**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM10-Q**

 

**(Mark One)**

 

| **x**                                             | **Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|---------------------------------------------------|-----------------------------------------------------------------------------------------------|
| ** **                                        | ** **                                                                                    |
| **For  the quarterly period ended June 30, 2006** |
| ** **                                        | ** **                                                                                    |
| **o**                                             | **Transition  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |

 

**For thetransition period from                to                **

 

**Commissionfile number: 000-17287**

 

**OutdoorChannel Holdings, Inc.**

(Exact name of Registrantas specified in its charter)

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

 

**43445Business Park Drive, Suite 113**

**Temecula,California 92590**

(Address and zip code ofprincipal executive offices)

 

**(951)699-4749**

(Issuer’s telephonenumber, including area code)

 

 

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

 

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

 

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

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

 

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

 

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

 

| **Class**                       | ** ** | **Number  of Shares Outstanding at July 31, 2006** |
|---------------------------------|------------|----------------------------------------------------|
| Common Stock, $0.001  par value |       | 25,025,294                                         |

 

 

----

 

**OUTDOORCHANNEL HOLDINGS, INC. AND SUBSIDIARIES**

**QuarterlyReport on Form 10-Q**

**For ThePeriod Ended June 30, 2006**

 

**Table ofContents**

 
|           | **Part I. Financial Information**                                                                                     |   |
|----------------|-----------------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                                  |   |
| **Item 1.**    | Financial  Statements                                                                                                 |   |
|           |                                                                                                                  |   |
|           | Condensed  Consolidated Balance Sheets at June 30, 2006 (Unaudited) and December 31,  2005                            |   |
|           |                                                                                                                  |   |
|           | Unaudited  Condensed Consolidated Statements of Operations for the Three and Six Months  Ended June 30, 2006 and 2005 |   |
|           |                                                                                                                  |   |
|           | Unaudited  Condensed Consolidated Statement of Stockholders’ Equity for the Six Months  Ended June 30, 2006 |   |
|           |                                                                                                                  |   |
|           | Unaudited  Condensed Consolidated Statements of Cash Flows for the Six Months  Ended June 30, 2006 and 2005      |   |
|           |                                                                                                                  |   |
|           | Notes  to Unaudited Condensed Consolidated Financial Statements                                                       |   |
|           |                                                                                                                  |   |
| **Item 2.**    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                           |   |
|           |                                                                                                                  |   |
|           | Recent  Accounting Developments                                                                                       |   |
|           |                                                                                                                  |   |
| **Item 3.**    | Quantitative  and Qualitative Disclosures About Market Risk                                                           |   |
|           |                                                                                                                  |   |
| **Item 4.**    | Controls and  Procedures                                                                                              |   |
|           |                                                                                                                  |   |
|           | **Part II. Other  Information**                                                                                       |   |
|           |                                                                                                                  |   |
| **Item 1.**    | Legal Proceedings                                                                                                     |   |
|           |                                                                                                                  |   |
| **Item 1A.**   | Risk Factors                                                                                                          |   |
|           |                                                                                                                  |   |
| **Item 2.**    | Unregistered  Sales of Equity Securities and Use of Proceeds                                                          |   |
|           |                                                                                                                  |   |
| **Item 3.**    | Defaults  Upon Senior Securities                                                                                      |   |
|           |                                                                                                                  |   |
| **Item 4.**    | Submission  of Matters to a Vote of Security Holders                                                                  |   |
|           |                                                                                                                  |   |
| **Item 5.**    | Other Information                                                                                                     |   |
|           |                                                                                                                  |   |
| **Item 6.**    | Exhibits                                                                                                              |   |
|           |                                                                                                                  |   |
| **Signatures** |                                                                                                                  |

 

* * *

 

2

----

 

**PART I—FINANCIAL INFORMATION**

 

**ITEM1.  Financial Statements.**

 

**OUTDOORCHANNEL HOLDINGS, INC. AND SUBSIDIARIES**

**Condensed Consolidated Balance Sheets**

(In thousands, except pershare data)

 
| ** **                                                                                                  | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                                                                  | ** ** | **(Unaudited)**    | ** ** | ** **             | ** ** |
| **Assets**                                                                                                  | ** ** | ** **         | ** ** | ** **             | ** ** |
| Current assets:                                                                                             |       |               |       |                   |       |
| Cash and cash  equivalents                                                                                  |       | $                  | 22,040     |                   | $          | 18,276 |   |
| Investment in  available-for-sale securities                                                                |       | 34,566             |       | 38,830                 |       |
| Accounts  receivable, net of allowance for doubtful accounts of $369 and $275                               |       | 6,623              |       | 5,320                  |       |
| Income tax  refund receivable                                                                               |       | 2,852              |       | 3,843                  |       |
| Deferred tax  assets, net                                                                                   |       | 1,858              |       | 1,015                  |       |
| Prepaid  programming costs                                                                                  |       | 2,893              |       | 2,381                  |       |
| Other current  assets                                                                                       |       | 1,813              |       | 689                    |       |
| Total current  assets                                                                                       |       | 72,645             |       | 70,354                 |       |
|                                                                                                        |       |               |       |                   |       |
| Property, plant and equipment at cost, net:                                                                 |       |               |       |                   |       |
| Membership  division                                                                                        |       | 3,409              |       | 3,526                  |       |
| Outdoor Channel  equipment and improvements                                                                 |       | 13,267             |       | 12,097                 |       |
| Property, plant  and equipment, net                                                                         |       | 16,676             |       | 15,623                 |       |
| Amortizable intangible assets                                                                               |       | 1,100              |       | 1,380                  |       |
| Goodwill                                                                                                    |       | 44,457             |       | 44,457                 |       |
| Other non-amortizable intangible assets                                                                     |       | 10,573             |       | 10,573                 |       |
| Deferred tax assets, net                                                                                    |       | 9,532              |       | 9,230                  |       |
| Derivative instruments                                                                                      |       | 59                 |       | —                 |       |
| Deposits and other assets                                                                                   |       | 1,205              |       | 605                    |       |
| Totals                                                                                                      |       | $                  | 156,247    |                   | $          | 152,222 |   |
|                                                                                                        |       |               |       |                   |       |
| **Liabilities  and Stockholders’ Equity**                                                              | ** ** | ** **         | ** ** | ** **             | ** ** |
| Current liabilities:                                                                                        |       |               |       |                   |       |
| Accounts payable  and accrued expenses                                                                      |       | $                  | 2,852      |                   | $          | 2,864 |   |
| Accrued  severance payments                                                                                 |       | 18                 |       | 18                     |       |
| Current portion  of long-term debt                                                                          |       | 699                |       | 708                    |       |
| Current portion  of deferred revenue                                                                        |       | 803                |       | 422                    |       |
| Customer  deposits                                                                                          |       | 1,039              |       | 159                    |       |
| Total current  liabilities                                                                                  |       | 5,411              |       | 4,171                  |       |
|                                                                                                        |       |               |       |                   |       |
| Accrued severance payments, net of current portion                                                          |       | 8                  |       | 16                     |       |
| Long-term debt, net of current portion                                                                      |       | 3,844              |       | 4,193                  |       |
| Deferred revenue, net of current portion                                                                    |       | 1,310              |       | 1,271                  |       |
| Derivative instruments                                                                                      |       | —             |       | 72                     |       |
| Deferred satellite rent obligations                                                                         |       | 319                |       | 295                    |       |
| Total  liabilities                                                                                          |       | 10,892             |       | 10,018                 |       |
|                                                                                                        |       |               |       |                   |       |
| Commitments and contingencies                                                                               |       |               |       |                   |       |
| Stockholders’ equity:                                                                                  |       |               |       |                   |       |
| Preferred stock;  25,000 shares authorized; none issued                                                     |       | —             |       | —                 |       |
| Common stock,  $0.001 par value; 75,000 shares authorized: 24,971 and 24,409 shares issued  and outstanding |       | 25                 |       | 24                     |       |
| Additional  paid-in capital                                                                                 |       | 159,927            |       | 158,700                |       |
| Deferred  compensation                                                                                      |       | —             |       | (1,520                 | )          |
| Accumulated  other comprehensive income (loss):                                                             |       |               |       |                   |       |
| Net unrealized  gains (losses) on derivative instruments                                                    |       | 59                 |       | (72                    | )          |
| Net unrealized  gains on available-for-sale securities                                                      |       | 13                 |       | 36                     |       |
| Total  accumulated other comprehensive income (loss)                                                        |       | 72                 |       | (36                    | )          |
| Accumulated  deficit                                                                                        |       | (14,669            | )          | (14,964                | )          |
| Total  stockholders’ equity                                                                            |       | 145,355            |       | 142,204                |       |
| Totals                                                                                                      |       | $                  | 156,247    |                   | $          | 152,222 |   |

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

3

----

 

**OUTDOORCHANNEL HOLDINGS, INC. AND SUBSIDIARIES**

**Unaudited Condensed Consolidated Statements of Operations**

(In thousands, except pershare data)

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                             | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** |
| ** **                                             | ** ** | **2006**               | ** ** | **2005**             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                              |       |                   |       |                 |       |   |   |   |   |
| Advertising                                            |       | $                      | 5,668      |                 | $          | 5,257 |   | $ | 11,353 |   | $ | 10,516 |   |
| Subscriber fees                                        |       | 4,341                  |       | 3,894                |       | 8,724 |   | 7,536 |   |
| Membership  income                                     |       | 918                    |       | 863                  |       | 2,139 |   | 2,023 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Total revenues                                         |       | 10,927                 |       | 10,014               |       | 22,216 |   | 20,075 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Expenses:                                              |       |                   |       |                 |       |   |   |   |   |
| Satellite  transmission fees                           |       | 614                    |       | 616                  |       | 1,252 |   | 1,249 |   |
| Advertising                                            |       | 1,587                  |       | 2,062                |       | 3,749 |   | 3,756 |   |
| Programming                                            |       | 2,206                  |       | 531                  |       | 3,750 |   | 1,052 |   |
| Selling, general  and administrative                   |       | 7,282                  |       | 5,967                |       | 14,788 |   | 12,453 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Total expenses                                         |       | 11,689                 |       | 9,176                |       | 23,539 |   | 18,510 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Income (loss) from operations                          |       | (762                   | )          | 838                  |       | (1,323 | ) | 1,565 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Interest expense                                       |       | 77                     |       | 1                    |       | 155 |   | 1 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Other income, net                                      |       | 645                    |       | 39                   |       | 1,268 |   | 91 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Income (loss) before income taxes                      |       | (194                   | )          | 876                  |       | (210 | ) | 1,655 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Income tax provision (benefit)                         |       | (571                   | )          | 364                  |       | (505 | ) | 691 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Net income                                             |       | $                      | 377        |                 | $          | 512 |   | $ | 295 |   | $ | 964 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Earnings per common share:                             |       |                   |       |                 |       |   |   |   |   |
| Basic                                                  |       | $                      | 0.02       |                 | $          | 0.03 |   | $ | 0.01 |   | $ | 0.05 |   |
| Diluted                                                |       | $                      | 0.01       |                 | $          | 0.02 |   | $ | 0.01 |   | $ | 0.04 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Weighted average  number of common shares outstanding: |       |                   |       |                 |       |   |   |   |   |
| Basic                                                  |       | 24,763                 |       | 18,558               |       | 24,613 |   | 18,516 |   |
| Diluted                                                |       | 25,972                 |       | 22,513               |       | 26,019 |   | 22,453 |   |

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

4

----

 

**OUTDOORCHANNEL HOLDINGS, INC. AND SUBSIDIARIES**

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

**For theSix Months Ended June 30, 2006**

(In thousands)

 
| ** **                                                                                       | ** ** | ** **        | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Accumulated** | ** ** | ** **  | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------|------------|----------------|------------|-------------------|------------|-----------------|------------|-------------|------------|------------|------------|
| ** **                                                                                       | ** ** | ** **        | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Other**       | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                                                                                       | ** ** | **Common  Stock** | ** ** | **Paid-in** | ** ** | **Deferred**   | ** ** | **Comprehensive** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
| ** **                                                                                       | ** ** | **Shares**        | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Compensation**  | ** ** | **Income**      | ** ** | **Deficit** | ** ** | **Total**  | ** ** |
| Balance, January  1, 2006                                                                        |       | 24,409            |       | $           | 24         |           | $          | 158,700           |       | $               | (1,520     | )           | $          | (36        | )          | $ | (14,964 | ) | $ | 142,204 |   |
|                                                                                             |       |              |       |        |       |           |       |              |       |            |       |        |       |       |       |
| Comprehensive  income:                                                                           |       |              |       |        |       |           |       |              |       |            |       |        |       |       |       |
| Net income                                                                                       |       |              |       |        |       |           |       |              |       |            |       | 295         |       | 295        |       |
| Effect of change  in fair value of available-for-sale securities, net of deferred taxes of $9    |       |              |       |        |       |           |       |              |       | (23             | )          |        |       | (23        | )          |
| Impact of cash  flow hedge                                                                       |       |              |       |        |       |           |       |              |       | 131             |       |        |       | 131        |       |
| Total  comprehensive income                                                                      |       |              |       |        |       |           |       |              |       |            |       |        |       | 403        |       |
|                                                                                             |       |              |       |        |       |           |       |              |       |            |       |        |       |       |       |
| Reclassification  of deferred compensation upon adoption of SFAS 123R                            |       |              |       |        |       | (1,520         | )          | 1,520             |       |            |       |        |       | —     |       |
|                                                                                             |       |              |       |        |       |           |       |              |       |            |       |        |       |       |       |
| Common stock  issued upon exercise of stock options                                              |       | 492               |       | 1           |       | 600            |       |              |       |            |       |        |       | 601        |       |
|                                                                                             |       |              |       |        |       |           |       |              |       |            |       |        |       |       |       |
| Issuance of  restricted stock to employees for services to be rendered, net of forfeited  shares |       | 73                |       |        |       |           |       |              |       |            |       |        |       | —     |       |
|                                                                                             |       |              |       |        |       |           |       |              |       |            |       |        |       |       |       |
| Stock-based  employee compensation expense                                                       |       |              |       |        |       | 1,714          |       |              |       |            |       |        |       | 1,714      |       |
|                                                                                             |       |              |       |        |       |           |       |              |       |            |       |        |       |       |       |
| Purchase and  retirement of treasury stock                                                       |       | (3                | )          |        |       | (33            | )          |              |       |            |       |        |       | (33        | )          |
|                                                                                             |       |              |       |        |       |           |       |              |       |            |       |        |       |       |       |
| Estimated tax  benefit from exercise of stock options                                            |       |              |       |        |       | 705            |       |              |       |            |       |        |       | 705        |       |
|                                                                                             |       |              |       |        |       |           |       |              |       |            |       |        |       |       |       |
| Change in  estimated tax benefit from exercise of stock options                                  |       |              |       |        |       | (239           | )          |              |       |            |       |        |       | (239       | )          |
|                                                                                             |       |              |       |        |       |           |       |              |       |            |       |        |       |       |       |
| Balance, June 30,  2006                                                                          |       | 24,971            |       | $           | 25         |           | $          | 159,927           |       | $               | —     |        | $          | 72         |       | $ | (14,669 | ) | 145,355 |   |
|                                                                                                  |            |                   |            |             |            |                |            |                   |            |                 |            |             |            |            |            |  |  |  |  |  |  |

