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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 June 30, 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
OUTDOOR CHANNEL HOLDINGS, INC.
------------------------------
(Exact name of Registrant as specified in its charter)
ALASKA 33-0074499
(State or other Jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
43445 BUSINESS PARK DRIVE, SUITE 113
TEMECULA, CALIFORNIA 92590
(Address and zip code of principal executive offices)
(951) 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 August 12, 2004
- ---------------------------- ----------------------------
Common Stock, $.02 par value 6,098,635
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2004
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2004 (Unaudited) and December 31, 2003.................. 2
Unaudited Condensed Consolidated Statements of Income for the Three and Six Months
Ended June 30, 2004 and 2003..................................................................... 3
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 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..................... 12
Recent Accounting Developments............................................................................ 14
Risks and Uncertainties................................................................................... 18
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk................................................ 26
ITEM 4. Controls and Procedures................................................................................... 26
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings......................................................................................... 27
ITEM 2. Changes In Securities and Use of Proceeds................................................................. 27
ITEM 3. Defaults Upon Senior Securities........................................................................... 27
ITEM 4. Submission of Matters to a Vote of Security Holders....................................................... 27
ITEM 5. Other Information......................................................................................... 27
ITEM 6. Exhibits and Reports on Form 8-K.......................................................................... 27
SIGNATURES.......................................................................................................... 29
CERTIFICATIONS...................................................................................................... 30
* * *
1
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
JUNE 30, DECEMBER 31,
2004 2003
--------------- ---------------
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 9,614 $ 7,214
Investment in available-for-sale securities 676 550
Accounts receivable, net of allowance for doubtful accounts of $211 and $234 4,272 3,797
Inventories 83 68
Income tax refund receivable 1,120 1,143
Current portion of deferred tax assets, net 557 525
Other current assets 630 671
--------------- ---------------
Total current assets 16,952 13,968
--------------- ---------------
Property, plant and equipment at cost, net:
Membership division 3,547 3,253
Outdoor Channel equipment and improvements 2,114 2,032
--------------- ---------------
Property, plant and equipment, net 5,661 5,285
--------------- ---------------
Trademark, net of accumulated amortization of $108 and $101 110 118
Deferred tax assets, net 436 436
Deposits and other assets 714 41
--------------- ---------------
Totals $ 23,873 $ 19,848
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 2,022 $ 1,790
Accrued severance payments 96 291
Current portion of notes payable and capital lease obligations 48 133
Current portion of deferred revenue -- 409
Customer deposits 749 --
--------------- ---------------
Total current liabilities 2,915 2,623
Accrued severance payments, net of current portion 47 66
Notes payable and capital lease obligations, net of current portion -- 59
Deferred revenue, net of current portion 1,164 1,225
Deferred satellite rent obligations 346 380
--------------- ---------------
Total liabilities 4,472 4,353
--------------- ---------------
Minority interest in subsidiary 2,791 2,302
--------------- ---------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; 25,000 shares authorized; none issued -- --
Common stock, $0.02 par value; 75,000 shares authorized:
6,092 and 5,887 shares issued 122 118
Common stock subscriptions receivable -- (30)
Cost of treasury stock (76 shares) (400) (400)
Additional paid-in capital 8,241 6,768
Accumulated other comprehensive income (loss) (12) 34
Retained earnings 8,659 6,703
--------------- ---------------
Total stockholders' equity 16,610 13,193
--------------- ---------------
Totals $ 23,873 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Revenues:
Advertising $ 5,364 $ 3,693 $ 10,190 $ 7,475
Subscriber fees 3,219 2,323 6,380 4,825
Membership income 986 1,165 2,218 2,325
--------- --------- --------- ---------
Total revenues 9,569 7,181 18,788 14,625
--------- --------- --------- ---------
Expenses:
Satellite transmission fees 586 605 1,177 1,202
Advertising and programming 2,232 1,214 3,753 2,247
Selling, general and administrative 4,994 4,001 9,812 7,960
--------- --------- --------- ---------
Total expenses 7,812 5,820 14,742 11,409
--------- --------- --------- ---------
Income from operations 1,757 1,361 4,046 3,216
Interest income (expense), net 18 (6) 33 (6)
--------- --------- --------- ---------
Income before provision for income taxes
and minority interest 1,775 1,355 4,079 3,210
Provision for income taxes 704 538 1,633 1,271
--------- --------- --------- ---------
Income before minority interest 1,071 817 2,446 1,939
Minority interest in net income of consolidated subsidiary 227 150 489 351
--------- --------- --------- ---------
Net income $ 844 $ 667 $ 1,957 $ 1,588
========= ========= ========= =========
Earnings per common share:
Basic $ 0.14 $ 0.12 $ 0.33 $ 0.30
========= ========= ========= =========
Diluted $ 0.10 $ 0.12 $ 0.25 $ 0.28
========= ========= ========= =========
Weighted average number of common shares outstanding:
Basic 6,021 5,427 5,984 5,366
========= ========= ========= =========
Diluted 6,237 5,783 6,222 5,696
========= ========= ========= =========
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
SIX MONTHS ENDED JUNE 30,
2004 2003
-------- --------
Operating activities:
Net income $ 1,957 $ 1,588
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 598 403
Provision for doubtful accounts -- 215
Costs of services offset against subscription receivable -- 251
Realized gain on sale of available-for-sale securities (34) (13)
Minority interest in net income of consolidated subsidiary 489 351
Tax benefit from exercise of stock options 466 --
Cash supplied (used) by changes in operating assets and liabilities:
Accounts receivable (475) (1,232)
Inventories (15) --
Other current assets 41 (416)
Income tax refund receivable 23 --
Deposits and other assets (673) 160
Accounts payable and accrued expenses 232 68
Accrued severance payments (214) --
Deferred revenue (470) 343
Customer deposits 749 231
Deferred satellite rent obligations (34) (34)
-------- --------
Net cash provided by operating activities 2,640 1,915
-------- --------
Investing activities:
Purchases of property, plant and equipment (966) (1,042)
Purchases of available-for-sale securities (256) (148)
Proceeds from sale of available-for-sale securities 85 36
-------- --------
Net cash used in investing activities (1,137) (1,154)
-------- --------
Financing activities:
Net payments of stockholder loans -- (15)
Principal payments on notes payable and capital leases (144) (116)
Proceeds from exercise of stock options 1,011 209
Proceeds from common stock subscriptions receivable 30 36
-------- --------
Net cash provided by financing activities 897 114
-------- --------
Net increase in cash and cash equivalents 2,400 875
Cash and cash equivalents, beginning of period 7,214 3,248
-------- --------
Cash and cash equivalents, end of period $ 9,614 $ 4,123
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ -- $ 34
======== ========
Income taxes paid $ 1,139 $ 1,660
======== ========
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 Resources,
Inc. and subsequently re-named Global Outdoors, Inc. The corporate name was
changed to its present name in 2003.
