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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 September 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)
DELAWARE 20-1558098
(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 November 12, 2004
- ----------------------------- -----------------------------
Common Stock, $0.001 par value 17,894,917
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2004 (Unaudited) and December 31, 2003.............2
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2004 and 2003................................................................3
Unaudited Condensed Consolidated Statements of Stockholders' Equity for the Nine Months Ended
September 30, 2004....................................................................................4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2004 and 2003.............................................................................5-6
Notes to Unaudited Condensed Consolidated Financial Statements............................................7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................16
Recent Accounting Developments............................................................................
Risks and Uncertainties...................................................................................26
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk................................................34
ITEM 4. Controls and Procedures...................................................................................34
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.........................................................................................35
ITEM 2. Changes In Securities and Use of Proceeds.................................................................35
ITEM 3. Defaults Upon Senior Securities...........................................................................35
ITEM 4. Submission of Matters to a Vote of Security Holders.......................................................35
ITEM 5. Other Information.........................................................................................36
ITEM 6. Exhibits and Reports on Form 8-K..........................................................................36
SIGNATURES..........................................................................................................38
CERTIFICATIONS
* * *
-1-
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- -------------
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 11,681 $ 7,214
Investment in available-for-sale securities 733 550
Accounts receivable, net of allowance
for doubtful accounts of $267 and $254 4,112 3,797
Inventories 83 68
Income tax refund receivable 198 1,143
Current portion of deferred tax assets, net 558 525
Other current assets 214 671
------------- -------------
Total current assets 17,579 13,968
------------- -------------
Property, plant and equipment at cost, net:
Membership division 3,547 3,253
Outdoor Channel equipment and improvements 2,483 2,032
------------- -------------
Property, plant and equipment, net 6,030 5,285
------------- -------------
Trademark, net of accumulated amortization of $112 and $101 107 118
Deferred tax assets, net 21,214 436
Goodwill 31,416 --
Other intangible assets 12,545
Deposits and other assets 58 41
------------- -------------
Totals $ 88,949 $ 19,848
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 2,500 $ 1,790
Accrued severance payments 47 291
Current portion of capital lease obligations 28 133
Current portion of deferred revenue -- 409
Customer deposits 39 --
------------- -------------
Total current liabilities 2,614 2,623
Accrued severance payments, net of current portion 42 66
Capital lease obligations, net of current portion 13 59
Deferred revenue, net of current portion 1,172 1,225
Deferred satellite rent obligations 329 380
------------- -------------
Total liabilities 4,170 4,353
------------- -------------
Minority interest in subsidiary -- 2,302
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; 25,000 shares authorized; none issued -- --
Common stock, $0.001 and $0.02 par value; 75,000 shares
authorized: 17,895 and 5,887 shares issued 18 118
Common stock subscriptions receivable -- (30)
Cost of treasury stock (191 shares) -- (400)
Additional paid-in capital 106,331 6,768
Accumulated other comprehensive income 34 34
Retained earnings (accumulated deficit) (21,604) 6,703
------------- -------------
Total stockholders' equity 84,779 13,193
------------- -------------
Totals $ 88,949 $ 19,848
============= =============
See Notes to Unaudited Condensed Consolidated Financial Statements.
-2-
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Revenues:
Advertising $ 5,739 $ 4,214 $ 15,928 $ 11,689
Subscriber fees 3,450 3,005 9,830 7,830
Membership income 1,776 1,224 3,995 3,549
--------- --------- --------- ---------
Total revenues 10,965 8,443 29,753 23,068
--------- --------- --------- ---------
Expenses:
Satellite transmission fees 582 611 1,759 1,813
Advertising and programming 2,243 910 5,997 3,158
Compensation expense from exchange of
stock options 52,233 -- 52,233 --
Selling, general and administrative 5,863 4,345 15,674 12,304
--------- --------- --------- ---------
Total expenses 60,921 5,866 75,663 17,275
--------- --------- --------- ---------
Income (loss) from operations (49,956) 2,577 (45,910) 5,793
Interest income, net 18 8 51 2
--------- --------- --------- ---------
Income (loss) before income taxes and
minority interest (49,938) 2,585 (45,859) 5,795
Income tax provision (benefit) (19,867) 1,028 (18,234) 2,300
--------- --------- --------- ---------
Income (loss) before minority interest (30,071) 1,557 (27,625) 3,495
Minority interest in net income of consolidated subsidiary 193 272 682 622
--------- --------- --------- ---------
Net income (loss) $(30,264) $ 1,285 $(28,307) $ 2,873
========= ========= ========= =========
Earnings (loss) per common share:
Basic $ (1.92) $ 0.09 $ (1.86) $ 0.21
========= ========= ========= =========
Diluted $ (1.92) $ 0.08 $ (1.86) $ 0.20
========= ========= ========= =========
Weighted average number of common shares outstanding:
Basic 15,789 14,138 15,238 13,656
========= ========= ========= =========
Diluted 15,789 15,191 15,238 14,581
========= ========= ========= =========
See Notes to Unaudited Condensed Consolidated Financial Statements.
-3-
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(In thousands)
Accumulated
Common Stock Additional Other
Common Stock Subscriptions Treasury Paid-in Comprehensive Retained
Shares Amount Receivable Stock Capital Income Earnings Total
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance,
January 1, 2004 5,887 $ 118 $ (30) $ (400) $ 6,768 $ 34 $ 6,703 $ 13,193
Net loss -- -- -- -- -- -- (28,307) (28,307)
Effect of 5 for 2
forward split and
change in par value 8,830 (103) -- -- 103 -- -- --
Common stock
issued upon
exercise of stock
options 532 -- -- -- 1,102 -- -- 1,102
Stock subscriptions
paid -- -- 30 -- -- -- -- 30
Stock exchanged for
stock of subsidiary 2,837 3 -- -- 46,059 -- -- 46,062
Effect of exchange
of stock options
for stock options
of subsidiary -- -- -- -- 52,233 -- -- 52,233
Tax benefit from
exercise of stock
options -- -- -- -- 466 -- -- 466
Retirement of
treasury stock (191) -- -- 400 (400) -- -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance,
September 30, 2004 17,895 $ 18 $ -- $ -- $ 106,331 $ 34 $ (21,604) $ 84,779
============ ============ ============ ============ ============ ============ ============ ============
See Notes to Unaudited Condensed Consolidated Financial Statements.
-4-
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2004 2003
--------- ---------
Operating activities:
Net income (loss) $(28,307) $ 2,873
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 896 605
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 682 622
Tax benefit from exercise of stock options 466 52
Compensation expense from exchange of stock options 52,233 --
Deferred tax benefit from exchange of stock options (20,788) --
Cash supplied (used) by changes in operating assets and liabilities:
Accounts receivable (315) (1,576)
Inventories (16) --
Other current assets 168 (40)
Income tax refund receivable 945 --
Deposits and other assets (17) 151
Accounts payable and accrued expenses 749 339
Accrued severance payments (268) --
Deferred revenue (462) 481
Deferred satellite rent obligations (51) (51)
--------- ---------
Net cash provided by operating activities 5,881 3,909
--------- ---------
Investing activities:
Purchases of property, plant and equipment (1,631) (1,220)
Purchases of available-for-sale securities (256) (443)
Proceeds from sale of available-for-sale securities 85 36
Advance to stockholder -- (25)
Cost related to acquisition of minority interest (593) --
--------- ---------
Net cash used in investing activities (2,395) (1,652)
--------- ---------
Financing activities:
Net payments of stockholder loans -- (15)
Principal payments on notes payable and capital leases (151) (150)
Proceeds from exercise of stock options 1,102 213
Proceeds from common stock subscriptions receivable 30 36
--------- ---------
Net cash provided by financing activities 981 84
--------- ---------
Net increase in cash and cash equivalents 4,467 2,341
Cash and cash equivalents, beginning of period 7,214 3,248
--------- ---------
Cash and cash equivalents, end of period $ 11,681 $ 5,589
========= =========
-5-
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Supplemental disclosure of cash flow information:
Interest paid $ -- $ 38
========= =========
Income taxes paid $ 1,139 $ 2,091
========= =========
Supplemental disclosures of non-cash investing and
financing activities:
Retirement of treasury stock $ 400 $ --
========= =========
Fair value of common stock issued to
acquire minority interest in subsidiary $ 46,062 $ --
========= =========
Receivable from exercise of stock options
offset against loans from stockholders $ -- $ 623
========= =========
Common stock issued to former officer/director
for payment of deferred compensation $ -- $ 16
========= =========
See Notes to Unaudited Condensed Consolidated Financial Statements.