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

5

----

 

**OUTDOORCHANNEL HOLDINGS, INC. AND SUBSIDIARIES**

**Unaudited Condensed Consolidated Statements of Cash Flows**

(In thousands)

 
| ** **                                                                                     | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                     | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| Operating activities:                                                                          |       |                           |       |   |   |
| Net income                                                                                     |       | $                              | 295        |   | $ | 964 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities:   |       |                           |       |   |   |
| Depreciation and  amortization                                                                 |       | 1,324                          |       | 1,073 |   |
| Provision for  doubtful accounts                                                               |       | 86                             |       | 140 |   |
| Stock-based  employee compensation                                                             |       | 1,714                          |       | 135 |   |
| Deferred tax  provision, net                                                                   |       | (708                           | )          | (6 | ) |
|                                                                                           |       |                           |       |   |   |
| Changes in  operating assets and liabilities:                                                  |       |                           |       |   |   |
| Accounts  receivable                                                                           |       | (1,389                         | )          | (367 | ) |
| Income tax  refund receivable                                                                  |       | 991                            |       | 767 |   |
| Prepaid  programming costs                                                                     |       | (512                           | )          | (2,000 | ) |
| Other current  assets                                                                          |       | (1,124                         | )          | (1,424 | ) |
| Deposits and  other assets                                                                     |       | (608                           | )          | (93 | ) |
| Accounts payable  and accrued expenses                                                         |       | (12                            | )          | (416 | ) |
| Deferred revenue                                                                               |       | 420                            |       | 100 |   |
| Customer  deposits                                                                             |       | 880                            |       | 942 |   |
| Accrued  severance payments                                                                    |       | (8                             | )          | (22 | ) |
| Deferred  satellite rent obligations                                                           |       | 24                             |       | (11 | ) |
| Net cash  provided by (used in) operating activities                                           |       | 1,373                          |       | (218 | ) |
|                                                                                           |       |                           |       |   |   |
| Investing activities:                                                                          |       |                           |       |   |   |
| Purchases of  property, plant and equipment                                                    |       | (2,089                         | )          | (3,373 | ) |
| Purchases of  available-for-sale securities                                                    |       | (82,303                        | )          | — |   |
| Proceeds from  sale of available-for-sale securities                                           |       | 86,573                         |       | — |   |
| Net cash  provided by (used in) investing activities                                           |       | 2,181                          |       | (3,373 | ) |
|                                                                                           |       |                           |       |   |   |
| Financing activities:                                                                          |       |                           |       |   |   |
| Principal  payments on long-term debt and capital leases                                       |       | (358                           | )          | (13 | ) |
| Proceeds from  exercise of stock options                                                       |       | 601                            |       | 408 |   |
| Purchase and  retirement of treasury stock                                                     |       | (33                            | )          | — |   |
| Prepaid offering  costs                                                                        |       | —                         |       | (902 | ) |
| Net cash  provided by (used in) financing activities                                           |       | 210                            |       | (507 | ) |
| Net increase (decrease) in cash and cash equivalents                                           |       | 3,764                          |       | (4,098 | ) |
| Cash and cash equivalents, beginning of period                                                 |       | 18,276                         |       | 13,105 |   |
| Cash and cash equivalents, end of period                                                       |       | $                              | 22,040     |   | $ | 9,007 |   |
|                                                                                           |       |                           |       |   |   |
| Supplemental disclosure of cash flow information:                                              |       |                           |       |   |   |
|                                                                                           |       |                           |       |   |   |
| Interest paid                                                                                  |       | $                              | 155        |   | $ | — |   |
|                                                                                           |       |                           |       |   |   |
| Income taxes  paid                                                                             |       | $                              | —     |   | $ | 5 |   |
|                                                                                           |       |                           |       |   |   |
| Supplemental disclosures of non-cash investing and  financing activities:                      |       |                           |       |   |   |
|                                                                                           |       |                           |       |   |   |
| Effect of net  decrease in fair value of available-for-sale securities, net of deferred  taxes |       | $                              | (23        | ) | $ | (7 | ) |
|                                                                                           |       |                           |       |   |   |
| Effect of net  increase in fair value of cash flow hedge                                       |       | $                              | 131        |   | $ | — |   |

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

6

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**OUTDOORCHANNEL HOLDINGS, INC. AND SUBSIDIARIES**

**Notes to Unaudited Condensed Consolidated FinancialStatements**

(In thousands, except pershare data)

 

**NOTE 1—ORGANIZATION AND BUSINESS**

 

**Description of Operations**

 

Outdoor Channel Holdings, Inc. or “Outdoor Channel Holdings,” isincorporated under the laws of the State of Delaware. Collectively, with itssubsidiaries, the terms “we,” “us,” “our” and the “Company” refer to OutdoorChannel Holdings, Inc. as a combined entity, except where noted or where thecontext makes clear the reference is only to Outdoor Channel Holdings, Inc. orone of our subsidiaries. Our wholly owned subsidiary, The Outdoor Channel, Inc.(“TOC”), operates The Outdoor Channel, which is a national television networkdevoted to traditional outdoor activities, such as hunting, fishing andshooting sports, as well as off-road motor sports and other related lifestyleprogramming. In addition, TOC also operates Outdoor Channel 2 HD, which also isa national television network with similar, but distinct, programming as TheOutdoor Channel’s but is produced and aired utilizing high definitiontechnology.

 

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

 

Other business activities consist of the promotion and sale of a goldprospecting expedition to our Cripple River property located near Nome, Alaska,and the sale of memberships in Lost Dutchman’s that entitle members to engagein gold prospecting on our Arizona, California, Colorado, Georgia, Michigan,North Carolina, Oregon, and South Carolina properties. We have signed anagreement with another organization for the mutual use of these and otherproperties.  Outdoor Channel Holdings isalso the sole member of 43455 BPD, LLC, the entity that owns the building whichhouses our broadcast facility.

 

**NOTE 2—UNAUDITED INTERIM FINANCIALSTATEMENTS**

 

In the opinion of management, the accompanying unaudited condensed consolidatedfinancial statements reflect all adjustments, consisting of normal recurringadjustments, necessary to present fairly the financial position of the Companyas of June 30, 2006 and its results of operations and cash flows for the threeand/or six months ended June 30, 2006 and 2005. Information included in theconsolidated balance sheet as of December 31, 2005 has been derived from, andcertain terms used herein are defined in, the audited financial statements ofthe Company as of December 31, 2005 (the “Audited Financial Statements”)included in the Company’s Annual Report on Form 10-K (the “10-K”) for the yearended December 31, 2005 that was previously filed with the Securities andExchange Commission (the “SEC”). Pursuant to the rules and regulations of theSEC, certain information and disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted from thesefinancial statements unless significant changes have taken place since the endof the most recent fiscal year. Accordingly, these unaudited condensedconsolidated financial statements should be read in conjunction with theAudited Financial Statements and the other information also included in the10-K.

 

The results of the Company’s operations for the three and six monthsended June 30, 2006 are not necessarily indicative of the results of operationsfor the full year ending December 31, 2006.

 

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

 

**NOTE 3— STOCK INCENTIVE PLANS**

 

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

 

7

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after the grant. We satisfy the exercise of options and awards ofrestricted stock by issuing previously unissued common shares. Currently wehave not awarded any SARs. Prior to the adoption of SFAS 123R, we used theintrinsic value method to account for stock options granted to employees andgenerally, made no charges against earnings with respect to those options atthe date of grant since our employee options had exercise prices that wereequal to the market price. SFAS 123R requires that we elect an approved methodto calculate the historical pool of windfall tax benefits upon adoption of SFAS123R within one year of its adoption. As of June 30, 2006, we have not madethat election.

 

For the three and six months ended June 30, 2006, the adoption of SFAS123R reduced income from operations by $756 and $1,470, respectively, reducednet income by $532 and $1,022, respectively, reduced basic earnings per shareby $0.02 and $0.04, respectively, and reduced diluted earnings per share by$0.02 and $0.04, respectively. The adoption of SFAS 123R did not have amaterial effect on the condensed consolidated statement of cash flows for thesix months ended June 30, 2006.

 

The weighted average grant date fair value of employee stock optionsgranted by us in the six months ended June 30, 2006 was estimated to be $6.72per share using the Black-Scholes option pricing model with the followingassumptions:

 

| ** **              | ** ** | **Six Months Ended  June 30, 2006** | ** ** |
|-------------------------|------------|-------------------------------------|------------|
| Risk-free interest rate |       | 4.3 - 4.9%                          |       |
| Dividend yield          |       | 0%                                  |       |
| Expected life           |       | 4.4 yrs.                            |       |
| Volatility factor       |       | 58.5 – 62.4%                   |       |

 

Expected volatilities are based on historical volatility of our stock.We have adopted the guidance of Staff Accounting Bulletin No. 107 that notes ifshare options have plain vanilla characteristics, a simplified method ofestimating the expected life of the option may be employed. The simplifiedmethod utilizes the average of the vested term and the original contract term.We have recently experienced certain events that indicate that our long-termhistorical experience is no longer valid. As such we adopted the simplifiedmethod. Our short-term historical experience with exercise and post-vestingemployment termination behavior supports this method for determining theoptions’ expected life. When sufficient historical experience has been realizedwe will use such experience for future estimations of the expected life. Theexpected life represents the period of time that options granted are expectedto be outstanding. The risk-free rate is based on the U.S. Treasury rate with amaturity date corresponding to the options’ expected life.

 

Our historical net income and earnings per common share and pro formanet income and earnings per common share assuming compensation cost had beendetermined for the three and six months ended June 30, 2005 based on the fairvalue instead of the intrinsic value at the grant date for all awards by us toour employees, using the Black-Scholes option pricing model consistent with theprovisions of SFAS 123R, and amortized ratably over the vesting period, are setforth below:

 
| ** **                                                                                                                              | ** ** | **For the Period Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                                              | ** ** | **June 30, 2005**        | ** ** |
| ** **                                                                                                                              | ** ** | **Three Months**         | ** ** | **Six Months** | ** ** |
| Net income:                                                                                                                             |       |                     |       |   |   |
| As reported                                                                                                                             |       | $                        | 512        |   | $ | 964 |   |
| Deduct:  Stock-based employee compensation expense assuming a fair value based method  had been used for all awards, net of tax effects |       | (432                     | )          | (829 | ) |
|                                                                                                                                    |       |                     |       |   |   |
| Pro forma – basic and diluted                                                                                                      |       | $                        | 80         |   | $ | 135 |   |
|                                                                                                                                    |       |                     |       |   |   |
| Basic earnings per common share:                                                                                                        |       |                     |       |   |   |
| As reported                                                                                                                             |       | $                        | 0.03       |   | $ | 0.05 |   |
| Pro forma                                                                                                                               |       | $                        | 0.00       |   | $ | 0.01 |   |
| Diluted earnings per common share:                                                                                                      |       |                     |       |   |   |
| As reported                                                                                                                             |       | $                        | 0.02       |   | $ | 0.04 |   |
| Pro forma                                                                                                                               |       | $                        | 0.00       |   | $ | 0.01 |   |

 

The fair value of each option granted by us in the six months endedJune 30, 2005 was estimated on the date of grant using the Black-Scholes optionpricing model with the following assumptions:

 

| ** **              | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|-------------------------|------------|-------------------------------------|------------|
| Risk-free interest rate |       | 3.7 – 4.2%                     |       |
| Dividend yield          |       | 0%                                  |       |
| Expected life           |       | 3.8 – 5.1 yrs.                 |       |
| Volatility factor       |       | 37.7%                               |       |

 

8

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In accordance with the provisions of SFAS 123R, all other issuances ofcommon stock, stock options, warrants or other equity instruments to employeesand non-employees as the consideration for goods or services received by us areaccounted for based on the fair value of the equity instruments issued (unlessthe fair value of the consideration received can be more reliably measured).Generally, the fair value of any options, warrants or similar equityinstruments issued is estimated based on the Black-Scholes option-pricingmodel.

 

**NOTE 4—EARNINGS PER SHARE**

 

We have presented “basic” and “diluted” earnings per common share inthe accompanying condensed consolidated statements of operations in accordancewith the provisions of Statement of Financial Accounting Standards No. 128, “EarningsPer Share” (“SFAS 128”). Basic earnings per common share is calculated bydividing net income by the weighted average number of common shares outstandingduring each period. The calculation of diluted earnings per common share issimilar to that of basic earnings per common share, except that the denominatoris increased to include the number of additional common shares that would havebeen outstanding if all potentially dilutive common shares of the Company wereissued during the period if any such issuances would have had a dilutiveeffect.

