Attached files
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EX-31.2 - EX-31.2 - OUTDOOR CHANNEL HOLDINGS INC | a56946exv31w2.htm |
EX-32.2 - EX-32.2 - OUTDOOR CHANNEL HOLDINGS INC | a56946exv32w2.htm |
EX-31.1 - EX-31.1 - OUTDOOR CHANNEL HOLDINGS INC | a56946exv31w1.htm |
EX-32.1 - EX-32.1 - OUTDOOR CHANNEL HOLDINGS INC | a56946exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 |
For the quarterly period ended June 30, 2010
o | 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: 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)
Temecula, California 92590
(Address and zip code of principal executive offices)
(951) 699-6991
(Issuers telephone number, including area code)
(Issuers 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 issuers 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
Quarterly Report on Form 10-Q
For the Period Ended June 30, 2010
Table of Contents
* * *
2
Table of Contents
PART IFINANCIAL INFORMATION
ITEM 1. Financial Statements.
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(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.
3
Table of Contents
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
(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.
4
Table of Contents
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statement of Stockholders Equity
For the Six Months Ended June 30, 2010
(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.
5
Table of Contents
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(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.
6
Table of Contents
OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share data)
NOTE 1ORGANIZATION 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 2ACQUISITION
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.
7
Table of Contents
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 3STOCK 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.
8
Table of Contents
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 | $ | | ||||||||||
9
Table of Contents
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 | |||||
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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 4EARNINGS (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 5INVESTMENTS 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.
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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 | ||||||||
(1) | Cash and cash equivalents consist primarily of treasury bills and money market funds with original maturity dates of three months or less, for which we determine fair value through quoted market prices. | |
(2) | Investments in available-for-sale securities consist of treasury bills with original maturity dates in excess of three months, for which we determine fair value through quoted market prices. | |
(3) | Investments in auction-rate securities consist of one auction-rate municipal security and one closed-end perpetual preferred auction-rate security (PPS). PPS use a discounted cash flow analysis to more accurately measure possible liquidity discounts. |
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:
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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 6COMPREHENSIVE 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 7GOODWILL 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 units goodwill and compare it to the carrying value of the reporting units
goodwill. If the carrying value of a reporting units 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 Companys 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.
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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 8LINES 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 9ACCOUNTS 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 10INCOME 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.
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NOTE 11RELATED 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 12COMMITMENTS 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 Channels 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
Companys standard form of confidential information and intellectual property agreement and the
Executives standard forms of equity award agreement), including, specifically the Change of
Control Severance Agreement.
Mr. Langstons agreement expires on December 31, 2012 and Mr. Allens 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. Langstons 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. Langstons 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.
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Mr. Allens 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. Allens annual incentive target will be prorated 60%. Mr.
Allens 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 Companys LTIP Plan. Mr. Allens 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. Langstons then outstanding awards relating to the Companys
common stock will vest in accordance with the terms and conditions specified in such awards and all
of Mr. Allens then outstanding awards relating to the Companys 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. Langstons 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. Allens 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.
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NOTE 13SEGMENT 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 | |||||||
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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 | |||||||
* | Corporate overhead expenses consist primarily of executive, legal and administrative functions not associated directly with either TOC or Production Services. We allocate a portion of these expenses to our Production Services segment, but the majority is captured in our TOC segment. Corporate assets consist primarily of cash not held in our operating accounts and available-for-sale securities. |
NOTE 14RECENT 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 Companys
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 15SUBSEQUENT 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.
* * *
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ITEM 2. MANAGEMENTS 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.
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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.
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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 units goodwill and compare it to the carrying value of the reporting units
goodwill. If the carrying value of a reporting units 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 Companys 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.
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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 | )% | |||||||||
(percentages may not add due to rounding)
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Comparison of Operating Results for the Six Months Ended June 30, 2010 and June 30, 2009
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 |
$ | 14,545 | $ | 14,899 | $ | (354 | ) | (2.4 | )% | 42.0 | % | 41.2 | % | |||||||||||
Subscriber fees |
9,335 | 10,001 | (666 | ) | (6.7 | ) | 26.9 | 27.6 | ||||||||||||||||
Production services |
10,770 | 11,289 | (519 | ) | (4.6 | ) | 31.1 | 31.2 | ||||||||||||||||
Total revenues |
34,650 | 36,189 | (1,539 | ) | (4.3 | ) | 100.0 | 100.0 | ||||||||||||||||
Cost of services: |
||||||||||||||||||||||||
Programming |
2,833 | 3,081 | (248 | ) | (8.0 | ) | 8.2 | 8.5 | ||||||||||||||||
Satellite transmission fees |
784 | 795 | (11 | ) | (1.4 | ) | 2.3 | 2.2 | ||||||||||||||||
Production and operations |
13,110 | 14,803 | (1,693 | ) | (11.4 | ) | 37.8 | 40.9 | ||||||||||||||||
Other direct costs |
221 | 207 | 14 | 6.8 | 0.6 | 0.6 | ||||||||||||||||||
Total cost of services |
16,948 | 18,886 | (1,938 | ) | (10.3 | ) | 48.9 | 52.2 | ||||||||||||||||
Other expenses: |
||||||||||||||||||||||||
Advertising |
1,265 | 1,383 | (118 | ) | (8.5 | ) | 3.7 | 3.8 | ||||||||||||||||
Selling, general and
administrative |
18,933 | 17,672 | 1,261 | 7.1 | 54.6 | 48.8 | ||||||||||||||||||
Depreciation and amortization |
1,839 | 1,855 | (16 | ) | (0.9 | ) | 5.3 | 5.1 | ||||||||||||||||
Total other expenses |
22,037 | 20,910 | 1,127 | 5.4 | 63.6 | 57.8 | ||||||||||||||||||
Loss from operations |
(4,335 | ) | (3,607 | ) | (728 | ) | 20.2 | (12.5 | ) | (10.0 | ) | |||||||||||||
Interest and other income, net |
27 | 52 | (25 | ) | (48.1 | ) | 0.1 | 0.1 | ||||||||||||||||
Loss from operations before
income taxes |
(4,308 | ) | (3,555 | ) | (753 | ) | 21.2 | (12.4 | ) | (9.8 | ) | |||||||||||||
Income tax benefit |
(1,639 | ) | (1,304 | ) | (335 | ) | 25.7 | (4.7 | ) | (3.6 | ) | |||||||||||||
Net loss |
$ | (2,669 | ) | $ | (2,251 | ) | $ | (418 | ) | 18.6 | % | (7.7 | )% (6.2 | )% | ||||||||||
(percentages may not add due to rounding)
The Companys total revenues decreased 12% and 4% for the three and six months ended June 30,
2010, respectively, as compared to the same periods in 2009. These decreases were primarily due to
decreases in production services revenue and subscriber fees, as further explained below.
Our total cost of services decreased 21% for the three months ended June 30, 2009 as compared to
the same period in 2009 and decreased 10% for the six months ended June 30, 2010 as compared to the
same period in 2009. These decreases were primarily due to decreased production costs at our
Production Services segment, as further explained below.
