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EX-32.2 - SECTION 1350 CERTIFICATION BY CHIEF FINANCIAL OFFICER - OUTDOOR CHANNEL HOLDINGS INCd347580dex322.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended March 31, 2012

 

¨ 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   33-0074499

(State or other Jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification Number)

43445 Business Park Drive, Suite 103

Temecula, California 92590

(Address and zip code of principal executive offices)

(951) 699-6991

(Issuer’s telephone number, including area code)

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  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).     x  Yes    ¨  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   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller Reporting Company   ¨

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

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

 

Class

  

Number of Shares Outstanding at May 7, 2012

Common Stock, $0.001 par value    25,776,040

 

 

 


Table of Contents

OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q

For the Period Ended March 31, 2012

Table of Contents

 

   Part I. Financial Information   
Item 1.   

Financial Statements

     3   
  

Condensed Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December  31, 2011

     3   
  

Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31,  2012 and 2011

     4   
  

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March  31, 2012 and 2011

     5   
  

Unaudited Condensed Consolidated Statement of Equity for the Three Months Ended March 31, 2012

     6   
  

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31,  2012 and 2011

     7   
  

Notes to Unaudited Condensed Consolidated Financial Statements

     8   
Item 2.   

Management’s Discussion and Analysis of Results of Operations and Financial Condition

     18   
Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     27   
Item 4.   

Controls and Procedures

     27   
  

Part II. Other Information

  
Item 1.   

Legal Proceedings

     27   
Item 1A.   

Risk Factors

     28   
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     28   
Item 3.   

Defaults Upon Senior Securities

     28   
Item 4.   

Mine Safety Disclosures

     28   
Item 5.   

Other Information

     28   
Item 6.   

Exhibits

     29   

Signatures

     29   

* * *

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

 

ITEM 1. Financial Statements.

OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

 

      March 31,
2012
    December 31,
2011
 
     (unaudited)  
Assets   

Current assets:

    

Cash and cash equivalents

   $ 20,933      $ 19,498   

Investments in available-for-sale securities

     38,167        40,049   

Accounts receivable, net of allowance for doubtful accounts of $950 and $949

     9,998        13,657   

Income taxes

     1,099        3   

Deferred tax assets, net

     2,168        2,168   

Programming and production costs

     7,560        6,020   

Subscriber acquisition fees, current portion

     1,156        1,523   

Other current assets

     2,865        4,352   
  

 

 

   

 

 

 

Total current assets

     83,946        87,270   
  

 

 

   

 

 

 

Property, plant and equipment, net

     11,578        11,875   

Amortizable intangible assets, net

     323        378   

Goodwill

     43,160        43,160   

Investments in auction-rate securities

     4,954        4,940   

Deferred tax assets, net

     754        754   

Subscriber acquisition fees, net of current portion

     316        421   

Deposits and other assets

     344        388   
  

 

 

   

 

 

 

Totals

   $ 145,375      $ 149,186   
  

 

 

   

 

 

 
Liabilities and Equity     

Current liabilities:

    

Accounts payable and accrued expenses

   $ 10,573      $ 12,424   

Deferred revenue

     1,172        634   

Deferred obligations, current portion

     49        49   

Unfavorable lease, current portion

     167        163   

Income taxes payable

     —          1,685   
  

 

 

   

 

 

 

Total current liabilities

     11,961        14,955   

Deferred obligations

     285        224   

Unfavorable lease

     639        682   
  

 

 

   

 

 

 

Total liabilities

     12,885        15,861   
  

 

 

   

 

 

 

Commitments and contingencies

    

Equity:

    

Preferred stock, $0.001 par value; 25,000 shares authorized; none issued

     —          —     

Common stock, $0.001 par value; 75,000 shares authorized; 25,784 and 25,461 shares issued and outstanding

     26        25   

Additional paid-in capital

     169,836        169,540   

Accumulated other comprehensive loss

     (261     (287

Accumulated deficit

     (37,111     (35,953
  

 

 

   

 

 

 

Total stockholders’ equity

     132,490        133,325   

Noncontrolling interest

     —          —     
  

 

 

   

 

 

 

Totals

   $ 145,375      $ 149,186   
  

 

 

   

 

 

 

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
March 31,
 
     2012     2011  

Revenues:

    

Advertising

   $ 7,435      $ 7,585   

Subscriber fees

     5,176        4,747   

Production services

     1,710        2,480   
  

 

 

   

 

 

 

Total revenues

     14,321        14,812   
  

 

 

   

 

 

 

Cost of services:

    

Programming

     1,798        1,630   

Satellite transmission fees

     429        399   

Production and operations

     4,141        4,553   

Other direct costs

     11        92   
  

 

 

   

 

 

 

Total cost of services

     6,379        6,674   
  

 

 

   

 

 

 

Other expenses:

    

Advertising

     648        305   

Selling, general and administrative

     8,553        8,283   

Depreciation and amortization

     732        746   
  

 

 

   

 

 

 

Total other expenses

     9,933        9,334   
  

 

 

   

 

 

 

Loss from operations

     (1,991     (1,196

Interest and other income, net

     19        9   
  

 

 

   

 

 

 

Loss from operations before income taxes

     (1,972     (1,187

Income tax benefit

     (814     (357
  

 

 

   

 

 

 

Net loss

     (1,158     (830

Net loss attributable to noncontrolling interest

     —          —     
  

 

 

   

 

 

 

Net loss attributable to controlling interest

   $ (1,158   $ (830
  

 

 

   

 

 

 

Loss per common share data:

    

Basic

   $ (0.05   $ (0.03
  

 

 

   

 

 

 

Diluted

   $ (0.05   $ (0.03
  

 

 

   

 

 

 

Weighted average common shares outstanding:

    

Basic

     25,021        24,605   
  

 

 

   

 

 

 

Diluted

     25,021        24,605   
  

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

4


Table of Contents

OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

 

     Three Months Ended
March 31,
 
     2012     2011  

Net loss

   $ (1,158   $ (830

Other comprehensive income, net of tax:

    

Unrealized gain on available-for-sale and auction-rate securities

     26        11   
  

 

 

   

 

 

 

Comprehensive loss

   $ (1,132   $ (819
  

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

5


Table of Contents

OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statement of Equity

For the Three Months Ended March 31, 2012

(In thousands)

 

     Common Stock     

Additional

Paid-in

   

Accumulated
Other

Comprehensive

    Accumulated     Total
Stockholders’
   

Non-

controlling

     Total  
     Shares     Amount      Capital     Income (Loss)     Deficit     Equity     Interest      Equity  

Balance, December 31, 2011

     25,461      $ 25       $ 169,540      $ (287   $ (35,953   $ 133,325      $ —         $ 133,325   

Net loss

     —          —           —          —          (1,158     (1,158     —           (1,158

Unrealized gain on avaliable-for-sale and auction-rate securities

     —          —           —          26        —          26        —           26   

Issuance of restricted stock to employees for services to be rendered, net of forfeited shares

     396        1         (1     —          —          —          —           —     

Share-based employee and non-employee compensation expense

     —          —           844        —          —          844        —           844   

Purchase and retirement of common stock related to employee and non-employee share-based compensation activity

     (73     —           (547     —          —          (547     —           (547

Cash contribution of noncontrolling interest

     —          —           —          —          —          —          —           —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, March 31, 2012

     25,784      $ 26       $ 169,836      $ (261 )   $ (37,111   $ 132,490      $ —         $ 132,490   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

6


Table of Contents

OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

 

     Three Months Ended
March 31,
 
     2012     2011  

Operating activities:

    

Net loss

   $ (1,158   $ (830

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation and amortization

     732        746   

Amortization of subscriber acquisition fees

     472        408   

Loss on sale of equipment

     10        2   

Provision for doubtful accounts

     15        79   

Share-based employee and non-employee compensation

     844        787   

Deferred tax benefit, net

     —          (391

Changes in operating assets and liabilities:

    

Accounts receivable

     3,644        6,598   

Income tax receivable and payable, net

     (2,781     (2,567

Programming and production costs

     (1,540     (1,060

Other current assets

     1,487        487   

Deposits and other assets

     34        47   

Subscriber acquisition fees

     —          (191

Accounts payable and accrued expenses

     (1,672     (4,049

Deferred revenue

     538        319   

Deferred obligations

     61        23   

Unfavorable lease obligations

     (39     (37
  

 

 

   

 

 

 

Net cash provided by operating activities

     647        371   
  

 

 

   

 

 

 

Investing activities:

    

Purchases of property, plant and equipment

     (646     (338

Purchase of intangibles

     —          (75

Proceeds from sale of equipment

     87        —     

Purchases of available-for-sale securities

     (24,143     (27,992

Proceeds from sale of available-for-sale and auction-rate securities

     26,037        27,000   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     1,335        (1,405
  

 

 

   

 

 

 

Financing activities:

    

Purchase of common stock

     (547     (471
  

 

 

   

 

 

 

Net cash used in financing activities

     (547     (471
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     1,435        (1,505

Cash and cash equivalents, beginning of period

     19,498        32,578   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 20,933      $ 31,073   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Income taxes paid

   $ 1,960      $ 2,542   
  

 

 

   

 

 

 

Supplemental disclosures of non-cash investing and financing activities:

    

Effect of net increase in fair value of available-for-sale and auction-rate securities

   $ 26      $ 11   
  

 

 

   

 

 

 

Property, plant and equipment costs incurred but not paid

   $ 178      $ 5   
  

 

 

   

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

7


Table of Contents

OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share data)

NOTE 1—ORGANIZATION AND BUSINESS

Description of Operations

Outdoor Channel Holdings, Inc. (“Outdoor Channel Holdings”) is incorporated under the laws of the State of Delaware. Collectively, with its subsidiaries and consolidated affiliate, 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, which is 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. Outdoor Channel Holdings also wholly owns Winnercomm, Inc., which is referred to as “Production Services”. The Production Services business relates to the production, development and marketing of sports programming. Winnercomm, Inc. wholly owns CableCam, LLC and SkyCam, LLC which comprise our Aerial Camera business. The Aerial Camera business is engaged in providing aerial camera services for customer owned telecasts.

In August 2011, the Company entered into an agreement with Professional Bass Tour (“PBT”) to establish Major League Fishing LLC (“MLF”), a joint venture created to produce a new style of professional competitive bass fishing tournaments to air exclusively on the Outdoor Channel. The Company is a 50% owner in MLF, controls the venture’s board of managers and will fund 100% of the costs of the venture via preferred capital contributions bearing a priority return which must be redeemed before MLF can make profit distributions. Accordingly, the Company is deemed the primary beneficiary and MLF is being treated as a variable interest entity, as defined by ASC 810, and MLF has been consolidated in our accompanying financial statements. Profits shall be allocated pro rata in proportion to the number of membership interests of MLF and losses shall be allocated in a similar proportionate manner but only while a member’s capital account is positive. Losses in excess of member’s capital are not allocated to members but will be only allocated to the Company. As of March 31, 2012, the Company has contributed approximately $1.4 million to MLF, and no cash amounts have been contributed by PBT. MLF recorded a loss for the three months ended March 31, 2012.

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 March 31, 2012 and its results of operations and cash flows for the three months ended March 31, 2012 and 2011. Pursuant to the rules and regulations of the Securities and Exchange Commission, 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, 2011, as filed with the Securities and Exchange Commission on March 9, 2012 (the “2011 Annual Report”).

Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. 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, telephone companies 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 website design, management, marketing and hosting services.

 

8


Table of Contents

NOTE 2—STOCK INCENTIVE PLANS

The measurement and recognition of compensation expense is recognized in the financial statements over the service period for the fair value of all awards granted after January 1, 2006. 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. 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 options, performance units, restricted stock and RSUs.

We have two stock incentive plans: our 2004 Long-Term Incentive Plan (“LTIP Plan”) and our Non-Employee Director Stock Option Plan (“NEDSOP”). No more options will be issued under the NEDSOP Plan. All awards issued under our plans are subject to terms and conditions as determined by our Board of Directors.

Our Board of Directors has discretion to allow our employees and directors 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 months ended March 31, 2012 and 2011, approximately 73,000 and 61,000 shares were repurchased with a market value of approximately $547 and $471, respectively.

2004 Long-Term Incentive Plan (“LTIP Plan”). During 2005 through March 31, 2012, 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 to the extent unvested. These awards generally vest quarterly over two to four years, however, some awards vest annually. RSUs vest over one year and, upon satisfaction of the service vesting requirement, the holder is entitled to the issuance of the underlying shares provided the holder has not elected to defer settlement, and 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 March 31, 2012, there were 716,550 restricted shares and 122,758 RSUs outstanding and there were no performance unit shares or options to purchase shares of common stock outstanding. There were 1,228,703 shares of common stock available for future grant as of March 31, 2012.

Non-Employee Director Stock Option Plan (“NEDSOP”). Under the NEDSOP, nonqualified stock options to purchase common stock were granted 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 March 31, 2012, options to purchase 250,000 shares of common stock were outstanding and no further option grants can be issued under this plan.

The fair value of the shares and options, adjusted for a forfeiture assumption, at the respective dates of grant (which represents deferred compensation not required to be recorded initially in the consolidated balance sheet) is 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 months ended March 31, 2012 and 2011:

 

     Three Months Ended
March  31,
 
     2012      2011  

Nature of Award:

  

Restricted stock

   $ 695       $ 639   

RSUs

     149         148   
  

 

 

    

 

 

 

Total share-based compensation expense

   $ 844       $ 787   
  

 

 

    

 

 

 

 

9


Table of Contents
     Three Months Ended
March  31,
 
     2012      2011  

Classification of Compensation Expense:

     

Cost of services:

     

Production and operations

   $ 55       $ 57   

Other expenses:

  

Selling, general and administrative

     789         730   
  

 

 

    

 

 

 

Total share-based compensation expense

   $ 844       $ 787   
  

 

 

    

 

 

 

Stock Options

A summary of the status of the options granted under our stock incentive plans as of March 31, 2012 and the changes in options outstanding during the three months then ended is as follows:

 

Options

   Shares      Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual

Term (Yrs.)
     Aggregate
Intrinsic Value
 
     (in thousands)                    (in thousands)  

Outstanding at beginning of period

     250       $ 12.65         

Granted

     —           —           

Exercised

     —           —           

Forfeited

     —           —           

Expired

     —           —           
  

 

 

    

 

 

       

Outstanding at end of period

     250       $ 12.65         1.76       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Vested or expected to vest at end of period

     250       $ 12.65         1.76       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable at end of period

     250       $ 12.65         1.76       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Additional information regarding options outstanding for all plans as of March 31, 2012 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)         

$12.50 — $12.50

     125         1.72       $ 12.50         125       $ 12.50   

$12.80 — $12.80

     125         1.80         12.80         125         12.80   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     250         1.76       $ 12.65         250       $ 12.65   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no options granted during the three months ended March 31, 2012 or 2011.

 

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Restricted Stock

A summary of the status of our nonvested restricted shares as of March 31, 2012 and the changes in restricted shares outstanding during the three months then ended is as follows:

 

     Three Months Ended
March 31, 2012
 
     Shares     Weighted
Average
Grant-Date
Fair Value
 
     (in thousands)        

Nonvested at beginning of period

     521      $ 6.88   

Granted

     412        7.34   

Vested

     (200     7.33   

Forfeited

     (16     6.21   
  

 

 

   

 

 

 

Nonvested at end of period

     717      $ 7.04   
  

 

 

   

 

 

 

During the three months ended March 31, 2012 and 2011, we issued 412,000 and 143,000 shares, respectively, of restricted stock to employees while 16,000 and 2,000 shares, respectively, of restricted stock were forfeited due to employee turnover.