-6-
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 reincorporated under the
laws of the State of Delaware on September 14, 2004. Originally Outdoor Channel
Holdings was incorporated under the name Global Resources, Inc., an Alaska
corporation, and was subsequently re-named Global Outdoors, Inc. In 2003, the
name was changed to Outdoor Channel Holdings, Inc. The Company acquired
substantially all of the remaining 17.6% minority interest in The Outdoor
Channel, Inc. ("TOC") that it did not previously hold on September 8, 2004 (see
Note 3). 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.
Our revenues include advertising fees from advertisements aired on The
Outdoor Channel, including producer fees paid by outside producers to air their
programs on The Outdoor Channel and from advertisements in "Gold Prospectors &
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
Prospector's Association of America, LLC ("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. We have signed an agreement with another organization for the mutual
use of mining properties.
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 September 30, 2004 and its results of operations and cash flows
for the three and nine months ended September 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 nine months
ended September 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.
On September 14, 2004, the Company effected a 5 for 2 forward split of
its stock in connection with its reincorporation in Delaware. All share and per
share data has been adjusted where appropriate to reflect this stock split. In
addition, the par value of the Company's stock was changed from $0.02 to $0.001
per share.
-7-
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 3 - ACQUISITION OF MINORITY INTEREST OF THE OUTDOOR CHANNEL, INC.
On September 9, 2004, the Company announced the completion of the
acquisition of substantially all of the remaining 17.6% minority interest in TOC
by Outdoor Channel Holdings 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 previously 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 was exchanged for an option to
purchase 0.65 shares of Outdoor Channel Holdings' common stock.
Based on the exchange ratio, the 5 for 2 forward split as explained in
Note 2 and the capitalization of TOC, Outdoor Channel Holdings issued 2,836
shares of its common stock as well as options to purchase 4,012 additional
shares on September 8, 2004.
In October 2004 the Company received notice from a TOC
shareholder that the shareholder was exercising dissenters' rights with respect
to 143,660 previously outstanding TOC common shares. The dissenter submitted a
written demand that TOC repurchase the dissenter's shares at a price of $28.27
per share. As of the date of this filing, TOC has not agreed to the dissenter's
asking price and the Company and TOC have been negotiating with the dissenting
shareholder over the dissenter's demand. TOC and the Company currently
anticipate that the negotiations could be protracted unless the dissenter
withdraws his demand. If TOC denies that such shares qualify as "dissenting
shares" or if TOC and the dissenter are unable to agree on a price for the
shares or other arrangements, either the dissenter or TOC may commence legal
action within six months from September 17, 2004 to determine whether or not
such shares are dissenting shares or to resolve the issue as to the fair market
value of the dissenting shares as of the day before the first announcement of
the terms of the proposed merger involving TOC. If TOC is required to repurchase
the shares of the dissenter, the Company believes that TOC has sufficient cash
on hand and available borrowings to pay such amounts without adversely impacting
currently anticipated operations, working capital requirements or capital
expenditures. For accounting purposes, the TOC shares held by the dissenter are
deemed to still be outstanding. However, the related minority interest as of
September 30, 2004 was not material. Any payments made to the dissenter will be
recorded as additional goodwill.
The acquisition of substantially all of the 17.6% minority interest in
TOC was accounted for using the purchase method of accounting. The cost of
acquiring the minority interest included the aggregate fair value of the common
shares of Outdoor Channel Holdings issued in exchange for common shares of TOC
and certain other direct costs. The acquisition cost was allocated based on the
fair value of the assets of TOC that were acquired and liabilities that were
assumed, including intangible assets that arose from contractual or other legal
rights or met certain other recognition criteria that underlie the approximate
17.6% minority interest that was acquired. The excess of the cost of the
minority interest over the fair value of the underlying interest in the net
identifiable assets acquired was allocated to goodwill.
-8-
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 3 - ACQUISITION OF MINORITY INTEREST OF THE OUTDOOR CHANNEL, INC.
(CONCLUDED)
The cost of the acquisition of the minority interest in TOC by Outdoor
Channel Holdings was $46,945 based on the issuance at the closing of 2,836
shares of Outdoor Channel Holdings' common stock and the average closing price
of $16.24 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
acquisition plus other certain costs. Based on the analysis of the fair value of
the assets that were acquired and liabilities that were assumed, the acquisition
costs of $46,945 were allocated to intangible assets and are subject to
amortization as follows:
Allocation Estimated Useful Life
---------- ---------------------
Multiple System Operators Relationships $10,573 Indefinite
Advertising Customer Relationships:
Short Form 1,351 4
Long Form 621 3
Goodwill 31,416 Indefinite
--------
Total Intangible Assets 43,961
Minority Interest in Subsidiary 2,984
--------
Aggregate Purchase Price $46,945
========
The exchange of vested options by Outdoor Channel Holdings for vested
options of TOC resulted in a charge to net income in the consolidated statement
of operations on September 8, 2004 equal to the intrinsic value of the options
issued on that date and a credit for the related income tax benefit. Outdoor
Channel Holdings issued fully-vested options to purchase 4,012 shares in
exchange for fully-vested options of TOC on September 8, 2004. On that day, the
market price of one share of common stock of Outdoor Channel Holdings was
$14.00. As a result, the Company incurred a non-cash, non-recurring charge to
operating expenses of $52,233 and recognized an income tax benefit of $20,789 or
a net charge of $31,444.
Summarized unaudited pro forma information, assuming this acquisition
occurred at the beginning of the respective three and nine month periods ended
September 30, 2004 and 2003, follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
2004 2003 2004 2003
---------- --------- ---------- ----------
Net revenues $ 10,965 $ 8,443 $ 29,753 $ 23,068
Net income $ 1,291 $ 1,475 $ 3,573 $ 3,249
Earnings per common share:
Basic $ 0.07 $ 0.09 $ 0.20 $ 0.22
Diluted $ 0.06 $ 0.07 $ 0.16 $ 0.17
The acquisition had no affect on net revenues. The pro forma net income
(loss) and the related per share amounts (i) include primarily the effects of
additional amortization related to certain intangible assets recorded, the
elimination of the minority interest and the additional shares issued by Outdoor
Channel Holdings and (ii) exclude the non-recurring net charge of $31,444
attributable to the exchange of options.
-9-
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 4 - EARNINGS PER SHARE
The Company has presented "basic" and "diluted" earnings (loss) per
common share in the accompanying condensed consolidated statements of operations
in accordance with the provisions of Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("SFAS 128"). Basic earnings (loss) per common
share is calculated by dividing net income (loss) applicable to common stock by
the weighted average number of common shares outstanding during each period. The
calculation of diluted earnings (loss) per common share is similar to that of
basic earnings (loss) 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 prior
to the acquisition of the remaining minority interest were issued during the
period if any such issuances have a dilutive effect.
The computation of diluted earnings (loss) per share takes into account
the effects on the weighted average number of common shares outstanding of the
assumed exercise in the three and nine months ended September 30, 2003 of all of
the outstanding stock options of Outdoor Channel Holdings, 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 loss per share for the three and nine months ended
September 30, 2004 does not take into account the outstanding stock options of
Outdoor Channel Holdings because the effect of their assumed exercise would be
anti-dilutive. The computation of diluted loss per share for the three and nine
months ended September 30, 2004 and diluted income per share for the three and
nine months ended September 30, 2003 do not take into account the increase in
the net income or loss attributable to the increase in the minority interest in
the net income of TOC that results from the assumed exercise of all of TOC's
outstanding stock options prior to the exchange of those options for Company
options on September 8, 2004 because the effects of the assumed exercise of TOC
stock options were not material. The number of shares potentially issuable at
September 30, 2004 and 2003 upon the exercise of the Company's stock options
that were not included in the computation of net loss per share because they
were antidilutive totaled 5,643 and -0- respectively.