Other expenses increased 1% for the three months ended June 30, 2010 as compared to the same period
in 2009 and increased 5% for the six months ended June 30, 2010 as compared to the same period in
2009. These increases were primarily due to costs associated with staff terminations, including the
departure of our prior chief financial officer, increased legal fees, accounting and professional
fees partially offset by the expiration of the supplemental compensation plan for our CEO, as
further explained below.
Revenues
Our revenues include revenues from advertising fees, subscriber fees and production services.
Advertising revenue is generated from the sale of advertising time on Outdoor Channel including
advertisements shown during a program (also known as short-form advertising) and infomercials in
which the advertisement is the program itself (also known as long-form advertising). Advertising
revenue is also generated from fees paid by third party programmers that purchase advertising time
in connection with the airing of their programs on Outdoor Channel. Subscriber fees are generated
from cable and satellite service providers who pay monthly subscriber fees to us for the right to
broadcast our channel. Production Services revenue is generated from production services for
customer-owned telecasts, Winnercomm-owned productions, aerial camera services for customer-owned
telecasts and revenue from web page design and marketing.
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Total revenues for the three months ended June 30, 2010 were $16,829,000, a decrease of $2,384,000,
or 12.4%, compared to revenues of $19,213,000 for the three months ended June 30, 2009. Total
revenues for the six months ended June 30, 2010 were $34,650,000, a decrease of $1,539,000, or
4.3%, compared to revenues of $36,189,000 for the six months ended June 30, 2009. The net decreases
were the result of changes in several items comprising revenue as discussed below.
Advertising revenue for the three months ended June 30, 2010 was $7,253,000, an increase of
$148,000, or 2.1%, compared to $7,105,000 for the three months ended June 30, 2009. Advertising
revenue for the six months ended June 30, 2010 was $14,545,000, a decrease of $354,000, or 2.4%,
compared to $14,899,000 for the six months ended June 30, 2009. The increase in advertising revenue
for the three months ended June 30, 2010 as compared to the same period a year ago was due
primarily to an increase in short-form and website advertising partially offset by a reduced amount
of advertising inventory being sold to our time-buy producers, increases in our make-good reserves
and lower infomercial revenues. The decrease in advertising revenue for the six months ended June
30, 2010 as compared to the same period a year ago was due primarily to reduced amounts of
advertising inventory being sold to our time-buy producers, increases in our make-good reserves and
lower infomercial revenues partially offset by increased website and short-form advertising
revenues. We expect short-form advertising revenues to be adversely
impacted in the third and fourth quarters of 2010 as we set aside
inventory during those periods to deliver to our advertisers the
contracted audience size. We expect demand for our advertising inventory will fluctuate
within our programming genre niche due primarily to current economic conditions. These conditions
make it harder to estimate future revenues because advertisers are generally buying inventory much
closer to the actual time of airing instead of contracting for the advertising inventory in
advance. In addition, we expect continued competitive pressure to negatively impact future
long-form advertising revenue.
Subscriber fees for the three months ended June 30, 2010 were $4,504,000, a decrease of $834,000 or
15.6% compared to $5,338,000 for the three months ended June 30, 2009. Subscriber fees for the six
months ended June 30, 2010 were $9,335,000, a decrease of $666,000 or 6.7% compared to $10,001,000
for the six months ended June 30, 2009. These decreases in subscriber fees were primarily due to
changes in our reserves for most-favored nation liabilities with our
various distributors. It is likely that our subscriber fee revenue
will be adversely affected by these accruals for the foreseeable future until we resolve
ongoing discussions with certain of our distributors.
For June 2010, Nielsen estimated that Outdoor Channel had 36.2 million viewers compared to 29.9
million for the same period a year ago. Nielsen revises its estimate of the number of
subscribers to our channel each month, and for August 2010 Nielsens estimate was at 35.6 million
subscribers. Nielsen is the leading provider of television audience measurement and advertising
information services worldwide, and its estimates and methodology are generally accepted and used
in the advertising industry. The estimate regarding Outdoor Channels subscriber base is made by
Nielsen Media Research and is theirs alone, and does not represent our opinions, forecasts or
predictions. It should not be implied that we endorse nor necessarily concur with such information,
simply due to our reference to or distribution of their estimate. Although we realize Nielsens
estimate is typically greater than the number of subscribers on which a network is paid by the
service providers, we are currently experiencing a greater difference in these two different
numbers of subscribers than we would expect. We anticipate this percentage difference to decrease
as we grow our total subscriber base, and we have seen it decrease over the past year. There can be
no assurances that Nielsen will continue to report growth of its estimate of our subscribers and in
fact at some point Nielsen may even report additional declines in our subscriber estimate. If that
were to happen, we could suffer a reduction in advertising revenue.
We are pursuing subscriber growth by utilizing various means including offering lower subscriber
fees for broader distribution and payment of subscriber acquisition or launch support fees among
other tactics. Such launch support fees are capitalized and amortized over the period that the pay
television distributor is required to carry the newly acquired TOC subscriber. To the extent
revenue is associated with the incremental subscribers, the amortization is charged to offset the
related revenue. Any excess of launch support amortization over the related subscriber fee revenue
is charged to expense as other direct costs. If we are successful with these tactics, our net
subscriber fee revenue may decrease over the short-term future.
Production services revenue for the three months ended June 30, 2010 was $5,072,000, a decrease of
$1,698,000, or 25.1%, as compared to $6,770,000 for the three months ended June 30, 2009.
Production services revenue for the six months ended June 30, 2010 was $10,770,000, a decrease of
$519,000, or 4.6%, as compared to $11,289,000 for the six months ended June 30, 2009. The decrease
for the three and six months ended June 30, 2010 as compared to the same period a year ago was due
primarily to a reduction in the number of production contracts that were renewed in the current
period partially offset by an increase in events and related revenue at our aerial cameras unit.
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Cost of Services
Our cost of services consists primarily of the cost of providing our broadcast signal and
programming to the distributors for transmission to the consumer. Cost of services includes
programming costs, satellite transmission fees, production and operations costs, and other direct
costs. In addition, cost of services includes production related labor and other costs related to
our Production Services segment.
Total cost of services for the three months ended June 30, 2010 was $8,042,000, a decrease of
$2,087,000, or 20.6%, compared to $10,129,000 for the three months ended June 30, 2009. Total cost
of services for the six months ended June 30, 2010 was $16,948,000, a decrease of $1,938,000, or
10.3%, compared to $18,886,000 for the six months ended June 30, 2009. As a percentage of revenues,
total cost of services was 47.8% and 52.7% in the three months ended June 30, 2010 and 2009,
respectively. As a percentage of revenues, total cost of services was 48.9% and 52.2% in the six
months ended June 30, 2010 and 2009, respectively. The net decreases were the result of changes in
several items comprising cost of services as discussed below.