Restricted Stock Units

A summary of the status of our RSUs as of March 31, 2012 and the changes in RSUs outstanding during the three months then ended is as follows:

 

     Three Months Ended
March 31, 2012
 
      Number of
Restricted
Stock Units
     Weighted
Average
Grant-Date
Fair Value
 
     (in thousands)         

RSUs outstanding at beginning of period

     123       $ 5.70   

Granted

     —           —     

Vested

     —           —     

Forfeited

     —           —     
  

 

 

    

 

 

 

Nonvested at end of period

     123       $ 5.70   
  

 

 

    

 

 

 

As of March 31, 2012, the vesting and settlement of one grant totaling 16,750 RSUs was deferred at the election of its holder.

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 March 31, 2012 are as follows:

 

     March 31, 2012  
     Expense Yet
to be
Recognized
     Weighted Average
Remaining
Requisite Service
Periods
 

Restricted stock

   $ 4,133         1.9 years   

RSUs

     89         0.2 year   
  

 

 

    

 

 

 

Total

   $ 4,222         1.9 years   
  

 

 

    

 

 

 

 

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NOTE 3—EARNINGS (LOSS) PER COMMON SHARE

Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during each period, excluding unvested restricted stock. Diluted earnings (loss) per common share reflects the potential dilution of securities by including common stock equivalents, such as unvested restricted stock and stock 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 loss per share for the three months ended March 31 (in thousands):

 

     2012      2011  

Weighted average shares used to calculate basic loss per share

     25,021         24,605   

Dilutive effect of potentially issuable common shares upon exercise of dilutive stock options, performance units, unvested restricted stock and stock units

     —           —     
  

 

 

    

 

 

 

Weighted average shares used to calculate diluted loss per share

     25,021         24,605   
  

 

 

    

 

 

 

For the three months ended March 31, 2012 and 2011, outstanding options and performance units to purchase a total of approximately 250,000 and 1,000,000 shares of common stock, respectively, were not included in the calculation of diluted loss per share because their effect was antidilutive.

NOTE 4—INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES

Assets recorded at fair value in the balance sheet as of March 31, 2012 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 and are as follows:

 

Level 1 –   Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2 –   Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are directly or indirectly observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 –   Unobservable inputs developed using estimates and assumptions developed by management, which reflect those that a market participant would use.

We measure the following financial assets at fair value on a recurring basis. The fair value of these financial assets was determined using the following inputs at March 31, 2012:

 

     Total      Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Cash and cash equivalents (1)

   $ 20,933       $ 14,934       $ 5,999       $ —     

Investments in available-for-sale securities (2)

     38,167         9,997         28,170         —     

Non-current investments in auction-rate securities (3)

     4,954         —           —           4,954   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 64,054       $ 24,931       $ 34,169       $ 4,954   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Cash and cash equivalents consist primarily of treasury bills, commercial paper and money market funds with original maturity dates of three months or less. For treasury bills and money market funds, we determine fair value through publicly available quoted market prices. For commercial paper, we determine fair value through third-party pricing sources using proprietary valuation models and other techniques that utilize market observable inputs.

(2)

Investments in available-for-sale securities consist of treasury bills, commercial paper and tax-exempt government securities with original maturity dates in excess of three months, for which we determine fair value through quoted market prices (Level 1) or through observable inputs, such as quoted prices for similar assets in markets that are not active or other inputs that are directly or indirectly observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. For commercial paper with original maturity dates in excess of three months, we determine fair value through third-party pricing sources using proprietary valuation models and other techniques that utilize market observable inputs.

(3)

Investments in auction-rate securities consist of one auction-rate municipal security and one closed-end perpetual preferred auction-rate security. We use a discounted cash flow analysis to more accurately measure possible liquidity discounts.

 

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The Company’s tax-exempt government securities which totaled $5,181 at March 31, 2012, are valued by outside professionals using proprietary valuation models and analytical tools in which all significant inputs related to similar instruments are observable or can be derived from or corroborated by publicly available observable market data for substantially the full term of the asset, and are therefore classified as Level 2 investments. Management is responsible for estimating the fair value of these investments, and in doing so, considers valuations provided by a large, independent pricing firm who maintains regular contact with market makers, brokers, dealers, and analysts to gather information on market movement, direction, trends, and other specific data. This information is used to structure yield curves for various types of securities and arrive at the daily valuations.

As of March 31, 2012, 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 both 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 ARS of $14 in the three months ended March 31, 2012. As a result of the lack of liquidity in the ARS market, we have an accumulated unrealized loss on our ARS of $273, which is included in accumulated other comprehensive loss on our consolidated balance sheet as of March 31, 2012. We deemed the loss to be temporary because we do not plan to sell any of the ARS 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. We are not certain how long we may be required to hold each security, but based on our combined cash and cash equivalents balance and investments in available-for-sale securities of $59,100 and our expected operating cash flows, we do not believe a lack of liquidity associated with our ARS 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. 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 ARS 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 March 31, 2012 were auction-rate securities. The one closed-end perpetual preferred auction-rate security totaling $2,919 had an interest rate of 1.49% and an auction reset of 28 days. The municipal security totaling $2,035 had an interest rate of 0.76%, an auction reset of 28 days and a maturity date of December 1, 2045. As of March 31, 2012 the next auction reset date for both securities was April 10, 2012. The following table summarizes our fair value measurements using significant Level 3 inputs, and changes therein, for the three month period ended March 31, 2012:

 

     Three Months Ended
March 31, 2012
 

Auction-Rate Securities:

  

Balance at beginning of period

   $ 4,940   

Unrealized gain included in accumulated other comprehensive loss

     14   
  

 

 

 

Balance as of March 31, 2012

   $ 4,954   
  

 

 

 

 

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We consider the yields we recognize from auction-rate securities and from cash held in our treasury bills, commercial paper, tax-exempt government securities and money market accounts to be interest income which are recorded in interest and other income, net for the three months ended March 31, 2012 and 2011 as follows:

 

     Three Months Ended
March  31,
 
     2012     2011  

Interest income

   $ 38      $ 31   

Interest expense

     (19     (22
  

 

 

   

 

 

 

Total interest and other income, net

   $ 19      $ 9   
  

 

 

   

 

 

 

NOTE 5—GOODWILL AND INTANGIBLE ASSETS

We currently have three reporting units, TOC, Production Services and Aerial Cameras. The Production Services reporting unit consists solely of our Winnercomm business and the Aerial Cameras reporting unit consists of our CableCam and SkyCam businesses which were acquired on January 12, 2009. All of our goodwill is attributed to our TOC reporting unit.

We review goodwill for impairment on an annual basis during the fourth quarter and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We typically perform a two-step impairment test on goodwill. In the first step, we compare the fair value of our reporting unit with goodwill to its carrying value. If the fair value of our reporting unit 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 our reporting unit exceeds the fair value, then we must perform the second step in order to determine the implied fair value of the reporting unit’s goodwill and compare it to the carrying value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we must record an impairment loss equal to the difference.

We historically have determined the implied fair value of its goodwill utilizing the discounted cash flow method under the income approach. Under the income approach, we derived the enterprise fair value based on the present value of estimated future cash flows, which were based on historical data and assumptions pertaining to the market. In performing the 2011 goodwill impairment test, we assessed the relevant qualitative factors and concluded that it is more likely than not that the fair value of our goodwill is greater than the carrying amount. After reaching this conclusion, no further testing was performed. The qualitative factors we considered included, but were not limited to, general economic conditions, the industry outlook, our recent and forecasted financial performance and the price of our common stock.