 

For the three and six months ended June 30, 2006 and 2005, thecomputation of diluted earnings per common share took into account the effectson the weighted average number of common shares outstanding of the assumedexercise of the outstanding stock options, adjusted for the application of thetreasury stock method. The greatest number of shares potentially issuableby us upon the exercise of stock options in either quarter of the six monthsended June 30, 2006 and 2005 that were not included in the computation of netearnings per common share because they were anti-dilutive, totaled 3,437 and 110,respectively.

 

The following table summarizes the calculation of net income and theweighted average common shares outstanding for basic and diluted earnings percommon share for the three and six months ended June 30, 2006 and 2005:

 
| ** **                                                                                                                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                                                          | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** |
| ** **                                                                                                                                          | ** ** | **2006**               | ** ** | **2005**             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Numerators:                                                                                                                                         |       |                   |       |                 |       |   |   |   |   |
| Net income–basic                                                                                                                               |       | $                      | 377        |                 | $          | 512 |   | $ | 295 |   | $ | 964 |   |
|                                                                                                                                                |       |                   |       |                 |       |   |   |   |   |
| Denominators:                                                                                                                                       |       |                   |       |                 |       |   |   |   |   |
| Weighted average  common shares outstanding—basic                                                                                              |       | 24,763                 |       | 18,558               |       | 24,613 |   | 18,516 |   |
| Dilutive effect  of potentially issuable common shares upon exercise of stock options as  adjusted for the application of the treasury stock method |       | 1,209                  |       | 3,955                |       | 1,406 |   | 3,937 |   |
| Diluted weighted  average common shares outstanding                                                                                                 |       | 25,972                 |       | 22,513               |       | 26,019 |   | 22,453 |   |
|                                                                                                                                                     |            |                        |            |                      |            |  |  |  |  |  |  |  |  |

 

**NOTE 5—EQUITY TRANSACTIONS**

 

**Issuances of Common Stock**

 

During the six months ended June 30, 2006 and 2005, we received cashproceeds of approximately $601 and $408 from the exercise of options for thepurchase of 492 and 194 shares of common stock, respectively.

 

During the six months ended June 30, 2006, we issued employees 86shares of restricted stock. The rights to these shares vest over three and fiveyear periods. Based on the weighted average closing market price on the daybefore the grants of $12.47 per share and after adjustment for the estimatedforfeiture rate, the fair value of the restricted stock was $812. Under SFAS123R this amount (which represents deferred compensation not required to berecorded initially in the consolidated balance sheet) will be amortized tostock-based employee compensation expense as the rights to the restricted stockvest with an equivalent amount added to additional paid-in capital. During thesix months ended June 30, 2006, a total of 13 shares of restricted stock havebeen cancelled due to employee turnover. As of June 30, 2006, we have 188non-vested shares of restricted stock outstanding and $1,990 of expense yet tobe recognized which will be amortized as compensation expense over theemployees’ remaining requisite service periods.

 

9

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**Stock Option Plans**

 

Descriptions of Outdoor Channel Holdings’ stock option plans areincluded in Note 3 herein and Note 11 of our Annual Report on Form 10-K for theyear ended December 31, 2005. A summary of the status of the options grantedunder Outdoor Channel Holdings’ stock option plans and outside of those plansas of June 30, 2006 and the changes in options outstanding during the sixmonths then ended is presented in the table that follows:

 
| ** **                            | ** ** | **Shares** | ** ** | **Weighted-  average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------------|------------|------------|------------|----------------------------------------|------------|---------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at beginning of period    |       | 3,564      |       | $                                      | 7.31       |                                              |       |                            |       |   |
| Options granted                       |       | 205        |       | 12.84                                  |       |                                              |       |                            |       |
| Options exercised                     |       | (492       | )          | 1.22                                   |       |                                              |       |                            |       |
| Options cancelled or expired          |       | (14        | )          | 11.85                                  |       |                                              |       |                            |       |
| Options  outstanding at end of period |       | 3,263      |       | $                                      | 8.56       |                                              | 3.8 years  |                            | $          | 16,733 |   |
|                                  |       |       |       |                                   |       |                                              |       |                            |       |
| Options exercisable at end of period  |       | 2,185      |       | $                                      | 6.20       |                                              | 3.0 years  |                            | $          | 14,617 |   |

 

The weighted-average grant-date fair value of options granted duringthe three and six months ended June 30, 2006 was $6.35 and $6.72,respectively. The total intrinsic value of stock options exercised duringthe three and six months ended June 30, 2006 was $3,392 and $5,147,respectively.

 

A summary of the status of Outdoor Channel Holdings’ non-vestedrestricted shares as of June 30, 2006 and the changes in restricted sharesoutstanding during the six months then ended is presented in the table thatfollows:

 

| ** **                                     | ** ** | **Shares** | ** ** | **Weighted-Average  Grant Date  Fair Value** | ** ** |
|------------------------------------------------|------------|------------|------------|----------------------------------------------|------------|
| Non-vested shares at beginning of period       |       | 127        |       | $                                            | 14.43      |   |
| Granted                                        |       | 86         |       | 12.47                                        |       |
| Vested                                         |       | (12        | )          | 14.91                                        |       |
| Cancelled                                      |       | (13        | )          | 14.67                                        |       |
|                                           |       |       |       |                                         |       |
| Non-vested shares outstanding at end of period |       | 188        |       | $                                            | 13.50      |   |

 

As of June 30, 2006, $8,485 of expense with respect to non-vestedshare-based arrangements has yet to be recognized which is expected to berecognized over a weighted average period of 1.9 years.

 

**NOTE 6—RELATED PARTY TRANSACTIONS**

 

We lease our administrative facilities from Musk Ox Properties, LP,which in turn is owned by Messrs. Perry T. Massie and Thomas H. Massie,principal stockholders, directors and officers of the Company. In December2005, the lease agreements were consolidated into one lease. The new leaseagreement has a five-year term, expiring on December 31, 2010, with 2 five-yearrenewal options at our discretion. Monthly rent payments are $29 with a 3% peryear escalator clause. Rent expense paid to Musk Ox Properties, LP totaledapproximately $87 and $63 in the three months ended June 30, 2006 and 2005,respectively, and approximately $174 and $126 in the six months ended June 30,2006 and 2005, respectively.

 

**NOTE 7—SEGMENT INFORMATION**

 

Pursuant to the Provisions of Statement of Financial AccountingStandards No. 131, “Disclosures About Segments of an Enterprise and RelatedInformation” (“SFAS 131”), we report segment information in the same format asreviewed by our Chief Operating Decision Maker (the “CODM”). We segregate ourbusiness activities into TOC and the Membership Division. TOC is a separatebusiness activity that broadcasts television programming on The Outdoor Channeland Outdoor Channel 2 HD24 hours a day, seven days a week. TOC generatesrevenue from advertising fees (which include fees paid by outside producers topurchase advertising time in connection with the airing of their programs onThe Outdoor Channel) and subscriber fees. Lost Dutchman’s and GPAA membershipsales and related activities are reported in the Membership Division. TheMembership Division also includes magazine sales, advertisements within themagazine, the sale of products and services related to gold prospecting, goldexpositions, expeditions and outings. Intersegment sales amounted to $149 ineach of the three months ended June 30, 2006 and 2005 and $298 in each of thesix months ended June 30, 2006 and 2005.

 

10

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Information with respect to these reportable segments as of and for thethree and six months ended June 30, 2006 and 2005 is as follows:

 
| ** **                                                | ** ** | **Revenues** | ** ** | **Income (Loss)  Before Income  Taxes** | ** ** | **Total  Assets** | ** ** | **Depreciation  and  Amortization** | ** ** | **Additions to  Property,  Plant and  Improvements** | ** ** |
|-----------------------------------------------------------|------------|--------------|------------|-----------------------------------------|------------|-------------------|------------|-------------------------------------|------------|------------------------------------------------------|------------|
| **As of  and for the Three Months Ended:  June 30, 2006** | ** ** | ** **   | ** ** | ** **                              | ** ** | ** **        | ** ** | ** **                          | ** ** | ** **                                           | ** ** |
| TOC                                                       |       | $            | 9,815      |                                    | $          | 549               |       | $                                   | 27,095     |                                                 | $          | 564 |   | $ | 888 |   |
| Membership  Division                                      |       | 1,112        |       | (190                                    | )          | 5,714             |       | 72                                  |       | 12                                                   |       |
| Subtotals of  Segments                                    |       | 10,927       |       | 359                                     |       | 32,809            |       | 636                                 |       | 900                                                  |       |
| Corporate*                                                |       | —       |       | (553                                    | )          | 123,438           |       | 136                                 |       | —                                               |       |
| Totals                                                    |       | $            | 10,927     |                                    | $          | (194              | )          | $                                   | 156,247    |                                                 | $          | 772 |   | $ | 900 |   |
|                                                      |       |         |       |                                    |       |              |       |                                |       |                                                 |       |
| **June  30, 2005**                                        | ** ** | ** **   | ** ** | ** **                              | ** ** | ** **        | ** ** | ** **                          | ** ** | ** **                                           | ** ** |
| TOC                                                       |       | $            | 8,994      |                                    | $          | 1,709             |       | $                                   | 23,296     |                                                 | $          | 285 |   | $ | 1,673 |   |
| Membership  Division                                      |       | 1,020        |       | (173                                    | )          | 5,929             |       | 78                                  |       | 32                                                   |       |
| Subtotals of  Segments                                    |       | 10,014       |       | 1,536                                   |       | 29,225            |       | 363                                 |       | 1,705                                                |       |
| Corporate*                                                |       | —       |       | (660                                    | )          | 72,917            |       | 136                                 |       | —                                               |       |
| Totals                                                    |       | $            | 10,014     |                                    | $          | 876               |       | $                                   | 102,142    |                                                 | $          | 499 |   | $ | 1,705 |   |
| ** **                                                | ** ** | ** **   | ** ** | ** **                              | ** ** | ** **        | ** ** | ** **                          | ** ** | ** **                                           | ** ** |
| **As of  and for the Six Months Ended:  June 30, 2006**   | ** ** | ** **   | ** ** | ** **                              | ** ** | ** **        | ** ** | ** **                          | ** ** | ** **                                           | ** ** |
| TOC                                                       |       | $            | 19,725     |                                    | $          | 1,362             |       | $                                   | 27,095     |                                                 | $          | 908 |   | $ | 2,065 |   |
| Membership  Division                                      |       | 2,491        |       | (1                                      | )          | 5,714             |       | 144                                 |       | 24                                                   |       |
| Subtotals of  Segments                                    |       | 22,216       |       | 1,361                                   |       | 32,809            |       | 1,052                               |       | 2,089                                                |       |
| Corporate*                                                |       | —       |       | (1,571                                  | )          | 123,438           |       | 272                                 |       | —                                               |       |
| Totals                                                    |       | $            | 22,216     |                                    | $          | (210              | )          | $                                   | 156,247    |                                                 | $          | 1,324 |   | $ | 2,089 |   |
|                                                      |       |         |       |                                    |       |              |       |                                |       |                                                 |       |
| **June  30, 2005**                                        | ** ** | ** **   | ** ** | ** **                              | ** ** | ** **        | ** ** | ** **                          | ** ** | ** **                                           | ** ** |
| TOC                                                       |       | $            | 17,751     |                                    | $          | 2,981             |       | $                                   | 23,296     |                                                 | $          | 645 |   | $ | 3,185 |   |
| Membership  Division                                      |       | 2,324        |       | (114                                    | )          | 5,929             |       | 156                                 |       | 188                                                  |       |
| Subtotals of  Segments                                    |       | 20,075       |       | 2,867                                   |       | 29,225            |       | 801                                 |       | 3,373                                                |       |
| Corporate*                                                |       | —       |       | (1,212                                  | )          | 72,917            |       | 272                                 |       | —                                               |       |
| Totals                                                    |       | $            | 20,075     |                                    | $          | 1,655             |       | $                                   | 102,142    |                                                 | $          | 1,073 |   | $ | 3,373 |   |

 

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*We capture corporate overhead that is applicable to both segments, butnot directly related to operations in a separate business unit, as “Corporate.”The expenses allocated to Corporate consisted primarily of: professional feesincluding public relations, accounting and legal fees, taxes associated withbeing incorporated in Delaware, board fees, and other corporate fees notassociated directly with either TOC or the Membership division. Corporateassets consisted primarily of cash not held in our operating accounts,available-for-sale securities, goodwill, net deferred tax assets and intangibleassets. Our CODM, when analyzing operations of our segments, considers the cashbalances and investments in available for sale securities held for futureinvestment in operations to be appropriately excluded from the operatingsegments. Further, the CODM does not consider the intangible assets whenassessing the performance of these segments and accordingly 100% of thegoodwill, net deferred tax assets and intangible assets are allocated toCorporate.

 

11

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

 

Our short term investments in marketable debt and equity securities areclassified as available-for-sale and are recorded at fair value at the end ofeach period. Gross realized gains and losses on sales of these securitiesduring the three and six months ended June 30, 2006 and 2005 and all grossrealized gains and losses related to such investments prior to the three andsix months ended June 30, 2006 and the year ended December 31, 2005 were notmaterial. Included in investments in available-for-sale securities at June 30,2006 and December 31, 2005 are investments in auction rate securities withshort-term interest rates that generally can be reset every 28 days. Theauction rate securities have long-term maturity dates and provide us withenhanced yields. However, we believe we have the ability to quickly liquidatethem at their original cost, although there is no guaranty and, accordingly,they are carried at cost, which approximates fair value, and classified ascurrent assets. All income generated from these investments is recorded asinterest income. We had unrealized net holding gains on marketable equitysecurities at June 30, 2006 and December 31, 2005 of $13 and $36, respectively,that are in “accumulated other comprehensive income”.