The following table summarizes the calculation of the weighted average
common shares outstanding for basic and diluted earnings per share for the three
and nine months ended September 30, 2004 and 2003:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Numerators:
Net income (loss) - basic $(30,264) $ 1,285 $(28,307) $ 2,873
========= ========= ========= =========
Denominators:
Weighted average common shares
outstanding - basic 15,789 14,138 15,238 13,656
Dilutive effect of potentially issuable
common shares for accrued
deferred compensation -- 336 -- 336
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 -- 717 -- 589
--------- --------- --------- ---------
Diluted weighted average common shares
outstanding 15,789 15,191 15,238 14,581
========= ========= ========= =========
-10-
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 5 - 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 (loss) and earnings (loss) per share
as if a fair value based method of accounting had been applied.
The Company's historical net income (loss) and earnings (loss) per
common share and pro forma net income (loss) and earnings (loss) per common
share assuming compensation cost had been determined for the three and nine
months ended September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ---------- ----------- ----------
Net income (loss):
As reported $ (30,264) $ 1,285 $ (28,307) $ 2,873
Add: Stock-based employee compensation
expense included in reported net
loss, net of tax effects* 31,444 -- 31,444 --
Deduct: Stock-based employee compensation
expense assuming a fair value
based method had been used for
all awards, net of tax effects* (32,499) (90) (34,014) (270)
----------- ---------- ----------- ----------
Pro forma - basic $ (31,319) $ 1,195 $ (30,877) $ 2,603
=========== ========== =========== ==========
Basic earnings (loss) per share:
As reported $ (1.92) $ 0.09 $ (1.86) $ 0.21
Pro forma $ (1.98) $ 0.08 $ (2.03) $ 0.19
Diluted earnings (loss) per common share:
As reported $ (1.92) $ 0.08 $ (1.86) $ 0.20
Pro forma $ (1.98) $ 0.08 $ (2.03) $ 0.18
*See Note 3
-11-
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 5 - PRO FORMA EFFECTS OF STOCK OPTIONS (CONCLUDED)
The fair value of each option granted by Outdoor Channel Holdings in
the nine months ended September 30, 2004 and the year ended December 31, 2003
was estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions:
Nine Months Ended Year Ended
September 30, 2004 December 31, 2003
------------------ -----------------
Risk-free interest rate 1.7% - 4.2% 2.3% - 3.3%
Dividend yield 0% 0%
Expected life of the option 3 months - 10 years 5 years
Volatility factor 41.7% - 79.0% 77%
NOTE 6 - EQUITY TRANSACTIONS
ISSUANCES OF COMMON STOCK BY THE COMPANY
During the nine months ended September 30, 2004 Outdoor Channel
Holdings received cash proceeds of approximately $1,093 from the exercise of
options for the purchase of 532 shares of common stock. Prior to the merger, 18
TOC options were exercised for net cash proceeds of $9 during the nine months
ended September 30, 2004 under TOC's stock option plan. The TOC stock option
plan was terminated in conjunction with the Company's acquisition of
substantially all of the remaining 17.6% minority interest in TOC (see Note 3).
OUTDOOR CHANNEL HOLDINGS, INC. STOCK OPTION PLANS
Descriptions of Outdoor Channel Holdings' and TOC's stock option plans
are included in Note 8 to the consolidated financial statements in 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 September 30, 2004 and the changes in
options outstanding during the nine months then ended is presented in the table
that follows:
Nine Months Ended September 30, 2004
------------------------------------
Weighted
Average
Shares Exercise
(in thousands) Price
-------------- --------
Outstanding at beginning of period 1,648 $ 6.57
Options granted 525 13.84
Options granted in exchange for TOC options* 4,012 0.98
Options exercised (532) 1.74
Options canceled or expired (10) 5.58
--------------
Options outstanding at end of period 5,643 $ 3.70
==============
*See Note 3
-12-
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 7 - 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 approximately $20. These
lease agreements expire on December 31, 2005. Rent expense was approximately $61
in each of the three months ended September 30, 2004 and 2003 and approximately
$183 in each of the nine months ended September 30, 2004 and 2003.
NOTE 8 - 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 TOC, Membership Division and
Corporate.
TOC is a separate business activity that broadcasts television
programming on "The Outdoor Channel" 24 hours a day, seven days a week. TOC
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
recurring expenses allocated to this business segment consist primarily of
professional fees and certain general and administrative expenses.
-13-
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 8 - SEGMENT INFORMATION (CONCLUDED)
Information with respect to these reportable business segments as of
and for the three and nine months ended September 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 September 30, 2003 has been reclassified
to conform with the presentation for the three and nine months ended September
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
- ------------------ -------- ----------------- ---------- ------------ ------------
September 30, 2004
------------------
TOC $ 9,038 $ 2,463 $ 19,374 $ 213 $ 581
Membership Division 1,927 306 70,575 86 84
Corporate* -- (52,707) -- -- --
------------ ------------ ------------ ------------ ------------
Totals $ 10,965 $ (49,938) $ 89,949 $ 299 $ 665
============ ============ ============ ============ ============
September 30, 2003
------------------
TOC $ 7,144 $ 2,695 $ 12,170 $ 137 $ 87
Membership Division 1,299 (17) 4,268 65 91
Corporate -- (93) -- -- --
------------ ------------ ------------ ------------ ------------
Totals $ 8,443 $ 2,585 $ 16,438 $ 202 $ 178
============ ============ ============ ============ ============
Nine Months Ended
- -----------------
September 30, 2004
------------------
TOC $ 25,346 $ 6,931 $ 19,374 $ 639 $ 1,081
Membership Division 4,407 482 70,575 257 550
Corporate -- (53,272) -- -- --
------------ ------------ ------------ ------------ ------------
Totals $ 29,753 $ (45,859) $ 89,949 $ 896 $ 1,631
============ ============ ============ ============ ============
September 30, 2003
------------------
TOC $ 19,365 $ 6,082 $ 12,170 $ 411 $ 803
Membership Division 3,703 37 4,268 194 417
Corporate -- (324) -- -- --
------------ ------------ ------------ ------------ ------------
Totals $ 23,068 $ 5,795 $ 16,438 $ 605 $ 1,220
============ ============ ============ ============ ============
*See Note 3
============
Intersegment sales amounted to approximately $149 in each of the three
months ended September 30, 2004 and 2003 and $446 in each of the nine months
ended September 30, 2004 and 2003.
NOTE 9 - INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES
During the nine months ended September 30, 2004 and 2003, the Company
incurred an unrealized gain, net of tax effects, on its available for sale
securities of approximately $0 and $16, respectively.
-14-
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 10 - BANK LINE OF CREDIT
On September 30, 2004, we entered into a revolving line of credit
agreement (the "revolver") with the U.S. Bank N.A. (the "Bank") that matures in
September 5, 2005. The total amount which can be drawn upon under the lines of
credit is $5,000,000. The revolver provides that the interest rate shall be
selected by us at the time of each advance, to be either (i) the prime rate
announced by the Bank from time to time as and when such rate changes or (ii)
1.25% above the 1, 2, 3, 6, or 12 month LIBOR rate quoted by the Bank from
Telerate Page 3750 or any successor thereto. The bank line of credit is
collateralized by substantially all of the Company's assets. We were out of
compliance with respect to a covenant requiring a minimum quarterly
profitability of greater than $250,000 for the three months ended September
30, 2004. We have received a waiver of this covenant violation as the cause of
the non-compliance is the non-cash, non-recurring charge, net of income tax
benefit of $31,444 (see Note 3). Otherwise, we were in full compliance with
the loan covenants under the revolvers as of September 30, 2004. As of
September 30, 2004, we did not have any outstanding borrowings under this
revolving line of credit.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
SAFE HARBOR STATEMENT
The information contained in this report 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 risks and uncertainties associated with: (1) our
ability to execute our business plan; (2) our ability to continue to manage our
revenue and profit growth; (3) competitive factors; (4) the failure to develop
or distribute popular shows on The Outdoor Channel; (5) the risk that
advertising and subscriber revenues may not increase or may in fact decline; (6)
the risk that the number of subscribers for The Outdoor Channel may not increase
or may in fact decline; (7) the risk of primary satellite failure; (8) the
anticipated launch of The Outdoor Channel 2 HD is unsuccessful; (9) the cost of
producing and acquiring programming costs more than planned: and (10) 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.