Programming expenses for the three months ended June 30, 2010 were $1,529,000, an increase of
$120,000, or 8.5%, compared to $1,409,000 for the three months ended June 30, 2009. This increase
was due primarily to certain third party produced programs airing during the current year period
with no airing of similar programs during the same period a year ago. Programming expenses for the
six months ended June 30, 2010 were $2,833,000, a decrease of $248,000, or 8.0%, compared to
$3,081,000 for the six months ended June 30, 2009. This decrease was primarily a result of a larger
proportion of higher quality shows that aired in the current period were being aired over 4
quarters (versus two quarters) and the result of lower expenses due to more programs being produced
internally by the Production Services segment versus being produced by unaffiliated third parties.
Our policy is to amortize costs of specific show production to programming expense over the
expected airing period beginning when the program first airs. The cost of programming is generally
first recorded as prepaid programming costs and is then amortized to programming expense based on
the anticipated airing schedule. The anticipated airing schedule has typically been over 2 or 4
quarters. As the anticipated airing schedule changes, the timing and amount of the charge to
expense is prospectively adjusted accordingly. At the time we determine a program is unlikely to
air or re-air, we amortize programming expense with the remaining associated cost recorded in
prepaid programming. We do not make any further expense or asset adjustments if in subsequent
periods demand brings episodes to air that had previously been fully expensed, rather, we consider
such events when we review our expected airings prospectively. Our programming costs per show are
expected to increase as we continue to improve the quality of our in-house produced shows, and we
expect our aggregate programming costs to remain relatively consistent over the foreseeable future.
As our programming strategy evolves, we will reconsider the appropriate amortization life of our
programming costs.
Satellite transmission fees for the three months ended June 30, 2010 were $393,000, a decrease of
$7,000, or 1.8%, compared to $400,000 for the three months ended June 30, 2009. Satellite
transmission fees for the six months ended June 30, 2010 were $784,000, a decrease of $11,000, or
1.4%, compared to $795,000 for the six months ended June 30, 2009. The decreases for the three and
six month periods were primarily due to lower uplink expenses.
Production and operations costs for the three months ended June 30, 2010 were $6,011,000, a
decrease of $2,199,000, or 26.8%, compared to $8,210,000 for the three months ended June 30, 2009.
Production and operations costs for the six months ended June 30, 2010 were $13,110,000, a decrease
of $1,693,000, or 11.4%, compared to $14,803,000 for the six months ended June 30, 2009. The
decrease in costs for the three and six months ended June 30, 2010 relates primarily to decreased
production costs at our Production Services segment caused by fewer production contracts being
renewed in the current year. These decreases in costs were partially offset by increased personnel
and related compensation costs and increased broadband services costs at our TOC segment of
approximately $75,000 and $268,000 for the three and six months ended June 30, 2010, respectively.
Also partially offsetting the Production Services segment cost reductions were increased production
costs associated with an annual marketing event of approximately $103,000 at our TOC segment for
the six months ended June 30, 2010.
Other direct costs for the three months ended June 30, 2010 were $109,000, a decrease of $1,000, or
0.9%, compared to $110,000 for the three months ended June 30, 2009. This decrease was due
primarily to decreased closed captioning costs partially offset by an increase in subscriber
acquisition fees amortization. Other direct costs for the six months ended June 30, 2010 were
$221,000, an increase of $14,000, or 6.8%, compared to $207,000 for the six months ended June 30,
2009. This increase was due primarily to an increase in subscriber acquisition fee amortization
related to additional subscriber launches
in the prior year. Our other direct costs may increase over the foreseeable future due to the
amortization of subscriber acquisition fees, also referred to as launch support fees, where the
costs are in excess of the related subscriber revenue.
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Other Expenses
Other expenses consist of the cost of advertising, selling, general and administrative expenses and
depreciation and amortization.
Total other expenses for the three months ended June 30, 2010 were $10,443,000, an increase of
$87,000, or 0.8%, compared to $10,356,000 for the three months ended June 30, 2009. Total other
expenses for the six months ended June 30, 2010 were $22,037,000, an increase of $1,127,000, or
5.4%, compared to $20,910,000 for the six months ended June 30, 2009. As a percentage of revenues,
total other expenses were 62.1% and 53.9% in the three months ended June 30, 2010 and 2009,
respectively. As a percentage of revenues, total other expenses were 63.6% and 57.8% in the six
months ended June 30, 2010 and 2009, respectively. The net increases were the result of changes in
several items comprising other expenses as described below.
Advertising expenses for the three months ended June 30, 2010 were $979,000, an increase of
$55,000, or 6.0%, compared to $924,000 for the three months ended June 30, 2009. This increase was
due primarily to television marketing spots incurred during the current period but were not
incurred in the prior year period partially offset by a decline in certain advertising events and
promotional materials as compared to the prior year period. Advertising expenses for the six months
ended June 30, 2010 were $1,265,000, a decrease of $118,000, or 8.5%, compared to $1,383,000 for
the six months ended June 30, 2009. This decrease was due primarily to an overall decrease in
spending on advertising materials, programs and campaigns.
Selling, general and administrative expenses for the three months ended June 30, 2010 were
$8,536,000, an increase of $71,000, or 0.8%, compared to $8,465,000 for the three months ended June
30, 2009. Selling, general and administrative expenses for the six months ended June 30, 2010 were
$18,933,000, an increase of $1,261,000, or 7.1%, compared to $17,672,000 for the six months ended
June 30, 2009. As a percentage of revenues, selling, general and administrative expenses were 50.7%
and 44.1% for the three months ended June 30, 2010 and 2009, respectively. As a percentage of
revenues, selling, general and administrative expenses were 54.6% and 48.8% for the six months
ended June 30, 2010 and 2009, respectively. The increase for the three months ended June 30, 2010
as compared to the same period in 2009 relates primarily to severance and related expenses
associated with the termination of several positions in our Production Services segment and the
departure of our former chief financial officer, which combined was approximately $403,000 and increased expenses related
to marketing events held during the second quarter of approximately $258,000 over the prior year
amounts. These increases were partially offset by decreases in stock compensation and in
compensation and related expenses associated with the expiration of the supplemental compensation
plan of our CEO in 2009 of approximately $311,000 and reductions in integration related and
international business development consulting fees of approximately $281,000. The increase in
selling, general and administrative expenses for the six months ended June 30, 2010 as compared to
the same period in 2009 relates primarily to severance and related compensation expenses associated
with the termination of several positions in our Production Services segment and the departure of
our chief financial officer of approximately $460,000, increased professional fees related to
public company and corporate governance matters of approximately $415,000, increased legal and
consulting fees related to ongoing litigation and potential acquisition activity of approximately
$323,000, increased accounting fees related to our annual audit and tax compliance of approximately
$188,000, a net increase in the provision for doubtful accounts of approximately $253,000 and
increased expenses related to marketing and promotional events held during the period of
approximately $552,000 over the prior year amounts. These increases were partially offset by
decreases in stock compensation and in compensation and related expenses associated with the
expiration of the supplemental compensation plan of our CEO in 2009 of approximately $934,000.