 

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

 

| ** **                           | ** ** | **As of  June 30, 2006** | ** ** | **As of  December 31, 2005** | ** ** |
|--------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| Auction rate securities              |       | $                        | 33,730     |                         | $          | 38,000 |   |
| Equities                             |       | 836                      |       | 830                          |       |
| Total  available-for-sale securities |       | $                        | 34,566     |                         | $          | 38,830 |   |

 

**NOTE 9—INCOME TAX PROVISION**

 

The income tax benefits reflected in the accompanying unauditedcondensed consolidated statements of operations for the three and six monthsended June 30, 2006 are different than the expected tax benefits computed basedon the pre-tax losses and the applicable statutory Federal income tax rate of34%.  Interim tax provisions and benefitsare determined using an estimate of the annual effective tax rate. However, theinterim tax benefit that can be recognized is limited to the amount for whichrealization is more likely than not.

 

We estimate that it is more likely than not that we will have incomebefore income taxes for financial statement reporting purposes for the yearending December 31, 2006 and that the annual effective tax rate (including anestimate for state taxes) will be approximately 240% of income before taxes. Accordingly,we have applied that rate in computing the tax benefits that we have recognizedfor the three and six months ended June 30, 2006.

 

Our estimated annual effective tax rate is affected by permanentdifferences between income before taxes for financial reporting purposes and taxableincome. Our most significant permanent difference, and the principal reason whyour estimated effective income tax rate is substantially greater than thestatutory Federal income tax rate, relates to the portion of our compensationexpense recognized for financial reporting purposes that is attributable to thenon-cash charges recorded under SFAS 123R for the fair value of qualifiedincentive stock options, or ISOs, granted to employees which are generally notdeductible for tax reporting purposes. We recognized non-cash charges tocompensation expense of $192 and $343 in the three and six months ended June30, 2006, respectively, related to ISOs under SFAS 123R.

 

Our estimate for state taxes is based on the California statutoryrates. We are in the process of filing income tax returns in various states inwhich we have nexus and have not previously filed income tax returns toapportion our income to such states. We believe that we will be able to amendour California returns to reflect the apportionment. In the event we are notable to amend our California returns, we could incur additional income taxes.

 

**NOTE 10—LONG TERM DEBT AND LINE OFCREDIT**

 

We have two long-term loans and a line of credit with U.S. Bank N.A.(the “Bank”). Aggregate outstanding borrowings as of June 30, 2006 under thelong-term loans were $4,543. We did not have any borrowings under the line ofcredit.  These loans and the line of creditcontain customary covenants including certain minimum profitability metricsmeasured at each quarter end including quarter profitability and trailingtwelve months profitability. As of March 31, 2006, we did not meet some ofthese covenants and were in violation thereof. On May 9, we received noticefrom the Bank giving us a waiver of the covenant violation and a permanentamendment of the covenant to exclude non-cash stock based employee compensationexpense in the profitability metrics. As of June 30, 2006, we are in compliancewith the current loan covenants.

 

* * *

 

12

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**ITEM2.      MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

**Safe Harbor Statement**

 

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

 

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

 

**General**

 

Through our indirect wholly owned subsidiary, The OutdoorChannel, Inc. or TOC, we own and operate The Outdoor Channel which is anational television network devoted primarily to traditional outdooractivities, such as hunting, fishing and shooting sports, as well as off-roadmotor sports and other outdoor related lifestyle programming. We also own andoperate related businesses which serve the interests of The Outdoor Channel’sviewers and other outdoor enthusiasts. These related businesses include:LDMA-AU, Inc., which we refer to as Lost Dutchman’s, and Gold Prospector’sAssociation of America, LLC, which we refer to as GPAA. Lost Dutchman’s is anational gold prospecting campground club with properties in Arizona,California, Colorado, Georgia, Michigan, North Carolina, Oregon and SouthCarolina. GPAA is the publisher of the*GoldProspector & Treasure Hunters in the Great Outdoors*magazine. In addition, we are the owner of a 2,300 acre property nearNome, Alaska used to provide outings for a fee to the members of Lost Dutchman’sand GPAA. Outdoor Channel Holdings also wholly owns 43455 BPD, LLC which ownsthe building housing our broadcast facility.

 

Our revenues include (1) advertising fees from advertisementsaired on The Outdoor Channel and from advertisements in*Gold Prospector & Treasure Hunters in theGreat Outdoors* magazine; (2) subscriber fees paid by cable andsatellite service providers that air The Outdoor Channel; and(3) membership fees from members in both Lost Dutchman’s and GPAA andother income including magazine sales, products and services related to goldprospecting, gold expositions, expeditions and outings. Advertising fees alsoinclude fees paid by third-party programmers to purchase advertising time inconnection with the airing of their programs on The Outdoor Channel.

 

**RecentAccounting Developments**

 

In December 2004, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards No. 123 (revised 2004)(“SFAS 123R”) “Share-Based Payment” which revised the standards for theaccounting for transactions in which an entity exchanges its equity instrumentsfor goods or services and focuses primarily on accounting for transactions inwhich an entity obtains employee services in share-based payment transactions.SFAS 123R requires that the fair value of such equity instruments,including all options granted to employees, be recognized as expense in thehistorical financial statements as services are performed. Prior to theadoption of SFAS 123R, we used the intrinsic value method to account foremployee stock options and, generally, made no charges against earnings withrespect to those options at the date of grant since our employee options hadexercise prices that were equal to the market price. SFAS 123R is effective forissuers as of the beginning of the first annual reporting period that beginsafter December 15, 2005. Accordingly, we adopted the provisions of SFASNo. 123R effective January 1, 2006.

 

In June 2006, the FASB issued Interpretation No. 48, “**Accounting for Uncertaintyin Income Taxes — an interpretation of FAS No. 109”**(“FIN 48”), which clarifies the accounting for uncertainty in income taxes.Currently, the accounting for uncertainty in income taxes is subject tosignificant and varied interpretations that have resulted in diverse andinconsistent accounting practices and measurements. Addressing such diversity,FIN 48 prescribes a consistent recognition threshold and measurement attribute,as well as clear criteria for subsequently recognizing, derecognizing andmeasuring changes in such tax positions for financial statement purposes. FIN48 also requires expanded disclosure with respect to the uncertainty in incometaxes. FIN 48 is effective for fiscal years beginning after December 15, 2006.We have not yet determined the impact of FIN 48 on our consolidated financialposition, results of operations, cash flows or financial statement disclosures.

 

The FASB had issued certain other accounting pronouncements as of June30, 2006 that will become effective in subsequent periods; however, ourmanagement does not believe that any of those pronouncements would havesignificantly affected our financial accounting measurements or disclosures hadthey been in effect during the three and six months ended June 30, 2006.

 

13

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**Comparison of Operating Results forthe Three Months Ended June 30, 2006 and June 30, 2005**

 

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

 
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** | **% of Total Revenue** | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------------------|------------|
| ** **                           | ** ** | **2006**   | ** ** | **2005**   | ** ** | **$**      | ** ** | **%**                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                            |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Advertising                          |       | $          | 5,668      |       | $          | 5,257      |       | $                      | 411        |   | 7.8 | % | 51.9 | % | 52.5 | % |
| Subscriber fees                      |       | 4,341      |       | 3,894      |       | 447        |       | 11.5                   |       | 39.7 |   | 38.9 |   |
| Membership  income                   |       | 918        |       | 863        |       | 55         |       | 6.4                    |       | 8.4 |   | 8.6 |   |
| Total revenues                       |       | 10,927     |       | 10,014     |       | 913        |       | 9.1                    |       | 100.0 |   | 100.0 |   |
|                                 |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Expenses:                            |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Satellite  transmission fees         |       | 614        |       | 616        |       | (2         | )          | (0.3                   | )          | 5.6 |   | 6.1 |   |
| Advertising                          |       | 1,587      |       | 2,062      |       | (475       | )          | (23.0                  | )          | 14.5 |   | 20.6 |   |
| Programming                          |       | 2,206      |       | 531        |       | 1,675      |       | 315.4                  |       | 20.2 |   | 5.3 |   |
| Selling, general  and administrative |       | 7,282      |       | 5,967      |       | 1,315      |       | 22.0                   |       | 66.7 |   | 59.6 |   |
| Total expenses                       |       | 11,689     |       | 9,176      |       | 2,513      |       | 27.4                   |       | 107.0 |   | 91.6 |   |
|                                 |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income (loss) from operations        |       | (762       | )          | 838        |       | (1,600     | )          | (190.9                 | )          | (7.0 | ) | 8.4 |   |
|                                 |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Interest expense                     |       | 77         |       | 1          |       | 76         |       | NMF                    |       | 0.7 |   | — |   |
|                                 |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Other income, net                    |       | 645        |       | 39         |       | 606        |       | NMF                    |       | 5.9 |   | 0.3 |   |
|                                 |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income (loss) before income taxes    |       | (194       | )          | 876        |       | (1,070     | )          | NMF                    |       | (1.8 | ) | 8.7 |   |
|                                 |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income tax provision (benefit)       |       | (571       | )          | 364        |       | (935       | )          | NMF                    |       | (5.2 | ) | 3.6 |   |
|                                 |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Net income                           |       | $          | 377        |       | $          | 512        |       | $                      | (135       | ) | NMF | % | 3.4 | % | 5.1 | % |

 

----

***NMF – NotMeaningful***

 

**Comparison of Operating Results forthe Six Months Ended June 30, 2006 and June 30, 2005**

 

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

 
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** | **% of Total Revenue** | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------------------|------------|
| ** **                           | ** ** | **2006**   | ** ** | **2005**   | ** ** | **$**      | ** ** | **%**                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                            |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Advertising                          |       | $          | 11,353     |       | $          | 10,516     |       | $                      | 837        |   | 8.0 | % | 51.1 | % | 52.4 | % |
| Subscriber fees                      |       | 8,724      |       | 7,536      |       | 1,188      |       | 15.8                   |       | 39.3 |   | 37.5 |   |
| Membership  income                   |       | 2,139      |       | 2,023      |       | 116        |       | 5.7                    |       | 9.6 |   | 10.1 |   |
| Total revenues                       |       | 22,216     |       | 20,075     |       | 2,141      |       | 10.7                   |       | 100.0 |   | 100.0 |   |
|                                 |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Expenses:                            |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Satellite  transmission fees         |       | 1,252      |       | 1,249      |       | 3          |       | 0.2                    |       | 5.6 |   | 6.2 |   |
| Advertising                          |       | 3,749      |       | 3,756      |       | (7         | )          | (0.2                   | )          | 16.9 |   | 18.7 |   |
| Programming                          |       | 3,750      |       | 1,052      |       | 2,698      |       | 256.5                  |       | 16.9 |   | 5.3 |   |
| Selling, general  and administrative |       | 14,788     |       | 12,453     |       | 2,335      |       | 18.8                   |       | 66.6 |   | 62.0 |   |
| Total expenses                       |       | 23,539     |       | 18,510     |       | 5,029      |       | 27.2                   |       | 106.0 |   | 92.2 |   |
|                                 |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income (loss) from operations        |       | (1,323     | )          | 1,565      |       | (2,888     | )          | (184.5                 | )          | (6.0 | ) | 7.8 |   |
|                                 |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Interest expense                     |       | 155        |       | 1          |       | 154        |       | NMF                    |       | 0.7 |   | — |   |
|                                 |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Other income, net                    |       | 1,268      |       | 91         |       | 1,177      |       | NMF                    |       | 5.7 |   | 0.4 |   |
|                                 |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income (loss) before income taxes    |       | (210       | )          | 1,655      |       | (1,865     | )          | NMF                    |       | (1.0 | ) | 8.2 |   |
|                                 |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Income tax provision (benefit)       |       | (505       | )          | 691        |       | (1,196     | )          | NMF                    |       | (2.3 | ) | 3.4 |   |
|                                 |       |       |       |       |       |       |       |                   |       |   |   |   |   |
| Net income                           |       | $          | 295        |       | $          | 964        |       | $                      | (669       | ) | NMF | % | 1.3 | % | 4.8 | % |

 

----

***NMF – Not Meaningful***

 

14

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**Revenues**

 

Our revenues include revenues from (1) advertising fees;(2) subscriber fees; and (3) membership income. Advertising revenueis generated from the sale of advertising time on The Outdoor Channel includingadvertisements shown during a program (also known as short-form advertising)and infomercials in which the advertisement is the program itself (also knownas long-form advertising), and from the sale of advertising space inpublications such as the*GoldProspectors & Treasure Hunters in the Great Outdoors*magazine. Advertising revenue is also generated from fees paid by third partyprogrammers that purchase advertising time in connection with the airing oftheir programs on The Outdoor Channel. For the three months ended June 30, 2006and 2005, The Outdoor Channel generated approximately 96.6% and 97.0% of ouradvertising revenue, respectively. For the six months ended June 30, 2006 and2005, The Outdoor Channel generated approximately 96.9% and 97.1% of ouradvertising revenue, respectively. Subscriber fees are solely related to TheOutdoor Channel. Membership income is generated by our activities other thanthe operation of The Outdoor Channel and includes membership sales, magazinesales, merchandise sales, and sponsored outings and expeditions in connectionwith GPAA and Lost Dutchman’s.

 

Total revenues for the three months ended June 30, 2006 were$10,927,000, an increase of $913,000, or 9.1%, compared to revenues of$10,014,000 for the three months ended June 30, 2005. Total revenues for thesix months ended June 30, 2006 were $22,216,000, an increase of $2,141,000, or10.7%, compared to revenues of $20,075,000 for the six months ended June 30,2005. The net increases were the result of changes in several items comprisingrevenue as discussed below.