Our revenues include advertising fees from advertisements aired on The
Outdoor Channel by The Outdoor Channel, Inc. ("TOC") (and include producer fees
paid by outside producers to air their programs on The Outdoor Channel) and from
advertisements in "Gold Prospectors and Treasure Hunters in the Great Outdoors"
magazine; subscriber fees paid by cable and direct broadcast satellite, or DBS,
operators that air The Outdoor Channel; membership fees from members in both
LDMA-AU, Inc. ("Lost Dutchman's") and Gold Prospectors Association of America,
Inc. ("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 our 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 our 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 (82.4% and 83.6%
at June 30, 2004 and 2003, respectively) in TOC. TOC operates The Outdoor
Channel which 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. Assuming that all
outstanding options to purchase common stock in TOC were exercised as of June
30, 2004 and 2003, the Company would have owned approximately 66.9% and 67.7%,
respectively. TOC 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 adjustments, necessary to present fairly the financial position of the
Company as of June 30, 2004 and its results of operations and cash flows for the
six months ended June 30, 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 consolidated 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 and six months
ended June 30, 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 TOC, its 82.4%-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 and six months ended June 30, 2004 and 2003 of all
of the outstanding stock options of Outdoor Channel Holdings and TOC, 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 and six
months ended June 30, 2004 also takes into account the reduction in net income
applicable to common stock attributable to the increase in the minority interest
(from approximately 17.6% to 33.1%) in the net income of TOC that results from
the assumed exercise of all of TOC's outstanding stock options (the effect on
net income for the three and six months ended June 30, 2003 of the assumed
exercise of stock options was not material).
The following table summarizes the calculation of the weighted average
common shares outstanding for basic and diluted earnings per share for the three
and six months ended June 30, 2004 and 2003:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
-------- -------- -------- --------
Numerators:
Net income - basic $ 844 $ 667 $ 1,957 $ 1,588
Deduct increase in minority interest
attributable to assumed exercise
of dilutive stock options of TOC (196) -- (421) --
-------- -------- -------- --------
Net income - diluted $ 648 $ 667 $ 1,536 $ 1,588
======== ======== ======== ========
Denominators:
Weighted average common shares
outstanding - basic 6,021 5,427 5,984 5,366
Dilutive effect of potentially issuable
common shares for accrued
deferred compensation -- 134 -- 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 216 222 238 196
-------- -------- -------- --------
Diluted weighted average common shares
outstanding 6,237 5,783 6,222 5,696
======== ======== ======== ========
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 and six months ended June 30, 2004 and 2003.
The Company's historical net income and earnings per common share and
pro forma net income and earnings (loss) per common share assuming compensation
cost had been determined for the three and six months ended June 30, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income (loss):
As reported $ 844 $ 667 $ 1,957 $ 1,588
Stock-based employee compensation
expense assuming a fair value
based method had been used for
all awards (758) (131) (1,515) (180)
---------- ---------- ---------- ----------
Pro forma - basic $ 86 $ 536 $ 442 $ 1,408
========== ========== ========== ==========
Pro forma - diluted $ (110) $ 536 $ 21 $ 1,408
========== ========== ========== ==========
Basic earnings per share:
As reported $ 0.14 $ 0.12 $ 0.33 $ 0.30
Pro forma $ 0.01 $ 0.10 $ 0.07 $ 0.26
Diluted earnings (loss) per common share:
As reported $ 0.10 $ 0.12 $ 0.25 $ 0.28
Pro forma $ (0.02) $ 0.09 $ 0.00 $ 0.25
7
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 (CONCLUDED)
The fair value of each option granted by Outdoor Channel Holdings in
the six months ended June 30, 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:
Six Months Ended Year Ended
June 30, 2004 December 31, 2003
---------------- -----------------
Risk-free interest rate 4% 2.3% - 3.3%
Dividend yield 0% 0%
Expected life of the option (years) 5-10 5
Volatility factor 72% 77%
NOTE 5 - EQUITY TRANSACTIONS
ISSUANCES OF COMMON STOCK BY THE COMPANY
During the six months ended June 30, 2004 Outdoor Channel Holdings
received cash proceeds of approximately $1,002 from the exercise of options for
the purchase of 204 shares of common stock.
OUTDOOR CHANNEL HOLDINGS, INC. STOCK OPTION PLANS
Descriptions of Outdoor Channel Holdings' and TOC'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 June 30, 2004 and the changes in options outstanding during the six months
then ended is presented in the table that follows:
Six Months Ended June 30, 2004
Weighted
Average
Shares Exercise
(in thousands) Price
-------------- --------------
Outstanding at beginning of period 659 $ 16.42
Options granted 60 33.23
Options exercised (204) 4.90
Options canceled or expired (4) 13.94
----------
Options outstanding at end of period 511 $ 23.02
==========
TOC'S STOCK OPTION PLAN
No options were granted or cancelled and 18 options were exercised for
net cash proceeds of $9 during the six months ended June 30, 2004 under TOC's
stock option plan. As a result, options to purchase 2,469 shares of TOC's common
stock at prices ranging from $1.50 to $5.00 per share remained outstanding and
exercisable at June 30, 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 and officers of the Company. The lease agreements
currently require monthly rent payments aggregating to $20. These lease
agreements expire on December 31, 2005. Rent expense was $61 in each of the
three months ended June 30, 2004 and 2003 and $122 in each of the six months
ended June 30, 2004 and 2003.
8
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
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 segregates its business activities into The Outdoor Channel,
Membership Division and Corporate.
The Outdoor Channel is a separate business activity that broadcasts
television programming on "The Outdoor Channel" 24 hours a day, seven days a
week. The Outdoor Channel generates revenue from advertising fees (which include
producer fees paid by outside producers to air their programs on The Outdoor
Channel) and subscriber fees.
Lost Dutchman's and GPAA membership sales and related activities are
reported in the Membership Division. The Membership Division also includes the
sale of products and services related to gold prospecting, gold shows, trips and
outings.
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. The Trips and Outings segment
information is now included in the Membership Division information.
In the fourth quarter of 2003, the Company began to report corporate
overhead that is applicable to both segments, but not directly related to any
given segment's operations, in a separate business segment, "Corporate." The
expenses allocated to this business segment consist primarily of professional
fees and certain general and administrative expenses.
9
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 7 - SEGMENT INFORMATION (CONCLUDED)
Information with respect to these reportable business segments as of
and for the three and six months ended June 30, 2004 and 2003 follows. In
addition, the Trips and Outing segment's and the Corporate segment's comparative
information for the three months ended June 30, 2003 has been reclassified to
conform with the presentation for the three and six months ended June 30, 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
- ------------------ ------------ -------------- ----------- ------------ -------------
June 30, 2004
-------------
The Outdoor Channel $ 8,414 $ 2,064 $ 17,260 $ 213 $ 192
Membership Division 1,155 25 6,613 86 348
Corporate -- (314) -- -- --
------------ -------------- ----------- ------------ -------------
Totals $ 9,569 $ 1,775 $ 23,873 $ 299 $ 540
============ ============== =========== ============ =============
June 30, 2003
-------------
The Outdoor Channel $ 5,974 $ 1,433 $ 9,900 $ 137 $ 183
Membership Division 1,207 40 4,797 65 98
Corporate -- (118) -- -- --
------------ -------------- ----------- ------------ -------------
Totals $ 7,181 $ 1,355 $ 14,697 $ 202 $ 281
============ ============== =========== ============ =============
Six Months Ended
- ----------------
June 30, 2004
-------------
The Outdoor Channel $ 16,308 $ 4,471 $ 17,260 $ 426 $ 504
Membership Division 2,480 172 6,613 172 462
Corporate -- (564) -- -- --
------------ -------------- ----------- ------------ -------------
Totals $ 18,788 $ 4,079 $ 23,873 $ 598 $ 966
============ ============== =========== ============ =============
June 30, 2003
-------------
The Outdoor Channel $ 12,221 $ 3,385 $ 9,900 $ 273 $ 716
Membership Division 2,404 56 4,797 130 326
Corporate -- (231) -- -- --
------------ -------------- ----------- ------------ -------------
Totals $ 14,625 $ 3,210 $ 14,697 $ 403 $ 1,042
============ ============== =========== ============ =============
Intersegment sales amounted to approximately $149 in each of the three
months ended June 30, 2004 and 2003 and $298 in each of the six months ended
June 30, 2004 and 2003.
