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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-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 MARCH 31, 2004
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 0-17287
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OUTDOOR CHANNEL HOLDINGS, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Alaska 33-0074499
- ------------------------- ----------------------------
(State or other Juris- (IRS Employer Identification
diction of incorporation Number)
or organization)
43445 BUSINESS PARK DRIVE, SUITE 113
TEMECULA, CALIFORNIA 92590
- --------------------------------------------------------------------------------
(Address and zip code of principal executive offices)
(909) 699-4749
- --------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
Class at April 22, 2004
---------------------------- ---------------------------
Common Stock, $.02 par value 6,080,085
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2004
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AT MARCH 31, 2004 (UNAUDITED)
AND DECEMBER 31, 2003..............................................2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE
MONTHS ENDED MARCH 31, 2004 AND 2003...............................3
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
THREE MONTHS ENDED MARCH 31, 2004 AND 2003.........................4
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS........5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.........................................11
RECENT DEVELOPMENTS..................................................12
RISKS AND UNCERTAINTIES..............................................16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........23
ITEM 4. CONTROLS AND PROCEDURES..............................................23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS....................................................24
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................24
ITEM 5. OTHER INFORMATION....................................................24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................24
SIGNATURES....................................................................25
CERTIFICATIONS................................................................26
* * *
1
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
March 31, December 31,
------------ ------------
2004 2003
------------ ------------
ASSETS (unaudited)
------
Current assets:
Cash and cash equivalents $ 9,412 $ 7,214
Investment in available-for-sale securities 549 550
Accounts receivable, net of allowance for doubtful accounts of
$190 and $234 3,846 3,797
Inventories 67 68
Income tax refund receivable 680 1,143
Current portion of deferred tax assets, net 525 525
Other current assets 740 671
------------ ------------
Total current assets 15,819 13,968
------------ ------------
Property, plant and equipment at cost, net:
Membership division 3,287 3,253
Outdoor Channel equipment and improvements 2,132 2,032
------------ ------------
Property, plant and equipment, net 5,419 5,285
------------ ------------
Trademark, net of accumulated amortization of $105 and $101 114 118
Deferred tax assets, net 436 436
Deposits and other assets 39 41
------------ ------------
Totals $ 21,827 $ 19,848
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 1,253 $ 1,790
Accrued severance payments 143 291
Current portion of notes payable and capital lease obligations 156 133
Current portion of deferred revenue -- 409
Customer deposits 444 --
------------ ------------
Total current liabilities 1,996 2,623
Accrued severance payments, net of current portion 55 66
Notes payable and capital lease obligations, net of current portion -- 59
Deferred revenue, net of current portion 1,214 1,225
Deferred satellite rent obligations 363 380
------------ ------------
Total liabilities 3,628 4,353
------------ ------------
Minority interest in subsidiary 2,564 2,302
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; 25,000 shares authorized; none issued -- --
Common stock, $.02 par value; 75,000 shares authorized:
6,078 and 5,887 shares issued 122 118
Common stock subscriptions receivable -- (30)
Cost of treasury stock (76 shares) (400) (400)
Additional paid-in capital 8,064 6,768
Accumulated other comprehensive income 33 34
Retained earnings 7,816 6,703
------------ ------------
Total stockholders' equity 15,635 13,193
------------ ------------
Totals $ 21,827 $ 19,848
============ ============
See Notes to Unaudited Condensed Consolidated Financial Statements.
2
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three Months Ended March 31,
---------------------------
2004 2003
------------ ------------
Revenues:
Advertising $ 4,826 $ 3,842
Subscriber fees 3,162 2,501
Membership income 1,232 1,101
------------ ------------
Total revenues 9,220 7,444
------------ ------------
Expenses:
Satellite transmission fees 591 597
Advertising and programming 1,521 1,033
Selling, general and administrative 4,818 3,958
------------ ------------
Total expenses 6,930 5,588
------------ ------------
Income from operations 2,290 1,856
Other income (expense):
Interest expense (4) (18)
Interest income 19 18
------------ ------------
Income before provision for income taxes and minority interest 2,305 1,856
Provision for income taxes 930 734
------------ ------------
Income before minority interest 1,375 1,122
Minority interest in net income of consolidated subsidiary 262 201
------------ ------------
Net income $ 1,113 $ 921
============ ============
Earnings per common share:
Basic $ 0.19 $ 0.17
============ ============
Diluted $ 0.14 $ 0.16
============ ============
Weighted average number of common shares outstanding:
Basic 5,931 5,305
============ ============
Diluted 6,191 5,872
============ ============
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended March 31,
---------------------------
2004 2003
------------ ------------
Operating activities:
Net income $ 1,113 $ 921
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 299 202
Provision for doubtful accounts -- 64
Costs of services offset against subscription receivable -- 189
Realized gain on sale of available-for-sale securities -- (13)
Minority interest in net income of consolidated subsidiary 262 201
Tax benefit from exercise of stock options 466 --
Cash supplied (used) by changes in operating assets and liabilities:
Accounts receivable (49) (743)
Inventories 1 --
Other current assets (69) 180
Income tax refund receivable 463 --
Deposits and other assets 3 155
Accounts payable and accrued expenses (93) 618
Accrued severance payments (159) --
Deferred revenue (420) (187)
Deferred satellite rent obligations (17) (17)
------------ ------------
Net cash provided by operating activities 1,800 1,570
------------ ------------
Investing activities:
Purchases of property, plant and equipment (430) (762)
Purchases of available-for-sale securities -- (148)
Proceeds from sale of available-for-sale securities -- 36
Proceeds from notes receivable -- 36
------------ ------------
Net cash used in investing activities (430) (838)
------------ ------------
Financing activities:
Net payments of stockholder loans -- (15)
Principal payments on notes payable and capital leases (36) (40)
Proceeds from exercise of stock options 834 --
Proceeds from common stock subscriptions receivable 30 --
------------ ------------
Net cash provided by (used in) financing activities 828 (55)
------------ ------------
Net increase in cash and cash equivalents 2,198 677
Cash and cash equivalents, beginning of period 7,214 3,248
------------ ------------
Cash and cash equivalents, end of period $ 9,412 $ 3,925
============ ============
See Notes to Unaudited Condensed Consolidated Financial Statements.
4
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 1 - ORGANIZATION AND BUSINESS
DESCRIPTION OF OPERATIONS
Outdoor Channel Holdings, Inc. ("Outdoor Channel Holdings," or collectively with
its subsidiaries, the "Company") was incorporated under the laws of the State of
Alaska on October 22, 1984 under the name Global Outdoors, Inc. In 2003, the
corporate name was changed to its present name.
Our revenues include advertising fees from advertisements aired by The Outdoor
Channel, Inc. ("The Outdoor Channel") and from advertisements in "Gold
Prospector" magazine; subscriber fees paid by cable and direct broadcast
satellite, or DBS, operators that air on The Outdoor Channel; producer fees paid
by outside producers to air their programs on The Outdoor Channel; membership
fees from members in both LDMA-AU, Inc. ("Lost Dutchman's") and Gold Prospectors
Association of America, ("GPAA") and other income including products and
services related to gold prospecting, gold shows, trips and outings.
Other business activities consist of the promotion and sale of an "Alaska trip",
a gold mining expedition to the Cripple River property located near Nome,
Alaska, and the sale of memberships in Lost Dutchman's which entitle members to
engage in gold prospecting on its Arizona, California, Colorado, Georgia,
Michigan, Nevada, North Carolina, Oregon, and South Carolina properties. Outdoor
Channel Holdings has signed an agreement with another organization for the
mutual use of mining properties.
Outdoor Channel Holdings also owns a majority interest (82.5% and 83.6% at March
31, 2004 and 2003, respectively) in The Outdoor Channel, a national television
network devoted primarily to traditional outdoor activities, such as hunting,
fishing, shooting sports, rodeo, motor sports, gold prospecting, and related
life-style programming. Assuming that all outstanding options to purchase common
stock in The Outdoor Channel were exercised as of March 31, 2004 and 2003, the
Company would have owned approximately 66.9% and 67.7%, respectively. The
Outdoor Channel was incorporated under the laws of the State of Nevada in 1990
under the name Gold News Network, Inc. In 1996, the incorporated name was
changed to its present name.
NOTE 2 - UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial position of the
Company as of March 31, 2004 and its results of
operations and cash flows for the three months ended March 31, 2004 and 2003.
