<PAGE> 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 June 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 August 1, 2000, 29,329,578 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.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
PAGE
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<S> <C>
ITEM 1. Financial Statements (Unaudited)
CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES
Introductory Comments............................................................................. 2
Pro Forma Condensed Consolidated Statements of Operations -
Three and Six Months Ended June 30, 1999 and 2000................................................ 2
Management's Discussion and Analysis of Pro Forma Results of Operations........................... 2
Condensed Consolidated Balance Sheets -
December 31, 1999 and June 30, 2000.............................................................. 3
Condensed Consolidated Statements of Operations -
Three and Six Months Ended June 30, 1999 and 2000................................................ 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 and 2000.......................................................... 5
Notes to Condensed Consolidated Financial Statements.............................................. 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 16
Risk Factors that May Affect Our Business, Operating Results and Financial Condition.............. 22
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk........................................ 27
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................................. 28
ITEM 2. Changes in Securities and Use of Proceeds......................................................... 28
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
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Introductory Comments
The Condensed Consolidated Financial Statements of Crown Media Holdings, Inc.
("Crown Media Holdings") 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 six months ended June 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 January 1
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 at 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.
CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenues 11,398,812 15,877,040 23,522,288 29,506,590
Total cost of sales 20,624,821 30,139,136 37,152,941 54,525,121
General and administrative expenses 13,259,316 20,529,977 22,054,726 35,251,530
Amortization of goodwill 3,132,078 3,132,078 6,264,156 6,264,156
------------ ------------ ------------ ------------
Loss from operations (25,617,403) (37,924,151) (41,949,535) (66,534,217)
Equity in net losses of
unconsolidated subsidiaries
and investment expenses (1,260,134) (970,522) (2,316,187) (2,324,944)
Minority interest in net loss 2,887,260 812,688 3,991,046 4,240,563
Interest income, net 673,791 155,840 1,373,708 149,320
------------ ------------ ------------ ------------
Net loss before income taxes (23,316,486) (37,926,145) (38,900,968) (64,469,278)
Income tax provision (111,907) (317,585) (338,091) (551,854)
------------ ------------ ------------ ------------
Net loss ($23,428,393) ($38,243,730) ($39,239,059) ($65,021,132)
============ ============ ============ ============
Weighted average number of
Class A and Class B shares
Outstanding 60,000,000 60,000,000 60,000,000 60,000,000
Loss per share $ (0.39) $ (0.64) $ (0.65) $ (1.08)
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE AND SIX MONTHS
ENDED JUNE 30, 1999
The following discussion concerns, and 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 at January 1 of each of the periods. 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 six months ended June 30, 2000
increased $4.5 million and $6.0 million, respectively, which represent increases
of 39.3% and 25.4%, respectively, over the comparable periods in 1999. Crown
Media Holdings is currently changing its focus of earning revenues from a
primarily subscriber-based revenue stream to additionally include advertising
revenues. Advertising and other revenues increased $1.7 million and $801,000 for
the three and six months ended June 30, 2000, which represent increases of 60.4%
and 12.5%, respectively, over the comparable periods in 1999. Advertising and
other revenues increased reflecting Crown Media Holdings' growing subscriber
base and expanding advertising infrastructure. The aforementioned increases in
total revenues were also attributable to $2.8 million and $5.2 million increases
in subscriber fees revenues for the three and six months ended June 30, 2000,
respectively, over the comparable periods in 1999. Subscriber fees revenues
resulted from new market launches and expanded distribution in existing markets.
Crown Media Holdings' subscribers of Hallmark Entertainment Network and Odyssey
Network as of June 30, 2000, increased 31.7% to 54.9 million, compared to June
30, 1999. Additionally, the Kermit Channel had 5.9 million subscribers at June
30, 2000. Subscribers increased at a higher rate than subscriber revenues as we
added additional subscribers with initial promotional periods. On May 1, 2000,
the Hallmark Entertainment Network was launched in the United Kingdom to
approximately 3.5 million digital subscribers. After June 30, 2000, the Hallmark
Entertainment Network was also launched to approximately 1.2 million subscribers
in Israel and to approximately 250,000 subscribers in Hungary. Sixty-six percent
of total revenues in the second quarter of 2000 were earned internationally.
Cost of sales. Cost of sales for the three and six months ended June 30,
2000, increased $9.5 million and $17.4 million, respectively, which represent
increases of 46.1% and 46.8%, respectively, over the comparable periods in 1999.