NOTE 8 - INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES
During the six months ended June 30, 2004 and 2003, the Company
incurred an unrealized gain (loss), net of tax effects, on its available for
sale securities of approximately ($46) and $11, respectively.
10
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 9 - RECENT DEVELOPMENTS
On April 21, 2004, the Company announced the execution of a merger
agreement which, as amended on May 18, 2004, and subject to shareholder
approvals and certain other conditions, would result in the acquisition by
Outdoor Channel Holdings of the remaining approximate 17.6% minority interest in
TOC through (i) the merger of TOC with a newly-formed, wholly-owned subsidiary
of Outdoor Channel Holdings, with TOC being the surviving corporation, and (ii)
the exchange of each share of TOC common stock not already held by Outdoor
Channel Holdings or its subsidiaries for 0.65 shares of Outdoor Channel
Holdings' common stock. In addition, each outstanding option to purchase one
share of TOC common stock would be exchanged for an option to purchase 0.65
shares of Outdoor Channel Holdings' common stock. On August 12, 2004, the
Company obtained a permit qualifying the securities to be issued in the proposed
merger under the California Corporate Securities Law of 1968.
Based on the exchange ratio explained above and the outstanding
capitalization of TOC as of June 30, 2004, Outdoor Channel Holdings would expect
to issue at the closing approximately 1,228 shares of its common stock as well
as options to purchase approximately 1,605 additional shares. If the exchange of
shares had been consummated on June 30, 2004, Outdoor Channel Holdings would
have had an approximate total of 7,320 outstanding shares of common stock, as
well as outstanding options to purchase approximately 2,116 additional shares.
The actual number of shares and options to be outstanding would 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.
The acquisition of the 17.6% minority interest in TOC would be
accounted for using the purchase method of accounting. The cost of acquiring the
minority interest would include the aggregate fair value of the common shares of
Outdoor Channel Holdings to be exchanged for common shares of TOC and certain
other direct costs. The acquisition cost would be allocated based on the fair
value of the assets of TOC being acquired and liabilities being assumed,
including intangible assets that arise from contractual or other legal rights or
meet certain other recognition criteria that underlie the 17.6% minority
interest being acquired. Any excess of the cost of the minority interest over
the fair value of the underlying interest in the net identifiable assets
acquired will be allocated to goodwill.
Outdoor Channel Holdings expects that the cost of the acquisition of
the minority interest in TOC would be approximately $49.9 million based on the
expected issuance at the closing of approximately 1,228 shares of Outdoor
Channel Holdings' common stock and the average closing price of $40.60 per share
for a specified period before and after April 20, 2004, the last trading day
before the public announcement of the material terms of the exchange. Although
it has not completed its analysis of the fair value of the assets being acquired
and liabilities being assumed that underlie the 17.6% minority interest being
acquired, Outdoor Channel Holdings currently expects that substantially all of
the of the estimated acquisition costs of $49.9 million would be allocated to
intangible assets that would be subject to amortization and charged to expense
in the consolidated statements of income over the seven year period subsequent
to the closing.
The exchange of vested options by Outdoor Channel Holdings for vested
options of TOC would result in a charge to expense in the consolidated statement
of income on the date of the closing equal to the intrinsic value of the options
to be issued on that date net of any related income tax benefit. Assuming the
options to purchase approximately 1,605 shares that Outdoor Channel Holdings
expects to issue in exchange for vested options of TOC at the closing had a fair
value of $37.00 per share based on the closing price of Outdoor Channel
Holdings' common stock on July 30, 2004, the Company would incur a non-cash
charge to operating expenses of approximately $33.3 million, net of income tax
benefits of $22.1 million.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Outdoor Channel Holdings, Inc. ("Outdoor Channel Holdings" or
collectively with its direct and indirect subsidiaries, the "Company") owns
approximately 82.4% of the outstanding stock of The Outdoor Channel, Inc.
("TOC"). In the event all outstanding options to purchase Common Stock in TOC
were exercised, as of June 30, 2004, the Company would own approximately 66.9%
of TOC on a fully diluted basis.
TOC operates The Outdoor Channel which 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. The Company also owns and operates 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 6,000 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 32,200 active members. GPAA is
the publisher of the "Gold Prospectors and Treasure Hunters in the Great
Outdoors" magazine and owner of a 2,300 acre property near Nome, Alaska used to
provide outings for a fee to its members.
The Company's revenues include advertising fees from advertisements
aired on The Outdoor Channel (which include producer fees paid by outside
producers to air their program on The Outdoor Channel) and from advertisements
in "Gold Prospector & Treasure Hunters in the Great Outdoors " magazine;
subscriber fees paid by cable and direct broadcast satellite (known as DBS)
operators that air The Outdoor Channel; membership fees from members in both
Lost Dutchman's and GPAA and other income including products and services
related to gold prospecting, gold shows, trips and outings.
Key elements of our current business strategy are as follows:
o Expanding marketing efforts in an attempt to grow The Outdoor
Channel's subscriber base;
o Pursuing national advertising accounts for The Outdoor Channel'
o Increasing production and licensing of high quality programming
for The Outdoor Channel; and
o Seeking new membership in our club organizations - GPAA and Lost
Dutchman's
The results of our operations for the three and six months ended June
30, 2004 reflect our pursuit of these strategies. In response to the recent
slowing in the growth rate of the number of subscribers to The Outdoor Channel,
we have launched a new marketing approach which involves spending more
advertising dollars on a "demand-push strategy", which focuses on the cable and
DBS operators, as compared to a "demand-pull strategy," which focuses on the
viewers of The Outdoor Channel. The recent growth in our advertising revenue for
the six months ended June 30, 2004 compared to the prior year comparable period
reflects our increased focus on national advertising accounts. In order to
assist in our building of a library of high quality programming and programming
distribution rights, we are increasing our in-house production of programming
compared to the amount of programming we previously produced in-house by The
Outdoor Channel in the past. As a result, we expect that advertising and
programming costs associated with these efforts will continue to increase in the
foreseeable future both in absolute dollars and when expressed as a percentage
of revenue.
Membership income declined for the three and six months ended June 30,
2004 compared to the results from the prior year comparable periods, but we
expect, based on results to date, that GPAA's summer 2004 Alaska Trip will
perform well in comparison to the results of the 2003 Alaska Trip. Revenue from
this trip is principally recognized in the third quarter. We, however, do not
currently expect that the operations of Lost Dutchman's and GPAA will reflect
significant revenue or profit growth during the remaining six months of the
current year.
Our ability to implement our business strategy requires that we
successfully manage our operations and business, which we may not be able to do
so as well as we anticipate. Our business is subject to numerous factors beyond
our control and we may not be able to successfully implement our strategy and no
assurances can be given that these efforts will result in increased revenues or
improved margins or profitability. If we are not able to increase our revenues
or increase our profitability in the future under this business strategy, its
results of operations could be adversely impacted.
