Outdoor Channel (OUTD) 10-Q 2006 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended March 31, 2006
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                   to

Commission file number: 000-17287

Outdoor Channel Holdings, Inc.

(Exact name of Registrant as specified in its charter)

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

43445 Business Park Drive, Suite 113

Temecula, California 92590

(Address and zip code of principal executive offices)

(951) 699-4749

(Issuer’s telephone number, including area code)

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

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

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

Large accelerated filer o Accelerated filer ý Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes     ý 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 April 30, 2006
Common Stock, $0.001 par value	24,600,794

OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q

For The Period Ended March 31, 2006

Table of Contents

	Part I. Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets at March 31, 2006 (Unaudited) and December 31, 2005
	Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2006 and 2005
	Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2006
	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005
	Notes to Unaudited Condensed Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Recent Accounting Developments
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
	Part II. Other Information
Item 1.	Legal Proceedings
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits
Signatures

* * *

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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, 2006			December 31, 2005
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	19,594		$	18,276
Investment in available-for-sale securities	37,349			38,830
Accounts receivable, net of allowance for doubtful accounts of $350 and $275	6,813			5,320
Income tax refund receivable	3,843			3,843
Deferred tax assets, net	1,456			1,015
Prepaid programming costs	2,575			2,381
Other current assets	1,077			689
Total current assets	72,707			70,354
Property, plant and equipment at cost, net:
Membership division	3,467			3,526
Outdoor Channel equipment and improvements	12,935			12,097
Property, plant and equipment, net	16,402			15,623
Amortizable intangible assets	1,240			1,380
Goodwill	44,457			44,457
Other non-amortizable intangible assets	10,573			10,573
Deferred tax assets, net	9,356			9,230
Derivative instruments	7			—
Deposits and other assets	671			605
Totals	$	155,413		$	152,222
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	3,502		$	2,864
Accrued severance payments	18			18
Current portion of long-term debt and capital lease obligations	701			708
Current portion of deferred revenue	1,102			422
Customer deposits	641			159
Total current liabilities	5,964			4,171
Accrued severance payments, net of current portion	12			16
Long-term debt and capital lease obligations, net of current portion	4,018			4,193
Deferred revenue, net of current portion	1,250			1,271
Derivative instruments	—			72
Deferred satellite rent obligations	307			295
Total liabilities	11,551			10,018
Commitments and contingencies
Stockholders’ equity:
Preferred stock; 25,000 shares authorized; none issued	—			—
Common stock, $0.001 par value; 75,000 shares authorized: 24,577 and 24,409 shares issued and outstanding	25			24
Additional paid-in capital	158,828			158,700
Deferred compensation	—			(1,520		)
Accumulated other comprehensive income (loss):
Net unrealized gains (losses) on derivative instruments	7			(72		)
Net unrealized gains on available-for-sale securities	48			36
Total accumulated other comprehensive income (loss)	55			(36		)
Accumulated deficit	(15,046		)	(14,964		)
Total stockholders’ equity	143,862			142,204
Totals	$	155,413		$	152,222

See Notes to Unaudited Condensed Consolidated Financial Statements.

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OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

(In thousands, except per share data)

	Three Months Ended March 31,
	2006			2005
Revenues:
Advertising	$	5,685		$	5,259
Subscriber fees	4,383			3,642
Membership income	1,221			1,160
Total revenues	11,289			10,061
Expenses:
Satellite transmission fees	638			633
Advertising	2,162			1,694
Programming	1,544			521
Selling, general and administrative	7,506			6,486
Total expenses	11,850			9,334
Income (loss) from operations	(561		)	727
Interest expense	78			1
Other income, net	623			53
Income (loss) before income taxes	(16		)	779
Income tax provision	66			327
Net income (loss)	$	(82	)	$	452
Earnings (loss) per common share:
Basic	$	0.00		$	0.02
Diluted	$	0.00		$	0.02
Weighted average number of common shares outstanding:
Basic	24,462			18,474
Diluted	24,462			22,397

See Notes to Unaudited Condensed Consolidated Financial Statements.

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OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statement of Stockholders’ Equity

For the Three Months Ended March 31, 2006

(In thousands)

	Common Stock				Additional Paid-in				Deferred				Accumulated Other Comprehensive				Accumulated
	Shares		Amount		Capital				Compensation				Income (Loss)				Deficit				Total
Balance, January 1, 2006	24,409		$	24	$		158,700		$	(1,520		)	$	(36		)	$	(14,964		)		$	142,204
Comprehensive Income:
Net loss																	(82		)		(82			)
Effect of change in fair value of available-for-sale securities, net of deferred taxes of ($19)													12								12
Impact of cash flow hedge													79								79
Total comprehensive income																					9
Reclassification of deferred compensation upon adoption of SFAS 123R					(1,520			)	1,520
Common stock issued upon exercise of stock options	174		1		182																183
Forfeited restricted shares	(6	)
Stock-based employee compensation expense					815																815
Tax benefit from exercise of stock options					651																651
Balance, March 31, 2006	24,577		$	25	$	158,828			$		—		$		55		$	(15,046		)		$	143,862

See Notes to Unaudited Condensed Consolidated Financial Statements.

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OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

	Three Months Ended March 31,
	2006			2005
Operating activities:
Net income (loss)	$	(82	)	$	452
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	552			575
Provision for doubtful accounts	67			9
Stock-based employee compensation	815			52
Deferred tax provision, net	66
Changes in operating assets and liabilities:
Accounts receivable	(1,560		)	221
Income tax refund receivable	—			326
Prepaid programming costs	(194		)	(548		)
Other current assets	(388		)	(828		)
Deposits and other assets	(69		)	(82		)
Accounts payable and accrued expenses	638			(1,241		)
Deferred revenue	659			20
Customer deposits	482			625
Accrued severance payments	(4		)	(20		)
Deferred satellite rent obligations	12			(8		)
Net cash provided by (used in) operating activities	994			(447		)
Investing activities:
Purchases of property, plant and equipment	(1,189		)	(1,668		)
Purchases of available-for-sale securities	(32,638		)	—
Proceeds from sale of available-for-sale securities	34,150			—
Net cash provided by (used in) investing activities	323			(1,668		)
Financing activities:
Principal payments on long-term debt and capital leases	(182		)	(6		)
Proceeds from exercise of stock options	183			170
Net cash provided by financing activities	1			164
Net increase (decrease) in cash and cash equivalents	1,318			(1,951		)
Cash and cash equivalents, beginning of period	18,276			13,105
Cash and cash equivalents, end of period	$	19,594		$	11,154
Supplemental disclosure of cash flow information:
Interest paid	$	78		$	—
Income taxes paid	$	—		$	5
Supplemental disclosures of non-cash investing and financing activities:
Effect of net increase (decrease) in fair value of available-for-sale securities, net of deferred taxes	$	12		$	(32	)
Effect of net increase in fair value of cash flow hedge	$	79		$	—

See Notes to Unaudited Condensed Consolidated Financial Statements.

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OUTDOOR CHANNEL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except per share data)

NOTE 1—ORGANIZATION AND BUSINESS

Description of Operations

Outdoor Channel Holdings, Inc. or “Outdoor Channel Holdings,” is incorporated under the laws of the State of Delaware. Collectively, with its subsidiaries, the terms “we,” “us,” “our” and the “Company” refer to Outdoor Channel Holdings, Inc. as a combined entity, except where noted or where the context makes clear the reference is only to Outdoor Channel Holdings, Inc. or one of our subsidiaries. The Company acquired the remaining 17.6% minority interest in our subsidiary, The Outdoor Channel, Inc. (“TOC”), which it did not previously hold, on September 8, 2004. TOC operates The Outdoor Channel, which is a national television network devoted to traditional outdoor activities, such as hunting, fishing and shooting sports, as well as off-road motor sports and other related lifestyle programming. TOC also operates Outdoor Channel 2 HD, which also is a national television network with similar programming as TOC’s but is produced and aired utilizing high definition technology.

Our revenues include advertising fees from advertisements aired on The Outdoor Channel, including fees paid by outside producers to purchase advertising time in connection with the airing of their programs on The Outdoor Channel, and from advertisements in “Gold Prospectors & Treasure Hunters in the Great Outdoors” magazine; subscriber fees paid by cable and satellite service providers that air The Outdoor Channel; membership fees from members in both LDMA-AU, Inc. (“Lost Dutchman’s”) and Gold Prospector’s Association of America, LLC (“GPAA”) and other income including products and services related to gold prospecting, gold expositions, expeditions and outings.

Other business activities consist of the promotion and sale of a gold prospecting expedition to our Cripple River property located near Nome, Alaska, and the sale of memberships in Lost Dutchman’s that entitle members to engage in gold prospecting on our Arizona, California, Colorado, Georgia, Michigan, North Carolina, Oregon, and South Carolina properties. We have signed an agreement with another organization for the mutual use of these and other properties.

Outdoor Channel Holdings also wholly owns 43455 BPD, LLC that owns the building housing our broadcast facility.

NOTE 2—UNAUDITED INTERIM FINANCIAL STATEMENTS

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position of the Company as of March 31, 2006 and its results of operations and cash flows for the three months ended March 31, 2006 and 2005. Information included in the consolidated balance sheet as of December 31, 2005 has been derived from, and certain terms used herein are defined in, the audited financial statements of the Company as of December 31, 2005 (the “Audited Financial Statements”) included in the Company’s Annual Report on Form 10-K (the “10-K”) for the year ended December 31, 2005 that was previously filed with the Securities and Exchange Commission (the “SEC”). Pursuant to the rules and regulations of the SEC, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from these financial statements unless significant changes have taken place since the end of the most recent fiscal year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the Audited Financial Statements and the other information also included in the 10-K.

The results of the Company’s operations for the three months ended March 31, 2006 are not necessarily indicative of the results of operations for the full year ending December 31, 2006.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities as of the dates of the condensed consolidated balance sheets and reported amount of revenues and expenses for the periods presented. Accordingly, actual results could materially differ from those estimates.

