1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-29109
CROWN MEDIA HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1524410
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
SUITE 500, 6430 S. FIDDLERS GREEN CIRCLE, ENGLEWOOD, COLORADO 80111
(Address of principal executive offices) (Zip Code)
(303) 220-7990
(Registrant'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. YES X NO
--- ---
As of October 26, 2000, 29,352,784 shares of the Issuer's Class A Common Stock,
$.01 par value, and 30,670,422 shares of the Issuer's Class B Common Stock,
$.01 par value, were outstanding.
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TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION PAGE
----
ITEM 1. Financial Statements (Unaudited)
CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES
Introductory Comments......................................................... 3
Pro Forma Condensed Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 1999 and 2000...................... 4
Management's Discussion and Analysis of Pro Forma Results of Operations....... 4
Condensed Consolidated Balance Sheets -
December 31, 1999 and September 30, 2000..................................... 6
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 1999 and 2000...................... 7
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 2000................................ 8
Notes to Condensed Consolidated Financial Statements.......................... 9
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 18
Risk Factors that May Affect Our Business, Operating Results and Financial Condition... 23
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.................... 27
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings............................................................. 27
ITEM 2. Changes in Securities and Use of Proceeds..................................... 27
ITEM 3. Defaults Upon Senior Securities............................................... 28
ITEM 4. Submission of Matters to a Vote of Security Holders........................... 28
ITEM 5. Other Information............................................................. 28
ITEM 6. Exhibits and Reports on Form 8-K.............................................. 28
Signatures.................................................................... 29
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Introductory Comments
The Condensed Consolidated Financial Statements of Crown Media Holdings,
Inc. ("Crown Media Holdings" or "the Company") included herein have been
prepared by us, without audit, pursuant to the rules and regulations of the
United States Securities and Exchange Commission ("SEC"). Certain information
and note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles ("GAAP") have been
condensed or omitted pursuant to such rules and regulations, although we
believe that the disclosures are adequate to enable a reasonable understanding
of the information presented. These Condensed Consolidated Financial Statements
should be read in conjunction with the audited financial statements and the
notes thereto for the year ended December 31, 1999, included in Crown Media
Holdings' prospectus dated May 3, 2000. Additionally, the Condensed
Consolidated Financial Statements should be read in conjunction with Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in this Form 10-Q.
The results of operations for the three and nine months ended September 30,
2000, are not necessarily indicative of the results to be expected for the full
year 2000.
The Condensed Consolidated Financial Statements of Crown Media Holdings
include the assets, liabilities and results of Crown Media International, Inc.
("Crown Media International") for all periods presented. The assets,
liabilities and results of Odyssey Holdings, L.L.C. ("Odyssey Holdings") are
included in the Condensed Consolidated Financial Statements from May 9, 2000.
On that date, Crown Media Holdings completed a reorganization which included
the acquisition of 100% of Crown Media International and 77.5% of Odyssey
Holdings. Crown Media Holdings considers Crown Media International as a
predecessor corporation. Unaudited pro forma information combining the results
of operations of Crown Media Holdings, Crown Media International, and Odyssey
Holdings, as if a reorganization and acquisition involving these entities had
occurred on January 1st of the periods presented is contained in Note 6 to the
Condensed Consolidated Financial Statements.
A summary of Crown Media Holdings' unaudited Pro Forma Condensed
Consolidated Statements of Operations and related Management's Discussion and
Analysis of Pro Forma Results of Operations have been included to provide a
comparative basis for users of Crown Media Holdings' financial information. The
aforementioned summary and related discussion immediately follow these
introductory comments.
The following unaudited pro forma information presents a summary of the
condensed consolidated results of operations of Crown Media Holdings, Crown
Media International, and Odyssey Holdings as if the reorganization and
acquisition had occurred on January 1st of the periods presented, along with
certain pro forma adjustments to give effect to amortization of goodwill,
equity in net losses of unconsolidated subsidiaries, minority interests, and
other adjustments. The pro forma financial information is not necessarily
indicative of the results of operations as they would have been had the
transaction been effected on the assumed dates.
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CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 2000 1999 2000
------------ ------------ ------------ ------------
Revenues:
Subscriber fees $ 9,679,622 $ 14,091,318 $ 26,434,039 $ 36,165,843
Advertising 2,820,045 4,436,082 7,954,816 10,450,750
Other 770,901 838,744 2,404,001 2,256,142
------------ ------------ ------------ ------------
Total revenues 13,270,568 19,366,144 36,792,856 48,872,735
Total cost of sales 20,041,822 31,234,958 57,194,763 85,760,077
Selling, general and
administrative expenses 18,183,277 18,244,638 40,238,003 53,489,500
Amortization of goodwill 3,132,078 3,132,078 9,396,234 9,396,234
------------ ------------ ------------ ------------
Loss from operations (28,086,609) (33,245,530) (70,036,144) (99,773,076)
Equity in net losses of
unconsolidated subsidiaries
and investment expenses (1,359,051) (953,816) (3,675,238) (3,278,759)
Minority interest in net loss 2,940,263 -- 6,931,309 4,240,563
Interest income, net 546,086 626,074 1,919,794 775,396
------------ ------------ ------------ ------------
Net loss before income taxes (25,959,311) (33,573,272) (64,860,279) (98,035,876)
Income tax provision (229,641) (468,037) (567,732) (1,019,891)
------------ ------------ ------------ ------------
Net loss $(26,188,952) $(34,041,309) $(65,428,011) $(99,055,767)
============ ============ ============ ============
Weighted average number of
Class A and Class B shares
Outstanding 60,000,000 60,006,188 60,000,000 60,002,063
Loss per share $ (0.44) $ (0.57) $ (1.09) $ (1.65)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 1999
The following discussion should be read in conjunction with the condensed
pro forma consolidated statements of operations. The condensed pro forma
statements of operations include results of Odyssey Holdings as if Odyssey
Holdings was acquired on January 1st of each of the periods presented.
Additionally, the following discussion should be read in conjunction with the
attached condensed consolidated financial statements and the prospectus of
Crown Media Holdings dated May 3, 2000.
Revenues. Total revenues for the three and nine months ended September 30,
2000 increased $6.1 million and $12.1 million, respectively, which represent
increases of 45.9% and 32.8%, respectively, over the comparable periods in
1999. The aforementioned increases in total revenues were attributable to $4.4
million and $9.7 million increases in subscriber fees for the three and nine
months ended September 30, 2000, respectively, over the comparable periods in
1999. Higher subscriber fees resulted from new market launches and expanded
distribution in existing markets. Crown Media Holdings' subscribers to Hallmark
Entertainment Network and Odyssey Network as of September 30, 2000, increased
26.0% to 56.2 million, compared to September 30, 1999. Additionally, the Kermit
Channel had 4.6 million subscribers as of September 30, 2000. Subscribers to
Hallmark Entertainment Network as of September 30, 2000, increased 72.3% to
30.3 million compared to September 30, 1999. The Hallmark Entertainment Network
was launched during the third quarter of 2000 in Hungary to approximately
50,000 subscribers and in Israel to approximately 1.0 million subscribers. In
the third quarter 2000, Crown Media Holdings signed long term distribution
agreements with three of the top nine domestic pay television distributors
bringing six of the nine domestic pay television distributors under long term
distribution agreements. During the third quarter of 2000, 64.5% of total
revenues were earned internationally and 35.5% of total revenues were earned
domestically. Crown Media Holdings is continuing to change its focus of earning
revenues primarily from subscriber fees to include increased advertising
revenues. Consistent with the shift, advertising and other revenues increased
$1.7 million and $2.3 million for the three and nine months ended September 30,
2000, which represent increases of 46.9% and 22.7%, respectively, over the
comparable periods in 1999. The increase in advertising and
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other revenues reflect Crown Media Holdings' growing subscriber base, expanding
sales of advertising time primarily in the United States and the United Kingdom
and higher rates. At the same time, subscriber fees increased at a greater rate
than subscribers primarily as a result of the addition of certain domestic
long-term distribution agreements. However, Crown Media Holdings provides and
will continue to offer free carriage to subscribers during promotional periods
in connection with new distribution agreements.
Cost of sales. Cost of sales for the three and nine months ended September
30, 2000, increased $11.2 million and $28.6 million, respectively, which
represented increases of 55.9% and 50.0%, respectively, over the comparable
periods in 1999. These increases were primarily due to increases of $3.2 million
and $13.3 million, respectively, in affiliated programming costs, increases of
$615,000 and $2.8 million, respectively, in subscriber acquisition fees, and
increases of $6.9 million and $14.0 million, respectively, in other operating
costs for the aforementioned periods. Affiliated programming costs for the three
and nine months ended September 30, 2000, increased due to a greater use of
Hallmark Entertainment Distribution titles necessary to fulfill the requirements
of our programming strategy. Higher subscriber acquisition fees for the three
and nine months ended September 30, 2000, were primarily attributable to
amortization of fees related to a distribution contract commencing during third
quarter 1999. The subscriber acquisition fees are likely to increase in the
future as Crown Media Holdings expands its distribution. Additionally, other
operating costs rose as Crown Media Holdings expanded existing markets and
launched the Hallmark Entertainment Network in the United Kingdom and Turkey
during the second quarter 2000 and in Israel and Hungary in July 2000. Total
cost of sales increased reflecting the increased infrastructure, certain key
senior management additions, and costs associated with supporting new markets.
Cost of sales as a percentage of total revenue increased to 161.3% and 175.5%
for the three and nine months ended 2000 from 151.0% and 155.5% for the three
and nine months ended 1999. Marketing expenses are expected to increase in the
fourth quarter of 2000 and the first and second quarters of 2001 due to Crown
Media Holdings' global business plan to introduce a new brand package for the
Hallmark Entertainment Network, which includes branded theme blocks, a new
positioning line, on-air graphics and signature music. The newly redesigned
brand will be rolled-out beginning November 1, 2000, in Asia and Latin America
and will continue to be rolled out in the other markets during the subsequent
six months.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended September 30, 2000, remained
constant over the comparable period in 1999. Selling, general and
administrative expenses for the nine months ended September 30, 2000, increased
$13.3 million which represented an increase of 32.9% over the comparable period
in 1999. This increase includes a $5.2 million increase in salaries and
benefits at Crown Media Holdings primarily related to compensatory stock option
expense in the first nine months of 2000. This increase also reflects increased
costs associated with supporting expanded distribution in existing markets and
new markets and the continued development of a corporate infrastructure to
support increased distribution and advertising, including expansion of the
management team and increased staffing levels. Selling, general and
administrative expenses as a percentage of total revenue decreased to 94.2% for
the three months ended 2000 from 137.0% for the three months ended 1999. This
decrease was due to a decrease in travel and entertainment, consulting, and
pre-launch expenses. Selling, general, and administrative expenses as a
percentage of total revenue remained constant for the nine months ended 2000
from the nine months ended 1999.
Loss from operations. Loss from operations for the three and nine months
ended September 30, 2000, increased $5.2 million and $29.7 million,
respectively, which represented increases of 18.4% and 42.5%, respectively,
over the comparable periods in 1999. The aforementioned increases in loss from
operations for the three and nine months ended September 30, 2000, are
attributable to the factors discussed above.
Interest income, net. Net interest income was $626,000 and $775,000,
respectively, for the three and nine months ended September 30, 2000, and
$546,000 and $1.9 million, respectively, for the three and nine months ended
September 30, 1999. The decrease in net interest income for the nine months
ended September 30, 2000, from the comparable period in 1999 was the result of
interest on increased borrowings to fund operations and a decrease in cash
available for investment. The increase in net interest income for the three
months ended September 30, 2000, from the comparable period in 1999 was the
result of interest from short-term investments earned on a portion of cash
proceeds received in conjunction with our initial public offering. Net interest
income was earned for the three and nine months ended September 30, 1999,
primarily from a note receivable from Hallmark Entertainment and investments
made by Odyssey Holdings.
Net loss. Net loss for the three and nine months ended September 30, 2000,
increased $7.9 million and $33.6 million, respectively, which represent
increases of 30.0% and 51.4%, respectively, over the comparable periods in
1999. The aforementioned increases in net loss for the three and nine months
ended September 30, 2000, are attributable to the factors discussed above.