GENERAL
Outdoor Channel Holdings, Inc. (which we refer to as "Outdoor Channel
Holdings" or the "Company"), through its indirect wholly-owned subsidiary The
Outdoor Channel, Inc. ("TOC"), owns and 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 Prospector's Association of America, LLC ("GPAA"). Lost
Dutchman's is a national gold prospecting campground club with approximately
6,100 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 31,800
active members. GPAA is the publisher of the "Gold Prospectors & 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 (1) 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; (2)
subscriber fees paid by cable and direct broadcast satellite (known as DBS)
operators that air The Outdoor Channel; and (3) 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 Launch The Outdoor Channel 2 HD (which we refer to as TOC 2
HD),including negotiating and securing carriage agreements for
this new channel;
o Pursuing national advertising accounts for The Outdoor
Channel;
o Increasing production and licensing of high quality
programming for The Outdoor Channel; and
o Building a library of high-definition programming to support
the TOC 2 HD and possible distribution in other outlets;
o Seeking new membership in our club organizations - GPAA and
Lost Dutchman's.
-16-
The results of our operations for the three and nine months ended
September 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 nine months ended September 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. This will help support the launch of TOC 2 HD as well as improve the
quality of programming on The Outdoor Channel. 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. We are reviewing capitalizing and amortizing
programming costs as may be deemed appropriate under changed circumstances.
Membership income increased for the three and nine months ended
September 30, 2004 compared to the results from the prior year comparable
periods. The increase in membership income was driven by increased attendance at
our gold shows and 70 more participants (or an increase of approximately 33%) on
our annual Alaska trip.
Our ability to implement our business strategy requires that we
successfully manage our operations and business, which we may not be able to do
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, our
results of operations could be adversely impacted.
This discussion should be read in conjunction with our Annual Report on
Form 10-KSB for the year ended December 31, 2003 that was previously filed with
the Securities and Exchange Commission. Unless otherwise noted, all dollar
amounts expressed herein are in thousands.
ACQUISITION OF SUBSTANTIALLY ALL OF THE MINORITY INTEREST OF THE OUTDOOR
CHANNEL, INC.
On September 9, 2004, the Company announced the completion of the
acquisition of substantially all of the remaining 17.6% minority interest in TOC
by Outdoor Channel Holdings 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 previously 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 was exchanged for an option to
purchase 0.65 shares of Outdoor Channel Holdings' common stock. Effective
September 14, 2004, the Company effected a 5 for 2 forward split of its stock in
conjunction with its reincorporation from Alaska to Delaware. All share data
included in this report has been adjusted to reflect this forward split.
Based on the exchange ratio and the 5 for 2 forward split as explained
above and the capitalization of TOC, Outdoor Channel Holdings issued 2,836
shares of its common stock as well as options to purchase 4,012 additional
shares on September 8, 2004.
The acquisition of substantially all of the 17.6% minority interest in
TOC was accounted for using the purchase method of accounting. The cost of
acquiring the minority interest included the aggregate fair value of the common
shares of Outdoor Channel Holdings issued in exchange for common shares of TOC
and certain other direct costs. The acquisition cost was allocated based on the
fair value of the assets of TOC that were acquired and liabilities that were
assumed, including intangible assets that arose from contractual or other legal
rights or met certain other recognition criteria that underlie the 17.6%
minority interest that was acquired. The excess of the cost of the minority
interest over the fair value of the underlying interest in the net identifiable
assets acquired was allocated to goodwill.
The cost of the acquisition of the minority interest in TOC by Outdoor
Channel Holdings was $46,945 based on the issuance at the closing of 2,836
shares of Outdoor Channel Holdings' common stock and the average closing price
of $16.24 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
acquisition plus other certain costs. Based on the analysis of the fair value of
the assets that were acquired and liabilities that were assumed, the acquisition
costs of $46,945 were allocated to intangible assets and are subject to
amortization as follows:
-17-
Allocation Estimated Useful Life
---------- ---------------------
MSO Relationships $ 10,573 Indefinite
Advertising Customer Relationships:
Short Form 1,351 4
Long Form 621 3
Goodwill 31,416 Indefinite
---------
Total Intangible Assets 43,961
Minority Interest in Subsidiary 2,984
---------
Aggregate Purchase Price $ 46,945
=========
The exchange of vested options by Outdoor Channel Holdings for vested
options of TOC resulted in a charge to net income in the consolidated statement
of operations on September 8, 2004 equal to the intrinsic value of the options
issued on that date net of any related income tax benefit. The options to
purchase approximately 4,012 shares that Outdoor Channel Holdings issued in
exchange for vested options of TOC on September 8, 2004 had a fair value of
$14.00 per share based on the closing price of Outdoor Channel Holdings' common
stock on that day. As a result, the Company incurred a non-cash, non-recurring
charge to operating expenses of $52,233 and recognized an income tax benefit of
$20,789 or a net charge of $31,444.
In some of the following period-to-period comparisons, the Company has
specifically noted, and at times excluded the non-cash, non-recurring
compensation expense of $52,233 incurred by the Company and the related tax
benefit of $20,789 as the result of the assumption of TOC options in connection
with the acquisition of the minority interest in TOC because it believes
quantifying the effects of this charge provides a better understanding of the
Company's results or operations. The Company's management also believes that
disclosure of its results in this manner, when presented in conjunction with
the corresponding GAAP measures, provides useful information to investors and
others in identifying and understanding the Company's operating performance for
the periods presented.
-18-
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Change % of Total Revenue
-------------------------- --------------------
2004 2003 $ % 2004 2003
--------- --------- --------- ---------- -------- -------
Advertising revenue $ 5,739 $ 4,214 $ 1,525 36.2% 52.3% 49.9%
Subscriber fees 3,450 3,005 445 14.8% 31.5% 35.6%
Membership income 1,776 1,224 552 45.1% 16.2% 14.5%
--------- --------- --------- ---------- -------- -------
Total revenues 10,965 8,443 2,522 29.9% 100.0% 100.0%
--------- --------- --------- ---------- -------- -------
Satellite transmission fees 582 611 (29) (4.7)% 5.3% 7.2%
Advertising and programming 2,243 910 1,333 146.5% 20.5% 10.8%
Compensation expense from exchange
of stock options 52,233 -- 52,233 NM 476.3% 0.0%
Selling, general and administrative 5,863 4,345 1,518 34.9% 53.5% 51.5%
--------- --------- --------- ---------- -------- -------
Total expenses 60,921 5,866 55,055 938.5% 555.6% 69.5%
--------- --------- --------- ---------- -------- -------
Income (loss) from operations (49,956) 2,577 (52,533) (2,038.5)% (455.6)% 30.5%
Interest income (expense), net 18 8 10 125.0% 0.2% 0.1%
--------- --------- --------- ---------- -------- -------
Income (loss) before provision for
income taxes and minority interest (49,938) 2,585 (52,523) (2,031.8)% (455.4)% 30.6%
Income tax provision (benefit) (19,867) 1,028 (20,895) (2,032.6)% (181.2)% 12.2%
--------- --------- --------- ---------- -------- -------
Income (loss) before minority interest (30,071) 1,557 (31,628) (2,031.3)% (274.2)% 18.4%
Minority interest in net income
of consolidated subsidiary 193 272 (79) (29.0)% 1.8% 3.2%
--------- --------- --------- ---------- -------- -------
Net income (loss) $(30,264) $ 1,285 $(31,549) (2,455.2)% (276.0)% 15.2%
========= ========= ========= ========== ======== =======
NM - NOT MEANINGFUL
REVENUES
Our revenues include revenues from: (1) advertising; (2) subscriber
fees; and (3) membership income, which includes membership sales, merchandise
sales and sponsored outings to prospect for gold in connection with GPAA and
Lost Dutchman's. 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 September 30, 2004 and 2003, The
Outdoor Channel generated approximately 97.4% and 97.9% of our advertising
revenue, respectively. Subscriber fees are solely related to The Outdoor Channel
business segment. Membership income is generated by our activities other than
the operation of The Outdoor Channel.
