UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 000-17287

Outdoor Channel Holdings, Inc.

(Exact name of Registrant as specified in its charter)

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

43445 Business Park Drive, Suite 103
Temecula, California 92590
(Address and zip code of principal executive offices)

(951) 699-6991
(Issuer’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller Reporting Company o
				(Do not check if a small reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

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

Class		Number of Shares Outstanding at August 5, 2010
Common Stock, $0.001 par value		25,391,040

 

 

OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
For the Period Ended June 30, 2010

Table of Contents

Part I. Financial Information
Item 1. Financial Statements			3
Condensed Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and December 31, 2009			3
Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009			4
Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2010			5
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009			6
Notes to Unaudited Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures About Market Risk			28
Item 4. Controls and Procedures			29
Part II. Other Information
Item 1. Legal Proceedings			30
Item 1A. Risk Factors			30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 3. Defaults Upon Senior Securities			39
Item 4. Removed and Reserved			39
Item 5. Other Information			39
Item 6. Exhibits			39
Signatures			40
EX-31.1
EX-31.2
EX-32.1
EX-32.2

* * *

PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements.

OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

		June 30,				December 31,
		2010				2009
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	36,131			$	20,848
Investments in available-for-sale securities			21,998				38,090
Accounts receivable, net of allowance for doubtful accounts of $981 and $620			10,884				15,827
Income tax refund receivable			206				—
Deferred tax assets, net			2,442				2,434
Prepaid programming and production costs			5,815				6,111
Other current assets			2,294				1,871
Total current assets			79,770				85,181
Property, plant and equipment, net			13,209				14,286
Amortizable intangible assets, net			634				828
Goodwill			43,160				43,160
Investments in auction-rate securities			5,050				5,775
Deferred tax assets, net			4,131				2,489
Subscriber acquisition fees			3,601				4,371
Deposits and other assets			622				688
Totals		$	150,177			$	156,778
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses		$	10,007			$	14,824
Accrued severance payments			497				255
Deferred revenue			1,839				1,469
Current portion of deferred obligations			50				165
Current portion of unfavorable lease			143				136
Income taxes payable			—				459
Total current liabilities			12,536				17,308
Deferred obligations			157				178
Unfavorable lease			921				994
Total liabilities			13,614				18,480
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 25,000 shares authorized; none issued			—				—
Common stock, $0.001 par value; 75,000 shares authorized; 25,284 and 25,444 shares issued and outstanding			25				25
Additional paid-in capital			166,244				165,374
Accumulated other comprehensive loss			(380	)			(444	)
Accumulated deficit			(29,326	)			(26,657	)
Total stockholders’ equity			136,563				138,298
Totals		$	150,177			$	156,778

See Notes to Unaudited Condensed Consolidated Financial Statements.

OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Revenues:
Advertising		$	7,253			$	7,105			$	14,545			$	14,899
Subscriber fees			4,504				5,338				9,335				10,001
Production services			5,072				6,770				10,770				11,289
Total revenues			16,829				19,213				34,650				36,189
Cost of services:
Programming			1,529				1,409				2,833				3,081
Satellite transmission fees			393				400				784				795
Production and operations			6,011				8,210				13,110				14,803
Other direct costs			109				110				221				207
Total cost of services			8,042				10,129				16,948				18,886
Other expenses:
Advertising			979				924				1,265				1,383
Selling, general and administrative			8,536				8,465				18,933				17,672
Depreciation and amortization			928				967				1,839				1,855
Total other expenses			10,443				10,356				22,037				20,910
Loss from operations			(1,656	)			(1,272	)			(4,335	)			(3,607	)
Interest and other income, net			15				28				27				52
Loss from operations before income taxes			(1,641	)			(1,244	)			(4,308	)			(3,555	)
Income tax benefit			(485	)			(307	)			(1,639	)			(1,304	)
Net loss		$	(1,156	)		$	(937	)		$	(2,669	)		$	(2,251	)
Loss per common share data:
Basic		$	(0.05	)		$	(0.04	)		$	(0.11	)		$	(0.09	)
Diluted		$	(0.05	)		$	(0.04	)		$	(0.11	)		$	(0.09	)
Weighted average common shares outstanding:
Basic			24,488				24,366				24,470				24,412
Diluted			24,488				24,366				24,470				24,412

See Notes to Unaudited Condensed Consolidated Financial Statements.

OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES

(In thousands)

										Additional				Accumulated Other
		Common Stock								Paid-in				Comprehensive				Accumulated
		Shares				Amount				Capital				Income (Loss)				Deficit				Total
Balance, December 31, 2009			25,444			$	25			$	165,374			$	(444	)		$	(26,657	)		$	138,298
Comprehensive income (loss):
Net loss			—				—				—				—				(2,669	)			(2,669	)
Change in fair value of auction-rate securities			—				—				—				64				—				64
Total comprehensive loss			—				—				—				—				—				(2,605	)
Issuance of restricted stock and performance shares to employees for services to be rendered, net of forfeited shares			4				—				—				—				—				—
Share-based employee and service provider compensation expense			—				—				1,809				—				—				1,809
Purchase and retirement of treasury stock related to employee and service provider share-based compensation activity			(102	)			—				(598	)			—				—				(598	)
Purchase and retirement of treasury stock related to the stock repurchase program			(62	)			—				(341	)			—				—				(341	)
Balance, June 30, 2010			25,284			$	25			$	166,244			$	(380	)		$	(29,326	)		$	136,563

See Notes to Unaudited Condensed Consolidated Financial Statements.

OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES

(In thousands)

		Six Months Ended
		June 30,
		2010				2009
Operating activities:
Net loss		$	(2,669	)		$	(2,251	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			1,839				1,855
Amortization of subscriber acquisition fees			770				299
Loss on sale of equipment			101				15
Gain on sale of available-for-sale and auction-rate securities			(11	)			(7	)
Provision for doubtful accounts			470				190
Share-based employee and service provider compensation			1,809				2,123
Deferred tax benefit, net			(1,639	)			(1,305	)
Changes in operating assets and liabilities:
Accounts receivable			4,473				(498	)
Income tax (payable) refund receivable			(676	)			(281	)
Prepaid programming costs			296				(1,066	)
Other current assets			(423	)			738
Deposits and other assets			45				(170	)
Subscriber acquisition fees			(441	)			(991	)
Accounts payable and accrued expenses			(4,527	)			(2,970	)
Deferred revenue			370				2,430
Accrued severance payments			242				(14	)
Deferred obligations			(136	)			(27	)
Unfavorable lease obligations			(66	)			(57	)
Net cash used in operating activities			(173	)			(1,987	)
Investing activities:
Purchases of property, plant and equipment			(614	)			(1,361	)
Proceeds from sale of equipment			93				—
Cash paid to purchase assets of Winnercomm, net of cash acquired			—				(5,746	)
Purchases of available-for-sale securities			(48,984	)			(26,992	)
Proceeds from sale of available-for-sale and auction-rate securities			65,900				100
Net cash provided by (used in) investing activities			16,395				(33,999	)
Financing activities:
Purchase of treasury stock			(598	)			(398	)
Purchase and retirement of treasury stock related to stock repurchase program			(341	)			(347	)
Net cash used in financing activities			(939	)			(745	)
Net increase in cash and cash equivalents			15,283				(36,731	)
Cash and cash equivalents, beginning of period			20,848				60,257
Cash and cash equivalents, end of period		$	36,131			$	23,526
Supplemental disclosure of cash flow information:
Income taxes paid		$	665			$	282
Supplemental disclosures of non-cash investing and financing activities:
Effect of net increase in fair value of auction-rate securities		$	64			$	70
Property, plant and equipment costs incurred but not paid		$	127			$	296
Subscriber acquisition fees incurred but not paid		$	—			$	2,259
Retirement of treasury stock		$	598			$	398

See Notes to Unaudited Condensed Consolidated Financial Statements.

OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except share data)

NOTE 1—ORGANIZATION AND BUSINESS

Description of Operations

Outdoor Channel Holdings, Inc. (“Outdoor Channel Holdings”) is incorporated under the laws of the State of Delaware. Collectively, with its subsidiaries, the terms “we,” “us,” “our” and the “Company” refer to Outdoor Channel Holdings, Inc. as a consolidated entity, except where noted or where the context makes clear the reference is only to Outdoor Channel Holdings, Inc. or one of our subsidiaries. Outdoor Channel Holdings, Inc. wholly owns OC Corporation which in turn wholly owns The Outdoor Channel, Inc. (“TOC”). Outdoor Channel Holdings is also the sole member of 43455 BPD, LLC, the entity that owns the building that houses our broadcast facility. TOC operates 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.

On January 12, 2009, the Company entered into and completed an asset purchase agreement with Winnercomm, Inc., an Oklahoma corporation and wholly-owned subsidiary of Winnercomm Holdings, Inc., a Delaware corporation, Cablecam, LLC, an Oklahoma limited liability company, and Skycam, LLC, an Oklahoma limited liability company (collectively, the “Sellers”), pursuant to which the Company purchased certain assets and assumed certain liabilities of the Sellers and formed Winnercomm, Inc., a Delaware corporation, CableCam, Inc., a Delaware corporation and SkyCam, Inc., a Delaware corporation. Outdoor Channel Holdings wholly owns Winnercomm, Inc., which in turn wholly owns CableCam, Inc. and SkyCam, Inc. (collectively referred to as “Winnercomm”). The Winnercomm businesses relate to the production, development and marketing of sports programming and aerial camera systems.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position of the Company as of June 30, 2010 and its results of operations and cash flows for the three and six months ended June 30, 2010 and 2009. Pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from these financial statements. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009.

Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities as of the dates of the condensed consolidated balance sheets and reported amounts of revenues and expenses for the periods presented. Accordingly, actual results could materially differ from those estimates.

Our revenues include advertising fees from advertisements aired on Outdoor Channel, including fees paid by outside producers to purchase advertising time in connection with the airing of their programs on Outdoor Channel and subscriber fees paid by cable and satellite service providers that air Outdoor Channel. Production Services revenue includes revenue from advertising fees, revenue from production services for customer-owned telecasts, revenue from camera services for customer-owned telecasts and revenue from web page design, marketing and hosting services.

Certain prior year amounts have been reclassified to conform to the current period presentation.

NOTE 2—ACQUISITION

On January 12, 2009, we completed an asset purchase agreement and formed the Winnercomm entities as noted above. We have included the financial results of Winnercomm in our 2009 consolidated results from the acquisition date. The total cash purchase price was $5,944 plus the assumption of certain liabilities.

Unaudited Pro Forma Financial Information

The unaudited pro forma financial information in the table below summarizes the combined results of operations for the Company and Winnercomm as though the companies were combined as of the beginning of fiscal 2009. The pro forma financial information for all periods presented also includes the business combination accounting effects resulting from these acquisitions including amortization charges from acquired intangible assets.

The pro forma financial information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of fiscal 2009.

The unaudited pro forma financial information was as follows for the six months ended June 30, 2009:

		Six Months Ended
		June 30,
		2009
Total revenues		$	37,137
Net income loss		$	(2,858	)
Basic loss per share		$	(0.12	)
Diluted loss per share		$	(0.12	)

NOTE 3—STOCK INCENTIVE PLANS

The measurement and recognition of compensation expense is recognized in the financial statements over the service period for the fair value of all awards granted after January 1, 2006 as well as for existing awards for which the requisite service had not been rendered as of the January 1, 2006. Our stock incentive plans provide for the granting of qualified and nonqualified options, restricted stock, restricted stock units (“RSUs”), stock appreciation rights (“SARs”) and performance units to our officers, directors and employees. Outstanding options generally vest over a period ranging from 90 days to four years after the date of the grant and expire no more than ten years after the grant. We satisfy the exercise of options and awards of restricted stock by issuing previously unissued common shares. Currently we have not awarded any SARs but have awarded performance units and RSUs.

We have two stock incentive plans: 2004 Long-Term Incentive Plan (“LTIP Plan”) and Non-Employee Director Stock Option Plan (“NEDSOP”). No more options can be issued under the NEDSOP Plan. We also may grant stock options that are not covered under any of the stock incentive plans, with appropriate shareholder approvals. Options and stock grants are subject to terms and conditions as determined by our 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. These options generally have 10 year lives.

Our Board of Directors has discretion to allow our employees to forego shares in lieu of paying requisite withholding taxes on vested restricted shares. In turn, we remit to the appropriate taxing authorities the U.S. Federal and state withholding taxes on the total compensation the employees have realized as a result of the vesting of these shares. During the three and six months ended June 30, 2010, approximately 41,000 and 102,000 shares were repurchased with a market value of approximately $230 and $598, respectively.