These increases were primarily due to increases of $5.5 million and $10.1
million, respectively, in affiliated programming costs, increases of $1.1
million and $2.2 million, respectively, in subscriber acquisition fees, and
increases of $4.5 million and $7.1 million, respectively, in operating costs for
the aforementioned periods. Affiliated programming costs for the three and six
months ended June 30, 2000, increased due to Crown Media Holdings' investments
in additional and higher quality programming. Subscriber acquisition fees for
the three and six months ended June 30, 2000, were attributable to fees to be
paid on a distribution contract that was entered into subsequent to December 31,
1999. 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 prepared to launch the
Hallmark Entertainment Network 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 percentage of total revenue increased to 189.8% and 184.8% for the
three and six months ended 2000 from 180.9% and 157.9% for the three and six
months ended 1999.
General and administrative expenses. General and administrative expenses
for the three and six months ended June 30, 2000, increased $7.3 million and
$13.2 million, respectively, which represent increases of 54.8% and 59.8%,
respectively, over the comparable periods in 1999. These increases include a
$6.9 million increase in salaries and benefits at Crown Media Holdings primarily
related to stock option expense in the first six months of 2000. These increases
also reflect 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. General and
administrative expenses as a percentage of total revenue increased to 129.3% and
119.5% for the three and six months ended 2000 from 116.3% and 93.8% for the
three and six months ended 1999.
Loss from operations. Loss from operations for the three and six months
ended June 30, 2000, increased $12.3 million and $24.6 million, respectively,
which represent increases of 48.0% and 58.6%, respectively, over the comparable
periods in 1999. The aforementioned increases in loss from operations for the
three and six months ended June 30, 2000, are attributable to the factors
discussed above.
Interest income, net. Net interest income was $156,000 and $149,000,
respectively, for the three and six months ended June 30, 2000, and $674,000 and
$1.4 million, respectively, for the three and six months ended June 30, 1999.
The decrease in net interest income for the three and six months ended June 30,
2000, from the comparable periods in 1999 was the result of interest on
increased borrowings to fund operations and a decrease in cash available for
investment. Net interest income was earned for the three and six months ended
June 30, 1999, primarily from a note receivable from Hallmark Entertainment and
investments made by Odyssey Holdings.
Net loss. Net loss for the three and six months ended June 30, 2000,
increased $14.8 million and $25.8 million, respectively, which represent
increases of 63.2% and 65.7%, respectively, over the comparable periods in 1999.
The aforementioned increases in net loss for the three and six months ended June
30, 2000, are attributable to the factors discussed above.
2
<PAGE> 4
CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31, As of June 30,
1999 2000
------------------ ---------------
(unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 3,865,455 $ 98,286,912
Accounts receivable, less allowance for doubtful accounts of
$695,409 and $2,684,574, respectively 7,184,999 16,047,420
Receivables from unconsolidated subsidiaries 1,628,642 4,095,157
Demand note and interest receivable from affiliate 33,625 --
--------------- ---------------
Total receivables 8,847,266 20,142,577
--------------- ---------------
Program license fees, net of accumulated amortization 10,845,675 41,071,404
Subtitling and dubbing, net of accumulated amortization 976,431 1,147,816
Prepaids and other assets 852,396 2,524,925
--------------- ---------------
Total current assets 25,387,223 163,173,634
Program license fees, net of current portion 7,735,657 66,289,404
Subtitling and dubbing, net of current portion 3,594,659 4,053,456
Subscriber acquisition fees, net -- 23,854,008
Property and equipment, net 7,984,587 21,211,231
Investment in Odyssey Holdings 35,362,626 --
Goodwill, net -- 246,405,396
Prepaids and other assets, net of current portion 981,462 2,340,444
--------------- ---------------
Total assets $ 81,046,214 $ 527,327,573
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Accounts payable and accrued liabilities $ 5,493,053 $ 22,410,706
Subscriber acquisition fees payable -- 27,209,620
License fees payable to Hallmark Entertainment Distribution 34,605,831 44,745,799
License fees payable to The Jim Henson Company -- 7,500,000
License fees payable to National Interfaith Cable Coalition -- 2,559,800