Total revenues for the three months ended September 30, 2004 were
$10,965, an increase of $2,522, or 29.9%, compared to revenues of $8,443 for the
three months ended September 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 September 30, 2004 was
$5,739, an increase of $1,525 or 36.2% compared to $4,214 for the three months
ended September 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 26.2 million subscribers at the end of September 2004
compared to 24.7 million at the end of September 2003 an increase of 1.5 million
or 6.1%. (Nielsen revises this estimate each month and as of November 1, 2004,
Nielsen reported that we had approximately 25.3 million subscribers.) 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.
-19-
Subscriber fees for the three months ended September 30, 2004 were
$3,450, an increase of $445 or 14.8% compared to $3,005 for the three months
ended September 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, second and third quarters of 2004 and not in the
comparable prior periods; and the increasing penetration of The Outdoor Channel
on DirecTV.
Membership income for the three months ended September 30, 2004 was
$1,776, an increase of $552 or 45.1% compared to $1,224 for the three months
ended September 30, 2003. The increase in membership income was driven by
increased attendance at our gold shows and 70 more participants (or an increase
of approximately 33%) on our annual Alaska trip.
EXPENSES
Expenses consist of (1) satellite transmission fees; (2) advertising
and programming; (3) compensation expense from exchange of TOC stock options;
and (4) selling, general and administrative expenses.
Total expenses for the three months ended September 30, 2004 were
$60,921, an increase of $55,055, or 938.5%, compared to $5,866 for the three
months ended September 30, 2003. As a percentage of revenues, total expenses are
555.6% and 69.5% in the three months ended September 30, 2004 and 2003,
respectively. The increase in expenses was due to several factors, but is
principally driven by compensation expense incurred by the issuance of options
with an intrinsic value of $52,233 in accordance with the terms of the
acquisition by the Company of substantially all of the remaining 17.6% minority
interest in TOC it did not already own.
Satellite transmission fees for the three months ended September 30,
2004 were $582, a decrease of $29, or 4.7%, compared to $611 for the three
months ended September 30, 2003. This relatively static comparison reflects the
fixed nature of our contracts for these services. We are scheduled for a price
increase in October 2005 amounting to $5 per month.
Advertising and programming expenses for the three months ended
September 30, 2004 were $2,243, an increase of $1,333 or 146.5% compared to $910
for the three months ended September 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, including programming for
The Outdoor Channel 2 HD. Advertising and programming expenses are expected to
continue to grow faster than the expected growth in total revenue thus
increasing 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. We believe in-house programming gives us better control of the
programming in terms of content and quality. Further, it yields increased
advertising inventory to drive growth of advertising revenue.
Compensation expense from exchange of stock options for the three
months ended September 30, 2004 was $52,233 and was incurred as a result of the
issuance of 4,012 options to TOC option holders in accordance with the terms of
the acquisition of substantially all of the remaining 17.6% minority interest in
TOC we did not already own. This charge is both non-cash and non-recurring.
Selling, general and administrative expenses for the three months ended
September 30, 2004 were $5,863, an increase of $1,518 or 34.9% compared to
$4,345 for the three months ended September 30, 2003. As a percentage of
revenues, selling, general and administrative expenses were 53.5% and 51.5% for
the three months ended September 30, 2004 and 2003, respectively. The increase
in the amount of these expenses is primarily due to several factors. Personnel
expenses increased by approximately $450 in the third quarter of 2004 over 2003
principally as a result of increased personnel to 127 from 111 at September 30,
2004 and 2003, respectively. Further, we experienced increases in other
components of selling, general and administrative expenses: Professional fees
and associated costs related to our reincorporation in Delaware; listing of our
common stock on the Nasdaq National Market; increased depreciation expense as a
result of our equipment purchases in 2004 and 2003 to support our growth; and
our increased travel related costs associated with our increased advertising
sales staff, support of our growing number of affiliates and the promotion of
The Outdoor Channel.
-20-
INCOME (LOSS) FROM OPERATIONS
Income (loss) from operations for the three months ended September 30,
2004 was ($49,956), a decrease of $52,533 or 2,038.5% compared to $2,577 for the
three months ended September 30, 2003. As a percentage of revenues, income
(loss) from operations was (455.6%) and 30.5% for the three months ended
September 30, 2004 and 2003, respectively.
As explained above, the non-cash, non-recurring compensation expense
charge of $52,233 which resulted from the assumption of options in connection
with the acquisition of the minority interest in TOC accounts for the majority
of the loss from operations for the three months ended September 30, 2004. If we
excluded this charge, income from operations would have been $2,277 or a
decrease of $300. As a percentage of revenue this adjusted total would have been
20.8%. As we shift to a larger percentage of our programming being produced
in-house and as we incur costs associated with the planned launch of a second
channel, The Outdoor Channel 2 HD, our margins are likely to continue to decline
until we achieve sufficient scale to allow revenue growth to out pace the cost
and expense growth.
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net for the three months ended September 30,
2004 was $18, an increase of $10 compared to $8 for the three months ended
September 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.
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST
IN NET INCOME OF CONSOLIDATED SUBSIDIARY
Income (loss) before provision for income taxes and minority interest
decreased significantly as a percentage of revenues to (455.4%) for the three
months ended September 30, 2004 compared to 30.6% for the three months ended
September 30, 2003.
For the TOC business segment, income before provision for income taxes
and minority interest as a percentage of revenue decreased to 27.3% for the
three months ended September 30, 2004, compared to 37.7% for the three months
ended September 30, 2003. The decrease was due mainly to the growth of our
advertising and programming expenses in the third quarter, increases in
personnel expenses resulting from (1) the increase in the number of employees
from 80 at the end of September 2003 to 96 by the end of September 2004 and (2)
increased commissions paid on increased advertising sales.
For the membership division segment, income before provision for income
taxes and minority interest as a percentage of revenues increased to 15.9% for
the three months ended September 30, 2004 compared to (1.3)% for the three
months ended September 30, 2003. The increase principally reflects a concerted
effort to control costs and make adjustments in our marketing and advertising
that yield increased sales while spending less on direct selling, general and
administrative expenses.
For the corporate business segment, loss before provision for income
taxes and minority interest for the three months ended September 30, 2004 was
$52,707, a decrease of $52,614 compared to a loss of $93 for the three months
ended September 30, 2003. The expenses allocated to this business segment
include: the non-cash, non-recurring compensation expense charge of $52,233
which resulted from the assumption of options in connection with the acquisition
of the minority interest in TOC, 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 costs associated with GPAA acquiring substantially all of the
remaining 17.6% minority interest in TOC.
INCOME TAX PROVISION (BENEFIT)
The provision for income taxes for the three months ended September 30,
2004 was ($19,867), a decrease of $20,895 or 2,032.6% as compared to $1,028 for
the three months ended September 30, 2003. The significant decrease was
principally due to the Company recognizing an income tax benefit of $20,789
arising from a non-cash, non-recurring compensation expense charge of $52,233
which resulted from the assumption of options in connection with the acquisition
of the minority interest in TOC. The effective income tax rate was approximately
40.0% for both three months ended September 30, 2004 and 2003.
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED SUBSIDIARY
Minority interest for the three months ended September 30, 2004 was
$193,000 compared to $272,000 for the three months ended September 30, 2003.
This was primarily due to the elimination of minority interest in the month of
September as a result of GPAA acquiring substantially all of the remaining 17.6%
minority interest in TOC it did not already own.