2004 Long-Term Incentive Plan (“LTIP Plan”). During 2005 through June 30, 2010, all options to purchase common stock, restricted stock awards, restricted stock units and performance units to our employees, service providers, and Board of Directors were issued under the LTIP Plan. Options granted under the LTIP Plan expire five years from the date of grant and typically vest equally over four years. Restricted stock awards granted under the LTIP Plan do not expire, but are surrendered upon termination of employment if unvested. These awards generally vest annually over three to five years, however, some awards vest monthly or quarterly. RSUs vest over one year and, upon satisfaction of the service vesting requirement, the holder is entitled to shares equal to the current value of the units and, provided the holder has not elected to defer settlement, will have compensation income equal to that value. Performance units vest based upon criteria established at the time of grant. Options or awards that are surrendered or cease to be exercisable continue to be available for future grant under the LTIP Plan. There are 4,050,000 shares of common stock reserved for issuance under the LTIP Plan. As of June 30, 2010, options to purchase 385,000 shares of common stock, 829,598 restricted shares, 100,500 RSUs and 700,000 performance unit shares were outstanding. There were 929,561 shares of common stock available for future grant as of June 30, 2010.

Non-Employee Director Stock Option Plan (“NEDSOP”). Under the NEDSOP, nonqualified stock options to purchase common stock were granted to three prior non-employee directors during periods of their appointment and to two of our current non-employee directors. Options granted under the NEDSOP expire 10 years from the date of grant. These grants 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% vested. The NEDSOP has 1,000,000 shares of common stock reserved for issuance. As of June 30, 2010, options to purchase 250,000 shares of common stock were outstanding and no further option grants can be issued under this plan.

The fair value of the shares and options, adjusted for a forfeiture assumption, at the respective dates of grant (which represents deferred compensation not required to be recorded initially in the consolidated balance sheet) will be amortized to share-based compensation expense as the rights to the restricted stock and options vest with an equivalent amount added to additional paid-in capital. Changes to forfeiture assumptions are based on actual experience and are recorded in accordance with the rules related to accounting for changes in estimates. The fair value of nonvested shares for grants is determined based on the closing trading price of our shares on the grant date.

The following tables summarize share-based compensation expense for the three and six months ended June 30, 2010 and 2009:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Nature of Award:
Restricted stock		$	674			$	988			$	1,715			$	1,851
RSUs			59				—				59				—
Options			12				121				35				272
Total share-based compensation expense		$	745			$	1,109			$	1,809			$	2,123

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Classification of Compensation Expense:
Cost of services:
Production and operations		$	85			$	109			$	158			$	214
Other expenses:
Selling, general and administrative			660				1,000				1,651				1,909
Total share-based compensation expense		$	745			$	1,109			$	1,809			$	2,123

Stock Options

A summary of the status of the options granted under our stock incentive plans and outside of those plans as of June 30, 2010 and the changes in options outstanding during the six months then ended is as follows:

						Weighted
						Average				Weighted Average
						Exercise				Remaining Contractual
Options		Shares				Price				Term (Yrs.)				Aggregate Intrinsic Value
		(in thousands)												(in thousands)
Outstanding at beginning of period			650			$	12.58
Granted			—				—
Exercised			—				—
Forfeited			—				—
Expired			(15	)			14.94
Outstanding at end of period			635			$	12.52				2.09			$	—
Vested or expected to vest at end of period			635			$	12.52				2.09			$	—
Exercisable at end of period			635			$	12.52				2.09			$	—

Additional information regarding options outstanding for all plans as of June 30, 2010 is as follows:

		Options Outstanding												Options Exercisable
						Weighted
						Average				Weighted								Weighted
						Remaining				Average								Average
		Number				Contractual				Exercise				Number				Exercise
Range of Exercise Prices		Outstanding				Term (Yrs.)				Price				Exercisable				Price
		(in thousands)												(in thousands)
$10.19 — $10.19			10				.76			$	10.19				10			$	10.19
$12.10 — $12.10			300				1.30				12.10				300				12.10
$12.50 — $12.50			125				3.47				12.50				125				12.50
$12.58 — $12.58			25				.93				12.58				25				12.58
$12.80 — $12.80			125				3.55				12.80				125				12.80
$14.86 — $14.86			50				0.55				14.86				50				14.86
Total			635				2.09			$	12.52				635			$	12.52

There were no options granted during the six months ended June 30, 2010 or 2009.

Restricted Stock

A summary of the status of our nonvested restricted shares as of June 30, 2010 and the changes in restricted shares outstanding during the six months then ended is as follows:

		As of June 30, 2010
						Weighted
						Average
						Grant-Date
		Shares				Fair Value
		(in thousands)
Nonvested at beginning of period			1,049			$	7.46
Granted			142				5.50
Vested			(324	)			7.75
Forfeited			(138	)			6.97
Nonvested at end of period			729			$	7.04

During the six months ended June 30, 2010 and 2009, we issued 142,000 and 586,000 shares, respectively, of restricted stock to employees while 138,000 and 4,000 shares of restricted stock, respectively, were canceled due to employee turnover, respectively. Also during the six months ended June 30, 2010, 18,000 shares of the total restricted stock issued were performance vesting shares. The performance goal associated with these shares is the achievement of certain annual financial operating targets. Share-based compensation expense related to these performance vesting shares for the three and six months ended June 30, 2010 was $9 and $17, respectively.

Restricted Stock Units

A summary of the status of our RSUs as of June 30, 2010 and the changes in RSUs outstanding during the six months then ended is as follows:

		As of June 30, 2010
						Weighted
		Number of				Average
		Restricted				Grant-Date
		Stock Units				Fair Value
		(in thousands)
RSUs outstanding at beginning of period			—			$	—
Granted			101				5.97
Vested			—				—
Forfeited			—				—
Nonvested at end of period			101			$	5.97

During the six months ended June 30, 2010, we granted 100,500 RSUs subject to time-based vesting to our Board of Directors. The aggregate fair market value of our RSU grants is being amortized to compensation expense over the one year vesting period.

Expense to be Recognized

Expense associated with our share-based compensation plans yet to be recognized as compensation expense over the employees’ remaining requisite service periods as of June 30, 2010 are as follows:

		June 30, 2010
						Weighted Average
		Expense Yet to be				Remaining Requisite
		Recognized				Service Periods
Restricted stock		$	4,119			2.1 years
RSUs			541			0.9 years
Total		$	4,660			2.0 years

NOTE 4—EARNINGS (LOSS) PER COMMON SHARE

Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during each period. Diluted earnings (loss) per common share reflects the potential dilution of securities by including common stock equivalents, such as stock options and performance units in the weighted average number of common shares outstanding for a period, if dilutive.

