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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 2004
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or
[_] 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 33-0074499
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
43445 BUSINESS PARK DR., SUITE 113, TEMECULA, CALIFORNIA 92590
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (951) 699-4749
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Securities registered pursuant to Section 12 (b) of the Act: NONE
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Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
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(Title of Class)
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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the voting common stock held by
non-affiliates of the registrant as of June 30, 2004 was $66.7 million computed
by reference to the average of the bid and asked price as quoted on the NASD's
Over the Counter Bulletin Board.
On March 15, 2005, the number of shares outstanding of the registrant's
common stock was 18,518,739.
DOCUMENTS INCORPORATED BY REFERENCE
None.
1
PART I
ITEM 1. BUSINESS.
As used in this annual report on Form 10-K, the terms "we," "us," "our" and
the "Company" refer to Outdoor Channel Holdings, Inc. and its subsidiaries as a
combined entity, except where noted or where the context makes clear the
reference is only to Outdoor Channel Holdings, Inc. or one of its subsidiaries.
FORWARD-LOOKING STATEMENTS
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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, or Nielsen,
estimates regarding total households and cable and satellite homes subscribing
to and viewers (ratings) of The Outdoor Channel; and (4) other matters. We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
These statements involve significant risks and uncertainties and 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 which are discussed below
in Item 7 of this annual report on Form 10-K under the caption "Risks and
Uncertainties" and other risks and uncertainties discussed elsewhere in this
report. In assessing forward-looking statements contained herein, readers are
urged to read carefully all cautionary statements contained in this Form 10-K
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 and Section 21E
of the Exchange Act.
COMPANY OVERVIEW
We own and operate The Outdoor Channel(R), a national television network
devoted to traditional outdoor activities such as hunting, fishing and shooting
sports, as well as off road motor sports and other related lifestyle
programming. Our target audience is comprised of sportsmen and outdoor
enthusiasts throughout the U.S. According to a survey by the U.S. Fish and
Wildlife Service, in 2001 there were over 82 million outdoor enthusiasts
throughout the U.S. who spent in excess of $100 billion in pursuit of their
outdoor activities. We currently have agreements with over 5,700 cable and
satellite service providers. Through these agreements, we believe The Outdoor
Channel is available to over 71 million households. The Outdoor Channel's
programming is offered nationally by cable and satellite service providers and
currently is subscribed to by approximately 24.4 million households according to
March 2005 estimates by Nielsen.
We believe The Outdoor Channel provides viewers with a unique destination
for authentic, informative and entertaining outdoor programming. As a result, we
believe that our viewers tend to be more loyal and spend more time watching The
Outdoor Channel than other networks with similar programming. We also believe
that The Outdoor Channel has become a particularly desirable network for
advertisers of products and services used by outdoor enthusiasts.
The Outdoor Channel was established in 1993 and began broadcasting 24 hours
a day in May 1994. Since inception, we have been committed to providing
excellent programming and customer service to our distribution partners. In
recognition of our efforts, The Outdoor Channel was named Programmer of the Year
in 2003 by the National Cable Television Cooperative. The Outdoor Channel is
currently carried by the 10 largest U.S. pay television service providers.
2
We also own and operate two national membership organizations, Gold
Prospector's Association of America, LLC, or GPAA, and LDMA-AU, Inc., or Lost
Dutchman's. The theme of these organizations is the search for gold deposits and
treasures while enjoying the outdoors. Initially, we created The Outdoor Channel
to market the membership in these organizations by airing programming related to
these activities. Through this process, we discovered that members in these
organizations were very enthusiastic and passionate about their activities which
resulted in a strong consumer demand for The Outdoor Channel. We then augmented
this consumer demand by airing programs associated with other membership, or
affinity, organizations such as the National Rifle Association and the North
American Hunting and Fishing Clubs. We believe that this approach has
contributed to our past growth and our current distribution, or number of
subscribers. We also believe that this consumer demand, along with increased
marketing efforts to encourage service providers to either move The Outdoor
Channel to a package of channels that has a greater number of subscribers or
make The Outdoor Channel available on their system, will allow us to continue to
increase the number of subscribers to The Outdoor Channel.
INDUSTRY
Historically, television broadcasters have transmitted signals through the
airwaves and households received the signals through antennas at no cost. This
method of broadcasting signals had several disadvantages. The signal could not
reach many areas due to signal strength, remoteness of many communities and
topography. In addition, for those households that could receive the signal, it
often produced poor picture and sound quality.
Unlike traditional television broadcasters which deliver their programming
without charge, cable companies provide subscription television service for a
fee. These service providers transmit signals through coaxial cable connected
directly to individual homes. In most markets, this service delivers a much
improved picture and sound quality and offers an increased number and wider
variety of channels as compared to broadcast television. In addition to using
cable for connectivity, companies use satellite technology to provide
subscription television service directly to households. This industry of
providing television service to households for a fee, or on a subscription
basis, is typically referred to as "pay television."
INDUSTRY PARTICIPANTS
The pay television industry is comprised primarily of two segments: service
providers and television networks.
SERVICE PROVIDERS. Pay television service providers, also commonly referred
to as distributors, are comprised of two types: cable and satellite. These
service providers own and operate the platforms they use to deliver television
programming to subscribers. Cable and satellite service providers compete
against each other for subscribers. These service providers attempt to create a
mix of channels, or tiers, that will be attractive to the households in the
markets they serve in an effort to attract and retain subscribers. Service
providers generate revenue primarily by selling television service to
households. They also make many of the programming decisions, including which
channels to carry and in which packaged offering, or tier, a channel should be
included.
CABLE SYSTEMS. Pay television cable systems consist of two groups:
independent cable providers and multi-system cable operators, or MSOs.
Independent cable providers are smaller, individual systems that deliver
the television signal to households in only one or a limited number of
regions. Generally, independent cable service providers operate in distinct
markets that range from large metropolitan centers to small rural areas and
do not compete directly with each other in their respective markets. In
comparison, MSOs are companies that are affiliated with, or control, a
number of regional or individual cable systems. Examples of MSOs include
Time Warner Cable and Comcast Cable Communications. In many instances,
channels need to establish a relationship with an MSO in order to pursue
carriage on its affiliated regional cable systems. As of March 2005, cable
providers delivered pay television to approximately 72.1 million U.S.
households according to Nielsen estimates.
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SATELLITE SYSTEMS. Pay television satellite systems deliver television
signals to households via orbiting satellites using digital technology.
Unlike cable, where the service providers generally do not compete against
each other, satellite service providers compete against each other directly
because reception from any one satellite service provider is available to
just about any viewer wishing to subscribe to it. Examples of satellite
service providers include DIRECTV(R) and DISH NetworkTM. As of March 2005,
there were approximately 21.7 million homes with systems delivering pay
television to homes using some means other than cable according to Nielsen.
We believe that most of these are satellite systems.
NETWORKS. Networks, also commonly referred to as television channels, bring
together television programs and package them into a branded schedule of
entertainment. Most networks are owned by MSOs or media conglomerates. In order
to secure the content necessary for a cohesive schedule, channels can either
produce programming internally or acquire third-party programming from
production companies. Broadcast networks, which are regulated by the Federal
Communications Commission, or the FCC, generate revenue primarily by selling
advertising whereas pay television networks generate revenue by both selling
advertising included in their programming and through subscription fees paid by
service providers for the right to deliver the network to their customers.
To gain distribution to households, new networks need to establish carriage
agreements with service providers. In order to initiate or improve carriage,
many networks, and in particular those networks not affiliated with any major
service provider, may need to offer launch incentives, which can include
marketing support or upfront cash payments. These incentives or payments are
typically made on a per-subscriber basis and generally before receiving any
subscriber fee revenues.
TRENDS IN PAY TELEVISION
TRANSITION FROM ANALOG TO DIGITAL IN CABLE SYSTEMS. Cable distribution has
been undergoing dramatic changes in the technologies used to deliver programming
and services including digital transmission technology, which enables improved
picture and sound quality, faster signal transmission and additional channel
capacity. Cable system operators can now offer additional services such as
pay-per-view, video-on-demand and Internet and telephone connectivity.
Households that receive a digital signal account for approximately 35% of the
households reached by cable providers.
THE EMERGENCE OF HIGH DEFINITION TELEVISION. Digital transmission
technology, whether used by cable or satellite systems, provides a platform for
a new content category: high-definition television, which is commonly referred
to as HD TV. HD TV offers a clearer and sharper picture and enhanced sound, as
compared to standard definition television. In addition, HD TV provides a
widescreen view that provides a wider field of vision. In order to deliver HD
TV, service providers have invested and are expected to continue to invest in
HD-enabled infrastructure. The number of households that will have HD
televisions is projected to grow to 29.3 million in 2008, according to the
Yankee Group.
CHANNEL PROLIFERATION. Increased system capacity has enabled service
providers to carry channels that offer programming on more focused subject
matter and themes. These channels can capture an audience that is interested in
a particular subject and chooses to watch dedicated and consistently themed
programming. The audience demographics of these specialized channels tend to be
more highly concentrated than those of general entertainment or broadcast
channels. As a result, such specialized channels offer advertisers an
opportunity to communicate with a highly targeted and relevant audience. Pay
television continues to attract viewers to the detriment of traditional
broadcast television. In fact, during the 2003/04 official TV season, more
viewers watched television on cable than on broadcast based on an analysis of
Nielsen data by Cabletelevision Advertising Bureau.
FOCUSED AND SEGMENTED ADVERTISING. We believe many advertisers, because
they have begun seeking out new methods to target specific demographics, have
become increasingly dissatisfied with the results of broadcasting to a broad
audience and have become increasingly focused on the composition of an audience
in an effort to maximize the returns generated per advertising dollar. We
believe that individual, specialized channels on pay television offer
advertisers the opportunity to reach a more focused demographic as compared to
broadcast television. To this end, we believe many advertisers have begun
dedicating portions of their advertising budgets towards channels focused on
targeted market segments.
4
OUR COMPETITIVE STRENGTHS
We intend to seek to use the following strengths in our efforts to increase
the subscriber base of The Outdoor Channel and in our efforts to improve our
overall performance:
o AUTHENTIC, INFORMATIVE AND ENTERTAINING OUTDOOR PROGRAMMING
We believe that The Outdoor Channel is a preferred destination for
television viewers seeking high-quality, traditional outdoor programming. We are
differentiated from other cable networks categorized as sports networks through
our focus on traditional outdoor activities such as hunting, fishing and
shooting sports, as well as off road motor sports and other related lifestyle
programming. Our programming does not include team sports or "extreme sports"
that other networks offer, which we believe dilutes the interest of our target
audience. We believe this strategy has enabled us to build an extremely loyal
audience that tends to watch The Outdoor Channel instead of other channels that
have similar outdoor programming.
o ATTRACTIVE VIEWER DEMOGRAPHICS
We believe that The Outdoor Channel delivers a television audience that is
not available through other networks and is particularly desirable for
advertisers seeking to target a large and concentrated audience of outdoor
enthusiasts. The Outdoor Channel demographic, primarily males between the ages
of 25 and 54, represents an audience for which advertisers allocate a
significant portion of their budget. According to Nielsen, in the fourth quarter
of 2004 the primetime ratings of The Outdoor Channel surpassed ratings achieved
by other male-oriented networks such as ESPN Classic, the Golf Channel and
Outdoor Life Network.
o LARGE OUTDOOR-FOCUSED MARKET
We believe our programming appeals to the traditional outdoor sports
enthusiasts which include those who hunt and/or fish. According to the U.S. Fish
and Wildlife Service's latest survey, there are estimated to be over 82 million
traditional outdoor sports enthusiasts that participated in outdoor recreation
and spent in excess of $100 billion in 2001 pursuing outdoor activities. Of this
group, more than 34 million people participated in fishing and 13 million people
participated in hunting, and in 2001 collectively spent in excess of $70 billion
in pursuit of these activities. In addition, we believe our programming appeals
to an even broader audience that may have historically participated in
traditional outdoor sports or desire to do so in the future. As we continue to
increase our subscriber base, we believe that national advertisers will rely on
The Outdoor Channel to reach our focused audience of outdoor enthusiasts.
o EXTENSIVE SERVICE PROVIDER RELATIONSHIPS
We have relationships or affiliate agreements with a broad group of service
providers, including the 10 largest in the U.S. In fact, The Outdoor Channel was
carried by the highest percentage of cable operators among those networks with
less than 35 million subscribers, according to a December 2004 survey by Beta
Research Corporation. Based on our estimates, The Outdoor Channel is currently
available to, and could potentially be subscribed by, over 71 million
households. Through our service provider relationships, we have grown our
subscriber base from approximately 5.3 million in 1999 to approximately 24.4
million in March 2005.
o HIGHLY LEVERAGEABLE BUSINESS MODEL
We anticipate that we will be able to transmit our programming to
additional subscribers with modest incremental delivery costs as our subscriber
base increases. We also believe that our programming, focused on traditional
outdoor activities and recorded in natural settings, tends to be less expensive
to produce than programming that requires elaborate sets, soundstages, highly
compensated actors and a large production staff.
o EXPERIENCED AND COMMITTED MANAGEMENT TEAM
The members of our senior management team and our board of directors have
significant experience in the cable television sector and many of them have been
associated with the Company for a considerable amount of time. The Outdoor
Channel was founded by outdoor enthusiasts for outdoor enthusiasts. We believe
that our thorough knowledge of the market for, and our active participation in,
outdoor activities fosters an unwavering commitment to programming that is
relevant to our viewers, producers, advertisers and sponsors.
5
OUR BUSINESS GROWTH STRATEGIES
The principal components of our strategy to grow our business are:
o SEEK TO GROW OUR SUBSCRIBER BASE
As a result of our focused content and affinity group marketing
initiatives, we have been successful in increasing our subscriber base to
approximately 24.4 million in March 2005, as estimated by Nielsen, from
approximately 5.3 million in 1999. We intend to seek new opportunities to
continue to grow our subscriber base through the following initiatives:
o EXPAND DISTRIBUTION RELATIONSHIPS
We intend to expand our marketing efforts to grow our subscriber base.
Through our existing relationships with carriers, we intend to migrate our
channel from premium packages to more affordable basic or expanded basic service
packages within these systems in order to capture broader distribution and
increase subscribers. In addition, we plan to continue to pursue agreements with
new service providers to increase the number of households that are able to
subscribe to our channel. Our expanded marketing efforts will include additional
support from us to assist the service providers in launching our channel with
new subscribers. Such "launch support" may include all or some of the following:
o local marketing support, such as promotional materials and
sharing of costs for local advertising;
o training support to local customer service representatives;
o subscription fee waivers for a limited time; and
o upfront cash payments.
o ADOPT HD TECHNOLOGY EARLY-OUTDOOR CHANNEL 2 HDSM
We intend to offer price incentives to those service providers desiring to
distribute both The Outdoor Channel and Outdoor Channel 2 HD. We believe that HD
television complements our outdoor-themed content and represents a significant
opportunity for us to expand our distribution and subscriber base. The outdoor
action inherent in our programming is well suited for high definition. In
addition, the audio and visual characteristics of HD substantially enhance the
experience and sense of adventure provided by our programming. We are currently
testing the HD version of our channel and plan a formal launch in July 2005. As
a validation of the high quality, visually compelling nature of our HD
programming, through an arrangement with Premier Retail Networks, Inc., we
provide branded HD content being used to demonstrate the benefits of HD in over
4,700 well known retail stores, such as Wal-Mart, Circuit City and Best Buy,
when promoting the sales of HD television sets. As an early adopter of HD TV
technology, we are ready to assist service providers as they migrate their
offerings to HD TV by providing quality HD TV programming, thereby gaining
distribution to this new customer segment early in its development, while at the
same time increasing the distribution of The Outdoor Channel.
o INCREASE VIEWERSHIP THROUGH CONSUMER-FOCUSED MARKETING
Our consumer marketing strategy is designed to increase consumer, or
subscriber, demand. We currently have working relationships with numerous
affinity organizations whose members are interested in outdoor activities such
as hunting, fishing and shooting sports and off road motor sports. We plan to
strengthen these current relationships and to seek opportunities to enter into
similar relationships with additional affinity groups and membership
organizations interested in traditional outdoor activities and related pursuits.
We also plan to increase consumer demand by expanding our marketing efforts to
include broader-based advertising to target those potential viewers that may not
be members of such organizations, but are interested in outdoor activities. We
believe that increased consumer awareness of our programming will create
additional demand for The Outdoor Channel and encourage service providers to
offer The Outdoor Channel within their most widely subscribed programming
packages.
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o INCREASE SALES AND MARKETING EFFORTS TO ATTRACT NATIONAL ADVERTISERS
We plan to attract additional national advertisers to The Outdoor Channel,
and we believe it will become easier to do so if we are successful in our
efforts to grow our subscriber base. Over the past several years, we have
increased our efforts to demonstrate the benefits of advertising on The Outdoor
Channel to companies that advertise nationally. A significant portion of the
increase in our advertising revenue over the last two years is attributable to
increases in national advertising on The Outdoor Channel.
Currently, national advertisers such as Ace Hardware, Auto Zone, Cabela's,
Castrol Motor Oil, Dickies, Geico Insurance, Honda, Jack Daniel's, John Deere,
Kawasaki, Polaris, Quaker State, Remington, Suzuki, the U.S. Army and Yamaha
regularly advertise on The Outdoor Channel. We believe our viewer demographics
are attractive to many other national advertisers. In an effort to more
effectively pursue these opportunities, we recently opened an office in New York
City where many such advertisers have offices.
We also offer national advertisers the opportunity to sponsor several hours
of themed programming as a means to capture more visibility, obtain premium
advertising spots and generate more brand awareness. These opportunities, which
we refer to as block-programming sponsorships, enable advertisers to embed
advertising messages and products in the programming itself in addition to
purchasing traditional commercial spots. These block-programming sponsorships
offer advertisers the opportunity to reach targeted audiences through the unique
nature of our programming. Our current popular block-programming sponsorships
include Monday Night Fishing currently sponsored by Cabela's, Tuesday Night
Hunting currently sponsored by Mossy Oak and Wednesday night Horsepower
sponsored by Optima Batteries.
o CREATE OR ACQUIRE HIGH-QUALITY, POPULAR PROGRAMS
Historically, to fill our programming schedule we have contracted with
third-party producers. The third-party producers retain ownership of the program
and typically purchase from us a block of the advertising time available in
their program which they then resell to advertisers or use themselves. We
currently produce approximately 20% of our programming schedule. In the future,
we intend to produce more in-house programming or acquire ownership in programs
produced by third parties by entering into exclusive, multi-year programming
agreements. We believe this will allow us to retain and sell more advertising
time for our own account.
We believe our programming has qualities that will provide opportunities
for rebroadcast or repurpose in the future. As we develop in-house programming
and acquire additional programming, we expect to develop a library of standard
definition and HD programs that may be re-broadcast with little incremental
cost. As a secondary use, we intend to seek opportunities to sell the airing
rights to portions of footage captured in the normal course of our program
production to production companies in need of natural setting footage. In
addition, we believe that by owning the content, we can better leverage other
potential opportunities that may exist such as DVD sales and international
syndication.
o EXPAND THE MEMBERSHIP IN OUR CLUB ORGANIZATIONS - GPAA AND LOST
DUTCHMAN'S
We originally founded The Outdoor Channel in an attempt to more effectively
market our club organizations, the theme of which is the search for small gold
deposits and other treasure. We intend to attempt to increase the membership
base of GPAA and Lost Dutchman's principally by marketing to viewers of The
Outdoor Channel and by producing programs that that are specifically directed
towards their prospecting interests. We will present to such viewers the
benefits of membership in GPAA and Lost Dutchman's while promoting subscriptions
to "Gold Prospectors & Treasure Hunters in the Great Outdoors" magazine. In
addition, we promote and market these two club organizations through direct mail
campaigns and our promotion and sponsorship throughout the country of
expositions dedicated to gold prospecting, treasure hunting and related
interests. We also offer introductory outings at our campsites in an effort to
increase membership sales in our national gold prospecting campground club and
to increase the number of participants attending our unique expeditions held
near Nome, Alaska and in the Motherlode area of California.
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SOURCES OF REVENUE
No single customer of ours accounts for greater than 10% of our total
revenue. Our revenues from The Outdoor Channel are derived primarily from two
sources, advertising fees and subscriber fees, as discussed below:
o ADVERTISING FEES
We believe that our core schedule of programming provides a targeted and
valuable audience to advertisers. During the fourth quarter of 2004, our
primetime household rating surpassed the ratings achieved by ESPN Classic, the
Golf Channel and Outdoor Life Network according to Nielsen. In addition, Nielsen
indicates that the majority of our viewers do not watch competing specialized
sports channels, such as ESPN2, Outdoor Life Network or Speed Channel during
primetime. As a result, we believe that The Outdoor Channel delivers a
television audience that is not available through alternative advertising paths.
Although our programming targets outdoor enthusiasts between the ages of 25 and
54, we believe our programming is appropriate for viewing by the entire family,
which is important to viewers, advertisers and service providers alike.
o SHORT-FORM ADVERTISING
We sell short-form advertisements on The Outdoor Channel for commercial
products and services, usually in 30 second increments. The total inventory for
our short-form advertising consists of seven minutes per half hour. Of this
available advertising time, one minute is reserved for the local service
providers who may preempt the advertisement we insert into the program with a
local advertisement. Of the remaining six minutes, we either sell it to
advertisers for our own account or to third-party producers who then resell this
time to advertisers for their own account or use it themselves.
Advertisers purchase from us the one minute of advertising time that is
reserved for the local service providers at a discount understanding that some
of the service providers will superimpose their own spots over the advertising
that we have inserted in the program, causing these advertisements to be seen by
less than all of the viewers of any program. All of this advertising time is
sold to direct response advertisers. Direct response advertisers rely on direct
appeals to our viewers to purchase products or services from toll-free telephone
numbers or websites and generally pay lower rates than national advertisers.
For the advertising time that we retain for our own account, we endeavor to
sell this time to national marketing firms and advertising agencies. The price
we are able to charge for this advertising time is dependent on market
conditions, perceived desirability of our viewers, household delivery and
ratings as estimated by Nielsen and the number of households subscribing to The
Outdoor Channel as estimated by Nielsen. If we are unable to sell all of this
advertising time to national firms and agencies, we sell the remaining time to
direct response advertisers. We have been successful in increasing the amount of
revenue generated by national advertisers in the last two years. The majority of
our revenue from short-form advertising is a result of arrangements with
advertising agencies, for which we pay a commission to such agencies. However,
we have some direct relationships with marketers who buy directly from us. Our
average rates for the advertising time we sell to national advertisers has
increased over time as a result of increased distribution, increased household
delivery and by increasing demand for our advertising time through expanded
sales efforts.
For the advertising time that we sell to third-party producers, we receive
revenue directly from the producers. This revenue is often at a lower rate than
we may have received if we were to retain such time and sell it ourselves. The
producers then resell this advertising time to others or use this time to
advertise their own products or services.
Our advertising revenue tends to reflect seasonal patterns of advertising
expenditures, which is common in the broadcast industry. Typically, our
advertising revenue during the first quarter is greater than the second quarter,
and the third quarter is greater than the fourth quarter of each year.
o LONG-FORM ADVERTISING
Long form advertisements are infomercials that we typically run for 30
minutes, the majority of which is during the overnight hours. In the future, we
plan to reduce the programming time used for infomercials by replacing it with
our traditional outdoor programming.
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o SUBSCRIBER FEES
Cable and satellite service providers typically pay monthly subscriber fees
to us for the right to broadcast our channel. Our service provider contracts
typically range from 5 to 10 years and contain an annual increase in the monthly
subscriber fees. Our contracts also contain volume discounts for increased
distribution by any one service provider.
PROGRAMMING
The Outdoor Channel's programming emphasizes traditional outdoor activities
such as hunting, fishing and shooting sports, as well as off road motor sports
and other related lifestyle programming. Some examples of our programs are:
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HUNTING/SHOOTING FISHING SPECIAL INTEREST
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Ted Nugent Spirit of the Wild Randy Jones Strike Zone* Four Wheeler TV
- --------------------------------------------------------------------------------------------------------
Jim Zumbo Outdoors* World Class Sportfishing* World of Outlaws Sprint Car Racing*
- --------------------------------------------------------------------------------------------------------
Guns and Ammo TV Mark Sosin's Saltwater Journal Monsters of Destruction*
- --------------------------------------------------------------------------------------------------------
* Designates programs that are produced or owned by The Outdoor Channel, Inc.