Payable to Hallmark Cards -- 1,410,183
Payable to Hallmark Entertainment 9,242,744 8,352,103
Notes and interest payable to affiliates 22,710,670 37,543,047
Deferred compensation 3,250,000 6,345,535
Deferred programming revenue 2,153,786 1,115,762
--------------- ---------------
Total current liabilities 77,456,084 159,192,555
Accrued liabilities and other 18,491 4,781,970
License fees payable to Hallmark Entertainment Distribution -- 23,676,621
License fees payable to The Jim Henson Company -- 2,127,159
Investment in the Kermit Channel 1,043,322 3,368,266
Deferred compensation 3,556,988 6,997,932
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' EQUITY (DEFICIT):
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 as of June 30, 2000; issued and outstanding shares
of 29,329,578 as of June 30, 2000 -- 293,296
Class B common stock, $.01 par value; 120,000,000 shares
authorized; issued and outstanding shares of 30,670,422
as of June 30, 2000 -- 306,704
Translation adjustment -- 91,341
Paid-in capital 69,901,504 484,246,646
Accumulated earnings (deficit) (132,868,359) (182,754,917)
--------------- ---------------
Total stockholders' equity (deficit) (62,966,844) 302,183,070
--------------- ---------------
Total liabilities and stockholders' equity (deficit) $ 81,046,214 $ 527,327,573
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 2000 1999 2000
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Subscriber fees $ 6,549,449 $ 10,428,857 $ 13,215,234 $ 19,090,660
Advertising 119,699 2,371,025 152,238 2,487,756
Other 685,271 712,356 1,295,342 1,226,906
-------------- -------------- -------------- --------------
Total revenues 7,354,419 13,512,238 14,662,814 22,805,322
Cost of Sales:
Programming costs:
Affiliates 3,269,690 6,822,574 6,597,544 9,703,073
Non-affiliates 3,170,236 3,196,504 6,376,087 5,295,221
Subscriber acquisition cost
amortization -- 597,302 -- 597,302
Other 5,116,832 13,240,055 9,219,603 19,096,829
-------------- -------------- -------------- --------------
Total cost of sales 11,556,758 23,856,435 22,193,234 34,692,425
General and administrative expenses 5,180,880 18,799,330 9,658,540 26,144,382
Amortization of goodwill -- 1,962,248 -- 2,374,472
-------------- -------------- -------------- --------------
Loss from operations (9,383,219) (31,105,775) (17,188,960) (40,405,957)
Equity in net losses of
unconsolidated subsidiaries
and investment expenses (4,559,619) (2,377,670) (7,131,680) (7,159,966)
Interest income (expense), net 244,955 17,866 615,269 (284,687)
-------------- -------------- -------------- --------------
Net loss before income taxes (13,697,883) (33,465,579) (23,705,371) (47,850,610)
Income tax provision (511,907) (317,585) (1,138,091) (551,854)
-------------- -------------- -------------- --------------
Net loss $ (14,209,790) $ (33,783,164) $ (24,843,462) $ (48,402,464)
============== ============== ============== ==============
Weighted average number of
Class A and Class B shares
Outstanding 32,620,678 48,953,052 32,160,593 41,557,511
Loss per share $ (0.46) $ (0.70) $ (0.83) $ (1.20)
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1999 2000
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (24,843,462) $ (48,402,464)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of goodwill -- 2,374,472
Amortization of program license fees 12,973,631 14,998,294
Amortization of subscriber acquisition fees -- 597,302
Depreciation and amortization of property and equipment 1,172,071 2,357,573
Amortization of subtitling and dubbing and other assets 1,390,296 854,092
Provision for losses on accounts receivable 378,388 1,989,165
Equity in net losses of unconsolidated subsidiaries 3,541,232 7,159,966
Amortization of equity investment basis difference 824,448 --
Deferred compensation 2,806,988 5,427,066
Provisions for deferred taxes 800,000 --
Changes in operating assets and liabilities:
Increase in accounts receivable (2,789,661) (3,456,161)
Increase in receivables from unconsolidated subsidiaries (292,892) (2,466,516)
Decrease in interest receivable 236,830 33,625
Gross additions to program license fees (14,225,075) (19,699,131)
Increase in subtitling and dubbing (1,572,732) (1,484,274)
Gross additions to subscriber acquisition fees -- (29,776)
Increase in prepaids and other assets (48,884) (448,566)
Decrease in accounts payable and accrued liabilities (4,563,383) (701,537)
Increase (decrease) in payable to Hallmark Entertainment
Distribution 6,040,482 (18,313,599)
Decrease in deferred revenue (1,229,711) (1,133,793)
-------------- -------------
Net cash used in operating activities (19,401,434) (60,344,262)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,398,887) (9,954,529)
Cash acquired from the purchase of Odyssey Holdings -- 13,055,435
Proceeds from note receivable from Hallmark Entertainment 16,566,000 --