 

Advertising revenue for the three months ended June 30, 2006 was$5,668,000, an increase of $411,000 or 7.8% compared to $5,257,000 for thethree months ended June 30, 2005. Advertising revenue for the six months endedJune 30, 2006 was $11,353,000, an increase of $837,000 or 8.0% compared to$10,516,000 for the six months ended June 30, 2005. For June 2006, Nielsenestimated that The Outdoor Channel had 26.6 million viewers compared to 24.6million for the same period a year ago. (Nielsen revises this estimate each monthand for August 2006, Nielsen increased its estimate to approximately 27.6million subscribers). The increase in advertising revenue for the three and sixmonths ended June 30, 2006 principally reflects higher prices paid by thirdparty programmers for advertising time in connection with the airing of theirprograms, incremental advertising inventory retained by us to sell andadditional revenue generated by our technical services department for providingproduction services for third party programmers. These factors contributing tothe increase were offset somewhat by less demand for our long-form inventorythat resulted in lower prices paid for infomercial blocks. We expect thissoftness in the long-form market to continue for the foreseeable future. Inaddition, we expect to provide less technical services to third parties in 2007than in 2006.

 

Subscriber fees for the three months ended June 30, 2006 were$4,341,000, an increase of $447,000 or 11.5% compared to $3,894,000 for thethree months ended June 30, 2005. Subscriber fees for the six months ended June30, 2006 were $8,724,000, an increase of $1,188,000 or 15.8% compared to$7,536,000 for the six months ended June 30, 2005. The increase in subscriberfees for the period was primarily due to an increased number of payingsubscribers both from new affiliates and from existing distributors andcontractual subscriber fee rate increases with existing service providerscarrying The Outdoor Channel. When comparing the respective quarterly results,most notable growth came from DirecTV, Time Warner, Comcast and Cox.Principally we attribute the growth to the popularity of our programming asconsumers continue to request our channel.

 

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

 

Membership income for the three months ended June 30, 2006 was$918,000, an increase of $55,000 or 6.4% compared to $863,000 for the threemonths ended June 30, 2005. Membership income for the six months ended June 30,2006 was $2,139,000, an increase of $116,000 or 5.7% compared to $2,023,000 forthe six months ended June 30, 2005. We believe that the recent surge in goldprices has reflected itself in renewed interest by the consuming public thatled to our increased activity in 2006. In the near term, we do not expect significantfluctuations in membership income year-to-year.

 

**Expenses**

 

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

 

Total expenses for the three months ended June 30, 2006 were$11,689,000, an increase of $2,513,000 or 27.4%, compared to $9,176,000 for thethree months ended June 30, 2005. Total expenses for the six months ended June30, 2006 were $23,539,000, an increase of $5,029,000 or 27.2%, compared to$18,510,000 for the six months ended June 30, 2005. As a percentage ofrevenues,

 

15

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total expenses were 107.0% and 91.6% in the three months ended June 30,2006 and 2005, respectively. As a percentage of revenues, total expenses were106.0% and 92.2% in the six months ended June 30, 2006 and 2005, respectively.The increase in expenses was due to several factors including increasedprogramming costs as a result of the launch of our second channel, OutdoorChannel 2 HD, at the beginning of the third quarter of 2005, adoption of SFAS123R effective January 1, 2006, additional depreciation expense resulting fromour broadcast facility which was placed into service effective April 1, 2006,and other items more fully described as follows.

 

Satellite transmission fees for the three months ended June 30, 2006were $614,000, a decrease of $2,000, or 0.3%, compared to $616,000 for thethree months ended June 30, 2005. Satellite transmission fees for the six monthsended June 30, 2006 were $1,252,000, an increase of $3,000, or 0.2%, comparedto $1,249,000 for the six months ended June 30, 2005. The noted changes reflectthe relative fixed nature of our contracts for uplink and transmission of oursignals.

 

Advertising expenses for the three months ended June 30, 2006 were$1,587,000, a decrease of $475,000 or 23.0% compared to $2,062,000 for thethree months ended June 30, 2005. Advertising expenses for the six months endedJune 30, 2006 were $3,749,000, a decrease of $7,000 or 0.2% compared to$3,756,000 for the six months ended June 30, 2005. In the first quarter of2006, we conducted an aggressive campaign that was part of our strategic planto support continued subscriber growth. In the second quarter of 2006, wereduced our spending on advertising to levels that, in aggregate, matched oursix month plan. Generally we expect spending levels on advertising relatedexpenses to trend with the aggregate six month levels with moderate increasesto support our effort to drive subscriber growth and ultimately revenue growth.

 

Programming expenses for the three months ended June 30, 2006 were$2,206,000, an increase of $1,675,000 or 315.4% compared to $531,000 for thethree months ended June 30, 2005. Programming expenses for the six months endedJune 30, 2006 were $3,750,000, an increase of $2,698,000 or 256.5% compared to$1,052,000 for the six months ended June 30, 2005. The increase is principallya result of our decision to launch our second channel, Outdoor Channel 2 HD, onJuly 1, 2005. We incurred minimal programming costs relative to thischannel in the first and second quarters of 2005 as most of such costs incurredat that time were charged to prepaid programming expense in anticipation of itslaunch in the second half of 2005. During the first and second quarters of2006, Outdoor Channel 2 HD was fully-programmed.

 

Our policy is to charge costs of specific show production toprogramming expense over the expected airing period beginning when the programfirst airs. The cost of programming is generally first recorded as prepaidprogramming costs and is then charged to programming expense based on theanticipated airing schedule. The anticipated airing schedule is typically over2 or 4 quarters that generally does not extend more than 2 years. As theanticipated airing schedule changes, the timing and amount of the charge toexpense is prospectively adjusted accordingly. At the time we determine aprogram is unlikely to air or re-air, we charge programming expense with theremaining associated cost recorded in prepaid programming.

 

Programming expenses are expected to increase as a percentage ofrevenue as we pursue our strategy to produce, or acquire, more programmingin-house as opposed to selling the air time to third party producers. As aresult, we believe we will control more of our programs’ quality, advertisinginventory, sponsorship opportunities, and the potential to re-package ourprogramming for other uses such as video-on-demand, international licensing, andproduction of DVDs for retail distribution. Since we have limited experience inre-packaging our programming for these other uses, we do not retain costs inprepaid programming to match with these potential revenue sources. When wedevelop a sufficient history, our policy might change.

 

Selling, general and administrative expenses for the three months endedJune 30, 2006 were $7,282,000, an increase of $1,315,000 or 22.0% compared to$5,967,000 for the three months ended June 30, 2005. Selling, general andadministrative expenses for the six months ended June 30, 2006 were$14,788,000, an increase of $2,335,000 or 18.8% compared to $12,453,000 for thesix months ended June 30, 2005. As a percentage of revenues, selling, generaland administrative expenses were 66.7% and 59.6% in the three months ended June30, 2006 and 2005, respectively. As a percentage of revenues, selling,general and administrative expenses were 66.6% and 62.0% in the six monthsended June 30, 2006 and 2005, respectively. The increase was primarilyattributable to the adoption of SFAS 123R as of January 1, 2006 which nowrequires us to charge the fair value of stock options we have issued to ouremployees over the vesting period to compensation expense which we did not haveto record in 2005. The non-cash charge in the three and six months ended June30, 2006 amounted to $756,000 and $1,470,000, respectively. The remainder ofthe increase in selling, general and administrative fees related primarily toincreased research fees to support our selling efforts, subscriptions tosupport our programming department, accounting fees for completion of ourSarbanes-Oxley audit in 2006 related to the 2005 fiscal year, legal feesincurred in the first quarter as a result of our ongoing efforts related to ourcarriage agreement negotiations, depreciation expense incurred related to ourbroadcast facility placed into service April 1, 2006 and to other operatingcosts.

 

We anticipate that selling, general and administrative costs willcontinue to increase over the foreseeable future. Such increases are expectedto result from the amortization of subscriber acquisition fees, also referredto as launch support fees, in excess of the related subscriber revenue as wecontinue to work to gain increased distribution of our channels, the adoptionof SFAS 123R as well as from increases in other corporate expenses.

 

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**Income (Loss) from Operations**

 

Income (loss) from operations for the three months ended June 30, 2006was a loss of $762,000, a decrease of $1,600,000 compared to income of $838,000for the three months ended June 30, 2005. Income (loss) from operations for thesix months ended June 30, 2006 was a loss of $1,323,000, a decrease of$2,888,000 compared to income of $1,565,000 for the six months ended June 30,2005. As discussed above, this decrease is primarily a result of the increasedprogramming costs associated with the launch of our second channel, OutdoorChannel 2 HD, increased compensation expense resulting from the adoption ofSFAS 123R, increased legal fees relating to our carriage agreements anddepreciation related to our newly opened broadcast facility. As wecontinue to strive to drive growth of our subscriber base including the ongoingand planned payment of launch support, and as we further develop our secondchannel, Outdoor Channel 2 HD, we will continue to incur increased expensessuch as programming, marketing and advertising that are unlikely to beimmediately offset by revenues. As a result, we anticipate our operatingmargins will be negatively impacted for the foreseeable future. There can be noassurance that these strategies will be successful.

 

**Interest Expense**

 

Interest expense for the three months ended June 30, 2006 was $77,000,an increase of $76,000 compared to $1,000 for the three months ended June 30,2005. Interest expense for the six months ended June 30, 2006 was $155,000, anincrease of $154,000 compared to $1,000 for the six months ended June 30, 2005.This is attributable to having obtained two term loans in November 2005 withoriginal aggregate principal amount of $4,950,000 with effective fixed interestrates of 6.59% and 6.35%.

 

**Other Income, Net**

 

Other income, net for the three months ended June 30, 2006 was$645,000, an increase of $606,000 compared to $39,000 for the three monthsended June 30, 2005. Other income, net for the six months ended June 30, 2006was $1,268,000, an increase of $1,177,000 compared to $91,000 for the sixmonths ended June 30, 2005. This improvement was primarily due to increaseddividends and interest earned on our increased investment in available-for-salesecurities and cash and cash equivalent balances.

 

**Income (Loss) Before Income Taxes**

 

Income (loss) before income taxes as a percentage of revenues was(1.8%) for the three months ended June 30, 2006 compared to 8.7% for the threemonths ended June 30, 2005. Income (loss) before income taxes as a percentageof revenues was (1.0%) for the six months ended June 30, 2006 compared to 8.2%for the six months ended June 30, 2005.

 

The TOC segment’s income before income taxes decreased to $549,000 forthe three months ended June 30, 2006 from $1,709,000 for the three months endedJune 30, 2005. The TOC segment’s income before income taxes decreased to$1,362,000 for the six months ended June 30, 2006 from $2,981,000 for the sixmonths ended June 30, 2005. Expressed as a percentage of revenue, the TOCsegment’s income before income taxes decreased to 5.6% for the three monthsended June 30, 2006, compared to 19.0% for the three months ended June 30,2005. Expressed as a percentage of revenue, the TOC segment’s income beforeincome taxes decreased to 6.9% for the six months ended June 30, 2006, comparedto 16.8% for the six months ended June 30, 2005. The decrease was due mainly toincreased programming costs as a result of having launched our second channel,Outdoor Channel 2 HD, at the beginning of the third quarter of 2005 thusrelated costs were incurred in the first and second quarters of 2006 that werenot incurred in the same periods in 2005. Contributing to the decline was theadoption of SFAS 123R whereby the TOC segment recognized $222,000 and $390,000of compensation expense related to employee stock options in the three and sixmonths ended June 30, 2006, respectively, (2.0% of segment revenue) that it didnot have in the same period in 2005. TOC placed our new broadcast facility intoservice April 1, 2006 which resulted in depreciation expense of $199,000 in thesecond quarter of 2006 that did not exist in 2005. Also, we incurredincremental expenses in subscriptions and research to support our programmingand selling efforts.

 

The Membership Division segment’s loss before income taxes increased to$190,000 for the three months ended June 30, 2006 from a loss of $173,000 forthe three months ended June 30, 2005. The Membership Division segment’s lossbefore income taxes decreased to $1,000 for the six months ended June 30, 2006from a loss of $114,000 for the six months ended June 30, 2005. Expressed as apercentage of revenues, the Membership Division segment’s loss before incometaxes increased to 17.1% for the three months ended June 30, 2006 compared to17.0% for the three months ended June 30, 2005. Expressed as a percentage ofrevenues, the Membership Division segment’s loss before income taxes improvedto 0.0% for the six months ended June 30, 2006 compared to (4.9%) for the sixmonths ended June 30, 2005. Revenue increased $92,000 or 9.0% and $167,000 or7.2% in the three and six months ended June 30, 2006, respectively. Theimprovement is principally a result of a renewed interest in gold prospectingwhich we believe is partially driven by rising gold prices. Also contributingto the improving segment margins is a slight decrease in personnel with thecommensurate savings of payroll, payroll related expenses and travel costs.

 

Corporate incurred a loss before income taxes for the three monthsended June 30, 2006 amounting to $553,000, a decrease of $107,000 compared to aloss of $660,000 for the three months ended June 30, 2005. Corporate incurred aloss before income taxes for the six months ended June 30, 2006 amounting to$1,571,000, an increase of $359,000 compared to a loss of $1,212,000 for the

 

17

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six months ended June 30, 2005. The expenses allocated to Corporateinclude: professional fees such as public relations, accounting and legal fees,amortization of intangibles, business insurance, board of directors fees andexpenses, and an allocation of corporate officers’ payroll and relatedexpenses. Effective January 1, 2006, we prospectively adopted SFAS 123R andCorporate incurred a charge to compensation expense related to stock options of$490,000 and $1,007,000 in the three and six months ended June 30, 2006,respectively. In the first three months of 2006, our Corporate loss was greaterthan the same period in 2005 due to the incurrence of a charge to compensationexpense for SFAS 123R of $517,000 not incurred in 2005, as well as an aggressivead campaign conducted in the first quarter of 2006, accounting expensesincurred with our first Sarbanes-Oxley 404 audit conducted in 2006 for December31, 2005, and certain legal fees incurred as a result of our ongoing effortsrelated to our carriage agreement negotiations. The increased expenses weresomewhat offset by interest and dividend income earned on our cash andinvestment in available-for-sale securities. In the second three months of 2006our Corporate loss was less than the same period in 2005. As noted above, weincurred approximately $490,000 of additional compensation expense as a resultof the adoption of SFAS 123R in the second quarter that we did not have in thesecond quarter of 2005 but we also realized approximately $622,000 of interestand dividend income in the 2006 quarter which was not generated in the sameperiod in 2005.

