlevels and anticipated capital requirements through at least November 1, 2006.To the extent that such amounts are insufficient to finance the Company’sworking capital requirements or the Company’s desire to expand operationsbeyond current levels, the Company could seek additional financing. There canbe no assurance that equity or debt financing will be available if needed or,if available, will be on terms favorable to the Company or its stockholders.

 

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**Risk and Uncertainties**

 

The Company’s business and operations aresubject to a number of risks and uncertainties, and the following list should notbe 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. Anyforward-looking statements made by the Company are made with the intention ofobtaining the benefits of the “safe harbor” provisions of the SecuritiesLitigation Reform Act and a number of factors, including, but not limited tothose discussed below, could cause the Company’s actual results and experiencesto differ materially from the anticipated results or expectations expressed inany forward-looking statements.

 

*We may not be able to grow our subscriberbase, and as a result our revenues and profitability may not increase and coulddecrease.*

 

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. Inaddition, as we plan for such growth, our expenses are expected to increase andif we are not able to concurrently increase our revenue, our profitabilitycould decrease.

 

*If we offer increased launch support fees orother incentives to service providers in order to grow our subscriber base, ouroperating results may be harmed.*

 

Although we currently have plans to increaseour marketing and sales efforts in an attempt to increase the number of oursubscribers, we may not be able to do so economically or at all. If we areunable to increase the number of our subscribers on a cost-effective basis, orif 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 ratablyover the term of the agreements with the service providers. However, if aservice provider terminates any such agreement prior to the expiration of theterm of such agreement, then under current accounting rules we may incur alarge expense 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 toincrease our number of subscribers, we structure launch support fees with oneservice provider in a way that would require us to offer the same support or incentivesto all other service 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.

 

*If The Outdoor Channel is placed inunpopular program packages by cable or satellite service providers, or ifservice fees are increased for our subscribers, the number of viewers of TheOutdoor Channel may decline which could harm our business and operatingresults.*

 

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

 

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Outdoor Channel is bundled by service providers with networks thatdo not appeal to our viewers or is moved to packages with fewer subscribers, wemay lose viewers. These factors may reduce the number of viewers of The OutdoorChannel, which in turn would reduce our subscriber fees and advertisingrevenue.

 

*Cable and satellite serviceproviders could discontinue or refrain from carrying The Outdoor Channel, whichcould reduce the 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 and multiplesystem operators’, which we refer to as MSOs, affiliated regional or individualcable systems. Although we have relationships or agreements with most of thelargest MSOs and satellite service providers, execution of an agreement with anMSO does not ensure that its affiliated regional or individual cable systemswill carry The Outdoor Channel. Under our current agreements, The OutdoorChannel typically offers MSOs and their cable affiliates the right to broadcastThe Outdoor Channel to their subscribers, but such contracts do not requirethat The Outdoor Channel be offered to all subscribers of, or any tiers offeredby, the MSO. Because certain carriage agreements do not specify on whichservice levels The Outdoor Channel is carried, such as analog versus basicdigital, expanded digital or specialty tiers, and in which geographic marketsThe Outdoor Channel will be offered, we have no assurance that The OutdoorChannel will be carried and available to viewers of any particular MSO or toall satellite subscribers. If cable and satellite service providers discontinueor refrain from carrying The Outdoor Channel, this could reduce the number ofviewers and harm our operating results.

 

*We may not be able to effectively manage ourfuture growth, and our growth may not continue, which may substantially harmour 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 purchased a building nearour current headquarters and are currently building out this property primarilyfor use as our broadcast facility in the future. We could incur cost overruns,delays and other difficulties with this construction. In addition, moving ourbroadcast facility and some of our personnel into this new facility could bedisruptive to our operations. We cannot assure you that we will be able tosuccessfully manage our growth, that future growth will occur or that we willbe successful in managing our business objectives. We can provide no assurancethat our profitability or revenues will not be harmed by future changes in ourbusiness. Our operating results could be harmed if such growth does not occur,or is slower or less profitable than projected.

 

*We may not be able to securenational advertising accounts, and as a result, our revenues and profitabilitymay be negatively impacted.*

 

Our ability to secure national advertisingaccounts, which generally pay higher advertising rates, depends upon the sizeof our audience, the popularity of our programming and the demographics of ourviewers, as well as strategies taken by our competitors, strategies taken byadvertisers and the relative bargaining power of advertisers. Competition fornational advertising accounts and related advertising expenditures is intense.We face competition for such advertising expenditures from a variety ofsources, including other cable 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.