Information included in the consolidated balance sheet as of December 31, 2003
has been derived from, and certain terms used herein are defined in the audited
financial statements of the Company as of December 31, 2003 (the "Audited
Financial Statements") included in the Company's Annual Report on Form 10-KSB
(the "10-KSB") for the year ended December 31, 2003 that was previously filed
with the Securities and Exchange Commission (the "SEC"). Pursuant to the rules
and regulations of the SEC, certain information and disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted from these financial statements unless significant changes
have taken place since the end of the most recent fiscal year. Accordingly,
these unaudited condensed consolidated financial statements should be read in
conjunction with the Audited Financial Statements and the other information also
included in the 10-KSB.
The results of the Company's operations for the three months ended
March 31, 2004 are not necessarily indicative of the results of operations for
the full year ending December 31, 2004.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities as of the dates of the condensed consolidated balance
sheets and reported amount of revenues and expenses for the periods presented.
Accordingly, actual results could materially differ from those estimates.
5
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 3 - EARNINGS PER SHARE
The Company has presented "basic" and "diluted" earnings per common
share in the accompanying condensed consolidated statements of income in
accordance with the provisions of Statement of Financial Accounting Standards
No. 128, EARNINGS PER SHARE ("SFAS 128"). Basic earnings per common share is
calculated by dividing net income applicable to common stock by the weighted
average number of common shares outstanding during each period. The calculation
of diluted earnings per common share is similar to that of basic earnings per
common share, except that the denominator is increased to include the number of
additional common shares that would have been outstanding if all potentially
dilutive common shares of the Company and The Outdoor Channel, its 82.5%-owned
subsidiary, were issued during the period.
The computation of diluted earnings per share takes into account the
effects on the weighted average number of common shares outstanding of the
assumed exercise in the three months ended March 31, 2004 and 2003 of all of the
outstanding stock options of the Company and The Outdoor Channel, adjusted for
the application of the treasury stock method, and the assumed payment in 2003 of
deferred compensation that had been payable by the Company in common stock. The
computation of diluted earnings per share for the three months ended March 31,
2004 also takes into account the reduction in net income applicable to common
stock attributable to the increase in the minority interest (from approximately
17.5% to 33.1%) in the net income of The Outdoor Channel that results from the
assumed exercise of its outstanding stock options (the effect on net income for
the three months ended March 31, 2003 of the assumed exercise of stock options
was not material). All of the options outstanding at March 31, 2004 were
included in the computation of diluted net income per share. The number of
shares potentially issuable at March 31, 2003 upon the exercise of the Company's
stock options that were not included in the computation of diluted net income
per share because they were antidilutive totaled 30.
The following table summarizes the calculation of the weighted average
common shares outstanding for basic and diluted earnings per share for the three
months ended March 31, 2004 and 2003:
Three Months Ended March 31,
---------------------
2004 2003
--------- ---------
Numerators:
Net income - basic $ 1,113 $ 921
Deduct increase in minority interest attributable to
assumed exercise of dilutive stock options of The
Outdoor Channel (225) --
--------- ---------
Net income - diluted $ 888 $ 921
========= =========
Denominators:
Weighted average common shares outstanding - basic 5,931 5,305
Dilutive effect of potentially issuable common shares for
accrued deferred compensation -- 134
Dilutive effect of potentially issuable common shares upon
exercise of stock options of the Company as adjusted for
the application of the treasury stock method 260 433
--------- ---------
Diluted weighted average common shares outstanding 6,191 5,872
========= =========
6
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 4 - PRO FORMA EFFECTS OF STOCK OPTIONS
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), provides for the use of a fair value
based method of accounting for employee stock compensation. However, SFAS 123
also allows an entity to continue to measure compensation cost for stock options
granted to employees using the intrinsic value method of accounting prescribed
by Accounting Principles Board Opinions No. 25, Accounting for Stock Issued to
Employees" ("APB 25"), which only requires charges to compensation expense for
the excess, if any, of the fair value of the underlying stock at the date a
stock option is granted (or at an appropriate subsequent measurement date) over
the amount the employee must pay to acquire the stock, if such amounts differ
materially. The Company has elected to continue to account for employee stock
options using the intrinsic value method under APB 25. By making that election,
it is required by SFAS 123 and Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure" to
provide pro forma disclosures of net income and earnings per share as if a fair
value based method of accounting had been applied.
Since the Company has elected to continue to use the intrinsic value
method of accounting prescribed by APB 25 in accounting for stock options
granted to employees and the exercise price of all of the options granted to
employees has been equal to or greater than the fair market value at the date of
grant, no earned or unearned compensation cost was recognized in the
accompanying condensed consolidated financial statements for the stock options
granted by the Company to its employees (The Outdoor Channel did not grant any
options in the three months ended March 31, 2004 and 2003).
The Company's historical net income and earnings per common share and
pro forma net income and earnings per common share assuming compensation cost
had been determined for the three months ended March 31, 2004 and 2003 based on
the fair value at the grant date for all awards by the Company using the
Black-Scholes option pricing model consistent with the provisions of SFAS 123
are set forth below:
Three Months Ended March 31,
----------------------------
2004 2003
------------ ------------
Net income:
As reported $ 1,113 $ 921
Stock-based employee compensation
expense assuming a fair value
based method had been used for
all awards (758) (48)
------------ ------------
Pro forma $ 355 $ 873
============ ============
Basic earnings per share:
As reported $ 0.19 $ 0.17
Pro forma $ 0.06 $ 0.16
Diluted earnings per common share:
As reported $ 0.14 $ 0.16
Pro forma $ 0.02 $ 0.15
The fair value of each option granted by the Company in the three
months ended March 31, 2004 and the year ended December 31, 2003 was estimated
on the date of grant using the Black-Scholes option pricing model, assuming no
expected dividends with the following assumptions:
Three Months Ended Year Ended
March 31, 2004 December 31, 2003
------------------ -------------------
Risk-free interest rate 4% 2.3% - 3.3%
Expected dividends 0% 0%
Expected life of the option (years) 10 5
Volatility factor 79% 77%
7
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 5 - EQUITY TRANSACTIONS
ISSUANCES OF COMMON STOCK BY THE COMPANY
During the three months ended March 31, 2004, the Company received cash
proceeds of approximately $834,000 from the exercise of options for the purchase
of 190,434 shares of common stock.
OUTDOOR CHANNEL HOLDINGS, INC. STOCK OPTION PLANS
Descriptions of Outdoor Channel Holdings' and The Outdoor Channel's
stock option plans are included in Note 8 of the Company's Annual Report on Form
10-KSB for the year ended December 31, 2003. A summary of the status of the
options granted under Outdoor Channel Holdings' stock option plans and outside
of those plans as of March 31, 2004 and the changes in options outstanding
during the three months then ended is presented in the table that follows:
Three Months Ended March 31, 2004
---------------------------------
Weighted
Average
Shares Exercise
(in thousands) Price
-------------- --------------
Outstanding at beginning of period 659 $16.42
Options granted 50 32.00
Options exercised (190) 4.38
Options canceled or expired (4) 13.94
--------------
Options outstanding at end of period 515 $22.40
==============
THE OUTDOOR CHANNEL'S STOCK OPTION PLAN
No options were granted, exercised or cancelled during the three months
ended March 31, 2004 under The Outdoor Channel's stock option plan. As a result,
options to purchase 2,487 shares of The Outdoor Channel's common stock at prices
ranging from $1.50 to $5.00 per share remained outstanding and exercisable at
March 31, 2004.
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company is leasing its administrative facilities from Musk Ox
Properties, LP, which in turn is owned by Messrs. Perry T. Massie and Thomas H.
Massie, principal shareholders of the Company. The lease agreements currently
require monthly rent payments of $20. These lease agreements expire on December
31, 2005. Rent expense was $61 in both of the three months ended March 31, 2004
and 2003.
NOTE 7 - SEGMENT INFORMATION
Pursuant to the Provisions of Statement of Financial Accounting
Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION ("SFAS 131"), the Company reports segment information in the same
format as reviewed by the Company's Chief Operating Decision Maker (the "CODM").
The Company now segregates its business activities into The Outdoor Channel,
Membership Division and Corporate.