We either produce a program in-house or license a program from a third
party. We have been producing in-house programs since our founding in 1993, and
in 2004 we produced 16 regularly scheduled programs. Third-party programming
license agreements typically provide that the producers retain copyrights to the
programming and that The Outdoor Channel is entitled to air each episode several
times per week for periods ranging from one calendar quarter to three years.
Substantially all of our programming contracts with third parties allow us
exclusive U.S. rights and non-exclusive foreign rights during the term of the
licensing agreement. In 2004, we acquired the rights to a total of approximately
1,859 episodes from third-party producers which occupied approximately 80% of
our programming schedule.
SALES AND MARKETING
Our sales and marketing efforts are focused on: (i) adding subscribers both
through improved positioning with those service providers already carrying The
Outdoor Channel and through new agreements with service provider systems not
currently carrying The Outdoor Channel, (ii) increasing demand from the viewing
audience and (iii) cultivating existing and pursuing new advertising clients.
SERVICE PROVIDERS
Generally, our sales and marketing efforts to increase distribution focus
on developing strong relationships with existing and potential service providers
through multiple points of contact including traditional sales visits, a
dedicated customer service staff, an active local event team and the use of a
dedicated web site. In addition to building strong relationships with our
customers, we are involved with a wide variety of traditional marketing efforts
including advertising in trade publications, participating in industry trade
shows, and supporting industry related associations. We anticipate that the
widespread adoption of the digital and high definition products offered by our
service providers will provide us with additional opportunities to grow and
develop The Outdoor Channel. In order to strengthen the sales efforts of these
service providers, we offer a wide variety of market specific support including
the opportunity to partner with local outdoor clubs, local promotions, direct
mail campaigns and integration into existing consumer marketing initiatives.
CONSUMERS
We market The Outdoor Channel to potential viewers to both create brand
awareness and to drive consumer requests for carriage, or for more accessible
packaging, by the service providers. These consumer-directed marketing efforts
are coordinated with and may be funded in part by the service providers. These
efforts often include traditional marketing campaigns consisting of print,
billboard and radio advertising. We also use our website to market and promote
The Outdoor Channel through schedule information, show synopses, games and
contests.
9
In addition, we have relationships with a number of outdoor clubs and
organizations which provide opportunities for us to utilize their communication
channels to reach their membership with targeted marketing messages. These
relationships also allow The Outdoor Channel to be associated with organizations
that have credibility and relevance to outdoor enthusiasts. Examples of the
clubs and organizations with which we have developed these relationships include
National Rifle Association, North American Hunting Club, North American Fishing
Club and the National Wild Turkey Federation.
We also have relationships and sponsorships with the following special
interest groups: Congressional Sportsmen's Foundation, National Shooting Sports
Foundation, Paralyzed Veterans of America, International Hunter Education Assn.,
International Assn. of Fish and Wildlife Agencies, US Dept. of Fish & Wildlife,
Farmers and Hunters Feeding the Hungry.
In addition to local marketing with service providers, we purchase
advertisements in magazines that specialize in content similar to The Outdoor
Channel. We currently advertise in approximately 90 popular magazines,
including, for example, American Rifleman, Flying, Heartland USA, Off-Road
Adventures and Outdoor Life.
ADVERTISERS
The sales and distribution of The Outdoor Channel's advertising time is
conducted by The Outdoor Channel's in-house sales personnel. In 2002, we began
to subscribe to Nielsen's services, and the availability of this information has
become a critical tool in attracting advertisers. Our sales team sells directly
to local, regional, and national advertising accounts, and continuously monitors
available spots to maximize advertising revenue.
OTHER BUSINESSES
In addition to The Outdoor Channel, we own and operate related businesses
that serve the interests of The Outdoor Channel viewers and other outdoor
enthusiasts. These related businesses include Gold Prospector's Association of
America LLC, or GPAA, and LDMA-AU, Inc., or Lost Dutchman's.
We believe GPAA is the largest gold prospecting club in the world with
approximately 32,800 active members. GPAA's members currently pay an initial
membership fee of $79 and an annual renewal fees ranging between $24 and $54.
GPAA sells products and services related to gold prospecting and is the
publisher of the "Gold Prospectors & Treasure Hunters in the Great Outdoors"
magazine.
Lost Dutchman's is a national gold prospecting campground club with
approximately 6,700 members and properties in Arizona, California, Colorado,
Georgia, Michigan, Nevada, North Carolina, Oregon and South Carolina. Lost
Dutchman's members currently pay a membership fee ranging between $3,500 and
$3,750 and an annual maintenance fee of $120. Members are entitled to use any of
the campgrounds we own or have rights to use and are entitled to keep all gold
found while prospecting on any of these properties.
We also offer unique expeditions where participants enjoy gold prospecting
and other outdoor activities. The expeditions include annual expeditions to the
heart of the historic Motherlode area in central California and to our
2,300-acre camp on the Cripple River adjacent to the Bering Sea near Nome,
Alaska. Participants pay on a per-expedition basis.
FINANCIAL INFORMATION ABOUT SEGMENTS
Financial information related to the Company's operating segments is
included in Note 11 to the consolidated financial statements included in this
annual report on Form 10-K, which note is incorporated by reference herein. The
Outdoor Channel, or TOC, segment has provided greater than 15% of our
consolidated revenue during each of the last three fiscal years.
COMPETITION
The Outdoor Channel competes with other television channels to be included
in the offerings of each system provider and for placement in the packaged
offerings having the most subscribers. In order to more effectively compete with
other channels for wider distribution of The Outdoor Channel, we may be required
to significantly increase our support to those service providers who move The
Outdoor Channel to a package of channels, or tier, to which more viewers
subscribe or launch The Outdoor Channel on their systems. This support may take
the form of subscriber acquisition fees, subscription fee waivers for a limited
time and other forms of launch or marketing support to service providers.
10
More particularly, each television channel focusing on a particular form of
content competes directly with other channels offering similar programming. In
the case of The Outdoor Channel, we compete for distribution and viewers with
other television networks aimed at our own target audience which consists
primarily of males between the ages of 25 and 54. We believe such competitors
include the Outdoor Life Network, Spike TV, ESPN and others. It is possible that
these or other competitors, many of which have substantially greater financial
and operational resources than us, could revise their programming to offer more
traditional outdoor activities such as hunting, fishing, shooting and other
topics which are of interest to our viewers.
In addition, certain technological advances, including the continued
development of digital compression technology and the increasing deployment of
fiber optic cable, are expected to allow cable systems to greatly expand their
present channel capacity. Such added capacity leaves room for additional
programming of all types which could dilute our market share by enabling the
emergence of channels with programming similar to that offered by The Outdoor
Channel and lead to increased competition for viewers from existing or new
channels.
We also compete with large television networks 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
channels. For instance, the Outdoor Life Network, which we consider to be our
closest current direct competitor, is owned and operated by Comcast, the largest
MSO in the U.S. We believe that while our closest competitor has a similar name,
there currently is a substantial difference between the two networks as The
Outdoor Channel emphasizes traditional outdoor activities such as fishing and
hunting and the other network features a significant amount of programming
concerning outdoor competitive, or extreme, sports and nature observation. As
The Outdoor Channel becomes more established, however, it is possible that other
channels will attempt to offer programming similar to what we offer on The
Outdoor Channel.
We compete for advertising revenue with other pay television networks,
broadcast networks, and local over-the-air television stations. In addition, we
compete with other forms or means of advertising such as satellite or broadcast
radio and the print media. We believe that many of these advertising avenues may
not permit an advertiser to target the specific demographic audience that
watches The Outdoor Channel with the same degree of concentration on our
targeted audience as is available to advertisers through The Outdoor Channel.
While Lost Dutchman's has numerous campground competitors, we believe it is
the only campground club in the United States that has a gold prospecting theme.
It has been estimated that there are approximately 15,000 campgrounds in the
United States, of which approximately 600 are membership campgrounds such as
Lost Dutchman's. Many of these campgrounds compete primarily by quality of
facilities and amenities offered. By contrast, Lost Dutchman's has rustic
facilities and few amenities and seeks to attract persons who are interested in
gold prospecting and hands-on outdoor activities and who wish to be part of an
informal family-oriented environment. We are not aware of any direct competitor
for our gold prospecting club GPAA, although in a broad sense both GPAA and Lost
Dutchman's compete with other sources of recreational activities. Lost
Dutchman's and GPAA both compete primarily through marketing and promotional
activities involving expositions, advertisements and shows on The Outdoor
Channel, reaching prospective members through our "Gold Prospectors & Treasure
Hunters in the Great Outdoors" magazine and other marketing activities.
EMPLOYEES
As of March 15, 2005, we had a total of 139 employees of which 136 were
full time. None of our employees are covered by a collective bargaining
agreement. We consider our relationship with our employees to be good.
GOVERNMENT REGULATION
Our operations are subject to various government regulations. The
operations of cable television systems, satellite distribution systems and
broadcast television program distribution companies are subject to the
Communications Act of 1934, as amended, and to regulatory supervision by the
FCC. Our leased uplink facility in Perris, California is licensed by the FCC and
must be operated in conformance with the terms and conditions of that license.
The license is also subject to periodic renewal and ongoing regulatory
requirements. Cable systems that carry our programming are also subjected to
local franchise authority regulation.
11
LOCAL CABLE REGULATION
The cable television industry is regulated by municipalities or other local
government authorities which have the jurisdiction to grant and to assign
franchises and to negotiate generally the terms and conditions of such
franchises, including rates for basic service charged to subscribers, except to
the extent that such jurisdiction is preempted by federal law. Any such rate
regulation could place downward pressure on the potential subscriber fees we can
earn.
FEDERAL CABLE REGULATION
In 1992, Congress enacted the Cable Television Consumer Protection and
Competition Act of 1992, or the 1992 Cable Act, which provides, among other
things, for a "must-carry" regime for local broadcast stations (which requires
the mandatory carriage of certain broadcast stations and payments by cable
operators to other broadcast stations for retransmission of their signals in
some instances), for certain local broadcast stations to be carried on specific
channels, for a prohibition on programmers in which cable operators have an
"attributable interest" from discriminating between cable operators and their
competitors, or among cable operators, and for increased competition in video
programming distribution (both within the cable industry and between cable and
competing video distributors). The 1992 Cable Act also directed the FCC to adopt
regulations limiting the percentage of nationwide subscribers any one MSO could
serve and the carriage by cable systems and other video distributors of
affiliated programming services. Although the FCC adopted such regulations, they
were invalidated by a Court of Appeals in 2001. The FCC subsequently initiated
rulemaking proceedings which remain pending.
In addition, the 1992 Cable Act requires the FCC to establish national
guidelines for the rates that cable operators subject to rate regulation may
charge for basic cable service and certain other services and to establish
guidelines for determining when cable programming may not be provided
exclusively to cable system operators. In 1996, Congress enacted the most
comprehensive rewrite of telecommunications law since the Communications Act of
1934, modifying many of the provisions of the 1992 Act. Among other things, the
legislation allows cable and telephone industries into each other's markets and
phased out federal cable rate regulation of non-basic services, such as the
rates charged by service providers to subscribers for our programming, in most
instances. It also required the FCC to establish rules ensuring that video
programming is fully accessible to the hearing impaired through closed
captioning. The rules adopted by the FCC require substantial closed captioning
over an eight to ten year phase-in period, which began in 2000, with only
limited exceptions.
Congress and the FCC may, in the future, adopt new laws, regulations and
policies regarding a wide variety of matters which could affect The Outdoor
Channel. We are unable to predict the outcome of future federal legislation,
regulation or policies, or the impact of any such laws, regulations or policies
on The Outdoor Channel's operations.
GPAA AND LOST DUTCHMAN'S REGULATIONS
To operate our campgrounds and mining sites, we must obtain discretionary
permits or approvals issued by local governments under local zoning ordinances
and other state laws. In addition, to construct improvements, we have usually
been required to obtain permits such as building and sanitary sewage permits.
Some states in which we sell memberships have laws regulating campground
memberships. These laws sometimes require comprehensive disclosure to
prospective purchasers. Some states have laws requiring us to register with a
state agency and obtain a permit to market.
OTHER REGULATIONS
In addition to the regulations applicable to the cable television and gold
mining industries in general, 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. In addition, our
mining clubs are subject to various local, state and federal statutes,
ordinances, rules and regulations concerning, zoning, development, and other
utilization of its properties.
12
INTELLECTUAL PROPERTY
"The Outdoor Channel(R)" is a registered trademark, and "Outdoor Channel 2
HDSM" is a service mark, of The Outdoor Channel, Inc. We have also filed for
registration of other trademarks, none of which we consider material at this
time. In addition, we rely on copyright protection of those programs that we
own.
ITEM 2. PROPERTIES.
We are currently leasing approximately 32,000 square feet of commercial
property located at 43445 Business Park Drive in Temecula, California. In
addition, we are currently leasing approximately 28,589 square feet of
industrial space and 4,147 square feet of office space located at 43455 Business
Park Drive in Temecula, and expect to close on the purchase of this property
sometime in 2005. The property located at 43445 Business Park Drive is currently
used as both our headquarters and as our broadcast facility for The Outdoor
Channel, and we are currently building out the property located at 43455
Business Park Drive for use as our broadcast facility in the future. Both of
these properties are used in connection with our two segments (The Outdoor
Channel and membership division) and the corporate unit.
We also own the following properties that we use for camping and gold
prospecting in connection with our membership division segment:
- --------------------------------------------------------------------------------
DESIGNATION OF PROPERTY APPROXIMATE NUMBER OF ACRES LOCATION
- --------------------------------------------------------------------------------
Cripple River 2,300 Alaska
- --------------------------------------------------------------------------------
Loud Mine 38 Georgia
- --------------------------------------------------------------------------------
Stanton Property 35 Arizona
- --------------------------------------------------------------------------------
Burnt River 135 Oregon
- --------------------------------------------------------------------------------
Cave Creek 32 Oregon
- --------------------------------------------------------------------------------
Vein Mountain Camp 130 North Carolina
- --------------------------------------------------------------------------------
Junction Bar Place 26 California
- --------------------------------------------------------------------------------
Oconee Camp 120 South Carolina
- --------------------------------------------------------------------------------
Leadville Property 60 Colorado
- --------------------------------------------------------------------------------
Omilak Silver Mine 40 Alaska
- --------------------------------------------------------------------------------
High Divide Property 20 Nevada
- --------------------------------------------------------------------------------
Athens Property 70 Michigan
- --------------------------------------------------------------------------------
Blue Bucket 119 Oregon
- --------------------------------------------------------------------------------
In connection with our membership division segment, we also have a mutual
use agreement with a non-profit organization, Lost Dutchman's Mining
Association, Inc., that owns property near some of the above properties. This
mutual use agreement allows our members to camp and gold prospect on the
properties owned by Lost Dutchman's Mining Association, Inc., and in return, the
members of Lost Dutchman's Mining Association, Inc. may camp and gold prospect
on our properties.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we may be involved in litigation relating to claims
arising out of our operations. As of the date of this report, we are not a party
to any legal proceedings that are expected, individually or in the aggregate, to
have a material adverse effect on our business, financial condition or operating
results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock began trading on the Nasdaq National Market
System on September 15, 2004 under the symbol "OUTD". From June 2003 to
September 14, 2004, the Company's common stock was listed for trading on
Nasdaq's OTC Bulletin Board, also under the trading symbol "OUTD". Prior to June
2003, when we changed our corporate name to Outdoor Channel Holdings, Inc., our
trading symbol was "GLRS" and likewise traded on Nasdaq's OTC Bulletin Board.
The following table sets forth for the quarters indicated the reported high and
low bid prices as quoted on the OTC Bulletin Board through September 14, 2004
and is adjusted for the 5 for 2 forward split effective September 15, 2005.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission, and may not represent actual transactions. After September 15,
2004 the table sets forth the high and low closing prices as reported on the
Nasdaq National Market System.
Bid
-----------------
High Low
----- -----
2003 First Quarter 4.08 3.30
Second Quarter 7.40 4.00
Third Quarter 13.00 7.20
Fourth Quarter 12.60 11.20
2004 First Quarter 15.84 11.96
Second Quarter 17.20 13.60
Third Quarter to September 14, 2004 19.50 13.92
Closing Price
-----------------
High Low
----- -----
September 15, 2004 to December 31, 2004 16.00 12.50
As of December 31, 2004, we had approximately 1,200 stockholders of record
of our common stock.
On September 14, 2004, every two outstanding shares of common stock were
converted into five outstanding shares of common stock in conjunction with our
reincorporation from Alaska to Delaware. On September 12, 1994, we effected a 2
for 1 forward split of our common stock. On March 4, 1992, we effected a 1 for
20 reverse split of our common stock. Share amounts and prices herein have been
restated to reflect the foregoing splits.
In January 2002, we authorized paying a dividend in cash to our Preferred
Stockholders for the years 1999 through 2001. Cash dividends have not been
declared with respect to our common shares since inception. It is not likely we
will pay any cash dividends in the foreseeable future. We currently anticipate
that we will retain all of our future earnings for use in the development and
expansion of our business and for general corporate purposes. Any determination
to pay dividends in the future will be at the discretion or our board of
directors and will depend upon our operating results, financial condition and
other factors as the board of directors, in its discretion, deems relevant.
Our Preferred Stock was issued as Convertible Exchangeable Preferred Stock.
The Preferred Stockholders had the right, at any time, to convert their
Preferred Stock to Common Stock and, conversely, we had the right, at any time
after March 31, 1991, to exchange the Preferred Stock for Common Stock. On
February 20, 2002, we called our then outstanding Preferred Stock for exchange.
Each share of Preferred Stock was exchanged for one share of Common Stock. The
exchange was effective on March 25, 2002, at which time all the outstanding
Preferred Stock was deemed exchanged for Common Stock. The issuance of the
shares of Common Stock in this exchange was based upon the exemption from
registration under the Securities Act of 1933, as amended, as a non-public
offering pursuant to Section 4(2) thereof. Immediately before the Preferred
Stock was called for exchange there were 146,812 shares of Preferred Stock
outstanding. After the exchange was effective, there was no Preferred Stock
outstanding and an additional 146,812 shares of Common Stock were issued.
The following issuances of shares were based upon the exemption from
registration under the Securities Act of 1933, as amended, as a non-public
offering pursuant to Section 4(2) thereof:
14
In January 2002 options to exercise 21,125 shares were exercised by a
former employee at the exercise prices of $1.20 and $1.60 per share. Said
shares were paid for by a secured loan from the Company which was re-paid
with cash in 2003. In May 2002 options to exercise 31,000 shares were
exercised by two former employees at exercise prices of $1.20 and $1.60 per
share. 30,000 shares were paid for by a secured loan from the Company which
was re-paid with cash in 2003. The 1,000 shares were paid for by cash at
the time of purchase. In October 2002, options to exercise 27,500 shares
were exercised, with cash, by consultants to the Company at exercise prices
of $1.20 and $1.60 per share and a weighted average price of $1.24 per
share.
In 2003 service providers exercised options to acquire 27,500 shares of
common stock with exercise prices ranging from $1.20 to $1.60 per share and
a weighted average price of $1.31 per share. Employees and a former
employee exercised, with cash, options to acquire 269,665 shares of common
stock with exercise prices ranging from $0.90 to $1.60 per share and a
weighted average price of $1.03 per share. Also during 2003, a former
director and officer of the Company exercised his right to accept 335,937
shares of common stock in lieu of cash in consideration of the cancellation
of deferred compensation due him of $175,375. At the same time, the
director/officer exercised his right to accept 125,726 shares of TOC's
common stock in lieu of cash in consideration of the cancellation of
deferred compensation due him by TOC of $142,375. The 125,726 shares of TOC
have subsequently been exchanged for approximately 204,304 shares of
Outdoor Channel Holdings, Inc. In 2003, we also offset $622,500 due from
the exercise of options for the purchase of 662,500 shares of common stock
at $0.90 per share against the balance of stockholder loans payable by us
to the holders of the options.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
You should read the selected consolidated financial data presented below in
conjunction with the audited consolidated financial statements appearing
elsewhere in this report and the notes to those statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
selected consolidated financial data as of December 31, 2004 and 2003, and for
each of the years in the three-year period ended December 31, 2004 have been
derived from our audited consolidated financial statements which appear
elsewhere in this report. The selected consolidated financial data as of
December 31, 2002, 2001 and 2000 and for each of the years in the two-year
period ended December 31, 2001 have been derived from our audited consolidated
financial statements which are not included in this report. The historical
results are not necessary indicative of the operating results to be expected in
the future. All financial information presented has been prepared in United
States dollars and in accordance with accounting principles generally accepted
in the United States of America (U.S. GAAP)."
15
In 2004, we completed the acquisition of all of the outstanding shares of
The Outdoor Channel, Inc. that we did not previously own. Please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Acquisition of the Minority Interest of The Outdoor Channel, Inc."
for a discussion regarding this transaction and the comparability of the 2004
information.
Year Ended December 31,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Revenues:
Advertising $ 21,817 $ 16,396 $ 10,969 $ 8,645 $ 6,849
Subscriber fees 13,391 10,836 6,071 3,874 2,826
Membership income 4,746 4,456 4,353 4,715 4,208
----------- ----------- ----------- ----------- -----------
Total revenues 39,954 31,688 21,393 17,234 13,883
----------- ----------- ----------- ----------- -----------
Expenses:
Satellite transmission fees 2,351 2,423 2,359 2,238 2,161
Advertising and programming 8,117 4,884 3,854 2,482 1,765
Compensation expense from exchange
of stock options 52,233 -- -- -- --
Selling, general and administrative 21,042 16,754 10,604 10,830 7,714
----------- ----------- ----------- ----------- -----------
Total expenses 83,743 24,061 16,817 15,550 11,640
----------- ----------- ----------- ----------- -----------
Income (loss) from operations (43,789) 7,627 4,576 1,684 2,243
Gain on sale or issuance of common stock
of subsidiary -- -- 46 -- 107
Gain on sale of marketable securities 34 13 -- -- --
Interest income (expense), net 81 13 (1) 26 (103)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and
minority interest (43,674) 7,653 4,621 1,710 2,247
Income tax provision (benefit) (17,637) 3,162 1,882 718 (85)
----------- ----------- ----------- ----------- -----------
Income (loss) before minority interest (26,037) 4,491 2,739 992 2,332
Minority interest in net income of
consolidated subsidiary 682 897 444 181 224
----------- ----------- ----------- ----------- -----------
Net income (loss) (26,719) 3,594 2,295 811 2,108
Preferred stock dividends -- -- (90) -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) applicable to common
stock $ (26,719) $ 3,594 $ 2,205 $ 811 $ 2,108
=========== =========== =========== =========== ===========
Earnings (loss) per common share:
Basic $ (1.67) $ 0.26 $ 0.17 $ 0.06 $ 0.16
=========== =========== =========== =========== ===========
Diluted $ (1.67) $ 0.19 $ 0.15 $ 0.06 $ 0.15
=========== =========== =========== =========== ===========
Weighted average number of common
shares outstanding:
Basic 15,998 13,824 13,220 13,071 13,154
=========== =========== =========== =========== ===========
Diluted 15,998 14,768 14,627 14,597 13,828
=========== =========== =========== =========== ===========
16
As of December 31,
-------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents $ 13,105 $ 7,214 $ 3,248 $ 2,574 $ 1,844
Goodwill 39,418 -- -- -- --
Total assets 97,110 19,848 11,830 9,214 8,899
Total liabilities 6,187 4,353 4,405 4,387 5,051
Minority interest in subsidiary -- 2,302 1,263 812 631
Stockholders' equity $ 90,923 $ 13,193 $ 6,162 $ 4,015 $ 3,217
ITEM 7. 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 and viewers (ratings) of The Outdoor Channel; and (4) other
matters. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
These statements involve significant risks and uncertainties and 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 which are discussed below
under the caption "Risks and Uncertainties" and other risks and uncertainties
discussed elsewhere in this report. In assessing forward-looking statements
contained herein, readers are urged to read carefully all cautionary statements
contained in this Form 10-K 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 and Section 21E of the Exchange Act.