NOTE 3— STOCK INCENTIVE PLANS

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). We have elected to use the modified prospective transition method. This method requires compensation cost to be recognized in the financial statements over the service period for the fair value of all awards (including awards to employees) granted after the date of adoption as well as for existing awards for which the requisite service had not been rendered as of the date of adoption and requires that prior periods not be restated. Our stock incentive plans provide for the granting of qualified and nonqualified options, restricted stock and stock appreciation rights (“SARs”) to our officers, directors and employees. Outstanding options are generally exercisable from 90 days to four years after the date of the grant and expire no more than ten years after the grant. We satisfy the exercise of

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options and awards of restricted stock by issuing previously unissued common shares. Currently we have not awarded any SARs. Prior to the adoption of SFAS 123R, we used the intrinsic value method to account for stock options granted to employees and made no charges against earnings with respect to those options at the date of grant since our employee options had exercise prices that were equal to the market price, however, as explained in the 10-K, we did recognize a charge in the third quarter of 2004 when we issued fully-vested options to purchase shares in Outdoor Channel Holdings in exchange for fully-vested options held by employees of TOC on September 8, 2004. SFAS 123R requires that we elect an approved method to calculate the historical pool of windfall tax benefits upon adoption of SFAS 123R within one year of its adoption. As of March 31, 2006, we have not made that election.

For the three months ended March 31, 2006, the adoption of SFAS 123R reduced income (loss) from operations by $713, reduced net income (loss) by $490 and reduced earnings (loss) per basic and diluted share by $0.02 and $0.02, respectively. The adoption of SFAS 123R did not have a material effect on the condensed consolidated statement of cash flows for the three months ended March 31, 2006.

The weighted average fair value of employee stock options granted by us in the three months ended March 31, 2006 was estimated to be $4.48 per share using the Black-Scholes option pricing model with the following assumptions:

	Three Months Ended March 31, 2006
Risk-free interest rate	4.2 - 4.6%
Dividend yield	0%
Expected life of the option	4.4 yrs.
Volatility factor	28.5 – 31.5%

Expected volatilities are based on historical volatility of the Company’s stock, and other factors. The Company uses historical experience with exercise and post-vesting employment termination behavior to determine the options’ expected life. The expected life represents the period of time that options granted are expected to be outstanding. The risk-free rate is based on the U.S. Treasury rate with a maturity date corresponding to the options’ expected life.

Our historical net income and earnings per common share and pro forma net income and earnings per common share assuming compensation cost had been determined for the three months ended March 31, 2005 based on the fair value instead of the intrinsic value at the grant date for all awards by us to our employees, using the Black-Scholes option pricing model consistent with the provisions of SFAS 123R, and amortized ratably over the vesting period, are set forth below:

	Three Months Ended March 31,
	2005
Net income:
As reported	$	452
Deduct: Stock-based employee compensation expense assuming a fair value-based method had been used for all awards, net of tax effects	(397		)
Pro forma – basic and diluted	$	55
Basic earnings per share:
As reported	$	0.02
Pro forma	$	0.00
Diluted earnings per common share:
As reported	$	0.02
Pro forma	$	0.00

The fair value of each option granted by us in the three months ended March 31, 2005 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

	Three Months Ended March 31, 2005
Risk-free interest rate	4%
Dividend yield	0%
Expected life of the option	10 yrs.
Volatility factor	79%

In accordance with the provisions of SFAS 123R, all other issuances of common stock, stock options, warrants or other equity instruments to employees and non-employees as the consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued (unless the fair value of the consideration received can be more reliably measured). Generally, the fair value of any options, warrants or similar equity instruments issued is estimated based on the Black-Scholes option-pricing model.

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NOTE 4—EARNINGS PER SHARE

We have presented “basic” and “diluted” earnings (loss) per common share in the accompanying condensed consolidated statements of operations in accordance with the provisions of Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (“SFAS 128”). Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during each period. The calculation of diluted earnings (loss) per common share is similar to that of basic earnings per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares of the Company were issued during the period if any such issuances would have had a dilutive effect.

For the three months ended March 31, 2006, the computation of diluted loss per common share does not take into account any of our outstanding stock options because the effect of their assumed exercise would be anti-dilutive.  For the three months ended March 31, 2005, the computation of diluted earnings per common share takes into account the effects on the weighted average number of common shares outstanding of the assumed exercise of the outstanding stock options of the Company, adjusted for the application of the treasury stock method. The number of shares potentially issuable by the Company at March 31, 2006 and 2005 upon the exercise of stock options that were not included in the computation of net earnings (loss) per common share because they were anti-dilutive totaled 3,437 and 25, respectively.

The following table summarizes the calculation of net income (loss) and the weighted average common shares outstanding for basic and diluted earnings (loss) per common share for the three months ended March 31, 2006 and 2005:

	Three Months Ended March 31,
	2006			2005
Numerators:
Net income (loss)—basic	$	(82	)	$	452
Denominators:
Weighted average common shares outstanding—basic	24,462			18,474
Dilutive effect of potentially issuable common shares upon exercise of stock options of the Company as adjusted for the application of the treasury stock method	—			3,923
Diluted weighted average common shares outstanding	24,462			22,397

NOTE 5—EQUITY TRANSACTIONS

Issuances of Common Stock by the Company

During the three months ended March 31, 2006 and 2005, we received cash proceeds of approximately $183 and $170 from the exercise of options for the purchase of 174 and 125 shares of common stock, respectively.

During the three months ended March 31, 2006, a total of 6 shares of restricted stock have been cancelled due to employee turnover. As of March 31, 2006, we have 121 shares of restricted stock outstanding and $1,418 of expense, with respect to non-vested restricted stock awards, has yet to be recognized and will be amortized as compensation expense over the employees’ remaining requisite service periods.

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Outdoor Channel Holdings, Inc. Stock Option Plans

Descriptions of Outdoor Channel Holdings’ stock option plans are included in Note 11 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. A summary of the status of the options granted under Outdoor Channel Holdings’ stock option plans and outside of those plans as of March 31, 2006 and the changes in options outstanding during the three months then ended is presented in the table that follows:

	Shares		Weighted-average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at beginning of period	3,564		$	7.31
Options granted	60		14.26
Options exercised	(174	)	1.05
Options canceled or expired	(13	)	11.85
Options outstanding at end of period	3,437		$	7.73	3.6 years	$	14,076
Options exercisable at end of period	2,395		$	5.82	3.0 years	$	13,945

The weighted-average grant-date fair value of options granted during the three months ended March 31, 2006 was $4.48.  The total intrinsic value of stock options exercised during the three months ended March 31, 2006 was $1,754.

A summary of the status of Outdoor Channel Holdings’ non-vested restricted shares as of March 31, 2006 and the changes in restricted shares outstanding during the three months then ended is presented in the table that follows:

	Shares		Weighted-Average Grant Date Fair Value
Non-vested shares at beginning of period	127		$	14.43
Granted	—		—
Vested	—		—
Canceled	(6	)	14.95
Non-vested shares outstanding at end of period	121		$	14.14

As of March 31, 2006, $7,589 of expense with respect to non-vested share-based arrangements has yet to be recognized which is expected to be recognized over a weighted average period of 1.9 years.

NOTE 6—RELATED PARTY TRANSACTIONS

We lease our administrative facilities from Musk Ox Properties, LP, which in turn is owned by Messrs. Perry T. Massie and Thomas H. Massie, principal stockholders, directors and officers of the Company. In December 2005, the lease agreements were consolidated into one lease. The new lease agreement has a five-year term, expiring on December 31, 2010, with 2 five-year renewal options at our discretion. Monthly rent payments are $29 with a 3% per year escalator clause. Rent expense paid to Musk Ox Properties, LP totaled approximately $87 and $63 in the three months ended March 31, 2006 and 2005, respectively.

NOTE 7—SEGMENT INFORMATION

Pursuant to the Provisions of Statement of Financial Accounting Standards No. 131, “Disclosures About Segments of an Enterprise and Related Information” (“SFAS 131”), we report segment information in the same format as reviewed by our Chief Operating Decision Maker (the “CODM”). We segregate our business activities into TOC and the Membership Division. TOC is a separate business activity that broadcasts television programming on The Outdoor Channel 24 hours a day, seven days a week. TOC generates revenue from advertising fees (which include fees paid by outside producers to purchase advertising time in connection with the airing of their programs on The Outdoor Channel) and subscriber fees. Lost Dutchman’s and GPAA membership sales and related activities are reported in the Membership Division. The Membership Division also includes magazine sales, the sale of products and services related to gold prospecting, gold expositions, expeditions and outings. Intersegment sales amounted to $149 in each of the three months ended March 31, 2006 and 2005.

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Information with respect to these reportable segments as of and for the three months ended March 31, 2006 and 2005 is as follows:

	Revenues		Income (Loss) Before Income Taxes			Total Assets		Depreciation and Amortization		Additions to Property, Plant and Improvements
As of and for the Three Months Ended: March 31, 2006
TOC	$	9,910	$	814		$	25,555	$	345	$	1,177
Membership Division	1,379		189			5,854		71		12
Subtotals of Segments	11,289		1,003			31,409		416		1,189
Corporate*	—		(1,019		)	124,004		136		—
Totals	$	11,289	$	(16	)	$	155,413	$	552	$	1,189
March 31, 2005
TOC	$	8,757	$	1,272		$	21,797	$	361	$	1,511
Membership Division	1,304		59			4,979		78		157
Subtotals of Segments	10,061		1,331			26,776		439		1,668
Corporate*	—		(552		)	73,520		136		—
Totals	$	10,061	$	779		$	100,296	$	575	$	1,668

*We capture corporate overhead that is applicable to both segments, but not directly related to operations in a separate business unit, as “Corporate.” The expenses allocated to Corporate consisted primarily of: professional fees including public relations, accounting and legal fees, taxes associated with being incorporated in Delaware, board fees, and other corporate fees not associated directly with either TOC or the Membership division. Corporate assets consisted primarily of cash, available-for-sale securities, goodwill, net deferred tax assets and intangible assets.