-------------- -------------
Net cash provided by investing activities 15,167,113 3,100,906
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock,
net of issuance costs -- 126,287,521
Payment on Odyssey Holdings note payable (20,000,000) (10,000,000)
Capital Contributions 20,000,000 10,000,000
Borrowings from affiliates 4,149,894 27,674,182
Payments on borrowings from affiliates -- (2,322,264)
-------------- -------------
Net cash provided by financing activities 4,149,894 151,639,439
Effective exchange rate changes on cash -- 25,374
-------------- -------------
Net increase (decrease) in cash and cash equivalents (84,427) 94,421,457
Cash and cash equivalents, beginning of period 2,876,779 3,865,455
-------------- -------------
Cash and cash equivalents, end of period $ 2,792,352 $ 98,286,912
============== =============
Supplemental disclosure of cash and non-cash activities:
Interest paid $ 21,018 $ 448,943
Income taxes paid $ 338,091 $ 551,854
Accretion related to predecessor Class B common stock subject
to put and call $ 1,830,762 $ 1,484,093
Purchase of Odyssey Holdings, net of cash acquired:
Program license fees, net $ -- $ 84,078,638
Goodwill, net -- 247,955,451
Other assets, net -- 10,326,407
Accounts payable and accrued liabilities -- 49,197,472
Affiliate license fees payable -- 64,317,147
Minority Interest -- 25,000,000
Issuance of Class A common stock $ -- $ 216,901,312
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 7
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.
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.
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 The Jim
Henson Company'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 six months ended June 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.
6
<PAGE> 8
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 since
inception and through June 30, 2000 as it acquired programming rights and
expanded into new international markets. Crown Media Holdings expects 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 six months ended June 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
Crown Media Holdings adopted SFAS No. 130, "Reporting Comprehensive
Income," during 1998. This statement establishes standards for the reporting and
presentation of comprehensive income 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 component for any period.
Other comprehensive income (loss) consists of the following:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
(in thousands) 1999 2000 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Income (loss) $(14,210) $(33,783) $(24,843) $(48,402)
-------- -------- -------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments -- (25) -- (25)
-------- -------- -------- --------
Other comprehensive income (loss) -- (25) -- (25)
-------- -------- -------- --------
Comprehensive income (loss) $(14,210) $(33,808) $(24,843) $(48,427)
======== ======== ======== ========
</TABLE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. This statement was subsequently amended by SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities --
Deferral of the Effective Date of FASB Statement No. 133," which changed the
effective date 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, but does not expect it to have a material
effect on its financial statements.
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 2.4 million stock options have been excluded from
the calculations below for the three and six months ended June 30, 2000, as
their effect would have been anti-dilutive. No stock options were outstanding
for the three and six months ended June 30, 1999.
7
<PAGE> 9
The computation of basic and diluted net loss per share consists of the
following:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
(In thousands, except share ENDED JUNE 30, ENDED JUNE 30,
and per share amounts) 1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss................................. $ (14,210) $ (33,783) $ (24,843) $ (48,402)
Accretion related to predecessor Class
B Common Stock subject to put and
call................................... (938) (453) (1,831) (1,484)
------------ ------------ ------------ ------------
$ (15,148) $ (34,236) $ (26,674) $ (49,886)
============ ============ ============ ============
Denominator:
Weighted average common shares
outstanding ........................... 32,620,678 48,953,052 32,160,593 41,557,511
============ ============ ============ ============
Net loss per share:
Basic and diluted loss per share....... $ (0.46) $ (0.70) $ (0.83) $ (1.20)
============ ============ ============ ============
</TABLE>
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 Statement of Financial Accounting Standards ("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.