GENERAL
Outdoor Channel Holdings, Inc. (which we refer to as "Outdoor Channel
Holdings" or collectively with its subsidiaries, 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 and
shooting sports, as well as off road motor sports and other related life style
programming. The Company also owns and operates related businesses which serve
the interests of The Outdoor Channel's viewers and other outdoor enthusiasts.
These related businesses include: LDMA-AU, Inc. ("Lost Dutchman's") and Gold
Prospectors Association of America, LLC. ("GPAA"). Lost Dutchman's is a national
gold prospecting campground club with approximately 6,700 members and properties
in Arizona, California, Colorado, Georgia, Michigan, Nevada, North Carolina,
Oregon and South Carolina. We believe GPAA is one of the largest gold
prospecting clubs in the world with approximately 32,800 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.
17
The Company's revenues include (1) advertising fees from advertisements
aired on The Outdoor Channel and from advertisements in "Gold Prospectors &
Treasure Hunters in the Great Outdoors" magazine; (2) subscriber fees paid by
cable and satellite service providers that air The Outdoor Channel; and (3)
membership fees from members in both Lost Dutchman's and GPAA and other income
including magazine sales, products and services related to gold prospecting,
gold expositions, expeditions and outings. Advertising fees include fees paid by
third-party programmers to purchase advertising time in connection with the
airing of their programs on The Outdoor Channel.
ACQUISITION OF THE MINORITY INTEREST OF THE OUTDOOR CHANNEL, INC.
On September 8, 2004, the Company completed the acquisition of the
remaining minority interest in TOC by Outdoor Channel Holdings which it did not
previously own 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. In September
2004, every two outstanding shares of the Company's common stock were converted
into five outstanding shares of common stock in conjunction with the Company's
reincorporation from Alaska to Delaware. All share data included in this report
has been adjusted to reflect this conversion.
Based on the exchange ratio in the merger and the conversion of the
outstanding shares in Outdoor Channel Holdings as part of the Company's
reincorporation from Alaska to Delaware as explained in the previous paragraph,
and the capitalization of TOC at the time the merger was accomplished, Outdoor
Channel Holdings issued 3,069,790 shares of its common stock as well as options
to purchase 4,012,125 additional shares. The shares issued includes the shares
of common stock issued to a former TOC shareholder who originally exercised his
dissenters' rights in connection with the transaction, but who later withdrew,
with the Company's consent, the demand to exercise such dissenter's rights. For
accounting purposes, all previously outstanding TOC common shares, including the
dissenting shares, have been deemed to have been exchanged for shares of Outdoor
Channel Holdings in September 2004.
The acquisition 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 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. In addition, in accordance with the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109") the tax effect of the intangible assets have been treated as additional
consideration. This additional consideration has also been allocated to
goodwill.
The cost of the acquisition of the minority interest in TOC by Outdoor
Channel Holdings was $50,735,000 based on the issuance at the closing of
3,069,790 shares of Outdoor Channel Holdings' common stock (including the former
dissenter's shares) 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 $50,735,000
were allocated to intangible assets and are subject to amortization as follows:
18
Allocation Estimated
(In thousands) Useful Life
-------------- -----------
MSO Relationships $ 10,573 Indefinite
Advertising Customer Relationships:
Short Form 1,351 4 years
Long Form 621 3 years
---------
Total Identifiable Intangible Assets 12,545
Goodwill 39,418 Indefinite
Deferred Tax Liability Associated
With Intangible Assets (4,212)
Minority Interest in Subsidiary 2,984
---------
Aggregate Purchase Price $ 50,735
=========
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 4,012,125 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 $52,233,000 and recognized an income tax benefit
of $20,789,000 or a net charge of $31,444,000.
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 $52,233,000 incurred by the Company and the related tax
benefit of $20,789,000 as the result of the assumption of TOC options in
connection with the acquisition of the minority interest in TOC as part of its
analysis because it believes separately quantifying the effects of these items
provides the reader with a better understanding of the Company's operating
results. The Company's management also believes that an analysis of its results
in this manner, when presented in conjunction with the corresponding GAAP
measures, provides useful information to management and others in identifying
and understanding the Company's operating performance for the periods presented
and in making useful comparisons.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with United States
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The Company
believes the following critical accounting policies affect its more significant
judgments and estimates used in the preparation of financial statements.
REVENUE RECOGNITION. Advertising revenues for The Outdoor Channel are
recognized when the advertisement is aired. Advertising revenues from
advertisements in the Company's bi-monthly magazine are recognized when the
magazine is distributed. Revenues from the expeditions are recognized when they
are taken in June through August each year. Revenues from outings and gold
expositions are recognized at the time of the event. Subscriber fees for The
Outdoor Channel are recognized in the period the programming is aired by the
distributor and collection is probable.
19
Broadcast and national television network advertising contracts may
guarantee the advertiser a minimum audience for its advertisements over the term
of the contracts. We provide the advertiser with additional advertising time if
we do not deliver the guaranteed audience size. The amount of additional
advertising time is generally based upon the percentage of shortfall in audience
size. This requires us to make estimates of the audience size that will be
delivered throughout the terms of the contracts. We base our estimate of
audience size on information provided by ratings services and our historical
experience. If we determine we will not deliver the guaranteed audience, an
accrual for "make-good" advertisements is recorded as a reduction of revenue.
The estimated make-good accrual is adjusted throughout the terms of the
advertising contracts.
Merchandise sales for the Company are recognized when the product is
shipped and collection of the receivable is probable. Lost Dutchman's campground
membership sales are generally recognized on a straight-line basis over the
estimated average life (7 years) of the membership. The Company does not record
receivables arising under these contracts. Accordingly, revenues recognized do
not exceed the total cash payments received and cash received in excess of
revenue earned is recorded as deferred revenue. The majority of GPAA membership
sales is for one year and is generally recognized in the year of sale.
Multi-year GPAA membership sales are recognized on a straight-line basis over
the life of a membership, and an estimated life of 15 years for a lifetime
membership.
LONG-LIVED ASSETS. Long-lived assets, such as property and equipment,
goodwill and trademarks, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Impairment losses are recognized when events or changes in
circumstances indicate that the undiscounted cash flows estimated to be
generated by such assets are less than their carrying value and, accordingly,
all or a portion of such carrying value may not be recoverable. Impairment
losses for assets to be held and used are then measured based on the excess, if
any, of the carrying amounts of the assets over their estimated fair values.
Long-lived assets to be disposed of in a manner that meets specific criteria are
stated at the lower of their carrying amounts or fair values less costs to sell
and are no longer depreciated.
ACCOUNTS RECEIVABLE. The Company maintains an allowance for doubtful
accounts for estimated losses that may arise if any of its customers are unable
to make required payments. Management specifically analyzes the age of customer
balances, historical bad debt experience, customer credit-worthiness and trade
publications regarding the financial health of its larger customers and changes
in customer payment terms when making estimates of the uncollectability of the
Company's trade accounts receivable balances. If the Company determines that the
financial condition of any of its customers deteriorated, whether due to
customer specific or general economic issues, increases in the allowance may be
made.
DEFERRED TAX ASSETS. The Company accounts for income taxes pursuant to the
asset and liability method which requires deferred income tax assets and
liabilities to be computed for temporary differences between the financial
statement and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted laws and rates applicable to
the periods in which the temporary differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized. The income tax provision is
the tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
RECENT ACCOUNTING DEVELOPMENTS
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (R) ("SFAS 123 (R)"). "Share-Based Payment" which establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services and focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS 123 (R) requires that the fair value of such equity
instruments, including all options granted to employees, be recognized as
expense in the historical financial statements as services are performed. Prior
to SFAS 123 (R), only certain pro forma disclosures of fair value were required.
SFAS 123 (R) shall be effective for issuers as of the beginning of the first
interim or annual reporting period that begins after June 15, 2005. The Company
intends to adopt the standards of SFAS No. 123 (R) effective January 1, 2005.
The adoption of SFAS 123 (R) is expected to have a material impact on the
financial statements of Outdoor Channel Holdings, Inc. during the first quarter
of 2005.
20
The FASB had issued certain other accounting pronouncements as of December
31, 2004 that will become effective in subsequent periods; however, management
of the Company does not believe that any of those pronouncements would have
significantly affected the Company's financial accounting measurements or
disclosures had they been in effect during 2004, 2003 or 2002.
COMPARISON OF YEARS ENDED DECEMBER 31, 2004 AND DECEMBER 31, 2003
The following table discloses certain financial information for the periods
presented, expressed in terms of dollars, dollar change, percentage change and
as a percent of total revenue (all dollar amounts are in thousands):
Change % of Total Revenue
------------------------ -------------------------
2004 2003 $ % 2004 2003
---------- ---------- ---------- ---------- ---------- ----------
Revenues:
Advertising $ 21,817 $ 16,396 $ 5,421 33.1% 54.6% 51.7%
Subscriber fees 13,391 10,836 2,555 23.6% 33.5% 34.2%
Membership income 4,746 4,456 290 6.5% 11.9% 14.1%
---------- ---------- ---------- ---------- ---------- ----------
Total revenues 39,954 31,688 8,266 26.1% 100.0% 100.0%
---------- ---------- ---------- ---------- ---------- ----------
Expenses:
Satellite transmission fees 2,351 2,423 (72) (3.0)% 5.9% 7.6%
Advertising and programming 8,117 4,884 3,233 66.2% 20.3% 15.4%
Compensation expense from 52,233 -- 52,233 NM 130.7% 0.0%
exchange of stock options
Selling, general and administrative 21,042 16,754 4,288 25.6% 52.7% 52.9%
---------- ---------- ---------- ---------- ---------- ----------
Total expenses 83,743 24,061 59,682 248.0% 209.6% 75.9%
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations (43,789) 7,627 (51,416) (674.1)% (109.6)% 24.1%
Gain on sale of marketable securities 34 13 21 161.5% 0.1% 0.0%
Interest income, net 81 13 68 523.1% 0.2% 0.0%
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and (43,674) 7,653 (51,327) (670.7)% 24.1%
minority interest (109.3)%
Income tax provision (benefit) (17,637) 3,162 (20,799) (657.8)% (44.1)% 10.0%
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before minority interest (26,037) 4,491 (30,528) (679.8)% (65.2)% 14.1%
Minority interest in net income of
consolidated subsidiary 682 897 (215) (24.0)% 1.7% 2.8%
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) $ (26,719) $ 3,594 $ (30,313) (843.4)% (66.9)% 11.3%
========== ========== ========== ========== ========== ==========
- ----------------------
*NM - NOT MEANINGFUL
REVENUES
Our revenues include revenues from (1) advertising fees; (2) subscriber
fees; and (3) membership income. 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. During 2004 and 2003, The Outdoor Channel generated
approximately 97% of our advertising revenue. Subscriber fees are solely related
to The Outdoor Channel. Membership income is generated by our activities other
than the operation of The Outdoor Channel; and includes membership sales,
magazine sales, merchandise sales, and sponsored outings in connection with GPAA
and Lost Dutchman's.
Total revenues for the year ended December 31, 2004 were $39,954,000, an
increase of $8,266,000, or 26.1%, compared to revenues of $31,688,000 for the
year ended December 31, 2003. This net increase was the result of changes in
several items comprising revenue as discussed below.
21
Advertising revenue for the year ended December 31, 2004 was $21,817,000,
an increase of $5,421,000 or 33.1% compared to $16,396,000 for the year ended
December 31, 2003. The increase was due, in part, to our improved ability to
demonstrate the value of advertising on The Outdoor Channel to national
advertisers. Nielsen reported that we had approximately 24.8 million subscribers
for the month of December 2004 compared to 25.7 million for the month of
December 2003 a decrease of 0.9 million or 3.5%. (Nielsen revises this estimate
each month and as of March 1, 2005, Nielsen reported that we had approximately
24.4 million subscribers). Having Nielsen ratings and demographic data enabled
us to better utilize our inventory of available advertising time and increase
our effective rates realized on our advertising time on The Outdoor Channel.
Further, as demand for our air time increased, we negotiated higher fees from
third party programmers that purchase advertising time in connection with the
airing of their programs on The Outdoor Channel.
Subscriber fees for the year ended December 31, 2004 were $13,391,000, an
increase of $2,555,000 or 23.6% compared to $10,836,000 for the year ended
December 31, 2003. The increase was primarily due to: an increased number of
paying subscribers as we increased the number of service providers carrying The
Outdoor Channel from approximately 5,400 at the end of 2003 to 5,700 at 2004
year end; contractual subscriber fee rate increases with existing service
providers carrying The Outdoor Channel; the beginning of payments late in 2003
from certain carriers who had previously received The Outdoor Channel without
charge; and the increasing penetration of The Outdoor Channel on existing
distributors such as National Cable Television Cooperative ("NCTC"), DIRECTV,
Comcast, DISH Network and Charter.
Membership income for the year ended December 31, 2004 was $4,746,000, an
increase of $290,000 or 6.5% compared to $4,456,000 for the year ended December
31, 2003. The increase in membership income was driven by increased attendance
at our gold expositions and greater participation in our annual expedition to
Cripple River, Alaska in 2004 compared to 2003.
EXPENSES
Expenses consist of the cost 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 year ended December 31, 2004 were $83,743,000, an
increase of $59,682,000, or 248.0%, compared to $24,061,000 for the year ended
December 31, 2003. As a percentage of revenues, total expenses are 209.6% and
75.9% in the years ended December 31, 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 $52,233,000 in
accordance with the terms of the acquisition by Outdoor Channel Holdings of the
remaining 17.6% minority interest in TOC it did not already own.
Satellite transmission fees for the year ended December 31, 2004 were
$2,351,000, a decrease of $72,000, or 3%, compared to $2,423,000 for the year
ended December 31, 2003. This relatively static comparison reflects the
substantially 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 $5,000 per month. However, we have plans to build our own
broadcast facility during 2005 that should be operational before the scheduled
increase which is expected to result in a decrease of $12,000 per month.
Advertising and programming expenses for the year ended December 31, 2004
were $8,117,000, an increase of $3,233,000 or 66.2% compared to $4,884,000 for
the year ended December 31, 2003. The increase in advertising and programming
expenses is principally a result of our increased spending on consumer and trade
industry awareness campaigns to build demand for The Outdoor Channel. Also,
contributing to the increase, we produced more of our programming in-house.
Advertising and programming expenses are expected to increase as a percentage of
revenue as we pursue our strategy to produce more programming in-house as
opposed to contracting with third party producers.
Compensation expense from exchange of stock options for the year ended
December 31, 2004 was $52,233,000 and was incurred as a result of the issuance
of 4,012,125 options to TOC option holders in accordance with the terms of the
acquisition by Outdoor Channel Holdings of all of the minority interest in TOC
it did not already own.
22
Selling, general and administrative expenses for the year ended December
31, 2004 were $21,042,000, an increase of $4,288,000 or 25.6% compared to
$16,754,000 for the year ended December 31, 2003. As a percentage of revenues,
selling, general and administrative expenses were 52.7% and 52.9% for the year
ended December 31, 2004 and 2003, respectively. This increase was primarily due
to the initiation of a program to provide digital receivers to a number of our
carriers, increased personnel costs and other costs as further discussed below.
During 2004, we made the decision to cease transmitting The Outdoor Channel
as an analog signal in order to conserve bandwidth and further our transition to
full digital transmission in preparation for the launch of Outdoor Channel 2 HD.
To equip existing analog based service providers and to attract new service
providers, we began providing service providers digital receivers which have the
capability to output the signal in either a digital or analog format. In 2004,
we spent approximately $1,110,000 on such receivers. This receiver program was
substantially completed in 2004; however we expect to continue to provide newly
launched service providers with such a receiver on an as-needed basis.
Personnel expenses increased approximately $1,100,000 in the year ended
December 31, 2004 over 2003 principally as a result of additional hiring during
2004. As of December 31, 2004, we had 139 employees as compared to 86 at
December 31, 2003. 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 System; 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 service providers and
the promotion of The Outdoor Channel.
INCOME (LOSS) FROM OPERATIONS
Income (loss) from operations for the year ended December 31, 2004 was
($43,789,000), a decrease of $51,416,000 or 674.1% compared to $7,627,000 for
the year ended December 31, 2003. As a percentage of revenues, income (loss)
from operations was (109.6%) and 24.1% for the year ended December 31, 2004 and
2003, respectively. If the effect of the non-cash, non-recurring compensation
expense of $52,233,000 related to the assumption of TOC stock options is
excluded, income from operations for 2004 would have been $8,444,000, an
increase of $817,000 or 10.7% compared to income from operations for 2003.
Income from operations as adjusted for the non-cash, non-recurring expense of
$52,233,000 grew at a slower pace than revenue during 2004 reflecting our
investment in subscriber acquisition programs, increased in-house programming
and receivers for our service providers. As we continue our launch of Outdoor
Channel 2 HD, we will incur start-up and operating costs in 2005 that are
unlikely to be immediately offset by revenues thus negatively impacting our
operating margins in the near term. There can be no assurance that these
strategies will be successful.
INTEREST INCOME, NET
Interest income, net for the year ended December 31, 2004 was $81,000, an
increase of $68,000 compared to $13,000 for the year ended December 31, 2003.
This improvement was primarily due to the retirement of the Company's debt to
stockholders during 2003, resulting in less interest expense complemented by the
interest earned on increased cash balances.
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED SUBSIDIARY
Income (loss) before income taxes and minority interest decreased
significantly as a percentage of revenues to (109.3%) for the year ended
December 31, 2004 compared to 24.1% for the year ended December 31, 2003.
The TOC segment's income before income taxes and minority interest
expressed as a percentage of revenue decreased to 28.8% for the year ended
December 31, 2004, compared to 34.7% for the year ended December 31, 2003. The
decrease was due mainly to the implementation in 2004 of our digital receiver
program; the growth of our advertising and programming expenses in the third
quarter of 2004; and increases in personnel expenses resulting from the increase
in the average number of TOC employees in 2004 compared to 2003.
23
The membership division segment's income (loss) before income taxes and
minority interest expressed as a percentage of revenues improved to 6.6% for the
year ended December 31, 2004 compared to a loss of 12.8% for the year ended
December 31, 2003. The increase principally reflects a concerted effort to
control costs and make adjustments in our marketing and advertising that yielded
increased sales, particularly as it relates to our expedition to Cripple River,
Alaska, while spending less on selling, general and administrative expenses.
The corporate unit's loss before income taxes and minority interest for the
year ended December 31, 2004 was $53,982,000, an increase of $52,939,000
compared to the loss of $1,043,000 for the year ended December 31, 2003. The
expenses allocated to this unit include: the non-cash, non-recurring
compensation expense of $52,233,000 in the third quarter of 2004 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 the corporate unit is principally related to costs associated
with the acquisition of the minority interest in TOC, legal fees resulting from
corporate restructuring including our listing on the Nasdaq National Market and
various securities filings fees.
INCOME TAX PROVISION (BENEFIT)
Income tax provision (benefit) for the year ended December 31, 2004 was a
benefit of $17,637,000, a decrease of $20,799,000 as compared to a $3,162,000
liability for the year ended December 31, 2003. The significant decrease was
due to the Company recognizing an income tax benefit of $20,789,000 arising
from a non-cash, non-recurring compensation expense charge of $52,233,000
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 40.4% and 41.3% for the years ended December 31, 2004 and 2003,
respectively.
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED SUBSIDIARY
Minority interest for the year ended December 31, 2004 was $682,000
compared to $897,000 for the year ended December 31, 2003. Minority interest was
eliminated in the month of September 2004 due to our acquisition of the
remaining minority interest in TOC which we did not already own. The amount
reported for the year ended December 31, 2004 reflects approximately eight
months of the minority interest in 2004 while 2003 reflects a full twelve
months. Further, based on our current ownership of our subsidiaries a minority
interest in our subsidiaries is not expected to continue as a result of our
current capital structure.
NET INCOME (LOSS)
Net income (loss) for the year ended December 31, 2004 was ($26,719,000) a
decrease of $30,313,000 or 843.4% compared to a $3,594,000 gain for the year
ended December 31, 2003. As a percentage of revenues, net income (loss) was
(66.9%) and 11.3% for the years ended December 31, 2004 and 2003, respectively.
If the non-cash, non-recurring compensation expense of $52,233,000 and the
corresponding income tax benefit of $20,789,000 incurred as a result of the
Company's acquisition of the minority interest in TOC described above is
excluded, net income for the year ended December 31, 2004 would have been
$4,725,000 or 11.8% of sales.
24
COMPARISON OF YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002
The following table discloses certain financial information for the periods
presented, expressed in terms of dollars, dollar change, percentage change and
as a percentage of total revenue (all dollar amounts are in thousands):
Change % of Total Revenue
-------------------------- --------------------------
2003 2002 $ % 2003 2002
----------- ----------- ----------- ----------- ----------- -----------
Revenues:
Advertising $ 16,396 $ 10,969 $ 5,427 49.5% 51.7% 51.3%
Subscriber fees 10,836 6,071 4,765 78.5% 34.2% 28.4%
Membership income 4,456 4,353 103 2.4% 14.1% 20.3%
----------- ----------- ----------- ----------- ----------- -----------
Total revenues 31,688 21,393 10,295 48.1% 100.0% 100.0%
----------- ----------- ----------- ----------- ----------- -----------
Expenses:
Satellite transmission fees 2,423 2,359 64 2.7% 7.6% 11.0%
Advertising and programming 4,884 3,854 1,030 26.7% 15.4% 18.0%
Selling, general and administrative 16,754 10,604 6,150 58.0% 52.9% 49.6%
----------- ----------- ----------- ----------- ----------- -----------
Total expenses 24,061 16,817 7,244 43.1% 75.9% 78.6%
----------- ----------- ----------- ----------- ----------- -----------
Income from operations 7,627 4,576 3,051 66.7% 24.1% 21.4%
Gain on sale or issuance of common
stock -- 46 (46) (100.0)% 0.0% 0.2%
Gain on sale of marketable securities 13 -- 13 NM 0.0% 0.0%
Interest income (expense), net 13 (1) 14 (1,400)% 0.0% 0.0%
----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes and 7,653 4,621 3,032 65.6% 24.1% 21.6%
minority interest
Income tax provision 3,162 1,882 1,280 68.0% 10.0% 8.8%
----------- ----------- ----------- ----------- ----------- -----------
Income before minority interest 4,491 2,739 1,752 64.0% 14.1% 12.8%
Minority interest in net income of
consolidated subsidiary 897 444 453 102.0% 2.8% 2.1%
----------- ----------- ----------- ----------- ----------- -----------
Net income $ 3,594 $ 2,295 $ 1,299 56.6% 11.3% 10.7%
=========== =========== =========== =========== =========== ===========
- -----------------------------
*NM - NOT MEANINGFUL
REVENUES
Total revenues for the year ended December 31, 2003 were $31,688,000, an
increase of $10,295,000, or 48.1%, compared to revenues of $21,393,000 for the
year ended December 31, 2002. This increase was the result of changes in several
items comprising revenue.
Advertising revenue increased to $16,396,000 for the year ended December
31, 2003 from $10,969,000 for the year ended December 31, 2002, an increase of
$5,427,000 or 49.5%. The increase is driven by being better able to compete for
national advertising business as a result of obtaining Nielsen ratings in July
2002 which allowed us to demonstrate our household delivery for the full year of
2003 compared to only a partial year in 2002. Nielsen reported that we had 25.7
million subscribers for the month of December 2003 compared to 18.7 million for
the month of December 2002, an increase of 7.0 million or 37.4%. The fact that
we had Nielsen ratings and demographic data coupled with the increased
subscribers allowed us to better utilize our inventory of available advertising
time and increase our effective rates realized on our advertising time on The
Outdoor Channel.
25
Subscriber fees for the year ended December 31, 2003 were $10,836,000, an
increase of $4,765,000 or 78.5%, compared to $6,071,000 for the year ended
December 31, 2002, primarily due to an increase in paying subscribers. We
increased the number of service providers carrying The Outdoor Channel to
approximately 5,400 at the end of 2003 from approximately 4,900 at 2002
year-end. Other factors that contributed to the increase include subscriber fee
rate increases with existing service providers; beginning of payments in late
2003 from certain carriers who had previously received The Outdoor Channel
without charge; and the third quarter 2002 launch of The Outdoor Channel on
DIRECTV.