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CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
1999 2000
------------------- -------------------
(UNAUDITED)
ASSETS:
Cash and cash equivalents $ 3,865,455 $ 61,832,130
Accounts receivable,less allowance for doubtful accounts
of $695,409 and $3,092,903, respectively 7,184,999 17,308,390
Receivables from unconsolidated subsidiaries 1,628,642 5,649,532
Demand note and interest receivable from affiliate 33,625 --
------------- -------------
Total receivables 8,847,266 22,957,922
------------- -------------
Program license fees, net of accumulated amortization 10,845,675 62,352,911
Subtitling and dubbing, net of accumulated amortization 976,431 1,431,331
Prepaids and other assets 852,396 1,884,922
------------- -------------
Total current assets 25,387,223 150,459,216
Accounts receivable, net of current portion -- 1,537,177
Program license fees, net of current portion 7,735,657 73,811,609
Subtitling and dubbing, net of current portion 3,594,659 4,131,801
Subscriber acquisition fees, net -- 25,471,850
Property and equipment, net 7,984,587 28,451,965
Investment in Odyssey Holdings 35,362,626 --
Goodwill, net -- 243,273,318
Prepaids and other assets, net of current portion 981,462 2,206,776
------------- -------------
Total assets $ 81,046,214 $ 529,343,712
============= =============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY:
Accounts payable and accrued liabilities $ 4,931,914 $ 16,862,899
Subscriber acquisition fees payable -- 27,210,000
License fees payable to non-affiliates 561,139 11,794,363
License fees payable to Hallmark Entertainment Distribution 34,605,831 54,090,960
License fees payable to The Jim Henson Company -- 7,500,000
License fees payable to National Interfaith Cable Coalition -- 1,279,900
Payable to Hallmark Cards -- 1,515,051
Payable to Hallmark Entertainment 9,242,744 7,393,104
Notes and interest payable to affiliates 22,710,670 37,579,293
Deferred compensation 3,250,000 8,802,000
Deferred programming revenue 2,153,786 586,414
------------- -------------
Total current liabilities 77,456,084 174,613,984
Accrued liabilities and other 18,491 18,490
License fees payable to non-affiliates -- 22,572,792
License fees payable to Hallmark Entertainment Distribution -- 26,757,499
License fees payable to The Jim Henson Company -- 2,411,599
Investment in the Kermit Channel 1,043,322 4,302,081
Deferred compensation 3,556,988 5,276,678
Deferred income taxes 1,600,000 --
Commitments and contingencies
Minority interest -- 25,000,000
Predecessor Class B common stock subject to put and call,
$.01 par value; 1,000 shares authorized; issued and outstanding
shares of 136.1 as of December 31, 1999 60,338,173 --
STOCKHOLDERS' (DEFICIT) EQUITY:
Predecessor Class A common stock, $.01 par value; 2,000 shares
authorized; issued and outstanding shares of
1,088.9 as of December 31, 1999 11 --
Class A common stock, $.01 par value; 150,000,000 shares
authorized; issued shares of 34,730,505; outstanding
shares of 29,352,784 as of September 30, 2000 -- 293,528
Class B common stock, $.01 par value; 120,000,000 shares
authorized; issued and outstanding shares of 30,670,422 as of
September 30, 2000 -- 306,704
Translation adjustment -- (50,787)
Paid-in capital 69,901,504 484,571,399
Accumulated (deficit) (132,868,359) (216,730,255)
------------- -------------
Total stockholders' (deficit) equity (62,966,844) 268,390,589
------------- -------------
Total liabilities and stockholders' (deficit) equity $ 81,046,214 $ 529,343,712
============= =============
The accompanying notes are an integral part of these financial statements.
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CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 2000 1999 2000
------------ ------------ ------------ ------------
Revenues:
Subscriber fees $ 7,486,772 $ 14,091,318 $ 20,702,006 $ 33,181,978
Advertising 1,133,577 4,436,082 1,285,815 6,745,348
Other 629,357 838,744 1,924,699 2,244,140
------------ ------------ ------------ ------------
Total revenues 9,249,706 19,366,144 23,912,520 42,171,466
Cost of Sales:
Programming costs:
Affiliates 2,714,961 11,327,083 9,312,505 23,453,739
Non-affiliates 2,434,511 3,609,054 8,810,598 8,048,141
Subscriber acquisition cost
amortization -- 1,147,183 -- 1,744,485
Other 5,557,755 15,151,638 14,777,358 36,044,889
------------ ------------ ------------ ------------
Total cost of sales 10,707,227 31,234,958 32,900,461 69,291,254
Selling, general and
administrative expenses 10,040,894 18,244,638 19,699,434 41,025,146
Amortization of goodwill -- 3,132,078 -- 5,506,550
------------ ------------ ------------ ------------
Loss from operations (11,498,415) (33,245,530) (28,687,375) (73,651,484)
Equity in net losses of
unconsolidated subsidiaries
and investment expenses (3,645,108) (953,816) (10,776,788) (8,113,781)
Interest income, net 157,808 626,074 773,077 341,388
------------ ------------ ------------ ------------
Net loss before income taxes (14,985,715) (33,573,272) (38,691,086) (81,423,877)
Income tax provision (629,641) (468,037) (1,767,732) (1,019,891)
------------ ------------ ------------ ------------
Net loss $(15,615,356) $(34,041,309) $(40,458,818) $(82,443,768)
============ ============ ============ ============
Weighted average number of
Class A and Class B shares
outstanding 33,816,900 60,006,188 32,712,695 47,707,070
Loss per share $ (0.49) $ (0.57) $ (1.32) $ (1.76)
The accompanying notes are an integral part of these financial statements.
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CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1999 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(40,458,818) $(82,443,768)
Adjustments to reconcile net loss to net cash used
in operating activities:
Loss on sale of property and equipment -- 5,107
Amortization of goodwill -- 5,506,550
Amortization of program license fees 18,123,103 31,501,880
Amortization of subscriber acquisition fees -- 1,744,485
Depreciation and amortization of property and equipment 1,770,214 3,772,948
Amortization of subtitling and dubbing and other assets 1,947,502 1,396,872
Provision for losses on accounts receivable 548,412 2,871,966
Equity in net losses of unconsolidated subsidiaries 9,540,116 8,113,781
Amortization of equity investment basis difference 1,236,672 --
Deferred compensation 2,258,989 6,143,889
Provisions for deferred taxes 1,200,000 --
Changes in operating assets and liabilities:
Increase in accounts receivable (4,238,940) (10,183,654)
Increase in receivables from unconsolidated subsidiaries (1,172,762) (4,020,891)
Decrease in interest receivable 315,123 33,625
Gross additions to program license fees (10,188,253) (63,164,054)
Increase in subtitling and dubbing (1,929,774) (2,388,915)
Gross additions to subscriber acquisition fees -- (2,794,801)
Increase in prepaids and other assets (6,630,090) (1,544,738)
Decrease in accounts payable and accrued liabilities 1,499,683 26,500,486
Increase (decrease) in payable to Hallmark Entertainment
Distribution 7,571,210 (5,887,560)
Increase in payable to The Jim Henson Company -- 284,440
Decrease in payable to Hallmark Entertainment -- (1,279,900)
Decrease in deferred revenue (1,923,726) (1,663,141)
------------ ------------
Net cash used in operating activities (20,531,339) (87,495,393)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,054,558) (18,719,278)
Disposition of property and equipment -- 78,970
Investment in equity affiliate (2,766,000) --
Cash acquired from the purchase of Odyssey Holdings -- 13,055,435
Proceeds from note receivable from Hallmark Entertainment 19,066,000 --
------------ ------------
Net cash provided by (used in) investing activities 14,245,442 (5,584,873)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock,
net of issuance costs -- 126,287,521
Proceeds from issuance of common stock due to exercise of options -- 240,062
Payment on Odyssey Holdings note payable (20,000,000) (10,000,000)
Capital Contributions 20,000,000 10,000,000
Borrowings from affiliates 5,317,958 27,059,653
Payments on borrowings from affiliates -- (2,525,620)
------------ ------------
Net cash provided by financing activities 5,317,958 151,061,616
Effect of exchange rate changes on cash -- (14,675)
------------ ------------
Net (decrease) increase in cash and cash equivalents (967,939) 57,966,675
Cash and cash equivalents, beginning of period 2,876,779 3,865,455
------------ ------------
Cash and cash equivalents, end of period $ 1,908,840 $ 61,832,130
============ ============
Supplemental disclosure of cash and non-cash activities:
Interest paid $ 21,018 $ 448,943
Income taxes paid $ 567,732 $ 1,019,891
Accretion related to predecessor Class B common stock subject
to put and call $ 2,830,892 $ 1,484,093
Purchase of Odyssey Holdings, net of cash acquired:
Program license fees, net $ -- $ 84,078,638
Subscriber acquisition fees, net
-- 24,421,534
Goodwill, net -- 247,955,451
Other assets, net -- 10,326,407
Accounts payable and accrued liabilities -- 21,987,472
Subscriber acquisition fees payable -- 27,210,000
Affiliate license fees payable -- 64,317,147
Minority Interest -- 25,000,000
Issuance of Class A common stock -- 216,901,312
The accompanying notes are an integral part of these financial statements.
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CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS AND ORGANIZATION
ORGANIZATION
On May 9, 2000, Crown Media Holdings, Inc. ("Crown Media Holdings")
completed a reorganization in which Crown Media Holdings shares were exchanged
for 100% of Crown Media International, Inc. ("Crown Media International"),
formerly known as Crown Media, Inc., and 77.5% of Odyssey Holdings, L.L.C.
("Odyssey Holdings"). At the same time, Crown Media Holdings completed a public
offering of 10,000,000 shares of Class A Common Stock at $14 per share. The net
proceeds from this offering, after expenses and underwriting discounts and
commissions, were approximately $126.3 million. We are a holding company, and,
prior to the completion of the reorganization and the offering on May 9, 2000,
we had no material assets, liabilities, contingent liabilities or operations.
Crown Media Holdings considers Crown Media International as a predecessor
corporation.
Our condensed consolidated financial statements include the assets and
liabilities of Crown Media International at their historical carrying values
since both we and Crown Media International are entities under common control
before and after the reorganization. The accompanying condensed consolidated
financial statements also include the assets and liabilities and results of
operations of Crown Media Holdings' other indirect, wholly and majority-owned
subsidiaries.
Crown Media International, a Delaware corporation, owns and operates the
Hallmark Entertainment Network, a pay television channel dedicated to high
quality family programming that is distributed in more than 70 countries. Crown
Media International also owns 50% of, and operates, the Kermit Channel, a pay
television channel featuring popular family and children's programming that is
distributed primarily in India. Crown Media International began operations in
June 1995 and was a majority-owned subsidiary of Hallmark Entertainment, Inc.
("Hallmark Entertainment").
National Interfaith Cable Coalition, Inc. ("National Interfaith Cable
Coalition"), VISN Management Corp. ("VISN Management Corp."), a wholly-owned
subsidiary of National Interfaith Cable Coalition, Liberty Media Corporation
("Liberty Media") and Vision Group Inc. ("VGI"), a wholly-owned subsidiary of
Liberty Media, entered into an agreement, effective July 1, 1995, to form The
F&V Channel, L.L.C. ("F&V") as a Delaware limited liability company. At that
time, VISN Management Corp. and VGI transferred their assets and liabilities to
F&V in exchange for 51% and 49%, respectively, of the membership interests in
F&V. In November 1996, F&V formed a wholly-owned subsidiary, Odyssey
Productions, Ltd., to produce a number of its television programs. During 1997,
F&V changed its name to Odyssey Holdings, L.L.C.
On November 13, 1998, Odyssey Holdings entered into an amended and restated
operating agreement (the "Company Agreement") with its members. The Company
Agreement provided for the admittance of Henson Cable Networks, Inc. ("HCN"), a
wholly-owned subsidiary of The Jim Henson Company, Inc. ("The Jim Henson
Company"), and Crown Media International, through a wholly-owned subsidiary.
Under the terms of the Company Agreement, HCN and Crown Media International
each agreed to pay $50.0 million, payable in installments, for a 22.5% common
equity interest in Odyssey Holdings. As a result of these transactions, the
common equity interest for VISN Management Corp., VGI, The Jim Henson Company
and Crown Media International (collectively the "Members") were 22.5%, 32.5%,
22.5% and 22.5%, respectively, with VISN Management Corp. additionally holding
a $25.0 million preferred liquidation preference.
Odyssey Holdings initially operated the Odyssey Network as a pay television
channel in the United States dedicated primarily to religious programming. In
April 1999, Odyssey Holdings relaunched the Odyssey Network as a channel
dedicated to high quality family programming.