 

*We may be required to pay additional stateincome taxes for past years.*

 

We are required to pay income taxes invarious states in which we conduct our business operations. In the past, wehave paid state income taxes only in California (where our headquarters islocated) and have not paid income taxes to any other state. We have determinedthat we may have state income tax liability in the eight states other thanCalifornia in which our gold prospecting properties are located. Although weexpect in the near future to gather sufficient information to enable us to

 

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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.

 

*Expenses relating toprogramming costs are generally increasing and a number of factors can causecost overruns and delays, and our operating results may be adversely impactedif we are not able to successfully recover the costs of developing and acquiringnew 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 substantial financialrisks inherent in developing and producing television programs. Actualprogramming and production costs may exceed their budgets. Factors such aslabor 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.

 

*Our operating results may be negativelyimpacted if our Outdoor Channel 2 HD network is not as successful as weanticipate.*

 

In July 2005, we launched an all new, allnative high definition network called Outdoor Channel 2 HD. There can be noassurance that Outdoor Channel 2 HD will not incur unexpected costs andexpenses. Distribution of Outdoor Channel 2 HD will depend on successfullyexecuting 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 or separately,could increase costs or restrain revenue and adversely affect our operatingresults.

 

*Changes in corporate governance and securities disclosureand compliance practices have increased and may continue to increase our legalcompliance and financial reporting 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 to achieve and maintain effective internal controlsin accordance with Section 404 of the Sarbanes-Oxley Act could have a materialadverse effect on our business and 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 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 we

 

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cannot produce reliable financial reports or prevent fraud, ourbusiness and operating results could be harmed, investors could lose confidencein our reported financial information and our stock price could decrease.

 

*If we fail to develop anddistribute popular programs, our viewership would likely decline, which couldcause advertising and subscriber fee revenues to decrease.*

 

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

 

*Changes in the methodology used by Nielsento estimate our subscriber base or television ratings, or inaccuracies in suchestimates, could cause our advertising 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.

 

*The market in which weoperate is highly competitive, and we may not be able to compete effectively,particularly against competitors with greater financial resources, brandrecognition, marketplace presence and relationships with service providers.*

 

We compete for viewers with other paycable television and broadcast networks, including the Outdoor Life Network,Spike TV, 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 fiberoptic cable, which are already substantially underway, are expected to allowcable systems to greatly expand their current channel capacity, which coulddilute our market share and lead to increased competition for viewers fromexisting or new programming services.

 

We 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 significant. We compete for advertisingsales with other pay television networks, broadcast networks, and localover-the-air television stations. We also compete for advertising sales withsatellite and broadcast radio and the print media. We compete with other cabletelevision networks for subscriber fees from, and affiliation agreements with,cable and satellite service providers. Actions by the Federal CommunicationsCommission, which we refer to as the FCC, and the courts have removed certainof the impediments to entry by local telephone companies into the videoprogramming distribution business, and other impediments could be eliminated ormodified in the future. These local telephone companies may distributeprogramming that is competitive with the programming provided by us to cableoperators.

 

*We may not be able to attract new, or retainexisting, members in our club organizations, and as a result our revenues andprofitability 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 The OutdoorChannel and such other efforts as direct mail campaigns, continued sponsorshipof expositions dedicated to gold prospecting, treasure hunting and relatedinterests around the country and introductory outings held at our campsites. Wecannot assure you that we will successfully attract new members or retainexisting members. A decline in membership in our club organizations could harmour business and operating results.

 

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*Consolidation among cable andsatellite distributors 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.

 

*The satellite infrastructure that we use mayfail or be preempted by another signal, which could impair our ability todeliver programming to our cable and satellite 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 ourrevenues and profits.

 

*Natural disasters and otherevents beyond our control could interrupt our signal.*

 

Our systems and operations may bevulnerable to damage or interruption from earthquakes, floods, fires, powerloss, telecommunication failures and similar events. They also could be subjectto break-ins, sabotage and intentional acts of vandalism. Since our productionfacilities for The Outdoor Channel are all located in Temecula, California, theresults of such events could be particularly disruptive because we do not havereadily available alternative facilities from which to conduct our business.Our business interruption insurance may not be sufficient to compensate 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 mayvary significantly, and historical 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 of cable and satellite service providers;

 

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

 

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

 

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

 

•    seasonal trends in viewer interests and activities;

 

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

 

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

 

•    our ability to react quickly to changing consumer trends;

 

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

 

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•    changing regulatory requirements.

 

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.