Membership income for the year ended December 31, 2003 was $4,456,000, an
increase of $103,000 or 2.4%, compared to $4,353,000 for the year ended December
31, 2002. We believe that most of this increase in membership income was a
result of increased demand for memberships and merchandise sales arising
primarily from programming aired on The Outdoor Channel.
EXPENSES
Total expenses for the year ended December 31, 2003 were $24,061,000, an
increase of $7,244,000, or 43.1%, compared to $16,817,000 for the year ended
December 31, 2002. As a percentage of revenues, total expenses are 75.9% and
78.6% in 2003 and 2002, respectively. The increase in expenses was principally
driven by increasing costs to support our revenue growth.
Satellite transmission fees for the year ended December 31, 2003 were
$2,423,000, an increase of $64,000 or 2.7%, compared to $2,359,000 for the year
ended December 31, 2002. The small increase in these fees reflects the fixed
nature of these contracts.
Advertising and programming expenses for the year ended December 31, 2003
were $4,884,000, an increase of $1,030,000 or 26.7%, compared to $3,854,000 for
the year ended December 31, 2002. Expressed as a percentage of revenue,
advertising and programming expenses were 15.4% and 18.0% in 2003 and 2002,
respectively. The dollar increase reflects an increase in spending on our
consumer and trade awareness programs. In 2003, The Outdoor Channel produced
more programs in-house as opposed to licensing our programming from third
parties which increased our programming costs.
Selling, general and administrative expenses were $16,754,000 for the year
ended December 31, 2003, an increase of $6,150,000 or 58.0%, compared to
$10,604,000 for the year ended December 31, 2002. As a percent of revenues,
selling, general and administrative expenses were 52.9% and 49.6% in 2003 and
2002, respectively. The increase of this expense is primarily due to additional
hiring. As of December 31, 2003 we had 86 employees as compared to 65 at year
end 2002. Other factors that contributed to the increase include: increased
depreciation expense as a result of our equipment purchases in 2003 and 2002;
travel related to our increased sales staff and others to promote The Outdoor
Channel; increased research costs associated with purchasing Nielsen ratings and
data; and increased professional fees including public relations, accounting and
legal fees.
Also increasing our selling, general and administrative expenses is the
inclusion of costs associated with the resignation of an officer/director in
November 2003 amounting to approximately $625,000 or 2% of revenues. In addition
the Company incurred approximately $251,000 in expenses relating to conversion
of stock subscriptions receivable for services.
INCOME FROM OPERATIONS
Income from operations for the year ended December, 31, 2003 was
$7,627,000, an increase of $3,051,000 or 66.7%, compared to $4,576,000 for the
year ended December 31, 2002. As a percentage of total revenues, income from
operations increased to 24.1% for the year ended December 31, 2003 compared to
21.4% for the year ended December 31, 2002. This increase was due mainly to the
increased revenues outlined above.
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net for the year ended December 31, 2003 was a
net income of $13,000, compared to a net expense of $1,000 for the year ended
December 31, 2002. This improvement was primarily due to the repayment of the
Company's debt to certain stockholders during 2003, resulting in less interest
expense complemented by the interest earned on its increased cash balances for
the year ended December 31, 2003 compared to the year ended December 31, 2002.
26
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED SUBSIDIARY
Income before income taxes and minority interest increased slightly as a
percentage of revenues at 24.1% for the year ended December 31, 2003 compared to
21.6% for the year ended December 31, 2002. The improvement is a result of the
Company being able to grow revenues faster than expenses.
The Outdoor Channel segment's income before income taxes and minority
interest as a percentage of revenue increased to 34.7% for the year ended
December 31, 2003, compared to 26.7% for the year ended December 31, 2002. This
improvement reflects the operating leverage inherent in TOC's business as
revenue growth outpaced expense growth.
The membership division segment's income (loss) before income taxes and
minority interest as a percentage of revenues decreased to a loss of 12.8% for
the year ended December 31, 2003 compared to a profit of 3.5% for the year ended
December 31, 2002 as a result of incurring rate increases on general and health
insurance, increased expenditures for publishing our magazines and mining guide
principally related to rate increases, and increases in payroll and related
costs.
The corporate unit's loss before income taxes and minority interest in 2003
was $1,043,000. The expenses allocated to this unit include: professional fees
including public relations, accounting and legal fees, the inclusion of
severance associated with the resignation of an officer/director in November
2003 and the conversion of stock subscriptions receivable for services rendered.
INCOME TAX PROVISION
Income tax provision for the year ended December 31, 2003 was $3,162,000 as
compared to $1,882,000 for the year ended December 31, 2002. This was due to the
Company earning more taxable income in 2003 as compared to 2002. The effective
income tax rate was approximately 41% for each of the years ended December 31,
2003 and 2002.
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED SUBSIDIARY
Minority interest for the year ended December 31, 2003 was $897,000
compared to $444,000 for the year ended December 31, 2002. This was due to the
increased profitability of TOC.
NET INCOME
Net income for the year ended December 31, 2003 was $3,594,000 compared to
$2,295,000 for the year ended December 31, 2002. This was due to the increased
profitability of TOC partially offset by the losses of the membership segment.
LIQUIDITY AND CAPITAL RESOURCES
We generated cash from operations of $8,045,000 in 2004, compared to
$6,190,000 in 2003 and had a cash and cash equivalents balance of $13,105,000 at
December 31, 2004, an increase of $5,891,000 from the balance of $7,214,000 at
December 31, 2003. Net working capital increased to $17,042,000 at December 31,
2004, compared to $11,345,000 at December 31, 2003.
Net Cash used in investing activities was $3,312,000 in 2004 compared to
$2,295,000 in 2003, an increase of $1,017,000. The increase was primarily
related to additional capital expenditures to build our inventory of cameras and
edit equipment to support our increased efforts in production of programming
in-house as opposed to licensing from third parties, in particular to increase
our HD equipment.
Net cash provided by financing activities was $1,158,000 in 2004 compared
to $71,000 in 2003, an increase of $1,087,000. The increase was primarily as a
result of the exercise of employee and service provider stock options from our
1995 incentive stock option plan.
During 2004, the Company entered into a new credit facility providing for a
revolving line of credit of up to $5,000,000 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 December 31, 2004 and as of the
date of this report, the Company did not have any amounts outstanding under the
credit facility.
27
Driven by a need to increase office space, we reassessed our facilities
including floor space utilization, master control equipment, uplink equipment,
etc. during the year ended December 31, 2004. On February 22, 2005 we announced
our intention to purchase a 33,000 square foot building in Temecula, California
for approximately $2.6 million. This building is planned to house our broadcast
facility including our master control, our uplink satellite dish and various
programming personnel. We currently estimate that capital expenditures to
complete the build-out including updated equipment could exceed $8 million.
While the Company believes that such estimated capital expenditures can be
funded from its cash on hand or cash from operations, the Company is currently
exploring long-term debt financing and other alternatives with regard to the
possible funding of a portion of these estimated capital expenditures. As of the
date of the filing of this report, the Company has not obtained any actual
commitments with regard to such financing.
As of December 31, 2004, the Company generated 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 April 1, 2006. To the
extent that such amounts are insufficient to finance the Company's working
capital requirements or the Company's desire 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 stockholders.
A summary of the Company's contractual obligations as of December 31, 2004 (In
thousands):
Over 1 year Over 3 years
Less than Less than Less than After
CONTRACTUAL OBLIGATIONS Total 1 year 3 years 5 years 5 years
---------- ---------- ----------- ------------ -----------
Capital lease obligations $ 35 $ 26 $ 9 $ -- $ --
Operating lease obligations 13,416 2,903 3,373 3,360 3,780
Standby letter of credit 140 -- -- -- 140
Purchase obligations 10,744 6,767 3,877 100 --
Other long-term liabilities 377 45 30 142 160
---------- ---------- ----------- ------------ -----------
TOTAL $ 24,712 $ 9,741 $ 7,289 $ 3,602 $ 4,080
========== ========== =========== ============ ===========
RISKS AND UNCERTAINTIES
The Company's 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 may affect the Company's business, financial
condition and future operating results and should be read in conjunction with
the factors risks and uncertainties contained in the Company's other filings
with the Securities and Exchange Commission. Any forward-looking statements made
by the Company are made with the intention of obtaining the benefits of the
"safe harbor" provisions of the Securities Litigation Reform Act and a number of
factors, including, but not limited to those discussed below, could cause the
Company's actual results and experiences to differ materially from the
anticipated results or expectations expressed in any forward-looking statements.
WE MAY NOT BE ABLE TO GROW OUR SUBSCRIBER BASE, AND AS A RESULT OUR REVENUES AND
PROFITABILITY MAY NOT INCREASE.
A major component of our growth strategy is based on increasing the number
of subscribers to our channels. 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 satellite subscribers, the
popularity of our programming, our ability to negotiate new carriage agreements
and maintain existing distribution, and other factors, some of which are 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 satellite
systems or that such carriage will not be harmed as a result of a number of
factors. If we are unable to grow our subscriber base, our subscriber and
advertising revenues may not increase and could decrease.
28
IF WE INCREASE OUR LAUNCH SUPPORT COSTS TO SERVICE PROVIDERS IN ORDER TO GROW
OUR SUBSCRIBER BASE, OUR OPERATING RESULTS MAY BE HARMED.
Although we currently have plans to increase our marketing and sales
efforts in an attempt to increase the number of our subscribers, we may not be
able to do so economically or at all. 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 would be harmed. In particular,
if we make any upfront cash payments to service providers for an increase in our
subscriber base, our cash flow could be adversely impacted, and we may incur
negative cash flow for some time.
IF THE OUTDOOR CHANNEL IS PLACED IN UNPOPULAR PROGRAM PACKAGES BY CABLE OR
SATELLITE SERVICE PROVIDERS, OR IF SERVICE FEES ARE INCREASED FOR OUR
SUBSCRIBERS, THE NUMBER OF VIEWERS OF THE OUTDOOR CHANNEL MAY DECLINE WHICH
COULD HARM OUR BUSINESS AND OPERATING RESULTS.
We do not control the cable channels with which The Outdoor Channel is
packaged by cable or satellite service providers. The placement by a cable or
satellite service provider of The Outdoor Channel in an unpopular program
package could reduce or impair the growth of the number of our viewers and
subscriber fees paid by service providers to us. In addition, we do not set the
prices charged by cable and satellite service providers to their subscribers
when The Outdoor Channel is packaged with other television 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 may lose viewers.
These factors may reduce the number of viewers of The Outdoor Channel, which in
turn would reduce our subscriber fees and advertising revenue.
CABLE AND SATELLITE SERVICE PROVIDERS COULD DISCONTINUE OR REFRAIN FROM CARRYING
THE OUTDOOR CHANNEL, WHICH COULD REDUCE THE NUMBER OF VIEWERS AND HARM OUR
OPERATING RESULTS.
The success of The Outdoor Channel is dependent, in part, on our ability to
enter into new carriage agreements and maintain existing agreements with, and
carriage by, satellite systems and multiple system operators, which we refer to
as MSOs, and their affiliate members. Although we have entered into national
carriage agreements with most of the largest MSOs and satellite service
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. 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 The Outdoor
Channel will be offered, we have no assurance that The Outdoor Channel will be
carried and available to viewers of any particular MSO or to all satellite
subscribers. If cable and satellite service providers discontinue or refrain
from carrying The Outdoor Channel, this could reduce the number of viewers and
harm our operating results.
WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR FUTURE GROWTH, AND OUR GROWTH AND
PROFITABILITY MAY NOT CONTINUE, WHICH MAY SUBSTANTIALLY HARM OUR BUSINESS AND
PROSPECTS.
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 the pursuit of new strategic
objectives, including among others: investment and development of appropriate
infrastructure, such as 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, such as
monitoring operations, controlling costs and maintaining effective quality and
service. Although we have recently upgraded our Temecula, California production
facility, we expect that additional expenditures will be required as we continue
to upgrade our facilities and to begin transmitting our channel from our
facilities directly. In particular, we have signed an agreement to purchase a
building near our current headquarters and are currently building out this
property primarily for use as our broadcast facility in the future. We could
29
incur cost overruns, delays and other difficulties with this construction. In
addition, moving our broadcast facility and some of our personnel into this new
facility could be disruptive to our operations. We cannot assure you that we
will be able to successfully manage our growth, that future growth will occur or
that we will be successful in managing our business objectives. We can provide
no assurance that our profitability or revenues will not be harmed by future
changes in our business. Our operating results could be harmed if such growth
does not occur, or is slower or less profitable than projected.
WE MAY NOT BE ABLE TO SECURE NATIONAL ADVERTISING ACCOUNTS, AND AS A RESULT, OUR
REVENUES AND PROFITABILITY MAY BE HARMED.
Our ability to secure national advertising accounts, which generally pay
higher advertising rates, depends upon the size of our audience, 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. If we are unable to attract national advertising accounts in
sufficient quantities, our revenues and profitability may be harmed.
IF WE FAIL TO DEVELOP AND DISTRIBUTE POPULAR PROGRAMS, OUR VIEWERSHIP WOULD
LIKELY DECLINE WHICH COULD CAUSE ADVERTISING AND SUBSCRIBER FEE REVENUES TO
DECREASE.
Our operating results depend significantly upon the generation of
advertising revenue. 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
and rates we are able to charge. If we fail to program popular shows that
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 business and operating results. In addition, if we fail to
program popular shows the number of subscribers to our channel may also
decrease, resulting in a decrease in our subscriber fee revenue.
CHANGES IN THE METHODOLOGY USED BY NIELSEN TO ESTIMATE OUR SUBSCRIBER BASE OR
TELEVISION RATINGS, OR INACCURACIES IN SUCH ESTIMATES, COULD CAUSE OUR
ADVERTISING REVENUE TO DECREASE.
Our ability to sell advertising is largely dependent on television ratings
and our subscriber base estimated by Nielsen. We do not control the methodology
used by Nielsen for these estimates. If Nielsen modifies its methodology or
changes the statistical sample it uses for these estimates, such as the
demographic characteristics of the households, our ratings could be negatively
affected resulting in a decrease in our advertising revenue.
EXPENSES RELATING TO PROGRAMMING COSTS ARE GENERALLY INCREASING AND A NUMBER OF
FACTORS CAN CAUSE COST OVERRUNS AND DELAYS, AND OUR OPERATING RESULTS MAY BE
ADVERSELY IMPACTED IF WE ARE NOT ABLE TO SUCCESSFULLY RECOVER THE COSTS OF
DEVELOPING AND ACQUIRING NEW PROGRAMMING.
The average cost of programming has increased recently for the cable
industry and such increases may continue. We plan to build our programming
library through the acquisition of long-term broadcasting rights from third
party producers, in-house production and outright acquisition of programming,
and this may lead to increases in our programming costs. The development,
production and editing of 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
business and operating results will be harmed.
30
OUR OPERATING RESULTS MAY BE HARMED IF THE ANTICIPATED LAUNCH OF THE OUTDOOR
CHANNEL'S HIGH DEFINITION NETWORK IS NOT AS SUCCESSFUL AS WE ANTICIPATE.
There can be no assurances that Outdoor Channel 2 HD will debut in July
2005 as currently anticipated or will not incur unexpected costs and expenses.
Distribution of Outdoor Channel 2 HD will depend on successfully executing
distribution agreements with cable and satellite service providers. There can be
no assurance that such agreements can be made, and if they are made, that they
will be on terms favorable to us or require us to grant 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 constraints may keep Outdoor Channel 2
HD from achieving sufficient distribution from service providers to reach
profitability. Competition for quality HD content may increase the costs of
programming for Outdoor Channel 2 HD 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 and adversely affect our operating results.
THE MARKET IN WHICH WE OPERATE IS HIGHLY COMPETITIVE, AND WE MAY NOT BE ABLE TO
COMPETE EFFECTIVELY, PARTICULARLY AGAINST COMPETITORS WITH GREATER FINANCIAL
RESOURCES, BRAND RECOGNITION, MARKETPLACE PRESENCE AND RELATIONSHIPS WITH
SERVICE PROVIDERS.
We compete for viewers with other basic and pay cable television networks,
including the Outdoor Life Network, Spike TV, ESPN2 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 current 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 some cases, we compete with cable and
satellite service providers that have the financial and technological resources
to create and distribute their own television networks, such as the Outdoor Life
Network which is owned and operated by Comcast. In order to compete for
subscribers, we may pay either launch fees or marketing support or both for
carriage in certain circumstances in the future, which may require significant
cash expenditures, harming our operating results and margins. We compete for
advertising sales with other pay television networks, broadcast networks, and
local over-the-air television stations. We also compete for advertising sales
with satellite and broadcast radio and the print media. We compete with other
cable television networks for subscriber fees from, and affiliation agreements
with, cable and satellite service providers. Actions by the Federal
Communications Commission, to which we refer to as the FCC, and the courts 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 NOT BE ABLE TO ATTRACT NEW, OR RETAIN EXISTING, MEMBERS IN OUR CLUB
ORGANIZATIONS, AND AS A RESULT OUR REVENUES AND PROFITABILITY MAY BE HARMED.
Our ability to attract new membership in our club organizations, GPAA and
Lost Dutchman's, depends upon our ability to attract new members and customers
with these interests through marketing efforts including our programming on The
Outdoor Channel and such other efforts as direct mail campaigns, continued
sponsorship of gold expositions around the country and introductory outings held
at our campsites. We cannot assure you that we will successfully attract new
members or retain existing members. A decline in membership in our club
organizations could harm our business and operating results.
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 distribution and bargaining power
to negotiate less favorable terms of carriage or to obtain additional volume
discounts, our business and operating results would suffer.
31
THE SATELLITE INFRASTRUCTURE THAT WE USE MAY FAIL OR BE PREEMPTED BY ANOTHER
SIGNAL, WHICH COULD IMPAIR OUR ABILITY TO DELIVER PROGRAMMING TO OUR CABLE AND
SATELLITE SERVICE PROVIDERS.
Our ability to deliver programming to service providers, and their
subscribers, is dependent upon the satellite equipment and software that we use
to be working properly to distribute our programming. If this satellite 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 satellite service provider customers and
their subscribers within the time periods advertised. We recently negotiated for
back-up capability with our satellite provider 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 provides that
our main signal is subject to preemption and until the back-up satellite is in
position, we could lose our signal for a period of time. A loss of our signal
could harm our reputation and reduce our revenues and profits.
NATURAL DISASTERS AND OTHER EVENTS BEYOND OUR CONTROL COULD INTERRUPT OUR
SIGNAL.
Our systems and operations may be vulnerable to damage or interruption from
earthquakes, floods, fires, power loss, telecommunication failures and similar
events. They also could be subject to break-ins, sabotage and intentional acts
of vandalism. Since our production facilities for The Outdoor Channel are all
located in Temecula, California, the results of such events could be
particularly disruptive because we do not have readily available alternative
facilities from which to conduct our business. Our business interruption
insurance may not be sufficient to compensate us for losses that may occur.
Despite any precautions we may take, the occurrence of a natural disaster or
other unanticipated problems at our facilities could result in interruptions in
our services. Interruptions in our service could harm our reputation and reduce
our revenues and profits.
OUR OPERATING RESULTS MAY VARY SIGNIFICANTLY, AND HISTORICAL 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. 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
satellite service providers; demand for advertising, advertising rates and
offerings of competing media; changes in the growth rate of cable and satellite
subscribers; cable and satellite service providers' 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 satellite-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 calendar quarter may disproportionately affect our
profitability because our expenses would remain relatively fixed and would not
decrease correspondingly.
SEASONAL INCREASES OR DECREASES IN ADVERTISING REVENUE MAY NEGATIVELY AFFECT OUR
BUSINESS.
Seasonal trends are likely to affect our viewership, and consequently,
could cause fluctuations in our advertising revenues. Our business reflects
seasonal patterns of advertising expenditures, which is common in the broadcast
industry. 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 our
cash flows may not correlate with revenue recognition.
32
WE MAY BE UNABLE TO ACCESS CAPITAL ON ACCEPTABLE TERMS TO FUND OUR FUTURE
OPERATIONS.
Our future capital requirements will depend on numerous factors, including
the success of our efforts to increase advertising revenues, the amount of
resources devoted to increasing distribution of The Outdoor Channel, and
acquiring and producing programming for The Outdoor Channel. As a result, we
could be required to raise substantial additional capital through debt or equity
financing. To the extent that we raise additional capital through the sale of
equity or convertible debt securities, the issuance of such securities could
result in dilution to existing stockholders. 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 and ability to fund future operations may 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. None of our
employees are under contract and 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., or Thomas E. Hornish, our General Counsel, could
adversely impact our business. 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 stockholders. 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.
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.
CABLE AND SATELLITE TELEVISION PROGRAMMING SIGNALS HAVE BEEN STOLEN OR COULD BE
STOLEN IN THE FUTURE, WHICH REDUCES OUR POTENTIAL REVENUE FROM SUBSCRIBER FEES
AND ADVERTISING.
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 satellite service providers'
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 fee revenues from the cable and
satellite service providers. Further, measures that could be taken by cable and
satellite service providers to limit such theft are not under our control.
Piracy of our copyrighted materials could reduce our revenue from subscriber
fees and advertising and negatively affect our business and operating results.
33
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 80-85% 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. In addition, protecting our intellectual
property rights by pursuing those who infringe or dilute our rights or defending
against third party claims can be costly and time consuming. 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.
WE MAY FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT COULD BE
TIME-CONSUMING, COSTLY TO DEFEND AND RESULT IN OUR LOSS OF SIGNIFICANT RIGHTS.
Other parties may assert intellectual property infringement claims against
us, and our products may infringe the intellectual property rights of third
parties. From time to time, we receive letters alleging infringement of
intellectual property rights of others. Intellectual property litigation can be
expensive and time-consuming and could divert management's attention from our
business. If there is a successful claim of infringement against us, we may be
required to pay substantial damages to the party claiming infringement or enter
into royalty or license agreements that may not be available on acceptable or
desirable terms, if at all. Our failure to license the proprietary rights on a
timely basis would harm our business.
OUR PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS BENEFICIALLY OWN
APPROXIMATELY 69.7% OF OUR OUTSTANDING COMMON STOCK AND THEREFORE EXERCISE
SIGNIFICANT CONTROL OVER US, AND THEY MAY MAKE DECISIONS WITH WHICH YOU
DISAGREE.
Our principal stockholders, executive officers and directors beneficially
own an aggregate of approximately 69.7% of our outstanding common stock. See
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS--Security Ownership of Certain Beneficial Owners and
Management" below. The interests of those stockholders could differ from those
of other stockholders. As a result of their large holdings of our common stock
relative to other stockholders, these individuals, acting individually or
together, could have a strong influence over matters requiring approval of our
stockholders.
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
STOCKHOLDERS.
Our certificate of incorporation, our bylaws and Delaware law contain
provisions, such as authorizing the issuance of one or more series of preferred
stock without a vote of our stockholders, that could make it difficult or
expensive for a third party to pursue a tender offer, change in control or
takeover attempt that is opposed by our management and board of directors. We
also have a staggered board of directors that makes it difficult for
stockholders to change the composition of our board of directors. These
provisions could allow our incumbent management to retain control over us and
prevent the consummation of a transaction in which our stockholders could
receive a substantial premium over the then current market price for their
shares.
TECHNOLOGIES IN THE CABLE AND SATELLITE TELEVISION 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 satellite television industry 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 harming our business and operating
results.
34
THE CABLE AND SATELLITE TELEVISION 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 cost of doing business.
The Cable Television Consumer Protection and Competition Act of 1992, to
which we refer to as 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 benefits independent
programmers such as us by limiting the ability of vertically integrated cable
programmers to offer exclusive programming arrangements to cable companies. This
provision was scheduled to expire in October 2002. However, the FCC deferred the
expiration date to October 2007 unless the FCC then determines that another
extension is necessary to protect competition and diversity. If this provision
expires, it could have an adverse effect on our ability to obtain carriage by
service providers.
Regulatory carriage requirements also could reduce the number of channels
available to carry The Outdoor Channel. The 1992 Cable Act granted television
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 reduce 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
broadcasters 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. On February 10, 2005, the FCC decided that television
broadcasters do not have such additional must-carry rights. Broadcasters may
seek judicial review of the FCC's decision or legislative change. 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 and could reduce carriage
of The Outdoor Channel.