Intangible assets that are subject to amortization consist of the following as of March 31, 2012:

 

     March 31, 2012  
     Gross      Accumulated
Amortization
     Net  

Trademark

   $ 219       $ 216       $ 3   

Internet domain names

     172         141         31   

Customer relationships

     980         720         260   

Patents

     90         61         29   
  

 

 

    

 

 

    

 

 

 

Total amortizable intangible assets

   $ 1,461       $ 1,138       $ 323   
  

 

 

    

 

 

    

 

 

 

As of March 31, 2012, the weighted average amortization period for the above intangibles is 1.7 years. Based on our most recent analysis, we believe that no impairment exists at March 31, 2012 with respect to our goodwill and other intangible assets. For the three months ended March 31, 2012 and 2011, we recognized amortization expense related to the intangible assets of $55 and $52, respectively.

Estimated future amortization expense related to intangible assets at March 31, 2012 is as follows:

 

Years Ending December 31,

   Amount  

2012 (remaining 9 months)

   $ 153   

2013

     165   

2014

     5   
  

 

 

 

Total

   $ 323   
  

 

 

 

 

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NOTE 6—LINES OF CREDIT

On August 10, 2010, the Board of Directors approved the renewal of the revolving line of credit agreement (the “Revolver”) with U.S. Bank N.A., extending the maturity date to September 5, 2012 and renewing the total amount which can be drawn upon under the Revolver to $10,000. The Revolver provides that the interest rate per annum as selected by us shall be prime rate (3.25% and 3.25% as of March 31, 2012 and 2011, respectively) plus 0.25% or LIBOR (0.25% and 0.25% as of March 31, 2012 and 2011, 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 March 31, 2012, we did not have any amounts outstanding under this credit facility. This Revolver is guaranteed by TOC and as of March 31, 2012, we were in full compliance with all the covenants of the Revolver.

NOTE 7—ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses as of March 31, 2012 and December 31, 2011 consist of the following:

 

     March 31, 2012      December 31, 2011  

Trade accounts payable

   $ 879       $ 1,951   

Accrued payroll and related expenses

     2,843         3,627   

Estimated make-good accrual

     1,514         1,575   

Estimated most-favored nation accrual

     2,003         2,003   

Accrued launch support commitment

     488         488   

Accrued expenses

     2,846         2,780   
  

 

 

    

 

 

 

Total

   $ 10,573       $ 12,424   
  

 

 

    

 

 

 

NOTE 8—INCOME TAX PROVISION

The income tax provision reflected in the accompanying unaudited condensed consolidated statement of operations for the three months ended March 31, 2012 and 2011 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 state net operating losses and credit carryforwards that will be subject to examination beyond the year in which they are ultimately utilized. Our policy is to record interest and penalties on uncertain tax positions as income tax expense.

NOTE 9—RELATED PARTY TRANSACTIONS

We lease our administrative facilities from Musk Ox Properties, LP, which in turn is owned by Messrs. Perry T. Massie, Co-Chairman of the Board and Thomas H. Massie, both of whom are principal stockholders and directors of the Company. The lease agreement had a five-year term and expired on December 31, 2010. Since January 2011, we have entered into a number of agreements with Musk Ox Properties, LP to extend our lease which now expires on September 30, 2012. Monthly rent payments for the extended lease term are approximately $19. We paid Musk Ox Properties, LP approximately $57 and $57 in the three months ended March 31, 2012 and 2011, respectively. We recognized rent expense related to this lease of $57 both in the three months ended March 31, 2012 and 2011.

We continue to lease our former SkyCam facility from Case and Associates Properties, Inc., which in turn is partially owned by James E. Wilburn, Chairman of Winnercomm. 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 $125 and $123 in the three months ended March 31, 2012 and 2011, respectively. We recognized rent expense related to this lease of $62 and $66 in the three months ended March 31, 2012 and 2011, respectively. We no longer occupy this facility and have sub-leased this facility in April 2012.

In October 2010 we engaged WATV, LLC to produce one off-road motorsport series for a total contract value of $390. Roger L. Werner, our former Chief Executive Officer and current Co-chairman of the board of directors, is a partner in WATV. During the first quarter of 2012, we paid WATV $9 related to the production of this series.

We license a program on a barter basis that is produced by Gold Prospectors Association of America, LLC (“Gold Prospectors”), an entity owned by Thomas H. Massie, who is a principal stockholder and director of the Company. The program airs during off-peak hours and the license period is from March 2009 through March 2012. In March 2012, we

 

15


Table of Contents

extended the license period of this show and agreed to pay $25 per quarter in exchange for increased commercial air time to be sold and retained by the Company. The value of this barter arrangement is not considered material to our consolidated financial statements.

In December 2011 we entered into a license agreement to air another program produced by Gold Prospectors. Under the agreement we will contribute $80 towards the production of 18 licensed episodes which will be jointly owned by the Company and Gold Prospectors. The agreement terminates in December 2012 and no amounts were paid during the current quarter of 2012.

NOTE 10—COMMITMENTS AND CONTINGENCIES

From time to time we are involved in litigation as both plaintiff and defendant arising in the ordinary course of business. In the opinion of management, the results of any pending litigation should not have a material adverse effect on our consolidated financial position or operating results.

We lease facilities and equipment, including access to satellites for television transmission, under non-cancelable operating leases that expire at various dates through 2022. Generally, the most significant lease is our satellite lease.

Rental expenses, including satellite and transponder expense, equipment and facilities rent expense, aggregated to approximately $703 and $756 for the three months ended March 31, 2012 and 2011, respectively.

We also have operating leases for general office and production facilities in Tulsa, OK, New York City, Chicago, IL, Fort Worth, TX and Greenwich, CT with varying expiration dates through March 2022.

NOTE 11—SEGMENT INFORMATION

We report segment information in the same format as reviewed by our chief operating decision maker in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our chief executive officer. In 2011, based on changes in how we monitor and measure our various businesses, we separated our aerial camera units, SkyCam and CableCam, into a separate segment. Previously, our aerial camera units were included in our Production Services segment. Accordingly, we now operate in three reporting segments: TOC, Production Services (which is comprised solely of Winnercomm) and our Aerial Cameras segment. TOC is a separate business activity that broadcasts television programming on the Outdoor Channel twenty-four 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 providing website services. Production Services generates revenue from advertising fees, production services for customer-owned telecasts, and from website design, management, marketing and hosting services. Aerial Cameras generates revenue from aerial camera services for customer-owned telecasts and events.

Intersegment revenues were generated by Production Services of approximately $412 and $584 respectively, for the three months ended March 31, 2012 and 2011, and intersegment cost of services were generated by Production Services of approximately $382 and $500, respectively, for the three months ended March 31, 2012 and 2011. Our Aerial Cameras segment had no intersegment revenues or intersegment cost of services for the three months ended March 31, 2012 and 2011.