NOTE 8—INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES

The Company’s short term investments in marketable debt and equity securities are classified as available-for-sale and are recorded at fair value at the end of each period. Gross realized gains and losses on sales of these securities during the three months ended March 31, 2006 and 2005 and all amounts related to such investments prior to the three months ended March 31, 2006 and the year ended December 31, 2005 were not material. Also included in investments in available-for-sale securities at March 31, 2006 and December 31, 2005 are investments in commercial paper and auction rate securities with short-term interest rates that generally can be reset every 28 days. The auction rate securities have long-term maturity dates and provide us with enhanced yields. However, we believe we have the ability to quickly liquidate them at their original cost, although there is no guaranty, and, accordingly, they are carried at cost, which approximates fair value, and classified as current assets. All income generated from these investments is recorded as interest income. We had unrealized net holding gains on marketable equity securities at March 31, 2006 and December 31, 2005 of $48 and $36, respectively, that are in “accumulated other comprehensive income”.

The investment in available-for-sale securities is as follows:

	As of March 31, 2006		As of December 31, 2005
Auction rate securities	$	33,500	$	38,000
Commercial paper	2,989		—
Equities	860		830
Total available-for-sale securities	$	37,349	$	38,830

NOTE 9—INCOME TAX PROVISION

The income tax provision reflected in the accompanying unaudited condensed consolidated statement of operations for the three months ended March 31, 2006 is different than that computed based on the applicable statutory Federal income tax rate of 34%. That portion of the current year SFAS 123R compensation expense relating to qualified incentive stock options, or ISOs, is recognized for financial statement purposes but is generally not deductible for tax purposes and thus is treated as a permanent difference between the two. We recognized a charge of $151,000 related to ISOs under SFAS 123R compensation expense. Because of this, and along with the effects of certain other income tax adjustments, we recorded positive taxable income resulting in income tax expense despite the financial statement loss.

NOTE 10—SUBSEQUENT EVENTS

On May 9, 2006, we received notice from the bank servicing our debt that it has given us a waiver of a covenant violation as of March 31, 2006 relating to our two term loans and our revolving line-of-credit facility requiring profitability of greater than $250,000 each fiscal quarter.  In addition, the bank modified such covenant to exclude the non-cash compensation expense relating to SFAS 123R when calculating the profitability under this covenant.

* * *

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

Safe Harbor Statement

The information contained in this report may include forward-looking statements. Our actual results could differ materially from those discussed in any forward-looking statements. The statements contained in this report that are not historical are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements, without limitation, regarding our expectations, beliefs, intentions or strategies regarding the future. We intend that such forward-looking statements be subject to the safe-harbor provisions contained in those sections. Such forward-looking statements relate to, among other things: (1) increased subscriber growth; (2) expected revenue and earnings growth and changes in mix; (3) anticipated expenses including advertising, programming, personnel and others; (4) Nielsen Media Research, which we refer to as Nielsen, estimates regarding total households and cable and satellite homes subscribing to and viewers (ratings) of The Outdoor Channel; and (5) more control over our programming. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

These statements involve significant risks and uncertainties and are qualified by important factors that could cause our actual results to differ materially from those reflected by the forward-looking statements. Such factors include but are not limited to risks and uncertainties which are included in Part II, Item 1A Risk Factors below and other risks and uncertainties discussed elsewhere in this report. In assessing forward-looking statements contained herein, readers are urged to read carefully all cautionary statements contained in this Form 10-Q and in our other filings with the Securities and Exchange Commission. For these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements in Section 27A of the Securities Act and Section 21E of the Exchange Act.

General

Through our indirect wholly owned subsidiary, The Outdoor Channel, Inc. or TOC, we own and operate The Outdoor Channel which is a national television network devoted primarily to traditional outdoor activities, such as hunting, fishing and shooting sports, as well as off-road motor sports and other outdoor related lifestyle programming. We also own and operate related businesses which serve the interests of The Outdoor Channel’s viewers and other outdoor enthusiasts. These related businesses include: LDMA-AU, Inc., which we refer to as Lost Dutchman’s, and Gold Prospector’s Association of America, LLC, which we refer to as GPAA. Lost Dutchman’s is a national gold prospecting campground club with properties in Arizona, California, Colorado, Georgia, Michigan, North Carolina, Oregon and South Carolina. GPAA is the publisher of the Gold Prospector & Treasure Hunters in the Great Outdoors magazine. In addition, we are the owner of a 2,300 acre property near Nome, Alaska used to provide outings for a fee to the members of Lost Dutchman’s and GPAA. Outdoor Channel Holdings also wholly-owns 43455 BPD, LLC which owns the building housing our broadcast facility.

Our revenues include (1) advertising fees from advertisements aired on The Outdoor Channel and from advertisements in Gold Prospector & Treasure Hunters in the Great Outdoors magazine; (2) subscriber fees paid by cable and satellite service providers that air The Outdoor Channel; and (3) membership fees from members in both Lost Dutchman’s and GPAA and other income including magazine sales, products and services related to gold prospecting, gold expositions, expeditions and outings. Advertising fees include fees paid by third-party programmers to purchase advertising time in connection with the airing of their programs on The Outdoor Channel.

Recent Accounting Developments

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS 123R”) “Share-Based Payment” which revised the standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services and focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R requires that the fair value of such equity instruments, including all options granted to employees, be recognized as expense in the historical financial statements as services are performed. Prior to SFAS 123R, only certain pro forma disclosures of fair value were required. SFAS 123R shall be effective for issuers as of the beginning of the first annual reporting period that begins after December 15, 2005. Accordingly, we adopted the provisions of SFAS No. 123R effective January 1, 2006. Prior to adoption, we used the intrinsic value method to account for employee stock options.

The FASB had issued certain other accounting pronouncements as of March 31, 2006 that will become effective in subsequent periods; however, our management does not believe that any of those pronouncements would have significantly affected our financial accounting measurements or disclosures had they been in effect during the three months ended March 31, 2006.

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Comparison of Operating Results for the Three Months Ended March 31, 2006 and March 31, 2005

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
	2006			2005		$			%		2006		2005
Revenues:
Advertising	$	5,685		$	5,259	$	426		8.1	%	50.4	%	52.3	%
Subscriber fees	4,383			3,642		741			20.3		38.8		36.2
Membership income	1,221			1,160		61			5.3		10.8		11.5
Total revenues	11,289			10,061		1,228			12.2		100.0		100.0
Expenses:
Satellite transmission fees	638			633		5			0.8		5.6		6.3
Advertising	2,162			1,694		468			27.6		19.1		16.8
Programming	1,544			521		1,023			196.4		13.7		5.2
Selling, general and administrative	7,506			6,486		1,020			15.7		66.5		64.5
Total expenses	11,850			9,334		2,516			27.0		104.9		92.8
Income (loss) from operations	(561		)	727		(1,288		)	(177.2	)	(4.9	)	7.2
Interest expense	78			1		77			NMF		0.7		—
Other income, net	623			53		570			NMF		5.5		0.5
Income (loss) before income taxes	(16		)	779		(795		)	NMF		(0.1	)	7.7
Income tax provision	66			327		(261		)	NMF		0.6		3.2
Net income (loss)	$	(82	)	$	452	$	(534	)	NMF	%	(0.7	)%	4.5	%

NMF – Not Meaningful

Revenues

Our revenues include revenues from (1) advertising fees; (2) subscriber fees; and (3) membership income. Advertising revenue is generated from the sale of advertising time on The Outdoor Channel including advertisements shown during a program (also known as short-form advertising) and infomercials in which the advertisement is the program itself (also known as long-form advertising) and from the sale of advertising space in publications such as the Gold Prospectors & Treasure Hunters in the Great Outdoors magazine. Advertising revenue is also generated from fees paid by third party programmers that purchase advertising time in connection with the airing of their programs on The Outdoor Channel. For the three months ended March 31, 2006 and 2005, The Outdoor Channel generated approximately 97.2% and 97.3% of our advertising revenue, respectively. Subscriber fees are solely related to The Outdoor Channel. Membership income is generated by our activities other than the operation of The Outdoor Channel and includes membership sales, magazine sales, merchandise sales, and sponsored outings and expeditions in connection with GPAA and Lost Dutchman’s.

Total revenues for the three months ended March 31, 2006 were $11,289,000, an increase of $1,228,000, or 12.2%, compared to revenues of $10,061,000 for the three months ended March 31, 2005. The net increases were the result of changes in several items comprising revenue as discussed below.

Advertising revenue for the three months ended March 31, 2006 was $5,685,000, an increase of $426,000 or 8.1% compared to $5,259,000 for the three months ended March 31, 2005. For March 2006, Nielsen estimated that The Outdoor Channel had 26.2 million viewers compared to 24.4 million for the same period a year ago. (Nielsen revises this estimate each month and for May 2006, Nielsen increased its estimate to approximately 26.7 million subscribers). The increase in advertising revenue for the three months ended March 31, 2006 reflects a larger percentage of our short-form advertising inventory being sold to national and endemic advertisers, generally at higher rates, than inventory being sold to direct response advertisers or long-form (infomercial) advertisers.

Subscriber fees for the three months ended March 31, 2006 were $4,383,000, an increase of $741,000 or 20.3% compared to $3,642,000 for the three months ended March 31, 2005. The increase in subscriber fees for the period was primarily due to an increased number of paying subscribers both from new affiliates and from existing distributors and contractual subscriber fee rate

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increases with existing service providers carrying The Outdoor Channel. Most notable growth when comparing the respective quarterly results came from DirecTV, Time Warner, Comcast and Cox in addition to Cablevision which did not carry The Outdoor Channel in the first quarter of 2005. Principally we attribute the growth to the popularity of our programming as consumers continue to request our channel.

We plan to accelerate our subscriber growth utilizing various means including deployment of subscriber acquisition or launch support fees. Such 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 a result, we anticipate that subscriber fee revenue, net of amortization of launch fees, may not increase over the foreseeable future as we deploy this strategy and, in fact, due to contractual volume discounts, subscriber fee revenue could actually decrease over the new or remaining contract lives.