The following table sets forth a reconciliation of the basic and diluted number of weighted average shares outstanding used in the calculation of earnings (loss) per share for the three and six months ended June 30 (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Weighted average shares used to calculate basic earnings (loss) per share			24,488				24,366				24,470				24,412
Dilutive effect of potentially issuable common shares upon exercise of dilutive stock options and performance units			—				—				—				—
Weighted average shares used to calculate diluted earnings (loss) per share			24,488				24,366				24,470				24,412

For the three months ended June 30, 2010 and 2009, outstanding options and performance units to purchase a total of 1,342,000 and 1,515,000 shares of common stock, respectively, were not included in the calculation of diluted earnings per share because their effect was antidilutive. For the six months ended June 30, 2010 and 2009, outstanding options and performance units to purchase a total of 1,344,000 and 1,518,000 shares of common stock, respectively, were not included in the calculation of diluted earnings per share because their effect was antidilutive.

NOTE 5—INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES

Assets recorded at fair value in the balance sheet as of June 30, 2010 are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets are as follows:

Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2 — Inputs other than Level 1 inputs that are either directly or indirectly observable; and

Level 3 — Unobservable inputs developed using estimates and assumptions developed by management, which reflect those that a market participant would use.

We measure the following financial assets at fair value on a recurring basis. The fair value of these financial assets was determined using the following inputs at June 30, 2010:

						Quoted Prices in
						Active Markets for				Significant Other				Significant
						Identical Assets				Observable Inputs				Unobservable Inputs
		Total				(Level 1)				(Level 2)				(Level 3)
Cash and cash equivalents (1)		$	36,131			$	36,131			$	—			$	—
Investments in available-for-sale securities (2)			21,998				21,998				—				—
Non-current investments in auction-rate securities (3)			5,050				—				—				5,050
Total		$	63,179			$	58,129			$	—			$	5,050

As of June 30, 2010, our investments in auction-rate securities (“ARS”) consisted of one auction-rate municipal security collateralized by federally backed student loans and one closed-end perpetual preferred security which has redemption features which call for redemption at 100% of par value and have maintained at least A3 credit rating despite the failure of the auction process. To date, we have collected all interest due on all of our ARS in accordance with their stated terms. Historically, the carrying value (par value) of the ARS approximated fair market value due to the frequent resetting of variable interest rates. Beginning in February 2008, however, the auctions for ARS began to fail and were largely unsuccessful, requiring us to hold them beyond their typical auction reset dates. As a result, the interest rates on these investments reset to the maximum based on formulas contained in the securities. The rates are generally equal to or higher than the current market for similar securities. The par value of the ARS associated with these failed auctions will not be available to us until a successful auction occurs, a buyer is found outside of the auction process, the securities are called or the underlying securities have matured. Due to these liquidity issues, we performed a discounted cash flow analysis to determine the estimated fair value of these investments. The assumptions used in preparing the models include, but are not limited to, interest rate yield curves for similar securities, market rates of returns, and the expected term of each security. In making assumptions of required rates of return, we considered risk-free interest rates and credit spreads for investments of similar credit quality. Based on these models, we recorded an unrealized gain on our PPS of $54 and $64 in the three and six month periods ended June 30, 2010, respectively. As a result of the lack of liquidity in the PPS market, we have an unrealized loss on our PPS of $380, which is included in accumulated other comprehensive loss on our balance sheet as of June 30, 2010. We deemed the loss to be temporary because we do not plan to sell any of the PPS prior to maturity at an amount below the original purchase value and, at this time, do not deem it probable that we will receive less than 100% of the principal and accrued interest. Based on our cash and cash equivalents balance of $36,131 and our expected operating cash flows, we do not believe a lack of liquidity associated with our PPS will adversely affect our ability to conduct business, and believe we have the ability to hold the securities throughout the currently estimated recovery period. We will continue to evaluate any changes in the market value of the failed ARS that have not been liquidated subsequent to year-end and in the future, depending upon existing market conditions, we may be required to record additional other-than-temporary declines in market value. We are not certain how long we may be required to hold each security. However, given our current cash and cash equivalent position, short-term investments in available-for-sale securities, and cash flow from operations, we believe we have the ability and we intend to hold the failed PPS as long-term investments until the market stabilizes.

All of our assets measured at fair value on a recurring basis using significant Level 3 inputs as of June 30, 2010 were auction-rate securities. The one closed-end perpetual preferred auction-rate security totaling $2,830 had an interest rate of 1.60% and an auction reset of 28 days. The municipal security had an interest rate of 1.35%, matures on December 1, 2045 and as of June 30, 2010 the next auction reset date was July 6, 2010. The following table summarizes our fair value measurements using significant Level 3 inputs, and changes therein, for the three and six month periods ended June 30, 2010:

		Three Months Ended				Six Months Ended
		June 30, 2010				June 30, 2010
Auction-Rate Securities:
Balance at beginning of period		$	5,696			$	5,775
Redeemed			(700	)			(800	)
Realized gain on redemption			—				11
Unrealized gain included in accumulated other comprehensive loss			54				64
Balance as of June 30, 2010		$	5,050			$	5,050

We consider the yields we recognize from auction-rate securities and from cash held in our treasury bills and money market accounts to be interest income and are recorded in interest and other income, net for the three and six months ended June 30, 2010 and 2009 as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Interest income		$	39			$	49			$	66			$	97
Interest expense			(24	)			(28	)			(50	)			(52	)
Gain on redemption of auction-rate securities			—				7				11				7
Total interest and other income, net		$	15			$	28			$	27			$	52

NOTE 6—COMPREHENSIVE LOSS

The following table provides the composition of other comprehensive loss:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Net loss, as reported		$	(1,156	)		$	(937	)		$	(2,669	)		$	(2,251	)
Unrealized gain on auction-rate securities			54			$	55				64				70
Comprehensive loss		$	(1,102	)		$	(882	)		$	(2,605	)		$	(2,181	)

NOTE 7—GOODWILL AND INTANGIBLE ASSETS

We review goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable, pursuant to a two-step impairment test. In the first step, we compare the fair value of each of our reporting units to its carrying value as of October 1 of each year. We determine the fair values of our reporting units using the income approach. If the fair value of any of our reporting units exceeds the carrying values of the net assets assigned to that unit, goodwill is not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to any of our reporting unit exceeds the fair value, then we must perform the second step in order to determine the implied fair value of the reporting unit’s goodwill and compare it to the carrying value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we must record an impairment loss equal to the difference.