In addition to base salaries and bonuses, we utilize share-based compensation packages as
incentives for our employees. We have generally utilized restricted stock grants as opposed to
stock options or performance units. For tax purposes, the tax deduction for restricted stock,
subject to the limitations on the deductibility of employee remuneration of Internal Revenue Code
Section 162(m), is the fair market value of the Companys stock on the date the restrictions lapsed
(e.g. vesting). Although we may find it necessary to motivate prospective or current employees with
additional cash and or equity awards, we anticipate that selling, general and administrative costs
will remain relatively consistent over the foreseeable future.
Depreciation and amortization for the three months ended June 30, 2010 were $928,000, a decrease of
$39,000, or 4.0%, compared to $967,000 for the three months ended June 30, 2009. Depreciation and
amortization for the six months ended June 30, 2010 were $1,839,000, a decrease of $16,000, or
0.9%, compared to $1,855,000 for the six months ended June 30, 2009. The decrease in depreciation
and amortization primarily relates to certain equipment in our TOC segment becoming fully
depreciated as of December 31, 2009 partially offset by increased depreciation related to an
increase in fixed assets.
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Loss from Operations
Loss from operations for the three months ended June 30, 2010 was a loss of $1,656,000, a change of
$384,000 compared to a loss of $1,272,000 for the three months ended June 30, 2009. Loss from
operations for the six months ended June 30, 2010 was a loss of $4,335,000, a change of $728,000
compared to a loss of $3,607,000 for the six months ended June 30, 2009. As discussed above, the
increase in our loss from operations was driven primarily by a reduction in our time-buy revenues,
losses in our Production Services segment and increased selling, general and administrative
expenses. As we continue to strive to grow our subscriber base which involves increased advertising
expenditures, subscriber rate relief for our carriage partners and the ongoing and planned payment
of launch or advertising support, we will continue to incur increased expenses such as broadband,
marketing and advertising that are unlikely to be immediately offset by revenues. As a result, we
anticipate our operating margins will be constrained for the short-term future until scale is
achieved. There can be no assurance that these strategies will be successful.
Interest and Other Income, Net
Interest and other income, net for the three months ended June 30, 2010 was $15,000, a decrease of
$13,000 compared to $28,000 for the three months ended June 30, 2009. Interest and other income,
net for the six months ended June 30, 2010 was $27,000, a decrease of $25,000 compared to $52,000
for the six months ended June 30, 2009. This decrease was primarily due to lower interest rates on
our cash equivalents and investments in available-for-sale securities.
Loss from Operations Before Income Taxes
Loss from operations before income taxes as a percentage of revenues was (9.8)% for the three
months ended June 30, 2010 compared to (6.5)% for the three months ended June 30, 2009. We
incurred a loss before income taxes for the three months ended June 30, 2010 amounting to
$1,641,000, a change of $397,000 compared to a loss of $1,244,000 for the three months ended June
30, 2009. Loss from operations before income taxes as a percentage of revenues was (12.4)% for the
six months ended June 30, 2010 compared to (9.8)% for the six months ended June 30, 2009. We
incurred a loss before income taxes for the six months ended June 30, 2010 amounting to $4,308,000,
a change of $753,000 compared to $3,555,000 for the six months ended June 30, 2009.
Income Tax Benefit
Income tax benefit for the three months ended June 30, 2010 was a benefit of $485,000, a change of
$178,000 as compared to a benefit of $307,000 for the three months ended June 30, 2009. Income tax
benefit for the six months ended June 30, 2010 was a benefit of $1,639,000, a change of $335,000 as
compared to a benefit of $1,304,000 for the six months ended June 30, 2009. 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).
The income tax benefit for the three months ended June 30, 2010 and 2009 included a discrete tax
expense related to option tax deductions upon exercise or lapse of restrictions on restricted stock
that is less than the book compensation previously recorded of $243,000 and $204,000, respectively,
and $243,000 and $239,000, respectively, for the six months ended June 30, 2010 and 2009. In
addition, a discrete tax expense of $0 and $74,000 related to a change in the future statutory tax
rate for the state of California was reflected in the accompanying unaudited condensed consolidated
statement of operations for the six months ended June 30, 2010 and 2009, respectively.
Net Loss
Net loss for the three months ended June 30, 2010 was a loss of $1,156,000, a change of $219,000
compared to a loss of $937,000 for the three months ended June 30, 2009. Net loss for the six
months ended June 30, 2010 was a loss of $2,669,000, a change of $418,000 compared to a loss of
$2,251,000 for the six months ended June 30, 2009. The larger loss was due to the reasons stated
above.
Liquidity and Capital Resources
We used $173,000 of cash in our operating activities in the six months ended June 30, 2010,
compared to a usage of $1,987,000 in the six months ended June 30, 2009 and had a cash and cash
equivalent balance of $36,131,000 at June 30, 2010, an increase of $15,283,000 from the balance of
$20,848,000 at December 31, 2009. The increase in cash flows from operating activities in the six
months ended June 30, 2010 compared to the same period in 2009 was due primarily to collection of
accounts receivable partially offset by increases in operating expenses. Net working capital
decreased to
$67,234,000 at June 30, 2010, compared to $67,873,000 at December 31, 2009, primarily due to an
increase in the collection of accounts receivable partially offset by the payment of accounts
payable and the payment of subscriber acquisition fees to our distributers.
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Net cash provided by investing activities was $16,395,000 in the six months ended June 30,
2010 compared to cash used of $33,999,000 for the six months ended June 30, 2009. The increase in
cash provided by investing activities related principally to the increased net sales of short-term
available-for-sale securities and a decrease in capital expenditures for fixed asset replacements.
The prior year period included cash paid to purchase assets of Winnercomm.
As of June 30, 2010, we held $5,050,000 of auction-rate securities. Auction-rate securities are
investment vehicles with long-term or perpetual maturities which pay interest monthly at current
market rates reset through a Dutch auction. Beginning in February 2008, the majority of auctions
for these types of securities failed due to liquidity issues experienced in global credit and
capital markets. Our auction-rate securities followed this trend and experienced multiple failed
auctions due to insufficient investor demand. As there is a limited secondary market for
auction-rate securities, we have been unable to convert our positions to cash. We do not anticipate
being in a position to liquidate all of these investments until there is a successful auction or
the security issuer redeems their security, and accordingly, have reflected our investments in
auction-rate securities as non-current assets on our balance sheet. 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. Our auction-rate security investments
continue to pay interest according to their stated terms, are fully collateralized by underlying
financial instruments (primarily closed-end preferred and municipalities) and have maintained at
least A3 credit ratings despite the failure of the auction process. We believe that based on the
Companys current cash, cash equivalents and investments in available-for-sale securities balances
at June 30, 2010, the current lack of liquidity in the credit and capital markets will not have a
material impact on our liquidity, cash flow, financial flexibility or our ability to fund our
operations.
We continue to monitor the market for auction-rate securities and consider its impact (if any) on
the fair value of our investments. If the current market conditions deteriorate further, or the
anticipated recovery in fair values does not occur, we may be required to record additional
impairment charges in future periods.