 

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

 

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

 

*We may be unable to accesscapital on acceptable terms to fund our future operations.*

 

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

 

*We may not be able to attract and retain keypersonnel.*

 

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 necessarypersonnel we may not be able to implement our business plan.

 

*New video recordingtechnologies may reduce our advertising revenue.*

 

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

 

*Cable and satellite television programming signals have beenstolen or could be stolen in the future, which reduces our potential revenuefrom subscriber fees and advertising.*

 

The delivery of subscription programmingrequires the use of conditional access technology to limit access toprogramming to only those who subscribe to programming and are authorized toview it. Conditional access systems use, among other things, encryptiontechnology to protect the transmitted signal from unauthorized access. It isillegal to create, sell or otherwise distribute software or devices tocircumvent conditional access technologies. However, theft of cable andsatellite programming has been widely reported, and the access or “smart” cardsused in cable and satellite service providers’ conditional access systems havebeen compromised and could be further compromised in the future. Whenconditional access

 

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systems are compromised, we do not receive the potentialsubscriber fee revenues from the cable and satellite service providers.Further, measures that could be taken by cable and satellite service providersto limit such theft are not under our control. Piracy of our copyrightedmaterials could reduce our revenue from subscriber fees and advertising andnegatively affect our business and operating results.

 

*Because we expect to become increasingly dependent upon ourintellectual property rights, our inability to protect those rights couldnegatively impact our ability to compete.*

 

We currently license approximately 77% ofprograms we air on The Outdoor Channel from third-party television and filmproducers. In order to build a library of programs and programming distributionrights, we must obtain all of the necessary rights, releases and consents fromthe parties involved in developing a project or from the owners of the rightsin a completed program. There can be no assurance that we will be able toobtain the necessary rights on acceptable terms, or at all, or properlymaintain and document such rights. In addition, protecting our intellectualproperty rights by pursuing those who infringe or dilute our rights can becostly and time consuming. If we are unable to protect our portfolio oftrademarks, service marks, copyrighted material and characters, trade names andother intellectual property rights, our business and our ability to competecould be harmed.

 

*We may face intellectual property infringement claims thatcould be time-consuming, costly to defend and result in our loss of significantrights.*

 

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 of our existing stockholders can exert control over usand may not make decisions that 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-takeover provisions in our certificate ofincorporation, our bylaws and under Delaware law may enable our incumbentmanagement to retain control of us and discourage or prevent a change ofcontrol 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 pay in the future for shares of our common stock,thereby depressing the market price of our common stock. Furthermore, theseprovisions could prevent attempts by our stockholders to replace or remove ourmanagement. These provisions:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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.

 

*Technologies in the cable and satellite television industryare constantly changing, and our failure to acquire or maintainstate-of-the-art technology may harm our business 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 cable and satellite television industry is subject tosubstantial governmental regulation for which compliance may increase our costsand expose us to 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 as a video programmer.

 

The Cable Television Consumer Protectionand Competition Act of 1992, to which we refer as the 1992 Cable Act, includesprovisions that precludes cable companies affiliated with video programmersfrom favoring their programmers over competitors. The 1992 Cable Act alsoprecludes such programmers from selling their programming exclusively to theiraffiliated cable companies. These provisions potentially benefit independentprogrammers such as us by limiting the ability of cable companies affiliatedwith programmers from carrying only programming in which they have an ownershipinterest and from offering exclusive programming arrangements to cablecompanies. However, the United States Court of Appeals for the District ofColumbia Circuit vacated the FCC Rule limiting the carriage of affiliatedprogrammers by cable companies, and the FCC has not adopted a new rule. Theexclusivity provision is scheduled to expire in October 2007 unless the FCCthen determines that a further extension is necessary to protect competitionand diversity. If these provisions of the 1992 Cable Act expire or become nolonger applicable, and if we are still able to increase the number ofsubscribers to our channel, then the costs associated with doing so mayincrease significantly.

 

Regulatory carriage requirements alsocould reduce the number of channels available to carry The Outdoor Channel. The1992 Cable Act granted television broadcasters a choice of must-carry rights orretransmission consent rights. The rules adopted by the FCC 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 Communications Policy Act of 1984, which require cabletelevision systems with 36 or more “activated” channels to reserve a percentageof such channels for commercial use by unaffiliated third parties and permitfranchise authorities to require the cable operator to provide channelcapacity, equipment and facilities for public, educational and governmentaccess channels, could reduce carriage of The Outdoor Channel by limiting itscarriage in cable systems with limited channel capacity. In 2001, the FCC adoptedrules relating 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 formally have requested that the FCC

 

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reconsider this decision and are seeking legislative change torequire such carriage. The imposition of such additional must-carry regulation,in conjunction with the current limited cable system channel capacity, wouldincrease the likelihood that cable operators may be forced to drop some cableprogramming services and could reduce carriage of The Outdoor Channel.