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.
12
SAFE HARBOR STATEMENT
The following information may include forward-looking statements. The
Company's actual results could differ materially from those discussed in any
forward-looking statements. 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 provisions contained in
those sections. 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 others; (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) other matters.
These statements involve significant risks and uncertainties and 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) the risk that the previously announced
proposed merger involving a subsidiary of Outdoor Channel Holdings and TOC may
not close as expected or at all; (2) risks and uncertainties associated with the
Company executing its business plan; (3) uncertainty and possible adverse
publicity or a negative outcome which could result from the criminal legal
proceeding currently pending against Perry T. Massie, the Chairman of the Board
and Chief Executive Officer of Outdoor Channel Holdings and the Chairman of the
Board and Co-President of TOC concerning a scuba dive in the Alabama River while
Mr. Massie was in the process of scouting for a new show for The Outdoor
Channel; (4) competitive factors; (5) the risk that advertising and subscriber
revenues may not increase or may in fact decline; (6) the failure to develop or
distribute popular shows on The Outdoor Channel; (7) the ability of The Outdoor
Channel to attract sports personalities as spokespersons and show hosts that
appeal to viewers; (8) the risk that the number of subscribers for The Outdoor
Channel may not increase or may in fact decline; (9) the risk of primary
satellite failure; (10) the Company's ability to attract and retain key
personnel; and other factors which are discussed below under the caption "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 and in our other filings with the Securities and Exchange Commission.
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.
RECENT DEVELOPMENTS
On April 21, 2004, the Company announced the execution of a merger
agreement in which, subject to shareholder approvals and other conditions,
Outdoor Channel Holdings would acquire the minority interest in TOC (17.6% as of
June 30, 2004) by merging GPAA and TOC, two of its subsidiaries. On May 18,
2004, the Company announced the amendment and restatement of this merger
agreement to change the structure of this proposed transaction so that Holdings
would acquire all of the outstanding shares of TOC that it does not currently
hold through a merger of a newly formed, wholly owned subsidiary of Holdings
(instead of GPAA) and TOC, with TOC being the surviving corporation. Under the
terms of this merger agreement, each share of TOC common stock not already held
by Outdoor Channel Holdings or its subsidiaries would be exchanged into 0.65
shares of Outdoor Channel Holdings' common stock and each outstanding option to
purchase one share of TOC common stock would be exchanged into an option to
purchase 0.65 shares of Outdoor Channel Holdings' common stock, if the proposed
merger closes. While, on August 12, 2004, the Company obtained a permit
qualifying the securities to be issued in the proposed merger under the
California Corporate Securities Law of 1968, the completion of the proposed
merger is still subject to other closing conditions, and the transaction may not
close as expected, or at all.
Based on the outstanding capitalization of TOC as of July 30, 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 if the proposed merger closes. Based on the
exchange ratio of 0.65 and the capitalization of each company as of July 30,
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 to be outstanding 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 July 30, 2004, TOC 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 July 30, 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 TOC options it would issue as a result of the
transaction which, based on the closing price of Outdoor Channel Holdings' stock
on July 30, 2004 of $37.00 per share, would have amounted to approximately $33.3
million net of a tax benefit of $22.1 million.
13
Outdoor Channel Holdings expects that the cost of the acquisition of
the minority interest in TOC would be approximately $49.9 million based on the
expected issuance at the closing of approximately 1.2 million shares of Outdoor
Channel Holdings' common stock and the average closing price of $40.60 per share
for a specified period before and after April 20, 2004, the last trading day
before the public announcement of the material terms of the exchange. Although
it has not completed its analysis of the fair value of the assets being acquired
and liabilities being assumed that underlie the 17.6% minority interest being
acquired, Outdoor Channel Holdings expects that substantially all of the
estimated acquisition costs of $49.9 million would be allocated to intangible
assets that would be subject to amortization and charged to expense in the
consolidated statements of income over the seven year period subsequent to the
closing.
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 June
30, 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 and six months ended June
30, 2004 or 2003 or that they will have a significant effect at the time they
become effective.
COMPARISON OF OPERATING RESULTS FOR QUARTERS AND SIX MONTH PERIODS ENDED JUNE
30, 2004 AND JUNE 30, 2003
REVENUES
Our revenues include revenues from advertising, 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 June 30, 2004 and 2003, The
Outdoor Channel generated approximately 96.9% and 97.3% of our advertising
revenue, respectively. For the six months ended June 30, 2004 and 2003, TOC
generated approximately 97.4% of our advertising revenue. Subscriber fees are
solely related to The Outdoor Channel business segment. Membership income is
generated by our activities other than the operation of The Outdoor Channel.
Total revenues for the three months ended June 30, 2004 were
$9,569,000, an increase of $2,388,000, or 33.3%, compared to revenues of
$7,181,000 for the three months ended June 30, 2003. Total revenues for the six
months ended June 30, 2004 were $18,788,000, an increase of $4,163,000, or
28.5%, compared to revenues of $14,625,000 for the six months ended June 30,
2003. This net increase was the result of changes in several items comprising
revenue as discussed below.
Advertising revenue for the three months ended June 30, 2004 was
$5,364,000, an increase of $1,671,000 or 45.2% compared to $3,693,000 for the
three months ended June 30, 2003. Advertising revenue for the six months ended
June 30, 2004 was $10,190,000, an increase of $2,715,000 or 36.3% compared to
$7,475,000 for the six months ended June 30, 2003. The increase is driven by TOC
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 June 2004 compared to 23.3 million at the end of June 2003 an
increase of 2.7 million or 11.6%. The fact that we had Nielsen ratings and
demographic data coupled with the increase in the number of 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, the fees paid by third party programmers to air their
programs on The Outdoor Channel increased.
Subscriber fees for the three months ended June 30, 2004 were
$3,219,000, an increase of $896,000 or 38.6% compared to $2,323,000 for the
three months ended June 30, 2003. Subscriber fees for the six months ended June
30, 2004 were $6,380,000, an increase of $1,555,000 or 32.2% compared to
$4,825,000 for the six months ended June 30, 2003. The increase was primarily
due to: the increased number of subscribers as noted above; contractual
subscriber fee rate increases with existing affiliates; the beginning of
payments late in 2003 from certain carriers who had previously received The
Outdoor Channel without charge which were realized in the first and second
quarters of 2004 and not in the comparable prior periods; and the increasing
penetration of The Outdoor Channel on DirecTV.
14
Membership income for the three months ended June 30, 2004 was
$986,000, a decrease of $179,000 or 15.4% compared to $1,165,000 for the three
months ended June 30, 2003. Membership income for the six months ended June 30,
2004 was $2,218,000, a decrease of $107,000 or 4.6% compared to $2,325,000 for
the six months ended June 30, 2003. We believe the decrease in membership income
was principally the result of the timing of the distribution of membership
renewal forms earlier in 2003 than in 2004.
EXPENSES
Expenses consist of satellite transmission fees; advertising and
programming; and selling, general and administrative expenses.