Information with respect to these reportable segments as of and for the three months ended March 31, 2012 and 2011 is as follows:

 

Revenues    Three Months Ended
March 31,
 
     2012     2011  

TOC

   $ 12,611      $ 12,332   

Production Services

     1,017        1,829   

Aerial Cameras

     1,105        1,235   

Eliminations

     (412     (584
  

 

 

   

 

 

 

Total revenues

   $ 14,321      $ 14,812   
  

 

 

   

 

 

 

 

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Table of Contents
Income (Loss) from Operations    Three Months Ended
March 31,
 
     2012     2011  

TOC*

   $ (931   $ 277   

Production Services*

     (381     (645

Aerial Cameras*

     (649     (744

Eliminations

     (30     (84
  

 

 

   

 

 

 

Total loss from operations

   $ (1,991   $ (1,196
  

 

 

   

 

 

 
Total Assets    March 31,
2012
    December 31,
2011
 

TOC

   $ 76,232      $ 77,771   

Production Services

     6,285        7,063   

Aerial Cameras

     6,706        7,954   

Corporate assets*

     56,480        56,696   

Eliminations

     (328     (298
  

 

 

   

 

 

 

Total assets

   $ 145,375      $ 149,186   
  

 

 

   

 

 

 
Depreciation and Amortization    Three Months Ended
March 31,
 
     2012     2011  

TOC

   $ 363      $ 390   

Production Services

     132        135   

Aerial Cameras

     237        221   
  

 

 

   

 

 

 

Total depreciation and amortization

   $ 732      $ 746   
  

 

 

   

 

 

 

 

* Corporate overhead expenses consist primarily of executive, legal and administrative functions not associated directly with TOC, Production Services or Aerial Cameras. We allocate a portion of these expenses to our Production Services and Aerial Cameras 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 12—RECENT ACCOUNTING PRONOUNCEMENTS

In June and December 2011, the Financial Accounting Standards Board (FASB) issued guidance on the presentation of comprehensive income. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity and also requires presentation of reclassification adjustments from other comprehensive income to net income on the face of the financial statements. We adopted this guidance beginning after January 1, 2012, with the exception of the requirement to present reclassification adjustments from other comprehensive income to net income on the face of the financial statements, which has been deferred pending further deliberation by the FASB. The adoption did not have a material effect on our financial condition or results of operations, and only resulted in a change to financial statement presentation.

On May 12, 2011 the FASB issued Accounting Standards Update (ASU) No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04). This update amends Accounting Standards Codification (ASC) Topic 820, “Fair Value Measurement and Disclosure.” ASU 2011-04 clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. ASU 2011-04 is effective for annual and interim reporting periods beginning on or after December 15, 2011. The adoption of this guidance did not a material effect our financial condition and results of operations.

NOTE 13—SUBSEQUENT EVENTS

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

* * *

 

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Table of Contents

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

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 “Item 1A. Risk Factors” of our latest Form 10-K 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.

Management’s discussion and analysis of result of operations and financial condition is provided as a supplement to and should be read in conjunction with the unaudited condensed consolidated financial statements and related notes to enhance the understanding of our results of operations, financial condition and cash flows. Additional context can also be found in our 2011 Annual Report.

Significant components of management’s discussion and analysis of results of operations and financial condition include:

 

   

Overview and Strategy. The overview section provides a summary of our business.

 

   

Consolidated Results of Operations. The consolidated results of operations section provides an analysis of our results on a consolidated basis for the quarter ended March 31, 2012 compared to the quarter ended March 31, 2011.

 

   

Segment Results of Operations. The segment results of operations section provides an analysis of our results on a reportable operating segment basis for the quarter ended March 31, 2012 compared to the quarter ended March 31, 2011.

 

   

Liquidity and Capital Resources. The liquidity and capital resources section provides a discussion of our cash flows for the three months ended March 31, 2012 compared to the three months ended March 31, 2011.

OVERVIEW AND STRATEGY

We operate in three reporting segments: TOC, Production Services and Aerial Cameras. Each of these operating segments has unique characteristics and faces different opportunities and challenges. An overview of our three operating segments follows.

Our core business, TOC, is engaged in the development, production and broadcast of traditional outdoor programming such as hunting, fishing, shooting and off-road motor sports. With hunting season being predominantly in the second half of the calendar year, the success of our hunting programming during this same time has been the main driver of our stronger financial performance in the second half of the year. We continue to broaden our programming offerings in the first half of the year in an attempt to improve our financial performance during that same period. As such, we expanded our fishing programming in 2011 with notable fishing programs like Bassmasters, Madfin Shark Series, Spanish Fly and Zona. In addition, we announced a joint venture, Major League Fishing, with 24 of the top anglers in the United States to provide us with opportunities to bolster this type of programming which began airing in late March 2012. Overall, in addition to increasing revenue opportunities in the first half of the year, we believe this strategy will generate growth in our revenue from improving our program viewership ratings and increasing our distribution.

 

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Our Production Services segment, which is made up entirely of our Winnercomm production entity, is closely aligned with our core focus on outdoor programming, but also produces scripted and live event sports television and provides website services to other third parties.

Our Aerial Cameras segment, which we acquired along with the purchase of Winnercomm in 2009, is the U.S. leader in overhead aerial camera production, and we believe it is a unique asset which has meaningful growth opportunities and is increasing in value. However, because it will likely require significant capital investments to accelerate its growth, we may explore a strategic partnership or other alternatives for this business in the future.

Additional information regarding each segment follows.

Outdoor Channel

Outdoor Channel 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 consist primarily of advertising fees, including those from advertisements aired on Outdoor Channel and fees paid by third-party producers to purchase advertising time in connection with the airing of their programs on Outdoor Channel, and subscriber fees paid by cable, satellite and telephone company service providers that air Outdoor Channel.

Our advertising revenue for TOC consists of advertising bought on our cable network and advertising revenue related to ads placed on our website, outdoorchannel.com. Advertising revenues are generally driven by audience delivery, which in turn are determined by our subscriber base and the ratings our programs achieve in those homes. A portion of TOC’s advertising contracts, primarily those with national non-endemic advertisers, typically guarantee the advertiser a minimum audience for its advertisements over the term of the contracts. This requires us to make estimates of the audience size that will be delivered throughout the terms of the contracts at the time we enter into such contracts. We base our estimate of audience size on our Nielsen ratings from prior years. If after running the advertising we determine we did not deliver the guaranteed audience, an accrual for “make-good” advertisements is recorded as a reduction of revenue, and we then provide the advertiser with additional advertising time to reach the aggregate minimum audience that we guaranteed and then recognize such revenue at that time. Any estimated make-good accrual is adjusted throughout the terms of the advertising contracts. The continued growth of our advertising revenues will, to a certain extent, be dependent on the growth of our audience viewing and subscriber base, as well as the general health of the advertising marketplace.

For March 2012, Nielsen estimated that Outdoor Channel had 37.1 million subscriber homes compared to 34.5 million for the same period a year ago, an 8% year-over-year increase. Nielsen revises its estimate of the number of subscribers to our channel each month and there is usually a lag of 2-3 months before Nielsen captures any new launches or tier migrations. For May 2012 Nielsen’s estimate increased to 37.8 million subscribers, which we believe relates to the lag in their picking up new Outdoor Channel subscribers in their estimates. 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. Our May 2012 Nielsen estimate of 37.8 million subscribers is the highest Outdoor Channel has ever achieved. The estimate regarding Outdoor Channel’s subscriber base is made by Nielsen 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. There can be no assurances that there will be any correlation between the actual growth or decline in our paying subscribers compared to Nielsen’s estimate of such growth or decline.

We continue to pursue subscriber growth by utilizing various incentives, including offering lower per-subscriber fees for broader distribution, payment of subscriber acquisition or launch support fees and TOC marketing dollars among other tactics. Any subscriber acquisition or 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.

While we are 100% programmed in high-definition format (“HD”), our HD signal is only carried on a subset of our overall subscriber base. We currently have approximately 11.8 million HD subscriber homes, all of which are on cable or telephone systems. We are continuing our efforts to increase the carriage of our HD signal as we deem this to be an important competitive feature.

 

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We increased our programming expenditures in 2011 and expect to continue to see increases in programming costs as we believe we need to invest in our programming brand given the increased viewing alternatives, including competitors with similar outdoor themed programming. While our advertising and marketing expense declined slightly in 2011 compared to 2010, we increased these expenses during the first quarter of 2012 and expect to increase our expenses in this area for the rest of 2012 and beyond to support our increased programming investment and our recent and expected continued growth in subscribers. While we believe these investments in programming and marketing will help assure our long term growth, they are likely to have a dampening effect on TOC’s operating income in the near term.

During the first quarter of 2012, our prime time viewership by key demographics (as measured by Nielsen) increased from last year although our aggregate viewership during the total day declined slightly. This decrease in aggregate daily viewership affected our ability to grow our national advertising revenue during the first quarter of 2012. We believe that our renewed investment in programming and marketing will have a positive effect on our ratings, although it may take some time before seeing these results, and this will then result in increased advertising revenue over time.