If we distribute television programming through other types of media, 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. In response to a request from the Committee on
Energy and Commerce of the House of Representatives, the FCC's Media Bureau
conducted a study in 2004 regarding, among other things, government-mandated a
la carte or mini-tier packaging of programming services in which each subscriber
would purchase only those channels that he or she desired instead of the larger
bundles of different channels as is typical today. The Media Bureau's report on
November 18, 2004 observed that such packaging would increase the cost of
programming to consumers and injure programmers. If, in response to any rate or
other government 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 reduced.
35
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 harmed by
future legislation, new regulation, deregulation or court decisions interpreting
laws and regulations.
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 entities, GPAA and Lost Dutchman's, share
the general risks of all outdoor recreational activities such as 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 their 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 and
operating results.
CHANGES IN CORPORATE GOVERNANCE AND SECURITIES DISCLOSURE AND COMPLIANCE
PRACTICES HAVE INCREASED AND MAY CONTINUE TO INCREASE OUR LEGAL COMPLIANCE AND
FINANCIAL REPORTING COSTS.
The Sarbanes-Oxley Act of 2002 required us to change or supplement some of
our corporate governance and securities disclosure and compliance practices. The
Securities and Exchange Commission and Nasdaq have revised, and continue to
revise, their regulations and listing standards. These developments have
increased, and may continue to increase, our legal compliance and financial
reporting costs.
FAILURE TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH
SECTION 404 OF THE SARBANES-OXLEY ACT COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS AND STOCK PRICE.
We are in the process of documenting and testing our internal control
procedures in order to satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act, which requires an annual management assessment of the
effectiveness of internal controls over financial reporting and an annual report
by our independent registered public accounting firm addressing the assessment.
During the course of our testing we may identify deficiencies which we may not
be able to remediate in time to meet the deadline for compliance with the
requirements of Section 404. In addition, if we fail to maintain the adequacy of
our internal controls, as such standards are modified, supplemented or amended
from time to time, we may not be able to ensure that we can conclude on an
ongoing basis that we have effective internal controls over financial reporting
in accordance with Section 404. Effective internal controls are necessary for us
to produce reliable financial reports and are important in the prevention of
financial fraud. If we cannot produce reliable financial reports or prevent
fraud, our business and operating results could be harmed, investors could lose
confidence in our reported financial information.
CHANGES TO FINANCIAL ACCOUNTING STANDARDS MAY AFFECT OUR REPORTED OPERATING
RESULTS.
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, Public Company
Accounting Oversight 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 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.
36
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2004 and 2003, our investment portfolio included
fixed-income securities of $741,000 and $550,000, respectively. These securities
are subject to interest rate risk and will decline in value if interest rates
increase. However, due to the short duration of our investment portfolio, an
immediate 10% change in interest rates would have no material impact on our
financial condition, operating results or cash flows. Declines in interest rates
over time will, however, reduce our interest income while increases in interest
rates over time may increase our interest expense.
We do not have a significant level of transactions denominated in
currencies other than U.S. dollars and as a result we have very limited foreign
currency exchange rate risk. The effect of an immediate 10% change in foreign
exchange rates would have no material impact on our financial condition,
operating results or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the registrant for the years ended
December 31, 2004, 2003 and 2002 are listed in the index on the following page.
35
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
I N D E X
---------
PAGE
----
Report of Independent Registered Public Accounting Firm..................... 38
Consolidated Balance Sheets as of December 31, 2004 and 2003................ 39
Consolidated Statements of Operations for the Years Ended
December 31, 2004, 2003 and 2002............................................ 40
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2004, 2003 and 2002...................................... 41
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002............................................ 44
Notes to Consolidated Financial Statements.................................. 46
* * *
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Stockholders and Board of Directors
Outdoor Channel Holdings, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Outdoor Channel
Holdings, Inc. and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2004.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Outdoor
Channel Holdings, Inc. and subsidiaries as of December 31, 2004 and 2003, and
their results of operations and cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
/s/ J.H. Cohn LLP
San Diego, California
February 25, 2005
38
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND 2003
(In thousands, except per share data)
2004 2003
----------- -----------
ASSETS
------
Current assets:
Cash and cash equivalents $ 13,105 $ 7,214
Investment in available-for-sale securities 741 550
Accounts receivable, net of allowance for doubtful
accounts of $207 and $234 4,848 3,797
Inventories 85 68
Income tax refund receivable 2,291 1,143
Current portion of deferred tax assets, net -- 525
Prepaid programming costs 606 --
Other current assets 50 671
----------- -----------
Total current assets 21,726 13,968
----------- -----------
Property, plant and equipment at cost, net:
Membership division 3,527 3,253
Outdoor Channel equipment and improvements 3,199 2,032
----------- -----------
Property, plant and equipment, net 6,726 5,285
----------- -----------
Amortizable intangible assets 1,939 118
Deferred tax assets, net 16,554 436
Goodwill 39,418 --
Other non-amortizable intangible assets 10,573 --
Deposits and other assets 174 41
----------- -----------
Totals $ 97,110 $ 19,848
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 3,705 $ 1,790
Accrued severance payments 28 291
Current portion of notes payable and capital lease obligations 26 133
Deferred tax liabilities, net 494 --
Current portion of deferred revenue 370 409
Customer deposits 61 --
----------- -----------
Total current liabilities 4,684 2,623
Accrued severance payments, net of current portion 37 66
Notes payable and capital lease obligations, net of current portion 9 59
Deferred revenue, net of current portion 1,145 1,225
Deferred satellite rent obligations 312 380
----------- -----------
Total liabilities 6,187 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;
18,394 (as adjusted for a five for two forward split) and 5,887
shares issued and outstanding 18 118
Common stock subscriptions receivable -- (30)
Cost of treasury stock (191 shares) -- (400)
Additional paid-in capital 111,912 6,768
Deferred compensation (1,034) --
Accumulated other comprehensive income 43 34
Retained earnings (accumulated deficit) (20,016) 6,703
----------- -----------
Total stockholders' equity 90,923 13,193
----------- -----------
Totals $ 97,110 $ 19,848
=========== ===========
See Notes to Consolidated Financial Statements.
39
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In thousands, except per share data)
2004 2003 2002
----------- ----------- -----------
Revenues:
Advertising $ 21,817 $ 16,396 $ 10,969
Subscriber fees 13,391 10,836 6,071
Membership income 4,746 4,456 4,353
----------- ----------- -----------
Total revenues 39,954 31,688 21,393
----------- ----------- -----------
Expenses:
Satellite transmission fees 2,351 2,423 2,359
Advertising and programming 8,117 4,884 3,854
Non-cash compensation expense
from exchange of stock options 52,233 -- --
Selling, general and administrative 21,042 16,754 10,604
----------- ----------- -----------
Total expenses 83,743 24,061 16,817
----------- ----------- -----------
Income (loss) from operations (43,789) 7,627 4,576
Gain on sale or issuance of common stock of subsidiary -- -- 46
Gain on sale of marketable securities 34 13 --
Interest income (expense), net 81 13 (1)
----------- ----------- -----------
Income (loss) before income taxes and minority interest (43,674) 7,653 4,621
Income tax provision (benefit) (17,637) 3,162 1,882
----------- ----------- -----------
Income (loss) before minority interest (26,037) 4,491 2,739
Minority interest in net income of consolidated subsidiary 682 897 444
----------- ----------- -----------
Net income (loss) (26,719) 3,594 2,295
Preferred stock dividends -- -- (90)
----------- ----------- -----------
Net income (loss) applicable to common stock $ (26,719) $ 3,594 $ 2,205
=========== =========== ===========
Earnings (loss) per common share:
Basic $ (1.67) $ 0.26 $ 0.17
=========== =========== ===========
Diluted $ (1.67) $ 0.19 $ 0.15
=========== =========== ===========
Weighted average number of common shares outstanding:
(as adjusted for a five for two forward split)
Basic 15,998 13,824 13,220
=========== =========== ===========
Diluted 15,998 14,768 14,627
=========== =========== ===========
See Notes to Consolidated Financial Statements.
40
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In thousands)
Common
Convertible Stock
Preferred Stock Common Stock Subscriptions Treasury
Shares Amount Shares Amount Receivable Stock
----------- ----------- ----------- ----------- ----------- -----------
Balance, January 1, 2002 59 $ -- 5,281 $ 106 $ (221) $ (290)
Comprehensive Income:
Net income
Effect of change in fair
value of available-for-
sale securities, net of
deferred taxes of $2
Total comprehensive income
Subsidiary investment in parent (110)
Cancellation of stock issued for
services (3) --
Common stock issued upon exercise
of stock options for cash and
notes receivable 32 -- (66)
Preferred dividend
Conversion of preferred stock to
common stock (59) -- 59 1
Subscription receivable paid
through provision of services 25
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2002 -- $ -- 5,369 $ 107 $ (262) $ (400)
=========== =========== =========== =========== =========== ===========
(Continued on next page)
41a
(Continued from previous page)
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In thousands)
Accumulated
Other Retained
Additional Compre- Earnings
Paid-in Deferred hensive (Accumulated
Capital Compensation Income Deficit) Total
----------- ----------- ----------- ----------- -----------
Balance, January 1, 2002 $ 3,516 $ -- $ -- $ 904 $ 4,015
Comprehensive Income:
Net income 2,295 2,295
Effect of change in fair
value of available-for-
sale securities, net of
deferred taxes of $2 4 4
-----------
Total comprehensive income 2,299
-----------
Subsidiary investment in parent (110)
Cancellation of stock issued for
services (12) (12)
Common stock issued upon exercise
of stock options for cash and
notes receivable 101 35
Preferred dividend (90) (90)
Conversion of preferred stock to
common stock (1) --
Subscription receivable paid
through provision of services 25
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2002 $ 3,604 $ -- $ 4 $ 3,109 $ 6,162
=========== =========== =========== =========== ===========
41b
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In thousands)
Common
Convertible Stock
Preferred Stock Common Stock Subscriptions Treasury
Shares Amount Shares Amount Receivable Stock
----------- ----------- ----------- ----------- ----------- -----------
Balance, January 1, 2003 -- $ -- 5,369 $ 107 $ (262) $ (400)
Comprehensive Income:
Net income
Effect of change in fair
value of available-for-
sale securities, net of
deferred taxes of $20
Total comprehensive income
Subscriptions receivable paid
through provision of services
and in cash 232
Tax benefit from exercise of non-
qualified stock options and
deferred compensation
Common stock issued upon exercise
of stock options for cash,
provision of services and
offset of notes payable 384 8
Common stock issued to former
Officer/director for payment
of deferred compensation 134 3
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2003 -- $ -- 5,887 $ 118 $ (30) $ (400)
=========== =========== =========== =========== =========== ===========
(Continued on next page)
42a
(Continued from previous page)
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In thousands)
Accumulated
Other Retained
Additional Compre- Earnings
Paid-in Deferred hensive (Accumulated
Capital Compensation Income Deficit) Total
----------- ----------- ----------- ----------- -----------
Balance, January 1, 2003 $ 3,604 $ -- $ 4 $ 3,109 $ 6,162
Comprehensive Income:
Net income 3,594 3,594
Effect of change in fair
value of available-for-
sale securities, net of
deferred taxes of $20 30 30
-----------
Total comprehensive income 3,624
-----------
Subscriptions receivable paid
through provision of services
and in cash 232
Tax benefit from exercise of non-
qualified stock options and
deferred compensation 2,064 2,064
Common stock issued upon exercise
of stock options for cash,
provision of services and
offset of notes payable 928 936
Common stock issued to former
Officer/director for payment
of deferred compensation 172 175
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2003 $ 6,768 $ -- $ 34 $ 6,703 $ 13,193
=========== =========== =========== =========== ===========
42b
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In thousands)
Common
Convertible Stock
Preferred Stock Common Stock Subscriptions Treasury
Shares Amount Shares Amount Receivable Stock
----------- ----------- ----------- ----------- ----------- -----------
Balance, January 1, 2004 -- $ -- 5,887 $ 118 $ (30) $ (400)
Comprehensive Income:
Net loss
Effect of change in fair
value of available-for-
sale securities, net of
deferred taxes of $4
Total comprehensive income
Effect of 5 for 2 forward split
and change in par value 8,830 (103)
Common stock issued upon
exercise of stock options 723
Stock subscriptions paid 30
Issuance of restricted stock
to employees for services 75
Amortization of deferred
compensation
Stock exchanged for stock of
subsidiary 3,070 3
Effect of exchange of stock
options for stock options
of subsidiary
Tax benefit from exercise
of stock options
Retirement of treasury stock (191) 400
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2004 -- $ -- 18,394 $ 18 $ -- $ --
=========== =========== =========== =========== =========== ===========
(Continued on next page)
43a
(Continued from previous page)
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In thousands)
Accumulated
Other Retained
Additional Compre- Earnings
Paid-in Deferred hensive (Accumulated
Capital Compensation Income Deficit) Total
----------- ----------- ----------- ----------- -----------
Balance, January 1, 2004 $ 6,768 $ -- $ 34 $ 6,703 $ 13,193
Comprehensive Income:
Net loss (26,719) (26,719)
Effect of change in fair
value of available-for-
sale securities, net of
deferred taxes of $4 9 9
-----------
Total comprehensive income (26,710)
-----------
Effect of 5 for 2 forward split
and change in par value 103 --
Common stock issued upon
exercise of stock options 1,285 1,285
Stock subscriptions paid 30
Issuance of restricted stock
to employees for services 1,043 (1,043) --
Amortization of deferred
compensation 9 9
Stock exchanged for stock of
subsidiary 49,850 49,853
Effect of exchange of stock
options for stock options
of subsidiary 52,233 52,233
Tax benefit from exercise
of stock options 1,030 1,030
Retirement of treasury stock (400) --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2004 $ 111,912 $ (1,034) $ 43 $ (20,016) $ 90,923
=========== =========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
43b
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In thousands)
2004 2003 2002
----------- ----------- -----------
Operating activities:
Net income (loss) $ (26,719) $ 3,594 $ 2,295
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,259 880 649
Provision for doubtful accounts 164 327 257
Costs of services offset against subscription receivable -- 251 32
Gain on issuance of common stock of subsidiary -- -- (40)
Realized gain on sale of available-for-sale securities (34) (13) --
Minority interest in net income of consolidated subsidiary 682 897 444
Tax benefit from exercise of stock options and issuance of
shares to pay deferred compensation 1,030 2,064 --
Common stock of subsidiary issued for services -- -- 9
Compensation expense from exchange of stock options 52,233 -- --
Amortization of deferred compensation 9 -- --
Deferred tax provision (benefit), net (19,310) 70 (187)
Cash supplied (used) by changes in operating assets and liabilities:
Accounts receivable (1,215) (1,651) (1,149)
Inventories (17) 19 (10)
Income tax refund receivable (1,126) -- --
Prepaid programming costs (606) -- --
Other current assets 331 (1,533) (189)
Deposits and other assets (133) 155 (155)
Accounts payable and accrued expenses 1,914 874 415
Accrued severance payments (291) -- --
Deferred revenue (119) 324 1
Customer deposits 61 -- --
Deferred satellite rent obligations (68) (68) (68)
----------- ----------- -----------
Net cash provided by operating activities 8,045 6,190 2,304
----------- ----------- -----------
Investing activities:
Purchases of property, plant and equipment (2,549) (1,924) (1,100)
Purchases of available-for-sale securities (255) (443) (74)
Proceeds from sale of available-for-sale securities 85 36 --
Costs related to acquisition of minority interest (593) -- --
Proceeds from notes receivable -- 36 --
----------- ----------- -----------
Net cash used in investing activities (3,312) (2,295) (1,174)
----------- ----------- -----------
Financing activities:
Net payments of stockholder loans -- (15) (58)
Principal payments on notes payable and capital leases (157) (182) (234)
Dividends paid on preferred stock -- -- (90)
Proceeds from exercise of stock options 1,285 268 36
Proceeds from common stock subscriptions receivable 30 -- --
Purchases of treasury stock -- -- (110)
----------- ----------- -----------
Net cash provided by (used in) financing activities 1,158 71 (456)
----------- ----------- -----------
Net increase in cash and cash equivalents 5,891 3,966 674
Cash and cash equivalents, beginning of year 7,214 3,248 2,574
----------- ----------- -----------
Cash and cash equivalents, end of year $ 13,105 $ 7,214 $ 3,248
=========== =========== ===========
44
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In thousands)
2004 2003 2002
----------- ----------- -----------
Supplemental disclosures of cash flow information:
Interest paid $ 5 $ 42 $ 35
=========== =========== ===========
Income taxes paid $ 1,139 $ 2,083 $ 2,154
=========== =========== ===========
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 $ 49,853 $ -- $ --
=========== =========== ===========
Common stock issued upon exercise of stock options in exchange
for notes receivable from ex-employees $ -- $ -- $ 66
=========== =========== ===========
Effect of net increase in fair value of available-for-sale securities,
net of deferred taxes $ 9 $ 30 $ 4
=========== =========== ===========
Note receivable from stockholder offset against accrued bonus $ -- $ 45 $ --
=========== =========== ===========
Receivable from exercise of stock options offset against loans
from stockholders $ -- $ 623 $ --
=========== =========== ===========
Common stock issued to former officer/director for payment of
deferred compensation $ -- $ 175 $ --
=========== =========== ===========
See Notes to Consolidated Financial Statements.
45
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO 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
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
to traditional outdoor activities, such as hunting, fishing and shooting
sports, as well as off road motor sports and other related lifestyle
programming.
Our revenues include advertising fees from advertisements aired on The
Outdoor Channel, including fees paid by outside producers to purchase
advertising time in connection with the airing of 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
satellite service providers 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
expositions, expeditions and outings.
Other business activities consist of the promotion and sale of 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
properties.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Outdoor
Channel Holdings and its subsidiaries, Gold Prospector's Association of
America, Inc., Lost Dutchman's, GPAA and TOC. All material intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
- ----------------
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 consolidated balance sheet
and reported amount of revenues and expenses for the periods presented.
Accordingly, actual results could materially differ from those estimates.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly-liquid investments with maturities of
three months or less when acquired to be cash equivalents.
Inventories
- -----------
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out ("FIFO") method.
Prepaid Programming Costs
- -------------------------
The Company produces a portion of the programming it airs on The Outdoor
Channel in-house as opposed to acquiring the programming from third party
producers. The cost of production is expensed when the show airs. As such,
at year-end the Company has incurred costs for programming that is yet to
air. These costs are accumulated on the balance sheet as "Prepaid
programming costs". Costs of specific shows will be charged to programming
expense when the program airs and the related advertising revenue is
recognized.
46
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
- ----------------------
Depreciation and amortization of costs of property and equipment are
provided using the straight-line method over the estimated useful lives of
the assets which range from 5 to 15 years.
Amortizable Intangible Assets
- -----------------------------
Costs of acquiring customer relationships are being amortized over a period
of either 3 or 4 years. TOC has the exclusive right to the trademark The
Outdoor Channel. The costs of acquiring the trademark are being amortized
on a straight-line basis over an estimated useful life of 15 years.
Impairment of Certain Long-Lived Assets
- ---------------------------------------
The impairment of long-lived assets with finite lives such as property and
equipment, customer relationships and trademarks, is recognized when events
or changes in circumstances indicate that the undiscounted cash flows
estimated to be generated by such assets are less than their carrying value
and, accordingly, all or a portion of such carrying value may not be
recoverable. Impairment losses are then measured by comparing the fair
value of assets to their carrying amounts. The Company did not record any
charges for the impairment of long-lived assets in 2004, 2003 or 2002.
Goodwill and Other Intangible Assets not Subject to Amortization
- ----------------------------------------------------------------
Goodwill represents the excess of cost over the fair value of net assets of
an acquired business. Under Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142") goodwill is deemed
to have an indefinite life and is no longer subject to amortization over its
estimated useful life but is tested for impairment annually under a two-step
approach, or more frequently, if events or changes in circumstances indicate
that the asset might be impaired.
Impairment is assessed at the "reporting unit" level by applying a fair
value-based test. A reporting unit is defined as the same as, or one level
below the operating segment level as described in Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS 131"). Under the two-step approach, the
carrying amount of the reporting unit is compared with its fair value. If
the carrying amount of the reporting unit exceeds its fair value, the
"implied" fair value (as defined in SFAS 142) of the reporting unit's
goodwill is compared with its carrying amount to measure the amount of the
impairment loss, if any. When the carrying amount of the reporting unit's
goodwill exceeds the implied fair value of the goodwill, an impairment loss
is recognized in an amount equal to the excess.
The cost allocated to the acquisition of multiple system operator
relationships is an intangible asset that is also deemed to have an
indefinite life and, accordingly, is not subject to amortization under SFAS
142. The Company is required to evaluate the remaining useful life of
these relationships each reporting period to determine whether
circumstances continue to support an indefinite useful life. If it
determines the life is no longer indefinite, the Company will begin to
amortize the costs of these multiple system operator relationships over
their remaining lives. In addition, such costs shall be tested for
impairment annually, or more frequently if circumstances indicate that the
asset might be impaired. The impairment test shall consist of a comparison
of the fair value of the asset with its carrying amount. If the carrying
amount exceeds its fair value, an impairment loss shall be recognized in an
amount equal to that excess.
Advertising
- -----------
The Company expenses the cost of advertising and promotions as incurred.
Advertising costs charged to operations totaled $5,600, $3,767 and $2,869
in 2004, 2003 and 2002, respectively.
47
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
- -------------------
The Company generates revenues from sales of television and print
advertising, from cable and satellite subscriber fees, from membership fees
and from sales of related products and services.
TOC's advertising revenues are recognized when the advertisement is aired
and the collectibility of fees is reasonably assured. Advertising revenues
from advertisements in the Company's bi-monthly magazine are recognized
when the magazine is distributed. Subscriber fees for The Outdoor Channel
are recognized in the period the programming is aired by the distributor.
Broadcast and national television network advertising contracts may
guarantee the advertiser a minimum audience for its advertisements over the
term of the contracts. We provide the advertiser with additional
advertising time if we do not deliver the guaranteed audience size. The
amount of additional advertising time is generally based upon the
percentage of shortfall in audience size. This requires us to make
estimates of the audience size that will be delivered throughout the terms
of the contracts. We base our estimate of audience size on information
provided by ratings services and our historical experience. If we determine
we will not deliver the guaranteed audience, an accrual for "make-good"
advertisements is recorded as a reduction of revenue. The estimated
make-good accrual is adjusted throughout the terms of the advertising
contracts.
Lost Dutchman's memberships are contractual arrangements that provide
members with prospecting and mineral rights and the use of land and
facilities for camping and recreational vehicle parking. Lost Dutchman's
memberships sold by the Company generally have payment terms that provide
for a down payment and monthly installments and are non-interest bearing
and unsecured. Revenues are generally recognized on a straight-line basis
over the estimated average life (7 years) of the Lost Dutchman's
membership.
The Company sells GPAA memberships for one to four years and it also offers
a GPAA lifetime membership ("Gold Life"). The majority of the memberships
are for one year. Multi-year GPAA membership revenues are recognized on a
straight-line basis over the life of a membership or an estimated life of
15 years for a lifetime membership. Merchandise sales for GPAA are
recognized as sales when the product is shipped and collection of the
receivable is probable. Merchandise sales for GPAA are included in the
"Membership income" revenue category.
The Company does not record any receivables arising under these contracts
or memberships. Accordingly, revenues recognized do not exceed the total of
the cash payments received and cash received in excess of revenue earned is
recorded as deferred revenue.
Revenues from the expeditions are recognized when they are taken in June
through August each year. Revenues from outings and gold expositions are
recognized at the time of the event.
Income Taxes
- ------------
The Company accounts for income taxes pursuant to the asset and liability
method which requires deferred income tax assets and liabilities to be
computed for temporary differences between the financial statement and tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted laws and rates applicable to the
periods in which the temporary differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized. The income tax
provision is the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and liabilities. Tax
benefits arising from the exercise of stock options and the issuance of
common shares to pay deferred compensation are recorded as additional
paid-in capital in the period the benefits are earned or realized.
48
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings (Loss) Per Share
- -------------------------
Effective September 15, 2004, the Company effected a 5 for 2 forward split
of its common 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 common stock
was changed from $0.02 to $0.001 per share.