-21-
NET INCOME (LOSS)
For the reasons stated above, net income (loss) for the three months
ended September 30, 2004 was ($30,264) a decrease of $31,549 or 2,455.2%
compared to $1,285 for the three months ended September 30, 2003. As a
percentage of revenues, net income (loss) was (276.0%) and 15.2% for the three
months ended September 30, 2004 and 2003, respectively. Excluding the non-cash,
non-recurring charge of $52,233, net of income tax benefit of $20,789, net
income for the three months ended September 30, 2004 would have been $1,180 or
10.8% of revenues.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share for the three months ended September
30, 2004 was $(1.92) per basic share and diluted share compared with $0.09 per
basic share and $0.08 per diluted share for the three months ended September 30,
2003. Diluted loss per share was equal to basic loss per share due to the
Company's losses.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Change % of Total Revenue
------------------------- ---------------------
2004 2003 $ % 2004 2003
--------- --------- --------- ----------- --------- ---------
Advertising revenue $ 15,928 $ 11,689 $ 4,239 36.3% 53.6% 50.7%
Subscriber fees 9,830 7,830 2,000 25.5% 33.0% 33.9%
Membership income 3,995 3,549 446 12.6% 13.4% 15.4%
--------- --------- --------- ----------- --------- ---------
Total revenues 29,753 23,068 6,685 29.0% 100.0% 100.0%
--------- --------- --------- ----------- --------- ---------
Satellite transmission fees 1,759 1,813 (54) (3.0)% 5.9% 7.9%
Advertising and programming 5,997 3,158 2,839 89.9% 20.1% 13.7%
Compensation expense from exchange of
stock options 52,233 -- 52,233 NM 175.6% 0.0%
Selling, general and administrative 15,674 12,304 3,370 27.4% 52.7% 53.3%
--------- --------- --------- ----------- --------- ---------
Total expenses 75,663 17,275 58,388 338.0% 254.3% 74.9%
--------- --------- --------- ----------- --------- ---------
Income (loss) from operations (45,910) 5,793 (51,703) (892.5)% (154.3)% 25.1%
Interest income (expense), net 51 2 49 2,450.0% 0.2% 0.0%
--------- --------- --------- ----------- --------- ---------
Income (loss) before provision for
income taxes and minority interest (45,859) 5,795 (51,654) (891.4)% (154.1)% 25.1%
Income tax provision (benefit) (18,234) 2,300 (20,534) (892.8)% (61.3)% 9.9%
--------- --------- --------- ----------- --------- ---------
Income (loss) before minority interest (27,625) 3,495 (31,120) (890.4)% (92.8)% 15.2%
Minority interest in net income of
consolidated subsidiary 682 622 60 9.6% 2.3% 2.7%
--------- --------- --------- ----------- --------- ---------
Net income (loss) $(28,307) $ 2,873 $(31,180) (1,085.3)% (95.1)% 12.5%
========= ========= ========= =========== ========= =========
NM - NOT MEANINGFUL
REVENUES
Total revenues for the nine months ended September 30, 2004 were
$29,793, an increase of $6,685, or 29.0%, compared to revenues of $23,068 for
the nine months ended September 30, 2003. This net increase was the result of
changes in several items comprising revenue as discussed below.
-22-
Advertising revenue for the nine months ended September 30, 2004 was
$15,928, an increase of $4,239 or 36.3% compared to $11,689 for the nine months
ended September 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 26.2 million subscribers at the end of September 2004
compared to 24.7 million at the end of September 2003 an increase of 1.5 million
or 6.1%. (Nielsen revises this estimate each month and as of November 1, 2004,
Nielsen reported that we had approximately 25.3 million subscribers.) 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 nine months ended September 30, 2004 were
$9,830, an increase of $2,000 or 25.5% compared to $7,830 for the nine months
ended September 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.
Membership income for the nine months ended September 30, 2004 was
$3,995, an increase of $446 or 12.6% compared to $3,549 for the nine months
ended September 30, 2003. The increase in membership income was driven by
increased attendance at our gold shows and 70 more participants (or an increase
by approximately 33%) on our annual Alaska trip.
EXPENSES
Total expenses for the nine months ended September 30, 2004 were
$75,663, an increase of $58,388, or 338.0%, compared to $17,275 for the nine
months ended September 30, 2003. As a percentage of revenues, total expenses are
254.3% and 74.9% in the nine months ended September 30, 2004 and 2003,
respectively. The increase in expenses was due to several factors, but is
principally driven by the non-cash, non-recurring compensation expense incurred
by the issuance of options in connection with the TOC merger with an intrinsic
value of $52,233 in accordance with the terms of the acquisition by the Company
of substantially all of the remaining 17.6% minority interest in TOC it did not
already own.
Satellite transmission fees for the nine months ended September 30,
2004 were $1,759, a decrease of $54, or 3.0%, compared to $1,813 for the nine
months ended September 30, 2003. This relatively static comparison reflects the
fixed nature of our contracts for these services and a negotiated price decrease
in the contract. We are scheduled for a price increase in October 2005 amounting
to $5 per month.
Advertising and programming expenses for the nine months ended
September 30, 2004 were $5,997, an increase of $2,839 or 89.9% compared to
$3,158 for the nine months ended September 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, including programming for
The Outdoor Channel 2 HD. 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.
Compensation expense from exchange of stock options for the nine months
ended September 30, 2004 was $52,233 and was incurred as a result of the
issuance of 4,012 options to TOC option holders in accordance with the terms of
the acquisition by the Company of substantially all of the remaining 17.6%
minority interest in TOC it did not already own.
Selling, general and administrative expenses for the nine months ended
September 30, 2004 were $15,674, an increase of $3,370 or 27.4% compared to
$12,304 for the nine months ended September 30, 2003. As a percentage of
revenues, selling, general and administrative expenses were 52.7% and 53.3% for
the nine months ended September 30, 2004 and 2003, respectively. This increase
was primarily due to personnel expenses which increased by approximately $1,250
in the nine months ended September 30, 2004 over 2003 principally as a result of
increased personnel to 127 from 111 at September 30, 2004 and 2003,
respectively. Further, we experienced increases in other components of selling,
general and administrative expenses: Professional fees and associated costs
related to our reincorporation from Alaska to Delaware; listing of our common
stock on the Nasdaq National Market; increased depreciation expense as a result
of equipment purchased in 2004 and 2003 to support our growth; and our increased
travel related costs associated with our increased advertising sales staff,
support of our growing number of affiliates and the promotion of The Outdoor
Channel.
-23-
INCOME (LOSS) FROM OPERATIONS
Income (loss) from operations for the nine months ended September 30,
2004 was ($45,910), a decrease of $51,703 or 892.5% compared to $5,793 for the
nine months ended September 30, 2003. As a percentage of revenues, income (loss)
from operations was (154.3%) and 25.1% for the nine months ended September 30,
2004 and 2003, respectively. If the effect of the non-cash, non-recurring
compensation expense of $52,233 related to the assumption of TOC stock options
is excluded, income from operations would have been $6,323 or an increase of
$530 or 9.1%. Thus income from operations as adjusted for the non-cash,
non-recurring expense of $52,233 grew at a slower pace than revenue growth
during the period reflecting our investment in programming. There can be no
assurance that this strategy will be successful.
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net for the nine months ended September 30,
2004 was $51, an increase of $49 compared to $2 for the nine months ended
September 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.
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST
IN NET INCOME OF CONSOLIDATED SUBSIDIARY
Income (loss) before provision for income taxes and minority interest
decreased significantly as a percentage of revenues to (154.1%) for the nine
months ended September 30, 2004 compared to 25.1% for the nine months ended
September 30, 2003.
The TOC business segment's income before provision for income taxes and
minority interest as a percentage of revenue decreased to 27.3% for the nine
months ended September 30, 2004, compared to 31.4% for the nine months ended
September 30, 2003. The decrease was due mainly to the growth of our advertising
and programming expenses in the third quarter and increases in personnel
expenses resulting from the increase in the number of employees from 80 at the
end of September 2003 to 96 by the end of September 2004.
For the membership division segment, income before provision for income
taxes and minority interest as a percentage of revenues increased to 10.9% for
the nine months ended September 30, 2004 compared to 1.0% for the nine months
ended September 30, 2003. The increase principally reflects a concerted effort
to control costs and make adjustments in our marketing and advertising that
yield increased sales while spending less on selling, general and administrative
expenses.
For the corporate business segment, loss before provision for income
taxes and minority interest for the nine months ended September 30, 2004 was
$53,272, a decrease of $52,948 or 99.4% compared to the loss of $324 for the
nine months ended September 30, 2003. The expenses allocated to this business
segment include: the non-cash, non-recurring compensation expense of $52,233 in
the third quarter which resulted from the issuance of options in connection with
the acquisition of the minority interest in TOC, 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 costs associated with GPAA acquiring substantially all of
the remaining 17.6% minority interest in TOC, legal fees resulting from
corporate restructuring including our listing on the Nasdaq National Market and
various securities filings.
INCOME TAX PROVISION (BENEFIT)
The provision for income taxes for the nine months ended September 30,
2004 was ($18,234), a decrease of $20,534 or 892.8% as compared to $2,300 for
the nine months ended September 30, 2003. The significant decrease was due to
the Company recognizing an income tax benefit of $20,789 arising from a
non-cash, non-recurring compensation expense charge of $52,233 which resulted
from the assumption of options in connection with the acquisition of the
minority interest in TOC. The effective income tax rate was approximately 40.0%
for both the nine months ended September 30, 2004 and 2003, respectively.