Program license fees consists of the following:
<TABLE>
<CAPTION>
(in thousands) As Of
-------------- -----
December 31, 1999 June 30, 2000
<S> <C> <C>
Program license fees -- affiliates .................... $ 17,361 $ 97,584
Program license fees -- non-affiliates................. 11,196 22,168
Prepaid program license fees .......................... 6,750 6,750
-------- ---------
Program license fees, at cost .................... 35,307 126,502
Accumulated amortization .............................. (16,726) (19,141)
-------- ---------
Program license fees .... .................... $ 18,581 $ 107,361
======== =========
</TABLE>
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:
<TABLE>
<CAPTION>
(in thousands) As Of
-------------- -----
December 31, 1999 June 30, 2000
<S> <C> <C>
Technical equipment and computers ..................... $ 10,330 $ 13,852
Furniture, fixtures and equipment ..................... 966 4,347
Leasehold improvements ................................ 461 1,437
Construction-in-progress .............................. 1,065 8,718
-------- ---------
Property and equipment at cost ...................... 12,822 28,354
Accumulated Depreciation and Amortization ............. (4,837) (7,143)
-------- ---------
Property and equipment, net ......................... $ 7,985 $ 21,211
======== =========
</TABLE>
Construction-in-progress as of June 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.
8
<PAGE> 10
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 loss of the Kermit Channel of approximately $1.2 million and $1.0 million
for the three months ended June 30, 1999 and 2000, respectively, and $2.3
million for each of the six months ended June 30, 1999 and 2000, respectively,
is 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 $685,000 and $712,000 for the three
months ended June 30, 1999 and 2000, respectively, and $1.3 million and $1.2
million for the six months ended June 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 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 of 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 $2.9 million and $1.4 million,
respectively, for the three months ended June 30, 1999 and 2000, and $4.0
million and $4.8 million, respectively, for the six months ended June 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 six months ended June 30, 1999,
approximately $412,000 and $824,000 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 wholly-owned 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 has been allocated to goodwill in the amount of
$217.0 million which 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 at
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.
9
<PAGE> 11
CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Subscriber fees $ 8,633,012 $ 11,439,747 $ 17,092,175 $ 22,275,757
Advertising 2,080,529 3,735,678 5,134,771 6,014,668
Other 685,271 701,615 1,295,342 1,216,165
------------ ------------ ------------ ------------
Total revenues 11,398,812 15,877,040 23,522,288 29,506,590
Cost of Sales:
Programming costs:
Affiliates 5,865,191 11,340,241 10,023,045 20,125,361
Non-affiliates 4,877,383 3,303,357 8,423,234 6,403,490
Subscriber acquisition cost
amortization 1,101,980 2,184,592
Other 9,882,247 14,393,558 18,706,662 25,811,678
------------ ------------ ------------ ------------
Total cost of sales 20,624,821 30,139,136 37,152,941 54,525,121
General and administrative expenses 13,259,316 20,529,977 22,054,726 35,251,530
Amortization of goodwill 3,132,078 3,132,078 6,264,156 6,264,156
------------ ------------ ------------ ------------
Loss from operations (25,617,403) (37,924,151) (41,949,535) (66,534,217)
Equity in net losses of
unconsolidated subsidiaries
and investment expenses (1,260,134) (970,522) (2,316,187) (2,324,944)
Minority interest in net loss 2,887,260 812,688 3,991,046 4,240,563
Interest income, net 673,791 155,840 1,373,708 149,320
------------ ------------ ------------ ------------
Net loss before income taxes (23,316,486) (37,926,145) (38,900,968) (64,469,278)
Income tax provision (111,907) (317,585) (338,091) (551,854)
------------ ------------ ------------ ------------
Net loss $(23,428,393) $(38,243,730) $(39,239,059) $(65,021,132)
============ ============ ============ ============
Weighted average number of
Class A and Class B shares
Outstanding 60,000,000 60,000,000 60,000,000 60,000,000
Loss per share $ (0.39) $ (0.64) $ (0.65) $ (1.08)
</TABLE>
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.
10
<PAGE> 12
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. Consequently, Hallmark Entertainment and Crown Media Holdings,
entered into a tax sharing agreement. Under the tax sharing agreement, where the
Hallmark Group and the Crown Group do file consolidated, combined or unitary tax
returns, Crown Group will make tax sharing payments to (or receive payments
from) Hallmark Entertainment equal to the taxes (or tax refunds) that Crown
Group would have paid (or received) if it filed on a stand-alone basis. Such
payments will be computed based on Crown Group's income, loss and other tax
items beginning the day following the May 9, 2000 reorganization.