The Outdoor Channel is a separate business activity whereby the
subsidiary broadcasts television programming on "The Outdoor Channel" 24 hours a
day, seven days a week. The Outdoor Channel earns advertising and subscription
revenues.
Lost Dutchman's and GPAA membership sales and related activities are
reported in the Membership Division as they deal with prospecting and rights to
use land and facilities for camping and recreational vehicle parking. The
Membership Division also includes the activity of the Company whereby members
participate in group prospecting at a Company site and attend the annual Alaska
trip.
8
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 7 - SEGMENT INFORMATION (continued)
Prior to September 30, 2003, the Company had reported segment
information for the operations associated with its Trips and Outings Division
(the "Trips and Outings Segment"). The sales, operating income and assets of the
Trips and Outings Segment no longer meet the thresholds that require separate
disclosure and the CODM no longer separately reviews such information.
Accordingly, the Company discontinued reporting separate Trips and Outings
Segment information in the third quarter of 2003.
In the fourth quarter of 2003, the Company began to report corporate
overhead that is applicable to both segments, but not directly related to
operations in a separate business segment, Corporate. The expenses allocated to
this business segment consisted primarily of professional fees and certain
general and administrative expenses.
Information with respect to these reportable business segments as of
and for the three months ended March 31, 2004 and 2003 follows. In addition, the
Trips and Outing segment's and the Corporate segment's comparative information
for the three months ended March 31, 2003 has been reclassified to conform with
the presentation for the three months ended March 31, 2004.
Income (Loss) Additions to
Before Income Depreciation Property,
As of and for the Taxes and Total and Plant and
Three Months Ended Revenues Minority Interest Assets Amortization Improvements
- ------------------- ------------ ----------------- ------------ ------------ -------------
March 31, 2004
- ------------------
The Outdoor Channel $ 7,894 $ 2,407 $15,756 $ 213 $ 311
Membership Division 1,326 148 6,071 86 119
Corporate - (250) - - -
------------ ------------ ------------ ------------ ------------
Totals $ 9,220 $ 2,305 $21,827 $ 299 $ 430
============ ============ ============ ============ ============
March 31, 2003
- -------------------
The Outdoor Channel $ 6,246 $ 1,953 $ 9,135 $ 137 $ 618
Membership Division 1,198 16 4,346 65 144
Corporate - (113) - - -
------------ ------------ ------------ ------------ ------------
Totals $ 7,444 $ 1,856 $13,481 $ 202 $ 762
============ ============ ============ ============ ============
Intersegment sales amounted to approximately $149 in both the three
months ended March 31, 2004 and 2003.
9
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 8 - SUBSEQUENT EVENTS
On April 21, 2004, the Company announced the merger of GPAA with The
Outdoor Channel. Under the terms of the merger agreement, each share of The
Outdoor Channel common stock not already held by Outdoor Channel Holdings or its
subsidiaries will be exchanged into 0.65 shares of Outdoor Channel Holdings'
common stock and each outstanding option of The Outdoor Channel will be
exchanged into an option to purchase 0.65 shares of Outdoor Channel Holdings'
common stock.
Based on the outstanding capitalization of The Outdoor Channel as of
April 20, 2004, Outdoor Channel Holdings expects to issue at the closing
approximately 1,200 shares of its common stock as well as options to purchase
approximately 1,600 additional shares using the exchange ratio set forth in the
merger agreement. Based on the exchange ratio and the capitalization of each
company as of April 20, 2004, on completion of the proposed transaction, Outdoor
Channel Holdings would expect to have outstanding approximately 7,200 total
shares of common stock as well as options to purchase approximately 2,100
additional shares. The actual number of shares and options will depend upon the
outstanding capitalization of each company at the time of closing. The proposed
transaction is expected to qualify as a tax-free reorganization under the
Internal Revenue Code. As of April 20, 2004, The Outdoor Channel had options to
purchase approximately 2,500 shares of common stock outstanding, all of which
were exercisable (see Note 5). Accordingly, if the merger had closed on April
20, 2004, the Company would have incurred a non-cash charge to operating
expenses equal to the difference between the aggregate exercise prices and the
intrinsic value of The Outdoor Channel options it would issue as a result of the
exchange which, based on the closing price of Outdoor Channel Holdings' stock on
April 20, 2004 of $40.00 per share, would have amounted to approximately
$61,000.
* * *
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following information includes forward-looking statements, the
realization of which may be impacted by certain factors, including those factors
discussed in Risk and Uncertainties below.
GENERAL
Outdoor Channel Holdings, Inc. ("Outdoor Channel Holdings," or
collectively with its subsidiaries, the "Company") owns approximately 82.5% of
The Outdoor Channel, Inc. (the "Outdoor Channel" or "Channel"). In the event all
outstanding options to purchase Common Stock in the Channel were exercised, as
at March 31, 2004, the Company would own approximately 66.9% of The Outdoor
Channel. The Outdoor Channel is a national television network devoted primarily
to traditional outdoor activities, such as hunting, fishing, shooting sports,
rodeo, motor sports, gold prospecting and related life style programming. We
also own and operate related businesses which serve the interests of viewers of
The Outdoor Channel and other outdoor enthusiasts. These related businesses
include: LDMA-AU, Inc. ("Lost Dutchman's") and Gold Prospectors' Association of
America, Inc. ("GPAA"). Lost Dutchman's is a national gold prospecting
campground club with approximately 6,300 members and properties in Arizona,
California, Colorado, Georgia, Michigan, Nevada, North Carolina, Oregon and
South Carolina. We believe GPAA is one of the largest gold prospecting clubs in
the world with approximately 33,100 active members. GPAA is the publisher of the
"Gold Prospector" magazine and owner of a 2,300 acre property near Nome, Alaska
used to provide outings for a fee to its members.
From July 30, 1997 to August 1, 2003, the Company's Common Stock had
been traded on the NASD's Over-the-Counter Bulletin Board under the symbol
"GLRS." Effective August 4, 2003, Outdoor Channel Holdings, Inc. (formerly
Global Outdoors, Inc.) changed its symbol to "OUTD."
This discussion should be read in conjunction with the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2003 that was previously
filed with the Securities and Exchange Commission.
SAFE HARBOR STATEMENT
The following information may include forward-looking statements.
Actual results could differ materially. The statements contained in this report
that are not historical are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), including statements, without limitation, regarding our
expectations, beliefs, intentions or strategies regarding the future. We intend
that such forward-looking statements be subject to the safe-harbor provided by
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements relate to, among other things: (1) expected revenue and earnings
growth and changes in mix; (2) anticipated expenses including advertising,
programming, personnel and bad debts; (3) Nielsen Media Research, which we refer
to as Nielsen, estimates regarding total households and cable and satellite
homes subscribing to The Outdoor Channel; and (4) estimates regarding the size
of target markets. These statements are qualified by important factors that
could cause our actual results to differ materially from those reflected by the
forward-looking statements. Such factors include but are not limited to: (1)
market acceptance of our programming and services; (2) our ability to establish
and expand direct and indirect distribution channels; (3) competition from a
better financed entrant into The Outdoor Channel's niche and (4) our ability to
fully-integrate the operations of The Outdoor Channel and to realize expected
synergies and expected benefits resulting from the merger.
Important factors that we believe might cause actual results to differ
from any results expressed or implied by these forward-looking statements are
discussed in Risks and Uncertainties. In assessing forward-looking statements
contained herein, readers are urged to read carefully all cautionary statements
contained in this Form 10-Q. For these forward-looking statements, we claim the
protection of the safe harbor for forward-looking statements in Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934.
11
RECENT DEVELOPMENTS
On April 21, 2004, the Company announced the merger of GPAA with The
Outdoor Channel. Under the terms of the merger agreement, each share of The
Outdoor Channel common stock not already held by Outdoor Channel Holdings or its
subsidiaries will be exchanged into 0.65 shares of Outdoor Channel Holdings'
common stock and each outstanding option of The Outdoor Channel will be
exchanged into an option to purchase 0.65 shares of Outdoor Channel Holdings'
common stock.