Total expenses for the three months ended June 30, 2004 were
$7,812,000, an increase of $1,992,000, or 34.2%, compared to $5,820,000 for the
three months ended June 30, 2003. Total expenses for the six months ended June
30, 2004 were $14,742,000, an increase of $3,333,000, or 29.2%, compared to
$11,409,000 for the six months ended June 30, 2003. As a percentage of revenues,
total expenses are 81.6% and 81.0% in the three months ended June 30, 2004 and
2003, respectively. As a percentage of revenues, total expenses are 78.5% and
78.0% in the six months ended June 30, 2004 and 2003, respectively. The increase
in expenses was due to several factors but is principally driven by increasing
advertising and programming expenses and increased selling, general and
administrative expenses.
Satellite transmission fees for the three months ended June 30, 2004
were $586,000, a decrease of $19,000, or 3.1%, compared to $605,000 for the
three months ended June 30, 2003. Satellite transmission fees for the six months
ended June 30, 2004 were $1,177,000, a decrease of $25,000, or 2.1%, compared to
$1,202,000 for the six months ended June 30, 2003. This relatively static
comparison reflects the fixed nature of our contracts for these services.
Advertising and programming expenses for the three months ended June
30, 2004 were $2,232,000, an increase of $1,018,000 or 83.9% compared to
$1,214,000 for the three months ended June 30, 2003. Advertising and programming
expenses for the six months ended June 30, 2004 were $3,753,000, an increase of
$1,506,000 or 67.0% compared to $2,247,000 for the six months ended June 30,
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. Advertising and programming expenses are expected to continue to grow
faster than the expected growth in total revenue and increase as a percentage of
revenue, as a larger percentage of our programming is produced in-house as
opposed to production being provided by third party producers.
Selling, general and administrative expenses for the three months ended
June 30, 2004 were $4,994,000, an increase of $993,000 or 24.8% compared to
$4,001,000 for the three months ended June 30, 2003. As a percentage of
revenues, selling, general and administrative expenses were 52.2% and 55.7% for
the three months ended June 30, 2004 and 2003, respectively. Selling, general
and administrative expenses for the six months ended June 30, 2004 were
$9,812,000, an increase of $1,852,000 or 23.3% compared to $7,960,000 for the
three months ended June 30, 2003. As a percentage of revenues, selling, general
and administrative expenses were 52.2% and 54.4% for the six months ended June
30, 2004 and 2003, respectively. The increase in the amount of these expenses is
due to a number of factors including increases in personnel expenses of over
$800,000 primarily resulting from: the increase in the number of employees from
108 at the end of June 2003 to 118 by the end of June 2004; increased
depreciation expense as a result of our equipment purchases in 2004 and 2003 to
support our growth; and our increased travel related to our increased sales
staff and others to promote The Outdoor Channel.
INCOME FROM OPERATIONS
Income from operations for the three months ended June 30, 2004 was
$1,757,000, an increase of $396,000 or 29.1% compared to $1,361,000 for the
three months ended June 30, 2003. As a percentage of revenues, income from
operations was 18.4% and 19.0% for the three months ended June 30, 2004 and
2003, respectively. Income from operations for the six months ended June 30,
2004 was $4,046,000, an increase of $830,000 or 25.8% compared to $3,216,000 for
the six months ended June 30, 2003. As a percentage of revenues, income from
operations was 21.5% and 22.0% for the six months ended June 30, 2004 and 2003,
respectively. Growth of our expenses has slightly outpaced our revenue growth
primarily resulting from our decision to produce more programming in-house.
15
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net for the three months ended June 30, 2004
was $18,000, an increase of $24,000 compared to ($6,000) for the three months
ended June 30, 2003. Net interest (expense)/income for the six months ended June
30, 2004 was $33,000, an increase of $39,000 compared to ($6,000) for the six
months ended June 30, 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 increased cash balances for the
three and six months ended June 30, 2004 compared to the three and six months
ended June 30, 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
decreased slightly as a percentage of revenues to 18.5% for the three months
ended June 30, 2004 compared to 18.9% for the three months ended June 30, 2003.
Income before provision for income taxes and minority interest decreased
slightly as a percentage of revenues to 21.7% for the six months ended June 30,
2004 compared to 21.9% for the six months ended June 30, 2003.
For The Outdoor Channel business segment, income before provision for
income taxes and minority interest as a percentage of revenue increased to 24.5%
for the three months ended June 30, 2004, compared to 24.0% for the three months
ended June 30, 2003. This increase reflects the strength of our advertising
revenue in achieving deeper penetration into the national ad sales market which
carries a higher margin than direct response advertising.
The Outdoor Channel business segment's income before provision for
income taxes and minority interest as a percentage of revenue decreased to 27.4%
for the six months ended June 30, 2004, compared to 27.7% for the six months
ended June 30, 2003. The decrease was due mainly to the growth of our
advertising and programming expenses in the second quarter as we continue to
spend on creating demand for The Outdoor Channel.
For the membership division segment, income before provision for income
taxes and minority interest as a percentage of revenues decreased to 2.2% for
the three months ended June 30, 2004 compared to 3.3% for the three months ended
June 30, 2003. Income before provision for income taxes and minority interest as
a percentage of revenues increased to 6.9% for the six months ended June 30,
2004 compared to 2.3% for the six months ended June 30, 2003. These increases
principally reflect a concerted effort to control costs and make adjustments in
our marketing and advertising effort that yielded increased sales while spending
less on selling, general and administrative expenses. The performance in the
second quarter of 2004 as compared to the first quarter of 2004 reflects a
seasonal shift in our business with less gold shows in the second quarter as we
prepared for the Alaska Trip.
For the corporate business segment, loss before provision for income
taxes and minority interest for the three months ended June 30, 2004 was
$314,000, an increase of the loss of $196,000 or 166.1% compared to $118,000 for
the three months ended June 30, 2003. As a percentage of revenues, corporate
loss from operations was 3.3% and 1.6% for the three months ended June 30, 2004
and 2003, respectively. Loss before provision for income taxes and minority
interest for the six months ended June 30, 2004 was $564,000, an increase of the
loss of $333,000 or 144.2% compared to $231,000 for the six months ended June
30, 2003. As a percentage of revenues, corporate loss from operations was 3.0%
and 1.6% for the six months ended June 30, 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 June 30, 2004
was $704,000, an increase of $166,000 or 30.9% as compared to $538,000 for the
three months ended June 30, 2003. The provision for income taxes for the six
months ended June 30, 2004 was $1,633,000, an increase of $362,000 or 28.5% as
compared to $1,271,000 for the six months ended June 30, 2003. The increase was
due to the Company earning more taxable income in the second quarter of 2004 as
compared to the second quarter of 2003. The effective income tax rate was
approximately 39.7% for both three months ended June 30, 2004 and 2003. The
effective income tax rate was approximately 40.0% and 39.6% for the six months
ended June 30, 2004 and 2003, respectively.
16
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED SUBSIDIARY
Minority interest for the three months ended June 30, 2004 was $227,000
compared to $150,000 for the three months ended June 30, 2003. Minority interest
for the six months ended June 30, 2004 was $489,000 compared to $351,000 for the
six months ended June 30, 2003. This was primarily due to the increased
profitability of TOC along with a slight increase in the percentage ownership of
TOC by the minority interest.
NET INCOME
Net income for the three months ended June 30, 2004 was $844,000 an
increase of $177,000 or 26.5% compared to $667,000 for the three months ended
June 30, 2003. Net income for the six months ended June 30, 2004 was $1,957,000
an increase of $369,000 or 23.2% compared to $1,588,000 for the six months ended
June 30, 2003. As a percentage of sales, net income was 8.8% and 9.3% for the
three months ended June 30, 2004 and 2003, respectively. As a percentage of
sales, net income was 10.4% and 10.9% for the six months ended June 30, 2004 and
2003, respectively.