We also have invested significant resources to build our outdoorchannel.com website and expect that we will continue to make investments in this area to support material revenue potential for our online operations.

Production Services

Production Services is comprised solely of our wholly owned subsidiary, Winnercomm, Inc., which is involved in the production, development and marketing of sports programming. Production Services revenues include revenues from sponsorship, sales representation fees on television advertising sold on behalf of client advertisers, revenues from production services for
customer-owned telecasts, and revenue from website design, management, marketing and hosting fees.

Since our acquisition of Winnercomm in January 2009, we have been focused on eliminating Winnercomm’s low margin production and non-strategic business and returning the segment to profitability. This has resulted in a material reduction of the segment’s
third-party revenues and gross profits, which we believe will begin to level in 2012. Our Winnercomm unit is increasingly being used to produce high quality programming for TOC.

Aerial Cameras

Our Aerial Cameras segment is comprised of our SkyCam and CableCam entities, which were acquired in connection with our Winnercomm acquisition in January 2009. These entities are engaged in providing aerial camera services for customer owned telecasts. Most of the segment’s revenues relate to professional and college football, but we also provide services, although to a much lesser extent, for other sports such as baseball, soccer and hockey and for special events such as concerts. We also hope to expand our business to other areas outside of football and sports in general, and in April 2012 we signed our first ever contract related to a U.S. government project, which we hope will become a new and growing customer group for us.

During 2011 our Aerial Cameras segment received a favorable jury verdict on our legal actions against ActionCam and its founder, a competitor to our aerial camera business which we initiated suit against in 2009 for misappropriation of trade secrets, breach of separation agreement and unfair competition. While we will likely incur additional costs pursuing final judgment in that case, our legal expense going forward will be significantly less than in the past two years.

Seasonality

All of our segments generate a higher proportion of their revenue and operating income in the second half of our fiscal year due to higher viewed hunting programming which coincides with the fall hunting season at TOC, hunting and sports related programming at our Production Services segment and to football driven revenues at our Aerial Cameras segment.

Succession Changes

Effective February 1, 2012, our former president and chief executive officer, Roger L. Werner, retired from his executive role with the Company and became Co-Chairman of our Board of Directors and entered into a transition agreement for the balance of 2012. Tom Hornish, our Executive Vice President and Chief Operating Officer, was appointed the Company’s president and chief executive officer effective that same date. Mr. Werner’s retirement from his executive role was planned for some time and the transition was expected and smooth. Additional executive appointments were made effective February 1, 2012 and two former executives departed the Company shortly after Mr. Hornish’s appointment. These succession changes had an adverse financial effect during the first quarter of 2012 but should reduce costs for the balance of the year and thereafter.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates.

 

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For further information regarding our critical accounting policies, judgments and estimates, please see “Critical Accounting Policies and Estimates” in Item 7 of our 2011 Annual Report.

CONSOLIDATED RESULTS OF OPERATIONS

Our consolidated results of operations are presented below for the quarter ended March 31, 2012 and 2011.

Comparison of Consolidated Operating Results for the Three Months Ended March 31, 2012 and March 31, 2011

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  
     2012     2011     $     %     2012     2011  

Revenues:

            

Advertising

   $ 7,435      $ 7,585      $ (150     (2 )%      52     51

Subscriber fees

     5,176        4,747        429        9        36        32   

Production services

     1,710        2,480        (770     (31     12        17   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     14,321        14,812        (491     (3     100        100   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of services:

            

Programming

     1,798        1,630        168        10        13        11   

Satellite transmission fees

     429        399        30        8        3        3   

Production and operations

     4,141        4,553        (412     (9     29        31   

Other direct costs

     11        92        (81     (88     —          1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of services

     6,379        6,674        (295     (4     45        45   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

            

Advertising

     648        305        343        113        5        2   

Selling, general and administrative

     8,553        8,283        270        3        60        56   

Depreciation and amortization

     732        746        (14     (2     5        5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses

     9,933        9,334        599        6        69        63   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (1,991     (1,196     (795     67        (14     (8

Interest and other income, net

     19        9        10        111        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations before income taxes

     (1,972     (1,187     (785     66        (14     (8

Income tax benefit

     (814     (357     (457     128        (6     (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (1,158   $ (830   $ (328     40     (8 )%      (6 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(percentages may not add due to rounding)

Revenues

Total revenues for the three months ended March 31, 2012 were $14.3 million, a decrease of $491,000, or 3%, compared to revenues of $14.8 million for the three months ended March 31, 2011. The decrease was due primarily to lower revenue at our Production Services and Aerial Cameras units and reductions in our advertising revenue, partially offset by increases in our subscriber fee revenue, all as discussed further in our segment results of operations below.

Cost of Services

Total cost of services for the three months ended March 31, 2012 were $6.4 million, a decrease of $295,000, or 4%, compared to cost of services of $6.7 million for the three months ended March 31, 2011. The decrease was primarily driven by lower production costs at our Production Services and Aerial Cameras units, net of increases in programming and operational expenses at our Outdoor Channel unit, as further discussed in the segment results of operations below.

 

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Other Expenses

Advertising expenses for the three months ended March 31, 2012 were $648,000, a 113% increase compared to $305,000 for the three months ended March 31, 2011, and were primarily due to increased cross channel advertising and promotional campaigns at TOC to support recent new subscriber and program launches.

Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2012 were $8.6 million, a 3% increase compared to SG&A expenses of $8.3 million for the three months ended March 31, 2011. The increase in SG&A was primarily due to succession related expenses, including severance, at our TOC unit, offset by reduced personnel related expenses at our Production Services unit and reduced legal fees at our Aerial Camera unit as further discussed in the segment results of operations below.

Depreciation and amortization expense for the three months ended March 31, 2012 was $732,000, a 2% decrease compared to depreciation and amortization expense of $746,000 for the three months ended March 31, 2011. The decrease primarily relates to more assets having become fully depreciated over the past year than depreciation on fixed assets acquired in that same period.

Loss from Operations

Loss from operations for the three months ended March 31, 2012 was $2.0 million, an increase of $795,000 compared to an operating loss of $1.2 million for the three months ended March 31, 2011. As discussed below in our segment results of operations, the decrease in income from operations was driven primarily by a decline in operating profits at TOC caused primarily by increases in programming, advertising and SG&A expenses, net of decreased Aerial Camera and Winnercomm losses.

Interest and Other Income, Net

Interest and other income, net for the three months ended March 31, 2012 was income of $19,000, an increase of $10,000 compared to income of $9,000 for the three months ended March 31, 2011. The increase was primarily due to an increase in our investments in available-for-sale securities balance which earns higher interest.

Loss from Operations Before Income Taxes

Loss from operations before income taxes as a percentage of revenues was 14% for the three months ended March 31, 2012 compared to 8% for the three months ended March 31, 2011 due primarily to TOC’s higher programming, advertising and SG&A expenses for the quarter, offset by a lower proportion of our overall revenue being contributed by our lower margin Production Services unit.

Income Tax Benefit

Income tax benefit for the three months ended March 31, 2012 was $814,000 compared to $357,000 for the three months ended March 31, 2011. The income tax benefit reflected in the accompanying unaudited condensed consolidated statements of operations for the three months ended March 31, 2012 and 2011 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 March 31, 2011 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 $74,000. There was no similar discrete tax expense for the three months ended March 31, 2012.

Net Loss

Net loss for the three months ended March 31, 2012 was $1.2 million, an increase of $328,000 compared to a net loss of $830,000 for the three months ended March 31, 2011.

 

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SEGMENT RESULTS OF OPERATIONS

Transactions between reportable segments are accounted for as third-party arrangements for the purposes of presenting reporting segment results of operations below. Typical intersegment transactions include the purchase by our TOC segment of programs to air on Outdoor Channel and website design, management and maintenance services from our Production Services segment. Our Aerial Cameras segment has no intersegment transactions between our TOC or Production Services segments.