Membership income for the three months ended March 31, 2006 was $1,221,000, an increase of $61,000 or 5.3% compared to $1,160,000 for the three months ended March 31, 2005. We believe that the recent surge in gold prices has reflected itself in renewed interest by the consuming public that led to our increased activity in 2006. Given that, we do not expect significant changes in the balance from year-to-year in the near term.

Expenses

Expenses consist of the cost of (1) satellite transmission fees; (2) advertising; (3) programming; and (4) selling, general and administrative expenses.

Total expenses for the three months ended March 31, 2006 were $11,850,000, an increase of $2,516,000 or 27.0%, compared to $9,334,000 for the three months ended March 31, 2005. As a percentage of revenues, total expenses were 104.9% and 92.8% in the three months ended March 31, 2006 and 2005, respectively. The increase in expenses was due to several factors, including an aggressive campaign that is part of our strategic plan to support continued subscriber growth that we conducted during the first quarter, which included full-page newspaper ads in targeted regions and the launch of www.IWantMyOutdoorChannel.com. This campaign, along with other ongoing efforts related to carriage agreement negotiations, resulted in additional first quarter expenses of approximately $750,000. In addition, programming costs increased as a result of the launch of our second channel, Outdoor Channel 2 HD, at the beginning of the third quarter of 2005 and other items more fully described as follows.

Satellite transmission fees for the three months ended March 31, 2006 were $638,000, an increase of $5,000, or 0.8%, compared to $633,000 for the three months ended March 31, 2005. The noted change reflects the relative fixed nature of our contracts for uplink and transmission of our signals.

Advertising expenses for the three months ended March 31, 2006 were $2,162,000, an increase of $468,000 or 27.6% compared to $1,694,000 for the three months ended March 31, 2005. The increase was due principally to the aggressive campaign that is part our strategic plan to support continued subscriber growth that we conducted during the first quarter, which included full-page newspaper ads in targeted regions and the launch of www.IWantMyOutdoorChannel.com.

Programming expenses for the three months ended March 31, 2006 were $1,544,000, an increase of $1,023,000 or 196.4% compared to $521,000 for the three months ended March 31, 2005. The increase is principally a result of our decision to launch our second channel, Outdoor Channel 2 HD, on July 1, 2005. We incurred minimal programming costs relative to this channel in the first quarter of 2005 as most of such costs incurred at that time were charged to prepaid programming expense in anticipation of its launch in the second half of 2005. During the first quarter of 2006, Outdoor Channel 2 HD was fully-programmed.

Our policy is to charge costs of specific shows to programming expense over the expected airing period beginning when the program first airs. The cost of programming is generally first recorded as prepaid programming costs and is then charged to programming expense based on the anticipated airing schedule. If the anticipated airing schedule changes, the timing and amount of the charge to expense is adjusted accordingly. Programming expenses are expected to increase as a percentage of revenue as we pursue our strategy to produce, or acquire, more programming in-house as opposed to selling the air time to third party producers. As a result, we believe we will control more of our programs’ quality, advertising inventory, sponsorship opportunities and the potential to re-package our programming for other uses such as video-on-demand, international licensing and production of DVDs for retail distribution.

Selling, general and administrative expenses for the three months ended March 31, 2006 were $7,506,000, an increase of $1,020,000 or 15.7% compared to $6,486,000 for the three months ended March 31, 2005. As a percentage of revenues, selling, general and administrative expenses were 66.5% and 64.5% in the three months ended March 31, 2006 and 2005, respectively.  The increase was primarily attributable to the adoption of SFAS 123R as of January 1, 2006 which now requires us to charge the fair value of stock options we have issued to our employees over the vesting period to compensation expense which we did not have to record in 2005. The charge in the three months ended March 31, 2006 amounted to $713,000. Restricted stock issued to employees in June and July of

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2005 resulted in a charge of $66,000. The remainder of the increase in selling, general and administrative fees related primarily to increased legal fees incurred as a result of our ongoing efforts related to our carriage agreement negotiations and to other operating costs.

We anticipate that selling, general and administrative costs will continue to increase over the foreseeable future both in dollars and when expressed as a percent of revenue as we continue to work to gain increased distribution of both channels including increases from the recognition of amortization of subscriber acquisition fees, also referred to as launch support fees, in excess of the related subscriber revenue, and as a result of the adoption of SFAS 123R as well as other corporate expenses.

Income (Loss) from Operations

Income (loss) from operations for the three months ended March 31, 2006 was a loss of $561,000, a decrease of $1,288,000 compared to income of $727,000 for the three months ended March 31, 2005. As discussed above, this decrease is primarily a result of the increased compensation expense resulting from the adoption of SFAS 123R, the increased expenses relating to the aggressive campaign conducted during the first quarter that is part of our strategic plan to support continued subscriber growth and the increased legal fees relating to our carriage agreements.  As we continue to strive to drive growth of our subscriber base including the ongoing and planned payment of launch support, and as we further develop our second channel, Outdoor Channel 2 HD, we will incur increased expenses such as programming, marketing and advertising that are unlikely to be immediately offset by revenues. As a result, we anticipate our operating margins will be negatively impacted for the foreseeable future. There can be no assurance that these strategies will be successful.

Interest Expense

Interest expense for the three months ended March 31, 2006 was $78,000, an increase of $77,000 compared to $1,000 for the three months ended March 31, 2005. This is attributable to having obtained two term loans in November 2005 with original aggregate principal amount of $4,950,000 with effective fixed interest rates of 6.59% and 6.35%.

Other Income, Net

Other income, net for the three months ended March 31, 2006 was $623,000, an increase of $570,000 compared to $53,000 for the three months ended March 31, 2005. This improvement was primarily due to increased dividends and interest earned on our increased investment in available-for-sale securities and cash and cash equivalent balances.

Income (Loss) Before Income Taxes

Income (loss) before income taxes as a percentage of revenues was (0.1%) for the three months ended March 31, 2006 compared to 7.7% for the three months ended March 31, 2005.

The TOC segment’s income before income taxes decreased to $814,000 for the three months ended March 31, 2006 from $1,272,000 for the three months ended March 31, 2005. Expressed as a percentage of revenue, the TOC segment’s income before income taxes decreased to 8.2% for the three months ended March 31, 2006, compared to 14.5% for the three months ended March 31, 2005. The decrease was due mainly to an aggressive campaign we conducted during the first quarter of 2006 that is part our strategic plan to support continued subscriber growth. Contributing to the decline was the adoption of SFAS 123R whereby the TOC segment recognized $167,000 of compensation expense (1.7% of segment revenue) that it did not have in the same period in 2005.

Also, programming costs increased as a result of having launched our second channel, Outdoor Channel 2 HD, at the beginning of the third quarter of 2005 thus related costs were incurred in the first quarter of 2006 that were not incurred in the same period in 2005.

The Membership Division segment’s income before income taxes increased to $189,000 for the three months ended March 31, 2006 from $59,000 for the three months ended March 31, 2005. Expressed as a percentage of revenues, the Membership Division segment’s income before income taxes increased to 13.7% for the three months ended March 31, 2006 compared to 4.5% for the three months ended March 31, 2005. The increase is principally a result of a renewed interest in gold prospecting which we believe is partially driven by rising gold prices. Revenue increased $75,000 or 5.8%. Also contributing to the improving segment margins is a decrease in personnel by a few persons with the commensurate savings of payroll, payroll related expenses and travel costs.

Corporate incurred a loss before income taxes for the three months ended March 31, 2006 amounting to $1,019,000, an increase of $467,000 compared to a loss of $552,000 for the three months ended March 31, 2005. The expenses allocated to Corporate include: professional fees such as public relations, accounting and legal fees, amortization of intangibles, business insurance, board of directors fees and expenses and an allocation of corporate officers’ payroll and related expenses. Effective January 1, 2006, we prospectively adopted SFAS 123R and Corporate incurred a charge to compensation expense of $517,000.

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Income Tax Provision

Income tax provision for the three months ended March 31, 2006 was $66,000, a decrease of $261,000 as compared to $327,000 for the three months ended March 31, 2005. The decrease was principally due to the Company incurring a loss in the three months ended March 31, 2006 as compared to income for the three months ended March 31, 2005. Many of our options are qualified incentive stock options or ISOs. That portion of the current year SFAS 123R compensation expense relating to ISOs is recognized for financial statement purposes but is generally not deductible for tax purposes and thus is treated as a permanent difference between the two. We recognized a charge of $151,000 related to ISOs under SFAS 123R compensation expense. Because of this, and along with the effects of certain other income tax adjustments, we recorded positive taxable income resulting in income tax expense despite the financial statement loss. The effective income tax rate for the three months ended March 31, 2006 is not meaningful. For the three months ended March 31, 2005, the effective income tax was approximately 42.0%.

Net Income (Loss)

Net income (loss) for the three months ended March 31, 2006 was ($82,000), a decrease of $534,000 compared to $452,000 for the three months ended March 31, 2005. The decrease was due to the reasons stated above.

Liquidity and Capital Resources

We generated $994,000 of cash in our operating activities in the three months ended March 31, 2006, compared to cash used in operating activities of $447,000 in the three months ended March 31, 2005 and had a cash and cash equivalent balance of $19,594,000 at March 31, 2006, an increase of $1,318,000 from the balance of $18,276,000 at December 31, 2005. We also had short-term investments classified as available-for-sale securities of $37,349,000 at March 31, 2006, a decrease of $1,481,000 from the balance of $38,830,000 at December 31, 2005. The investments at March 31, 2006 were comprised almost entirely of auction rate securities ($33,500,000) with interest rates that generally reset every 28 days. The auction rate securities have long-term maturity dates and provide us with enhanced yields. commercial paper ($2,989,000) and various equity securities ($860,000) make up the remainder of the March 31, 2006 balance. We believe we have the ability to quickly liquidate the auction rate securities and commercial paper at their original cost although there is no guaranty we would be able to do so. Net working capital increased to $66,743,000 at March 31, 2006, compared to $66,183,000 at December 31, 2005.