Total income tax provision consists of the following:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
(in thousands) ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
1999 2000 1999 2000
<S> <C> <C> <C> <C>
Current:
Federal ............................... $ -- $ -- $ -- $ --
Foreign ............................... 112 318 338 552
State and local ....................... -- -- -- --
----------- ----------- ----------- -----------
Total current ...................... 112 318 338 552
Deferred:
Federal ............................... 400 -- 800 --
State and local ....................... -- -- -- --
----------- ----------- ----------- -----------
Total deferred ..................... 400 -- 800 --
----------- ----------- ----------- -----------
Total .............................. $ 512 $ 318 $ 1,138 $ 552
=========== =========== =========== ===========
</TABLE>
The following table reconciles the income tax provision at the U.S.
statutory rate to that in the financial statements:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
(in thousands) ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
1999 2000 1999 2000
<S> <C> <C> <C> <C>
Taxes computed at 35% ................... $ (4,794) $ (11,713) $ (8,297) $ (16,748)
Net operating losses not benefiting Crown
Media ................................. 5,194 11,713 9,097 16,748
Additional tax on foreign income ........ 112 318 338 552
----------- ------------ ----------- ------------
Income tax provision ............... $ 512 $ 318 $ 1,138 $ 552
=========== ============ =========== ============
</TABLE>
11
<PAGE> 13
CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of Crown Media Holdings' deferred tax assets and liabilities
consist of the following:
<TABLE>
<CAPTION>
(in thousands) AS OF
-------------------------------------
DECEMBER 31, 1999 JUNE 30, 2000
<S> <C> <C>
Deferred tax assets:
Deferred revenue ...................... $ 862 $ 448
Bad debt reserve ...................... 278 1,387
Accrued compensation .................. 1,923 4,938
Net operating loss .................... -- 8,400
Valuation allowance ................... -- (10,152)
----------- -----------
Total deferred tax assets .......... 3,063 5,021
Deferred tax liabilities:
Depreciation .......................... (556) (551)
Unconsolidated subsidiaries' losses ... (4,015) (4,470)
Other ................................. (92) --
----------- -----------
Total deferred tax liabilities ..... (4,663) (5,021)
----------- -----------
Net deferred taxes .............. $ (1,600) $ --
=========== ===========
</TABLE>
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.
Information relating to Crown Media Holdings' continuing operations is set
forth in the following table (operating income (loss) is defined as revenue less
cost of sales and general and administrative expenses and amortization of
goodwill; home office costs are reflected in the domestic operating income
(loss) and are not allocated to other geographic regions):
<TABLE>
<CAPTION>
REVENUE FROM REVENUE FROM OPERATING IDENTIFIABLE
(in millions) UNRELATED ENTITIES RELATED ENTITIES INCOME (LOSS) ASSETS
<S> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1999:
Domestic $ -- $ 0.7 $ (5.8) $ 10.8
International 6.7 -- (3.6) 27.4
--------------- --------------- --------------- ---------------
$ 6.7 $ 0.7 $ (9.4) $ 38.2
=============== =============== =============== ===============
THREE MONTHS ENDED JUNE 30, 2000:
Domestic $ 2.7 $ 1.0 $ (26.3) $ 224.1
International 9.8 -- (4.8) 32.4
--------------- --------------- --------------- ---------------
$ 12.5 $ 1.0 $ (31.1) $ 256.5
=============== =============== =============== ===============
SIX MONTHS ENDED JUNE 30, 1999:
Domestic $ -- $ 1.3 $ (11.3) $ 10.8
International 13.4 -- (5.9) 27.4
--------------- --------------- --------------- ---------------
$ 13.4 $ 1.3 $ (17.2) $ 38.2
=============== =============== =============== ===============
SIX MONTHS ENDED JUNE 30, 2000:
Domestic $ 2.7 $ 1.5 $ (35.4) $ 224.1
International 18.6 -- (5.0) 32.4
--------------- --------------- --------------- ---------------
$ 21.3 $ 1.5 $ (40.4) $ 256.5
=============== =============== =============== ===============
</TABLE>
12
<PAGE> 14
CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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' revenue
for the three and six months ended June 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 period, 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 $3.3 million and
$3.7 million for the three months ended June 30, 1999 and 2000, respectively,
and $6.6 million for each of the six months ended June 30, 1999 and 2000,
respectively. As of December 31, 1999 and June 30, 2000, $34.6 million and $68.4
million, respectively, are included in license fees payable to Hallmark
Entertainment Distribution in the accompanying condensed consolidated balance
sheets.