TOC

Comparison of Operating Results for the Three Months Ended March 31, 2012 and March 31, 2011

The following table discloses certain financial information for the periods presented, expressed in terms of dollars, dollar change and percentage change (all dollar amounts are in thousands):

 

     Three Months Ended March 31,  
                  Change  
     2012     2011      $     %  

Revenues:

         

Advertising

   $ 7,435      $ 7,585       $ (150     (2 )% 

Subscriber fees

     5,176        4,747         429        9   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

     12,611        12,332         279        2   
  

 

 

   

 

 

    

 

 

   

 

 

 

Cost of services:

         

Programming

     1,872        1,757         115        7   

Satellite transmission fees

     429        399         30        8   

Production and operations

     2,501        2,167         334        15   

Other direct costs

     11        92         (81     (88
  

 

 

   

 

 

    

 

 

   

 

 

 

Total cost of services

     4,813        4,415         398        9   
  

 

 

   

 

 

    

 

 

   

 

 

 

Other expenses:

         

Advertising

     648        305         343        113   

Selling, general and administrative

     7,718        6,945         773        11   

Depreciation and amortization

     363        390         (27     (7
  

 

 

   

 

 

    

 

 

   

 

 

 

Total other expenses

     8,729        7,640         1,089        14   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) from operations

   $ (931   $ 277       $ (1,208     (436 )% 
  

 

 

   

 

 

    

 

 

   

 

 

 

(percentages may not add due to rounding)

Revenues

Advertising revenue for the three months ended March 31, 2012 was $7.4 million, a decrease of $150,000, or 2%, compared to $7.6 million for the three months ended March 31, 2011. The decrease in advertising revenue was due primarily to a ratings driven decrease in short-form advertising.

Subscriber fees for the three months ended March 31, 2012 were $5.2 million, an increase of $429,000, or 9%, compared to $4.7 million for the three months ended March 31, 2011. This increase in subscriber fees was primarily due to our annual increase in subscriber rates and to a decrease in our estimated potential most-favored nation liabilities related to our distributors in the current year period as compared to the same prior year period.

Cost of Services

Programming expenses for the three months ended March 31, 2012 were $1.9 million, an increase of $115,000, or 7%, compared to $1.8 million for the three months ended March 31, 2011. The increase was due primarily to new, more expensive programs airing during the current year period compared to the prior year period.

Satellite transmission fees for the three months ended March 31, 2012 were $429,000, an increase of $30,000, or 8%, compared to $399,000 for the three months ended March 31, 2011. The increase was primarily due to an upgrade in backup transponder services.

Production and operations costs for the three months ended March 31, 2012 were $2.5 million, an increase of $334,000, or 15%, compared to $2.2 million for the three months ended March 31, 2011. The increase in costs was driven primarily by succession related severance expense, partially offset by lower online consulting services.

 

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Other direct costs for the three months ended March 31, 2012 were $11,000, a decrease of $81,000, or 88%, compared to $92,000 for the three months ended March 31, 2011. This decrease was due primarily to a decrease in subscriber acquisition fees amortization.

Other Expenses

Advertising expenses for the three months ended March 31, 2012 were $648,000, an increase of $343,000, or 113%, compared to $305,000 for the three months ended March 31, 2011 due primarily to increased cross channel advertising and promotional campaigns to support recent new subscriber and program launches.

SG&A expenses for the three months ended March 31, 2012 were $7.7 million, an increase of $773,000, or 11%, compared to $6.9 million for the three months ended March 31, 2011. The increase relates primarily to succession-related compensation expense, including severance and related compensation expense associated with the departure of one of our senior sales executives, and to increased marketing research fees, partially offset by a reduction in our reserve for doubtful accounts.

Depreciation and amortization for the three months ended March 31, 2012 was $363,000, a decrease of $27,000, or 7%, compared to $390,000 for the three months ended March 31, 2011. The decrease in depreciation and amortization primarily relates to more fixed assets becoming fully depreciated over the past year than depreciation on fixed asset additions in that same period.

Income (Loss) from Operations

Our resulting loss from operations for the three months ended March 31, 2012 was $931,000 compared to income of $277,000 million for the three months ended March 31, 2011. As discussed above, the decline in our income from operations was driven primarily by increased online service costs, increased programming, advertising and SG&A expenses, partially offset by increased subscriber fee revenue.

Production Services

Comparison of Operating Results for the Three Months Ended March 31, 2012 and March 31, 2011

The following table discloses certain financial information for the periods presented, expressed in terms of dollars, dollar change and percentage change (all dollar amounts are in thousands):

 

     Three Months Ended March 31,  
                 Change  
     2012     2011     $     %  

Revenues:

        

Production services

   $ 1,017      $ 1,829      $ (812     (44 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     1,017        1,829        (812     (44
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of services:

        

Production and operations

     967        1,669        (702     (42
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of services

     967        1,669        (702     (42
  

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

        

Selling, general and administrative

     299        670        (371     (55

Depreciation and amortization

     132        135        (3     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses

     431        805        (374     (47
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

   $ (381   $ (645   $ 264        (41 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

(percentages may not add due to rounding)

Revenues

Production services revenue for the three months ended March 31, 2012 was $1.0 million, a decrease of $812,000, or 44%, as compared to $1.8 million for the three months ended March 31, 2011. The decrease in revenue was due primarily to an expected reduction in the number of third-party production contracts that were renewed at Winnercomm in the current year period. Revenues for the remainder of 2012 will continue to decline on a year-over-year basis reflecting the business we cancelled or that was non-renewed in 2012, although to a lesser degree.

 

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Cost of Services

Production and operations costs for the three months ended March 31, 2012 were $967,000, a decrease of $702,000, or 42%, compared to $1.7 million for the three months ended March 31, 2011. The decrease in costs relates primarily to decreased production costs caused by fewer Winnercomm production contracts being renewed in the current year. Cost of sales for the remainder of 2012 will continue to decline on a year-over-year basis reflecting the business we cancelled or was non-renewed in 2011, although to a lesser degree.

Other Expenses

SG&A expenses for the three months ended March 31, 2012 were $299,000, a decrease of $371,000, or 55%, compared to $670,000 for the three months ended March 31, 2011. The decrease relates primarily to reduced payroll and related compensation costs associated with terminations in 2011 and to the allocation and reassignment of personnel in the current quarter as compared to the prior year quarter, and to reduced rent and related expenses resulting from the relocation of our Winnercomm business to a new facility.

Depreciation and amortization for the three months ended March 31, 2012 was $132,000, a decrease of $3,000, or 2%, compared to $135,000 for the three months ended March 31, 2011. The decrease in depreciation and amortization primarily relates to more fixed assets becoming fully depreciated over the past year than depreciation on assets acquired in that same period.

Loss from Operations

Loss from operations for the three months ended March 31, 2012 was $381,000, a decrease of $264,000 compared to an operating loss of $645,000 for the three months ended March 31, 2011. As discussed above, the decrease in loss from operations was due primarily to lower SG&A expenses.

Aerial Cameras

Comparison of Operating Results for the Three Months Ended March 31, 2012 and March 31, 2011

The following table discloses certain financial information for the periods presented, expressed in terms of dollars, dollar change and percentage change (all dollar amounts are in thousands):

 

     Three Months Ended March 31,  
                 Change  
     2012     2011     $     %  

Revenues:

        

Production services

   $ 1,105      $ 1,235      $ (130     (11 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     1,105        1,235        (130     (11
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of services:

        

Production and operations

     981        1,090        (109     (10
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of services

     981        1,090        (109     (10
  

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

        

Selling, general and administrative

     536        668        (132     (20

Depreciation and amortization

     237        221        16        7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses

     773        889        (116     (13
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

   $ (649   $ (744   $ 95        (13 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

(percentages may not add due to rounding)

Revenues

Production services revenue from our aerial camera unit for the three months ended March 31, 2012 was $1.1 million, a decrease of $130,000, or 11%, as compared to $1.2 million for the three months ended March 31, 2011. The decrease was due primarily to a slight reduction in the number of professional and collegiate sporting and other production events.