 

**Income Tax Provision (Benefit)**

 

Income tax provision (benefit) for the three months ended June 30, 2006was ($571,000), a decrease of $935,000 as compared to $364,000 for the threemonths ended June 30, 2005. Income tax provision (benefit) for the six monthsended June 30, 2006 was ($505,000), a decrease of $1,196,000 as compared to$691,000 for the six months ended June 30, 2005. The decrease was principallydue to the Company incurring a loss in the first six months of 2006 as comparedto income generated in the first six months of 2005. The effective income taxrate for the three and six months ended June 30, 2006 is (294.3%) and (240.5%),respectively. For the three and six months ended June 30, 2005, the effectiveincome tax was approximately 41.6% and 41.8%, respectively. These benefit ratesexceed the expected tax benefits computed based on the pre-tax losses and theapplicable statutory Federal income tax rate of 34%. Interim tax provisions andbenefits are determined using an estimate of the annual effective tax rate. Ourestimated annual effective tax rate is affected by permanent differencesbetween income before taxes for financial reporting purposes and taxableincome. Our most significant permanent difference, and the principal reason whyour estimated effective income tax rate is substantially greater than thestatutory Federal income tax rate, relates to the portion of our compensationexpense recognized for financial statement reporting purposes that isattributable to the non-cash charges recorded under SFAS 123R for the fairvalue of qualified incentive stock options, or ISOs, granted to employees whichare generally not deductible for tax reporting purposes. We recognized non-cashcharges to compensation expense of $192 and $343 in the three and six monthsended June 30, 2006, respectively, related to ISOs under SFAS 123R. 

 

**Net Income**

 

Net income for the three months ended June 30, 2006 was $377,000, adecrease of $135,000 compared to $512,000 for the three months ended June 30,2005. Net income for the six months ended June 30, 2006 was $295,000, adecrease of $669,000 compared to $964,000 for the six months ended June 30,2005. The decrease was due to the reasons stated above.

 

**Liquidity and Capital Resources**

 

We generated $1,373,000 of cash in our operating activities in the sixmonths ended June 30, 2006, compared to cash used in operating activities of$218,000 in the six months ended June 30, 2005 and had a cash and cashequivalent balance of $22,040,000 at June 30, 2006, an increase of $3,764,000from the balance of $18,276,000 at December 31, 2005. We also hadshort-term investments classified as available-for-sale securities of $34,566,000at June 30, 2006, a decrease of $4,264,000 from the balance of $38,830,000 atDecember 31, 2005. The investments at June 30, 2006 were comprisedprincipally of auction rate securities ($33,730,000) with interest rates thatgenerally reset every 28 days. The auction rate securities have long-termmaturity dates and provide us with enhanced yields. Various equity securities($836,000) make up the remainder of the June 30, 2006 balance. We believe wehave the ability to quickly liquidate the auction rate securities at theiroriginal cost although there is no guaranty we would be able to do so. Networking capital increased to $67,234,000 at June 30, 2006, compared to$66,183,000 at December 31, 2005.

 

Net cash provided by investing activities was $2,181,000 in the sixmonths ended June 30, 2006 compared to cash used of $3,373,000 for the sixmonths ended June 30, 2005. The increase in cash provided by investingactivities was related principally to the net difference of sales and purchasesof short-term auction rate securities which did not exist in the first andsecond quarters of 2005. Additionally contributing to the increase in cashprovided by investing activities was a decrease in capital expenditures in thefirst six months of 2006 compared to the same time period in 2005. In the firsthalf of 2005 we acquired equipment related to our HD signal and production inanticipation of the launch of our second channel on July 1, 2005. In 2005, wealso purchased a number of vehicles we use in support of affiliate sales andour annual Alaska trip. After we reassessed our facilities requirementsincluding floor space utilization, master control equipment, uplink equipment,and other needs, we announced our intention to purchase a 28,000 square footbuilding in Temecula, California for approximately $2.6 million, onFebruary 22, 2005. We completed the purchase during the third quarter of2005. We have substantially completed the building improvements and placed thefacility into service on April 1, 2006. Additional capital expenditures werefor fixed asset replacements.

 

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Cash provided by financing activities was $210,000 in the six monthsended June 30, 2006 compared to cash used of $507,000 for the six months endedJune 30, 2005. The cash provided by financing activities in the six monthsended June 30, 2006 was the exercise of stock options, offset by principalpayments on outstanding debt. The cash used in financing activities in the sixmonths ended June 30, 2005 was primarily for prepaid costs for our publicoffering completed on July 1, 2005 partially offset by the proceeds from theexercise of stock options.

 

On November 2, 2005, we renewed our revolving line of creditagreement (the “revolver”) with U.S. Bank N.A. (the “Bank”), extending thematurity date to September 7, 2007 and increasing the total amount whichcan be drawn upon under the revolver from $5,000,000 to $8,000,000. Therevolver provides that the interest rate shall be LIBOR plus 1.25%. The revolveris collateralized by substantially all of our assets. This credit facilitycontains customary financial and other covenants and restrictions, as amendedon November 2, 2005, including a change of control provision and certainminimum profitability metrics (which, as amended, exclude the effects ofnon-cash stock based employee compensation expense) measured at each quarterend. As of June 30, 2006 and as of the date of this report, we did not have anyamounts outstanding under this credit facility.

 

On November 2, 2005, we obtained a $1,950,000 mortgage loan fromthe Bank on our recently purchased building that houses our broadcast facilitylocated in Temecula, California which has a 10 year term loan with a 25 yearamortization schedule. This loan carries a variable interest rate of LIBOR plus1.35%. This loan is secured primarily by a Deed of Trust on the property and isalso secondarily secured by the same assets as the revolver. It also containscustomary financial and other covenants and restrictions including a change ofcontrol provision and certain minimum profitability metrics (which, as amended,exclude the effects of non-cash stock based employee compensation expense)measured at each quarter end. On November 7, 2005, we entered into an interestrate swap agreement with the Bank to reduce the potential impact of increasinginterest rates and effectively fixed the interest rate on this loan at 6.59%.

 

On November 2, 2005, we obtained a $3,000,000, five year fullyamortizing term loan. This loan carries a variable interest rate of LIBOR plus1.35%. This term loan is secured by the same assets as the revolver andcontains customary financial and other covenants and restrictions including achange of control provision and certain minimum profitability metrics (which,as amended, exclude the effects of non-cash stock based employee compensationexpense) measured at each quarter end. On November 7, 2005, we enteredinto an interest rate swap agreement with the Bank to reduce the potentialimpact of increasing interest rates and effectively fixed the interest rate onthis term loan at 6.35%. This loan was obtained to help finance the equipmentand leasehold improvements bought in relation the build out of our broadcastfacility including delivery of our HD signal and production.

 

As of June 30, 2006, we had sufficient cash on hand and had beengenerating sufficient cash flow from operations to meet our short-term cashflow requirements including the payment of unpaid taxes to those states inwhich we have sufficient nexus but have not previously apportioned income.Management believes that our anticipated cash flows from operating activityalong with our existing cash resources including cash on-hand,available-for-sale securities and access to the revolver, will be sufficient tofund our operations at current levels and anticipated capital requirementsthrough at least September 1, 2007. To the extent that such amounts areinsufficient to finance our working capital requirements or our desire toexpand operations beyond current levels, we could seek additional financing.There can be no assurance that equity or debt financing will be available ifneeded or, if available, will be on terms favorable to us.

 

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

 

At June 30, 2006 and December 31, 2005, our investment portfolioincluded fixed-income and equity securities of $34,566,000 and $38,830,000,respectively. These securities are subject to interest rate risk and willdecline in value if interest rates increase. However, due to the short durationof our investment portfolio, an immediate 10% change in interest rates wouldhave no material impact on our financial condition, operating results or cashflows. Declines in interest rates over time will, however, reduce our interestincome while increases in interest rates over time may increase our interestexpense.

 

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

 

As of June 30, 2006 and as of the date of this report, we had aggregateoutstanding borrowings of approximately $4,543,000 and $4,426,000,respectively. The rates of interest on our currently outstanding debt are fixedwhile the rate of interest on our line-of-credit is variable, but we currentlyhave no outstanding balance under this credit facility. Because of thesereasons, an immediate 10% change in interest rates would have no material,immediate impact on our financial condition, operating results or cash flows.

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

*Evaluation of disclosure controlsand procedures.* We maintain disclosure controls andprocedures designed to provide reasonable assurance of achieving the objectivethat information in our Exchange Act reports is recorded, processed, summarizedand reported within the time periods specified pursuant to the regulations ofthe Securities and Exchange Commission. Disclosure controls and procedures, asdefined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, include controlsand procedures designed to ensure the information required to be disclosed byus in the reports we file or submit under the Exchange Act is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure. It should be noted that our system of controls, however welldesigned and operated, can provide only reasonable, and not absolute, assurancethat the objectives of the system are met.

 

Our management, with the participation of our Chief Executive Officerand Chief Financial Officer, evaluated the effectiveness of our disclosurecontrols and procedures as of June 30, 2006, the end of the period covered bythis report, and concluded that our disclosure controls and procedures wereeffective as of June 30, 2006.

 

*Changes in internal control overfinancial reporting.* During the three months ended June 30,2006, there was no change in our internal control over financial reporting thatmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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**PART II—OTHER INFORMATION**

 

**ITEM1.                Legal Proceedings.**

 

From time to time, we may be involved in litigation relating to claimsarising out of our operations. As of the date of this report, we are not aparty to any legal proceedings that are expected, individually or in theaggregate, to have a material adverse effect on our business, financialcondition or operating results.

 

**ITEM1A.             Risk Factors.**

 

Our business andoperations are subject to a number of risks and uncertainties, and thefollowing list should not be considered to be a definitive list of all factorsthat may affect our business, financial condition and future operatingresults and should be read in conjunction with the risks and uncertainties,including risk factors, contained in our other filings with the Securities andExchange Commission. Any forward-looking statements made by us are made withthe intention of obtaining the benefits of the “safe harbor” provisions of theSecurities Litigation Reform Act and a number of factors, including, butnot limited to those discussed below, could cause our actual results andexperiences to differ materially from the anticipated results or expectationsexpressed in any forward-looking statements.

 

**We may not be able to grow oursubscriber base at a sufficient rate to offset planned increased costs or atall, and as a result our revenues and profitability may not increase andcould decrease.**

 

A major component of ourgrowth strategy is based on increasing the number of subscribers to ourchannels. Growing our subscriber base depends upon many factors, such as thesuccess of our marketing efforts in driving consumer demand for our channels;overall growth in cable and satellite subscribers; the popularity of ourprogramming; our ability to negotiate new carriage agreements, or amendmentsto, or renewals of, current carriage agreements, and maintain existingdistribution; plus other factors that are beyond our control. There can be noassurance that we will be able to maintain or increase the subscriber base ofour channels on cable and satellite systems or that our current carriage willnot decrease as a result of a number of factors. In particular, negotiationsfor new carriage agreements, or amendments to, or renewals of, current carriageagreements, are lengthy and complex, and we are not able to predict with anyaccuracy when such increases in our subscriber base may occur, if at all.If we are unable to grow our subscriber base, our subscriber and advertisingrevenues may not increase and could decrease. In addition, as we plan andprepare for such projected growth in our subscriber base, we plan to increaseour expenses accordingly. If we are not able to increase our revenue to offsetthese increased expenses, our profitability could decrease.

 

**If we offer increased launch supportfees or other incentives to service providers in order to grow our subscriberbase, our operating results may be harmed.**

 

Although we currentlyhave plans to increase our marketing and sales efforts in an attempt toincrease the number of our subscribers, we may not be able to do so economicallyor at all. If we are unable to increase the number of our subscribers on acost-effective basis, or if the benefits of doing so do not materialize, ourbusiness and operating results would be harmed. In particular, if we make anyupfront cash payments to service providers for an increase in our subscriberbase, our cash flow could be adversely impacted, and we may incur negativecash flow for some time. In addition, if we were to make such upfront cashpayments or provide other incentives to service providers, we expect toamortize such amounts ratably over the term of the agreements with the serviceproviders. However, if a service provider terminates any such agreement priorto the expiration of the term of such agreement, then under current accountingrules we may incur a large expense in that quarter in which theagreement is terminated equal to the remaining un-amortized amounts and ouroperating results could accordingly be adversely affected.

 

**If, in our attempt to increase ournumber of subscribers, we structure launch support fees with one serviceprovider 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 existingagreements with cable and satellite service providers contain “most favorednation” clauses. These clauses typically provide that if we enter into anagreement with another service provider on more favorable terms, these termsmust be offered to the existing service provider, subject to some exceptionsand conditions. Future agreements with service providers may also containsimilar “most favored nation” clauses. If, in our attempt to increase ournumber of subscribers, we structure launch support fees to effectively offermore favorable terms to any service provider, these clauses may require usto reduce the effective subscriber fee rates that we receive from other serviceproviders, and this could negatively affect our operating results.

 

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

 

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

 

**Cable and satellite service providerscould discontinue or refrain from carrying The Outdoor Channel, which couldreduce the number of viewers and harm our operating results.**

 

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

 

**Consolidationamong cable and satellite distributors may harm our business.**

 

Cable and satelliteoperators continue to consolidate, making The Outdoor Channel increasinglydependent on fewer operators. If these operators fail to carry The OutdoorChannel, use their increased distribution and bargaining power to negotiateless favorable terms of carriage or to obtain additional volume discounts, ourbusiness and operating results would suffer.