In February 2000, EM.TV Merchandising AG ("EM.TV") acquired The Jim Henson
Company. In July 2000, we agreed in principle with EM.TV to acquire EM.TV's
22.5% ownership interest in Odyssey Holdings and its 50% interest in the Kermit
Channel. As a result of this transaction, we will own 100% of the members'
interests in Odyssey Holdings and 100% of the Kermit Channel. In consideration
for these ownership interests, we will issue 5,377,721 shares of our Class A
Common Stock to EM.TV. These shares, which are treated as issued but not
outstanding, have been placed in escrow until this transaction is completed.
Based on our outstanding shares at September 30, 2000, the newly issued shares
to EM.TV will represent after the transaction approximately 8.2% of our
outstanding Class A and Class B Common Stock and 15.5% of our Class A Common
Stock. The parties contemplate that EM.TV will enter into the stockholders
agreement among the Company's significant stockholders. This acquisition is
subject to negotiation and execution of the definitive documents, and there is
no assurance that the transaction will be completed. In connection with the
acquisition, we and EM.TV also plan to enter into a license agreement providing
for our use of family programming of EM.TV on the Odyssey Channel.
9
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The assets and liabilities of Odyssey Holdings and its subsidiaries
relating to Crown Media International's 22.5% interest in Odyssey Holdings
which are owned indirectly by us following the reorganization, as well as
EM.TV's 22.5% interest in Odyssey Holdings, are included in Crown Media
Holdings' condensed consolidated financial statements at their historical
carrying values. The acquisition of Liberty Media's 32.5% interest in Odyssey
Holdings and the National Interfaith Cable Coalition's 22.5% interest in
Odyssey Holdings, both of which were transferred to us as part of the
reorganization, are included in our condensed consolidated financial statements
at their fair market value using purchase accounting as of the date of the
reorganization. No minority interest is reflected in the accompanying condensed
consolidated statements of operations for the three and nine months ended
September 30, 2000, as the common minority shareholder's interest is in a
deficit position and the minority shareholder is not obligated to further fund
the losses or obligations of Odyssey Holdings.
LIQUIDITY
Crown Media Holdings is currently negotiating with a group of banks to
obtain a $100.0 million credit facility. Crown Media Holdings has signed a
non-binding term sheet for this credit facility. Crown Media Holdings believes
the proceeds from the initial public offering and credit facility will be
sufficient to meet the liquidity needs of both Crown Media International and
Odyssey Holdings, through at least the next 18 months.
Crown Media Holdings has incurred significant recurring losses from
inception through September 30, 2000 as it acquired programming rights and
expanded into new international markets. Crown Media Holdings expects to
continue to incur losses in the future.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The unaudited condensed consolidated financial statements include the
consolidated accounts of Crown Media Holdings and those of its majority-owned
and controlled subsidiaries. Investments in entities which are not
majority-owned and controlled by Crown Media Holdings are accounted for under
the equity method. All significant intercompany balances and transactions have
been eliminated in consolidation.
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include all of the information and notes
required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals and
deferrals) and disclosures are adequate to enable a reasonable understanding of
the information presented. Operating results for the three and nine months
ended September 30, 2000 are not necessarily indicative of the results that may
be expected for the year ended December 31, 2000. Crown Media Holdings'
unaudited condensed consolidated financial statements should be read in
conjunction with Crown Media International's and Odyssey Holdings' audited
consolidated financial statements and notes. For further information, refer to
the audited consolidated financial statements and notes thereto for the year
ended December 31, 1999 included in Crown Media Holdings' prospectus dated May
3, 2000.
COMPREHENSIVE INCOME (LOSS)
Crown Media Holdings has adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This statement
establishes standards for the reporting and presentation of comprehensive
income (loss) and its components in financial statements and thereby reports a
measure of all changes in equity of an enterprise that result from transactions
and other economic events other than transactions with owners. No tax benefit
has been provided on the foreign currency translation loss for any period.
Comprehensive income (loss) consists of the following:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
(IN THOUSANDS) 1999 2000 1999 2000
- ------------------------------------------ -------- -------- -------- --------
Net loss $(15,615) $(34,041) $(40,459) $(82,444)
-------- -------- -------- --------
Other comprehensive income (loss):
Foreign currency translation adjustments -- (76) -- (51)
-------- -------- -------- --------
Comprehensive income (loss) $(15,615) $(34,117) $(40,459) $(82,495)
======== ======== ======== ========
Accumulated comprehensive income (loss) $ -- $ (51) $ -- $ (51)
======== ======== ======== ========
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. The implementation date of this statement was
deferred to fiscal years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. Crown Media Holdings intends to adopt the new accounting
standard in the first quarter of 2001 and does not expect it to have a material
effect on our financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements ("SAB 101")," which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met in order to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. Crown Media Holdings
intends to adopt SAB 101 in the fourth quarter of 2000 and does not expect that
it will have a material effect on our financial position or results of
operations.
In March 2000, the Financial Accounting Standard Board (FASB) issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25," which clarifies the
application of APB Opinion No. 25 for certain issues including: (1) the
definition of an employee for purposes of applying APB Opinion No. 25, (2) the
criteria for determining whether a plan qualifies as a non-compensatory plan,
(3) the accounting consequences of various modifications to the terms of a
previously fixed stock option or award and (4) the accounting for an exchange
of stock compensation awards in a business combination. Interpretation No. 44
is effective July 1, 2000, but certain conclusions cover specific events if
occurring earlier. The adoption of this guidance on July 1, 2000 did not have a
material effect on our financial position or results of operations.
NET LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss available to
common stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted net loss per share is computed
based on the weighted average number of common shares and dilutive potential
common shares outstanding. The calculation of diluted net loss per share
excludes potential common shares if the effect is anti-dilutive. Potential
common shares consist of incremental common shares issuable upon the exercise
of stock options. Approximately 2.8 million stock options have been excluded
from the calculations below for the three and nine months ended September 30,
2000, as their effect would have been anti-dilutive. No stock options were
outstanding for the three and nine months ended September 30, 1999.
The computation of basic and diluted net loss per share consists of the
following:
FOR THE THREE MONTHS FOR THE NINE MONTHS
(IN THOUSANDS, EXCEPT SHARE ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
AND PER SHARE AMOUNTS) 1999 2000 1999 2000
- ------------------------------------------ ----------- ----------- ----------- -----------
Net loss .................................. $ (15,615) $ (34,041) $ (40,459) $ (82,444)
Accretion related to predecessor Class
B Common Stock subject to put and
call .................................... (1,000) -- (2,831) (1,484)
----------- ----------- ----------- -----------
$ (16,615) $ (34,041) $ (43,290) $ (83,928)
=========== =========== =========== ===========
Denominator:
Weighted average common shares
outstanding ............................. 33,816,900 60,006,188 32,712,695 47,707,070
=========== =========== =========== ===========
Net loss per share:
Basic and diluted loss per share ........ $ (0.49) $ (0.57) $ (1.32) $ (1.76)
=========== =========== =========== ===========
RECLASSIFICATIONS
Certain reclassifications have been made to conform prior periods' data to
the current presentation. These reclassifications have no effect on reported
net loss.
3. PROGRAM LICENSE FEES
Program license fees are the rights to air programs acquired from others.
In accordance with SFAS No. 63, "Financial Reporting by Broadcasters," program
rights are deferred and then amortized on a straight-line basis over their
license periods (the "airing windows") or anticipated usage, whichever is
shorter. At the inception of these contracts and periodically thereafter, Crown
Media Holdings evaluates the recoverability of these costs versus the revenues
directly associated with the programming and related expense. Where an
evaluation indicates that a programming contract will ultimately result in a
loss, additional amortization is provided to currently recognize that loss.
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Program license fees consists of the following:
AS OF
----------------------------------------
(IN THOUSANDS) DECEMBER 31, 1999 SEPTEMBER 30, 2000
- ------------------------------------------- ----------------- ------------------
Program license fees -- affiliates ........ $ 17,361 $107,413
Program license fees -- non-affiliates .... 11,196 51,909
Prepaid program license fees .............. 6,750 6,750
-------- --------
Program license fees, at cost ........ 35,307 166,072
Accumulated amortization .................. (16,726) (29,907)
-------- --------
Program license fees, net ........ $ 18,581 $136,165
======== ========
On May 9, 2000, Crown Media Holdings acquired $84.1 million of program
license fees as part of the acquisition of Odyssey Holdings.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
AS OF
----------------------------------------
(IN THOUSANDS) DECEMBER 31, 1999 SEPTEMBER 30, 2000
- ------------------------------------------- ----------------- ------------------
Technical equipment and computers ............ $10,330 $18,446
Furniture, fixtures and equipment ............ 966 1,790
Leasehold improvements ....................... 461 2,569
Construction-in-progress ..................... 1,065 13,153
------- -------
Property and equipment at cost ............. 12,822 35,958
Accumulated depreciation and amortization .... (4,837) (7,506)
------- -------
Property and equipment, net ................ $ 7,985 $28,452
======= =======
Construction-in-progress as of September 30, 2000, consists primarily of
costs incurred for an advanced global network-operating center at our
Englewood, Colorado, headquarters.
Additionally, on May 9, 2000, Crown Media Holdings acquired $5.6 million of
property and equipment as part of the acquisition of Odyssey Holdings.
5. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
THE KERMIT CHANNEL
In May 1998, Crown Media International formed two New York limited
liability companies, H&H Programming-Latin America, L.L.C. ("HHPLA") and H&H
Programming-Asia, L.L.C. (collectively operating as the "Kermit Channel") with
The Jim Henson Company, a New York corporation, for the purpose of developing,
owning and operating pay television programming services in Latin America and
Asia. HHPLA was dissolved in December 1999. Each of Crown Media International
and The Jim Henson Company held a 50% interest in each of the limited liability
companies and currently holds a 50% interest in the Kermit Channel. The Kermit
Channel is reflected in Crown Media Holdings' financial statements using the
equity method of accounting for investments. Crown Media Holdings' equity in
the net losses of the Kermit Channel of approximately $1.4 million and $1.0
million for the three months ended September 30, 1999 and 2000, respectively,
and $3.7 million and $3.3 million for the nine months ended September 30, 1999
and 2000, respectively, are included in the condensed consolidated statements
of operations as equity in net losses of unconsolidated subsidiaries and
investment expenses.
Crown Media Holdings provides services to the Kermit Channel in exchange
for a fee as provided in an agreement between Crown Media and the Kermit
Channel. This fee, which was approximately $629,000 and $1.0 million for the
three months ended September 30, 1999 and 2000, respectively, and $1.9 million
and $2.2 million for the nine months ended September 30, 1999 and 2000,
respectively, includes direct and indirect costs incurred on behalf of the
Kermit Channel, as provided by the agreements. Additionally, Hallmark
Entertainment Distribution, a related-party, provides programming to the Kermit
Channel in exchange for a fee through a license agreement.
INVESTMENT IN ODYSSEY HOLDINGS, L.L.C.
In November 1998, Crown Media International, through its wholly-owned
subsidiary Hallmark Domestic Holdings, Inc., entered into an agreement to
acquire a 22.5% common equity interest in Odyssey Holdings. The purchase price
for Crown Media International's
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interest in Odyssey Holdings was $50.0 million. Pursuant to the terms of the
agreement, Crown Media International paid $20.0 million of this purchase price
in November 1998, an additional $20.0 million in May 1999 and the final payment
of $10.0 million in February 2000. Consequently, at December 31, 1999, Crown
Media International had an outstanding note payable related to this investment,
included in notes and interest payable to affiliates in the accompanying
condensed consolidated balance sheet of $10.0 million.
Crown Media International funded its February 2000 capital contribution to
Odyssey Holdings with the proceeds of additional investments of $8.9 million
and $1.1 million in Crown Media International by its stockholders, Hallmark
Entertainment and Chase Equity Associates, L.P. ("Chase"), respectively.
Hallmark Entertainment and Chase were issued 22.222 shares of predecessor Class
A common stock and 2.7775 shares of predecessor Class B common stock,
respectively, related to the additional funding.