Based on the outstanding capitalization of The Outdoor Channel as of
April 20, 2004, Outdoor Channel Holdings expects to issue at the closing
approximately 1.2 million shares of its common stock as well as options to
purchase approximately 1.6 million additional shares using the exchange ratio
set forth in the merger agreement. Based on the exchange ratio and the
capitalization of each company as of April 20, 2004, on completion of the
proposed transaction, Outdoor Channel Holdings would expect to have outstanding
approximately 7.2 million total shares of common stock as well as options to
purchase approximately 2.1 million additional shares. The actual number of
shares and options will depend upon the outstanding capitalization of each
company at the time of closing. The proposed transaction is expected to qualify
as a tax-free reorganization under the Internal Revenue Code. As of April 20,
2004, The Outdoor Channel had options to purchase approximately 2.5 million
shares of common stock outstanding, all of which were exercisable. Accordingly,
if the merger had closed on April 20, 2004, the Company would have incurred a
non-cash charge to operating expenses equal to the difference between the
aggregate exercise prices and the intrinsic value of The Outdoor Channel options
it would issue as a result of the exchange which, based on the closing price of
Outdoor Channel Holdings' stock on April 20, 2004 of $40.00 per share, would
have amounted to approximately $61 million.
RECENT ACCOUNTING DEVELOPMENTS
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure" ("SFAS 148"), which amended SFAS No. 123, "Accounting for
Stock-Based Compensation" to provide alternative methods of transition for
voluntary change to the fair value based method of accounting for stock-based
compensation. The Company has not made and does not currently intend to make
such a change. In addition, SFAS 148 amended the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the chosen method on reporting results. The Company has
included the disclosures required by SFAS 148 in Notes 3 and 4 to the
accompanying condensed consolidated financial statements.
The FASB had issued certain other accounting pronouncements as of March
31, 2004 that will become effective in subsequent periods; however, management
of the Company does not believe that any of those pronouncements would have
significantly affected the Company's financial accounting measurements or
disclosures had they been in effect during the three months ended March 31, 2004
or 2003 or that will have a significant effect at the time they become
effective.
COMPARISON OF OPERATING RESULTS FOR QUARTERS ENDED MARCH 31, 2004 AND MARCH
31, 2003
REVENUES
Our revenues include revenues from advertising fees, subscriber fees,
GPAA and Lost Dutchman's membership sales, merchandise sales and sponsored
outings to prospect for gold. Advertising revenue is generated from the sale of
advertising time on The Outdoor Channel and from the sale of advertising space
in publications such as the "Gold Prospectors & Treasure Hunters in the Great
Outdoors" magazine. For the three months ended March 31, 2004 and 2003, The
Outdoor Channel generated approximately 98.1% and 97.5% of our Advertising
revenue, respectively. Subscriber fees are solely related to The Outdoor Channel
business segment. Membership income is generated by our activities other than
The Outdoor Channel.
Total revenues for the three months ended March 31, 2004 were
$9,220,000, an increase of $1,776,000, or 23.9%, compared to revenues of
$7,444,000 for the three months ended March 31, 2003. This increase was the
result of changes in several items comprising revenue.
12
Advertising revenue for the three months ended March 31, 2004 was
$4,826,000, an increase of $984,000 or 25.6% compared to $3,842,000 for the
three months ended March 31, 2003. The increase is driven by The Outdoor Channel
being better able to compete for national advertising business as a result of
obtaining Nielsen ratings which allowed us to demonstrate our household
delivery. Nielsen reported that we had approximately 26 million subscribers at
the end of March 2004 compared to 23 million at the end of March 2003 an
increase of 3 million or 13%. The fact that we had Nielsen ratings and
demographic data coupled with the increased subscribers allowed us to better
utilize our advertising inventory and increase our effective rates realized on
our advertising time on The Outdoor Channel. Further, as demand for our air time
increased we were able to increase our prices for fees paid by third party
programmers to air their programs on The Outdoor Channel.
Subscriber fees for the three months ended March 31, 2004 were
$3,162,000, an increase of $661,000 or 26.4% compared to $2,501,000 for the
three months ended March 31, 2003. The increase was primarily due to contractual
subscriber fee rate increases with existing affiliates; beginning of payments
late in 2003 from certain carriers who had previously received The Channel
without charge; and the fall 2002 launch and subsequent increasing penetration
of The Outdoor Channel on DirecTV.
Membership income for the three months ended March 31, 2004 was
$1,232,000, an increase of $131,000 or 11.9% compared to $1,101,000 for the
three months ended March 31, 2003. We believe the increase in membership income
was principally the result of increases in memberships and merchandise sales
reflect our strong push for membership renewal via direct mail, programming on
The Outdoor Channel and via our website. Further we experienced more successful
gold shows early in 2004 compared to the same period in 2003. We believe that
this is a result of expanded distribution of The Outdoor Channel allowing our
advertisements to reach and draw more participants in the first three months of
2003.
EXPENSES
Expenses consist of the cost of the Company's satellite transmission
fees, advertising and programming and selling, general and administrative
expenses.
Total expenses for the three months ended March 31, 2004 were
$6,930,000, an increase of $1,342,000, or 24.0%, compared to $5,588,000 for the
three months ended March 31, 2003. As a percentage of revenues, total expenses
are 75.2% and 75.1% in the three months ended March 31, 2004 and 2003,
respectively. The increase in expenses was due to several factors but is
principally driven by increasing costs to support our revenue growth.
Satellite transmission fees for the three months ended March 31, 2004
were $591,000, a decrease of $6,000, or 1%, compared to $597,000 for the three
months ended March 31, 2003. This relatively static comparison reflects the
fixed nature of our contracts for these services.
Advertising and programming expenses for the three months ended March
31, 2004 were $1,521,000, an increase of $488,000 or 47.2% compared to
$1,033,000 for the three months ended March 31, 2003. The increase in
advertising and programming expenses is principally a result of our increased
spending on consumer and trade industry awareness campaigns to build demand for
and awareness of The Outdoor Channel. Part of the increase is also a result of
our decision to produce more of our programming in-house.
Selling, general and administrative expenses for the three months ended
March 31, 2004 were $4,818,000, an increase of $860,000 or 21.7% compared to
$3,958,000 for the three months ended March 31, 2003. As a percent of revenues,
selling, general and administrative expenses were 52.3% and 53.2% at March 31,
2004 and 2003, respectively. The increase in the amount of these expenses is due
to a number of factors including increases in personnel expenses primarily
resulting from the increase in the number of employees from 102 at the end of
March 2003 to 123 by the end of March 2004; increased depreciation expense as a
result of our equipment purchases in 2004 and 2003 to support our growth; our
increased travel related to our increased sales staff and others to promote The
Channel; increased professional fees including public relations, accounting and
legal fees.
13
INCOME FROM OPERATIONS
Income from operations for the three months ended March 31, 2004 was
$2,290,000, an increase of $434,000 or 23.4% compared to $1,856,000 for the
three months ended March 31, 2003. As a percent of revenues, income from
operations was 24.8% and 24.9% at March 31, 2004 and 2003, respectively.
NET INTEREST (EXPENSE)/INCOME
Net interest (expense)/income for the three months ended March 31, 2004
was $15,000, an increase of $15,000 compared to a net zero balance for the three
months ended March 31, 2003. This improvement was primarily due to the
retirement of the Company's debt to stockholders during 2003, resulting in less
interest expense complemented by the interest earned on its increased cash
balances for the three months ended March 31, 2004 compared to the three months
ended March 31, 2003.
INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST IN NET
INCOME OF CONSOLIDATED SUBSIDIARY
Income before provision for income taxes and minority interest
increased slightly as a percentage of revenues to 25.0% for the three months
ended March 31, 2004 compared to 24.9% for the three months ended March 31,
2003.
For The Outdoor Channel business segment, income before provision for
income taxes and minority interest as a percentage of revenue decreased to 30.5%
for the three months ended March 31, 2004, compared to 31.3% for the three
months ended March 31, 2003. The decrease was due mainly to the growth of our
advertising and programming expenses as we continue to spend on creating demand
for The Outdoor Channel.
For the membership division segment, income (loss) before provision for
income taxes and minority interest as a percentage of revenues increased to
11.2% for the three months ended March 31, 2004 compared to 1.3% for the three
months ended March 31, 2003 principally reflecting a concerted effort to control
costs and making adjustments in our marketing and advertising effort that
yielded increased sales while spending less on selling, general and
administrative expenses.