 

**We may not be able toeffectively manage our future growth, and our growth may not continue,which may substantially harm our business and prospects.**

 

We have undergone rapidand significant growth in revenue and subscribers over the last several years,and our strategic objectives include not only further developing and enhancingour existing 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 successfully managegrowth, such as monitoring operations, controlling costs, maintaining effectivequality and service, and implementing and maintaining adequate internalcontrols. Although we have recently moved into our new Temecula, Californiaproduction facility, we expect that additional expenditures will be required aswe continue to upgrade our facilities. We cannot assure you that we will beable to successfully manage our growth, that future growth will occur or thatwe will be successful in managing our business objectives. We can provide noassurance that our profitability or revenues will not be harmed by futurechanges in our business. Our operating results could be harmed if such growthdoes not occur, or is slower or less profitable than projected.

 

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

 

Our ability to securenational advertising accounts, which generally pay higher advertising rates,depends upon the size of our audience, the popularity of our programming andthe demographics of our viewers, as well as strategies taken by ourcompetitors, strategies taken by advertisers and the relative bargaining powerof advertisers. Competition for national advertising accounts and relatedadvertising expenditures is intense. We face competition for such advertisingexpenditures from a variety of sources, including other cable network companiesand other media. We cannot assure you that our sponsors will pay advertisingrates for commercial air time at levels sufficient for us to make a profit orthat we will be able to attract new advertising sponsors or increaseadvertising revenues. If we are unable to attract national advertising accountsin sufficient quantities, our revenues and profitability may be harmed.

 

**Wemay be required to pay additional state income taxes for past years.**

 

We are required to payincome taxes in various states in which we conduct our business operations. Inthe past, we have paid state income taxes only in California (where ourheadquarters is located) and have not paid income taxes to any other state. Wehave determined that we may have state income tax liability in the eightstates other than California in which our gold prospecting properties arelocated. Although we expect in the near future to gather sufficient informationto enable us to apportion our income to such states and file income tax returnsin those states for past years, we can offer no assurances as to when we willbe able to file state income tax returns in those states where we may haveoutstanding, current and future tax liabilities. In general, we believe anyincome taxes that we may be required to pay to states other 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 wemay owe outstanding income taxes has a different methodology forcalculating tax owed and a different tax rate, our aggregate state income taxliability could be greater than what we have paid to California in prior years.Our aggregate state income tax liability, on which we may owe accruedinterest and penalties, could be material to our results of operations.

 

**Expenses relating to programmingcosts are generally increasing and a number of factors can cause cost overrunsand delays, and our operating results may be adversely impacted if we arenot able to successfully recover the costs of developing and acquiring newprogramming.**

 

The average cost ofprogramming has increased recently for the cable industry and such increasesmay continue. We plan to build our programming library through theacquisition of long-term broadcasting rights from third party producers,in-house production and outright acquisition of programming, and thismay lead to increases in our programming costs. The development,production and editing of television programming requires a significant amountof capital and there are substantial financial risks inherent in developing andproducing television programs. Actual programming and production costsmay exceed their budgets. Factors such as labor disputes, death ordisability of key spokespersons or program hosts, damage to film negatives,master tapes and recordings or adverse weather conditions may cause costoverruns and delay or prevent completion of a project. If we are not able tosuccessfully recover the costs of developing or acquiring programming throughincreased revenues, whether the programming is produced by us or acquired fromthird-party producers, our business and operating results will be harmed.

 

**Our operating results may benegatively impacted if our Outdoor Channel 2 HD network is not as successful aswe anticipate.**

 

In July 2005, welaunched an all new, all native high definition network called Outdoor Channel2 HD. There can be no assurance that Outdoor Channel 2 HD will not incurunexpected costs and expenses. Distribution of Outdoor Channel 2 HD will dependon successfully executing new or amended distribution agreements with cable andsatellite service providers. There can be no assurance that such agreements canbe made, and if they are made, that they will be on terms favorable to us orthat they will not require us to grant periods of free service and/or marketingcommitments to encourage carriage. The public may not adopt HD consumertelevision equipment in numbers sufficient to allow profits for anadvertiser-supported service. Bandwidth constraints may keep OutdoorChannel 2 HD from achieving sufficient distribution from service providers toreach profitability. Competition for quality HD content may increase thecosts of programming for Outdoor Channel 2 HD beyond our control orexpectations. All of these factors, combined or separately, could increasecosts or restrain revenue and adversely affect our operating results.

 

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**Our operating results may varysignificantly, and historical comparisons of our operating results are notnecessarily meaningful and should not be relied upon as an indicator of futureperformance.**

 

Our operations areinfluenced by many factors. These factors may cause our financial resultsto vary significantly in the future and our operating results may not meetthe expectations of securities analysts or investors. If this occurs, the priceof our stock may decline. Factors that can cause our results to fluctuateinclude, but are not limited to:

 

•  carriage decisions ofcable and satellite service providers;

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

•  changes in the growthrate of cable and satellite subscribers;

• cable and satellite service providers’ capital and marketing expenditures andtheir impact on programming offerings and penetration;

•  seasonal trends inviewer interests and activities;

•  pricing, service,marketing and acquisition decisions that could reduce revenues and impairquarterly financial results;

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

•  our ability to reactquickly to changing consumer trends;

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

•  changing regulatory requirements.

 

Due to the foregoing andother factors, many of which are beyond our control, our revenue and operatingresults vary from period to period and are difficult to forecast. Our expenselevels are based in significant part on our expectations of futurerevenue. Therefore, our failure to meet revenue expectations would seriouslyharm our business, operating results, financial condition and cash flows.Further, an unanticipated decline in revenue for a particular calendar quartermay disproportionately affect our profitability because our expenses wouldremain relatively fixed and would not decrease correspondingly.

 

**Changes to financial accountingstandards or our accounting estimates may affect our reportedoperating results.**

 

We prepare our financialstatements to conform to generally accepted accounting principles (“GAAP”),which are subject to interpretations by the Financial Accounting StandardsBoard, the Securities and Exchange Commission and various bodies formed tointerpret and create appropriate accounting policies. A change in thosepolicies can have a significant effect on our reported results andmay even 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 stockoption grants, have recently been revised or are under review. Changes to thoserules or the questioning of current practices may adversely affectour reported financial results or the way we conduct our business. In addition,our preparation of financial statements in accordance with GAAP requires thatwe make estimates, judgments and assumptions that affect the recorded amountsof assets and liabilities, disclosure of those assets and liabilities at thedate of the financial statements and the recorded amounts of revenue andexpenses during the reporting period. A change in the facts and circumstancessurrounding those estimates, including the interpretation of the terms and conditionsof our contractual obligations, could result in a change to our estimates andcould impact our future operating results.

 

**If we fail to develop and distributepopular programs, our viewership would likely decline, which could causeadvertising and subscriber fee revenues to decrease.**

 

Our operating resultsdepend significantly upon the generation of advertising revenue. Our ability togenerate advertising revenues is largely dependent on our Nielsen ratings,which estimates the number of viewers of The Outdoor Channel, and this directlyimpacts the level of interest of advertisers and rates we are able to charge.If we fail to program popular shows that maintain or increase our currentnumber of viewers, our Nielsen ratings could decline, which in turn could causeour advertising revenue to decline and adversely impact our business andoperating results. In addition, if we fail to program popular shows the numberof subscribers to our channel may also decrease, resulting in a decreasein our subscriber fee and advertising revenue.

 

**Changes in the methodology used byNielsen to estimate our subscriber base or television ratings, or inaccuraciesin such estimates, could cause our advertising revenue to decrease.**

 

Our ability to selladvertising is largely dependent on television ratings and our subscriber baseestimated by Nielsen. We do not control the methodology used by Nielsen forthese estimates. If Nielsen modifies its methodology or changes the statisticalsample it uses for these estimates, such as the demographic characteristics ofthe households, our ratings could be negatively affected resulting in adecrease in our advertising revenue.

 

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**The market in which we operate ishighly 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 viewerswith other pay cable television and broadcast networks, including OLN, SpikeTV, ESPN2 and others. If these or other competitors, many of which havesubstantially greater financial and operational resources than us,significantly expand their operations with respect to outdoor-relatedprogramming or their market penetration, our business could be harmed. Inaddition, certain technological advances, including the deployment of 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 withtelevision network companies that generally have large subscriber bases andsignificant investments in, and access to, competitive programming sources. Insome cases, we compete with cable and satellite service providers that have thefinancial and technological resources to create and distribute their owntelevision networks, such as OLN, which is owned and operated by Comcast. Inorder 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 operatingresults and margins. We may also issue our securities from time to time inconnection with our attempts for broader distribution of The Outdoor Channeland the number of such securities could be significant. We compete foradvertising sales with other pay television networks, broadcast networks, andlocal over-the-air television stations. We also compete for advertising saleswith satellite and broadcast radio and the print media. We compete with othercable television networks for subscriber fees from, and affiliation agreementswith, cable and satellite service providers. Actions by the FederalCommunications Commission, which we refer to as the FCC, and the courts haveremoved certain of the impediments to entry by local telephone companies intothe video programming distribution business, and other impediments could beeliminated or modified in the future. These local telephone companiesmay distribute programming that is competitive with the programmingprovided by us to cable operators.

 

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

 

The Sarbanes-Oxley Act of2002 required us to change or supplement some of our corporate governance andsecurities disclosure and compliance practices. The Securities and ExchangeCommission and NASDAQ have revised, and continue to revise, their regulationsand listing standards. These developments have increased, and may continueto increase, our legal compliance and financial reporting costs.

 

**We may not be able to attractnew, or retain existing, members in our club organizations, and as a result ourrevenues and profitability may be harmed.**

 

Our ability to attractnew members and retain existing members in our club organizations, GPAA andLost Dutchman’s, depends, in part, upon our marketing efforts, including ourprogramming on The Outdoor Channel and such other efforts as direct mailcampaigns, continued sponsorship of expositions dedicated to gold prospecting,treasure hunting and related interests around the country and introductoryoutings held at our campsites. We cannot assure you that we will successfullyattract new members or retain existing members. A decline in membership in ourclub organizations could harm our business and operating results.

 

**The satellite infrastructure that weuse may fail or be preempted by another signal, which could impair ourability to deliver programming to our cable and satellite service providers.**

 

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

 

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**Naturaldisasters and other events beyond our control could interrupt our signal.**

 

Our systems andoperations may be vulnerable to damage or interruption from earthquakes,floods, fires, power loss, telecommunication failures and similar events. Theyalso could be subject to break-ins, sabotage and intentional acts of vandalism.Since our production facilities for The Outdoor Channel are all located inTemecula, California, the results of such events could be particularlydisruptive because we do not have readily available alternative facilities fromwhich to conduct our business. Our business interruption insurance may notbe sufficient to compensate us for losses that may occur. Despite anyprecautions we may take, the occurrence of a natural disaster or otherunanticipated problems at our facilities could result in interruptions in ourservices. Interruptions in our service could harm our reputation and reduce ourrevenues and profits.

 

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

 

Seasonal trends arelikely to affect our viewership, and consequently, could cause fluctuations inour advertising revenues. Our business reflects seasonal patterns ofadvertising expenditures, which is common in the broadcast industry. For thisreason, fluctuations in our revenues and net income could occur from period toperiod depending upon the availability of advertising revenues. Due, in part,to these seasonality factors, the results of any one quarter are not necessarilyindicative of results for future periods, and our cash flows may notcorrelate with revenue recognition.

 

**Wemay be unable to access capital on acceptable terms to fund our futureoperations.**

 

Our future capitalrequirements will depend on numerous factors, including the success of ourefforts to increase advertising revenues, the amount of resources devoted toincreasing distribution of The Outdoor Channel, and acquiring and producingprogramming for The Outdoor Channel. As a result, we could be required to raisesubstantial additional capital through debt or equity financing. To the extentthat we raise additional capital through the sale of equity or convertible debtsecurities, the issuance of such securities could result in dilution toexisting stockholders. If we raise additional capital through the issuance ofdebt securities, the debt securities would have rights, preferences andprivileges senior to holders of common stock and the terms of such debt couldimpose restrictions on our operations. In November 2005, we entered intoan aggregate of up to thirteen million dollars in debt financing from acommercial bank. We cannot assure you that additional capital, if required,will be available on acceptable terms, or at all. If we are unable to obtain additionalcapital, our current business strategies and plans and ability to fund futureoperations may be harmed.

 

**Wemay not be able to attract and retain key personnel.**

 

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

 

**Newvideo recording technologies may reduce our advertising revenue.**

 

A number of new personalvideo recorders, such as TiVo® in the United States, have emerged in recentyears. These recorders often contain features allowing viewers to watchpre-recorded programs without watching advertising. The effect of theserecorders on viewing patterns and exposure to advertising could harm our operationsand results if our advertisers reduce the advertising rates they are willing topay because they believe television advertisements are less effective withthese technologies.

 

**Cable and satellite televisionprogramming signals have been stolen or could be stolen in the future, whichreduces our potential revenue from subscriber fees and advertising.**

 

The delivery ofsubscription programming requires the use of conditional access technology tolimit access to programming to only those who subscribe to programming and areauthorized to view it. Conditional access systems use, among other things,encryption technology to protect the transmitted signal from unauthorizedaccess. It is illegal to create, sell or otherwise distribute software ordevices to circumvent conditional access technologies. However, theft of cableand satellite programming has been widely reported, and the access or “smart”cards used in cable and satellite service providers’ conditional access systemshave been

 

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

 

**Because we expect to becomeincreasingly dependent upon our intellectual property rights, our inability toprotect those rights could negatively impact our ability to compete.**

 

Currently approximately70% of programs we air on The Outdoor Channel are provided by third-partytelevision and film producers. In order to build a library of programs andprogramming distribution rights, we must obtain all of the necessary rights,releases and consents from the parties involved in developing a project or fromthe owners of the rights in a completed program. There can be no assurance thatwe will be able to obtain the necessary rights on acceptable terms, or at all,or properly maintain and document such rights. In addition, protecting ourintellectual property rights by pursuing those who infringe or dilute ourrights can be costly and time consuming. If we are unable to protect ourportfolio of trademarks, service marks, copyrighted material and characters,trade names and other intellectual property rights, our business and ourability to compete could be harmed.