Cash used by financing activities was $939,000 in the six months ended June 30, 2010 compared to
cash used of $745,000 in the six months ended June 30, 2009. The cash used by financing activities
in both the six months ended June 30, 2010 and six months ended June 30, 2009 was principally the
cash used for the purchase and retirement of treasury stock as employees used stock to satisfy
withholding taxes related to vesting of restricted shares and the purchase and retirement of common
stock in connection with the stock repurchase plan.
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
$10,000,000. 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. This Revolver is
guaranteed by TOC. As of June 30, 2010, we were in full compliance with all the covenants of the
Revolver.
As of June 30, 2010, we had sufficient cash on hand and expected cash flow from operations to meet
our short-term cash flow requirements. Management believes that our existing cash resources
including cash on-hand and anticipated cash flows from operations will be sufficient to fund our
operations at current levels and anticipated capital requirements through at least the next twelve
months. To the extent that such amounts are insufficient to finance our working capital
requirements or our desire to expand operations beyond current levels, we 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 us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At June 30, 2010 and 2009, our investment portfolio included fixed-income securities of $5,050,000
and $5,933,000, respectively. At June 30, 2010, all of our securities were auction-rate securities
with long-term maturities. These securities are subject to interest rate risk and will decline in
value if interest rates increase. However, due to the amount 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.
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We currently do not have significant transactions denominated in currencies other than U.S. dollars
and as a result we currently have little to no 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.
As of June 30, 2010 and as of the date of this report, we did not have any outstanding
borrowings. The rate of interest on our line-of-credit is variable, but we currently have no
outstanding balance under this credit facility. Because of these reasons, an immediate 10% change
in interest rates would have no material, immediate impact on our financial condition, operating
results or cash flows.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures
designed to provide reasonable assurance of achieving the objective that information in our
Exchange Act reports is recorded, processed, summarized and reported within the time periods
specified and pursuant to the regulations of the Securities and Exchange Commission. Disclosure
controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, include
controls and procedures designed to ensure the information required to be disclosed by us in the
reports we file or submit under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. It should be noted that our system of controls, however
well designed and operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system are met.
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2010,
the end of the period covered by this report. Based on this evaluation, we have concluded that our
disclosure controls and procedures were effective, as of the end of the period covered by this
report, to provide reasonable assurance that information required to be disclosed by us in reports
that we file or submit under the Exchange Act are recorded, processed, summarized and reported,
completely and accurately, within the time periods specified in SEC rules and forms.
Changes in internal control over financial reporting. There were no changes in our internal
control over financial reporting that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
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PART IIOTHER INFORMATION
ITEM 1. Legal Proceedings.
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 $75,000 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 Channels 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.
ITEM 1A. Risk Factors.
Our business and operations are subject to a number of risks and uncertainties, and the following
list should not be considered to be a definitive list of all factors that may affect our business,
financial condition and future operating results and should be read in conjunction with the risks
and uncertainties, including risk factors, contained in our other filings with the Securities and
Exchange Commission. Any forward-looking statements made by us 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 our actual
results and experiences to differ materially from the anticipated results or expectations expressed
in any forward-looking statements.
Service providers could discontinue or refrain from carrying Outdoor Channel, or decide to not
renew our distribution agreements, which could substantially reduce the number of viewers and harm
our operating results.
The success of Outdoor Channel is dependent, in part, on our ability to enter into new carriage
agreements and maintain existing agreements or arrangements with, and carriage by, satellite
systems, telephone companies, which we refer to as telcos, and multiple system operators, which we
refer to as MSOs, affiliated regional or individual cable systems. Although we currently have
arrangements or agreements with, and are being carried by, all the largest MSOs, satellite and
telco service providers, having such relationship or agreement with an MSO does not always ensure
that an MSOs affiliated regional or individual cable systems will carry or continue to carry
Outdoor Channel or that the satellite or telco service provider will carry our channel. Under our
current contracts and arrangements, our subsidiary The Outdoor Channel, Inc. or TOC typically
offers the service providers the right to broadcast Outdoor Channel to their subscribers, but not
all such contracts or arrangements require that Outdoor Channel be offered to all subscribers of,
or any tiers offered by, the service provider or a specific minimum number of subscribers. Because
many of our carriage arrangements do not specify on which service levels Outdoor Channel is
carried, such as analog versus basic digital, expanded digital or specialty tiers, or in which
geographic markets Outdoor Channel will be offered, in many cases we have no assurance that Outdoor
Channel will be carried and available to viewers of any particular service provider. In addition,
under the terms of some of our agreements, the service providers could decide to discontinue
carrying Outdoor Channel. Lastly, we are currently not under any long-term contract with one of the
major service providers as of June 30, 2010, although we continue to distribute our channel via
such service provider on a month-to-month basis. If we are unable to renew this distribution
agreement for a committed number of subscribers or for a multi-year term, we could lose, or be
subject to a loss of, a substantial number of subscribers. If a service provider discontinues or
refrains from carrying Outdoor Channel, or decides to not renew our distribution agreement with
them, this could reduce the number of viewers and harm our operating results.
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If our channel is placed in unpopular program packages by our service providers, or if service fees
are increased for our subscribers, the number of viewers of our channel may decline which could
harm our business and operating results.
We do not control the channels with which our channel is packaged by providers. The placement by a
service provider of our channel in unpopular program packages 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 the service providers to their subscribers when our channel is
packaged with other television channels or offered by itself. The prices for the channel packages
in which our channel is bundled, or the price for our channel by itself, may be set too high to
appeal to individuals who might otherwise be interested in our network. Further, if our channel is
bundled by service providers 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
subscribers and/or viewers of our channel, which in turn would reduce our subscriber fees and
advertising revenue.
A deterioration in general economic conditions may cause a decrease in, or hinder our ability to
grow, our advertising revenues.
A slowing economy or recession may impact our advertisers business activities which in turn could
have an adverse effect on our advertising revenues. During prior economic slowdowns, many
advertisers have reduced or slowed their advertising spending. If our advertisers decide to do so,
our growth in advertising revenues may slow or our advertising revenues could decrease.
We may not be able to effectively manage our future growth or the integration of acquisitions, and
our growth may not continue, which may substantially harm our business and prospects.
We have undergone rapid and significant growth in revenue and subscribers over the last several
years, including our very recent expansion of our operations to include the production of various
television programs and live events. 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 managements attention and resources from critical areas and
existing projects; and implementing systems and procedures to successfully manage growth, such as
monitoring operations, controlling costs, maintaining effective quality and service, and
implementing and maintaining adequate internal controls. We expect that additional expenditures,
which could be substantial, will be required as we continue to upgrade our facilities or to
significantly accelerate the growth of any of our lines of business, such as the aerial camera
service, if we decide to pursue such a strategy. In addition, we may acquire other companies to
supplement our business and the integration of such other operations may take some time in order to
fully realize the synergies of such acquisitions or for us to implement cost savings such as
reduced real estate lease rates. 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 or that capital investments for future growth will have an immediate
return, if ever. 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 maintain sufficient revenue relating to our production business to offset its
fixed costs, and as a result our profitability may decrease.