For the corporate business segment, loss before provision for income
taxes and minority interest for the three months ended March 31, 2004 was
$250,000, an increase of the loss of $137,000 or 121.2% compared to $113,000 for
the three months ended March 31, 2003. As a percent of revenues, corporate loss
from operations was 2.7% and 1.5% at March 31, 2004 and 2003, respectively. The
expenses allocated to this business segment include: professional fees including
public relations, accounting and legal fees, business insurance, board of
directors fees and expenses and an allocation of corporate officers' payroll and
related expenses. The increase in the expenses of corporate business segment is
principally related to legal fees resulting from corporate restructuring and
various securities filings.
PROVISION FOR INCOME TAXES
The provision for income taxes for the three months ended March 31,
2004 was $930,000, an increase of $196,000 or 26.7% as compared to $734,000 for
the three months ended March 31, 2003. The increase was due to the Company
earning more taxable income in the first three months of 2004 as compared to the
first three months of 2003. The effective income tax rate was approximately
40.3% and 39.5% for the three months ended March 31, 2004 and 2003,
respectively.
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED SUBSIDIARY
Minority interest for the three months ended March 31, 2004 was
$262,000 compared to $201,000 for the three months ended March 31, 2003. This
was primarily due to the increased profitability of The Outdoor Channel along
with an increase in the percentage ownership of the minority interest.
NET INCOME
Net income for the three months ended March 31, 2004 was $1,113,000 an
increase of $192,000 or 20.8% compared to $921,000 for the three months ended
March 31, 2003. This was due to the increased profitability of The Outdoor
Channel and membership division partially offset by the increased losses of the
corporate segment.
14
EARNINGS PER SHARE
Earnings per common share for the three months ended March 31, 2004 was
$0.19 per basic share or $0.14 per diluted share compared with $0.17 per basic
share or $0.16 per diluted share for the three months ended March 31, 2003.
Diluted earnings per share for both the three months ending March 31, 2004 and
March 31, 2003 reflect the material effects of the assumed exercise of all of
the outstanding stock options granted by us and our subsidiary, The Outdoor
Channel, and the application of the treasury stock method to the shares assumed
to have been issued.
The common stock of The Outdoor Channel is not publicly traded. In
applying the treasury stock method in connection with the assumed exercise of
the outstanding options of The Outdoor Channel and the computation of diluted
earnings per share, we had determined the fair value of the shares of our
subsidiary based on the selling price for those shares in actual cash
transactions. However, there have been only a limited number of such
transactions at infrequent intervals.
During 2004, we obtained a valuation of The Outdoor Channel's shares
from an independent valuation firm. That valuation was significantly above the
value we had used in the three months ended March 31, 2003. We believe that this
valuation is the best estimate to use as of March 31, 2004. Under the treasury
stock method, the higher estimate resulted in a significant increase in the
number of shares that would have been issued to the holders of The Outdoor
Channel options and the portion of the net income of The Outdoor Channel
allocable to minority stockholders in the computation of diluted earnings per
share.
LIQUIDITY AND CAPITAL RESOURCES
The Company provided cash from operations of $1,800,000 in the three
months ended March 31, 2004, compared to $1,570,000 in the three months ended
March 31, 2003 and had a cash and cash equivalents balance of $9,412,000 at
March 31, 2004, which was an increase of $2,198,000 from the balance of
$7,214,000 at December 31, 2003. Current assets increased to $15,819,000 at
March 31, 2004 compared to $13,968,000 at December 31, 2003. Current liabilities
decreased to $1,996,000 at March 31, 2004 compared to $2,623,000 at December 31,
2003. Net working capital increased to $13,823,000 at March 31, 2004, compared
to $11,345,000 at December 31, 2003. Total liabilities decreased to $3,628,000
at March 31, 2004 compared to $4,353,000 at December 31, 2003.
For the three months ended March 31, 2004, the Company generated an
operating profit of $2,290,000 compared to an operating profit of $1,856,000 for
the three months ended March 31, 2003. From 2000 through the present, the
Company has financed its activities primarily from cash flows from operations.
Between the Company and The Outdoor Channel, we have two lines of credit
aggregating to $1,650,000 with no outstanding borrowings and a standby letter of
credit for $140,000 issued under the line of credit as of March 31, 2004. The
Company does not have any present plans that would effect liquidity requirements
on a long-term basis. The Company had no significant capital commitments as of
March 31, 2004. The capital improvements the Company made in 2003 and in the
first three months of 2004, which included purchasing high definition camera
equipment for The Outdoor Channel, were funded with cash from operations. The
long-term liquidity requirement could change in the event the Company changes
its business strategy, including The Outdoor Channel's methods of increasing
subscribers, producing in-house programming and/or making a significant
acquisition.
As of March 31, 2004, the Company had a note in the amount of $88,000
payable to a bank outstanding at an effective interest rate of 5.00%. This note
is secured by substantially all of the Company's assets and is personally
guaranteed by Perry T. Massie and Thomas H. Massie. The Company retired this
note in April 2004.
As of March 2004, the Company is generating sufficient cash flow from
operations to meet its short-term cash flow requirements. The Outdoor Channel is
generating cash flow in excess of its short-term cash flow requirements and is
continuing the trend of increased revenues. Management believes that the
Company's existing cash resources and anticipated cash flows from operations
will be sufficient to fund the Company's operations at current levels and
anticipated increased levels through January 1, 2005. To the extent that such
amounts are insufficient to finance the Company's working capital requirements,
the Company could be required to seek financing. There can be no assurance that
equity or debt financing will be available if needed or, if available, will be
on terms favorable to the Company or its shareholders. Significant dilution may
be incurred by present shareholders as a result of any such financing.
15
The Company continually reviews its business opportunities to assess
feasibility of enhanced operations or competitive position. The results of such
analysis could result in the dedication of capital to take advantage of the
opportunities so identified. Currently the Company is reviewing modest
improvements to its properties and is reviewing the capital requirements for
broadcasting in high definition. To date, the Company has purchased some high
definition equipment out of cash flow. Significant commitments for additional
capital purchases have not been made.
RISK AND UNCERTAINTIES
Our financial results will be significantly impacted in the quarter in
which we complete the acquisition of the shares of The Outdoor Channel,
Inc. that we do not already hold.
Under the terms of the merger agreement between GPAA and The Outdoor
Channel, we will acquire all of the shares of The Outdoor Channel that we do not
currently hold and we will issue options to purchase approximately 1.6 million
shares of the Company's common stock in exchange for retiring options to acquire
approximately 2.5 million shares of The Outdoor Channel's common stock. As a
result of the option exchange, we will be required to record, when the merger
closes, a non-cash charge equal to the difference between the aggregate exercise
price and the intrinsic value of the number of vested options of The Outdoor
Channel. If the merger were to have closed on the day of the signing of the
merger agreement, April 20, 2004, the non-cash charge, based on the closing
price of our stock of $40.00 per share, would have been approximately $61
million. The actual amount of the non-cash charge resulting from the exchange of
options will ultimately be determined by the number of options exchanged in the
merger and the stock price for our common stock on the date the transaction is
consummated. This non-cash charge will cause us to report a significant net loss
for the quarter in which the merger is consummated, and such an event may have a
negative impact on our stock price.
We may not be able to effectively execute our business plan to increase
our revenues.
Our strategy includes (1) expanding marketing efforts to grow our
subscriber base, (2) aggressively pursuing national advertising accounts, (3)
increasing production and licensing high quality programming, and (4) seeking
new membership in our club organizations - GPAA and Lost Dutchman's.
Growing our subscriber base depends upon many factors such as the
success of our marketing efforts in driving consumer demand for our Channel,
overall growth in cable and DBS subscribers, the popularity of our programming,
and our ability to negotiate new carriage agreements and maintain existing
agreements and distribution. There can be no assurance that we will be able to
increase the subscriber base of The Outdoor Channel on cable and DBS systems or
that such carriage will not decrease.
Our ability to aggressively pursue national advertising accounts and
thus to increase advertising rates depends upon the popularity of our
programming and the demographics of our viewers, as well as strategies taken by
our competitors, strategies taken by advertisers and the relative bargaining
power of advertisers. We cannot assure you that our sponsors will pay
advertising rates for commercial air time at which we can make a profit or that
we will be able to attract new advertising sponsors.
Building a library of programs by increasing our production and
licensing high quality programming and program distribution rights requires
significant resources. We currently produce approximately 15% of our
programming. Although we have recently upgraded our Temecula, California,
production facility, we expect that additional expenditures will be required.