 

**We may face intellectualproperty infringement claims that could be time-consuming, costly to defend andresult in our loss of significant rights.**

 

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

 

**Some of our existing stockholders canexert control over us and may not make decisions that are in the bestinterests of all stockholders.**

 

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

 

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

 

Our stock hashistorically been and continues to be traded at relatively low volumes andtherefore has been subject to price volatility. Various factors contribute tothe volatility of our stock price, including, for example, low trading volume,quarterly variations in our financial results, increased competition andgeneral economic and market conditions. While we cannot predict the individualeffect that these factors may have on the market price of our commonstock, these factors, either individually or in the aggregate, could result insignificant volatility in our stock price during any given period of time.There can be no assurance that a more active trading market in our stock willdevelop. As a result, relatively small trades may have a significantimpact on the price of our common stock. Moreover, companies that haveexperienced volatility in the market price of their stock often are subject tosecurities class action litigation. If we were the subject of suchlitigation, it could result in substantial costs and divert management’sattention and resources.

 

**Anti-takeover provisions in ourcertificate of incorporation, our bylaws and under Delaware law may enableour incumbent management to retain control of us and discourage or prevent achange of control that may be beneficial to our stockholders.**

 

Provisions of Delawarelaw, our certificate of incorporation and bylaws could discourage, delay orprevent a merger, acquisition or other change in control that stockholdersmay consider favorable, including transactions in which you mightotherwise receive a premium for your shares. These provisions also could limitthe price that investors might be willing to pay in the future for shares ofour common stock, thereby depressing the market price of our common stock.Furthermore, these provisions could prevent attempts by our stockholders toreplace or remove our management. These provisions:

 

•  allow the authorizednumber of directors to be changed only by resolution of our board of directors;

 

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

 

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

 

• authorize our board of directors to issue without stockholder approval blankcheck preferred stock that, if issued, could operate as a “poison pill” todilute the stock ownership of a potential hostile acquirer to prevent anacquisition that is not approved by our board of directors;

 

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

 

• establish advance notice requirements for stockholder nominations to our boardof directors or for stockholder proposals that can be acted on at stockholdermeetings;

 

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

 

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

 

In addition, because weare incorporated in Delaware, we are governed by the provisions ofSection 203 of the Delaware General Corporation Law, which may, unlesscertain criteria are met, prohibit large stockholders, in particular thoseowning 15% or more of our outstanding voting stock, from merging or combiningwith us for a prescribed period of time.

 

**Technologies in the cable andsatellite television industry are constantly changing, and our failure toacquire or maintain state-of-the-art technology may harm our business andcompetitive advantage.**

 

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

 

**The cable and satellite televisionindustry is subject to substantial governmental regulation for which compliancemay increase our costs and expose us to penalties for failure to comply.**

 

The cable televisionindustry is subject to extensive legislation and regulation at the federal andlocal levels, and, in some instances, at the state level, and many aspects ofsuch regulation are currently the subject of judicial proceedings andadministrative or legislative proposals. Similarly, the satellite televisionindustry is subject to federal regulation. Operating in a regulated industryincreases our cost of doing business as a video programmer.

 

The Cable TelevisionConsumer Protection and Competition Act of 1992, to which we refer as the 1992Cable Act, includes provisions that preclude cable operators affiliated withvideo programmers from favoring their programmers over competitors. The 1992Cable Act also precludes such programmers from selling their programmingexclusively to cable operators. These provisions potentially benefitindependent programmers such as us by limiting the ability of cable operatorsaffiliated with programmers from carrying only programming in which they havean ownership interest and from offering exclusive programming arrangements.However, the United States Court of Appeals for the District of ColumbiaCircuit vacated the FCC Rule limiting the carriage of affiliatedprogrammers by cable operators. Although the FCC issued further notices ofproposed rulemaking in 2001 and 2005 addressing this issue, it has not adoptednew rules. The exclusivity provision is scheduled to expire inOctober 2007 unless the FCC then determines that a further extension isnecessary to protect competition and diversity. If these provisions of the 1992Cable Act expire or become no longer applicable, and if we are still able toincrease the number of subscribers to our channel, then the costs associatedwith doing so may increase significantly.

 

Regulatory carriagerequirements also could reduce the number of channels available to carry TheOutdoor Channel. The 1992 Cable Act granted television broadcasters a choice ofmust-carry rights or retransmission consent rights. The rules adopted bythe FCC generally provided for mandatory carriage by cable systems of all localfull-power commercial television broadcast signals selecting must-carry rightsand, depending on a cable system’s channel capacity, non-commercial televisionbroadcast signals. Such statutorily mandated carriage of broadcast stations,coupled with the provisions of the Cable Communications Policy Act of 1984,which require cable television systems with 36 or more “activated” channels toreserve a percentage of such channels for commercial use by unaffiliated thirdparties and permit franchise authorities to require the cable operator toprovide channel capacity, equipment and facilities for public, educational andgovernment access channels, could reduce carriage of The Outdoor Channel bylimiting its carriage in cable systems with limited channel capacity. In 2001,the FCC adopted rules relating to the cable carriage of digital

 

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television signals. Among other things, the rules clarify that adigital-only television station can assert a right to analog or digitalcarriage on a cable system. The FCC initiated a further proceeding to determinewhether television broadcasters may assert the rights to carriage of bothanalog and digital signals during the transition to digital television and tocarriage of all digital signals. On February 10, 2005, the FCC decidedthat television broadcasters do not have such additional must-carry rights.Broadcasters formally have requested that the FCC reconsider this decision andare seeking legislative change to require such carriage. On June 21, 2006, thismatter was scheduled to be heard by the FCC at its open meeting, but wasremoved from the agenda without discussion. The imposition of such additionalmust-carry regulation, in conjunction with any limited cable system channelcapacity, would increase the likelihood that cable operators may be forcedto drop some cable programming services and could reduce carriage of TheOutdoor Channel.

 

The TelecommunicationsAct of 1996 required the FCC to establish rules and an implementationschedule to ensure that video programming is fully accessible to thehearing impaired through closed captioning. The rules adopted by the FCCrequire substantial closed captioning over a six to ten year phase-in period,which began in 2000, with only limited exemptions. As a result, we willcontinue to incur additional costs for closed captioning. Failure to meet theseclosed captioning requirements could cause a service provider to discontinuecarrying The Outdoor Channel.

 

If we distributetelevision programming through other types of media, we may be required toobtain federal, state and local licenses or other authorizations to offer suchservices. We may not be able to obtain licenses or authorizations in a timelymanner, or at all, or conditions could be imposed upon licenses andauthorizations that may not be favorable to us.

 

In the future, anyincreased regulation of rates, and in particular the rates for basic cableservices, could, among other things, put downward pressure on the rates chargedby cable programming services, and affect the ability or willingness of cablesystem operators to retain or to add The Outdoor Channel network on their cablesystems.

 

In addition,government-mandated or increased tiering of a limited number of channels bycable system operators could impact our viewership levels if The OutdoorChannel is moved to such a tier. In response to a request from the Committee onEnergy and Commerce of the House of Representatives, the FCC’s Media Bureauconducted a study in 2004 regarding, among other things, government-mandated ala carte or mini-tier packaging of programming services in which eachsubscriber would purchase only those channels that he or she desired instead ofthe larger bundles of different channels as is typical today. The Media Bureau’sreport on November 18, 2004 observed that such packaging would increasethe cost of programming to consumers and injure programmers. OnFebruary 9, 2006, the Media Bureau released a further report which statedthat the 2004 report was flawed and which concluded that a-la-carte sales couldbe in the best interests of consumers. Although the FCC cannot mandatea-al-carte sales, its endorsement of the concept could encourage Congress toconsider proposals to mandate a-ala-carte sales or otherwise seek to imposegreater regulatory controls on how cable programming is sold. For example, onJuly 20, 2006, a bill was introduced in the House of Representatives (the “FamilyChoice Act”) that would require the FCC to regulate pay-TV providers forindecent content, which, under one option, would require offering consumers afamily tier that may or may not include services such as The Outdoor Channel.If, in response to any statue enacted by Congress, or any rate or othergovernment regulation, cable system operators implement channel offerings thatrequire subscribers to affirmatively choose to pay a separate fee to receiveThe Outdoor Channel, either by itself or in combination with a limited numberof other channels, the number of viewers for The Outdoor Channel could bereduced.

 

The regulation ofprogramming services, cable television systems and satellite licensees issubject to the political process and has been in constant flux over the pastdecade. Further material changes in the law and regulatory requirements aredifficult to anticipate and our business may be harmed by futurelegislation, new regulation, deregulation or court decisions interpreting lawsand regulations.

 

**We must comply with many local, state,federal and environmental regulations, for which compliance may be costlyand may expose us to substantial penalties.**

 

Our recreational outdooractivity entities, GPAA and Lost Dutchman’s, share the general risks of alloutdoor recreational activities such as personal injury, environmentalcompliance and real estate and environmental regulation. In addition to thegeneral cable television industry regulations, we are also subject to variouslocal, state and federal regulations, including, without limitation,regulations promulgated by federal and state environmental, health and laboragencies. Our prospecting clubs are subject to various local, state and federalstatutes, ordinances, rules and regulations concerning zoning, developmentand other utilization of their properties. We cannot predict what impactcurrent or future regulations may have on these businesses. In addition,failure to maintain required permits or licenses, or to comply with applicableregulations, could result in substantial fines or costs or revocation of ouroperating licenses, which would have a material adverse effect on our businessand operating results.

 

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**If our goodwill or otherindefinite-lived intangibles become impaired, we will be required to take anon-cash charge which could have a significant effect on our reported netearnings.**

 

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

 

**Future issuance by us of preferredshares could adversely affect the holders of existing shares, and thereforereduce the value of existing shares.**

 

We are authorized toissue up to 25,000,000 shares of preferred stock. The issuance of any preferredstock could adversely affect the rights of the holders of shares of our commonstock, and therefore reduce the value of such shares. No assurance can be giventhat we will not issue shares of preferred stock in the future.

 

**Wedo 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, at the time of any potentialpayment of a cash dividend we may subject to contractual restrictions on,or prohibitions against, the payment of dividends.

 

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**ITEM2.                Unregistered Sales of Equity Securities and Use of Proceeds.**

 

None.

 

**ITEM3.                Defaults Upon Senior Securities.**

 

None.

 

**ITEM4.                Submission of Matters to a Vote of Security Holders.**

 

(a) Annual meeting of stockholders was held on May 16,2006.

 

(b) Stockholders voted for the election of Mr. ThomasH. Massie, Mr. David C. Merritt and Ms. Elizabeth J. Sanderson as directorswhose term shall expire in 2009. Messrs. Perry T. Massie and T. Bahnson Stanleycontinued as directors whose term shall expire in 2007. Messrs. Jerry R.Berglund and Ray V. Miller continued as directors whose term shall expirein 2008.

 

(c) Proposal One to elect three directors to theCompany’s board of directors to serve until the 2009 annual meeting ofstockholders resulted in the election of Mr. T. Massie with 17,520,158 (97.94%)votes for and 369,010 (2.06%) withheld, Mr. Merritt with 17,707,800 (98.99%)votes for and 181,368 (1.01%) withheld and Ms. Sanderson with 17,820,805(99.62%) votes for and 68,363 (0.38%) withheld.

 

**ITEM5.                Other Information**

 

None.

 

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**ITEM6.                Exhibits**

 
| **Exhibit****Number** | ** ** | **Description** |
|-----------------------|------------|-----------------|
|                  |       |            |
| 3.1                   |       |            | Certificate of Incorporation of Outdoor Channel  Holdings, Inc, a Delaware corporation (filed as Exhibit 3.1 to the  Company’s Current Report on Form 8-K filed on September 20, 2004 and  incorporated herein by reference) |
| 3.2                   |       |            | By-Laws of Outdoor Channel Holdings, Inc., a  Delaware corporation (filed as Exhibit 3.2 to the Company’s Current  Report on Form 8-K filed on September 20, 2004 and incorporated herein  by reference) |
| 4.1                   |       |            | Instruments defining the rights of security holders,  including debentures (see exhibits 3.1 and 3.2 above and Exhibit 4.1 to the  Company’s Form 10-Q for the period ended June 30, 2005 which is incorporated  herein by reference) |
| 10.1                  |       |            | Amendments to Revolving Credit Agreement and Term  Loan Agreement by and between the Company and U.S. Bank N.A. dated as of May  15, 2006 |
| 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 CommissionRelease No. 33-8238, this certification will be treated as “accompanying” thisQuarterly Report on Form 10-Q and not “filed” as part of such report forpurposes of Section 18 of the Securities Exchange Act of 1934, as amended, orotherwise subject to the liability of Section 18 of the Securities Exchange Actof 1934, as amended, and this certification will not be deemed to beincorporated by reference into any filing under the Securities Act of 1933, asamended, or the Securities Exchange Act of 1934, as amended, except to theextent that the registrant specifically incorporates it by reference.

 

**SIGNATURES**

 

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

 

 
| ** ** | **OUTDOOR CHANNEL HOLDINGS, INC.**                                                              |
|------------|-------------------------------------------------------------------------------------------------|
|       |                                                                                            |
|       | /s/ William A. Owen                                                                             |   |
| ** ** | **William A. Owen**                                                                             |
|       | Authorized Officer, Chief Financial Officer and  Controller  (Principal and Accounting Officer) |
|       | Date: August 9, 2006                                                                            |

 

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