Some of the costs relating to our recently acquired production operations cannot be immediately
reduced for various reasons, particularly because some of such costs relate to long-term contracts
that we have assumed. As a result, if the projected revenue from such operations is not generated,
we may not be able to react quickly enough to decrease our expenses to sufficiently offset the
decreased revenue, and as a result we may not be as profitable as we currently project, if at all.
We do not control the methodology used by Nielsen to estimate our subscriber base or television
ratings, and changes, or inaccuracies, in such estimates could cause our advertising revenue to
decrease.
Our ability to sell advertising is largely dependent on the size of our subscriber base and
television ratings estimated by Nielsen. We do not control the methodology used by Nielsen for
these estimates, and estimates regarding Outdoor Channels subscriber base made by Nielsen is
theirs alone and does not represent opinions, forecasts or predictions of Outdoor Channel Holdings,
Inc. or its management. Outdoor Channel Holdings, Inc. does not by its reference to Nielsen or
distribution of the Nielsen Universe Estimate imply its endorsement of or concurrence with such
information. In particular, we believe that we may be subject to a wider difference between the
number of subscribers as estimated by Nielsen and the number of subscribers reported by our service
providers than is typically expected because we are not fully distributed and are sometimes carried
on poorly penetrated tiers. In addition, if Nielsen modifies its methodology or changes the
statistical sample it uses for these estimates, such as the demographic characteristics of the
households, the size of our subscriber base
and our ratings could be negatively affected resulting in a decrease in our advertising revenue.
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We may not be able to grow our subscriber base of Outdoor Channel at a sufficient rate to offset
planned increased costs, decreased revenue or at all, and as a result our revenues and
profitability may not increase and could decrease.
A major component of our financial growth strategy is based on increasing the number of subscribers
to our channel. Growing our subscriber base depends upon many factors, such as the success of our
marketing efforts in driving consumer demand for our channels; overall growth in cable, satellite
and telco subscribers; the popularity of our programming; our ability to negotiate new carriage
agreements, or amendments to, or renewals of, current carriage agreements, and maintenance of
existing distribution; plus other factors that are beyond our control. There can be no assurance
that we will be able to maintain or increase the subscriber base of our channel on cable, satellite
and telco systems or that our current carriage will not decrease as a result of a number of factors
or that we will be able to maintain our current subscriber fee rates. In particular, negotiations
for new carriage agreements, or amendments to, or renewals of, current carriage agreements, are
lengthy and complex, and we are not able to predict with any accuracy when such increases in our
subscriber base may occur, if at all, or if we can maintain our current subscriber fee rates. If we
are unable to grow our subscriber base or we reduce our subscriber fee rates, our subscriber and
advertising revenues may not increase and could decrease. In addition, as we plan and prepare for
such projected growth in our subscriber base, we plan to increase our expenses accordingly. If we
are not able to increase our revenue to offset these increased expenses, and if our subscriber fee
revenue decreases, our profitability could decrease.
We could have an aerial camera fall, harming our reputation and possibly causing damage exceeding
our liability insurance limits.
The cables or rigging supporting our aerial cameras could fail for a variety of reasons, causing an
aerial camera to drop onto the venue in which it is suspended. If such an event were to happen,
damages could be significant which may have an adverse effect on our ability to continue our aerial
camera business. In addition, if the damages caused by such event exceed our liability and property
damage insurance, such an event could have a detrimental effect on our financial resources.
If we offer favorable terms or incentives to service providers in order to grow our subscriber
base, our operating results may be harmed or your percentage of the Company may be diluted.
Although we currently have plans to offer incentives to service providers 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, it may be
necessary to reduce our subscriber fees in order to grow or maintain our subscriber base. In
addition, 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. In addition, if we were to make such upfront cash payments or provide other incentives
to service providers, we expect to amortize such amounts ratably over the term of the agreements
with the service providers. However, if a service provider terminates any such agreement prior to
the expiration of the term of such agreement, then under current accounting rules we may incur a
large expense in that quarter in which the agreement is terminated equal to the remaining
un-amortized amounts and our operating results could accordingly be adversely affected. In
addition, if we offer equity incentives, the terms and amounts of such equity may not be favorable
to us or our stockholders.
If, in our attempt to increase our number of subscribers, we structure favorable terms or
incentives with one service provider in a way that would require us to offer the same terms or
incentives to all other service providers, our operating results may be harmed.
Many of our existing agreements with service providers contain most-favored nation clauses. These
clauses typically provide that if we enter into an agreement with another service provider on more
favorable terms, these terms must be offered to the existing service provider, subject to some
exceptions and conditions. Future agreements with service providers may also contain similar
most-favored nation clauses. If, in our attempt to increase our number of subscribers, we reduce
our subscriber fees or structure launch support fees or other incentives to effectively offer more
favorable terms to any service provider, these clauses may require us to offer similar incentives
to other service providers or reduce the effective subscriber fee rates that we receive from other
service providers, and this could negatively affect our operating results.
Consolidation among service providers may harm our business.
Service providers continue to consolidate, making us increasingly dependent on fewer operators. If
these operators fail to carry 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.
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The cable, satellite and telco television industry is subject to substantial governmental
regulation for which compliance may increase our costs, hinder our growth and possibly expose us to
penalties for failure to comply.
The pay 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.
Similarly, the satellite television industry is subject to federal regulation. Operating in a
regulated industry increases our cost of doing business as a video programmer, and such regulation
may in some cases also hinder our ability to increase our distribution. The regulation of
programming services 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.
The FCC has adopted rules to ensure that pay television subscribers continue to be able to view
local broadcast television stations during and after the transition to digital television. Federal
law initially required that analog television broadcasting end on February 17, 2009, but this
deadline was extended to June 12, 2009. In September 2007, the FCC established rules which will
require operators make local television broadcast programming available to all subscribers. They
may do so either by carrying each local stations digital signal in analog format or in digital
format, provided that all subscribers are provided with the necessary equipment to view the station
signals. This requirement will remain in effect until February 2012, and possibly longer, depending
on a FCC review of the state of technology and the marketplace in the year prior to that date.
These broadcast signal carriage requirements could reduce the available capacity on systems to
carry channels like Outdoor Channel. We cannot predict how these requirements will affect the
Company.
The FCC may adopt rules which would require service providers to make available programming
channels on an a la carte basis or as part of packages of family friendly programming channels.
We cannot predict whether such rules will be adopted or how their adoption would impact our ability
to have the Outdoor Channel carried on multichannel programming distribution systems.
Our investments in auction-rate securities are subject to risks which may affect the liquidity of
these investments and could cause additional impairment charges.