Net cash provided by investing activities was $323,000 in the three months ended March 31, 2006 compared to cash used of $1,668,000 for the three months ended March 31, 2005. The increase in cash provided by investing activities was related principally to the net difference of sales and purchases of short-term auction rate securities which did not exist in the first quarter of 2005 partially offset by a decrease in capital expenditures on “construction in progress” and equipment related to the build-out of our new broadcast facility as further discussed below. Additional capital expenditures were for fixed asset replacements.

Cash provided by financing activities was $1,000 in the three months ended March 31, 2006 compared to $164,000 for the three months ended March 31, 2005. The cash provided by financing activities in the three months ended March 31, 2006 was the exercise of stock options, offset by principal payments on outstanding debt. The cash provided by financing activities in the three months ended March 31, 2005 was from the exercise of employee and service provider stock options from our 1995 incentive stock option plan.

On November 2, 2005, we renewed our revolving line of credit agreement (the “revolver”) with U.S. Bank N.A. (the “Bank”), extending the maturity date to September 7, 2007 and increasing the total amount which can be drawn upon under the revolver from $5,000,000 to $8,000,000. The revolver provides that the interest rate shall be LIBOR plus 1.25%. The revolver is collateralized by substantially all of our assets. This credit facility contains customary financial and other covenants and restrictions, as amended on November 2, 2005, including a change of control provision. As of March 31, 2006 and as of the date of this report, we did not have any amounts outstanding under this credit facility.

On November 2, 2005, we obtained a $1,950,000 mortgage loan from the Bank on our recently purchased building that houses our broadcast facility located in Temecula, California which has a 10 year term loan with a 25 year amortization schedule. This loan carries a variable interest rate of LIBOR plus 1.35%. This loan is secured primarily by a Deed of Trust on the property and is also secondarily secured by the same assets as the revolver. It also contains customary financial and other covenants and restrictions including a change of control provision. On November 7, 2005, we entered into an interest rate swap agreement with the Bank to reduce the potential impact of increasing interest rates and effectively fixed the interest rate on this loan at 6.59%.

On November 2, 2005, we obtained a $3,000,000, five year fully amortizing term loan. This loan carries a variable interest rate of LIBOR plus 1.35%. This term loan is secured by the same assets as the revolver and contains customary financial and other covenants and restrictions including a change of control provision. On November 7, 2005, we entered into an interest rate swap agreement with the Bank to reduce the potential impact of increasing interest rates and effectively fixed the interest rate on this term loan at 6.35%.

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Driven by a need to increase office space, we reassessed our facilities including floor space utilization, master control equipment, uplink equipment, and other needs during the year ended December 31, 2004. On February 22, 2005, we announced our intention to purchase a 28,000 square foot building in Temecula, California for approximately $2.6 million. We completed the purchase during the third quarter of 2005. We have been completing the building improvements since that time and as of March 31, 2006 are nearly complete. We estimated that aggregate capital expenditures to complete the build-out including updated equipment could exceed $8 million. As of March 31, 2006, we have spent approximately $6 million on such upgrades, and we expect to spend less than $1 million to complete the project prior to the end of 2006. Effective April 1, 2006, we have placed the building and most of the capital expenditures incurred to date “in-service”. In addition to the remaining capital expenditures relating to this building, we also expect to have other capital expenditures of approximately $2 million for the year ended December 31, 2006.

Because of our net loss of $82,000 for the three months ended March 31, 2006, we were in violation as of March 31, 2006 of a covenant relating to our two term loans and our revolving line-of-credit facility requiring profitability of greater than $250,000 each fiscal quarter. On May 9, 2006, we received notice from the bank servicing our debt that it has given us a waiver of this covenant violation.  In addition, the bank modified such covenant to exclude the non-cash compensation expense relating to SFAS 123R when calculating the profitability under this covenant.  Because of this modification, we currently anticipate to be in compliance with such covenant for at least the next 12 months.

As of March 31, 2006, we had sufficient cash on hand and had been generating sufficient cash flow from operations to meet our short-term cash flow requirements. Management believes that our anticipated cash flows from operating activity along with our existing cash resources including cash on-hand, available-for-sale securities and access to the revolver, will be sufficient to fund our operations at current levels and anticipated capital requirements through at least June 1, 2007. To the extent that such amounts are insufficient to finance our working capital requirements or our desire to expand operations beyond current levels, we could seek additional financing. There can be no assurance that equity or debt financing will be available if needed or, if available, will be on terms favorable to us.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At March 31, 2006 and December 31, 2005, our investment portfolio included fixed-income securities of $37,349,000 and $38,830,000, respectively. These securities are subject to interest rate risk and will decline in value if interest rates increase. However, due to the short duration of our investment portfolio, an immediate 10% change in interest rates would have no material impact on our financial condition, operating results or cash flows. Declines in interest rates over time will, however, reduce our interest income while increases in interest rates over time may increase our interest expense.

We do not have a significant level of transactions denominated in currencies other than U.S. dollars and as a result we have very limited foreign currency exchange rate risk. The effect of an immediate 10% change in foreign exchange rates would have no material impact on our financial condition, operating results or cash flows.

As of March 31, 2006 and as of the date of this report, we had aggregate outstanding borrowings of approximately $4,719,000 and $4,601,000, respectively. The rates of interest on our currently outstanding debt are fixed while 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, 2006, the end of the period covered by this report, and concluded that our disclosure controls and procedures were effective as of March 31, 2006.

Changes in internal control over financial reporting. During the three months ended March 31, 2006, there was no change in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1.Legal Proceedings.

None.

ITEM 1A.Risk Factors.

The Company’s business and operations are subject to a number of risks and uncertainties, and the following list should not be considered to be a definitive list of all factors that may affect the Company’s business, financial condition and future operating results and should be read in conjunction with the risks and uncertainties, including risk factors, contained in our other filings with the Securities and Exchange Commission. Any forward-looking statements made by the Company are made with the intention of obtaining the benefits of the “safe harbor” provisions of the Securities Litigation Reform Act and a number of factors, including, but not limited to those discussed below, could cause our actual results and experiences to differ materially from the anticipated results or expectations expressed in any forward-looking statements.

We may not be able to grow our subscriber base at a sufficient rate to offset planned increased costs or at all, and as a result our revenues and profitability may not increase and could decrease.

A major component of our growth strategy is based on increasing the number of subscribers to our channels. Growing our subscriber base depends upon many factors, such as the success of our marketing efforts in driving consumer demand for our channels; overall growth in cable and satellite subscribers; the popularity of our programming; our ability to negotiate new carriage agreements, or amendments to current carriage agreements, and maintain existing distribution; plus other factors that are beyond our control. There can be no assurance that we will be able to maintain or increase the subscriber base of our channels on cable and satellite systems or that our current carriage will not decrease as a result of a number of factors. In particular, negotiations for new carriage agreements, or amendments to current carriage agreements, are lengthy and complex, and we are not able to predict with any accuracy when such increases in our subscriber base may occur, if at all. If we are unable to grow our subscriber base, our subscriber and advertising revenues may not increase and could decrease. In addition, as we plan and prepare for such projected growth in our subscriber base, we plan to increase our expenses accordingly. If we are not able to increase our revenue to offset these increased expenses, our profitability could decrease.

If we offer increased launch support fees or other incentives to service providers in order to grow our subscriber base, our operating results may be harmed.

Although we currently have plans to increase our marketing and sales efforts in an attempt to increase the number of our subscribers, we may not be able to do so economically or at all. If we are unable to increase the number of our subscribers on a cost-effective basis, or if the benefits of doing so do not materialize, our business and operating results would be harmed. In particular, if we make any upfront cash payments to service providers for an increase in our subscriber base, our cash flow could be adversely impacted, and we may incur negative cash flow for some time. In addition, if we were to make such upfront cash payments or provide other incentives to service providers, we expect to amortize such amounts ratably over the term of the agreements with the service providers. However, if a service provider terminates any such agreement prior to the expiration of the term of such agreement, then under current accounting rules we may incur a large expense in that quarter in which the agreement is terminated equal to the remaining un-amortized amounts and our operating results could accordingly be adversely affected.

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If, in our attempt to increase our number of subscribers, we structure launch support fees with one service provider in a way that would require us to offer the same support or incentives to all other service providers, our operating results may be harmed.

Many of our existing agreements with cable and satellite service providers contain “most favored nation” clauses. These clauses typically provide that if we enter into an agreement with another service provider on more favorable terms, these terms must be offered to the existing service provider, subject to some exceptions and conditions. Future agreements with service providers may also contain similar “most favored nation” clauses. If, in our attempt to increase our number of subscribers, we structure launch support fees to effectively offer more favorable terms to any service provider, these clauses may require us to reduce the effective subscriber fee rates that we receive from other service providers, and this could negatively affect our operating results.

If our channels are placed in unpopular program packages by cable or satellite service providers, or if service fees are increased for our subscribers, the number of viewers of our channels may decline which could harm our business and operating results.

We do not control the channels with which our channels are packaged by cable or satellite service providers. The placement by a cable or satellite service provider of our channels in unpopular program package could reduce or impair the growth of the number of our viewers and subscriber fees paid by service providers to us. In addition, we do not set the prices charged by cable and satellite service providers to their subscribers when our channels are packaged with other television channels. The prices for the channel packages in which our channels are bundled may be set too high to appeal to individuals who might otherwise be interested in our networks. Further, if our channels are bundled by service providers with networks that do not appeal to our viewers or is moved to packages with fewer subscribers, we may lose viewers. These factors may reduce the number of viewers of our channel, which in turn would reduce our subscriber fees and advertising revenue.

Cable and satellite service providers could discontinue or refrain from carrying The Outdoor Channel, which could reduce the number of viewers and harm our operating results.