The Company has presented "basic" and "diluted" earnings (loss) per common
share in the accompanying 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 TOC, prior to the acquisition of the
remaining minority interest in TOC, were issued during the period if any
such issuances would have had a dilutive effect.
The computation of diluted loss per share for 2004 does not take into
account either the outstanding stock options of Outdoor Channel Holdings
because the effect of their assumed exercise would be anti-dilutive or the
increase in net loss attributable to the increase in the minority interest
in the net income of TOC that would result 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 effect would be
immaterial. The computation of diluted earnings per share for 2003 and 2002
takes into account the effects on the weighted average number of common
shares outstanding of the assumed exercise of all of the outstanding stock
options of the Outdoor Channel Holdings and TOC, adjusted for the
application of the treasury stock method, and the assumed payment in 2002
of deferred compensation that had been payable by the Company in common
stock (see Note 9). The computation of diluted earnings per share for 2003
also takes into account the reduction in net income applicable to common
stock attributable to the increase in the minority interest (from
approximately 13% to 33%) in the net income of TOC that results from the
assumed exercise of its outstanding stock options (the effect on net income
applicable to common stock in 2002 of the assumed exercise of stock options
was not material). The number of shares potentially issuable at December
31, 2004, 2003 and 2002 upon the exercise of stock options that were not
included in the computation of net earnings (loss) per common share because
they were anti-dilutive totaled 5,630, 725 and 75, respectively.
The following table summarizes the calculation of the weighted average
common shares outstanding for basic and diluted earnings per share for the
years ended December 31, 2004, 2003 and 2002:
2004 2003 2002
---------- ---------- ----------
Numerators:
Net income (loss) - basic $ (26,719) $ 3,594 $ 2,205
Deduct increase in minority interest attributable to
assumed exercise of dilutive stock options of
TOC (see Note 9) -- (777) --
---------- ---------- ----------
Net income (loss) - dilutive $ (26,719) $ 2,817 $ 2,205
========== ========== ==========
Denominators:
Weighted average common shares outstanding - basic 15,998 13,824 13,220
Dilutive effect of potentially issuable common shares for
accrued deferred compensation -- -- 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 -- 944 1,071
---------- ---------- ----------
Diluted weighted average common shares outstanding 15,998 14,768 14,627
========== ========== ==========
49
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Treasury Stock
- --------------
The Company had adopted the treasury stock method in accounting for TOC's
investment in Outdoor Channel Holdings. This is in accordance with ARB No.
51 "Consolidated Financial Statements", which provides that in
consolidation the cost of an investment in a parent's common stock is
treated as a cost of treasury shares. The weighted average number of common
shares outstanding has been adjusted to reflect TOC's minority
stockholders' ownership percentage of treasury shares.
Subsequent to the acquisition of the minority interest in TOC, all common
shares of Outdoor Channel Holdings owned by TOC were retired.
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 Opinion 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 pro forma earnings (loss) per
common share assuming compensation cost had been determined for 2004, 2003
and 2002 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, and amortized over the vesting period are set forth
below:
2004 2003 2002
---------- ---------- ----------
Net income (loss):
As reported $ (26,719) $ 3,594 $ 2,205
Add: Stock-based employee compensation expense included
in reported net loss, net of tax effects* 31,444 -- --
Deduct: Stock-based employee compensation expense assuming
a fair value based method had been used for all awards,
net of tax effects* (36,063) (311) (195)
---------- ---------- ----------
Pro forma $ (31,338) $ 3,283 $ 2,010
========== ========== ==========
Basic earnings (loss) per share:
As reported $ (1.67) $ 0.26 $ 0.17
Pro forma $ (1.96) $ 0.24 $ 0.15
Diluted earnings (loss) per common share:
As reported $ (1.67) $ 0.19 $ 0.15
Pro forma $ (1.96) $ 0.17 $ 0.14
*See Note 3
50
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)
Stock Options (concluded)
- -------------------------
As a result of amendments of SFAS 123, the Company would be required to
charge the fair value of employee stock options to expense over the vesting
period beginning with its fiscal quarter ending September 30, 2005.
However, the Company intends to adopt the provisions of the amendments
effective for its fiscal quarter ending March 31, 2005.
In accordance with the provisions of SFAS 123, all other issuances of
common stock, stock options, warrants or other equity instruments to
employees and non-employees as the consideration for goods or services
received by the Company are accounted for based on the fair value of the
equity instruments issued (unless the fair value of the consideration
received can be more reliably measured). Generally, the fair value of any
options, warrants or similar equity instruments issued are estimated based
on the Black-Scholes option-pricing model.
Additional Required Pro Forma Disclosures Related to Employee Stock Options
- ---------------------------------------------------------------------------
The fair value of each option granted by the Company in 2004, 2003 and 2002
was estimated on the date of grant using the Black-Scholes options pricing
model with the following assumptions:
2004 2003 2002
---------------- ---------------- ----------------
Risk-free interest rate 1.7% - 4.2% 2.3% - 3.3% 4.65%
Dividend yield 0% 0% 0%
Expected life of the option 3 mos. - 10 yrs. 5-10 yrs. 5 yrs.
Volatility factor 41.7% - 79% 77% 83%
Sale or Issuance of Stock by Subsidiary
- ---------------------------------------
The Company recognizes non-operating gains from sales or issuances of
common stock by its subsidiaries directly to third parties where the
Company's ownership percentage in the subsidiaries is reduced by the
issuance of such stock and the amount received per share is more than the
Company's carrying amount per share.
Investments
- -----------
Pursuant to Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", the
Company's investments in marketable equity securities have been classified
as available-for-sale securities and, accordingly, are valued at fair value
at the end of each period. Any material unrealized holding gains and losses
arising from such valuation are excluded from net income and reported, net
of applicable income taxes, in other comprehensive income. Accumulated net
unrealized holding gains and losses are included at the end of each year in
accumulated other comprehensive income which is a separate component of
stockholders' equity.
Reclassifications
- -----------------
Certain amounts in the 2002 and 2003 consolidated financial statements have
been reclassified to conform to the 2004 presentations.
51
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 3 - ACQUISITION OF MINORITY INTEREST OF THE OUTDOOR CHANNEL, INC.
On September 8, 2004, the Company announced the completion of the
acquisition 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 3,070
shares of its common stock as well as options to purchase 4,012 additional
shares on September 8, 2004.
As previously disclosed by the Company, in October 2004, the Company
received notice from a TOC stockholder that the stockholder was exercising
dissenters' rights with respect to 144 previously outstanding TOC common
shares. The dissenter submitted a written demand that TOC repurchase the
dissenter's shares. On March 8, 2005, the dissenter withdrew this demand
and accepted 233 common shares of the Company in exchange for his 144
common shares of TOC. The number of shares exchanged reflects the exchange
ratio. For accounting purposes, the dissenter's shares have been deemed to
have been exchanged as of September 8, 2004 and the cost of those shares
has been recorded as additional goodwill as shown below.
The acquisition of 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.
In addition, in accordance with the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" the tax effects
of the intangible assets have been treated as additional consideration.
This additional consideration has also been allocated to goodwill.
The cost of the acquisition of the minority interest in TOC by Outdoor
Channel Holdings was $50,735 based on the issuance at the closing of 3,070
shares of Outdoor Channel Holdings' common stock (including the former
dissenter's shares) 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 certain other costs. Based on the analysis of the fair value of the
assets that were acquired and liabilities that were assumed, the
acquisition costs of $50,735 were allocated primarily to intangible assets
that are or are not subject to amortization as follows:
Estimated
Allocation Useful Life
---------- -----------
Multiple system operators relationships $ 10,573 Indefinite
Advertising customer relationships:
Short form 1,351 4 years
Long form 621 3 years
---------
Total identifiable intangible assets 12,545
Goodwill 39,418 Indefinite
Deferred tax liability associated
with intangible assets (4,212)
Minority interest in subsidiary 2,984
---------
Aggregate purchase price $ 50,735
=========
52
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 3 - ACQUISITION OF MINORITY INTEREST OF THE OUTDOOR CHANNEL, INC.
(CONCLUDED)
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 years ended December 31, 2004
and 2003 follows:
For the Years Ended December 31,
--------------------------------
2004 2003
-------- --------
Net revenues $ 39,954 $ 31,688
Net income $ 4,862 $ 3,946
Earnings per share:
Basic $ 0.27 $ 0.23
Diluted $ 0.22 $ 0.19
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.
53
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 4 - REVENUE TO BE EARNED UPON COLLECTION
As of December 31, 2004, the approximate scheduled payments to be
recognized as revenue, assuming such amounts are collected in future years
from existing Lost Dutchman's sales contracts, are as follows:
Years Ending
December 31, Amount
------------ ------
2005 $ 1,371
2006 1,157
2007 1,341
2008 1,377
2009 1,084
Thereafter 1,630
----------
Total $ 7,960
==========
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT AND AMORTIZABLE INTANGIBLE ASSETS
Property, plant and equipment at December 31, 2004 and 2003 consist of the
following:
2004 2003
---------- ----------
Membership division:
Land $ 2,480 $ 2,176
Equipment 1,240 1,073
Buildings and improvements 1,472 1,387
Furniture and fixtures 62 53
Vehicles 1,325 1,290
Leasehold improvements 86 75
---------- ----------
6,665 6,054
Less accumulated depreciation (3,138) (2,801)
---------- ----------
Subtotals 3,527 3,253
---------- ----------
Outdoor Channel:
Equipment 4,543 2,737
Furniture and fixtures 158 158
Vehicles 251 212
Leasehold improvements 556 462
Video library 211 211
---------- ----------
5,719 3,780
Less accumulated depreciation and amortization (2,520) (1,748)
---------- ----------
Subtotals 3,199 2,032
---------- ----------
Totals $ 6,726 $ 5,285
========== ==========
54
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT AND AMORTIZABLE INTANGIBLE ASSETS
(CONCLUDED)
Amortizable intangible assets at December 31, 2004 and 2003 are summarized
as follows:
2004 2003
---------- ----------
Advertising customer relationships $ 1,972 $ --
Trademark 219 219
---------- ----------
Subtotals 2,191 219
Less accumulated amortization (252) (101)
---------- ----------
Totals $ 1,939 $ 118
========== ==========
The approximate remaining useful economic lives of the advertising
customer relationships and trademark are 3.6 years and 7 years,
respectively.
For the years ended December 31, 2004 and 2003, the Company incurred $151
and $15 of amortization expense, respectively. The estimated aggregate
amortization expense for the years subsequent to December 31, 2004 is
$1,939.
NOTE 6 - NOTES PAYABLE, CAPITAL LEASE OBLIGATIONS AND LINES OF CREDIT
Notes Payable and Capital Lease Obligations
- -------------------------------------------
Notes payable and capital lease obligations at December 31, 2004 and 2003
consist of the following:
2004 2003
---------- ----------
Note payable to a bank, collateralized by
substantially all of the Company's assets,
guaranteed by two major stockholders, with
interest due monthly at the prime rate plus
1.00% (an effective rate of 5.00% at
December 31, 2003) $ -- $ 109
Capital lease obligations (see Note 7) 35 83
---------- ----------
Totals 35 192
Less current portion 26 133
---------- ----------
Long-term portion - notes payable and
capital lease obligations $ 9 $ 59
========== ==========
Bank Lines 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
September 5, 2005. The total amount which can be drawn upon under the line
of credit is $5,000. 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 in
full compliance with the loan covenants under the revolver as of December
31, 2004. As of December 31, 2004, we did not have any outstanding
borrowings under this revolving line of credit.
55
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 7 - COMMITMENTS
Operating Leases
- ----------------
The Company leases facilities and equipment, including access to satellites
for television transmission, under non-cancelable operating leases that
expire at various dates through 2010. Generally, the most significant
leases are satellite leases that require escalating rental payments. Rent
expense is recognized on a straight-line basis over each lease term. The
excess of the expense accrued over the amounts currently payable is
reflected as deferred satellite rent obligations in the accompanying
consolidated balance sheets.
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 stockholders 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. The
Company expects to renew the lease at prevailing market rates prior to its
expiration.
Rent expense, including rent paid to Musk Ox Properties, LP, aggregated to
approximately $2,604, $2,668 and $2,599 in the years ended December 31,
2004, 2003 and 2002, respectively.
Total rental commitments under the operating lease agreements described
above for years ending subsequent to December 31, 2004 are as follows:
Year Ending
December 31, Amount
------------ ----------
2005 $ 2,903
2006 1,693
2007 1,680
2008 1,680
2009 1,680
Thereafter 3,780
----------
Total $ 13,416
==========
Capital Leases
- --------------
The Company leases certain equipment under capital leases which expire on
various dates through 2006. At December 31, 2004, the Company's future
minimum lease payments are as follows:
Year Ending
December 31, Amount
------------ ----------
2005 $ 28
2006 9
----------
Total 37
Less amount representing an
interest rate of 9.5% (2)
----------
Present value of minimum lease payments 35
Less current portion 26
----------
Long-term portion $ 9
==========
The current and long-term portions of capital lease obligations are
included in notes payable and capital lease obligations in the accompanying
consolidated balance sheets (see Note 6).
56
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 8 - INCOME TAXES
The components of the provision (benefit) for income taxes for the years
ended December 31, 2004, 2003 and 2002 were as follows:
2004 2003 2002
---------- ---------- ----------
Current:
Federal $ 1,216 $ 2,410 $ 1,616
State 457 682 453
---------- ---------- ----------
Total current 1,673 3,092 2,069
---------- ---------- ----------
Deferred:
Federal (14,957) 58 (155)
State (4,353) 12 (32)
---------- ---------- ----------
Total deferred (19,310) 70 (187)
---------- ---------- ----------
Totals $ (17,637) $ 3,162 $ 1,882
========== ========== ==========
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 2004 and 2003 were related to the following:
2004 2003
---------- ----------
Deferred tax assets:
Stock option expense $ 19,869 $ --
Deferred revenues 371 556
Deferred rent 124 151
Current state taxes 77 247
Provision for doubtful accounts 82 93
Other accrued liabilities 57 88
Other 6 --
---------- ----------
20,586 1,135
---------- ----------
Deferred tax liabilities:
Fixed assets (345) (152)
Intangible assets (4,157) --
Other (24) (22)
---------- ----------
(4,526) (174)
---------- ----------
Deferred tax assets, net $ 16,060 $ 961
========== ==========
The provision (benefit) for income taxes reflected in the accompanying
consolidated statements of operations are different than those computed
based on the applicable statutory Federal income tax rate of 34% in 2004,
2003 and 2002 as shown below:
2004 2003 2002
---------- ---------- ----------
Federal income tax provision
(benefit)at statutory income
tax rate $ (14,849) $ 2,581 $ 1,588
State taxes, net of Federal benefit (2,571) 458 278
Non-deductible expense 38 63 35
Deferred compensation (198) -- --
Other (57) 60 (19)
---------- ---------- ----------
Income tax provision (benefit) $ (17,637) $ 3,162 $ 1,882
========== ========== ==========
57
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 9 - EQUITY TRANSACTIONS
Preferred Stock
- ---------------
There were 147 shares of the Company's common stock at December 31, 2001
reserved for issuance on the conversion of the 147 shares of convertible
preferred stock, then outstanding. During 2002, all of the preferred shares
were converted to common stock.
During 2002, the Company declared dividends on preferred stock for the
years 2001, 2000 and 1999. The total amount of dividends paid during 2002
amounted to $90.
As of December 31, 2004, 2003 and 2002, the Company was authorized to issue
up to 25,000, 25,000 and 10,000 shares of preferred stock, $0.001 par value
per share in one or more series with designations, rights and preferences
as determined by the Company's Board of Directors, respectively.
Changes in Common Stock Subscriptions Receivable by the Company
- ---------------------------------------------------------------
On June 22, 1993, certain stockholders and other individuals exercised
stock options for the purchase of a total of 260 shares of common stock. In
connection therewith, these individuals issued promissory notes, due June
30, 1999 (extended several times), to the Company whereby they were
obligated to pay a total of $221, plus interest at 4% per annum. During
2002, one of the subscribers provided the Company with consulting services
with a fair value of $32 and the Company offset its payable for the
services against subscriptions receivable of $25 and accrued interest
receivable of $7.
During 2002, the Company issued 80 shares of its common stock upon exercise
of stock options by ex-employees and others and received $36 of cash
payments for 29 shares and $66 of notes receivable for 51 shares. The notes
receivable bore interest at 5% per annum, were collateralized by 26 shares
of the Company's common stock and was due May 2004.
During 2003, the Company paid bonuses to certain stockholders who are also
employees totaling $251 by converting subscriptions receivable for common
stock of $196 and accrued interest on the receivables of $55. Subscriptions
receivable were also reduced by cash payments of $36 in 2003 and, as a
result, the balance of subscriptions receivable was reduced to $30 as of
December 31, 2003, which was paid in January 2004.
Issuances of Common Stock by the Company
- ----------------------------------------
During 2003, the Company issued 336 shares of common stock valued at $175
to a former Officer/Director for the payment of deferred compensation (see
Note 10).
During 2003, the Company (i) received cash proceeds of $268 from the
exercise of options for the purchase of 247 shares of common stock; (ii)
offset the $623 due from the exercise of options for the purchase of 663
shares at $0.90 per share against the balance of all stockholder loans
payable by the Company to the holder of the options; and (iii) offset the
$45 due from the exercise of options for the purchase of 50 shares of
common stock at $0.90 per share against the balance of a bonus payable to
the employee.
During 2004, the Company received cash proceeds of approximately $1,285
from the exercise of options for the purchase of 723 shares of the
Company's common stock and options for the purchase of 18 TOC shares of
common stock which were exercised prior to the merger under TOC's stock
option plan. The TOC stock option plan was assumed in conjunction with the
Company's acquisition of the remaining 17.6 % minority interest in TOC (see
Note 3).
Also during 2004, the Company issued an employee 75 shares of restricted
common stock. The rights to these shares vest over a five year period.
Based on the closing market price on the day before the grant of $13.90 per
share, the value of the stock was $1,043. This amount has been included in
deferred compensation as an offset to stockholders' equity and will be
amortized to compensation expense as the rights to the restricted stock
vest.
58
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 9 - EQUITY TRANSACTIONS (CONTINUED)
The Company's Stock Option Plans
- --------------------------------
The Company had five stock option plans: Stock Option Plan 1 ("Plan 1"),
Stock Option Plan 2 ("Plan 2"), 1995 Stock Option Plan (the "1995 Plan"),
Long-Term Incentive Plan (the "LTIP Plan"), and Non-Employee Director Stock
Option Plan (the "NEDSOP" Plan). During 2003, all holders of options under
Plan 1 and Plan 2 exercised all of the outstanding options under those two
plans. No more options may be granted under either of those two plans. In
addition, on September 8, 2004, TOC's 1997 Stock Option Plan (the "1997
Plan") was assumed by Outdoor Channel Holdings. No more options can be
issued under this plan. The Company also may grant stock options that are
not covered under any of the stock option plans.
As of December 31, 2004, the Company had an aggregate of 9,075 shares of
its common stock reserved for issuance under its various stock option/long
term incentive plans, of which 5,630 shares are subject to outstanding
options, 75 are issued as restricted common stock and 3,370 shares are
available for future grants. Options and stock grants are subject to terms
and conditions as determined by the Company's Board of Directors. Stock
option grants are generally exercisable in increments of 25% during each
year of employment beginning three months to one year from the date of
grant. Generally, stock options expire five years from the date of grant.
Options issued under our NEDSOP plan are generally exercisable 40% after
the first 3 months of service and 20% on the first anniversary of
appointment and each anniversary thereafter until 100% are vested.
59
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 9 - EQUITY TRANSACTIONS (CONTINUED)
The Company's Stock Option Plans (concluded)
- --------------------------------------------
A summary of the status of options granted under the five stock option
plans and outside of those plans as of December 31, 2004, 2003 and 2002 and
changes in options outstanding during the years then ended is presented in
the table that follows:
2004 2003 2002
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(in thousands) Price (in thousands) Price (in thousands) Price
-------------- ---------- -------------- ---------- -------------- ----------
Outstanding at
beginning of year 1,648 $ 6.57 1,751 $ 1.43 1,744 $ 1.25
Options granted 705 13.88 863 10.78 125 3.73
Options granted in
exchange for TOC
options (see Note 3) 4,012 0.98 -- -- -- --
Options exercised (723) 1.77 (960) 0.98 (80) 1.31
Options canceled
or expired (12) 5.71 (6) 1.74 (38) 1.81
------------ ------------ --------------
Options outstanding
at end of year 5,630 $ 4.12 1,648 $ 6.57 1,751 $ 1.43
============ ============ ==============
2004 2003 2002
-------------- -------------- -------------
Option price range at end of year $0.92 - $15.75 $1.20 - $12.50 $0.90 - $4.00
Options available for grant at end of year 3,370 -- 419
Weighted-average fair value of 705; 863; and 125 options
granted during 2004, 2003 and 2002, respectively,
with an exercise price equal to the market price at
the date of grant $ 8.21 $ 7.20 $ 2.36
Weighted-average fair value of 4,012 options
granted during 2004 with an exercise price
less than the market price at the date of grant $ 13.08 $ -- $ --
The following table summarizes information about stock options outstanding
at December 31, 2004, all of which are at fixed prices:
Options Outstanding Options Exercisable
--------------------------- --------------------------------
Weighted Average Weighted
Range of Number Remaining Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices (in thousands) Life Price (in thousands) Price
- --------------- -------------- ----------- ---------- -------------- ----------
$ 0.92 - $ 1.20 3,519 2.9 years $ 0.93 3,519 $ 0.93
$ 1.40 - $ 3.08 457 2.2 years $ 1.55 457 $ 1.55
$ 3.20 - $ 6.14 224 2.4 years $ 4.11 121 $ 3.48
$11.60 - $15.75 1,430 6.5 years $ 12.80 482 $ 12.69
------------ -------------
5,630 $ 4.12 4,579 $ 2.30
============ =============
60
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 9 - EQUITY TRANSACTIONS (CONTINUED)
Changes in Outstanding Common Shares of TOC and Shares Owned by the Company
- ---------------------------------------------------------------------------
The changes in the number of outstanding common shares of TOC and the
changes in the number of shares and the percentage owned by the Company
during 2004, 2003 and 2002 are summarized below:
Common Shares Owned by the Company
Outstanding -------------------------
of TOC Shares Percent
----------- ----------- -----------
Balance January 1, 2002 10,524 8,818 83.8%
===========
Effects of shares issued by TOC 18 --
----------- -----------
Balance December 31, 2002 10,542 8,818 83.6%
===========
Effects of shares issued by TOC 126 --
----------- -----------
Balance December 31, 2003 10,668 8,818 82.7%
===========
Effects of shares issued by TOC 40 --
----------- -----------
Balance September 8, 2004 10,708 8,818 82.4%
=========== =========== ===========
During 2002, TOC issued 18 shares at prices ranging from $1.50 to $5.00 per
share to board members and employees for services performed and upon the
exercise of stock options. The Company recorded gains from issuance of the
shares of $47 in 2002. It also recorded an increase in minority interests
as a result of such issuances of $6.
During 2003, TOC issued 126 shares to a former director upon his election
to take payment of deferred compensation in the form of stock of the
Company and TOC (see Note 10). The Company did not record a gain or loss
during 2003 because the price of the stock issued approximated the carrying
value of the Company's investment in the subsidiary. This issuance in 2003
caused an increase in minority interest of $142.
During 2004, TOC issued 18 shares in connection with employees exercising
options under its 1997 Plan. Further, TOC issued 22 shares to directors
owed for services rendered prior to 2000.
61
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 9 - EQUITY TRANSACTIONS (CONCLUDED)
TOC's Stock Option Plan
- -----------------------
Under the 1997 Plan, TOC could grant incentive and non-qualified stock
options to its employees, directors, consultants and service providers to
purchase up to an aggregate of 3,000 shares of its common stock at an
exercise price determined by the administrator subject to one of the
following: (a) the exercise price of an incentive option could not be less
than 100% of the fair market value of the common stock at the date of the
grant; and (b) the exercise price of a non-qualified option could not be
less than 85% of the fair market value of the common stock at the date of
the grant.