Additionally, we rely on our producers and hosts to produce our programming. We
acquire the remaining percentage of our shows from independent producers.
Although we are generally able to acquire shows at costs that allow us to
generate a profit, there is no assurance that we will be able to do so in the
future. There can be no assurances that we will successfully acquire, develop or
produce original programming of interest to our audience.
16
Our ability to attract new membership in our club organizations - GPAA
and Lost Dutchman's, depends upon our ability to attract viewers with these
interests to The Outdoor Channel and the success of direct mail campaigns,
continued sponsorship of gold shows around the country and introductory outings
to be held at our campsites. We cannot assure you that we will succeed in
cross-selling our club organizations, their products and services to viewers of
The Outdoor Channel or that viewers will maintain current interest levels in
these activities. Further we cannot assure you that our direct mail campaigns
will drive interest in the clubs or that continued sponsorship of gold shows
around the country and introductory outings to be held at our campsites will
successfully attract new members or retain existing members.
If the costs associated with increasing the number of our subscribers
are higher than we anticipate, our rate of growth could be less than
currently planned.
Although we currently have plans to increase our marketing and sales
efforts to increase our number of subscribers, which in turn could increase our
advertising rates, we may not be able to do so economically. If the cost of
increasing the number of our subscribers is too expensive, or if the benefits of
doing so do not materialize, we may not be able to achieve our current plans to
expand and improve our business and operating results or to prevent a decrease
in the number of subscribers.
If The Outdoor Channel is placed in unpopular program packages by cable
or DBS operators, or if service fees are increased for our subscribers,
the number of viewers may decline.
We do not control which cable channels The Outdoor Channel is packaged
with by cable or DBS operators. The placement of The Outdoor Channel in an
unpopular program package could reduce the number of our viewers. We do not set
the prices charged by cable and DBS operators to their subscribers when The
Outdoor Channel is packaged with other cable channels. The prices for the
channel packages in which The Outdoor Channel is bundled may be set too high to
appeal to individuals who might otherwise be interested in our network. Further,
if The Outdoor Channel is bundled with networks that do not appeal to our
viewers or is moved to packages with fewer subscribers, we will lose viewers.
These factors may adversely affect our viewership and harm our ability to
achieve our carriage goals.
We may not be able to increase our revenues sufficiently to cover
increased expenses relating to programming costs.
The cost of programming has generally increased for the cable industry.
We plan to build our programming library through the acquisition of long-term
broadcasting rights or the outright ownership of programs. This is expected to
lead to a substantial increase in programming costs. We cannot assure you that
we will be able to successfully recover the cost of developing or acquiring
programming, whether produced by us or acquired from third-party producers.
The development, production and completion of television programs
requires a significant amount of capital. There are substantial financial risks
inherent in developing and producing television programs. Actual program costs
may exceed their budgets. Factors such as labor disputes, death or disability of
key spokespersons or program hosts, damage to film negatives, master tapes and
recordings or adverse weather conditions may cause cost overruns and delay or
prevent completion of a project.
If we fail to develop and distribute popular programs, our viewership
would likely decline and cause our advertising revenue to decrease.
Our operating results depend significantly upon the generation of
advertising revenue, mainly from manufacturers of products used by outdoorsmen.
Our advertising success largely depends on our Nielsen ratings, which estimates
the number of viewers of The Outdoor Channel, and this directly impacts the
level of interest of advertisers. If we fail to program popular shows to
maintain or increase our current number of viewers, our Nielsen ratings could
decline, which would likely cause our advertising revenue to decline.
We may not be able to retain and recruit sports personalities that
appeal to our viewers as spokespersons and hosts.
17
Our success depends, in part, upon our ability to recruit, contract
with and retain sportspersons who have the recognition, ability and charisma to
make television programs and events interesting and entertaining to our viewers.
There can be no assurance that we will be able to retain our current
spokespersons and hosts or identify and contract with new spokespersons and
hosts in the future. Our failure to attract and retain spokespersons and hosts
that appeal to our viewing audience could lead to a decline in our audience and
market share.
We may not be able to effectively manage our projected growth.
We have undergone rapid and significant growth over the last several
years, and our strategic objectives include not only further developing and
enhancing our existing business, but also expanding our in-house production
capabilities. There are risks inherent in rapid growth and working toward
achieving new strategic objectives, such as: directing capital resources at
appropriate infrastructure, including facilities, information technologies
systems and other equipment to support a growing organization; hiring and
training new management, sales and marketing, production, and other personnel
and the diversion of management's attention and resources from critical areas
and existing projects; and implementing systems and procedures to successfully
manage growth, including monitoring operations, controlling costs and
maintaining effective quality and service. We cannot assure you that we will be
able to successfully manage our projected growth or that we will be successful
in managing our business objectives.
Cable and DBS operators could discontinue or refrain from carrying The
Outdoor Channel or move it to less highly-penetrated packages.
The success of The Outdoor Channel is dependent on our ability to enter
into new carriage agreements while maintaining existing agreements with and
carriage by multiple system operators, which we refer to as MSOs, their
affiliate members and DBS systems. Although we have entered into national
carriage agreements with approximately 80 of the top 100 MSOs and DBS providers,
execution of a national carriage agreement with an MSO does not ensure that its
affiliate systems will carry The Outdoor Channel. Under our current national
carriage agreements and carriage agreements with the MSOs' affiliates, The
Outdoor Channel typically offers MSOs and their cable affiliates the right to
broadcast The Outdoor Channel to their subscribers, but do not require that The
Outdoor Channel be offered to its subscribers. Our most significant cable and
DBS distribution contracts include Charter, Comcast, Direct TV, EchoStar, Time
Warner, and the NCTC. These contracts generally have terms ranging from three to
ten years and come up for renewal between today and 2008. Because certain
carriage agreements do not specify on which service levels The Outdoor Channel
is carried, such as analog versus basic digital, expanded digital or specialty
tiers, and in which geographic markets, we have no assurance that The Outdoor
Channel will be carried and available to viewers of any particular MSO.
Our satellite infrastructure may fail or be preempted by another
signal.
Our ability to deliver programming to cable and DBS operators, and
their subscribers, is dependent upon our satellite equipment and software
working properly to distribute our programming. If this system fails, or a
signal with a higher priority replaces our signal, which is determined by our
agreement with the owner of the satellite, we may not be able to deliver
programming to our cable and DBS operator customers and their subscribers within
the time periods advertised. In turn, we may lose subscribers, our revenue will
fall and our ability to offer programming and services will be harmed.
Technologies in the cable television and DBS industry are constantly
changing, and our failure to acquire or maintain state-of-the-art
technology may harm our business and competitive advantage.
The technologies used in cable and DBS industries are rapidly evolving.
Many technologies and technological standards are in development and have the
potential to significantly transform the ways in which programming is created
and transmitted. In addition, under some of our MSO contracts, we may be
required to encrypt our signal. We cannot accurately predict the effects that
implementing new technologies will have on our programming and broadcasting
operations. We may be required to incur substantial capital expenditures to
implement new technologies, or, if we fail to do so, may face significant new
challenges due to technological advances adopted by competitors, which may harm
our business.
18
We may not be able to attract and retain key personnel.
Our success depends to a significant degree upon the continued
contributions of the principal members of our sales, marketing, production and
management personnel, many of whom would be difficult to replace. All of our
employees are "at-will". Any of our officers or key employees could leave at any
time, and we do not have "key person" life insurance policies covering any of
our employees. The competition for qualified personnel has been strong in our
industry. This competition could make it more difficult to retain our key
personnel and to recruit new highly qualified personnel. If we lost Perry T.
Massie, our President and Chief Executive Officer and Co-President of The
Outdoor Channel, Inc., or Thomas H. Massie, our Executive Vice President, or
William A. Owen, our Chief Financial Officer, or Andrew J. Dale, the Chief
Executive Officer and Co-President of The Outdoor Channel, Inc., our business
would likely suffer. To attract and retain qualified personnel, we may be
required to grant large option or other stock-based incentive awards, which may
be highly dilutive to existing shareholders. We may also be required to pay
significant base salaries and cash bonuses to attract and retain these
individuals, which payments could harm our operating results. If we are not able
to attract and retain the necessary personnel we may not be able to implement
our business plan.