EARNINGS PER SHARE
Earnings per common share for the three months ended June 30, 2004 was
$0.14 per basic share or $0.10 per diluted share compared with $0.12 per basic
share or $0.12 per diluted share for the three months ended June 30, 2003.
Earnings per common share for the six months ended June 30, 2004 was $0.33 per
basic share or $0.25 per diluted share compared with $0.30 per basic share or
$0.28 per diluted share for the six months ended June 30, 2003. Diluted earnings
per share for the three and six months ending June 30, 2004 and June 30, 2003
reflect the material effects of the assumed exercise of all of the outstanding
stock options granted by us and our subsidiary, TOC, and the application of the
treasury stock method to the shares assumed to have been issued.
The common stock of TOC is not publicly traded. In applying the
treasury stock method in connection with the assumed exercise of the outstanding
options of TOC and the computation of diluted earnings per share in 2003, 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 TOC's shares from an
independent valuation firm. That valuation was significantly above the value we
had used in the three and six months ended June 30, 2003. We believe that this
valuation is the best estimate to use as of June 30, 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 TOC options and
the portion of the net income of TOC allocable to minority stockholders in the
computation of diluted earnings per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company provided cash from operations of $2,640,000 in the six
months ended June 30, 2004, compared to $1,915,000 in the six months ended June
30, 2003 and had a cash and cash equivalents balance of $9,614,000 at June 30,
2004, which was an increase of $2,400,000 from the balance of $7,214,000 at
December 31, 2003. Current assets increased to $16,952,000 at June 30, 2004
compared to $13,679,000 at December 31, 2003. Current liabilities increased to
$2,915,000 at June 30, 2004 compared to $2,623,000 at December 31, 2003. Net
working capital increased to $14,037,000 at June 30, 2004, compared to
$11,345,000 at December 31, 2003. Total liabilities increased to $4,472,000 at
June 30, 2004 compared to $4,353,000 at December 31, 2003.
For the three months ended June 30, 2004, the Company generated income
from operations of $1,757,000 compared to income from operations of $1,361,000
for the three months ended June 30, 2003. For the six months ended June 30,
2004, the Company generated income from operations of $4,046,000 compared to
income from operations of $3,216,000 for the six months ended June 30, 2003.
From 2000 through the present, the Company has financed its activities primarily
from cash flows from operations. Between Outdoor Channel Holdings and TOC, we
have two lines of credit which provide up to an aggregate of $1,650,000 of
available funds with no outstanding borrowings and the availability to issue
standby letters of credit for up to $140,000, none of which was utilized as of
June 30, 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 June 30, 2004. The capital improvements the Company
made in 2003 and 2004, which included purchasing high definition camera
equipment for TOC, were funded with cash from operations. The long-term
liquidity requirement could change in the event the Company changes its business
strategy, including TOC's methods of increasing subscribers, producing in-house
programming and/or making a significant acquisition.
As of June 30, 2004, the Company does not have notes payable
outstanding.
17
As of June 30, 2004, the Company is generating sufficient cash flow
from operations to meet its short-term cash flow requirements. TOC 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 at least June 30, 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.
We continually review our business opportunities to assess the
feasibility of enhancing our operations or our competitive position. The results
of such analysis could result in the dedication of capital to take advantage of
the opportunities so identified. Currently we are reviewing modest improvements
to our properties and are 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's financial statements are prepared in conformity with
accounting principles generally accepted in the United States. The preparation
thereof requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingencies
at the date of the financial statements as well as the reported amounts of
revenues and expenses during the reporting period. Estimates have been prepared
on the basis of the most current and best available information and actual
results could differ materially from those estimates.
There were no significant changes in the Company's critical
accounting policies during the second quarter of 2004.
RISK AND UNCERTAINTIES
In addition to the other information contained in this report, readers
should consider carefully the following factors and uncertainties in evaluating
our business. Our business and operations are subject to a number of risks and
uncertainties and the following list should not be considered to be a definitive
list of all factors that my affect our business, financial condition and future
results of operations, and the following list should be read in conjunction with
the factors, risks and uncertainties contained in our other filings with the
Securities and Exchange Commission.
WE ARE SEEKING TO ACQUIRE THE SHARES OF THE OUTDOOR CHANNEL, INC. THAT
WE DO NOT ALREADY HOLD PURSUANT TO A PENDING MERGER, WHICH IS SUBJECT
TO CLOSING CONDITIONS. OUR FINANCIAL RESULTS WILL BE SIGNIFICANTLY
IMPACTED IN THE FISCAL QUARTER DURING WHICH WE COMPLETE THE PROPOSED
ACQUISITION AND FOR SEVERAL YEARS THEREAFTER.
We are seeking to acquire all of the common shares (approximately
17.6%) of TOC that we do not currently hold under the terms of a previously
announced merger agreement and a proposed exchange of shares of our common stock
and our options for shares of TOC's common stock and TOC's options. If and when
this proposed acquisition of the minority interest in TOC is completed, we
anticipate we would be required to issue vested options to purchase
approximately 1.6 million shares of our common stock in exchange for outstanding
vested options to acquire approximately 2.5 million shares of TOC's common
stock. As a result, we would also be required to record a non-cash charge equal
to the intrinsic value (the market price less the exercise price of our shares
at the date of the exchange) of each of the options we exchange for options of
TOC. If the merger were to have closed on July 30, 2004, the non-cash charge,
based on the closing price of our stock of $37.00 per share, would have been
approximately $33.3 million, net of income tax benefits of $22.1 million. The
actual amount of the non-cash charge resulting from the exchange of options
would ultimately be determined by the number of options exchanged and the stock
price for our common stock on the date the exchange is consummated. It is likely
that this non-cash charge would cause us to report a significant net loss for
the fiscal quarter in which the exchange is consummated, and such an event may
have a negative impact on our stock price.
Further, we expect that the cost of the acquisition of the minority
interest in TOC would be approximately $49.9 million based on the expected
issuance at the closing of approximately 1,228 shares of our common stock and
the average closing price of $40.60 per share for a specified period before and
after April 20, 2004, the last trading day before the public announcement of the
material terms of the exchange. We also understand that substantially all of the
estimated acquisition cost could be allocated to intangible assets that would be
subject to amortization and charged to expense in our consolidated financial
statements over the seven year period subsequent to closing. It is also likely
that the non-cash charges for such amortization would also have a negative
impact on our earnings and our stock price over the amortization period.
While, on August 12, 2004, the Company obtained a permit qualifying the
securities to be issued in the proposed merger under the California Corporate
Securities Law of 1968, the completion of the proposed merger is still subject
to other closing conditions, and the transaction may not close as expected, or
at all.
18
WE MAY NOT BE ABLE TO EFFECTIVELY EXECUTE OUR BUSINESS STRATEGY, AND
AS A RESULT OUR REVENUES AND OUR PROFITABILITY MAY NOT INCREASE OR
IMPROVE.