Crown Media Holdings' investment in Odyssey Holdings was reflected in the
condensed consolidated financial statements using the equity method of
accounting until May 9, 2000, the date of the reorganization (note 1), at which
time it became a consolidated subsidiary. Crown Media Holdings' equity in the
net loss of Odyssey Holdings was approximately $1.9 million for the three
months ended September 30, 1999, and $5.9 million and $4.8 million,
respectively, for the nine months ended September 30, 1999 and 2000. These
amounts are included in the condensed consolidated statements of operations as
equity in net losses of unconsolidated subsidiaries and investment expenses.
Crown Media Holdings' investment in Odyssey Holdings, through the date of the
reorganization, exceeded the underlying equity in the net assets of Odyssey
Holdings as of the date of the investment. This goodwill was being amortized
over 20 years. For the three and nine months ended September 30, 1999,
approximately $412,000 and $1.2 million were amortized related to this
difference and were reflected in equity in net losses of unconsolidated
subsidiaries and investment expenses in the accompanying condensed consolidated
statements of operations, respectively.
Prior to the reorganization and acquisition, Odyssey Holdings was accounted
for as an equity investment. On May 9, 2000, Crown Media Holdings acquired an
additional 55% interest in Odyssey Holdings (note 6). Subsequently, Odyssey
Holdings was and will be accounted for as a consolidated subsidiary.
6. ACQUISITION
The acquisition of the 55% interest in Odyssey Holdings in the
reorganization on May 9, 2000 has been accounted for using the purchase method
of accounting. The results of operations of Odyssey Holdings have been included
in the condensed consolidated financial statements since May 9, 2000. The
purchase price of the 55% interest in Odyssey Holdings has been allocated among
net assets of Odyssey Holdings based on the estimated fair values of net assets
acquired at the date of acquisition. The excess of purchase price over
identifiable net assets acquired of $217.0 million has been allocated to
goodwill and is being amortized using the straight-line method over the
estimated useful life of 20 years.
The following unaudited pro forma information presents a summary of
consolidated results of operations of Crown Media Holdings, Crown Media
International, and Odyssey Holdings as if the acquisition had occurred on
January 1st of the periods presented, along with certain pro forma adjustments
to give effect to amortization of goodwill, equity in net losses of
unconsolidated subsidiaries, minority interests, and other adjustments. The
unaudited pro forma financial information is not necessarily indicative of the
results of operations as they would have been had the transaction been effected
on the assumed dates.
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CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 2000 1999 2000
------------ ------------ ------------ ------------
Revenues:
Subscriber fees $ 9,679,622 $ 14,091,318 $ 26,434,039 $ 36,165,843
Advertising 2,820,045 4,436,082 7,954,816 10,450,750
Other 770,901 838,744 2,404,001 2,256,142
------------ ------------ ------------ ------------
Total revenues 13,270,568 19,366,144 36,792,856 48,872,735
Cost of Sales:
Programming costs:
Affiliates 8,117,349 11,327,083 18,140,394 31,452,443
Non-affiliates 3,184,897 3,609,054 11,608,131 10,012,544
Subscriber acquisition cost
Amortization 532,500 1,147,183 532,500 3,331,775
Other 8,207,076 15,151,638 26,913,738 40,963,315
------------ ------------ ------------ ------------
Total cost of sales 20,041,822 31,234,958 57,194,763 85,760,077
Selling, general and
administrative expenses 18,183,277 18,244,638 40,238,003 53,489,500
Amortization of goodwill 3,132,078 3,132,078 9,396,234 9,396,234
------------ ------------ ------------ ------------
Loss from operations (28,086,609) (33,245,530) (70,036,144) (99,773,076)
Equity in net losses of
unconsolidated subsidiaries
and investment expenses (1,359,051) (953,816) (3,675,238) (3,278,759)
Minority interest in net loss 2,940,263 -- 6,931,309 4,240,563
Interest income, net 546,086 626,074 1,919,794 775,396
------------ ------------ ------------ ------------
Net loss before income taxes (25,959,311) (33,573,272) (64,860,279) (98,035,876)
Income tax provision (229,641) (468,037) (567,732) (1,019,891)
------------ ------------ ------------ ------------
Net loss $(26,188,952) $(34,041,309) $(65,428,011) $(99,055,767)
============ ============ ============ ============
Weighted average number of
Class A and Class B shares
Outstanding 60,000,000 60,006,188 60,000,000 60,002,063
Loss per share $ (0.44) $ (0.57) $ (1.09) $ (1.65)
A summary of Crown Media Holdings' unaudited Pro Forma Condensed
Consolidated Statements of Operations and related Management's Discussion and
Analysis of Pro Forma Results of Operations have been included to provide a
comparative basis for users of Crown Media Holdings' financial information at
the beginning of this Form 10-Q.
7. INCOME TAXES
Crown Media Holdings accounts for income taxes using the liability method.
Under this method, Crown Media Holdings recognizes deferred tax assets and
liabilities for future tax consequences attributable to the difference between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Since its inception and through May 9, 2000, Crown Media Holdings and its
predecessor were included in the consolidated federal income tax return of
Hallmark Cards, Inc. ("Hallmark"). Crown Media Holdings and its predecessor
were also included in combined state income tax returns of Hallmark or Hallmark
Entertainment. Crown Media Holdings and its predecessor did not have a tax
sharing agreement with Hallmark or Hallmark Entertainment. Hallmark has used
all federal tax losses and foreign tax credits relating to Crown Media Holdings
and its predecessor. Hallmark and Hallmark Entertainment have used state tax
losses relating to Crown Media Holdings and its predecessor in combined state
income tax returns. Hallmark and Hallmark Entertainment will not reimburse
Crown Media Holdings for the use of such tax benefits. Accordingly, Crown Media
Holdings has not recorded a tax benefit for federal or state tax losses. Crown
Media Holdings has recorded a tax provision related to foreign taxes for the
periods prior to May 9, 2000, and has established a deferred tax liability as
required for certain timing items and corresponding deferred tax assets related
to anticipated future benefits available from net operating losses. Such
deferred tax assets will be reduced by a valuation allowance when necessary.
Effective May 10, 2000, Crown Media Holdings is no longer included in the
consolidated federal income tax return of Hallmark. Crown Media Holdings may be
included in certain combined state income tax returns of Hallmark or Hallmark
Entertainment.
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Consequently, Hallmark Entertainment and Crown Media Holdings entered into a
tax sharing agreement. Under the tax sharing agreement, where Hallmark and
Crown Media Holdings do file consolidated, combined or unitary tax returns,
Crown Media Holdings will make tax sharing payments to (or receive payments
from) Hallmark Entertainment equal to the taxes (or tax refunds) that Crown
Media Holdings would have paid (or received) if it filed on a stand-alone
basis. Such payments will be computed based on Crown Media Holdings' income,
loss and other tax items beginning the day following the May 9, 2000
reorganization.
Total income tax provision consists of the following:
FOR THE THREE MONTHS FOR THE NINE MONTHS
(IN THOUSANDS) ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
- -------------------------- -------------------- --------------------
1999 2000 1999 2000
---- ---- ---- ----
Current:
Federal ................ $ -- $ -- $ -- $ --
Foreign ................ 230 468 568 1,020
State and local ........ -- -- -- --
---- ---- ------ ------
Total current ....... 230 468 568 1,020
Deferred:
Federal ................ 400 -- 1,200 --
State and local ........ -- -- -- --
---- ---- ------ ------
Total deferred ...... 400 -- 1,200 --
---- ---- ------ ------
Total ............... $630 $468 $1,768 $1,020
==== ==== ====== ======
The following table reconciles the income tax provision at the U.S.
statutory rate to that in the financial statements:
FOR THE THREE MONTHS FOR THE NINE MONTHS
(IN THOUSANDS) ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
- ------------------------------------------ -------------------- ---------------------
1999 2000 1999 2000
------- -------- -------- --------
Taxes computed at 35% ..................... $(5,245) $(11,659) $(13,542) $(28,406)
Net operating losses not benefiting
Crown Media Holdings ...................... 5,645 11,659 14,742 28,406
Additional tax on foreign income .......... 230 468 568 1,020
------- -------- -------- --------
Income tax provision ................. $ 630 $ 468 $ 1,768 $ 1,020
======= ======== ======== ========
The components of Crown Media Holdings' deferred tax assets and liabilities
consist of the following:
AS OF
---------------------------------------
(IN THOUSANDS) DECEMBER 31, 1999 SEPTEMBER 30, 2000
- --------------------------------------------- ----------------- ------------------
Deferred tax assets:
Deferred revenue .......................... $ 862 $ 235
Bad debt reserve .......................... 278 1,551
Accrued compensation ...................... 1,923 5,631
Net operating loss ........................ -- 16,500
Other ..................................... -- 513
Valuation allowance ....................... -- (22,431)
------- --------
Total deferred tax assets .............. 3,063 1,999
Deferred tax liabilities:
Depreciation .............................. (556) (551)
Unconsolidated subsidiaries' losses ....... (4,015) (1,448)
Other ..................................... (92) --
------- --------
Total deferred tax liabilities ......... (4,663) (1,999)
------- --------
Net deferred taxes ................... $(1,600) $ --
======= ========
As a result of the reorganization, Crown Media Holdings acquired net
deferred tax assets in excess of its prior existing net deferred tax
liabilities. The offset of existing net deferred tax liabilities with net
deferred tax assets acquired was treated as a reduction of the purchase price
of Odyssey Holdings and, therefore, a reduction of goodwill recorded.
8. OPERATIONS IN DIFFERENT GEOGRAPHIC AREAS
Crown Media Holdings' adopted SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information" in 1998. This statement requires
companies to report in their financial statements certain information about
operating segments, their services, the geographic areas in which they operate
and their major customers.
All of Crown Media Holdings' material operations are part of the domestic
and international pay television programming service industry and, therefore,
Crown Media Holdings reports as two industry segments. Crown Media Holdings
does not have operating decision authority through its minority investment in
the Kermit Channel (note 5). Consequently, selected operating and asset data of
the Kermit Channel are not included in the following table.
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Information relating to Crown Media Holdings' continuing operations is set
forth in the following table (operating loss is defined as total revenues less
cost of sales; selling, general and administrative expenses; and amortization
of goodwill. Home office costs are reflected in the domestic operating losses
and are not allocated internationally):
REVENUE FROM REVENUE FROM OPERATING IDENTIFIABLE
(IN MILLIONS) UNRELATED ENTITIES RELATED ENTITIES LOSS ASSETS(A)
- --------------------------------------- ------------------ ---------------- --------- -------------
Three Months Ended September 30, 1999:
Domestic $ -- $0.6 $(11.4) $ 9.0
International 8.6 -- (0.1) 18.2
----- ---- ------ ------
$ 8.6 $0.6 $(11.5) $ 27.2
===== ==== ====== ======
Three Months Ended September 30, 2000:
Domestic $ 6.6 $1.0 $(30.4) $198.0
International 11.8 -- (2.8) 25.7
----- ---- ------ ------
$18.4 $1.0 $(33.2) $223.7
===== ==== ====== ======
Nine Months Ended September 30, 1999:
Domestic $ -- $1.9 $(22.7) $ 9.0
International 22.0 -- (6.0) 18.2
----- ---- ------ ------
$22.0 $1.9 $(28.7) $ 27.2
===== ==== ====== ======
Nine Months Ended September 30, 2000:
Domestic $ 9.6 $2.2 $(65.9) $198.0
International 30.4 -- (7.8) 25.7
----- ---- ------ ------
$40.0 $2.2 $(73.7) $223.7
===== ==== ====== ======
(A) Identifiable assets exclude financial assets and goodwill.
The countries in the Asia Pacific region and Latin America region have
experienced illiquidity, volatile currency exchange rates and interest rates,
and volatile political and economic conditions. Crown Media Holdings will be
affected in the foreseeable future by economic conditions in these regions,
although it is not possible to predict the extent of such impact.
No customer accounted for more than 10% of Crown Media Holdings' total
revenues for the three and nine months ended September 30, 1999 and 2000.
9. RELATED PARTY TRANSACTIONS
PROGRAM LICENSE AGREEMENT WITH HALLMARK ENTERTAINMENT DISTRIBUTION
The primary supplier of programming to Crown Media International is
Hallmark Entertainment Distribution. Crown Media International has two program
agreements with Hallmark Entertainment Distribution through December 31, 2004,
which are renewable through December 31, 2009 at Hallmark Entertainment
Distribution's option. Under the terms of the agreement, Crown Media
International has the exclusive right to exhibit Hallmark Entertainment
Distribution's programming in the territories in which Crown Media
International operates during three distinct 18-month time periods. Crown Media
International also has the exclusive right to exhibit programming in markets
where it does not currently operate, subject to any third party agreement
existing at the time Crown Media International launches in those markets. In
addition, under the agreement, Hallmark Entertainment Distribution is generally
obligated to sell to Crown Media International and Crown Media International is
obligated to purchase all of the programming it produces during the term of the
agreement.