We currently have two reporting units, TOC and Production Services. The Production Services reporting unit consists of Winnercomm, CableCam and SkyCam businesses which were acquired on January 12, 2009. All of the Company’s goodwill is currently attributed to our TOC reporting unit. There were no other changes to our reporting units or allocation of goodwill by reporting units during 2009 or 2010.

Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The estimate of fair value of each of our reporting units is based on our projection of revenues, cost of services, other expenses and cash flows considering historical and estimated future results, general economic and market conditions as well as the impact of planned business and operational strategies. We base our fair value estimates on assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Actual results may differ from those estimates. The valuations employ present value techniques to measure fair value and consider market factors.

Intangible assets that are subject to amortization consist of the following as of June 30, 2010:

		June 30, 2010
						Accumulated
		Gross				Amortization				Net
Trademark		$	219			$	196			$	23
Internet domain names			97				73				24
Customer relationships			980				450				530
Patents			80				23				57
Programming library			50				50				—
Total amortizable intangible assets		$	1,426			$	792			$	634

As of June 30, 2010, the weighted average amortization period for the above intangibles is 3.3 years. Based on our most recent analysis, we believe that no impairment exists at June 30, 2010 with respect to our goodwill and other intangible assets.

Estimated future amortization expense related to intangible assets at June 30, 2010 is as follows:

Years Ending December 31,		Amount
2010 (remaining 6 months)		$	120
2011			180
2012			167
2013			162
2014 and thereafter			5
Total		$	634

NOTE 8—LINES OF CREDIT

On September 15, 2009, the Board of Directors approved the renewal of the revolving line of credit agreement (the “Revolver”) with U.S. Bank N.A. (the “Bank”), extending the maturity date to September 5, 2010 and renewing the total amount which can be drawn upon under the Revolver at $10,000. The Revolver provides that the interest rate per annum as selected by the Company shall be prime rate (3.25% and 3.25% as of June 30, 2010 and 2009, respectively) plus 0.25% or LIBOR (0.35% and 0.31% as of June 30, 2010 and 2009, respectively) plus 2.25%. The Revolver is unsecured. This credit facility contains customary financial and other covenants and restrictions, as amended, including a change of control provision and minimum liquidity metrics. As of June 30, 2010, we did not have any amounts outstanding under this credit facility and we were in compliance with all of the Revolver covenants. This Revolver is guaranteed by TOC.

NOTE 9—ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses as of June 30, 2010 and December 31, 2009 consist of the following:

		June 30, 2010				December 31, 2009
Trade accounts payable		$	2,167			$	4,849
Accrued payroll and related expenses			2,688				4,488
Estimated make-good accrual			751				281
Estimated most-favored nation accrual			739				260
Accrued launch support commitment			1,664				3,046
Accrued expenses			1,998				1,900
Total		$	10,007			$	14,824

NOTE 10—INCOME TAX BENEFIT

The income tax benefit reflected in the accompanying unaudited condensed consolidated statement of operations for the three and six months ended June 30, 2010 and 2009 is different than that computed based on the applicable statutory Federal income tax rate of 34% primarily due to state taxes and the limitations on the deductibility of executive compensation as provided for in Internal Revenue Code Section 162(m).

We file income tax returns in the United States and various state and local tax jurisdictions. We have net operating loss and credit carryforwards that will be subject to examination beyond the year in which they are ultimately utilized. Our policy is to record interest and penalties on uncertain tax positions as income tax expense.

NOTE 11—RELATED PARTY TRANSACTIONS

We lease certain of our administrative facilities from Musk Ox Properties, LP, which in turn is owned by Messrs. Perry T. Massie, Chairman of the Board and Thomas H. Massie, both of whom are principal stockholders and directors of the Company. The lease agreement has a five-year term, expiring on December 31, 2010, with 2 renewal options (between 2 and 5 years) exercisable at our discretion. Monthly rent payments under this lease agreement were approximately $19 with a 3% per year escalation clause. We paid Musk Ox Properties, LP approximately $57 and $56 in the three months ended June 30, 2010 and 2009, respectively, and $115 and $111 in the six months ended June 30, 2010 and 2009, respectively. We recognized rent expense related to this lease of $53 and $53 in the three months ended June 30, 2010 and 2009, respectively, and $107 and $107 in the six months ended June 30, 2010 and 2009, respectively.

We lease our SkyCam facility from Case and Associates Properties, Inc., which in turn is partially owned by one of our executive officers. The lease agreement has a ten year term expiring in May 2016. Monthly rent payments under this lease agreement were $43. We paid Case and Associates Properties, Inc., approximately $129 and $248and $85 and $210 in the three and six months ended June 30, 2010 and 2009, respectively. We recognized rent expense related to this lease of $71 and $70 in the three months ended June 30, 2010 and 2009, respectively, and $144 and $162 in the six months ended June 30, 2010 and 2009, respectively.

NOTE 12—COMMITMENTS AND CONTINGENCIES

From time to time we are 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 our consolidated financial position or operating results.

On April 7, 2009, we filed a complaint in the U.S. District Court, Central District of California against Actioncam, LLC and a former employee of Skycam, LLC now working at Actioncam, LLC seeking damages for unfair competition, false designation of origin, copyright infringement, misappropriation of trade secrets, breach of written contract, and unfair competition. This complaint seeks aggregate general damages in excess of $75 plus other indeterminable amounts plus fees and expenses. On May 18, 2009 this case transferred from the U.S. District Court, Central District of California to the U.S. District Court, Northern District of Oklahoma.

On January 15, 2010, we filed a complaint in the U.S. District Court, Northern District of Oklahoma against In Country Television, Inc., a Delaware corporation, Performance One Media, LLC, a New York limited liability company, and Robert J. Sigg, an individual, seeking injunctive relief and monetary damages for trademark infringement, false designation of origin, trade dress infringement, trademark dilution, and unauthorized use of a plurality of Outdoor Channel’s federally registered trademarks. This complaint seeks injunctive relief and other general damages in an amount that is presently indeterminable plus fees and expenses. On February 4, 2010, the complaint was amended after discovering that the name In Country Television was a fictitious business name of defendant Performance One Media, LLC. The complaint was also amended at that same time to reflect the defendants’ removal of the slogan BRINGING THE OUTDOORS HOME from the home page of defendants’ website since the date the suit was originally filed.