The success of The Outdoor Channel is dependent, in part, on our ability to enter into new carriage agreements and maintain existing agreements with, and carriage by, satellite systems and multiple system operators’, which we refer to as MSOs, affiliated regional or individual cable systems. Although we have relationships or agreements with most of the largest MSOs and satellite service providers, execution of an agreement with an MSO does not ensure that its affiliated regional or individual cable systems will carry The Outdoor Channel. Under our current agreements, The Outdoor Channel typically offers MSOs and their cable affiliates the right to broadcast The Outdoor Channel to their subscribers, but such contracts do not require that The Outdoor Channel be offered to all subscribers of, or any tiers offered by, the MSO. Because certain carriage agreements do not specify on which service levels The Outdoor Channel is carried, such as analog versus basic digital, expanded digital or specialty tiers, and in which geographic markets The Outdoor Channel will be offered, we have no assurance that The Outdoor Channel will be carried and available to viewers of any particular MSO or to all satellite subscribers. If cable and satellite service providers discontinue or refrain from carrying The Outdoor Channel, this could reduce the number of viewers and harm our operating results.

We may not be able to effectively manage our future growth, and our growth may not continue, which may substantially harm our business and prospects.

We have undergone rapid and significant growth in revenue and subscribers over the last several years, and our strategic objectives include not only further developing and enhancing our existing business, but also expanding our in-house production capabilities. There are risks inherent in rapid growth and the pursuit of new strategic objectives, including among others: investment and development of appropriate

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infrastructure, such as facilities, information technology systems and other equipment to support a growing organization; hiring and training new management, sales and marketing, production, and other personnel and the diversion of management’s attention and resources from critical areas and existing projects; and implementing systems and procedures to successfully manage growth, such as monitoring operations, controlling costs, maintaining effective quality and service, and implementing and maintaining adequate internal controls. Although we have recently upgraded our Temecula, California production facility, we expect that additional expenditures will be required as we continue to upgrade our facilities and to begin transmitting our channel from our facilities directly. In particular, we have purchased a building near our current headquarters and are currently building out this property primarily for use as our broadcast facility in the future. We could incur cost overruns, delays and other difficulties with this construction. In addition, moving our broadcast facility and some of our personnel into this new facility could be disruptive to our operations. We cannot assure you that we will be able to successfully manage our growth, that future growth will occur or that we will be successful in managing our business objectives. We can provide no assurance that our profitability or revenues will not be harmed by future changes in our business. Our operating results could be harmed if such growth does not occur, or is slower or less profitable than projected.

We may not be able to secure national advertising accounts, and as a result, our revenues and profitability may be negatively impacted.

Our ability to secure national advertising accounts, which generally pay higher advertising rates, depends upon the size of our audience, the popularity of our programming and the demographics of our viewers, as well as strategies taken by our competitors, strategies taken by advertisers and the relative bargaining power of advertisers. Competition for national advertising accounts and related advertising expenditures is intense. We face competition for such advertising expenditures from a variety of sources, including other cable network companies and other media. We cannot assure you that our sponsors will pay advertising rates for commercial air time at levels sufficient for us to make a profit or that we will be able to attract new advertising sponsors or increase advertising revenues. If we are unable to attract national advertising accounts in sufficient quantities, our revenues and profitability may be harmed.

We may be required to pay additional state income taxes for past years.

We are required to pay income taxes in various states in which we conduct our business operations. In the past, we have paid state income taxes only in California (where our headquarters is located) and have not paid income taxes to any other state. We have determined that we may have state income tax liability in the eight states other than California in which our gold prospecting properties are located. Although we expect in the near future to gather sufficient information to enable us to apportion our income to such states and file income tax returns in those states for past years, we can offer no assurances as to when we will be able to file state income tax returns in those states where we may have outstanding, current and future tax liabilities. In general, we believe any income taxes that we may be required to pay to states other than California will be partially offset by a refund from the State of California for income tax amounts we have overpaid to California in past years. We may, however, be limited as to the number of years for which we can receive a refund from California for taxes previously paid, and we cannot predict when we would receive any such refund. In addition, because each state to which we may owe outstanding income taxes has a different methodology for calculating tax owed and a different tax rate, our aggregate state income tax liability could be greater than what we have paid to California in prior years. Our aggregate state income tax liability, on which we may owe accrued interest and penalties, could be material to our results of operations.

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Expenses relating to programming costs are generally increasing and a number of factors can cause cost overruns and delays, and our operating results may be adversely impacted if we are not able to successfully recover the costs of developing and acquiring new programming.

The average cost of programming has increased recently for the cable industry and such increases may continue. We plan to build our programming library through the acquisition of long-term broadcasting rights from third party producers, in-house production and outright acquisition of programming, and this may lead to increases in our programming costs. The development, production and editing of television programming requires a significant amount of capital and there are substantial financial risks inherent in developing and producing television programs. Actual programming and production costs may exceed their budgets. Factors such as labor disputes, death or disability of key spokespersons or program hosts, damage to film negatives, master tapes and recordings or adverse weather conditions may cause cost overruns and delay or prevent completion of a project. If we are not able to successfully recover the costs of developing or acquiring programming through increased revenues, whether the programming is produced by us or acquired from third-party producers, our business and operating results will be harmed.

Our operating results may be negatively impacted if our Outdoor Channel 2 HD network is not as successful as we anticipate.

In July 2005, we launched an all new, all native high definition network called Outdoor Channel 2 HD. There can be no assurance that Outdoor Channel 2 HD will not incur unexpected costs and expenses. Distribution of Outdoor Channel 2 HD will depend on successfully executing new or amended distribution agreements with cable and satellite service providers. There can be no assurance that such agreements can be made, and if they are made, that they will be on terms favorable to us or that they will not require us to grant periods of free service and/or marketing commitments to encourage carriage. The public may not adopt HD consumer television equipment in numbers sufficient to allow profits for an advertiser-supported service. Bandwidth constraints may keep Outdoor Channel 2 HD from achieving sufficient distribution from service providers to reach profitability. Competition for quality HD content may increase the costs of programming for Outdoor Channel 2 HD beyond our control or expectations. All of these factors, combined or separately, could increase costs or restrain revenue and adversely affect our operating results.

Our operating results may vary significantly, and historical comparisons of our operating results are not necessarily meaningful and should not be relied upon as an indicator of future performance.

Our operations are influenced by many factors. These factors may cause our financial results to vary significantly in the future and our operating results may not meet the expectations of securities analysts or investors. If this occurs, the price of our stock may decline. Factors that can cause our results to fluctuate include, but are not limited to:

•  carriage decisions of cable and satellite service providers;

•  demand for advertising, advertising rates and offerings of competing media;

•  changes in the growth rate of cable and satellite subscribers;

•  cable and satellite service providers’ capital and marketing expenditures and their impact on programming offerings and penetration;

•  seasonal trends in viewer interests and activities;

•  pricing, service, marketing and acquisition decisions that could reduce revenues and impair quarterly financial results;

•  the mix of cable television and satellite-delivered programming products and services sold and the distribution channels for those products and services;

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•  our ability to react quickly to changing consumer trends;

•  specific economic conditions in the cable television and related industries; and

•  changing regulatory requirements.

Due to the foregoing and other factors, many of which are beyond our control, our revenue and operating results vary from period to period and are difficult to forecast. Our expense levels are based in significant part on our expectations of future revenue. Therefore, our failure to meet revenue expectations would seriously harm our business, operating results, financial condition and cash flows. Further, an unanticipated decline in revenue for a particular calendar quarter may disproportionately affect our profitability because our expenses would remain relatively fixed and would not decrease correspondingly.

Changes to financial accounting standards or our accounting estimates may affect our reported operating results.

We prepare our financial statements to conform with generally accepted accounting principles (“GAAP”), which are subject to interpretations by the Financial Accounting Standards Board, the Securities and Exchange Commission and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on our reported results and may even affect our reporting of transactions completed before a change is announced. Accounting policies affecting many other aspects of our business, including rules relating to business combinations and employee stock option grants, have recently been revised or are under review. Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. In addition, our preparation of financial statements in accordance with GAAP requires that we make estimates, judgments and assumptions that affect the recorded amounts of assets and liabilities, disclosure of those assets and liabilities at the date of the financial statements and the recorded amounts of revenue and expenses during the reporting period. A change in the facts and circumstances surrounding those estimates, including the interpretation of the terms and conditions of our contractual obligations, could result in a change to our estimates and could impact our future operating results.

If we fail to develop and distribute popular programs, our viewership would likely decline, which could cause advertising and subscriber fee revenues to decrease.

Our operating results depend significantly upon the generation of advertising revenue. Our ability to generate advertising revenues is largely dependent on our Nielsen ratings, which estimates the number of viewers of The Outdoor Channel, and this directly impacts the level of interest of advertisers and rates we are able to charge. If we fail to program popular shows that maintain or increase our current number of viewers, our Nielsen ratings could decline, which in turn could cause our advertising revenue to decline and adversely impact our business and operating results. In addition, if we fail to program popular shows the number of subscribers to our channel may also decrease, resulting in a decrease in our subscriber fee and advertising revenue.

Changes in the methodology used by Nielsen to estimate our subscriber base or television ratings, or inaccuracies in such estimates, could cause our advertising revenue to decrease.

Our ability to sell advertising is largely dependent on television ratings and our subscriber base estimated by Nielsen. We do not control the methodology used by Nielsen for these estimates. If Nielsen modifies its methodology or changes the statistical sample it uses for these estimates, such as the demographic characteristics of the households, our ratings could be negatively affected resulting in a decrease in our advertising revenue.

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The market in which we operate is highly competitive, and we may not be able to compete effectively, particularly against competitors with greater financial resources, brand recognition, marketplace presence and relationships with service providers.

We compete for viewers with other pay cable television and broadcast networks, including OLN, Spike TV, ESPN2 and others. If these or other competitors, many of which have substantially greater financial and operational resources than us, significantly expand their operations with respect to outdoor-related programming or their market penetration, our business could be harmed. In addition, certain technological advances, including the deployment of fiber optic cable, which are already substantially underway, are expected to allow cable systems to greatly expand their current channel capacity, which could dilute our market share and lead to increased competition for viewers from existing or new programming services.