Our strategy includes (1) expanding marketing efforts in an attempt to
grow our subscriber base, (2) pursuing national advertising accounts, (3)
increasing production and licensing of high quality programming, and (4) seeking
new membership in our club organizations - GPAA and Lost Dutchman's. This
strategy requires that we successfully manage our business and operations and
there can be no assurances that we will be able to successfully implement our
business strategy or that our efforts will result in increased revenues or
improved profitability. If we are not able to increase our revenue or improve
profitability, our results of operations could be adversely affected.
Growing our subscriber base depends upon many factors such as the
success of our marketing efforts in driving consumer demand for The Outdoor
Channel, overall growth in cable and DBS subscribers, the popularity of our
programming, our ability to negotiate new carriage agreements and maintain
existing agreements and distribution, and other factors beyond our control.
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
be adversely affected as a result of a number of factors.
Our ability to actively 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. Competition for national advertising accounts and related
advertising expenditures is intense. We face competition for such advertising
expenditures from a variety of sources, including other cable companies and
other media. 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 or increased advertising revenues.
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% to 20% 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 much of 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. Moreover, if TOC cannot acquire, develop or produce original
programming of interest to our audience, then the number of viewers of The
Outdoor Channel would be adversely affected with would adversely impact revenues
and results or operations.
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
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 of The Outdoor Channel or our existing club
members will maintain current interest levels in these activities. Furthermore,
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. A decline in membership in our club
organizations could adversely affect our results of operations.
UNCERTAINTIES AND POSSIBLE ADVERSE PUBLICITY OR A NEGATIVE OUTCOME
WHICH MIGHT ARISE IN CONNECTION WITH A CRIMINAL LEGAL PROCEEDING
PENDING AGAINST ONE OF OUR PRINCIPAL EXECUTIVE OFFICERS COULD
ADVERSELY IMPACT OUR BUSINESS AND RESULTS OF OPERATIONS.
In October 2003 Perry T. Massie, Chief Executive Officer, President and
Chairman of the Board of Outdoor Channel Holdings, Inc. and Chairman of the
Board and Co-President of The Outdoor Channel, Inc., was evaluating the
possibility of filming a television show to air on The Outdoor Channel that
would feature scuba diving in the Alabama River and the history surrounding the
river and Selma, Alabama. In the process of scouting for the new show, Mr.
Massie made a dive in the Alabama River. Mr. Massie's guide was the
owner/operator of a local scuba shop and diving school who was experienced in
diving that area of the river and familiar with its history. The area of their
dive was not designated as a historical site. During the dive, the other diver
discovered a pre-Civil War carbine, but Mr. Massie did not find any significant
relics. On returning to the dock after the dive, the two men were arrested under
a 1999 Alabama law that makes it a felony to intentionally and knowingly remove,
alter, disturb or destroy cultural resources without prior permission. On April
8, 2004, the grand jury in Dallas County, Alabama issued an indictment against
Mr. Massie on the charges. Absent the dismissal of these charges, the case is
currently scheduled to go to trial on November 29, 2004. Although Mr. Massie
believes he has done nothing wrong and is vigorously defending himself against
these charges, it is possible that the Company's business or results of
operations could be adversely impacted to the extent uncertainty, adverse
reaction or negative publicity result from the pending trial. In addition, at
this time the Company is unable to predict the full extent to which its business
would be impacted if the matter is resolved negatively for Mr. Massie, however,
the Company could be adversely impacted by being deprived of Mr. Massie's
services, by a decline in revenues or by possible additional costs and expenses.
19
WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR PROJECTED GROWTH, AND OUR
GROWTH AND PROFITABILITY MAY NOT CONTINUE, WHICH MAY RESULT IN A
DECREASE IN OUR STOCK PRICE.
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. We can provide no assurance that our
profitability or revenues will not be adversely affected by future changes in
our business. Slower or less profitable growth or losses could adversely affect
our results of operations and resulting stock price.
CABLE AND DBS OPERATORS COULD DISCONTINUE OR REFRAIN FROM CARRYING THE
OUTDOOR CHANNEL OR MOVE IT TO LESS HIGHLY-PENETRATED PACKAGES, WHICH
COULD ADVERSELY AFFECT THE NUMBER OF VIEWERS.
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.
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 OF THE OUTDOOR CHANNEL MAY DECLINE
WHICH COULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.
We do not control which cable channels The Outdoor Channel is packaged
with by cable or DBS operators. The placement by a cable or DBS operator of The
Outdoor Channel in an unpopular program package could reduce the number of our
viewers. In addition, 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 the number
of viewers of The Outdoor Channel, which in turn could have an adverse effect on
our business, results of operations and financial condition.
IF WE FAIL TO DEVELOP AND DISTRIBUTE POPULAR PROGRAMS, OUR VIEWERSHIP
WOULD LIKELY DECLINE WHICH COULD CAUSE ADVERTISING REVENUE TO
DECREASE.
Our operating results depend significantly upon the generation of
advertising revenue, mainly from manufacturers of products used by outdoorsmen.
Our ability to generate advertising revenues is largely dependent 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 which maintain or increase our current number of viewers, our
Nielsen ratings could decline, which in turn could cause our advertising revenue
to decline and adversely impact our results of operations.
WE MAY NOT BE ABLE TO RETAIN AND RECRUIT SPORTS PERSONALITIES OR OTHER
PERSONS THAT APPEAL TO OUR VIEWERS AS SPOKESPERSONS AND PROGRAM HOSTS.
Our success depends, in part, upon our ability to recruit, contract
with and retain sportspersons and other persons 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 The Outdoor Channel's viewing audience and market share.
20
IF THE COSTS ASSOCIATED WITH INCREASING THE NUMBER OF OUR SUBSCRIBERS
ARE HIGHER THAN WE ANTICIPATE, OR IF WE ARE OTHERWISE UNABLE TO
INCREASE THE NUMBER OF OUR SUBSCRIBERS OR PREVENT THE NUMBER OF OUR
SUBSCRIBERS FROM DECREASING, OUR PROFITABILITY AND RESULTS FROM
OPERATIONS COULD BE ADVERSELY IMPACTED.
Although we currently have plans to increase our marketing and sales
efforts in attempts to increase our number of subscribers, which in turn may
result in an increase in our advertising rates, we may not be able to do so
economically or at all. Growth in The Outdoor Channel's subscriber base has
recently slowed, and efforts to attempt to grow the subscriber base may not be
successful for a number of reasons, including reasons beyond our control. If we
are unable to increase the number of our subscribers on a cost effective basis,
or if the benefits of doing so do not materialize, our business and operating
results may be adversely affected.
THE SATELLITE INFRASTRUCTURE THAT WE USE MAY FAIL OR BE PREEMPTED BY
ANOTHER SIGNAL, WHICH COULD RESULT IN OUR ABILITY TO DELIVER
PROGRAMMING TO OUR CABLE AND DBS OPERATOR CUSTOMERS.
Our ability to deliver programming to cable and DBS operators, and
their subscribers, is dependent upon the satellite equipment we use 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 would be adversely
impacted. We are currently negotiating with our satellite provider in an attempt
to remove the clause in the contract which permits preemption of The Outdoor
Channel under certain circumstances, but no assurances can be given that we will
be successful in our attempt
OUR RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED AND OUR STOCK
PRICE MAY DECLINE IF THE ANTICIPATED LAUNCH OF THE OUTDOOR CHANNEL'S
HIGH DEFINITION NETWORK IS NOT AS SUCCESSFUL AS WE ARE CURRENTLY
PLANNING.