In June 2010, the Company entered into Employment Agreements with its Chief Accounting Officer, Mr. Douglas J. Langston and with its Chief Financial Officer, Mr. Thomas D. Allen (each an “Agreement,” and collectively, the “Agreements”). With respect to Mr. Langston, the Agreement supersedes in its entirety all prior agreements between the Company and the executive (with the exception of the Company’s standard form of confidential information and intellectual property agreement and the Executive’s standard forms of equity award agreement), including, specifically the Change of Control Severance Agreement.

Mr. Langston’s agreement expires on December 31, 2012 and Mr. Allen’s agreement, which commenced on July 16, 2010, expires on December 31, 2013. Thereafter, the Agreements will automatically renew for additional one (1) year terms, unless either party provides 60-day prior written notice.

Mr. Langston’s initial annual salary will be $204, and he will be eligible to receive targeted annual cash incentives of not less than forty percent (40%) of his base salary during the term of his Agreement. Mr. Langston’s performance goals include: (i) achieving targeted revenues and profitability; (ii) ensuring all financial and legal reports are timely prepared and filed with the SEC; (iii) successfully effecting strategic initiatives; (iv) hiring and retaining key employees; and (v) providing leadership and creating a working environment that fosters passion, teamwork and agility within the organization.

Mr. Allen’s initial annual salary will be $350, and he will be eligible to receive targeted annual cash incentives of not less than fifty percent (50%) of his base salary during the term of his Agreement. For fiscal year 2010, Mr. Allen’s annual incentive target will be prorated 60%. Mr. Allen’s performance goals include: (i) achieving targeted revenues and profitability; (ii) identifying and implementing expense savings; (iii) ensuring all financial and legal reports are timely prepared and filed with the SEC; (iv) successfully effecting strategic initiatives; (v) hiring and retaining key employees; and (vi) providing leadership and creating a working environment that fosters passion, teamwork and agility within the organization.

The compensation committee retains the sole and absolute discretion to determine any annual cash incentive bonuses paid pursuant to the Agreements. For Fiscal 2010, the compensation committee also retains the right to pay these executives a fully discretionary bonus.

Mr. Allen will receive a restricted stock grant of 120,000 shares on his initial day of employment, July 16, 2010. The restricted stock grant will be granted under and subject to the terms, definitions and provisions of the Company’s LTIP Plan. Mr. Allen’s restricted stock grant will vest in equal quarterly installments, beginning as of his initial day of employment, such that the entire grant is 100% vested as of the fourth anniversary of his initial date of employment.

Upon a Change in Control, all of Mr. Langston’s then outstanding awards relating to the Company’s common stock will vest in accordance with the terms and conditions specified in such awards and all of Mr. Allen’s then outstanding awards relating to the Company’s common stock will fully vest.

In addition, under the Agreements (subject to certain conditions such as executing a release and agreeing to not compete against the Company during the period in which payments are made) each of the Executives may receive the following severance payments:

	•		If the Company terminates Mr. Langston’s employment without cause, or Mr. Langston resigns for good reason, Mr. Langston will receive (i) monthly severance payments of $17 (less taxes) for nine (9) months (resulting in an aggregate severance payment of $153) if such termination or resignation is not in connection with a change in control of the Company; and (ii) monthly severance payments of approximately $27 for twelve (12) months (resulting in an aggregate severance payment of $325) if such termination or resignation is in connection with a change in control of the Company.
	•		If the Company terminates Mr. Allen’s employment without cause, or Mr. Allen resigns for good reason, Mr. Allen will receive (i) monthly severance payments of $31 (less taxes) for twelve (12) months (resulting in an aggregate severance payment of $375) if such termination or resignation is not in connection with a change in control of the Company; and (ii) monthly severance payments of approximately $42 for twelve (18) months (resulting in an aggregate severance payment of $750) if such termination or resignation is in connection with a change in control of the Company.

Operating Leases

We lease facilities and equipment, including access to satellites for television transmission, under non-cancelable operating leases that expire at various dates through 2016. Generally, the most significant leases are our satellite lease.

We lease certain of our administrative facilities from Musk Ox Properties, LP, which in turn is owned by Messrs. Perry T. Massie, Chairman of the Board and Thomas H. Massie, both of whom are principal stockholders and directors of the Company. The lease agreement has a five-year term, expiring on December 31, 2010, with 2 renewal options (between 2 and 5 years) exercisable at our discretion. Monthly rental payments are $19 with a 3% per year escalation clause.

We lease our SkyCam facility from Case and Associates Properties, Inc., which in turn is partially owned by one of our executive officers. The lease agreement has a ten year term expiring in May 2016. Monthly rent payments under this lease agreement are $43.

Our Winnercomm office lease agreement expired in June 2010. During March 2010, we entered into a new lease agreement which extended the lease term for certain portions of the facility from July 2010 to June 2011, with monthly rent payments of $36.

Our CableCam facility lease agreement expires in October 2011. Monthly rent payments under this lease agreement are $10.

Rental expenses including satellite and transponder expense, rent expense paid to Musk Ox Properties, LP, Case and Associate Properties, Inc., and our Winnercomm and CableCam facilities, aggregated to approximately $722 and $926 for the three months ended June 30, 2010 and 2009, respectively, and approximately $1,588 and $1,789 for the six months ended June 30, 2010 and 2009, respectively.

NOTE 13—SEGMENT INFORMATION

We report segment information in the same format as reviewed by our chief operating decision maker in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our chief executive officer. Following the acquisition of Winnercomm in January 2009, we have two reporting segments, TOC and Production Services. TOC is a separate business activity that broadcasts television programming on Outdoor Channel 24 hours a day, seven days a week. TOC generates revenue primarily from advertising fees (which include fees paid by outside producers to purchase advertising time in connection with the airing of their programs on Outdoor Channel) and subscriber fees. Production Services is a separate business activity that relates to the production, development and marketing of sports programming and the rental of aerial camera systems. Production Services generates revenue from advertising fees, production services for customer-owned telecasts, from aerial camera services for customer-owned telecasts and from web page design, marketing and hosting services. Intersegment revenues generated by Production Services of approximately $206 and $463, respectively, for the three months ended June 30, 2010 and 2009, and intersegment cost of services generated by Production Services of approximately $345 and $466, respectively for the three months ended June 30, 2010 and 2009, have been eliminated within the Production Services segment. Intersegment revenues generated by Production Services of approximately $728 and $840, respectively, for the six months ended June 30, 2010 and 2009, and intersegment cost of services generated by Production Services of approximately $835 and $773, respectively, for the six months ended June 30, 2010 and 2009, have been eliminated within the Production Services segment.