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED SUBSIDIARY
Minority interest for the nine months ended September 30, 2004 was $682
compared to $622 for the nine months ended September 30, 2003. Minority interest
was eliminated in the month of September due to GPAA acquiring substantially all
of the remaining 17.6% minority interest in TOC it did not already own. The
amount reported for the nine months ended September 30, 2004 reflects
approximately eight months of activity while the same period in 2003 reflects
nine months. The growth of minority interest was primarily due to the increased
profitability of TOC along with a slight increase in the percentage of ownership
-24-
of TOC by the minority interest. As a result of the acquisition of the remaining
interest in TOC by GPAA, minority interest will be the same amount for the year
ended December 31, 2004 as for the nine months ended September 30, 2004 and
thereafter will not continue as a result of our current capital structure.
NET INCOME (LOSS)
Net income (loss) for the nine months ended September 30, 2004 was
($28,307) a decrease of $31,180 or 1,085.3% compared to $2,873 for the nine
months ended September 30, 2003. As a percentage of revenues, net income (loss)
was (95.1%) and 12.5% for the nine months ended September 30, 2004 and 2003,
respectively.
If the non-cash, non-recurring compensation expense of $52,233 net of
tax benefit of $20,789 described above is excluded, net income for the nine
months ended September 30, 2004 would have been $3,137 or 10.5% of sales. The
decline in the rate of net income principally reflects the decision to produce a
larger percentage of programming in-house as opposed to licensing from third
parties and our decision to invest in advertising.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share for the nine months ended September
30, 2004 was $(1.86) per basic and diluted share compared with $0.21 per basic
share or $0.20 per diluted share for the nine months ended September 30, 2003.
Diluted loss per share was equal to basic loss per share due to the Company's
losses.
LIQUIDITY AND CAPITAL RESOURCES
We generated cash from operations of $5,288 in the nine months ended
September 30, 2004, compared to $3,909 in the nine months ended September 30,
2003 and had a cash and cash equivalents balance of $11,681 at September 30,
2004, which was an increase of $4,467 from the balance of $7,214 at December 31,
2003. Current assets increased to $17,579 at September 30, 2004 compared to
$13,968 at December 31, 2003. Current liabilities decreased to $2,614 at
September 30, 2004 compared to $2,623 at December 31, 2003. Net working capital
increased to $14,965 at September 30, 2004, compared to $11,345 at December 31,
2003. Total liabilities decreased to $4,170 at September 30, 2004 compared to
$4,353 at December 31, 2003.
We generated a loss from operations in the three and nine months ended
September 30, 2004 of $49,956 and $45,910 respectively. These losses were
principally a result of the non-cash, non-recurring charge to operating expenses
of $52,233. After excluding this charge, income from operations for the three
months ended September 30, 2004 would have been $2,277 compared to an income
from operations of $2,577 for the three months ended September 30, 2003 and
income from operations for the nine months ended September 30, 2004 was $6,323
compared to an income from operations of $5,793 for the nine months ended
September 30, 2003. From 2000 through the present, the Company has financed its
activities primarily from cash flows from operations. During the quarter ended
September 30, 2004, the Company entered into a new credit facility providing for
a revolving line of credit of up to $5,000 of available borrowings. The
borrowings under the credit facility are secured by accounts receivable,
instruments, documents, chattel paper, general intangibles, contract rights,
investment property, certificates of deposit, deposit accounts, letter of credit
rights, inventory, and equipment. The credit facility matures on September 5,
2005 and contains customary financial and other covenants and restrictions
including a change of control provision. As of September 30, 2004, the Company
did not have any amounts outstanding under the credit facility. We did not have
any significant capital commitments as of September 30, 2004. The capital
improvements we made in the nine months ended September 30, 2004, which included
purchasing high definition camera equipment for TOC, were funded with cash from
operations.
Driven by a need to increase office space, we began a reassessment of
our facilities including floor space utilization, master control equipment,
uplink equipment, etc. during the three months ended September 30, 2004. The
Company is in the process of assessing its alternatives, including renovating
its current facilities and upgrading its equipment along with possibly
purchasing the building where the Company is currently located. While no
decision had been reached with regard to these alternatives, the Company
believes that a significant portion of such capital expenditures could be funded
from its cash on hand. We also believe that long-term debt financing may be
available to fund a portion of these expenditures although we do not have
commitments to do so and may not actually obtain such commitments on terms
acceptable to us.
In October 2004, the Company received notice from a TOC
shareholder that the shareholder was exercising dissenters' rights with respect
to 143,660 previously outstanding TOC common shares. The dissenter submitted a
written demand that TOC repurchase the dissenter's shares at a price of $28.27
per share. As of the date of this filing, TOC has not agreed to the dissenter's
asking price and the Company and TOC have been negotiating with the dissenting
shareholder over the dissenter's demand. TOC and the Company currently
anticipate that the negotiations could be protracted unless the dissenter
withdraws his demand. If TOC denies that such shares qualify as "dissenting
shares" or if TOC and the dissenter are unable to agree on a price for the
-25-
shares or other arrangements, either the dissenter or TOC may commence legal
action within six months from September 17, 2004 to determine whether or not
such shares are dissenting shares or to resolve the issue as to the fair market
value of the dissenting shares as of the day before the first announcement of
the terms of the proposed merger involving TOC. If TOC is required to repurchase
the shares of the dissenter, the Company believes that TOC has sufficient cash
on hand and available borrowings to pay such amounts without adversely impacting
currently anticipated operations, working capital requirements or capital
expenditures. For accounting purposes, the TOC shares held by the dissenter are
deemed to still be outstanding. However, the related minority interest as of
September 30, 2004 was not material. Any payments made to the dissenter will
be recorded as additional goodwill.
As of September 30, 2004, the Company is generating sufficient cash
flow from operations to meet its short-term cash flow requirements. 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 capital requirements through at least September 30, 2005.
To the extent that such amounts are insufficient to finance the Company's
working capital requirements or the Company's desires to expand operations
beyond current levels, the Company could seek additional 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.
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 third 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 might 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 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) the launch of The Outdoor Channel 2 HD including
negotiating and securing carriage agreements for this new channel, (3) pursuing
national advertising accounts, (4) increasing production and licensing of high
quality programming, (5)building a library of high-definition programming to
support TOC 2 HD and possible distribution through other outlets, and (6)
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 distribution, and other factors beyond our control. There can be no
assurance that we will be able to maintain or 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 increase 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
-26-
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 most 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 which would adversely impact
revenues and results of 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.
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 technology 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 such contracts do not
require that The Outdoor Channel be offered to all subscribers of the MSO. 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.
-27-
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.
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 which could
adversely impact our revenue and our ability to offer programming and services.
We recently negotiated with our satellite provider back-up capability on an
in-orbit spare satellite which provides us carriage on the back-up satellite in
the event that catastrophic failure occurs on the primary satellite. Our
contract does, however, provide that our signal is preempt-able and until the
back-up satellite is in position, we could lose our signal for a period of time.
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 The Outdoor Channel 2 HD, is expected to offer
programming both shared with and independent of existing Outdoor Channel
programming. There can be no assurances that The Outdoor Channel 2 HD will debut
in July 2005 as originally anticipated or will not incur unexpected costs and
expenses.
Distribution of The 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 The 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 The Outdoor Channel 2 HD,
increasing costs beyond our control or expectations.
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 the escalation may continue. We plan to build our programming
library through the acquisition of long-term broadcasting rights or the in-house
production or outright ownership of programming and this is expected to lead to
increases in programming costs. The development, production and completion of
-28-
television programming requires a significant amount of capital and there are
substantial financial risks inherent in developing and producing television
programs. Actual programming and production 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.
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.
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.
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
-29-
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.
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.
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 currently set for sometime in
March 2005, 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.
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 sometime in March 2005. 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.
Neither the Company nor any of its subsidiaries is a party to this litigation.
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.
-30-
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.
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.
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.
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.
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 75% 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 CERTIFICATE OF INCORPORATION, OUR
BYLAWS AND UNDER DELAWARE 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 certificate of incorporation, our bylaws and the
Delaware 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.