 

The Telecommunications Act of 1996required the FCC to establish rules and an implementation schedule to ensurethat video programming is fully accessible to the hearing impaired throughclosed captioning. The rules adopted by the FCC require substantial closedcaptioning over a six to ten year phase-in period, which began in 2000, withonly limited exemptions. As a result, we will continue to incur additionalcosts for closed captioning.

 

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,among other things, government-mandated a la carte or mini-tier packaging ofprogramming services in which each subscriber would purchase only thosechannels that he or she desired instead of the larger bundles of differentchannels as is typical today. The Media Bureau’s report on November 18, 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 must comply with many local, state, federal andenvironmental regulations, for which compliance may be costly and may expose usto 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.

 

*If our goodwill or other indefinite-lived intangibles becomeimpaired, we will be required to take a non-cash charge which could have asignificant effect on our reported 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 to financial accounting standards may affect ourreported 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

 

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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.

 

*Future issuance by us of preferred shares could adverselyaffect the holders of existing shares, and therefore reduce the value ofexisting 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 not expect to pay dividends in the foreseeable future.*

 

We do not anticipatepaying cash dividends on our common stock in the foreseeable future. Anypayment of cash dividends will also depend on our financial condition,operating results, capital requirements and other factors and will be at thediscretion of our board of directors. Furthermore, we may in the future becomesubject to contractual restrictions on, or prohibitions against, the payment ofdividends.

 

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**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

At September 30, 2005 and December 31,2004, our investment portfolio included fixed-income securities of $21,923,000and $741,000, respectively. These securities are subject to interest rate riskand will decline in value if interest rates increase. However, due to the shortduration of our investment portfolio, an immediate 10% change in interest rateswould have no material impact on our financial condition, operating results orcash flows. Declines in interest rates over time will, however, reduce ourinterest income while increases in interest rates over time may increase ourinterest expense.

 

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

 

As of September 30, 2005, we had nooutstanding debt. As of the date of this report, we have aggregate outstandingborrowings of approximately $4,950,000. The rates of interest on our currentlyoutstanding debt are fixed while the rate of interest on our line-of-credit isvariable, but we currently have no outstanding balance under this creditfacility. Because of these reasons, an immediate 10% change in interest rateswould have no material, immediate impact on our financial condition, operatingresults or cash flows.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

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

 

Our management, with the participation ofour Chief Executive Officer and Chief Financial Officer, evaluated theeffectiveness of our disclosure controls and procedures as of September 30,2005, the end of the period covered by this report, and concluded that ourdisclosure controls and procedures were effective as of September 30, 2005.

 

During the fiscal quarter ended September30, 2005, there was no change in our internal control over financial reportingthat materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II—OTHER INFORMATION**

 

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

 

None

 

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

 

On July 13, 2005, the Company issued toMr. Ray V. Miller 93,516 shares of common stock upon the exercise ofoptions.  No underwriters were involvedwith this issuance to Mr. Miller.  Theaggregate consideration paid by Mr. Miller was approximately $86,325, and suchissuance was deemed exempt from registration under the Securities Act of 1933,as amended, in reliance on Section 4(2) thereof as a transaction by an issuernot involving a public offering.

 

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

 

None

 

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

 

(a) AnnualMeeting of Stockholders was held on August 30, 2005.

 

(b) Stockholders voted for the election ofMessrs. Jerry R. Berglund and Ray V. Miller as directors whose term shallexpire in 2008. Messrs. Thomas H. Massie, David C. Merritt and Ms. Elizabeth J.Sanderson continued as directors whose term shall expire in 2006. Messrs. PerryT. Massie and T. Bahnson Stanley continued as directors whose term shall expirein 2007.

 

(c) Proposal One to elect two directors tothe Company’s board of directors to serve until the 2008 Annual Meetingresulted in the election of Mr. Berglund with 16,428,222 (99.52%) votes for and79,438 (0.48%) withheld, and Mr. Miller with 16,428,222 (99.52%) votes for and79,438 (0.48%) withheld.

 

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

 

The date of our 2006 annual meeting ofstockholders will be May 16, 2006, which is more than 30 calendar days earlierthan the date of our 2005 annual meeting of stockholders. All stockholderproposals and director nominations for the 2006 annual meeting must besubmitted in accordance with the procedures set forth in our bylaws.