A summary of the status of TOC's 1997 Plan at December 31, 2004, 2003 and
2002 and changes during the years then ended is presented in the table
below:
2004 2003 2002
----------------------- ----------------------- ------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
or Price Exercise or Price Exercise or Price Exercise
Per Share Price Per Share Price Per Share Price
----------- ---------- ----------- ---------- ----------- ----------
Options outstanding at
beginning of year 2,487 $ 1.60 2,492 $ 1.59 2,505 $ 1.60
Options exercised 18 1.83 -- -- (4) 1.50
Options cancelled -- -- (5) 1.50 (9) 1.50
----------- ----------- -----------
Options exchanged for
Company options
(see Note 3) (2,469) $ 1.59
Options outstanding at
end of year -- -- 2,487 $ 1.60 2,492 $ 1.59
=========== =========== ===========
Option price range at
end of year -- $1.50-$5.00 $1.50-$5.00
Options available for
grant at end of year -- 505 500
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company had an agreement with a director, who was also one of its
officers, pursuant to which a portion of the officer's compensation, prior
to 2002, had been paid in cash and the remainder was deferred. The deferred
portion was payable by the Company in cash or shares of the common stock of
the Company and/or TOC at a future date, at the election of the director.
If payments were in the form of shares, such payments were to be based on
the market value of the shares at the time the services were rendered.
During 2003, the director/officer left the Company at which time he elected
to receive shares as compensation. Deferred compensation under the
agreement totaled $318. The Company and TOC issued 336 and 126 shares,
respectively, to satisfy their obligations to the director (see Note 9).
Additionally, the Company incurred $625 in severance costs, including
related legal fees, in connection with his resignation.
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 stockholders 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 totaled approximately $244, $242 and $237 in 2004, 2003 and 2002,
respectively.
Interest expense on stockholder loans aggregated to $20 in 2003. All
stockholder loans were paid by June 2003.
62
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 11 - 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 and
Membership Division.
TOC is a separate business activity that broadcasts television programming
24 hours a day, seven days a week. TOC generates revenue from advertising
fees (which include fees paid by outside producers to purchase advertising
time in connection with the airing of 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
magazine sales, the sale of products and services related to gold
prospecting, gold expositions, expeditions 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
Outing segment information is now included in the Membership Division
information.
Information with respect to these reportable segments for the years ended
December 31, 2004, 2003 and 2002 are as follows:
Income (Loss)
Before Income Additions to
Taxes and Depreciation Property,
Minority Total and Plant and
Revenues Interest Assets Amortization Improvements
------------ ------------ ------------ ------------ ------------
2004
- ----
TOC $ 34,596 $ 9,954 $ 21,872 $ 779 $ 1,938
Membership Division 5,358 354 6,857 344 611
------------ ------------ ------------ ------------ ------------
Subtotal of Segments 39,954 10,308 28,729 1,123 2,549
Corporate* -- (53,982) 68,381 136 --
------------ ------------ ------------ ------------ ------------
Totals $ 39,954 $ (43,674) $ 97,110 $ 1,259 $ 2,549
============ ============ ============ ============ ============
2003
- ----
TOC $ 26,835 $ 9,315 $ 13,855 $ 558 $ 1,274
Membership Division 4,853 (619) 5,993 322 650
------------ ------------ ------------ ------------ ------------
Subtotal of Segments 31,688 8,696 19,848 880 1,924
Corporate* -- (1,043) -- -- --
------------ ------------ ------------ ------------ ------------
Totals $ 31,688 $ 7,653 $ 19,848 $ 880 $ 1,924
============ ============ ============ ============ ============
2002
- ----
TOC $ 16,680 $ 4,457 $ 7,476 $ 341 $ 931
Membership Division 4,713 164 4,354 308 169
------------ ------------ ------------ ------------ ------------
Totals $ 21,393 $ 4,621 $ 11,830 $ 649 $ 1,100
============ ============ ============ ============ ============
Intersegment sales amounted to $595, $473 and $385 for 2004, 2003 and 2002,
respectively.
*The Company captured corporate overhead, commencing in 2003 that is
applicable to both segments, but not directly related to operations in a
separate business unit, "Corporate." The expenses allocated to Corporate
consisted primarily of: professional fees including public relations,
accounting and legal fees; severance associated with the resignation of an
officer/director in November 2003; and the cost of bonuses paid through an
offset against stock subscriptions receivable.
63
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's material financial instruments consist of its cash and cash
equivalents, investments in available-for-sale securities, accounts
receivable, accounts payable, notes payable, capital lease obligations and
related party receivables and payables. The carrying amounts of the
Company's financial instruments generally approximated their fair values at
December 31, 2004, 2003 and 2002. 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.
NOTE 13 - CONTINGENCIES
The Company is, from time to time, involved in litigation as both plaintiff
and defendant arising in the ordinary course of business. In the opinion of
management, the results of any pending litigation should not have a
material adverse effect on the Company's financial position or operating
results.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments and accounts receivable. The Company reduces credit risk by
placing its temporary cash investments with major financial institutions
with high credit ratings. At December 31, 2004, the Company had cash and
cash equivalents balances of approximately $13,105 with major financial
institutions in certain investment accounts which were not covered by the
Federal Deposit Insurance Corporation.
The Company reduces credit risk related to accounts receivable by routinely
assessing the financial strength of its customers. The Company maintains an
allowance for doubtful accounts based on the credit risk of specific
customers, historical trends and other information that management believes
will adequately provide for credit losses.
During 2003, the Company entered into a contract to sponsor a driver in 17
professional car races to be held during 2003 and 2004. As amended, the
contract calls for a total sponsorship price of $1,000 for the 17 races of
which the Company had paid $250 during 2003. The remainder of the amount
due was contingent on whether the Company's sponsored driver qualified for
the upcoming races during 2004. All amounts under this contract were paid.
During 2004, the Company entered into a contract to sponsor a driver in 16
professional car races to be held during 2005. As amended, the contract
calls for a total sponsorship price of $1,250 for the 16 races. As
additional compensation, the Company had agreed to air a number of 30
second advertisements for associate sponsors. The aggregate commitment is
for $500 worth of advertising which will be based on the Company's
prevailing rates at the time of the airings. The Company may, at its
option, elect to renew the relationship for the 2006 and again for the 2007
seasons with certain cost escalators.
Programming and talent commitments of the Company, estimated to aggregate
approximately $6,394 as of December 31, 2004, included $5,994 for
programming, and $400 for a talent contract. Such fees are payable over
several years, as part of the normal course of business as follows:
Years Ending
December 31, Amount
------------- -----------
2005 $ 2,417
2006 2,233
2007 1,644
2008 100
-----------
Total $ 6,394
===========
On February 22, 2005, the Company announced its intention to purchase a
building in Temecula, California for approximately $2,600. This building is
planned to house the Company's broadcast facility including its master
control, uplink satellite dish and various programming personnel. Currently
the Company estimates that capital expenditures to complete the build-out
including updating equipment could exceed $8,000.
64
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 14 - 401(K) SAVINGS PLAN
The Company maintains a 401(k) Plan (the "401(k) Plan"). The Company is
required to make matching contributions to the 401(k) Plan in the amount of
50% of the first 6% of wages deferred by each participating employee.
During 2004, 2003 and 2002, the Company incurred a total charge of
approximately $91, $73 and $47 for employer matching contributions,
respectively.
NOTE 15 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Three Months Ended
------------------------------------------------------
March 31 June 30 September 30 December 31
----------- ----------- ------------ -----------
2004
Revenue $ 9,220 $ 9,569 $ 10,965 $ 10,200
Income (loss) from operations* 2,290 1,757 (49,956) 2,120
Net income (loss)* 1,113 844 (30,264) 1,588
Earnings (loss) per common share:
Basic $ 0.08 $ 0.06 $ (1.92) $ 0.09
Diluted $ 0.06 $ 0.04 $ (1.92) $ 0.07
2003
Revenue $ 7,444 $ 7,181 $ 8,443 $ 8,620
Income from operations 1,856 1,361 2,577 1,833
Net income 921 667 1,285 721
Earnings per common share:
Basic $ 0.07 $ 0.05 $ 0.09 $ 0.05
Diluted $ 0.06 $ 0.05 $ 0.08 $ 0.03
All per share data has been adjusted to reflect the 5 for 2 forward split
of our stock effective September 15, 2004. (see Note 1)
* 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 income tax benefit. Outdoor Channel
Holdings issued fully-vested options to purchase approximately 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.
* * *
65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer, Chief Financial Officer, and Chief Accounting Officer has
evaluated the effectiveness of the Company's disclosure controls and procedures
as of December 31, 2004. Based on this evaluation, the Company's Chief Executive
Officer, Chief Financial Officer, and Chief Accounting Officer concluded that
the Company's disclosure controls and procedures are effective as of December
31, 2004 to ensure that information required to be disclosed by the registrant
in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms.
During the fiscal quarter ended December 31, 2004, there was no change in
the Company's internal control over financial reporting that materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
66
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of our
executive officers and directors as of March 15, 2005. Their respective
backgrounds are described below.
EXECUTIVE OFFICERS AND DIRECTORS:
- ---------------------------------
NAME AGE POSITION
- ---- --- --------
Perry T. Massie 42 Chief Executive Officer, President,
Director-Chairman of the Board, and
Co-President of The Outdoor Channel, Inc.
William A. Owen 46 Chief Financial Officer and Controller
Thomas H. Massie 39 Executive Vice President, Secretary and
Director-Vice Chairman of the Board
Andrew J. Dale 50 Chief Executive Officer and Co-President
of The Outdoor Channel, Inc.
Thomas E. Hornish 45 General Counsel
Jerry R. Berglund 56 Director
David C. Merritt 50 Director
Ray V. Miller 71 Director
Elizabeth J. Sanderson 51 Director
T. Bahnson Stanley 52 Director
PERRY T. MASSIE has served as a director of Outdoor Channel Holdings, Inc.
since 1984, as its Chief Executive Officer since 1986, and has served as its
President and Chairman of the Board since 1994. From 1986 until 1996, he also
served as the Chief Financial Officer of Outdoor Channel Holdings, Inc. Mr.
Massie has served as Co-President of The Outdoor Channel, Inc. since 1998. He is
the Managing Editor of the "Gold Prospectors & Treasure Hunters in the Great
Outdoors" magazine and is also the host of the "Prospecting America" show. Mr.
Massie earned a Bachelor of Science degree in Mining Engineering from the
University of Alaska, Fairbanks. Perry T. Massie is the brother of Thomas H.
Massie.
WILLIAM A. OWEN has served as the Chief Financial Officer of Outdoor
Channel Holdings, Inc. since November 2003 and as its Controller since July
2004. From 1998 to 2003, he served as Chief Financial Officer of Cruttenden
Partners, LLC an investment firm. In 1999, Mr. Owen also served as Chief
Financial Officer and Chief Administrative Officer for E*OFFERING Corp., an
on-line investment banking firm developed by Cruttenden Partners, LLC., which
was sold to Wit Soundview Corporation in 2000. From 1991 to 1998, Mr. Owen
served as Vice President, Corporate Finance for Cruttenden Roth Incorporated, an
investment banking firm. From 1990 to 1991, he was a Managing Director for Tuerk
& Associates, an investment banking firm. From 1985 to 1989 Mr. Owen was a Vice
President for The Geneva Companies, a firm specializing in conducting mergers
and acquisitions and business valuations. From 1982 to 1985, Mr. Owen was an
Auditor for Price Waterhouse, a public accounting firm and earned his CPA
certificate. He earned his Masters in Business Administration at the University
of California - Irvine and his Bachelor of Arts Degree in Business and
Administration from Fort Lewis College.
THOMAS H. MASSIE has served as a director and the Secretary of Outdoor
Channel Holdings, Inc. since 1984, its Executive Vice President since 1994 and
as its Vice Chairman of the Board since 1999. Mr. Massie is also the host of the
"Gold Fever" show. He attended the University of Alaska, Fairbanks, studying
business administration. Thomas H. Massie is the brother of Perry T. Massie.
ANDREW J. DALE has served as Chief Executive Officer and Co-President of
The Outdoor Channel, Inc. since 1998. He was Chief Operating Officer of The
Outdoor Channel, Inc. from 1997 to 1998. From 1994 to 1997 he was Senior Vice
President Operations of The Outdoor Channel, Inc. From 1990 to 1993, he was a
video and television consultant to both Outdoor Channel Holdings, Inc. and The
Outdoor Channel, Inc. Mr. Dale began his television career in 1982 working at
Financial News Network, or "FNN", an early cable news channel. He is currently a
member of the Cable Television Association for Marketing, the Society of Motion
Picture and Television Engineers, and serves on the Satellite Network Committee
for the National Cable Telecommunications Association. In 2001 and 2002 he was
listed as one of the top 100 most influential people in the cable industry by
CableFax Magazine.
THOMAS E. HORNISH has served as our General Counsel since December 2004.
From February 2003 to December 2004, he served as "Of Counsel" with Paul,
Hastings, Janofsky & Walker LLP, an international law firm. Prior to that, he
was an associate attorney with Brobeck Phleger & Harrison LLP since 1996. Mr.
Hornish is licensed to practice law in California and Illinois, and is also a
registered patent attorney. He is a decorated veteran with more than 20 years
experience in the U.S. Air Force and is currently serving as a reservist in the
Air Force. Mr. Hornish earned his Juris Doctorate degree in 1995 from The Ohio
State University, Order of the Coif, while also attending the University of
Chicago. He also holds a Bachelor of Science degree in chemical engineering from
The Ohio State University.
67
JERRY R. BERGLUND has served as a director of Outdoor Channel Holdings,
Inc. since September 2004 and had previously served as a director of The Outdoor
Channel, Inc. since 1999. From 1988 to 1996, Mr. Berglund was the primary owner
and President of Denpak, a wood product distribution and manufacturing company
that he co-founded. In 1996, Denpak was purchased by a subsidiary of Wolseley
PLC of Great Britain. Mr. Berglund stayed on as vice-president and consultant
until September of 2000. Mr. Berglund actively serves on the Boards of Colorado
Uplift and the Foundation for Urban Youth Ministries, both of which are inner
city charities for youth in the Denver area. He earned a Bachelor of Science
degree in Agricultural Economics from the University of California at Berkeley
in 1970.
DAVID C. MERRITT has served as a director of Outdoor Channel Holdings, Inc.
since December 2003. He has served as a director of Charter Communications,
Inc., a provider of cable television and other communication services, since
July 2003. Mr. Merritt has been a Managing Director at Salem Partners LLC, an
investment banking firm, since October 2003. From January 2001 through April
2003, Mr. Merritt served as Managing Director in the Entertainment Media
Advisory Group at Gerard Klauer Mattison & Co., Inc., a company that provides
advisory services to the entertainment media industries. He has also served as a
director of Laser-Pacific Media Corporation from January 2001 to October 2003.
He served as Chief Financial Officer of CKE Associates, Ltd., a privately held
company with interests in talent management, film production, television
production, music and new media from 1999 to 2000. Before joining CKE Associates
in 1999, Mr. Merritt was an audit and consulting partner of KPMG LLP for 14
years. During that time, he served as national partner in charge of the media
and entertainment practice. Mr. Merritt holds a B.S. degree in business and
accounting from California State University -- Northridge.
RAY V. MILLER has served as a director of Outdoor Channel Holdings, Inc.
since September 2004 and had previously served as a director of The Outdoor
Channel, Inc. since 1997. Mr. Miller has been Chairman of Carolina Mountain
Cablevision, Inc., an independent cable television operator in North Carolina
since 2002. From 1990 to present, Mr. Miller has been Chairman of Country
Cablevision, Inc., an independent cable television operator in North Carolina.
Mr. Miller was a director of the NCTC from 1992 to 2001 and served as Chairman
of the NCTC until 2001. Mr. Miller also served as Vice Chairman of the First
Western Bank from 1997 to 2001.
ELIZABETH J. SANDERSON has served as a director of Outdoor Channel
Holdings, Inc. since September 2004 and had previously served as a director of
The Outdoor Channel, Inc. since 1997. Ms. Sanderson has been a practicing
attorney since 1984, and has been an interviewer for the Oral History Project of
the National Cable Television Center from 1997 to present. Ms. Sanderson served
as a director from 1993 to 1997 of the National Cable Television Center and from
1994 to 1995 she served as Chairperson. From 1997 to 1999, Ms. Sanderson served
as Chair of TRD Frameworks (formerly known as The Research Department). From
1991 to 1997, Ms. Sanderson served on the Boards of People's Communications
Companies, for rural telephone, fiber-optic and cable plant construction,
internet and cellular divisions, and as President of People's Broadband
Communications, a cable television operating company. Ms. Sanderson earned her
B.A. after attending Colorado College and the University of Freiburg, Germany.
Ms. Sanderson earned law degrees from Pepperdine University and the University
of British Columbia.
T. BAHNSON STANLEY has served as a director of Outdoor Channel Holdings,
Inc. since January 2004. From 1991 to 2003, Mr. Stanley served in various
positions for Landmark Communications, Inc. most recently as Executive Vice
President -- Strategy and Development -- The Weather Channel Companies(R). While
with Landmark, he was responsible for strategy, new business development and
operations of various properties such as The Travel Channel and The Weather
Channel. From 1985 to 1991, Mr. Stanley held the position of Vice President --
Investment Banking with Scott & Stringfellow (now a division of BB&T
Corporation). From 1980 to 1985, Mr. Stanley served in various positions within
Landmark Communications, Inc. As the Director of Business Development, Cable and
Broadcast, Mr. Stanley developed the strategy and tactics to convert The Weather
Channel from a free service to subscriber fee based service. Mr. Stanley earned
his MBA from the University of Virginia and his BA degree from Duke University.
68
CLASSIFIED BOARD
Our board of directors is divided into three classes. The term of office
and directors consisting of each class is as follows:
- --------------------------------------------------------------------------------
CLASS DIRECTORS TERM OF OFFICE
- --------------------------------------------------------------------------------
Class I Jerry R. Berglund Expires at the annual meeting of
Ray V. Miller stockholders in 2005 and at each third
succeeding annual meeting thereafter.
- --------------------------------------------------------------------------------
Class II David C. Merritt Expires at the annual meeting of
Thomas H. Massie stockholders in 2006 and at each third
Elizabeth J. Sanderson succeeding annual meeting thereafter.
- --------------------------------------------------------------------------------
Class III Perry T. Massie Expires at the annual meeting of
T. Bahnson Stanley stockholders in 2007 and at each third
succeeding annual meeting thereafter.
- --------------------------------------------------------------------------------
The classification of directors has the effect of making it more difficult
to change the composition of the board of directors.
BOARD COMMITTEES
Our board of directors currently has a standing audit committee and a
compensation committee and may from time to time establish other committees.
AUDIT COMMITTEE
Our audit committee is directly responsible for the appointment,
compensation, retention and oversight of our independent auditors and reviews
our financial statements and internal controls. The current members of our audit
committee are Messrs. Berglund, Stanley and Merritt, who chairs the committee.
The board of directors has determined that each member of the Audit Committee is
independent, as defined in Rule 4200(a)(15) of the Nasdaq Stock Market
Marketplace Rules (the "Nasdaq Rules") and under Rule 10A-3 promulgated by the
Securities and Exchange Commission. The board of directors has determined that
Mr. Merritt is an audit committee financial expert for purposes of the rules and
regulations of the Securities and Exchange Commission.
COMPENSATION COMMITTEE
Our compensation committee is responsible for determining, either alone or
with the other independent directors, or recommending to the board, the
compensation and benefits of our executive officers and other key employees,
administers our stock option plans and establishes and reviews general policies
relating to compensation and benefits of all of our employees. The current
members of the compensation committee are Messrs. Miller, Stanley and Ms.
Sanderson, who chairs the committee.
COMPENSATION OF DIRECTORS
Directors who are also employees do not receive any fees or remuneration,
as such, for service on our board or any board committee.
In fiscal year 2004, each non-employee director was entitled to receive an
annual retainer of $18,000 for service on the board and the Chair of the Audit
Committee received an annual retainer of $5,000 for serving in that capacity. In
addition, non-employee directors of Outdoor Channel Holdings, Inc. received
meeting fees of $500 for each special meeting of the board of directors and for
each committee meeting attended by the director. In addition, during fiscal year
2004, Outdoor Channel Holdings, Inc. paid $9,335, $10,809 and $6,198 for the
healthcare insurance premiums for Mr. Berglund, Mr. Miller and Ms. Sanderson,
respectively.
In fiscal year 2005, each non-employee director is entitled to receive an
annual retainer of $24,000 for service on the board, $1,000 for each meeting of
the board of directors and $500 for each Audit Committee, Compensation Committee
or Non-Employee Directors meeting attended by the director. In addition, the
Chair of the Audit Committee is to receive an annual retainer of $7,500 for
serving in that capacity and the Chair of the Compensation Committee is to
receive an annual retainer of $2,500 for serving in that capacity.
Pursuant to our Non-Employee Directors Stock Option Plan, each non-employee
director receives an option to purchase 125,000 shares of common stock when they
initially join the board of directors, and each current non-employee director
has received such an option.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
69
o any breach of their duty of loyalty to the corporation or its
stockholders;
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
o any transaction from which the director derived an improper personal
benefit.
Our bylaws provide that we will indemnify our directors and officers to the
fullest extent permitted by law, including if he or she is serving as a
director, officer, employee or agent of another company at our request. Our
bylaws also permit us to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
connection with their services to us, regardless of whether our bylaws permit
such indemnification.
We have entered into separate indemnification agreements with our directors
and executive officers, in addition to the indemnification provided for in our
bylaws. These agreements, among other things, provide that we will indemnify our
directors and executive officers for certain expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by a director or
executive officer in any action or proceeding arising out of such person's
services as one of our directors or executive officers, or any of our
subsidiaries or any other company or enterprise to which the person provides
services at our request. We believe that these provisions and agreements are
necessary to attract and retain qualified persons as directors and executive
officers.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Except as follows, and based solely upon its review of the copies of
reports furnished to the Company, or representations that no annual Form 5
reports were required, the Company believes that all filing requirements under
Section 16(a) of the Exchange Act applicable to its directors, officers and any
persons holding ten percent (10%) or more of the Company's Common Stock with
respect to the Company's fiscal year ended December 31, 2004, were satisfied. In
connection with various transfers related to the estate planning for the Miller
family, the Company is aware that Mr. Ray V. Miller had a late filing of his
Form 5 for fiscal year 2004.
CODE OF CONDUCT AND ETHICS
The board of directors has adopted a code of conduct and ethics that
applies not only to the Company's principal executive officer, principal
financial officer and principal accounting officer as required by the Securities
and Exchange Commission, but also to all of its employees. The full text of the
code is published on the Company's web site at www.outdoorchannelholdings.com in
the "Corporate Governance" section. If the Company makes any amendments to, or
grants any waivers of, a provision of the code of conduct and ethics applicable
to its principal executive officer, principal financial officer or principal
accounting officer, the Company intends to disclose such amendment or waiver on
its website. Information on the Company's website, however, does not form a part
of this annual report on Form 10-K.
70
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth compensation received for the fiscal years
ended December 31, 2004, 2003 and 2002 by (i) our Chief Executive Officer, (ii)
our three other most highly compensated executive officers at the end of fiscal
year 2004 and whose salary and bonus exceeded $100,000 for fiscal year 2004, and
(iii) the Chief Executive Officer and Co-President of our subsidiary The Outdoor
Channel, Inc., who was not deemed to be an executive officer of Outdoor Channel
Holdings, Inc. until September 2004. We refer to these individuals as the Named
Executive Officers.
SUMMARY COMPENSATION TABLE
-------------------------------------------------------------------------------------------------
Other Annual Restricted Securities All Other
Compensation Stock Underlying Compensation
Name and Principal Position Year Salary ($) Bonus ($) (1) ($) (2) Awards ($) Options (#) ($) (3)
- --------------------------- ---- ---------- ------------- ------------ ----------- ----------- ------------
Perry T. Massie, CEO 2004 191,538 103,086 - - - 4,875
2003 164,448 70,382 - - - 72,547
2002 138,680 44,675 - 4,500(4) - 7,113
William A. Owen, CFO 2004 171,923 41,960 - - - 982
And Controller (5) 2003 28,846 21,000 - - 500,000 -
Thomas H. Massie, 2004 192,256 94,720 - - - 4,875
Executive VP 2003 146,058 66,240 - - - 76,405
2002 137,000 35,570 - 4,500(4) - 7,113
Andrew J. Dale, CEO 2004 208,731 170,160 - - - 6,262
and Co- President of The 2003 178,154 62,000 - - - 5,345
Outdoor Channel, Inc. 2002 132,000 48,750 - - - 8,773
Thomas E. Hornish 2004 10,000(6) -- - 1,042,500(7) 125,000 -
General Counsel
- -----------------------------------------------------------------------------------------------------------------------------------
- ----------
(1) Bonus amounts are disclosed in the fiscal year in which they were paid.