Odyssey Holdings also licenses programming for distribution in the United
States from Hallmark Entertainment Distribution under a program license
agreement, dated November 13, 1998. Under the program agreement, Odyssey
Holdings generally licenses made-for-television movies and miniseries owned or
controlled by Hallmark Entertainment Distribution, as well as all programming
produced by or on behalf of Hallmark Entertainment Distribution for Odyssey
Holdings. The program agreement has a term of five years and is automatically
renewable for additional three-year periods, subject to rate adjustments, so
long as Hallmark Entertainment Distribution, as applicable, or its affiliates,
own 10% or more of Odyssey Holdings. In the event that Hallmark Entertainment
Distribution owns less than 10% of Odyssey Holdings, the remaining term of the
applicable program agreement will be two years from the date its ownership
reaches that level.
Programming costs related to the program agreements were $3.0 million and
$7.5 million for the three months ended June 30, 1999 and 2000, respectively,
and $9.3 million and $15.5 million for the nine months ended September 30, 1999
and 2000, respectively. As of December 31, 1999 and September 30, 2000, $34.6
million and $80.8 million, respectively, are included in license fees payable
to Hallmark Entertainment Distribution in the accompanying condensed
consolidated balance sheets.
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CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SERVICES AGREEMENT WITH HALLMARK ENTERTAINMENT
Hallmark Entertainment, its subsidiaries and various affiliates, provide
Crown Media International with services that include legal, financial, tax and
other general corporate services. For each of the nine months ended September
30, 1999 and 2000, Crown Media International has accrued $375,000 under the
agreement.
DEMAND NOTE
In November 1999, Crown Media International entered into an agreement, as
amended, with HC Crown Corporation, an affiliate of Hallmark Cards, under which
HC Crown Corporation agreed to lend Crown Media International up to $40.0
million. Amounts borrowed under this agreement bear interest at 130% of the
Applicable Federal Rate as set forth in the Internal Revenue Code, with the
interest compounding on an annual basis. Amounts outstanding are due on demand.
As of December 31, 1999 and September 30, 2000, principal and accrued interest
under the agreement were approximately $12.7 million and $37.6 million,
respectively, both of which are included in notes and interest payable to
affiliates on the accompanying condensed consolidated balance sheets.
PROGRAM LICENSE AGREEMENTS
On November 13, 1999, Odyssey Holdings entered into a program license
agreement with the National Interfaith Cable Coalition ("NICC Program License
Agreement") under which Odyssey Holdings licenses programming from the National
Interfaith Cable Coalition for distribution within the United States. The
agreement terminates upon termination of the Company Agreement. The National
Interfaith Cable Coalition is obligated to furnish a minimum of 200 hours of
programming each year under the program license agreement.
Under the NICC Program License Agreement, Odyssey Holdings has agreed to
advance an annual program license fee of $5.0 million, payable in quarterly
installments and subject to adjustment in accordance with the terms of the
Company Agreement as discussed below. The advance is treated as an advance
payment against programs undertaken to be produced or acquired by the National
Interfaith Cable Coalition.
Under the Company Agreement, the advance will be an amount equal to the sum
of $3.5 million and, so long as VISN Management Corp. owns the preferred
interest in the Company, $1.5 million multiplied by the quotient of the
preferred liquidation preference (as adjusted under certain circumstances)
divided by $25.0 million. The advance is increased annually based on the
Consumer Price Index. The National Interfaith Cable Coalition is required to
use these payments solely for programming related activities.
Odyssey Holdings also licenses programming for distribution in the United
States from The Jim Henson Company under a program license agreement, dated
November 13, 1998. Under the program agreement, Odyssey Holdings generally
licenses made-for-television movies and miniseries owned or controlled by The
Jim Henson Company, as well as all programming produced by or on behalf of The
Jim Henson Company for Odyssey Holdings. The program agreement has a term of
five years and is automatically renewable for an additional three-year period,
subject to rate adjustments, so long as The Jim Henson Company, as applicable,
or its affiliates, own 10% or more of Odyssey Holdings. In the event that The
Jim Henson Company owns less than 10% of Odyssey Holdings, the remaining term
of the applicable program agreement will be two years from the date its
ownership reaches that level.
ADVERTISING REVENUE
Odyssey Holdings' advertising revenues include revenue from Hallmark Cards
of $712,000 and $1.8 million, respectively, for the three and nine months ended
September 30, 2000. No advertising revenue from Hallmark Cards was earned in
comparable periods in 1999.
10. SUBSEQUENT EVENTS
The operation of the Network Operations Center ("NOC") at our Englewood,
Colorado, headquarters is currently expected to be completed in February 2001,
when fiber optic connections necessary to uplink programs from the playback
center become available. No interruption of service is expected.
The share appreciation rights held by certain employees of Odyssey Holdings
will be converted to a total of 1.3 million stock options under the 2000 Long
Term Incentive Plan during the fourth quarter of 2000. Additionally, during the
fourth quarter, Crown Media Holdings plans to change the vesting term of
certain outstanding options from five years to four years. Both transactions
have been approved by the Board of Directors.
On October 26, 2000 the Company announced that, as part of its continuing
efforts to increase distribution and drive advertising sales, it will be
collapsing the Kermit Channel in Asia and introducing a new six-hour daytime
block dedicated to the kids market on the Hallmark Entertainment Network in
Asia. The Kermit Channel will remain on the air in India, where the Company is
considering a joint venture partnership with Modi Entertainment Network.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and the prospectus of Crown Media
Holdings dated May 3, 2000.
The reported financial statements and data for 1999 are comprised only of
the predecessor entity, Crown Media International, and its wholly-owned
subsidiaries. Therefore, significant variances between 1999 and 2000 financial
information exist and are, to a large extent, the result of the acquisition of
Odyssey Holdings on May 9, 2000. Please refer to "Management's Discussion and
Analysis of Pro Forma Results of Operations" included in "Part I: Financial
Information" for further information.
Crown Media International and Odyssey Holdings have historically operated
as separate entities. The results of Odyssey Holdings are only reported on a
consolidated basis with us from the effective date of the reorganization and
offering. Crown Media Holdings accounts for H&H Programming-Asia, of which it
owns a 50% interest, and accounted for Odyssey Holdings, of which it owned a
22.5% interest through May 9, 2000, in the consolidated financial statements
using the equity method of accounting.
Crown Media Holdings' acquisition of Crown Media International has been
accounted for as a reorganization of entities under common control. Our
acquisition of the additional 55% interest in Odyssey Holdings has been
accounted for using the purchase method of accounting. With the completion of
our initial public offering and the reorganization, Odyssey Holdings has been
consolidated with us and is no longer accounted for using the equity method of
accounting.
We own and operate pay television channels dedicated to high quality family
programming, which we believe represents one of the most popular television
formats. We currently operate and distribute the Hallmark Entertainment Network
internationally and the Odyssey Network domestically, primarily through cable
and direct-to-home satellite systems. At September 30, 2000, we had more than
60 million subscribers worldwide.
Each of our channels benefits from a long-term program agreement with a
subsidiary of Hallmark Entertainment, Inc. ("Hallmark Entertainment"), our
parent company. These program agreements generally provide exclusive pay
television access to Hallmark Entertainment's first-run presentations and
extensive library of original made-for-television movies and miniseries.
Hallmark Entertainment's library consists of more than 4,000 hours of
programming, including eight of the 10 most highly rated made-for-television
movies for the 1993 through 1999 television seasons, based on A.C. Nielson
ratings. Programs contained in this library have won more than 90 Emmy Awards,
Golden Globe Awards and Peabody Awards. The Odyssey Network also licenses a
substantial amount of programming produced by The Jim Henson Company, Inc., a
producer of popular family and children's programming, through a long-term
program agreement. Programs contained within The Jim Henson Company's library
have won more than 40 Emmy Awards and Peabody Awards. In addition, we and The
Jim Henson Company each own 50% of the Kermit Channel. The Kermit Channel,
which we operate primarily in India, features popular family and children's
programming.
We believe that with the programming we license from Hallmark Entertainment
and The Jim Henson Company, we are establishing the Hallmark Entertainment
Network and the Odyssey Network as destinations for viewers seeking high
quality family entertainment and as attractive outlets for advertisers seeking
to target these viewers. We believe our programming will continue to drive the
growth in the number of our worldwide subscribers and the growth of our
revenues.
We have distribution agreements with leading pay television distributors in
each of our markets. Internationally, for the Hallmark Entertainment Network,
some of these include British Sky Broadcasting, Ltd., Multicanal, and United
Pan-Europe Communications. In the United States, the nine largest pay
television distributors account for approximately 80% of all pay television
subscribers. We currently distribute the Odyssey Network on cable systems
operated by each of these nine pay television distributors, and at September
30, 2000, we had long term distribution agreements with six of the top nine pay
television distributors, although there can be no assurance that we will be
able to reach agreement with any of them. We are in discussions to sign long
term distribution agreements with the remaining three top pay television
distributors. No individual pay television distributor accounted for more than
10% of our revenues for the nine months ended September 30, 2000. Two
individual domestic pay television distributors, AT&T and Time Warner,
accounted for 12.3% and 12.0%, respectively, of our total subscribers for the
nine months ended September 30, 2000. We currently distribute the Odyssey
Network to approximately 31.4% of all United States pay television subscribers.
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REVENUES
Our revenues consist primarily of subscriber fees and advertising revenue.
Subscriber fees are payable to us on a per subscriber basis by pay television
distributors for the right to carry our channels. Subscriber fees are recorded
net of promotional subscribers. Prices vary according to:
o market;
o the relative position in the market of the distributor and the channel;
o the packaging arrangements for the channel; and
o other commercial terms such as platform exclusivity and length of term.
In some circumstances, distributors provide minimum revenue guarantees.
Our channels' growth in subscriber fees has been driven primarily by:
o expansion of our channels into new markets;
o new distribution agreements for our channels in existing markets; and
o growth in the number of multi-channel homes.
Advertising sales are made on the basis of a price per advertising spot or
per unit of audience measurement (for example, a ratings point). Prices vary on
a market-by-market basis. Rates differ within markets depending on audience
demographics.
In markets where regular audience measurements are available, our
advertising rates are calculated on the basis of an agreed upon price per unit
of audience measurement in return for a guaranteed investment level by the
advertiser. In these markets, we commit to provide advertisers certain rating
levels in connection with their advertising. Revenue is recorded net of
estimated shortfalls, which are usually settled by providing the advertiser
additional advertising time. In other markets, our advertising rates are
calculated on the basis of cost per advertising spot or package of advertising
spots, and the price varies by audience level expected (but not measured)
during a particular time slot. This is the predominant arrangement in the
countries outside the United States in which we sell advertising time.
Advertising rates also vary by time of year based on seasonal changes in
television viewership.
COST OF SALES
Crown Media Holdings' cost of sales consists primarily of program license
fees and the cost of signal distribution, dubbing and subtitling, marketing,
and creating the promotional segments that are aired between programs. In the
United States, we pay certain television distributors one-time subscriber
acquisition fees to carry our channels. However, internationally, the markets
generally do not require us to pay these fees. Subscriber acquisition fees are
capitalized and amortized over the term of the applicable distribution
agreement. At the time we sign a distribution agreement, and periodically
thereafter, we evaluate the recoverability of the expenses we incur against the
revenues directly associated with each agreement. New market launches can
require significant up front investments in program license fees, signal
distribution, dubbing and subtitling, marketing, and promotional segments and
creative production. Initial revenues from new market launches generally trail
expenses by three to six months. We expect cost of sales to continue to
increase in the future as we enter new markets and expand programming to
support our advertising strategy.
GOODWILL
As a result of the reorganization, we have generated a significant amount
of goodwill, which we are amortizing on a straight-line basis over the next 20
years. The amount of goodwill that we amortize in any given year will be
treated as a charge against earnings under generally accepted accounting
principles. If we are required to write-off our goodwill or accelerate the
amortization of our goodwill, our results of operations, stockholders' equity
or profitability could be materially adversely affected.