 

If a stockholder wants us to considerincluding a proposal in our proxy materials for the 2006 annual meeting,pursuant to Rule 14a-8 under the Exchange Act the stockholder must submitthe proposal no later than an expected date of November 30, 2005. Any proposalreceived at the Company’s executive offices after such date will be considereduntimely and may be excluded from the proxy statement and form of proxy for the2006 annual meeting. If the proposal complies with all of the requirements ofRule 14a-8, we will include it in the Proxy Statement and set it forth onthe form of proxy issued for the 2006 annual meeting. Any such stockholderproposals should be directed to the attention of the Company’s Secretary orAssistant Secretary at our headquarters at 43445 Business Park Drive,Suite 113, Temecula, California 92590.

 

With respect to any proposal that a stockholderintends to present at the 2006 annual meeting but is not submitted forinclusion in our proxy materials pursuant to Rule 14a-8, the proxy forsuch annual meeting will confer discretionary voting authority to vote on suchstockholder proposal unless we are notified of such proposal no later than anexpected date of February 13, 2006 and the proponent complies with allapplicable requirements set forth in Regulation 14A under the ExchangeAct.

 

On November 2, 2005, the Company renewedits line-of-credit agreement with U.S. Bank N.A. extending the maturity date toSeptember 7, 2007 and increasing the available borrowings to $8,000, 000,subject to certain provisions. This credit line carries a variable interestrate of LIBOR plus 1.25%. The borrowings under this credit facility are securedby accounts receivable, instruments, documents, chattel paper, generalintangibles, contract rights, investment property, certificates of deposit,deposit accounts, letter of credit rights, inventory, and equipment. Thiscredit facility contains customary financial and other covenants andrestrictions, as amended on November 2, 2005, including a change of controlprovision. As of date of this report, the Company did not have any amountsoutstanding under this credit facility.

 

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On November 2, 2005, the Company enteredinto a $1,950,000 mortgage loan with U.S. Bank N.A. on its recently purchasedbroadcast facility located in Temecula, California representing a 75% loan to value,10 year term loan with a 25 year amortization schedule. This loan carries avariable interest rate of LIBOR plus 1.35%. This loan is secured primarily by aDeed of Trust on the property and is also secondarily secured by the sameassets as the line-of-credit. It also contains customary financial and othercovenants and restrictions including a change of control provision. On November7, 2005, the Company entered into an interest rate swap agreement with U.S.Bank N.A. to reduce the potential impact of increasing interest rates andeffectively fixed the interest rate on this loan at 6.59%.

 

On November 2, 2005, the Company enteredinto a $3,000,000, 5 year fully amortizing term loan with U.S. Bank N.A. Thisloan carries a variable interest rate of LIBOR plus 1.35%. This term loan issecured by the same assets as the line-of-credit and contains customaryfinancial and other covenants and restrictions including a change of controlprovision. On November 7, 2005, the Company entered into an interest rate swapagreement with U.S. Bank N.A. to reduce the potential impact of increasinginterest rates and effectively fixed the interest rate on this term loan at6.35%.

 

**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) |
| 31.1                 |       |            | Certification  by Chief Executive Officer |
| 31.2                 |       |            | Certification  by Chief Financial Officer |
| 32.1                 | *          |            | Section  1350 Certification by Chief Executive Officer |
| 32.2                 | *          |            | Section  1350 Certification by Chief Financial Officer |

 

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*        Pursuant to Commission Release No.33-8238, this certification will be treated as “accompanying” this Quarterly Report on Form 10-Q andnot “filed”as part of such report for purposes of Section 18 of the Securities ExchangeAct of 1934, as amended, or otherwise subject to the liability of Section 18 ofthe Securities Exchange Act of 1934, as amended, and this certification willnot be deemed to be incorporated by reference into any filing under theSecurities Act of 1933, as amended, or the Securities Exchange Act of 1934, asamended, except to the extent that the registrant specifically incorporates itby reference.

 

**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
| ** ** | **OUTDOOR CHANNEL  HOLDINGS, INC.**                                                             |
|------------|-------------------------------------------------------------------------------------------------|
|       |                                                                                            |
|       | /s/ William A. Owen                                                                             |   |
| ** ** | **William A. Owen**                                                                             |
|       | Authorized Officer, Chief Financial  Officer and Controller  (Principal and Accounting Officer) |
|       | Date: November 14, 2005                                                                         |

 

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