 

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Cost of Services

Production and operations costs for the three months ended March 31, 2012 were $981,000, a decrease of $109,000, or 10%, compared to $1.1 million for the three months ended March 31, 2011. The decrease in costs relates primarily to reduced aerial camera production events, lower facility costs resulting from our 2011 relocations and also to a favorable revision during the current quarter of $50,000 to the previously recorded lease abandonment charge to reflect the actual terms of our recent sublease agreement for our former Tulsa facility.

Other Expenses

SG&A expenses for the three months ended March 31, 2012 were $536,000, a decrease of $132,000, or 20%, compared to $668,000 for the three months ended March 31, 2011. This decrease relates primarily to decreased legal fees related to the ActionCam litigation partially offset by continued move related expenses incurred in connection with last year’s relocation of our aerial camera units to a new combined facility.

Depreciation and amortization for the three months ended March 31, 2012 was $237,000, an increase of $16,000, or 7%, compared to $221,000 for the three months ended March 31, 2011. The increase in depreciation and amortization primarily relates to increased depreciation of new assets including leasehold improvements at our new location in Ft. Worth, Texas.

Loss from Operations

Loss from operations for the three months ended March 31, 2012 was $649,000, a decrease of $95,000 compared to an operating loss of $744,000 for the three months ended March 31, 2011. As discussed above, the decrease in loss from operations was due primarily to reductions in SG&A expense.

LIQUIDITY AND CAPITAL RESOURCES

We generated $647,000 of cash in our operating activities in the three months ended March 31, 2012, an increase of $276,000 compared to cash generated from operating activities of $371,000 in the three months ended March 31, 2011. The increase was due primarily to lower payments of subscriber acquisition payments and lower income tax payments during the current year period.

Net cash provided by investing activities was $1.3 million in the three months ended March 31, 2012 compared to cash used in investing activities of $1.4 million for the three months ended March 31, 2011. The increase in cash provided by investing activities related principally to net proceeds (sales, net of purchases) of short-term available-for-sale securities in the current quarter of $1.9 million compared to net purchases (purchases, net of sales) of $1.0 million, partially offset by an increase in capital expenditures for fixed assets.

Cash used by financing activities was $547,000 in the three months ended March 31, 2012 compared to cash used of $471,000 in the three months ended March 31, 2011. The increase was related to the increase in cash used for the purchase and retirement of common stock as recipients of stock awards used stock to satisfy withholding taxes related to vesting of restricted shares.

On August 10, 2010, the Board of Directors approved the renewal of the revolving line of credit agreement (the “Revolver”) with U.S. Bank N.A., extending the maturity date to September 5, 2012 and renewing the total amount which can be drawn upon under the Revolver to $10.0 million. The Revolver provides that the interest rate per annum as selected by us shall be prime rate (3.25% and 3.25% as of March 31, 2012 and 2011, respectively) plus 0.25% or LIBOR (0.25% and 0.25% as of March 31, 2012 and 2011, 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 March 31, 2012, we did not have any amounts outstanding under this credit facility. This Revolver is guaranteed by TOC and as of March 31, 2012, we were in full compliance with all the covenants of the Revolver.

Our combined cash and cash equivalent and investment in available-for-sale securities balance was $59.1 million at March 31, 2012, a decrease of $0.4 million from the combined balance of $59.5 million at December 31, 2011. Net working capital decreased to $72.0 million at March 31, 2012, compared to $72.3 million at December 31, 2011. We believe that our combined cash and available-for-sale securities and our expected cash flow from operations will meet our short-term cash flow requirements and 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 we desire to expand operations beyond current levels, we could draw on our Revolver or 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.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

At March 31, 2012 and December 31, 2011, our non-current investment portfolio consists of two auction-rate securities with
long-term maturities for both periods totaling approximately $4.9 million. Although these securities have rate reset features, they 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.

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 March 31, 2012 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 March 31, 2012, 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 Securities and Exchange Commission 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.

PART II—OTHER INFORMATION

 

ITEM 1. Legal Proceedings.

“Item 3. Legal Proceedings” of our Form 10-K includes a discussion of our legal proceedings. Except as described below, there have been no material changes from the legal proceedings described in our 2011 Annual Report.

On July 27, 2011, a complaint was filed in the U.S. District Court, Northern District of Texas, by Ewell E. Parker, Jr. against Outdoor Channel Holdings, Inc., The Outdoor Channel, Inc. and a third party production company known as Reel In The Outdoors, Ltd. The complaint alleges contributory copyright infringement against Outdoor Channel Holdings, Inc. and The Outdoor Channel, Inc. This complaint seeks aggregate general damages in excess of $75,000 plus other indeterminable amounts, fees and expenses.

We received a favorable jury verdict on September 2, 2011 regarding our previously disclosed litigation by SkyCam, LLC against ActionCam, LLC and a former employee of SkyCam, LLC, seeking damages for unfair competition, false designation of origin, copyright infringement, misappropriation of trade secrets, breach of written contract and unfair competition. The jury found that the former employee of SkyCam breached his separation agreement and that he, along with ActionCam, misappropriated SkyCam’s trade secrets and engaged in unfair competition. The jury also determined that by clear and

 

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convincing evidence, both the former employee and ActionCam were willful and malicious and acted with a reckless disregard of the rights of others. Actual and punitive damages were awarded to SkyCam by the jury, although a final judgment and order has not yet been entered in this case. On September 13, 2011, ActionCam, LLC withdrew its counterclaim with prejudice against SkyCam LLC and its third-party complaints against Outdoor Channel Holdings, Inc. and Winnercomm, Inc. On December 22 and 23, 2011, the court scheduled a bifurcated bench trial related to SkyCam, LLC’s claims against ActionCam, LLC for patent assignment rights and injunctive relief. The judge has not yet issued his ruling with respect to the bifurcated trial.

 

ITEM 1A. Risk Factors.

“Item 1A. Risk Factors” of our Form 10-K includes a discussion of our risk factors. There have been no material changes from the risk factors described in our 2011 Annual Report.

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

 

ITEM 3. Defaults Upon Senior Securities.

None.

 

ITEM 4. Mine Safety Disclosures.

None.

 

ITEM 5. Other Information.

None.

 

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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 Company’s Current Report on Form 8-K filed on September 20, 2004 and incorporated herein by reference)
  3.2   By-Laws of Outdoor Channel Holdings, Inc., a Delaware corporation (filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on September 20, 2004 and incorporated herein by reference)
  4.1   Instruments defining the rights of security holders, including debentures (see Exhibits 3.1 and 3.2 above and Exhibit 4.1 to the Company’s Form 10-Q for the period ended June 30, 2005)
10.34   Amendment dated April 10, 2012 to the Amended and Restated Employment Agreement with Thomas E. Hornish effective as of February 1, 2012 (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on April 11, 2012 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
101 **   The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at March 31, 2012 and December 31, 2011; (ii) Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011; (iii) Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2012 and 2011; (iv) Unaudited Condensed Consolidated Statement of Equity for the three months ended March 31, 2012; (v) Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011; and (vi) Notes to Unaudited Condensed Consolidated Financial Statements, tagged as blocks of text.

 

* 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.
** Users of this data are advised that pursuant to Rule 406T of Regulation S-T, this XBRL information is being furnished and not filed herewith for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and Sections 11 or 12 of the Securities Act of 1933, as amended, and is not to be incorporated by reference into any filing, or part of any registration statement or prospectus, of Outdoor Channel Holdings, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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: May 9, 2012

 

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