We engaged an independent firm to complete a valuation of Odyssey Holdings
as a basis for the allocation of its purchase price. Our calculation of
goodwill reflects estimated fair values as of the acquisition date; however,
the calculation is subject to further adjustments under the provisions of
Accounting Principles Board Opinion 16 and related accounting pronouncements.
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INCOME TAX PROVISION
We account for income taxes using the liability method. Under this method,
we recognize deferred tax assets and liabilities for future tax consequences
attributable to the difference between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled.
Prior to the reorganization on May 9, 2000, Crown Media Holdings did not
record a tax benefit for federal or state tax losses since these losses were
used by our parent and were not available to us. Crown Media Holdings has
recorded a tax provision related to foreign taxes and to establish a deferred
tax liability as required for certain timing items.
Subscriber fees are subject to withholding tax in many of the foreign
jurisdictions in which we currently operate at rates ranging from 5% to 20%.
Crown Media Holdings attempts to take advantage of reduced withholding rates
pursuant to any treaties between the United States and foreign taxing
jurisdictions to the extent available.
Foreign withholding tax may be claimed as a credit against Crown Media
Holdings' U.S. tax liability, subject to certain limitations. Any amounts not
allowed as a credit in the year generated may be carried back to the two
preceding tax years and then forward to the five succeeding tax years.
Alternatively, if taxes cannot be claimed as a credit during these carry back
and carryover periods, an election may be made to claim these taxes as a
deduction, thus resulting in a tax benefit to the extent of Crown Media
Holdings' tax rate and its ability to use such deductions. Tax losses may only
be used to offset taxable income. To the extent losses are limited, such excess
losses may be carried back to the two preceding tax years and then forward to
the 20 succeeding tax years.
Crown Media Holdings has generated tax losses since its inception and there
is no certainty that Crown Media Holdings will generate taxable income in the
future. Crown Media Holdings' policy is to establish a valuation allowance
against its tax credits and tax losses until such time that realization is
reasonably assured.
Goodwill generated as a result of the reorganization and any amortization
of such goodwill for financial reporting purposes is not deductible for tax
purposes. Consequently, our effective tax rate will be higher than the
statutory rate as a result of such non-deductible goodwill.
As a result of the reorganization, Odyssey Holdings is consolidated for
financial reporting purposes but not for tax purposes. Odyssey Holdings is
treated as a partnership for tax purposes, and members of Odyssey Holdings will
be allocated income and losses pursuant to the amended and restated company
agreement of Odyssey Holdings.
CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1999
Overview. The actual results of operations reflect only the predecessor
entity, Crown Media International, for the three and nine months ended
September 30, 1999. Therefore, significant variances exist as a result of the
acquisition of Odyssey Holdings. Please refer to "Pro Forma Results of
Operations" included in "Part I: Financial Information" for further
information.
Revenues. Total revenues for the three and nine months ended September 30,
2000 increased $10.1 million and $18.3 million, respectively, which represent
increases of 109.4% and 76.4%, respectively, over the comparable periods in
1999. The aforementioned increases in total revenues were attributable to $6.6
million and $12.5 million increases in subscriber fees for the three and nine
months ended September 30, 2000, respectively, over the comparable periods in
1999. Higher subscriber fees resulted from new market launches and expanded
distribution in existing markets. Crown Media Holdings' subscribers to Hallmark
Entertainment Network and Odyssey Network as of September 30, 2000 increased
219.4% to 56.2 million, compared to September 30, 1999. Subscribers to Hallmark
Entertainment Network as of September 30, 2000 increased 72.3% to 30.3 million
compared to September 30, 1999. The Kermit Channel had an additional 4.6
million subscribers at September 30, 2000. The Hallmark Entertainment Network
was launched during the third quarter 2000 in Hungary to approximately 50,000
subscribers and in Israel to approximately 1.0 million subscribers. In the
third quarter 2000, Crown Media Holdings signed long term distribution
agreements with three of the top nine domestic pay television distributors
bringing six of the nine domestic pay television distributors under long term
distribution agreements. During the third quarter 2000, 64.5% percent of total
revenues were earned internationally and 35.5% of total revenues were earned
domestically. Crown Media Holdings is continuing to change its focus of earning
revenues primarily from subscriber fees to include increased advertising
revenues. Consistent with this shift, advertising and other revenues increased
$3.5 million and $5.8 million for the three and nine months ended September 30,
2000, which represent increases of 199.2% and 180.0%, respectively, over the
comparable periods in 1999. The increase in advertising
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and other revenues reflect Crown Media Holdings' growing subscriber base,
expanding sales of advertising time primarily in the United States and the
United Kingdom and higher rates. Additionally, total revenues increased due to
the acquisition of Odyssey Holdings on May 9, 2000. Crown Media Holdings
recorded $4.6 million, or 100%, of Odyssey Holdings' revenue for the period May
9 through September 30, 2000. At the same time, subscribers increased at a
greater rate than subscriber fees as a result of free carriage for a period of
time, sometimes up to several years, associated with the acquisition of new
subscribers.
Cost of sales. Cost of sales for the three and nine months ended September
30, 2000 increased $20.5 million and $36.4 million, respectively, which
represent increases of 191.7% and 110.6%, respectively, over the comparable
periods in 1999. These increases were primarily due to the acquisition of
Odyssey Holdings on May 9, 2000. Crown Media Holdings recorded $22.8 million, or
100%, of Odyssey Holdings' cost of sales for the period May 9 through September
30, 2000. Cost of sales as a percent of total revenue increased to 161.3% for
the three months ended September 30, 2000, from 115.8% for the three months
ended 1999. This increase was due primarily to a $8.6 million increase in
affiliated programming costs and a $9.6 million increase in other operating
costs for the aforementioned periods. Affiliated programming costs rose due to a
greater use of Hallmark Entertainment Distribution titles necessary to fulfill
the requirements of our programming strategy. The subscriber acquisition fees
are likely to increase in the future as Crown Media Holdings expands its
distribution. Additionally, operating costs rose as Crown Media Holdings
expanded existing markets and launched the Hallmark Entertainment Network in the
United Kingdom and Turkey during the second quarter 2000 and in Israel in July
2000. Total cost of sales increased reflecting the increased infrastructure,
certain key senior management additions, and costs associated with supporting
new markets. Cost of sales as a percent of total revenue increased to 164.3% for
the nine months ended September 30, 2000, from 137.6% for the nine months ended
September 30, 1999. This increase was primarily due to a $14.1 million increase
in affiliated programming costs and a $21.3 million increase in other operating
costs for the aforementioned periods. These increases in programming costs and
other operating costs were attributable to the factors discussed above.
Marketing expenses are expected to increase in the fourth quarter of 2000 and
the first and second quarters of 2001 due to Crown Media Holdings' global
business plan to introduce a new brand package for the Hallmark Entertainment
Network, which includes branded theme blocks, a new positioning line, on-air
graphics and signature music. The newly redesigned brand will be rolled-out
beginning November 1, 2000, in Asia and Latin America and will continue to be
rolled out in the other markets during the subsequent six months.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three and nine months ended September 30, 2000
increased $8.2 million and $21.3 million, respectively, which represent
increases of 81.7% and 108.3%, respectively, over the comparable periods in
1999. These increases were due in part to the acquisition of Odyssey Holdings
on May 9, 2000. Crown Media Holdings recorded $13.9 million, or 100%, of
Odyssey Holdings' selling, general and administrative expenses for the period
May 9 through September 30, 2000. Selling, general and administrative expenses
as a percent of total revenue decreased to 94.2% for the three months ended
September 30, 2000 from 108.6% for the three months ended September 30, 1999,
respectively. This decrease was due to the increase in total revenues discussed
above. Selling, general and administrative expenses as a percent of total
revenue increased to 97.3% for the nine months ended September 30, 2000 from
82.4% for the nine months ended September 30, 1999, respectively. This increase
primarily reflects increased costs associated with supporting new markets and
the continued development of a corporate infrastructure to support increased
distribution and advertising, including expansion of the management team and
increased staffing levels.
Goodwill amortization expense. Goodwill amortization expense for the three
and nine months ended September 30, 2000, was $3.1 million and $5.5 million,
respectively. These increases were due to the acquisition of Odyssey Holdings
on May 9, 2000.
Loss from operations. Loss from operations for the three and nine months
ended September 30, 2000 increased $21.7 million and $45.0 million,
respectively, which represent increases of 189.1% and 156.7%, respectively,
over the comparable periods in 1999. These increases in the loss from
operations for the three and nine months ended September 30, 2000 were
attributable to the factors discussed above.
Equity in net losses of unconsolidated subsidiaries. Equity in net losses
of unconsolidated subsidiaries for both the three and nine months ended
September 30, 2000 decreased $2.7 million which represents decreases of 73.8%
and 24.7%, respectively, over the comparable periods in 1999. These decreases
were primarily due to the acquisition of Odyssey Holdings on May 9, 2000. Crown
Media Holdings commenced consolidation of Odyssey Holdings on the date of the
acquisition, as Crown Media Holdings has significant control over its
subsidiary. Net losses derived from Odyssey Holdings were recorded under the
equity method of accounting through May 9, 2000, and consolidated thereafter.
Net losses derived from the Kermit Channel were recorded under the equity
method of accounting.
Interest (income) expense, net. Net interest income of $626,000 and
$341,000, respectively, were earned for the three and nine months ended
September 30, 2000 primarily from interest earned on short-term investments.
Due to the initial public offering, the cash-on-hand balance was $61.8 million
at September 30, 2000, as compared to $1.9 million at September 30, 1999. Net
interest income of $158,000 and $773,000, respectively, were earned for the
three and nine months ended September 30, 1999 primarily from a note receivable
from Hallmark Entertainment.
Income tax provision. Income tax provision for the three and nine months
ended September 30, 2000 decreased $162,000 and $748,000, respectively, which
represent decreases of 25.7% and 42.3%, respectively, over the comparable
periods in 1999. The decreases were attributable to the reversal of deferred
tax liabilities related to the increase in ownership of Odyssey Holdings.
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Net loss. Net loss for the three and nine months ended September 30, 2000
increased $18.4 million and $42.0 million respectively, which represent
increases of 118.0% and 103.8%, respectively, over the comparable periods in
1999. These increases in net loss for the three and nine months ended September
30, 2000 were attributable to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the initial public offering, Crown Media Holdings and its
predecessor, Crown Media International, had financed operations primarily
through loans, advances and equity contributions from Hallmark Entertainment
and its affiliates, in addition to the issuance in 1998 of $50.0 million of
predecessor Class B common stock to Chase Equity Associates. Hallmark
Entertainment does not have any obligation to provide, and we do not currently
expect to receive, financial support from Hallmark Entertainment.
Since its inception, Odyssey Holdings has financed its operations primarily
through equity contributions from its members. In connection with the
admittance of The Jim Henson Company and Crown Media International as members
in 1998, each of these new members agreed to each contribute $50.0 million,
payable in installments. Each member received a 22.5% common equity interest in
exchange for its initial contribution of $20.0 million. The new members paid a
total of $40.0 million in each of 1998 and 1999, and the balance of $20.0
million was paid in February 2000, for a total of $100.0 million.
As of September 30, 2000, Crown Media Holdings had obligations representing
license fees for programming to non-affiliates, to Hallmark Entertainment
Distribution, The Jim Henson Company, and the National Interfaith Cable
Coalition of $34.4 million, $80.8 million, $9.9 million, and $1.3 million,
respectively. Additionally, Crown Media Holdings also had obligations as of
September 30, 2000, representing payables and notes payable to Hallmark Cards,
Hallmark Entertainment, and other affiliates of $1.5 million, $7.4 million, and
$37.6 million, respectively. As of September 30, 2000, receivables were $23.0
million, the current portion of program license fees was $73.8 million and cash
and cash equivalents were $61.8 million.
Cash used in operating activities was $87.5 million and $20.5 million for
the nine months ended September 30, 2000 and 1999, respectively. Net cash used
was used primarily to fund operating expenditures related to net losses of
$82.4 million and $40.5 million for the nine months ended September 30, 2000
and 1999, respectively. The increase in cash used was also impacted by the
purchase of $63.2 million additional program license fees and the payment of
$30.0 million to Hallmark Entertainment Distribution for license fees payable.
Additionally, Crown Media Holdings' accounts receivable and receivables from
unconsolidated subsidiaries increased $10.2 million and $4.2 million,
respectively, for the nine months ended September 30, 2000 and 1999.