(2) No perquisites were paid to any Named Executive Officer during 2004, 2003 or
2002.
(3) Included in the amounts for this column for 2003 are $19,750 and $23,750 for
Messrs. P. Massie and T. Massie, respectively, for service on the board of
directors of The Outdoor Channel, Inc. Also included in this column for 2003 are
$48,011 and $48,011 for Messrs. P. Massie and T. Massie, respectively, received
by each individual as a bonus by canceling subscriptions receivable for common
stock and the interest thereon. The other amounts in this column for each of the
individuals represent contributions to our 401k plans.
(4) Represents the dollar value of stock awards consisting of 1,350 fully vested
shares of common stock of The Outdoor Channel, Inc. as compensation for serving
as a director of The Outdoor Channel, Inc.
(5) Mr. Owen was hired in October 2003 and the amounts disclosed for 2003
represent his compensation in 2003 since such date. In July 2004, Mr. Owen
assumed the additional responsibilities of Controller and principal accounting
officer.
(6) Mr. Hornish was hired in December 2004 and the amounts disclosed for 2004
represent his compensation since such date.
(7) Consists of 75,000 shares which vest 20% per year over five years beginning
December 13, 2005; dividends paid, if any, on such shares shall be held by us
and paid only upon the vesting of such shares. As of December 31, 2004, Mr.
Hornish held 75,000 restricted shares of common stock and the value of such
shares was $1,042,500 as determined by the closing sales price of $13.90 per
share as reported on the Nasdaq National Market as of such date.
71
STOCK OPTIONS
The following table shows all stock option grants to the Named Executive
Officers during fiscal year 2004.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
--------------------------------------------------------
POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL
TOTAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO EXERCISE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM (1)
OPTIONS IN FISCAL PRICE EXPIRATION --------------------------
NAME GRANTED (#) YEAR ($/SH) DATE 5% ($) 10% ($)
---- ----------- ---------- -------- ---------- ------------ -----------
Thomas E. Hornish 125,000 17.7 $13.90 12/13/2009 480,039 1,060,761
- ----------
(1) Potential realizable value is based on an assumption that our common stock
appreciates at the annual rate shown (compounded annually) from the date of
grant until the end of the option term. Such amounts are based on the
assumption that the named persons hold the options for their full term.
These numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission and do not reflect our estimate of
future share price growth.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth for the option exercises by the Named
Executive Officers for the fiscal year ended December 31, 2004, and exercisable
and unexercisable options held by them as of December 31, 2004.
The "Value of Unexercised In-the-Money Options at Fiscal Year-End " is
calculated based on the difference between the closing sales price of $13.90 per
share as of December 31, 2004 as reported on the Nasdaq National Market and the
exercise price for the shares underlying the option, multiplied by the number of
shares issuable upon exercise of the option.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised in-the-
Underlying Unexercised Money Options at Fiscal
Options at Fiscal Year-End(#) Year-End ($)
Value
Shares Acquired Realized
Name on Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------ --------------- -------------- ----------- ------------- ----------- -------------
Perry T. Massie - - 487,500 - 6,326,239 -
Thomas H. Massie - - 487,500 - 6,326,239 -
Andrew J. Dale - - 406,250 - 5,271,866 -
Thomas E. Hornish - - - 125,000 - -
William A. Owen - - 175,000 325,000 402,500 747,500
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
As of December 31, 2004 we did not have any employment contracts with any
of our employees.
Upon a change in control of the Company or a sale of substantially all of
the Company's assets, the vesting of previously unvested options to purchase
common stock and previously unvested restricted shares of common stock held by
our employees and directors accelerates 100% and such options and restricted
shares become fully vested.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to establishing the compensation committee, the board of directors as
a whole made decisions relating to compensation of our executive officers. No
member of the Company's compensation committee was at any time during fiscal
year 2004 or at any other time an officer or employee of the Company. No
executive officer of the Company served on the board of directors or
compensation committee of any entity which has one or more executive officers
serving as members of the Company's board of directors or compensation
committee.
72
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
EQUITY COMPENSATION PLAN INFORMATION
We have six compensation plans approved by stockholders under which our
equity securities are authorized for issuance to employees or directors in
exchange for goods or services: the 1995 Stock Option Plan; The Outdoor Channel,
Inc. 1997 Stock Option Plan under which we assumed the outstanding options;
stock option agreements with two employees, the Non-Employee Directors Stock
Option Plan and the 2004 Long-term Incentive Plan.
The following table summarizes information about our equity compensation
plans at December 31, 2004:
(D)
NUMBER OF
SECURITIES
(B) (C) REMAINING AVAILABLE
(A) NUMBER OF WEIGHTED- FOR FUTURE ISSUANCE
NUMBER OF SECURITIES TO BE AVERAGE EXERCISE UNDER EQUITY
SHARES OF ISSUED UPON PRICE OF COMPENSATION PLANS
RESTRICTED EXERCISE OF OUTSTANDING (EXCLUDING
STOCK ISSUED OUTSTANDING OPTIONS, SECURITIES REFLECTED
(SUBJECT TO OPTIONS, WARRANTS WARRANTS IN COLUMNS (A) AND
VESTING) AND RIGHTS AND RIGHTS (B))
---------------- ---------------- ---------------- ----------------
Equity compensation plans
approved by security
holders 75,000 5,629,875 $ 4.12 3,370,000(1)
Equity compensation plans
not approved by security
holders (2) -- -- -- --
---------------- ---------------- ---------------- ----------------
75,000 5,629,875 $ 4.12 3,370,000(1)
================ ================ ================ ================
(1) On December 31, 2004, 375,000 and 2,995,000 shares were available under the
Non-Employee Directors Stock Option Plan and the 2004 Long-tem Incentive Plan,
respectively, for future grants of stock options or sale of stock. No future
grants of stock options or direct issuance of stock may be made under any of our
other equity compensation plans.
(2) There are no equity compensation plans (including individual compensation
arrangements) not approved by the Company's security holders.
73
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 15, 2005 by each director
and executive officer of the Company, each person known to the Company to be the
beneficial owner of more than 5% of the outstanding common stock, and all
directors and executive officers of the Company as a group. Except as otherwise
indicated below, the Company believes that each person listed below has sole
voting and investment power with respect to the shares owned, subject to
applicable community property laws.
NAME AND ADDRESS OF BENEFICIAL SHARES BENEFICIALLY
OWNER OR IDENTITY OF GROUP (1) OWNED (2)
------------------------------ ----------------------
NUMBER PERCENT
------ -------
Thomas H. Massie (3)............................ 7,321,837 38.5%
Perry T. Massie (4)............................. 7,313,407 38.5%
Musk Ox Investments, LP (5)..................... 3,226,655 17.4%
Elizabeth J. Sanderson (6)...................... 1,305,592 6.7%
Ray V. Miller (7)............................... 1,146,300 6.0%
Jerry R. Berglund (8)........................... 811,674 4.3%
Andrew J. Dale (9).............................. 485,250 2.6%
William A. Owen (10)............................ 225,000 1.2%
David C. Merritt (11)........................... 75,000 <1%
T. Bahnson Stanley (12)......................... 75,000 <1%
Thomas E. Hornish (13).......................... 100,000 <1%
Richard K. Dickson II (14)...................... 1,849,664 9.8%
42950 Calle Sauza,
Temecula, CA 92590
All directors and executive
officers as a group (10 persons) (15)....... 15,498,125 69.7%
- -----------
(1) Unless otherwise noted above, the business address of each stockholder is
c/o Outdoor Channel Holdings, Inc., 43445 Business Park Dr., Suite 113,
Temecula, California 92590.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock subject
to options or warrants currently exercisable or convertible, or exercisable
or convertible within 60 days of March 15, 2005, are deemed outstanding for
computing the percentage of the persons holding such options but are not
deemed outstanding for computing the percentage of any other person.
(3) Includes shares owned with Mr. Thomas Massie's wife, in trusts and control
companies and 3,360,935 shares owned by entities including Musk Ox
Investments LP owned jointly with Mr. Perry Massie. Mr. Thomas Massie
disclaims beneficial ownership of the shares owned by Musk Ox Investments
LP except to the extent of his pecuniary interest therein. Includes 487,500
shares subject to options exercisable within 60 days of March 15, 2005.
(4) Includes shares owned with Mr. Perry Massie's wife, in trusts and 3,360,935
shares owned by entities including Musk Ox Investments LP owned jointly
with Mr. Thomas Massie. Mr. Perry Massie disclaims beneficial ownership of
the shares owned by Musk Ox Investments LP except to the extent of his
pecuniary interest therein. Includes 487,500 shares subject to options
exercisable within 60 days of March 15, 2005.
(5) Musk Ox Investments, L.P. is owned equally by Messrs. Perry and Thomas
Massie. Its shares are included in both of their total shares since both
individuals might be considered to be the beneficial owner of such shares.
(6) Includes 49,412 shares held in various trusts and 862,500 shares subject to
options exercisable within 60 days of March 15, 2005.
(7) Includes 96,250 shares owned by Mr. Miller's wife and 700,000 shares
subject to options exercisable within 60 days of March 15, 2005.
(8) Includes 201,747 shares owned by Mr. Berglund's wife and children, 8,750
shares held in a trust and 375,000 shares subject to options exercisable
within 60 days of March 15, 2005,
74
(9) Mr. Dale was not deemed to be an executive officer of Outdoor Channel
Holdings Inc. until September 2004. Includes 406,250 shares subject to
options exercisable within 60 days of March 15, 2005.
(10) Includes 225,000 shares subject to options exercisable within 60 days of
March 15, 2005.
(11) Includes 75,000 shares subject to options exercisable within 60 days of
March 15, 2005.
(12) Includes 75,000 shares subject to options exercisable within 60 days of
March 15, 2005.
(13) Includes 25,000 shares subject to options exercisable within 60 days of
March 15, 2005.
(14) Mr. Dickson was previously a director and officer of the Company and
resigned all positions with us effective November 13, 2003. Includes
325,000 shares subject to options exercisable within 60 days of March 15,
2005.
(15) Includes our current directors' and executive officers' shares listed
above, including a total of 3,718,420 shares subject to options exercisable
within 60 days of March 15, 2005.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
We currently have two lease agreements regarding a portion of our
administrative facilities with Musk Ox Properties, LP, a stockholder of ours and
which in turn is owned by Messrs. P. Massie and T. Massie. The lease agreements
currently require aggregate monthly rent payments of $20,949. These lease
agreements expire December 31, 2005. Our rent expense paid to Musk Ox
Properties, LP totaled an aggregate of $243,523 and $242,396 for the years ended
December 31, 2004 and 2003, respectively.
As of December 31, 2002, the amount owed Wilma M. Massie, who passed away
in August 2003 and was the mother of Messrs. P. Massie and T. Massie, for two
notes payable aggregated to $577,950 including accrued interest. The original
maturity dates of the loans from Wilma M. Massie were December 31, 2002 and
April 30, 2003, respectively. The loans carried interest rates of 9.5% and 10%,
respectively. On March 1, 2003, both notes payable including accrued interest
were combined into one unsecured note payable with an interest rate of 8% and
the maturity date of the new note was extended to September 31, 2004. This note
was subsequently retired in June 2003 as consideration for the exercise of
options held by Ms. Massie.
As of December 31, 2002, the Company owed Wilma M. Massie an additional
$17,140, secured by print equipment purchased in May 2001. The original amount
of this loan was approximately $313,000 and interest accrued at 10%. The Company
was paying this obligation at the rate of $5,000 per month, and this loan was
fully paid in March 2003.
Effective April 1999, we entered into an employment agreement with Richard
K. Dickson II who was our Chief Operating Officer at that time and is currently
a beneficial owner of greater than 5% of our outstanding common stock. The
agreement was for one year and pursuant to the agreement had been automatically
extended for one year terms until Mr. Dickson's resignation in December 2003. At
the time of Mr. Dickson's resignation, the agreement provided for a salary of
$11,250 per month. Prior to 2002, a portion of the compensation was paid each
month in cash and the remainder was deferred. At Mr. Dickson's election, the
deferred portion was payable in cash or shares of the common stock of Outdoor
Channel Holdings, Inc. and/or The Outdoor Channel, Inc. Deferred compensation
under the agreement totaled $317,750 as of December 31, 2002. In December 2003,
Mr. Dickson elected to take the entire deferred compensation balance in the form
of shares. Outdoor Channel Holdings, Inc. and The Outdoor Channel issued 134,375
and 125,726 shares, respectively, to satisfy their obligations to Mr. Dickson.
These 134,375 shares of Outdoor Channel Holdings, Inc. have subsequently been
split into approximately 335,937 shares, and the 125,726 shares of The Outdoor
Channel, Inc. have subsequently been exchanged for approximately 204,304 shares
of Outdoor Channel Holdings, Inc. The employment agreement also provided that
Mr. Dickson shall receive options to purchase 60,000 shares of common stock of
Outdoor Channel Holdings, Inc. at an exercise price of $3.00 per share. These
options were fully vested at the time of Mr. Dickson's resignation. Mr. Dickson
exercised all of these options in January 2004. The shares of Outdoor Channel
Holdings, Inc. issued upon the exercise of these options have subsequently been
split into 150,000 shares. In connection with Mr. Dickson's resignation, we also
agreed to pay him approximately $374,000 over time. These payments are scheduled
to terminate in November 2007. In addition, in December 2003 we entered into a
Registration Rights Agreement with Mr. Dickson granting him the right to
register some of his shares for resale in a registration statement filed by
Outdoor Channel Holdings, Inc. or on a Form S-3, subject to various terms and
conditions.
During 2003, the Company paid bonuses of $38,813 and $77,987 to Mr. Dickson
and Ms. Massie, respectively, by canceling subscriptions receivable for common
stock and the interest payable thereon.
75
In September 2004, in connection with the acquisition of all of the
outstanding shares of The Outdoor Channel, Inc. that Outdoor Channel Holdings,
Inc. did not previously own, the following entities and individuals received
shares of common stock, and options to purchase that number of shares of common
stock, of Outdoor Channel Holdings, Inc. in exchange for the shares of common
stock, and options to purchase that number of shares of common stock of The
Outdoor Channel, Inc. they previously held. The exchange rate used for this
conversion of the shares and options of The Outdoor Channel, Inc. for the
following entities and individuals was the same exchange rate used for all other
holders of shares and options of The Outdoor Channel, Inc.
NAME OF OWNER OR ENTITY
-----------------------
SHARES OPTIONS
------ -------
Thomas H. Massie............................. 21,437 487,500
Perry T. Massie.............................. 9,595 487,500
Musk Ox Properties, LP (1)................... 3,100 --
Elizabeth J. Sanderson (2)................... 430,592 812,500
Ray V. Miller................................ 428,050 650,000
Jerry R. Berglund (3)........................ 336,702 325,000
Andrew J. Dale............................... 16,250 406,250
- -----------
(1) Musk Ox Properties, LP is owned equally by Messrs. Perry and Thomas
Massie.
(2) Includes shares owned directly by Ms. Sanderson or held in various
trusts and excludes 177,974 shares held in trusts related to Ms.
Sanderson but for which she disclaims beneficial ownership and/or
control.
(3) Includes 156,165 shares owned directly by Mr. Berglund, 154,212 shares
held by his wife and 26,325 shares held by Mr. Berglund's children.
Our bylaws provide that the Company will indemnify its directors and
executive officers and may indemnify its other officers, employees and other
agents to the fullest extent permitted by the Delaware General Corporation Law.
The Company is also empowered under its bylaws to enter into indemnification
contracts with its directors and officers and to purchase insurance on behalf of
any person whom it is required or permitted to indemnify. Pursuant to this
provision, the Company has entered into indemnity agreements with each of its
directors and officers.
In addition, the Company's certificate of incorporation provides that to
the fullest extent permitted by Delaware law, the Company's directors will not
be liable for monetary damages for breach of the directors' fiduciary duty of
care to the Company and its stockholders. This provision in the Certificate of
Incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as an injunction or other forms of
non-monetary relief would remain available under Delaware law. Each director
will continue to be subject to liability for breach of the director's duty of
loyalty to the Company, for acts or omissions not in good faith or involving
intentional misconduct or knowing violations of law, for acts or omissions that
the director believes to be contrary to the best interests of the Company or its
stockholders, for any transaction from which the director derived an improper
personal benefit, for acts or omissions involving a reckless disregard for the
director's duty to the Company or its stockholders when the director was aware
or should have been aware of a risk of serious injury to the Company or its
stockholders, for acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the Company
or its stockholders, for improper transactions between the director and the
Company and for improper distributions to stockholders and loans to directors
and officers. This provision also does not affect a director's responsibilities
under any other laws, such as the federal securities laws or state or federal
environmental laws.
All future transactions between the Company and its officers, directors,
principal stockholders and affiliates will be approved by a majority of the
independent and disinterested members of the board of directors, and will be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties.
76
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees billed the Company by J. H. Cohn LLP, the Company's
independent registered public accounting firm, for professional services
rendered for the audit of the Company's annual financial statements for the
fiscal years ended December 31, 2004 and 2003 and the reviews of the financial
statements included in the Company's Quarterly Reports for such fiscal years
were $171,000 and $92,000, respectively.
AUDIT-RELATED FEES
The aggregate fees billed the Company by J. H. Cohn LLP for
assurance and related services that are reasonably related to the performance of
the audit of the Company's annual financial statements for the fiscal years
ended December 31, 2004 and 2003 and are not reported above were $8,000 and
$37,000, respectively.
TAX FEES
The aggregate fees billed the Company by J. H. Cohn LLP for
professional services rendered for tax compliance, tax advice, and tax planning
to the Company's for the fiscal years ended December 31, 2004 and 2003 were
$10,000 and $21,000, respectively. The nature of the services provided for these
fees are for the preparation of tax returns, tax advice rendered regarding the
resignation and severance agreement of a former officer/director and other tax
advice for the fiscal years ended December 31, 2004 and 2003.
ALL OTHER FEES
None.
AUDIT COMMITTEE PRE-APPROVAL POLICIES
Our Audit Committee pre-approved all services described above in this Item
14 for fiscal year 2004, including non-audit services, and has determined that
these fees and services are compatible with maintaining the independence of J.
H. Cohn LLP. The Audit Committee requires that each service provided by J. H.
Cohn LLP be pre-approved by the Audit Committee.
77
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) THE FOLLOWING DOCUMENTS ARE INCLUDED AS PART OF THIS ANNUAL REPORT ON FORM
10-K.
Index to Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(B) 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)
3.1 Certificate of Incorporation of Outdoor Channel Holdings, Inc, a
Delaware corporation (filed as Exhibit 3.1 to the Company's Current
Report on Form 8-K filed on September 20, 2004 and incorporated herein
by reference)
3.2 By-Laws of Outdoor Channel Holdings, Inc., a Delaware corporation
(filed as Exhibit 3.2 to the Company's Current Report on Form 8-K filed
on September 20, 2004 and incorporated herein by reference)
4.1 Instruments defining the rights of security holders, including
debentures (see exhibits 3.1 and 3.2 above)
10.1 Letter of intent dated August 27, 1993, regarding the proposed
acquisition of Gold Prospector's Association of America, Inc. by the
Company (filed as Exhibit 10.4 to the Company's Form 10-Q for the
quarter ended September 30, 1993 and incorporated herein by reference).
10.2 Agreement and Plan of Reorganization dated February 13, 1995, by and
between the Registrant and Gold Prospector's Association of America,
Inc. (filed as Exhibit B to the Company's Form 8-K dated February 13,
1995 and incorporated herein by reference).
10.3 Confidential Severance Agreement and General Release by and among
Richard K. Dickson II, Outdoor Channel Holdings, Inc, and the other
parties named therein dated December 16, 2003 (filed as Exhibit 99.1 to
the Company's Form 8-K dated December 16, 2003 and incorporated herein
by reference).
10.4 Registration Rights Agreement by and among Outdoor Channel Holdings,
Inc. and Richard K. Dickson II dated December 16, 2003 (filed as
Exhibit 99.2 to the Company's Form 8-K dated December 16, 2003 and
incorporated herein by reference).
10.5 Channel Stock Pledge Agreement between Richard K. Dickson II and
Outdoor Channel Holdings, Inc. dated December 16, 2003 (filed as
Exhibit 99.3 to the Company's Form 8-K dated December 16, 2003 and
incorporated herein by reference).
10.6 Form of Indemnification Agreement between Outdoor Channel Holdings,
Inc. and its directors and certain executive officers (filed as Exhibit
10.1 to the Company's Form 10-Q for the quarter ended September 30,
2004 and incorporated herein by reference).
10.7 Revolving Credit Agreement and related agreements by and between the
Company and U.S. Bank N.A. dated September 30, 2004 (filed as Exhibit
10.2 to the Company's Form 10-Q for the quarter ended September 30,
2004 and incorporated herein by reference).
10.8 1995 Stock Option Plan (filed as Exhibit 10.6 to the Company's Form
10-KSB for the year ended December 31, 1995 and incorporated herein by
reference).
10.9 Form of Stock Option Agreement pursuant to the Company's 1995 Stock
Option Plan (filed as Exhibit 4.2 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).
10.10 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).
78
10.11 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).
10.12 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).
10.13 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).
10.14 Form of Stock Option Agreement pursuant to Non-Employee Directors Stock
Option Plan. (filed as Exhibit 10.13 to the Company's Form 10-KSB for
the year ended December 31, 2003 and incorporated herein by reference.)
10.15 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).
10.16 Form of Stock Option Award Agreement pursuant to 2004 Long-Term
Incentive Plan (filed as Exhibit 99.1 to the Company's Form 8-K dated
December 20, 2004 and incorporated herein by reference).
10.17 Form of Restricted Shares Award Agreement pursuant to 2004 Long-Term
Incentive Plan (filed as Exhibit 99.2 to the Company's Form 8-K dated
December 20, 2004 and incorporated herein by reference).
21.1 Subsidiaries of Registrant
23.1 Consent of J.H. Cohn LLP, Independent Registered Public Accounting Firm
24.1 Power of Attorney (see Page 80)
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 Annual Report on Form 10-K 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.
79
SIGNATURES
Pursuant to the requirements of section 13 or 15 (d) 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.
By: /s/ Perry T. Massie
--------------------------
Perry T. Massie, President
Dated: March 31, 2005
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears
below constitutes and appoints Perry T. Massie or William A. Owen, his or her
attorney-in-fact, with power of substitution in any and all capacities, to sign
any amendments to this annual report on Form 10-K, and to file the same with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that the
attorney-in-fact or his or her substitute or substitutes may do or cause to be
done by virtue hereof. This power of attorney may be executed in multiple
counterparts, each of which shall be deemed an original, but which taken
together shall constitute one instrument.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Perry T. Massie Chief Executive Officer, March 31, 2005
- ----------------------------- President and Chairman of
Perry T. Massie the Board (Principal
Executive Officer)
/s/ William A. Owen Chief Financial Officer March 31, 2005
- ----------------------------- and Controller (Principal
William A. Owen Financial and Accounting
Officer)
Executive Vice President, March 31, 2005
- ----------------------------- Secretary and Vice Chairman
Thomas H. Massie of the Board
/s/ Jerry R. Berglund Director March 31, 2005
- -----------------------------
Jerry R. Berglund
/s/ David C. Merritt Director March 31, 2005
- -----------------------------
David C. Merritt
/s/ Ray V. Miller Director March 31, 2005
- -----------------------------
Ray V. Miller
/s/ Elizabeth J. Sanderson Director March 31, 2005
- -----------------------------
Elizabeth J. Sanderson
/s/ T. Bahnson Stanley Director March 31, 2005
- -----------------------------
T. Bahnson Stanley
80