In May 2004, we announced plans to launch a new and separate network
offering outdoor programming entirely in high definition. This new network,
which will be referred to as Outdoor Channel 2 HD, is expected to offer
programming both shared with and independent of the existing Outdoor Channel
programming. There can be no assurances that Outdoor Channel 2 HD will debut in
July 2005 as originally anticipated or will not incur unexpected costs and
expenses.
Distribution of Outdoor Channel 2 HD will depend on successfully
executing distribution agreements with cable and DBS operators. There are no
assurances such agreements can be made and if they are made they will be of
uncertain duration and terms and may involve the granting of periods of free
service and/or marketing commitments to encourage carriage.
The public may not adopt HD consumer television equipment in numbers
sufficient to allow profits for an advertiser-supported service. Bandwidth
restraints may keep Outdoor Channel 2 HD from achieving sufficient distribution
from affiliates to reach profitability. Competition for quality HD content may
increase the costs of programming for Outdoor Channel 2 HD, increasing costs
beyond our control.
All of these factors, combined or separately, could prevent the launch
of the new channel, or if the new channel is launched, could increase costs or
restrain revenue to prevent profitable operations.
EXPENSES RELATING TO PROGRAMMING COSTS ARE GENERALLY INCREASING AND A
NUMBER OF FACTORS CAN CAUSE COST OVERRUNS AND DELAYS. OUR RESULTS FROM
OPERATIONS MAY BE ADVERSELY IMPACTED IF WE ARE NOT ABLE TO
SUCCESSFULLY RECOVER THE COSTS OF DEVELOPING AND ACQUIRING NEW
PROGRAMMING.
The cost of programming has generally increased recently for the cable
industry and this escalation may continue. We plan to build our programming
library through the acquisition of long-term broadcasting rights or the outright
ownership of programs and this is expected to lead to a substantial increase in
programming costs. The development, production and completion of television
programs require a significant amount of capital and 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 are not able to
successfully recover the costs of developing or acquiring programming through
increased revenues, whether the programming is produced by us or acquired from
third-party producers, our results from operations and cash flows will be
adversely impacted.
21
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 in turn
could result in adversely affecting our business and results of operations.
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. The loss of 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., could adversely
impact our business. In this regard, Perry T. Massie is currently the subject of
a criminal legal proceeding with a trial date set for November 29, 2004, and we
are unable to determine the impact of a negative decision in the case, however,
the Company could be adversely impacted by being deprived of Mr. Massie's
services for a period of time. 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.
22
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, the number of viewers for The Outdoor Channel could be adversely
affected.
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 are difficult to anticipate 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.
23
BECAUSE WE EXPECT TO BECOME INCREASINGLY DEPENDENT 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 the necessary rights on acceptable terms, or at all, 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 business and 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, AND COMPARISONS OF OUR
OPERATING RESULTS ARE NOT NECESSARILY MEANINGFUL AND SHOULD NOT BE
RELIED UPON AS AN INDICATOR OF FUTURE PERFORMANCE.
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 our operating results may not meet the expectations of securities
analysts or investors. If this occurs, the price of our stock may 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 and other factors, many of which are beyond our
control, our revenue and operating results vary from period to period and 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, our current business
strategies and plans may be adversely affected.
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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 costs or revocation of our operating
licenses, which would have a material adverse effect on our business, financial
condition and results of operations.
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 and results from operations 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 current officers, directors and greater than 5% 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.
We prepare our financial statements to conform with accounting
principles generally accepted in the United States, or GAAP. GAAP are subject to
interpretations by the Financial Accounting Standards Board, 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.
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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 and accounts payable. The carrying amounts of the Company's financial
instruments generally approximated their fair values at June 30, 2004 and 2003
and at December 31, 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 and Chief Financial Officer has evaluated the effectiveness of
the Company's disclosure controls and procedures as of June 30, 2004. Based on
this evaluation, the Company's Chief Executive Officer and Chief Financial
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 June 30, 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.
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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
- -------------- -----------
2.1 Amended and Restated Agreement and Plan of Merger
among The Outdoor Channel, Inc., Outdoor Channel
Holdings, Inc. and Gold Prospector's Association of
America, Inc. dated as of May 12, 2004 (filed as
Exhibit 2.1 to the Company's Current Report on Form
8-K filed on May 18, 2004 and incorporated herein by
reference).
3.1 Amended and Restated Articles of Incorporation of
Outdoor Channel Holdings, formerly known as Global
Outdoors, Inc., dated June 12, 2002 and filed with
the State of Alaska Commissioner of the Department of
Community and Economic Development, Division of
Banking Securities and Corporations on June 21, 2002
(filed as Exhibit 3 to the Company's Form 10-Q for
the quarter ended June 30, 2002 and incorporated
herein by reference).
3.2 Articles of Amendment of Articles of Incorporation of
Outdoor Channel Holdings, Inc., formerly known as
Global Outdoors, 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 (filed as Exhibit
3.1 to the Company's Form 10-Q for the quarter ended
June 30, 2003 and incorporated herein by reference).
3.3 Amended and Restated By-Laws of Outdoor Channel
Holdings, Inc., formerly known as Global Outdoors,
Inc., dated March 31, 2003 (filed as Exhibit 3.2 to
the Company's Form 10-Q for the quarter ended June
30, 2003 and incorporated herein by reference).
31.1 Certification by Chief Executive Officer
31.2 Certification by Chief Financial Officer
32.1** Section 1350 Certification by Chief Executive Officer
32.2** Section 1350 Certification by Chief Financial Officer
- ---------------
** Pursuant to Commission Release No. 33-8238, this certification will be
treated as "accompanying" this Quarterly Report on Form 10-Q 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:
27
During the fiscal quarter ended June 30, 2004 we filed the following Current
Reports on Form 8-K:
(1) Current Report on Form 8-K, dated and filed with the
SEC on April 21, 2004, reporting under Item 5, "Other
Events," the execution of an Agreement and Plan of
Merger among The Outdoor Channel, Inc., Outdoor
Channel Holdings, Inc. and Gold Prospector's
Association of America, Inc.
2) Current Report on Form 8-K, dated and filed with the
SEC on April 30, 2004, reporting under Item 12,
"Results of Operations and Financial Condition," our
issuance of a press release reporting our financial
results for the three-month period ended March 31,
2004.
(3) Current Report on Form 8-K, dated and filed with the
SEC on May 3, 2004, reporting under Item 12, "Results
of Operations and Financial Condition," our issuance
of a press release announcing that The Outdoor
Channel, Inc. is set to launch an HD network to debut
in July 2005.
(4) Current Report on Form 8-K, dated May 12, 2004 and
filed with the SEC on May 18, 2004 reporting under
Item 5, "Other Events," the execution of an amendment
and restatement to the Agreement and Plan of Merger
among The Outdoor Channel, Inc., Outdoor Channel
Holdings, Inc. and Gold Prospector's Association of
America, Inc.
(5) Current Report on Form 8-K, dated and filed with the
SEC on May 25, 2004, reporting under Item 5, "Other
Events," legal proceedings involving the Company's
Chief Executive Officer.
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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 the
undersigned thereunto duly authorized.
OUTDOOR CHANNEL HOLDINGS, INC.
/s/ William A. Owen
-------------------------------------------
WILLIAM A. OWEN
Authorized Officer, Chief Financial Officer
and Chief Accounting Officer
Date: August 13, 2004
29