Cash used in investing activities was $5.6 million for the nine months
ended September 30, 2000. Cash provided by investing activities was $14.2 for
the nine months ended September 30, 1999. The decrease in cash provided was due
to the $18.7 million increase in purchases of property and equipment for the
nine months ended September 30, 2000, as compared to the $2.1 million of
purchases in the comparable period in 1999, offset by the $13.1 million
received in conjunction with the May 9, 2000, acquisition of Odyssey Holdings.
Cash provided by financing activities was $151.1 million and $5.3 million
for the nine months ended September 30, 2000 and 1999, respectively. The
increase in cash provided by financing activities resulted primarily from Crown
Media Holdings' initial public offering on May 9, 2000, which resulted in net
proceeds of $126.3 million. The increase in cash provided by financing
activities also resulted from a $27.1 million increase in borrowings from an
affiliate. Additionally, during the nine months ended September 30, 2000 Crown
Media Holdings received $10.0 million in capital contributions, which were used
to fund the obligation to Odyssey Holdings of $10.0 million prior to its
acquisition by us.
In connection with our growth strategy, we expect that Crown Media Holdings
will continue to make significant investments in programming, distribution and
technology, as well as additional investments in infrastructure and facilities.
Crown Media Holdings is currently committed to spend more than $50.0 million
for programming and more than $35.0 million for distribution over the next 12
months. Crown Media Holdings also expects to make capital expenditures of more
than $5.0 million to complete construction of the network operating center over
the same period.
We are currently negotiating with a group of banks to obtain a $100.0
million credit facility ("credit facility"). We have entered into a non-binding
term sheet for this credit facility. We believe the proceeds from the initial
public offering and credit facility will be sufficient to meet the liquidity
needs of both Crown Media and Odyssey Holdings, through at least the next 18
months. During the next 18 months and thereafter, we may seek to raise
additional funds to operate and expand our businesses. Any additional equity
financings could result in dilution to our existing investors. Any debt
financings will likely increase our interest expense and may impose restrictive
covenants.
The impact of inflation on Crown Media Holdings' operations has not been
significant to date. There can be no assurance that a high rate of inflation in
the future would not have an adverse effect on Crown Media Holdings'
operations.
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RISK FACTORS THAT MAY AFFECT OUR BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION
If we do not successfully address the risks described below, our business,
prospects, financial condition, results of operations or cash flow could be
materially adversely affected. The trading price of our Class A common stock
could decline because of any of these risks.
RISKS RELATING TO OUR BUSINESS
OUR BUSINESS HAS INCURRED NET LOSSES SINCE INCEPTION AND MAY CONTINUE TO
INCUR LOSSES.
The Hallmark Entertainment Network and the Odyssey Network both have a
history of net losses and we expect to continue to report net losses for the
foreseeable future. As of September 30, 2000, we had an accumulated deficit of
approximately $216.8 million and goodwill of $243.3 million. Amortization of
goodwill resulted in a $5.5 million charge to earnings for the nine months
ended September 30, 2000.
As a result of the foregoing we may not achieve or sustain profitability.
If we are not able to achieve or sustain profitability, the trading price
of our Class A common stock may fall significantly. In addition, we could
experience increased capital needs in the future if our losses are greater, or
continue for longer, than we anticipate.
WE MAY NEED TO RAISE ADDITIONAL FUNDS, WHICH MAY NOT BE AVAILABLE.
We may need to raise additional funds to operate and expand our business.
We may not be able to obtain the needed additional funds, through borrowings or
the issuance of additional equity, on acceptable terms or at all. If we cannot
raise needed funds on acceptable terms, we may not be able to:
o expand our United States and international distribution as anticipated;
o grow our advertising revenues;
o remain current with evolving industry standards;
o take advantage of future opportunities; or
o respond to competitive pressure.
BECAUSE WE DEPEND ON HALLMARK ENTERTAINMENT, INC. FOR A SIGNIFICANT PORTION
OF OUR PROGRAMMING, THE LOSS OR INTERRUPTION OF THAT PROGRAMMING WOULD
SEVERELY DISRUPT OUR OPERATIONS AND SERVICES.
We may be unable to implement our operating strategy successfully without
the continued availability and commercial success of programming from Hallmark
Entertainment, Inc. Under our program agreements with a subsidiary of Hallmark
Entertainment, Inc., we are required to license substantially all of the
programming owned or controlled by Hallmark Entertainment, Inc. for the markets
in which we operate during the five-year term of the agreements. If this
programming were to become unavailable or unsuccessful for any reason during
the term of the program agreements, we could be unable to obtain alternative
programming of equivalent quality and popularity or on terms as favorable to
us. Consequently, any significant interruption in the supply of programming
from Hallmark Entertainment, Inc. for any reason could hinder our ability to
attract and retain subscribers, generate revenues and achieve profitability.
IF WE ARE UNABLE TO OBTAIN PROGRAMMING FROM PARTIES OTHER THAN HALLMARK
ENTERTAINMENT, INC., WE MAY BE UNABLE TO INCREASE OUR SUBSCRIBER BASE.
We compete with other pay television channel providers for the acquisition
of programming. If we fail to continue to obtain programming on reasonable
terms for any reason, including as a result of competition, we could be forced
to incur additional costs of acquiring alternative programming and the growth
of our subscriber base could be hindered.
IF OUR PROGRAMMING DECLINES IN POPULARITY, OUR SUBSCRIBER FEES AND
ADVERTISING REVENUE COULD FALL.
The success of our programming depends partly upon unpredictable and
volatile factors beyond our control, such as viewer preferences, competing
programming and the availability of other entertainment activities. A shift in
viewer preferences could cause our programming to decline in popularity, which
could cause a decline in both advertising and subscriber fee revenues. We may
not be able to
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anticipate and react effectively to shifts in tastes and interests in our
markets. In particular, our ability to react effectively may be limited by our
obligation to license programming from Hallmark Entertainment, Inc., The Jim
Henson Company and the National Interfaith Cable Coalition, each of which has
standards that limit the types of programming that they will provide to us. In
addition, our competitors may have more flexible programming arrangements, as
well as greater volumes of production, distribution and capital resources, and
may be able to react more quickly to shifts in tastes and interests. We may be
unable to maintain the commercial success of any of our current programming, or
to generate sufficient demand and market acceptance for our new programming.
IF WE ARE UNABLE TO INCREASE OUR ADVERTISING REVENUE, WE MAY BE UNABLE TO
ACHIEVE PROFITABILITY.
If we fail to increase our advertising revenue, we may be unable to achieve
and sustain profitability, or expand our business. We expect that over time the
portion of our revenues derived from the sale of advertising time on our
channels will increase. We have a limited history of marketing and selling
advertising time. Our ability to achieve advertising revenue growth in the
future will depend in large part on our ability to expand our sales and
marketing organization. We may be unable to identify, attract and retain
experienced sales and marketing personnel with relevant experience, and our
sales and marketing organization may be unable to successfully compete against
the significantly more extensive and well-funded sales and marketing operations
of our current or potential competitors.
HALLMARK ENTERTAINMENT, INC. CONTROLS US AND THIS CONTROL COULD CREATE
CONFLICTS OF INTEREST OR INHIBIT POTENTIAL CHANGES OF CONTROL.
Hallmark Entertainment, Inc. controls all of our outstanding shares of
Class B common stock, representing more than 90% of the voting power on all
matters submitted to our stockholders. Hallmark Entertainment, Inc.'s control
could discourage others from initiating potential merger, takeover or other
change of control transactions that may otherwise be beneficial to our
businesses or holders of Class A common stock. As a result, the market price of
our Class A common stock or our business could suffer. Hallmark Entertainment,
Inc.'s control relationship with us also could give rise to conflicts of
interest, including:
o conflicts between Hallmark Entertainment, Inc., as our controlling
stockholder, and our other stockholders, whose interests may differ
with respect to, among other things, our strategic direction or
significant corporate transactions;
o conflicts related to corporate opportunities that could be pursued by
us, on the one hand, or by Hallmark Entertainment, Inc. or its other
affiliates, on the other hand; or
o conflicts related to existing or new contractual relationships between
us, on the one hand, and Hallmark Entertainment, Inc. and its
affiliates, on the other hand.
In addition, persons serving as directors, officers or employees of both us
and Hallmark Entertainment, Inc. may have conflicting duties to each. For
example, it is currently contemplated that Robert A. Halmi, Jr. will continue
in his current positions as our Chairman of the Board and as President and
Chief Executive Officer of Hallmark Entertainment, Inc., which could create
potential conflicts of interest. As a result, it is possible that we may
receive less favorable contractual terms from Hallmark Entertainment, Inc. than
if none of our officers or directors had any affiliation with Hallmark
Entertainment, Inc.
WE COULD LOSE THE RIGHT TO USE THE NAME "HALLMARK ENTERTAINMENT" BECAUSE WE
HAVE LIMITED-DURATION TRADEMARK LICENSE AGREEMENTS, WHICH COULD HARM OUR
BUSINESS.
We license the name "Hallmark Entertainment" from Hallmark Cards under a
three-year trademark license agreement dated as of August 1, 1999. Many of our
international subscribers may now associate our programming with the name
"Hallmark Entertainment." If Hallmark Cards fails to renew the trademark
license agreement for any reason, including our failure to meet minimum
programming thresholds dependent on programming provided by its affiliates or
to comply with Hallmark Cards' programming standards as determined in its sole
discretion, we would be forced to significantly revise our business plan and
operations, and could experience a significant erosion of our subscriber base
and revenues.
IF OUR THIRD-PARTY SUPPLIERS FAIL TO PROVIDE US WITH NETWORK INFRASTRUCTURE
SERVICES ON A TIMELY BASIS, OUR COSTS COULD INCREASE AND OUR GROWTH COULD
BE HINDERED.
We currently rely on third parties to supply key network infrastructure
services, including uplink, playback, transmission and satellite services,
which are available only from limited sources. We have occasionally experienced
delays and other problems in receiving communications equipment, services and
facilities and may, in the future, be unable to obtain such services, equipment
or facilities on the scale and within the time frames required by us on terms
we find acceptable, or at all. If we are unable to obtain, or if we experience
a delay in the delivery of, such services, we may be forced to incur
significant unanticipated expenses to secure alternative third party suppliers
or adjust our operations, which could hinder our growth and reduce our revenues
and profitability.
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WE DO NOT HAVE COMPLETE CONTROL OVER ODYSSEY HOLDINGS, WHICH COULD HINDER
OUR ABILITY TO EXPAND THAT BUSINESS.
Our ability to react to business opportunities that may arise for Odyssey
Holdings and our ability to raise capital for it is limited. Under an agreement
relating to Odyssey Holdings, The Jim Henson Company has certain protective
rights requiring its consent, including:
o entering into any merger or consolidation;
o creating or issuing equity interests;
o incurring debt in excess of $50.0 million;
o distributing programming through free broadcast or transmission;
o transferring assets valued in excess of $500,000; and
o transferring our interests in Odyssey Holdings to a third party.
In addition, a stockholders agreement signed upon the completion of the
offering requires:
o that we broadcast at least 10 hours weekly of faith and values-based
programming
o that we broadcast at least 30 hours weekly of programming provided by
the National Interfaith Cable Coalition; and
o that the National Interfaith Cable Coalition consent to the transfer of
our interests in Odyssey Holdings.
Our ability to implement strategies may be limited if we do not receive
these required consents from The Jim Henson Company or the National Interfaith
Cable Coalition.
WE MAY HAVE TO INCUR SIGNIFICANT CAPITAL EXPENDITURES IN ORDER TO ADAPT TO
TECHNOLOGICAL CHANGE.
The pay television industry has been, and is likely to continue to be,
subject to:
o rapid and significant technological change, including continuing
developments in technology which do not presently have widely accepted
standards; and
o frequent introductions of new services and alternative technologies,
including new technologies for providing video services.
We expect that new technologies will emerge that may be superior to, or may
not be compatible with, some of our current technologies, which may require us
to make significant capital expenditures to remain competitive. Our future
success will depend, in part, on our ability to anticipate and adapt to
technological changes and to offer, on a timely basis, services that meet
customer demands and evolving industry standards. We rely in part on third
parties for the development of, and access to, communications and network
technology. As a result, we may be unable to obtain access to new technology on
a timely basis or on satisfactory terms. If we fail to adapt successfully to
any technological change or obsolescence, or fail to obtain access to important
technologies, our business, prospects, financial condition or results of
operations could be materially adversely affected.