We also compete with television network companies that generally have large subscriber bases and significant investments in, and access to, competitive programming sources. In some cases, we compete with cable and satellite service providers that have the financial and technological resources to create and distribute their own television networks, such as OLN, which is owned and operated by Comcast. In order to compete for subscribers, we may pay either launch fees or marketing support or both for carriage in certain circumstances in the future, which may require significant cash expenditures, harming our operating results and margins. We may also issue our securities from time to time in connection with our attempts for broader distribution of The Outdoor Channel and the number of such securities could be significant. We compete for advertising sales with other pay television networks, broadcast networks, and local over-the-air television stations. We also compete for advertising sales with satellite and broadcast radio and the print media. We compete with other cable television networks for subscriber fees from, and affiliation agreements with, cable and satellite service providers. Actions by the Federal Communications Commission, which we refer to as the FCC, and the courts have removed certain of the impediments to entry by local telephone companies into the video programming distribution business, and other impediments could be eliminated or modified in the future. These local telephone companies may distribute programming that is competitive with the programming provided by us to cable operators.

Changes in corporate governance and securities disclosure and compliance practices have increased and may continue to increase our legal compliance and financial reporting costs.

The Sarbanes-Oxley Act of 2002 required us to change or supplement some of our corporate governance and securities disclosure and compliance practices. The Securities and Exchange Commission and Nasdaq have revised, and continue to revise, their regulations and listing standards. These developments have increased, and may continue to increase, our legal compliance and financial reporting costs.

We may not be able to attract new, or retain existing, members in our club organizations, and as a result our revenues and profitability may be harmed.

Our ability to attract new members and retain existing members in our club organizations, GPAA and Lost Dutchman’s, depends, in part, upon our marketing efforts, including our programming on The Outdoor Channel and such other efforts as direct mail campaigns, continued sponsorship of expositions dedicated to gold prospecting, treasure hunting and related interests around the country and introductory outings held at our campsites. We cannot assure you that we will successfully attract new members or retain existing members. A decline in membership in our club organizations could harm our business and operating results.

Consolidation among cable and satellite distributors may harm our business.

Cable and satellite operators continue to consolidate, making The Outdoor Channel increasingly dependent on fewer operators. If these operators fail to carry The Outdoor Channel, use their increased

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distribution and bargaining power to negotiate less favorable terms of carriage or to obtain additional volume discounts, our business and operating results would suffer.

The satellite infrastructure that we use may fail or be preempted by another signal, which could impair our ability to deliver programming to our cable and satellite service providers.

Our ability to deliver programming to service providers, and their subscribers, is dependent upon the satellite equipment and software that we use to work properly to distribute our programming. If this satellite system fails, or a signal with a higher priority replaces our signal, which is determined by our agreement with the owner of the satellite, we may not be able to deliver programming to our cable and satellite service provider customers and their subscribers within the time periods advertised. We have negotiated for back-up capability with our satellite provider on an in-orbit spare satellite, which provides us carriage on the back-up satellite in the event that catastrophic failure occurs on the primary satellite. Our contract provides that our main signal is subject to preemption and until the back-up satellite is in position, we could lose our signal for a period of time. A loss of our signal could harm our reputation and reduce our revenues and profits.

Natural disasters and other events beyond our control could interrupt our signal.

Our systems and operations may be vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures and similar events. They also could be subject to break-ins, sabotage and intentional acts of vandalism. Since our production facilities for The Outdoor Channel are all located in Temecula, California, the results of such events could be particularly disruptive because we do not have readily available alternative facilities from which to conduct our business. Our business interruption insurance may not be sufficient to compensate us for losses that may occur. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems at our facilities could result in interruptions in our services. Interruptions in our service could harm our reputation and reduce our revenues and profits.

Seasonal increases or decreases in advertising revenue may negatively affect our business.

Seasonal trends are likely to affect our viewership, and consequently, could cause fluctuations in our advertising revenues. Our business reflects seasonal patterns of advertising expenditures, which is common in the broadcast industry. For this reason, fluctuations in our revenues and net income could occur from period to period depending upon the availability of advertising revenues. Due, in part, to these seasonality factors, the results of any one quarter are not necessarily indicative of results for future periods, and our cash flows may not correlate with revenue recognition.

We may be unable to access capital on acceptable terms to fund our future operations.

Our future capital requirements will depend on numerous factors, including the success of our efforts to increase advertising revenues, the amount of resources devoted to increasing distribution of The Outdoor Channel, and acquiring and producing programming for The Outdoor Channel. As a result, we could be required to raise substantial additional capital through debt or equity financing. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of such securities could result in dilution to existing stockholders. If we raise additional capital through the issuance of debt securities, the debt securities would have rights, preferences and privileges senior to holders of common stock and the terms of such debt could impose restrictions on our operations. In November 2005, we entered into an aggregate of up to thirteen million dollars in debt financing from a commercial bank. We cannot assure you that additional capital, if required, will be available on acceptable terms, or at all. If we are unable to obtain additional capital, our current business strategies and plans and ability to fund future operations may be harmed.

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We may not be able to attract and retain key personnel.

Our success depends to a significant degree upon the continued contributions of the principal members of our sales, marketing, production and management personnel, many of whom would be difficult to replace. None of our employees are under contract and all of our employees are “at-will.” Any of our officers or key employees could leave at any time, and we do not have “key person” life insurance policies covering any of our employees. The competition for qualified personnel has been strong in our industry. This competition could make it more difficult to retain our key personnel and to recruit new highly qualified personnel. The loss of Perry T. Massie, our President and Chief Executive Officer and Co-President of The Outdoor Channel, Inc., or Thomas H. Massie, our Executive Vice President, or William A. Owen, our Chief Financial Officer, or Andrew J. Dale, the Chief Executive Officer and Co-President of The Outdoor Channel, Inc., or Thomas E. Hornish, our General Counsel, could adversely impact our business. To attract and retain qualified personnel, we may be required to grant large option or other stock-based incentive awards, which may be highly dilutive to existing stockholders. We may also be required to pay significant base salaries and cash bonuses to attract and retain these individuals, which payments could harm our operating results. If we are not able to attract and retain the necessary personnel we may not be able to implement our business plan.

New video recording technologies may reduce our advertising revenue.

A number of new personal video recorders, such as TiVo® in the United States, have emerged in recent years. These recorders often contain features allowing viewers to watch pre-recorded programs without watching advertising. The effect of these recorders on viewing patterns and exposure to advertising could harm our operations and results if our advertisers reduce the advertising rates they are willing to pay because they believe television advertisements are less effective with these technologies.

Cable and satellite television programming signals have been stolen or could be stolen in the future, which reduces our potential revenue from subscriber fees and advertising.

The delivery of subscription programming requires the use of conditional access technology to limit access to programming to only those who subscribe to programming and are authorized to view it. Conditional access systems use, among other things, encryption technology to protect the transmitted signal from unauthorized access. It is illegal to create, sell or otherwise distribute software or devices to circumvent conditional access technologies. However, theft of cable and satellite programming has been widely reported, and the access or “smart” cards used in cable and satellite service providers’ conditional access systems have been compromised and could be further compromised in the future. When conditional access systems are compromised, we do not receive the potential subscriber fee revenues from the cable and satellite service providers. Further, measures that could be taken by cable and satellite service providers to limit such theft are not under our control. Piracy of our copyrighted materials could reduce our revenue from subscriber fees and advertising and negatively affect our business and operating results.

Because we expect to become increasingly dependent upon our intellectual property rights, our inability to protect those rights could negatively impact our ability to compete.

We currently license approximately 78% of programs we air on The Outdoor Channel from third-party television and film producers. In order to build a library of programs and programming distribution rights, we must obtain all of the necessary rights, releases and consents from the parties involved in developing a project or from the owners of the rights in a completed program. There can be no assurance that we will be able to obtain the necessary rights on acceptable terms, or at all, or properly maintain and document such rights. In addition, protecting our intellectual property rights by pursuing those who infringe or dilute our rights can be costly and time consuming. If we are unable to protect our portfolio of trademarks, service marks, copyrighted material and characters, trade names and other intellectual property rights, our business and our ability to compete could be harmed.

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We may face intellectual property infringement claims that could be time-consuming, costly to defend and result in our loss of significant rights.

Other parties may assert intellectual property infringement claims against us, and our products may infringe the intellectual property rights of third parties. From time to time, we receive letters alleging infringement of intellectual property rights of others. Intellectual property litigation can be expensive and time-consuming and could divert management’s attention from our business. If there is a successful claim of infringement against us, we may be required to pay substantial damages to the party claiming infringement or enter into royalty or license agreements that may not be available on acceptable or desirable terms, if at all. Our failure to license the proprietary rights on a timely basis would harm our business.

Some of our existing stockholders can exert control over us and may not make decisions that are in the best interests of all stockholders.

Our current officers, directors and greater than 5% stockholders together currently control greater than 50% of our outstanding common stock. As a result, these stockholders, acting together, would be able to exert significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of our company, even when a change may be in the best interests of stockholders. In addition, the interests of these stockholders may not always coincide with our interests as a company or the interests of other stockholders. Accordingly, these stockholders could cause us to enter into transactions or agreements that you would not approve.

The market price of our common stock has been and may continue to be subject to wide fluctuations.

Our stock has historically been and continues to be traded at relatively low volumes and therefore has been subject to price volatility. Various factors contribute to the volatility of our stock price, including, for example, low trading volume, quarterly variations in our financial results, increased competition and general economic and market conditions. While we cannot predict the individual effect that these factors may have on the market price of our common stock, these factors, either individually or in the aggregate, could result in significant volatility in our stock price during any given period of time. There can be no assurance that a more active trading market in our stock will develop. As a result, relatively small trades may have a significant impact on the price of our common stock. Moreover, companies that have experienced volatility in the market price of their stock often are subject to securities class action litigation. If we were the subject of such litigation, it could result in substantial costs and divert management’s attention and resources.