Information with respect to these reportable segments as of and for the three and six months ended June 30, 2010 is as follows:

						Income (Loss)								Depreciation
As of and for the Three Months Ended:						Before Income				Total				and
June 30, 2010
TOC		$	11,757			$	(207	)		$	83,927			$	413
Production Services			5,072				(1,434	)			6,571				515
Subtotals of Segments			16,829				(1,641	)			90,498				928
Corporate*			—				—				59,679				—
Totals		$	16,829			$	(1,641	)		$	150,177			$	928
June 30, 2009
TOC		$	12,443			$	1,266			$	85,065			$	508
Production Services			6,770				(2,510	)			11,572				459
Subtotals of Segments			19,213				(1,244	)			96,637				967
Corporate*			—				—				55,445				—
Totals		$	19,213			$	(1,244	)		$	152,082			$	967

						Income (Loss)								Depreciation
						Before Income				Total				and
As of and for the Six Months Ended:		Revenues				Taxes				Assets				Amortization
June 30, 2010
TOC		$	23,880			$	(572	)		$	83,927			$	818
Production Services			10,770				(3,736	)			6,571				1,021
Subtotals of Segments			34,650				(4,308	)			90,498				1,839
Corporate*			—				—				59,679				—
Totals		$	34,650			$	(4,308	)		$	150,177			$	1,839
June 30, 2009
TOC		$	24,900			$	1,359			$	85,065			$	1,008
Production Services			11,289				(4,914	)			11,572				847
Subtotals of Segments			36,189				(3,555	)			96,637				1,855
Corporate*			—				—				55,445				—
Totals		$	36,189			$	(3,555	)		$	152,082			$	1,855

NOTE 14—RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the FASB issued guidance that requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. The guidance is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures that are effective for annual periods beginning after December 15, 2010. We do not expect the adoption of this guidance to have a material impact on the Company’s consolidated results of operations or financial position.

In February 2010, the FASB issued amended guidance on subsequent events. Under this amended guidance, SEC filers are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. This guidance was effective immediately and the Company adopted these new requirements upon issuance of this guidance.

NOTE 15—SUBSEQUENT EVENTS

The Company has completed an evaluation of all subsequent events through the date the consolidated financial statements were issued and concluded no subsequent events occurred that required recognition or disclosure.

* * *

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Safe Harbor Statement

The information contained in this report may include forward-looking statements. Our 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, integration costs 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 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 included in Part II, Item 1A Risk Factors below 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-Q and in our other filings with the Securities and Exchange Commission. For these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements in Section 27A of the Securities Act and Section 21E of the Exchange Act.

General

We are organized into two operating segments, Outdoor Channel (or “TOC”) and Production Services. Each of these operating segments has unique characteristics and faces different opportunities and challenges. An overview of our two operating segments follows.

The Outdoor Channel or TOC 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 outdoor related lifestyle programming. TOC revenues include advertising fees from advertisements aired on Outdoor Channel and fees paid by third-party programmers to purchase advertising time in connection with the airing of their programs on Outdoor Channel and subscriber fees paid by cable and satellite service providers that air Outdoor Channel.

Production Services is comprised of our wholly owned subsidiary, Winnercomm, Inc., which in turn wholly owns CableCam, Inc. and SkyCam, Inc. These businesses are involved in the production, development and marketing of sports programming and aerial camera systems. Production Services revenues include revenue from sponsorship and advertising fees from company ad inventory, revenue from production services for customer-owned telecasts, revenue from camera services for customer-owned telecasts and revenue from web page design, marketing and hosting fees.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, judgments and assumptions. We believe that our estimates, judgments and assumptions made when accounting for items and matters such as customer retention patterns, allowance for bad debts, useful lives of assets, asset valuations including cash flow projections, recoverability of assets, potential unasserted claims under contractual obligations, income taxes, reserves and other provisions and contingencies are reasonable, based on information available at the time they are made. These estimates, judgments and assumptions can 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.

We believe that the policies set forth below may involve a higher degree of judgment and complexity in their application than our other accounting policies and represent the critical accounting policies used in the preparation of our financial statements.

Subscriber Acquisition Fees

Subscriber acquisition fees are paid to obtain carriage on certain pay television distributors’ systems. Under certain of these agreements with pay television distributors, TOC is obligated to pay subscriber acquisition fees to the pay television distributors if they meet defined criteria for the provision of additional carriage for Outdoor Channel on the pay television distributors’ systems. Such costs are accrued when TOC receives appropriate documentation that the distributors have met the contractual criteria and have provided the additional carriage.

Subscriber acquisition fees included in other assets, are amortized over the contractual period that the pay television distributor is required to carry the newly acquired TOC subscriber, generally 3 to 5 years. The amortization is charged as a reduction of the subscriber fee revenue that the pay television distributor is obligated to pay us. If the amortization expense exceeds the subscriber fee revenue recognized on a per incremental subscriber basis, the excess amortization is included as a component of cost of services. We assess the recoverability of these costs periodically by comparing the net carrying amount of the subscriber acquisition fees to the estimates of future subscriber fees and advertising revenues. We also assess the recoverability when events such as changes in distributor relationships occur or other indicators suggest impairment.

Prepaid Programming Costs

We produce a portion of the programming we air on our channel in-house. The cost of production is expensed as the show airs. As such, we have 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 based on anticipated airings, when the program airs and the related advertising revenue is recognized. At the time it is determined that a program will not likely air, we charge to programming expense any remaining costs recorded in prepaid programming costs.

Revenue Recognition

TOC generates revenue through advertising fees from advertisements and infomercials aired on Outdoor Channel, fees paid by outside producers to purchase advertising time in connection with the airing of their programs on Outdoor Channel and from subscriber fees paid by cable and satellite service providers that air Outdoor Channel. Advertising revenues are recognized when the advertisement is aired and the collectability of fees is reasonably assured. Subscriber fees are recognized in the period the programming is aired by the distributor.