-31-
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 the 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.
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.
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.
-32-
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.
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.
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.
-33-
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 September 30, 2004 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
September 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 September 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.
-34-
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.
We held our annual meeting of the shareholders on September 8, 2004, to
elect four directors to our Board of Directors and to consider and vote
upon proposals to approve certain option grants, ratify and approve the
Company's Non-Employee Directors Stock Option Plan, approve the
Company's 2004 Long-Term Incentive Plan and, in connection with a
merger between a newly formed wholly-owned subsidiary of the Company
and TOC, to approve the issuance of the shares of the Company and the
assumption of options to purchase shares of common stock of TOC in such
merger and to approve the Company's reincorporation from Alaska to
Delaware and related proposals to classify the Board of Directors and
provisions which provide that only the Board of Directors my call
special meetings of stockholders.
The following individuals were elected as directors and received the
number of votes indicated below:
------------------- ---------------------- -----------------------
NAME OF NOMINEE VOTES FOR VOTES WITHHELD
------------------- ---------------------- -----------------------
Perry T. Massie 5,041,883 534,006
------------------- ---------------------- -----------------------
Thomas H. Massie 5,033,233 542,656
------------------- ---------------------- -----------------------
David C. Merritt 5,051,341 524,548
------------------- ---------------------- -----------------------
Thomas B. Stanley 5,051,399 524,490
------------------- ---------------------- -----------------------
The proposal to ratify and approve a stock option grant to William A.
Owen was approved as follows:
--------------- ---------------- -------------- -------------------
VOTES FOR VOTES AGAINST ABSTENTIONS NOT VOTED
--------------- ---------------- -------------- -------------------
4,519,718 552,606 3,252 500,313
--------------- ---------------- -------------- -------------------
The proposal to ratify and approve a stock option grant to Eugene A.
Brookhart was approved as follows:
---------------- ---------------- --------------- ----------------
VOTES FOR VOTES AGAINST ABSTENTIONS NOT VOTED
---------------- ---------------- --------------- ----------------
5,058,174 14,000 3,402 500,313
---------------- ---------------- --------------- ----------------
The proposal to ratify and approve the Company's Non-Employee Directors
Stock Option Plan was approved as follows:
--------------- ----------------- -------------- ------------------
VOTES FOR VOTES AGAINST ABSTENTIONS NOT VOTED
--------------- ----------------- -------------- ------------------
4,515,127 558,607 1,842 500,313
--------------- ----------------- -------------- ------------------
The proposal to ratify and approve the Company's 2004 Long-Term
Incentive Plan was approved as follows:
---------------- ----------------- -------------- ---------------
VOTES FOR VOTES AGAINST ABSTENTIONS NOT VOTED
---------------- ----------------- -------------- ---------------
4,509,926 563,564 2,086 500,313
---------------- ----------------- -------------- ---------------
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The proposal to approve the issuance of shares of the Company's common
stock and the assumption of options of TOC as contemplated in the
Agreement and Plan of Merger dated May 12,2004 among the Company, Gold
Prospector's Association of America, Inc. and TOC was approved as
follows:
--------------- ----------------- --------------- -----------------
VOTES FOR VOTES AGAINST ABSTENTIONS NOT VOTED
--------------- ----------------- --------------- -----------------
4,521,285 551,414 2,877 500,313
--------------- ----------------- --------------- -----------------
The proposal to approve the reincorporation of the Company from Alaska
to Delaware was approved as follows:
---------------- ----------------- --------------- ----------------
VOTES FOR VOTES AGAINST ABSTENTIONS NOT VOTED
---------------- ----------------- --------------- ----------------
5,040,072 32,048 3,456 500,313
---------------- ----------------- --------------- ----------------
In connection with the reincorporation into Delaware, the proposal to
classify the Board of Directors was approved as follows:
--------------- ----------------- --------------- -----------------
VOTES FOR VOTES AGAINST ABSTENTIONS NOT VOTED
--------------- ----------------- --------------- -----------------
4,535,470 536,800 3,306 500,313
--------------- ----------------- --------------- -----------------
In connection with the reincorporation into Delaware, the proposal to
include certain provisions in the Company's certificate of
incorporation and bylaws which provide that only the Board of Directors
may call special meetings of stockholders was approved as follows:
--------------- ----------------- --------------- -----------------
VOTES FOR VOTES AGAINST ABSTENTIONS NOT VOTED
--------------- ----------------- --------------- -----------------
4,503,514 568,846 3,216 500,313
--------------- ----------------- --------------- -----------------
ITEM 5. OTHER INFORMATION
During the three month period ending September 30, 2004 the Company
completed its reincorporation from Alaska to Delaware. As previously
described in the Company's Definitive Proxy Statement filed with the
Securities and Exchange Commission on August 19, 2004, in connection
with its reincorporation into Delaware, the Company entered into
indemnification agreements with all of its current directors, William
A. Owen, Chief Financial Officer of the Company and Andy Dale, Chief
Executive Officer and Co-President of TOC. A form of such
indemnification agreement is attached as Exhibit 10.1 hereto.
During the three month period ending September 30, 2004, the Company
entered into a new credit facility providing for a revolving line of
credit up to $5,000 of available borrowings. The borrowings under the
credit facility are secured by accounts receivable, instruments,
documents, chattel paper, general intangibles, contract rights,
investment property, certificates of deposit, deposit accounts, letter
of credit rights, inventory, and equipment. The credit facility matures
on September 5, 2005 and contains customary financial and other
covenants and restrictions including a change of control provision.
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 April
20, 2004, as amended and restated 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)
2.2 Agreement and Plan of Merger between Outdoor Channel Holdings,
Inc., a Delaware corporation, and Outdoor Channel Holdings,
Inc., an Alaska corporation, dated as of September 8, 2004
(filed as Exhibit 2.1 to the Company's Current Report on Form
8-K filed on September 20, 2004 and incorporated herein by
reference)
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3.1 Certificate of Incorporation of Outdoor Channel Holdings, Inc,
a Delaware corporation (filed as Exhibit 3.1 to the Company's
Current Report on Form 8-K filed on September 20, 2004 and
incorporated herein by reference)
3.2 By-Laws of Outdoor Channel Holdings, Inc., a Delaware
corporation (filed as Exhibit 3.2 to the Company's Current
Report on Form 8-K filed on September 20, 2004 and
incorporated herein by reference)
10.1 Form of Indemnification Agreement between Outdoor Channel
Holdings, Inc. and its directors and certain executive
officers
10.2 Revolving Credit Agreement and related agreements by and
between the Company and U.S. Bank N.A. dated September 30,
2004
10.3 The Outdoor Channel, Inc. 1997 Stock Option Plan (filed as
Exhibit 4.1 to the Company's Registration Statement on Form
S-8 with respect to the shares underlying the options assumed
by the Company under such plan that was filed on November 12,
2004 and incorporated herein by reference)
10.4 Form of Stock Option Agreement pursuant to The Outdoor
Channel, Inc. 1997 Stock Option Plan (filed as Exhibit 4.2 to
the Company's Registration Statement on Form S-8 with respect
to the shares underlying the options assumed by the Company
under such plan that was filed on November 12, 2004 and
incorporated herein by reference)
10.5 Non-Statutory Stock Option Plan and Agreement, dated as of
November 13, 2003, by and between the Company and William A.
Owen, as amended (filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-8 with respect to the shares
underlying such plan that was filed on November 12, 2004 and
incorporated herein by reference)
10.6 Non-Statutory Stock Option Plan and Agreement, dated as of
June 10, 2004, by and between the Company and Eugene Brookhart
(filed as Exhibit 4.1 to the Company's Registration Statement
on Form S-8 with respect to the shares underlying such plan
that was filed on November 12, 2004 and incorporated herein by
reference)
10.7 2004 Long-Term Incentive Plan (filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-8 with respect to
the shares underlying such plan that was filed on November 12,
2004 and incorporated herein by reference)
10.8 Non-Employee Directors Stock Option Plan, as amended (filed as
Exhibit 4.1 to the Company's Registration Statement on Form
S-8 with respect to the shares underlying such plan that was
filed on November 12, 2004 and incorporated herein by
reference)31.1
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.
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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: November 12, 2004
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