As of June 30, 2010, our investments in auction-rate securities included $5.1 million of high-grade
(at least A3 rated) auction-rate securities comprised of one closed-end perpetual preferred
securities and one federally backed student loan municipal security. Beginning in February 2008, we
were informed that there was insufficient demand at auction for our high-grade auction-rate
securities. As a result, these affected securities are currently not liquid, and we could be
required to hold them until they are redeemed by the issuer or to maturity. We may experience a
similar situation with our remaining auction-rate securities. In the event we need to access the
funds that are in an illiquid state, we will not be able to do so without a loss of principal,
until a future auction on these investments is successful, the securities are redeemed by the
issuer or they mature. The market for these investments is presently uncertain. If the credit
ratings of the security issuers deteriorate and any decline in market value is determined to be
other-than-temporary, we would be required to adjust the carrying value of the investment through
an impairment charge. As of August 4, 2010, we had investments in two auction-rate securities which
totaled $5.1 million, net.
We may not be able to secure sufficient or additional advertising revenue, and as a result, our
profitability may be negatively impacted.
Our ability to secure additional advertising accounts relating to our Outdoor Channel operations
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 advertising accounts and related
advertising expenditures is intense. We face competition for such advertising expenditures from a
variety of sources, including other networks and other media. We cannot assure you that our
sponsors will pay advertising rates for commercial air time at levels sufficient for us to make a
profit or that we will be able to attract new advertising sponsors or increase advertising
revenues. If we are unable to attract advertising accounts in sufficient quantities, our revenues
and profitability may be harmed.
In addition, in some projects relating to our recently acquired production capabilities and
relationships with television channels other than Outdoor Channel, we may agree to absorb the
production costs of a program and retain the rights to sell the advertising in, or sponsorships
relating to, such programming. If we are not able to sell sufficient advertising or sponsorships
relating to such programs, we may lose money in such project, and our operating results may be
significantly
harmed.
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We cannot be certain in the future that we will be able to report that our controls are without
material weakness or to complete our evaluation of those controls in a timely fashion.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404), and the rules and
regulations promulgated by the SEC to implement Section 404, we are required to include in our SEC
reports a report by our management regarding the effectiveness of our internal control over
financial reporting. The report includes, among other things, an assessment of the effectiveness of
our internal control over financial reporting. This assessment must include disclosure of any
material weaknesses in our internal control over financial reporting identified by management. As
of December 31, 2009, based on managements evaluation, our internal control over financial
reporting was effective. However, if we fail to maintain an effective system of disclosure controls
or internal control over financial reporting, we may discover material weaknesses that we would
then be required to disclose. We may not be able to accurately or timely report on our financial
results, and we might be subject to investigation by regulatory authorities. This could result in a
loss of investor confidence in the accuracy and completeness of our financial reports, which may
have an adverse effect on our stock price.
In addition, all internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only reasonable assurance with
respect to the preparation and presentation of financial statements. Projections of any evaluation
of controls effectiveness to future periods are subject to risks. Over time, controls may become
inadequate because of changes in conditions or deterioration in the degree of compliance with
policies or procedures.
Expenses relating to programming and production 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, acquiring and producing new
programming.
The average cost of programming has increased for the pay TV industry and production companies, and
such increases are likely to 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 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.
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 service providers; | ||
| demand for advertising, advertising rates and offerings of competing media; | ||
| changes in the growth rate of cable, satellite and telco subscribers; | ||
| service providers capital and marketing expenditures and their impact on programming offerings and penetration; | ||
| seasonal trends in viewer interests and activities; | ||
| our advertising sales, for both Outdoor Channel and our Production Services, tend to be more robust during the second half of each year, while expenses remain relatively constant throughout the year; | ||
| pricing, service, marketing and acquisition decisions that could reduce revenues and impair quarterly financial results; | ||
| the mix of cable television, satellite-delivered and telco programming products and services sold and the distribution channels for those products and services; |
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| our ability to react quickly to changing consumer trends; | ||
| increased compensation expenses resulting from the hiring or promotion of highly qualified employees; | ||
| our need to retain some employees on a full-time basis throughout the year so that we have the minimally necessary personnel available during the busiest seasons; | ||
| the necessity to do some projects that may be minimally profitable, if at all, in order to establish a business relationship with a strategic customer; | ||
| specific economic conditions in the pay 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.
Changes to financial accounting standards or our accounting estimates may affect our reported
operating results.
We prepare our financial statements to conform to accounting principles generally accepted in the
United States of America which are subject to interpretations by the Financial Accounting Standards
Board, the Securities and Exchange Commission and various bodies formed to interpret and create
appropriate accounting policies. A change in those policies can have a significant effect on our
reported results and may even affect our reporting of transactions completed before a change is
announced. Accounting policies affecting many other aspects of our business, including rules
relating to business combinations and employee share-based compensation, 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,
judgments 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
revenue and expenses during the reporting period. A change in the facts and circumstances
surrounding those estimates, including the interpretation of the terms and conditions of our
contractual obligations, could result in a change to our estimates and could impact our operating
results.
Our expansion into international operations has inherent risks, including currency exchange rate
fluctuations, possible governmental seizure of property, and our inability or increased costs
associated with enforcing our rights, including intellectual property rights.
We have international operations relating to our aerial camera services, and are exploring the
distribution of our outdoor programming internationally. In some countries, we may be able to do
business only in that countrys currency which may cause us to accept the risk relating to that
countrys currency exchange rate. In addition, we may not be able to legally enforce our
contractual and property rights in such countries, and even if a country is party to an
international treaty relating to such legal procedures, the cost of doing so may be prohibitive.
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 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 and advertising revenue.
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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 established pay television and broadcast networks, including
Versus (formerly OLN), 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 deployment of fiber optic cable, which are already
substantially underway, are expected to allow 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. In addition, the satellite and telco service providers
generally have more bandwidth capacity than cable service providers allowing them to possibly
provide more channels offering the type of programming we offer.
We also compete with television network companies that generally have large subscriber bases and
significant investments in, and access to, competitive programming sources. In some cases, we
compete with service providers that have the financial and technological resources to create and
distribute their own television networks, such as Versus, which is owned and operated by Comcast.
In order to compete for subscribers, we may be required to reduce our subscriber fee rates or pay
either launch fees or marketing support or both for carriage in certain circumstances in the future
which may harm our operating results and margins. We may also issue our securities from time to
time in connection with our attempts for broader distribution of Outdoor Channel and the number of
such securities could be significant. 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
networks for subscriber fees from, and affiliation agreements with, cable, satellite and telco
service providers.
In addition, we face competition in our television production operations. In particular, there are
a few other domestic and international aerial camera services with which we compete. If any of
these competitors were able to invent improved technology, or we are not able to prevent them from
obtaining and using our proprietary technology and trade secrets, our business and operating
results, as well as our future growth prospects, could be negatively affected.
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.
The satellite infrastructure that we use may fail or be preempted by another signal, which could
impair our ability to deliver programming to our 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 work 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 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, tornadoes,
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 Outdoor Channel are all located in Temecula, California, our CableCam operations are located in
Chatsworth, California, and all of our Winnercomm and SkyCam operations are in Tulsa and Broken
Arrow, Oklahoma, respectively, the results of such events could be particularly disruptive because
we do not have readily available alternative facilities from which to conduct our respective
businesses. 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 services could harm our reputation and reduce our revenues and profits.
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.