Production Services revenue includes revenue from sponsorship and advertising fees from company ad inventory, revenue from production services for customer-owned telecasts, revenue from aerial camera services for customer-owned telecasts and revenue from web page design and marketing. Advertising revenues are recognized when the advertisement is aired and the collectability of fees is reasonably assured. Revenue from production services for customer-owned telecasts is recognized upon completion and delivery of the telecast to the customer. Costs incurred prior to completion and delivery are reflected as prepaid production costs in the accompanying consolidated balance sheets. Advances of contract fees prior to completion and delivery are shown as deferred revenue in the accompanying consolidated balance sheets. Revenue from aerial camera services for customer-owned telecasts is recognized upon completion and delivery of the telecast to the customer. Revenue from each event is based on an agreed upon contracted amount plus allowed expenses. Revenue from web page design and marketing is recognized upon the completion of services.

Commission revenue from the marketing of program advertising and commercial air time is recognized when the advertising or commercial air time occurs. In the normal course of business, the Company acts as or uses an intermediary or agent in executing transactions with third parties. Certain transactions are recorded on a gross or net basis depending on whether we are acting as the principal in a transaction or acting as an agent in the transaction. We serve as the principal in transactions in which we have substantial risks and rewards of ownership and, accordingly, record revenue on a gross basis. For those transactions in which we do not have substantial risks and rewards of ownership, we are considered an agent in the transaction and, accordingly, record revenue on a net basis. As such, we record revenue when our commission is earned.

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. 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.

We maintain an allowance for doubtful accounts for estimated losses that may arise if any of our 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 our larger customers and changes in customer payment terms when making estimates of the uncollectability of our trade accounts receivable balances. If we determine that the financial condition of any of our customers deteriorated or improved, whether due to customer specific or general economic conditions, we make appropriate adjustments to the allowance.

Valuation of Goodwill

We review goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable, pursuant to a two-step impairment test. In the first step, we compare the fair value of each of our reporting units to its carrying value as of October 1 of each year. We determine the fair values of our reporting units using the income approach. If the fair value of any of our reporting units exceeds the carrying values of the net assets assigned to that unit, goodwill is not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to any of our reporting unit exceeds the fair value, then we must perform the second step in order to determine the implied fair value of the reporting unit’s goodwill and compare it to the carrying value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we must record an impairment loss equal to the difference.

We currently have two reporting units, TOC and Production Services. The Production Services reporting unit consists of Winnercomm, CableCam and SkyCam businesses which were acquired on January 12, 2009. All of the Company’s goodwill is currently attributed to our TOC reporting unit. There were no other changes to our reporting units or allocation of goodwill by reporting units during 2009 or 2010.

Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The estimate of fair value of each of our reporting units is based on our projection of revenues, cost of services, other expenses and cash flows considering historical and estimated future results, general economic and market conditions as well as the impact of planned business and operational strategies. We base our fair value estimates on assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Actual results may differ from those estimates. The valuations employ present value techniques to measure fair value and consider market factors.

Key assumptions used to determine the fair value of each reporting unit as of our annual assessment date were: (a) expected cash flow for the period from 2010 to 2014 plus a terminal year; (b) a discount rate of 10%, which is based on marketplace participant expectations; and (c) a debt-free net cash flow long-term growth rate of 4% which is based on expected levels of growth for nominal GDP and inflation.

As of October 1, 2009, if forecasted debt-free net cash flow growth had been 10% lower than estimated, sensitivity calculations indicate that goodwill attributed to TOC would not be impaired. As of October 1, 2009, if the discount rate applied in our analysis had been 10% higher than estimated, sensitivity calculations indicate that goodwill attributed to TOC would not be impaired. As of October 1, 2009, the Company would have been required to perform the second step of the implied fair value analysis had the projected cash flow growth rate been less than negative four percent. Changes in the judgments and estimates underlying our analysis of goodwill for possible impairment, including expected future cash flows and discount rate, could result in a significantly different estimate of the fair value of the reporting units in the future and could result in the impairment of goodwill.

Income Taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

We follow the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods. Also included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Stock Incentive Plans

We record stock compensation expense for equity based awards granted, including stock options, for which expense is recognized over the service period based on the fair value of the award at the date of grant.

We account for stock options granted to non-employees using the fair value method. Compensation expense for options granted to non-employees has been determined as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. Compensation expense for options granted to non-employees is periodically remeasured as the underlying options vest and is recorded as expense in the consolidated financial statements.

Comparison of Operating Results for the Three Months Ended June 30, 2010 and June 30, 2009

Overview — On January 12, 2009 we acquired Winnercomm (see Note 2) and began operating in two segments, Production Services and TOC. The unaudited condensed consolidated statements of operations include the financial results of the Production Services segment from the date of acquisition. For additional information regarding business segments, refer to Note 13 — Segment Information.

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
		2010				2009				$				%				2010				2009
Revenues:
Advertising		$	7,253			$	7,105			$	148				2.1	%			43.1	%			37.0	%
Subscriber fees			4,504				5,338				(834	)			(15.6	)			26.8				27.8
Production services			5,072				6,770				(1,698	)			(25.1	)			30.1				35.2
Total revenues			16,829				19,213				(2,384	)			(12.4	)			100.0				100.0
Cost of services:
Programming			1,529				1,409				120				8.5				9.1				7.3
Satellite transmission fees			393				400				(7	)			(1.8	)			2.3				2.1
Production and operations			6,011				8,210				(2,199	)			(26.8	)			35.7				42.7
Other direct costs			109				110				(1	)			(0.9	)			0.6				0.6
Total cost of services			8,042				10,129				(2,087	)			(20.6	)			47.8				52.7
Other expenses:
Advertising			979				924				55				6.0				5.8				4.8
Selling, general and administrative			8,536				8,465				71				0.8				50.7				44.1
Depreciation and amortization			928				967				(39	)			(4.0	)			5.5				5.0
Total other expenses			10,443				10,356				87				0.8				62.1				53.9
Loss from operations			(1,656	)			(1,272	)			(384	)			30.2				(9.8	)			(6.6	)
Interest and other income, net			15				28				(13	)			(46.4	)			0.1				0.1
Loss from operations before income taxes			(1,641	)			(1,244	)			(397	)			31.9				(9.8	)			(6.5	)
Income tax benefit			(485	)			(307	)			(178	)			58.0				(2.9	)			(1.6	)
Net loss		$	(1,156	)		$	(937	)		$	(219	)			23.4	%			(6.9	)%			(4.9	)%