The cable television and DBS industry is subject to substantial
regulation by federal, state and local governments, for which
compliance may be expensive, time consuming and may expose us to
substantial compliance costs and penalties for failure to comply.
The cable television industry is subject to extensive legislation and
regulation at the federal and local levels, and, in some instances, at the state
level, and many aspects of such regulation are currently the subject of judicial
proceedings and administrative or legislative proposals. Operating in a
regulated industry increases our costs of doing business.
To spur the development of independent cable programmers and
competition to incumbent cable operators, the 1992 Cable Act imposed
restrictions on the dealings between cable operators and cable programmers. Of
special significance from a competitive business perspective, the 1992 Cable Act
precludes video programmers affiliated with cable companies from favoring their
affiliated cable operators over competitors and requires such programmers to
sell their programming to other multi-channel video distributors. This provision
limits the ability of vertically integrated cable programmers to offer exclusive
programming arrangements to cable companies. This prohibition was scheduled to
expire in October 2002, however the Federal Communications Commission, to which
we refer as the FCC, extended the expiration date to October 2007 unless the FCC
then determines that another extension is necessary to protect competition and
diversity.
Many of the FCC's program access rules apply only to
satellite-delivered programming, and, if a programmer delivers its programs
terrestrially, the program access rules may be inapplicable to such programming.
The DBS industry and other multi-channel video programming distributors are also
subject to certain rules, regulations and FCC oversight.
Regulatory carriage requirements also could adversely affect the number
of channels available to carry The Outdoor Channel. The 1992 Cable Act granted
broadcasters a choice of must carry rights or retransmission consent rights. The
rules adopted by the FCC generally provided for mandatory carriage by cable
systems of all local full-power commercial television broadcast signals
selecting must carry rights and, depending on a cable systems' channel capacity,
non-commercial television broadcast 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 to reserve a percentage of such channels for commercial use
by unaffiliated third parties and permit franchise authorities to require the
cable operator to provide channel capacity, equipment and facilities for public,
educational and government access channels, could adversely affect carriage of
The Outdoor Channel by limiting its carriage in cable systems with limited
channel capacity. In 2001, the FCC adopted rules relating to the cable carriage
of digital television signals. Among other things, the rules clarify that a
digital-only television station can assert a right to analog or digital carriage
on a cable system. The FCC initiated a further proceeding to determine whether
television stations may assert the rights to carriage of both analog and digital
signals during the transition to digital television and to carriage of all
digital signals. The imposition of such additional must carry regulation, in
conjunction with the current limited cable system channel capacity, would make
it likely that cable operators will be forced to drop some cable programming
services, which may have an adverse impact on the programming companies in which
we have interests.
19
If we distribute television programming through new media, such as
video-on-demand through the Internet, we may be required to obtain federal,
state and local licenses or other authorizations to offer such services. We may
not be able to obtain licenses or authorizations in a timely manner, or at all,
or conditions could be imposed upon licenses and authorizations that may not be
favorable to us.
In the future, any increased regulation of rates, and in particular the
rates for basic cable services, could, among other things, put downward pressure
on the rates charged by cable programming services, and affect the ability or
willingness of cable system operators to retain or to add The Outdoor Channel
network on their cable systems. If, in response to any rate regulation, cable
system operators implement channel offering structures that require subscribers
to affirmatively choose to pay a separate fee to receive The Outdoor Channel
network, either by itself or in combination with a limited number of other
channels, our business could be harmed.
The regulation of programming services, cable television systems and
satellite licensees is subject to the political process and has been in constant
flux over the past decade. Further material changes in the law and regulatory
requirements must be anticipated and our business may be adversely affected by
future legislation, new regulation or deregulation.
Cable television and DBS programming signals have been stolen or could
be stolen in the future, which reduces the potential revenue from
subscriber fees.
The delivery of subscription programming requires the use of
conditional access technology to limit access to programming to only those who
subscribe to programming and are authorized to view it. Conditional access
systems use, among other things, encryption technology to protect the
transmitted signal from unauthorized access. It is illegal to create, sell or
otherwise distribute software or devices to circumvent conditional access
technologies. However, theft of cable and satellite programming has been widely
reported, and the access or "smart" cards used in cable and DBS operators'
conditional access systems have been compromised and could be further
compromised in the future. When conditional access systems are compromised, we
do not receive the potential subscriber revenues from the cable and DBS
operators. Further, measures that could be taken by cable and DBS operators to
limit such theft are not under our control.
The market in which we operate is highly competitive, and we may not be
able to compete effectively, especially against competitors with
greater financial resources, brand recognition or marketplace presence.
We compete for viewers with other basic and pay cable television
networks, including the Outdoor Life Network, Spike TV, ESPN and others. If
these or other competitors, many of which have substantially greater financial
and operational resources than us, significantly expand their operations with
respect to outdoor-related programming or their market penetration, our business
could be harmed. In addition, certain technological advances, including the
development of digital compression technology and the deployment of fiber optic
cable which are already substantially underway, are expected to allow cable
systems to greatly expand their present channel capacity, which could dilute our
market share and lead to increased competition for viewers from existing or new
programming services.
We also compete with large television network companies that generally
have large installed subscriber bases and significant investments in, and access
to, competitive programming sources. In addition, large cable companies have the
financial and technological resources to create and distribute their own
programming services, such as the Outdoor Life Network owned and operated by
Comcast, the largest MSO, which provide substantial competition to The Outdoor
Channel. Although historically we never have done so, we may be required to pay
launch or marketing support for carriage in certain circumstances in the future,
which could require significant expenditures of money, harming our operating
results and margins. We compete for advertising revenue with cable television
networks, as well as with other national programming services, superstations,
broadcast networks, and local over-the-air television stations, and, with
respect to their available advertising time in distributed programming, DBS,
multi-channel, multi-point distribution services, other multi-channel video
programming distributors, broadcast radio and the print media. We compete with
other cable television networks for subscriber fees from, and affiliation
agreements with, cable operators. Court and FCC actions have removed certain of
the impediments to entry by local telephone companies into the video programming
distribution business, and other impediments could be eliminated or modified in
the future. These local telephone companies may distribute programming that is
competitive with the programming provided by us to cable operators.
20
Because we expect to increasingly depend upon our intellectual property
rights, our inability to protect those rights could negatively impact
our ability to compete.
We currently license most of our programs from third-party television
and film producers. In order to build a library of programs and programming
distribution rights, we must obtain all of the necessary rights, releases and
consents from the parties involved in developing a project or from the owners of
the rights in a completed program. There can be no assurance that we will be
able to obtain necessary rights or properly maintain and document such rights.
If we are unable to protect our portfolio of trademarks, service marks,
copyrighted material and characters, trade names and other intellectual property
rights, our ability to compete could be harmed. Protecting our intellectual
property rights by pursuing those who infringe or dilute our rights or defending
against third party claims, can be costly.
Seasonal increases or decreases in viewership may negatively affect our
business.
Seasonal trends are likely to affect our viewership, and consequently,
could cause fluctuations in our advertising revenues. For this reason,
fluctuations in our revenues and net income could occur from period to period
depending upon the availability of advertising revenues. Due, in part, to these
seasonality factors, the results of any one quarter are not necessarily
indicative of results for future periods, and cash flows may not correlate with
revenue recognition.
Our operating results may vary significantly.
Our operations are influenced by many factors that we cannot fully
control. These factors may cause our financial results to vary significantly in
the future and may not meet the expectations of securities analysts or
investors. If this occurs, the price of our stock would likely decline. Factors
that can cause our results to fluctuate include, but are not limited to:
carriage decisions of cable and DBS operators; demand for advertising and
advertising rates and offerings of competing media; changes in the growth rate
of cable and DBS subscribers; cable and DBS operators' capital and marketing
expenditures and their impact on programming offerings and penetration; seasonal
trends in viewer interests and activities; pricing, service, marketing and
acquisition decisions that could reduce revenues and impair quarterly financial
results; the mix of cable television and DBS-delivered programming products and
services sold and the distribution channels for those products and services; our
ability to react quickly to changing consumer trends; specific economic
conditions in the cable television and related industries; and Changing
regulatory requirements.
Due to the foregoing factors, among others, our revenue and operating
results are difficult to forecast. Our expense levels are based in significant
part on our expectations of future revenue. Therefore, our failure to meet
revenue expectations would seriously harm our business, operating results,
financial condition and cash flows. Further, an unanticipated decline in revenue
for a particular quarter may disproportionately affect our profitability because
our expenses would remain relatively fixed and would not decrease
correspondingly.