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We may be unable to access capital, or offer equity as an incentive for increased subscribers or
for acquisitions, on acceptable terms to fund our future growth and operations.
Our future capital and subscriber growth 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 Outdoor Channel, acquiring and producing programming and our aerial
camera business. As a result, we could be required to raise substantial additional capital through
debt or equity financing or offer equity as an incentive for increased distribution or in
connection with an acquisition. To the extent that we raise additional capital through the sale of
equity or convertible debt securities, or offer equity incentives for subscriber growth or
acquisitions, 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, or offer equity incentives for subscriber growth or acquisitions, 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. Generally, all of our employees are at-will, however, we have entered into
employment agreements with employees in key positions, including our Chief Executive Officer, Chief
Operating Officer, Chief Financial Officer, Chief Accounting Officer and Chairman of our wholly
owned subsidiary, Winnercomm, Inc. Any of our officers or key employees could leave at any time,
and we generally do not have key person life insurance policies covering 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. To
attract and retain qualified personnel, we may be required to grant large option or other
share-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.
Cable, satellite and telco 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 programming
has been widely reported, and the access or smart cards used in 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 service providers. Further, measures that could be taken by 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.
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 produce and own approximately 20% of the programs we air on Outdoor Channel (exclusive
of infomercials). 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. We also possess significant proprietary information
relating to our aerial camera services. Protecting our intellectual property rights by pursuing
those who infringe or dilute our rights can be costly and time consuming. If we are unable to
protect our portfolio of patents, 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 managements 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.
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Some of our existing stockholders can exert control over us and may not make decisions that are in
the best interests of all stockholders.
Our current officers, directors and greater than 5% stockholders together currently control a very
high percentage of our outstanding common stock. As a result, these stockholders, acting together,
may be able to exert significant influence over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate transactions. In
addition, this concentration of ownership may delay or prevent a change in control of our company,
even when a change may be in the best interests of stockholders. In addition, the interests of
these stockholders may not always coincide with our interests as a company or the interests of
other stockholders. Accordingly, these stockholders could cause us to enter into transactions or
agreements that you would not approve.
The market price of our common stock has been and may continue to be subject to wide fluctuations.
Our stock has historically been and continues to be traded at relatively low volumes and therefore
has been subject to price volatility. Various factors contribute to the volatility of our stock
price, including, for example, low trading volume, quarterly variations in our financial results,
increased competition and general economic and market conditions. While we cannot predict the
individual effect that these factors may have on the market price of our common stock, these
factors, either individually or in the aggregate, could result in significant volatility in our
stock price during any given period of time. There can be no assurance that a more active trading
market in our stock will develop. As a result, relatively small trades may have a significant
impact on the price of our common stock. Moreover, companies that have experienced volatility in
the market price of their stock often are subject to securities class action litigation. If we were
the subject of such litigation, it could result in substantial costs and divert managements
attention and resources.
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.
Provisions of Delaware law, our certificate of incorporation and bylaws could discourage, delay or
prevent a merger, acquisition or other change in control that stockholders may consider favorable,
including transactions in which you might otherwise receive a premium for your shares. These
provisions also could limit the price that investors might be willing to pay in the future for
shares of our common stock, thereby depressing the market price of our common stock. Furthermore,
these provisions could prevent attempts by our stockholders to replace or remove our management.
These provisions:
| allow the authorized number of directors to be changed only by resolution of our board of directors; | ||
| establish a classified board of directors, providing that not all members of the board be elected at one time; | ||
| require a 66 2/3% stockholder vote to remove a director, and only for cause; | ||
| authorize our board of directors to issue without stockholder approval blank check preferred stock that, if issued, could operate as a poison pill to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that is not approved by our board of directors; | ||
| require that stockholder actions must be effected at a duly called stockholder meeting and prohibit stockholder action by written consent; | ||
| establish advance notice requirements for stockholder nominations to our board of directors or for stockholder proposals that can be acted on at stockholder meetings; | ||
| except as provided by law, allow only our board of directors to call a special meeting of the stockholders; and | ||
| require a 66 2/3% stockholder vote to amend our certificate of incorporation or bylaws. |
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section
203 of the Delaware General Corporation Law, which may, unless certain criteria are met, prohibit
large stockholders, in particular those owning 15% or more of our outstanding voting stock, from
merging or combining with us for a prescribed period of time.
Technologies in the pay 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 pay 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.
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.
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If our goodwill becomes impaired, we will be required to recognize a noncash charge which could
have a significant effect on our reported net earnings.
A significant portion of our assets consists of goodwill. We test goodwill for impairment on
October 1 of each year, and on an interim date if factors or indicators become apparent that would
require an interim test. A significant downward revision in the present value of estimated future
cash flows for a reporting unit could result in an impairment of goodwill and a noncash charge
would be required. Such a charge could have a significant effect on our reported net earnings.
Future issuance by us of preferred shares could adversely affect the holders of existing shares,
and therefore reduce the value of existing shares.
We are authorized to issue up to 25,000,000 shares of preferred stock. The issuance of any
preferred stock could adversely affect the rights of the holders of shares of our common stock, and
therefore reduce the value of such shares. No assurance can be given that we will not issue shares
of preferred stock in the future.
We do not expect to pay dividends in the foreseeable future.
We do not anticipate paying cash dividends on our common stock in the foreseeable future. Any
payment of cash dividends will also depend on our financial condition, operating results, capital
requirements and other factors and will be at the discretion of our board of directors.
Furthermore, at the time of any potential payment of a cash dividend we may subject to contractual
restrictions on, or prohibitions against, the payment of dividends.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Removed and Reserved.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits.
Exhibit | ||
Number | Description | |
3.1
|
Certificate of Incorporation of Outdoor Channel Holdings, Inc, a Delaware corporation (filed as Exhibit 3.1 to the Companys 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 Companys 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 and Exhibit 4.1 to the Companys Form 10-Q for the period ended June 30, 2005) | |
10.41
|
Employment Agreement with Douglas J. Langston dated June 28, 2010 (filed as Exhibit 99.2 to the Companys Current Report on Form 8-K filed on July 1, 2010 and incorporated herein by reference) | |
10.42
|
Employment Agreement with Thomas D. Allen dated June 29, 2010 (filed as Exhibit 99.3 to the Companys Current Report on Form 8-K filed on July 1, 2010 and incorporated herein by reference) | |
31.1
|
Certification by Chief Executive Officer | |
31.2
|
Certification by Chief Financial Officer | |
32.1 *
|
Section 1350 Certification by Chief Executive Officer | |
32.2 *
|
Section 1350 Certification by Chief Financial Officer |
* | Pursuant to Commission Release No. 33-8238, this certification will be treated as accompanying this Quarterly Report on Form 10-Q and not filed as part of such report for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of Section 18 of the Securities Exchange Act of 1934, as amended, and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference. |
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
OUTDOOR CHANNEL HOLDINGS, INC. |
||||
/s/ Thomas D. Allen | ||||
Thomas D. Allen | ||||
Authorized Officer, Chief Financial Officer and Principal Accounting Officer Date: August 6, 2010 |
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