Anti-takeover provisions in our certificate of incorporation, our bylaws and under Delaware law may enable our incumbent management to retain control of us and discourage or prevent a change of control that may be beneficial to our stockholders.

Provisions of Delaware law, our certificate of incorporation and bylaws could discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions also could limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. Furthermore, these provisions could prevent attempts by our stockholders to replace or remove our management. These provisions:

•  allow the authorized number of directors to be changed only by resolution of our board of directors;

•  establish a classified board of directors, providing that not all members of the board be elected at one time;

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•  require a 66 2¤3% stockholder vote to remove a director, and only for cause;

•  authorize our board of directors to issue without stockholder approval blank check preferred stock that, if issued, could operate as a “poison pill” to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that is not approved by our board of directors;

•  require that stockholder actions must be effected at a duly called stockholder meeting and prohibit stockholder action by written consent;

•  establish advance notice requirements for stockholder nominations to our board of directors or for stockholder proposals that can be acted on at stockholder meetings;

•  except as provided by law, allow only our board of directors to call a special meeting of the stockholders; and

•  require a 66 2¤3% stockholder vote to amend our certificate of incorporation or bylaws.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may, unless certain criteria are met, prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a prescribed period of time.

Technologies in the cable and satellite television industry are constantly changing, and our failure to acquire or maintain state-of-the-art technology may harm our business and competitive advantage.

The technologies used in the cable and satellite television industry are rapidly evolving. Many technologies and technological standards are in development and have the potential to significantly transform the ways in which programming is created and transmitted. In addition, under some of our MSO contracts, we may be required to encrypt our signal. We cannot accurately predict the effects that implementing new technologies will have on our programming and broadcasting operations. We may be required to incur substantial capital expenditures to implement new technologies, or, if we fail to do so, may face significant new challenges due to technological advances adopted by competitors, which in turn could result in harming our business and operating results.

The cable and satellite television industry is subject to substantial governmental regulation for which compliance may increase our costs and expose us to penalties for failure to comply.

The cable television industry is subject to extensive legislation and regulation at the federal and local levels, and, in some instances, at the state level, and many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. Similarly, the satellite television industry is subject to federal regulation. Operating in a regulated industry increases our cost of doing business as a video programmer.

The Cable Television Consumer Protection and Competition Act of 1992, to which we refer as the 1992 Cable Act, includes provisions that preclude cable operators affiliated with video programmers from favoring their programmers over competitors. The 1992 Cable Act also precludes such programmers from selling their programming exclusively to cable operators. These provisions potentially benefit independent programmers such as us by limiting the ability of cable operators affiliated with programmers from carrying only programming in which they have an ownership interest and from offering exclusive programming arrangements. However, the United States Court of Appeals for the District of Columbia Circuit vacated the FCC Rule limiting the carriage of affiliated programmers by cable operators. Although the FCC issued further notices of proposed rulemaking in 2001 and 2005 addressing this issue, it has not adopted new rules. The exclusivity provision is scheduled to expire in October 2007 unless the FCC then determines that a further extension is necessary to protect competition and diversity. If these provisions of the 1992 Cable

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Act expire or become no longer applicable, and if we are still able to increase the number of subscribers to our channel, then the costs associated with doing so may increase significantly.

Regulatory carriage requirements also could reduce the number of channels available to carry The Outdoor Channel. The 1992 Cable Act granted television broadcasters a choice of must-carry rights or retransmission consent rights. The rules adopted by the FCC generally provided for mandatory carriage by cable systems of all local full-power commercial television broadcast signals selecting must-carry rights and, depending on a cable system’s channel capacity, non-commercial television broadcast signals. Such statutorily mandated carriage of broadcast stations, coupled with the provisions of the Cable Communications Policy Act of 1984, which require cable television systems with 36 or more “activated” channels to reserve a percentage of such channels for commercial use by unaffiliated third parties and permit franchise authorities to require the cable operator to provide channel capacity, equipment and facilities for public, educational and government access channels, could reduce carriage of The Outdoor Channel by limiting its carriage in cable systems with limited channel capacity. In 2001, the FCC adopted rules relating to the cable carriage of digital television signals. Among other things, the rules clarify that a digital-only television station can assert a right to analog or digital carriage on a cable system. The FCC initiated a further proceeding to determine whether television broadcasters may assert the rights to carriage of both analog and digital signals during the transition to digital television and to carriage of all digital signals. On February 10, 2005, the FCC decided that television broadcasters do not have such additional must-carry rights. Broadcasters formally have requested that the FCC reconsider this decision and are seeking legislative change to require such carriage. The imposition of such additional must-carry regulation, in conjunction with any limited cable system channel capacity, would increase the likelihood that cable operators may be forced to drop some cable programming services and could reduce carriage of The Outdoor Channel.

The Telecommunications Act of 1996 required the FCC to establish rules and an implementation schedule to ensure that video programming is fully accessible to the hearing impaired through closed captioning. The rules adopted by the FCC require substantial closed captioning over a six to ten year phase-in period, which began in 2000, with only limited exemptions. As a result, we will continue to incur additional costs for closed captioning.

If we distribute television programming through other types of media, we may be required to obtain federal, state and local licenses or other authorizations to offer such services. We may not be able to obtain licenses or authorizations in a timely manner, or at all, or conditions could be imposed upon licenses and authorizations that may not be favorable to us.

In the future, any increased regulation of rates, and in particular the rates for basic cable services, could, among other things, put downward pressure on the rates charged by cable programming services, and affect the ability or willingness of cable system operators to retain or to add The Outdoor Channel network on their cable systems. In response to a request from the Committee on Energy and Commerce of the House of Representatives, the FCC’s Media Bureau conducted a study in 2004 regarding, among other things, government-mandated a la carte or mini-tier packaging of programming services in which each subscriber would purchase only those channels that he or she desired instead of the larger bundles of different channels as is typical today. The Media Bureau’s report on November 18, 2004 observed that such packaging would increase the cost of programming to consumers and injure programmers. On February 9, 2006, the Media Bureau released a further report which stated that the 2004 report was flawed and which concluded that a-la-carte sales could be in the best interests of consumers. Although the FCC cannot mandate a-al-carte sales, its endorsement of the concept could encourage Congress to consider proposals to mandate a-ala-carte sales or otherwise seek to impose greater regulatory controls on how cable programming is sold. If, in response to any statue enacted by Congress, or any rate or other government regulation, cable system operators implement channel offerings that require subscribers to affirmatively choose to pay a separate fee to receive The Outdoor Channel, either by itself or in combination with a limited number of other channels, the number of viewers for The Outdoor Channel could be reduced.

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The regulation of programming services, cable television systems and satellite licensees is subject to the political process and has been in constant flux over the past decade. Further material changes in the law and regulatory requirements are difficult to anticipate and our business may be harmed by future legislation, new regulation, deregulation or court decisions interpreting laws and regulations.

We must comply with many local, state, federal and environmental regulations, for which compliance may be costly and may expose us to substantial penalties.

Our recreational outdoor activity entities, GPAA and Lost Dutchman’s, share the general risks of all outdoor recreational activities such as personal injury, environmental compliance and real estate and environmental regulation. In addition to the general cable television industry regulations, we are also subject to various local, state and federal regulations, including, without limitation, regulations promulgated by federal and state environmental, health and labor agencies. Our prospecting clubs are subject to various local, state and federal statutes, ordinances, rules and regulations concerning zoning, development and other utilization of their properties. We cannot predict what impact current or future regulations may have on these businesses. In addition, failure to maintain required permits or licenses, or to comply with applicable regulations, could result in substantial fines or costs or revocation of our operating licenses, which would have a material adverse effect on our business and operating results.

If our goodwill or other indefinite-lived intangibles become impaired, we will be required to take a non-cash charge which could have a significant effect on our reported net earnings.

A significant portion of our assets consists of goodwill and other indefinite-lived intangible assets. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, or SFAS 142, we test goodwill and other indefinite-lived intangible assets for impairment during the fourth quarter of each year, and on an interim date if factors or indicators become apparent that would require an interim test. A significant downward revision in the present value of estimated future cash flows for a reporting unit could result in an impairment of goodwill or other indefinite-lived intangibles under SFAS 142 and a non-cash charge would be required. Such a charge could have a significant effect on our reported net earnings.

Future issuance by us of preferred shares could adversely affect the holders of existing shares, and therefore reduce the value of existing shares.

We are authorized to issue up to 25,000,000 shares of preferred stock. The issuance of any preferred stock could adversely affect the rights of the holders of shares of our common stock, and therefore reduce the value of such shares. No assurance can be given that we will not issue shares of preferred stock in the future.

We do not expect to pay dividends in the foreseeable future.

We do not anticipate paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends will also depend on our financial condition, operating results, capital requirements and other factors and will be at the discretion of our board of directors. Furthermore, we may in the future become subject to contractual restrictions on, or prohibitions against, the payment of dividends.

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

None.

ITEM 3.Defaults Upon Senior Securities.

None.

ITEM 4.Submission of Matters to a Vote of Security Holders.

None.

ITEM 5.Other Information

On May 9, 2006, we entered into a modification of our existing loans with U.S. Bank N.A. to exclude the non-cash compensation expense relating to SFAS 123R when calculating the profitability under a covenant requiring profitability of greater than $250,000 each fiscal quarter.

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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, 3.2 and 4.1 above to the Company’s Form 10-Q for the period ended June 30, 2005
31.1		Certification by Chief Executive Officer
31.2		Certification by Chief Financial Officer
32.1	*	Section 1350 Certification by Chief Executive Officer
32.2	*	Section 1350 Certification by Chief Financial Officer

*        Pursuant to Commission Release No. 33-8238, this certification will be treated as “accompanying” this Quarterly Report on Form 10-Q and not “filed” as part of such report for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of Section 18 of the Securities Exchange Act of 1934, as amended, and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

OUTDOOR CHANNEL HOLDINGS, INC.

/s/ William A. Owen

William A. Owen

Authorized Officer, Chief Financial Officer and Controller
(Principal and Accounting Officer)

Date: May 10, 2006

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