We may be unable to access capital on acceptable terms to fund
operations at projected levels.
Our future capital requirements will depend on numerous factors,
including the success of our efforts to increase advertising revenues and the
amount of resources devoted to increasing distribution of The Outdoor Channel
and acquiring and producing programming for The Outdoor Channel. As a result, we
could be required to raise substantial additional capital through debt or equity
financing. To the extent that we raise additional capital through the sale of
equity or convertible debt securities, the issuance of such securities could
result in dilution to existing shareholders. If we raise additional capital
through the issuance of debt securities, the debt securities would have rights,
preferences and privileges senior to holders of common stock and the terms of
such debt could impose restrictions on our operations. We cannot assure you that
additional capital, if required, will be available on acceptable terms, or at
all. If we are unable to obtain additional capital, we may be required to reduce
the scope of our business plan.
21
We must comply with many local, state, federal and environmental
regulations, for which compliance may be costly and may expose us to
substantial penalties.
Our recreational outdoor activity affiliates, GPAA and Lost Dutchman's,
share the general risks of all outdoor recreational activities - personal
injury, environmental compliance and real estate and environmental regulation.
In addition to the general cable television industry regulations, we are also
subject to various local, state and federal regulations, including, without
limitation, regulations promulgated by federal and state environmental, health
and labor agencies. Our prospecting clubs are subject to various local, state
and federal statutes, ordinances, rules and regulations concerning zoning,
development and other utilization of its properties. We cannot predict what
impact future regulations may have on these businesses. In addition, failure to
maintain required permits or licenses, or to comply with applicable regulations,
could result in substantial fines or revocation of our operating licenses.
Consolidation among cable and satellite distributors may harm our
business.
Cable and satellite operators continue to consolidate, making The
Outdoor Channel increasingly dependent on fewer operators. If these operators
fail to carry The Outdoor Channel, use their increased bargaining power to
negotiate less favorable terms of carriage, or take advantage of additional
volume discounts, our business could be harmed.
New video recording technologies may reduce our advertising revenue.
A number of new personal video recorders, such as TIVO in the United
States, have emerged in recent years. These recorders often contain features
allowing viewers to watch pre-recorded programs without watching advertising.
The effect of these recorders on viewing patterns and exposure to advertising
could harm our operations and results if our advertisers reduce the advertising
rates they are willing to pay because they believe television advertisements are
less effective with these technologies.
Some of our existing shareholders can exert control over us and may not
make decisions that are in the best interests of all shareholders.
Our officers, directors and principal shareholders together control
approximately 78% of our outstanding common stock. As a result, these
shareholders, acting together, would be able to exert significant influence over
all matters requiring shareholder approval, including the election of directors
and approval of significant corporate transactions. In addition, this
concentration of ownership may delay or prevent a change in control of our
company, even when a change may be in the best interests of our shareholders. In
addition, the interests of these shareholders may not always coincide with our
interests as a company or the interests of other shareholders. Accordingly,
these shareholders could cause us to enter into transactions or agreements that
you would not approve.
Anti-takeover provisions in our articles of incorporation, our bylaws
and under Alaska law may enable our incumbent management to retain
control of us and discourage or prevent a change of control that may be
beneficial to our shareholders.
Provisions of our articles of incorporation, our bylaws and the Alaska
Corporations Code could delay or prevent a change of control of our company,
which could adversely affect the market price of our common stock. These
provisions could allow our incumbent management to retain control over us and
prevent the consummation of a transaction in which our shareholders could
receive a substantial premium over the current market price for their shares.
Changes to financial accounting standards may affect our reported
results of operations.
22
We prepare our financial statements to conform with generally accepted
accounting principles, or GAAP. GAAP are subject to interpretations by the
American Institute of Public Accountants, the Securities and Exchange Commission
and various bodies formed to interpret and create appropriate accounting
policies. A change in those policies can have a significant effect on our
reported results and may even affect our reporting of transactions completed
before a change is announced. Accounting policies affecting many other aspects
of our business, including rules relating to business combinations and employee
stock option grants have recently been revised or are under review. Changes to
those rules or the questioning of current practices may adversely affect our
reported financial results or on the way we conduct our business. In addition,
our preparation of financial statements in accordance with GAAP requires that we
make estimates and assumptions that affect the recorded amounts of assets and
liabilities, disclosure of those assets and liabilities at the date of the
financial statements and the recorded amounts of expenses during the reporting
period. A change in the facts and circumstances surrounding those estimates
could result in a change to our estimates and could impact our future operating
results.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's material financial instruments consist of its cash and
cash equivalents, investments in available-for-sale securities, accounts
receivable, accounts payable, notes payable, capital lease obligations and
related party receivables and payables. The carrying amounts of the Company's
financial instruments generally approximated their fair values at March 31, 2004
and 2003. The fair market value of financial instruments classified as current
assets or liabilities approximated their carrying value due to the short-term
maturity of the instruments.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer, Chief Financial Officer, and Chief Accounting Officer has
evaluated the effectiveness of the Company's disclosure controls and procedures
as of March 31, 2004. Based on this evaluation, the Company's Chief Executive
Officer, Chief Financial Officer, and Chief Accounting Officer concluded that
the Company's disclosure controls and procedures are effective for gathering,
analyzing and disclosing the information the Company is required to disclose in
the reports it files under the Securities Exchange Act of 1934, within the time
periods specified in the SEC's rules and forms.
During the fiscal three months ended March 31, 2004, there was no
change in the Company's internal control over financial reporting that
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
- ------ -----------
3* Articles of Incorporation and by-laws as amended
3.1 Articles of Amendment of Outdoor Channel Holdings, Inc. dated June 24,
2003, and filed with the State of Alaska Department of Community and
Economic Development, Division of Banking, Securities and Corporations
on June 27, 2003. (Incorporated by reference to Exhibit 3.1 to the
Company's Form 10-Q for the quarter ended June 30, 2003).
3.2 Amended and Restated By-Laws of Global Outdoors, Inc. dated Mach 31,
2003. (Incorporated by reference to Exhibit 3.2 to the Company's Form
10-Q for the quarter ended June 30, 2003).
4* Instruments defining the rights of security holders, including
debentures
31.1 Certification by Chief Executive Officer
31.2 Certification by Chief Financial Officer
31.3 Certification by Chief Accounting Officer
32.1** Section 1350 Certification by Chief Executive Officer
32.2** Section 1350 Certification by Chief Financial Officer
32.3** Section 1350 Certification by Chief Accounting Officer
* Incorporated by reference from S-1 Registration Statement filed with the
SEC June 21, 1989; Amendment No. 1 thereto filed on November 28, 1989;
Amendment No.2 thereto filed on January 10, 1990; Amendment No. 3 thereto
filed on February 7, 1990; SB-2 Registration Statement filed with the SEC
August 5,1996; Amendment No. 1 thereto file on January 27, 1997; and
Amendment No. 2 thereto Filed January 30, 1997.
** Pursuant to Commission Release No. 33-8238, this certification will be
treated as "accompanying" this Quarterly Report on Form 10-QSB and not
"filed" as part of such report for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise subject to the liability of
Section 18 of the Securities Exchange Act of 1934, as amended, and this
certification will not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, except to the extent that the registrant
specifically incorporates it by reference.
(b) Reports on Form 8-K:
None
24
SIGNATURES
In accordance with section 13 or 15 (d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
(Registrant) OUTDOOR CHANNEL HOLDINGS, INC.
By: (Signature and Title) /s/ Perry T. Massie
-------------------------------
Perry T. Massie, President
Dated: April 30, 2004
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated:
By: (Signature and Title) /s/ Perry T. Massie
-------------------------------
Perry T. Massie, President,
CEO, and Director
Dated: April 30, 2004
By: (Signature and Title) /s/ Thomas H. Massie
-------------------------------
Thomas H. Massie, Executive VP,
Secretary and Director
Dated: April 30, 2004
By: (Signature and Title) /s/ William A. Owen
-------------------------------
William A. Owen, CFO
Dated: April 30, 2004
By: (Signature and Title) /s/ Mark C. Corcoran
-------------------------------
Mark C. Corcoran, Chief
Accounting Officer and
Controller
Dated: April 30, 2004
25