IF WE ARE UNABLE TO RETAIN KEY EXECUTIVES AND OTHER PERSONNEL, OUR GROWTH
COULD BE INHIBITED AND OUR BUSINESS HARMED.
Our success depends on the expertise and continued service of our executive
officers and key employees of our subsidiaries, and on our ability to hire
additional personnel to accommodate our anticipated growth. If we fail to
attract, hire or retain the necessary personnel, or if we lose the services of
our key executives, we may be unable to implement our business plan or keep
pace with developing trends in our industry. We do not carry key person life
insurance on all of our personnel, nor is the insurance that we do carry
necessarily sufficient to cover the losses that we would incur in the event we
lose one of our key executives to death or disability.
WE ARE SUBJECT TO THE RISKS OF DOING BUSINESS OUTSIDE THE UNITED STATES.
Historically, a significant portion of our revenues have been generated
from foreign operations. In order to maintain or expand our presence in foreign
markets, we may enter into joint ventures or other strategic relationships with
local operators in those markets. Such
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relationships may, among other things, require us to issue additional equity,
make minimum capital contributions, or inhibit our ability to make decisions
with respect to operations in those markets. Certain foreign laws, regulations
and judicial procedures may not be as protective of programmer rights as those
which apply in the United States. In addition, many foreign countries have
currency and exchange laws regulating the international transfer of currencies.
To the extent that significant currency fluctuations result in materially
higher costs to any of our foreign customers, those customers may be unable or
unwilling to make the required payments. We are subject to delays in access to
courts and to the remedies local laws impose in order to collect our payments
and recover our assets. In the future, we may experience problems with
collecting accounts due from foreign customers, which would adversely affect
our revenues and income. Our growth and profitability may suffer also as a
result of, among other matters, competitive pressures on video delivery, labor
stoppages, recessions and other political or economic events adversely
affecting world or regional trading markets or affecting a particular customer.
OUR CURRENT AND FUTURE OPERATIONS IN EMERGING MARKETS MAY BE HARMED BY THE
INCREASED POLITICAL AND ECONOMIC RISKS ASSOCIATED WITH THESE MARKETS.
We currently broadcast in several foreign markets where market economies
have only recently begun to develop, and we may expand these operations in the
future. If the governments in these markets adopt more restrictive economic
policies, we may not be able to continue operating, or to implement our
expansion plans, in those markets. More generally, we are exposed to certain
risks, many of which are beyond our control, inherent in operating in emerging
market countries. These risks include changes in laws and policies affecting
trade, investment and taxes (including laws and policies relating to the
repatriation of funds and to withholding taxes), differing degrees of
protection for intellectual property and the instability of emerging market
economies, currencies and governments.
THE AMOUNT OF OUR GOODWILL MAY HINDER OUR ABILITY TO ACHIEVE PROFITABILITY.
As a result of the reorganization, we have generated a significant amount
of goodwill, which we expect to amortize on a straight-line basis over the next
20 years. The amount of goodwill that we amortize in any given year will be
treated as a charge against earnings under generally accepted accounting
principles; as a result, the amortization of our goodwill may hinder our
ability to achieve profitability. If we are required to write-off our goodwill
or accelerate the amortization of our goodwill, our results of operations,
stockholders' equity or profitability could be materially adversely affected.
RISKS RELATING TO OUR INDUSTRY
COMPETITION COULD REDUCE OUR CHANNEL REVENUES AND OUR PROFITABILITY.
We operate in the pay television business, which is highly competitive. If
we are unable to compete effectively with large diversified entertainment
companies that have substantially greater resources than we have, our operating
margins and market share could be reduced, and the growth of our business
inhibited. In particular, we compete for distribution with other pay television
channels and, when distribution is obtained, compete for viewers and
advertisers with pay television channels, broadcast television networks, radio,
the Internet and print media. We also compete, in varying degrees, with other
leisure-time activities such as movie theaters, television, the Internet,
radio, print media, personal computers and other alternative sources of
entertainment and information. In addition, future technological developments
may affect competition within this business.
A continuing trend towards business combinations and alliances in both the
domestic and foreign communications industry may create significant new
competitors for us. Many of these combined entities will have resources far
greater than ours. These combined entities may provide bundled packages of
programming, delivery and other services that compete directly with the
products we offer. These entities may also offer services sooner and at more
competitive rates than we do. In addition, these alliances may benefit from
both localized content and the local political climate.
We may need to reduce our prices or license additional programming to
remain competitive, and we may be unable to sustain future pricing levels as
competition increases. Our failure to achieve or sustain market acceptance of
our programming at desired pricing levels could impair our ability to achieve
profitability or positive cash flow, which would harm our business.
NEW DISTRIBUTION TECHNOLOGIES MAY FUNDAMENTALLY CHANGE THE WAY WE
DISTRIBUTE OUR CHANNELS AND COULD SIGNIFICANTLY DECREASE OUR REVENUES.
The advent of digital technology is likely to accelerate the convergence of
broadcast, telecommunications, Internet and other media and could result in
material changes in the economics, regulations, intellectual property usage and
technical platforms on which our business relies, including lower retail rates
for video services. These changes could fundamentally affect the scale, source
and volatility of our revenue streams, cost structures and profitability, and
may require us to significantly change our operations. There is a risk that our
business and prospects will be harmed by these changes or that we will not
identify or adapt to them as quickly as our competitors do.
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THE EXPANSION OF DIGITAL DISTRIBUTION IN OUR MARKETS MAY INCREASE
COMPETITION FOR VIEWERS, RATINGS AND RELATED ADVERTISING REVENUES.
The increased capacity of digital distribution platforms, including the
introduction of digital terrestrial television, may reduce the competition for
the right to carry channels and allow development of extra services at low
incremental cost. Therefore, increased digital capacity could lower barriers to
entry for competing channels, and place pressure on our operating margins and
market position. A greater number of channels would likely increase competition
among channels for viewers and advertisers, which could affect our ability to
attract advertising and new distribution at desired pricing levels, and could
therefore hinder or prevent the growth of our subscriber base.
IF WE FAIL TO COMPLY WITH APPLICABLE GOVERNMENT REGULATIONS, OUR BUSINESS
COULD BE HARMED.
If, as a provider of television channels, we fail to comply with applicable
present or future government regulations in any markets in which we operate, we
could be prohibited from operating in those markets and could be subject to
monetary fines, either of which would increase our operating costs, reduce our
revenues and limit our ability to achieve profitability. The scope of
regulation to which we are subject varies from country to country, although in
many significant respects a similar approach is taken to the regulation of
broadcasting across all of the markets in which we operate. Typically,
broadcasting regulation in each of the countries in which we operate requires
that domestic broadcasters and platform providers secure broadcasting licenses
from the domestic broadcasting authority. Additionally, most nations have
broadcasting legislation and regulations which set minimum standards regarding
program content, prescribe minimum standards for the content and scheduling of
television advertisements and provide that a certain portion of programming
carried by broadcasters be produced domestically and to some degree be sourced
from domestic production companies who are independent of the broadcaster.
Moreover, broadcasting regulations are generally subject to periodic and
on-going governmental review and legislative initiatives which may, in the
future, affect the nature of programming we are able to offer and the means by
which it is distributed. The timing, scope or outcome of these reviews could be
unfavorable to us, and any changes to current broadcasting legislation or
regulations could require adjustments to our operations.
SPECIAL NOTE WITH RESPECT TO
FORWARD-LOOKING INFORMATION
We have made some statements which constitute forward-looking statements.
These statements involve known and unknown risks, uncertainties and other
factors that may cause our actual results, levels of activity, performance, or
achievements to be materially different from any results, levels of activity,
performance or achievements expressed or implied by any forward-looking
statements. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "could," "expects," "intends,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential," or
"continue" or the negative of these terms or other comparable terminology.
Although we believe that the expectations reflected in forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Actual results could differ materially
from those in the forward-looking statements. Among the factors that could
cause actual results to differ materially are those discussed above, in other
parts of this Form 10-Q and in our prospectus dated May 3, 2000. We are under
no duty to update any of the forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not use derivative financial instruments in our investment portfolio.
We only invest in instruments that meet high credit and quality standards, as
specified in our investment policy guidelines. These instruments, like all
fixed income instruments, are subject to interest rate risk. The fixed income
portfolio will fall in value if there were an increase in interest rates. If
market interest rates were to increase immediately and uniformly by 10% from
levels as of September 30, 2000, the decline of the fair value of the fixed
income portfolio would not be material. We do not currently engage in any
currency hedging transactions.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
SALES OF REGISTERED SECURITIES AND USE OF PROCEEDS
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Initial Public Offering
On May 9, 2000, we completed an initial public offering of 10,000,000
shares of our Class A common stock. All of the shares were sold pursuant to a
registration statement on Form S-1 (File No. 333-95573) that was declared
effective by the SEC on May 3, 2000. The managing underwriters for the offering
were Donaldson, Lufkin & Jenrette, Lehman Brothers, Salomon Smith Barney and
DLJdirect Inc. All of the shares were sold by us at a price of $14.00 per
share, resulting in gross proceeds of $140.0 million. After payment of $8.75
million to the underwriters and $5.0 million of additional expenses, our total
net proceeds from the offering were approximately $126.3 million.
Since the effective date of the registration statement through October 26,
2000, we have used approximately $86.7 million of the net proceeds. The
aforementioned amount was used to pay outstanding programming payables of $30.0
million to Hallmark Entertainment, an affiliate, and to purchase additional
programming, to enhance our NOC at our Denver facilities, to expand our
distribution, to expand our advertising staff, and to fund other general
corporate expenditures. The remaining proceeds have been invested in short term
and cash equivalent investments until they are needed for our operating
expenses. These uses of proceeds from our offering do not represent a material
change from the anticipated uses described in the prospectus included in our
registration statement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Crown Media Holdings announced on August 21, 2000, that it will introduce a
new brand strategy. We have created a new brand package for the Hallmark
Entertainment Network, which will include branded theme blocks, a new
positioning line, on-air graphics and signature music. Please see our press
release issued in connection with this development, a copy of which has been
filed at Exhibit 99 to this Quarterly Report on Form 10-Q.
Odyssey Network signed a long-term distribution agreement with EchoStar
Communications Corporation ("EchoStar") to make the network available to
EchoStar's 4.3 million customers beginning September 5, 2000. The Odyssey
Network will be offered in DISH Network's America's Top 150 programming package
at no additional charge. The term of the long term distribution agreement with
EchoStar is approximately 6.6 years, and under the agreement, Crown Media
Holdings will pay certain amounts to EchoStar for subscribers. Please see our
press release issued in connection with this development, a copy of which has
been filed at Exhibit 99 to this Quarterly Report on Form 10-Q.
In the third quarter of 2000, Odyssey Holdings also entered into a long
term distribution agreement with Charter for a period of 5 years. The terms of
this agreement require Crown Media Holdings to pay certain subscriber
acquisition fees.
In the third quarter 2000, Odyssey Holdings entered into a distribution
agreement with Adelphia for a term of approximately 5.5 years. Crown Media
Holdings has paid and will pay to Adelphia in the future certain fees for
subscribers.
On October 26, 2000 the Company announced that, as part of its continuing
efforts to increase distribution and drive advertising sales, it will be
collapsing the Kermit Channel in Asia and introducing a new six-hour daytime
block dedicated to the kids market on the Hallmark Entertainment Network in
Asia. The Kermit Channel will remain on the air in India, where the Company is
considering a joint venture partnership with Modi Entertainment Network. Please
see our press release issued in connection with this development, a copy of
which has been filed at Exhibit 99 to this Quarterly Report on Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT
NUMBER DESCRIPTION
27 Financial Data Schedule
99 Press Releases of Crown Media Holdings, Inc. dated August 21,
2000, September 5, 2000, and October 26, 2000.
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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.
CROWN MEDIA HOLDINGS, INC. (Registrant)
Date: October 26, 2000 /s/ David J. Evans
-----------------------------------
David J. Evans
President, Chief Executive Officer
and Director
(PRINCIPAL EXECUTIVE OFFICER)
Date: October 26, 2000 /s/ William J. Aliber
-----------------------------------
William J. Aliber
Executive Vice President and
Chief Financial Officer
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27 Financial Data Schedule
99 Press Releases of Crown Media Holdings, Inc. dated August 21,
2000, September 5, 2000, and October 26, 2000.