SERVICES AGREEMENT WITH HALLMARK ENTERTAINMENT
Hallmark Entertainment, its subsidiaries and various affiliates, provide
Crown Media International with services that include payroll, legal, financial,
tax and other general corporate services. For each of the six months ended June
30, 1999 and 2000, Crown Media International has accrued $250,000 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 June 30, 2000, principal and accrued interest under
the agreement were approximately $12.7 million and $37.5 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.
13
<PAGE> 15
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 fee 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.
14
<PAGE> 16
10. SUBSEQUENT EVENTS
In February 2000, EM.TV Merchandising AG ("EM.TV") acquired The Jim
Henson Company. In July 2000, we agreed in principle with EM.TV for the
acquisition by us of 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. Based on our outstanding shares at
July 31, 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.
On August 8, 2000, the Class A Common Stock of Crown Media Holdings was
listed for trading on the Stock Market of Amsterdam Exchanges under the ticker
symbol "CRWN".
15
<PAGE> 17
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. We have more than 50 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 the June 30, 2000, we had long
term distribution agreements with the AT&T, Time Warner and DirecTV distribution
systems, the three largest distributors. No individual pay television
distributor accounted for more than 10% of our revenues or 15% of our
subscribers for the year ended December 31, 1999 on a pro forma basis. We are in
discussions to sign long-term agreements with the other six pay television
distributors. We currently distribute the Odyssey Network to approximately 35%
of all United States pay television subscribers.
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 fee revenues 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.
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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 countries, 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.
We derive revenues primarily from subscriber fees paid by television
distributors for the right to carry our channels and from the sale of
advertising time on our channels. We expect to increase the percentage of our
revenues from the sale of advertising time. No individual advertiser accounted
for more than 2% of our revenues for the year ended December 31, 1999, or the
six months ended June 30, 2000.
COST OF SALES
Crown Media Holdings' cost of sales consist 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 market does 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 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. 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.
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CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE AND SIX
MONTHS ENDED JUNE 30, 1999
Overview. The actual results of operations reflect only the predecessor
entity, Crown Media International, for the three and six months ended June 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 six months ended June 30, 2000
increased $6.2 million and $8.1 million, respectively, which represent increases
of 83.7% and 55.5%, respectively, over the comparable periods in 1999. Crown
Media Holdings is currently changing its focus of earning revenues from a
primarily subscriber-based revenue stream to additionally include advertising
revenues. Advertising and other revenues increased $2.3 million for each of the
three and six months ended June 30, 2000, which represent increases of 283.0%
and 156.6%, respectively, over the comparable periods in 1999. Advertising and
other revenues increased reflecting Crown Media Holdings' growing subscriber
base and expanding advertising infrastructure. Additionally, total revenues
increased due to the acquisition of Odyssey Holdings on May 9, 2000. Crown Media
Holdings recorded $3.0 million, or 100%, of Odyssey Holdings' revenue for the
period May 9 through June 30, 2000. The aforementioned increases in total
revenues were also attributable to $3.9 million and $5.9 million increases in
subscriber fees revenue for the three and six months ended June 30, 2000,
respectively, over the comparable periods in 1999. Subscriber fees revenues
resulted from new market launches and expanded distribution in existing markets.
Crown Media Holdings' subscribers of Hallmark Entertainment Network and Odyssey
Network as of June 30, 2000 increased 31.7% to 54.9 million, compared to June
30, 1999. The Kermit Channel had an additional 5.9 million subscribers at June
30, 2000. Subscribers increased at a higher rate than subscriber revenues as we
added additional subscribers with initial promotional periods. On May 1, 2000,
the Hallmark Entertainment Network was launched in the United Kingdom to
approximately 3.5 million digital subscribers. After June 30, 2000, the Hallmark
Entertainment Network was also launched to approximately 1.2 million subscribers
in Israel and to approximately 250,000 subscribers in Hungary. Eighty-two
percent of total revenues in the second quarter of 2000 were earned
internationally.
Cost of sales. Cost of sales for the three and six months ended June 30,
2000 increased $12.3 million and $12.5 million, respectively, which represent
increases of 106.4% and 56.3%, 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 $9.6 million, or 100%, of Odyssey
Holdings' cost of sales for the period May 9 through June 30, 2000. Cost of
sales as a percent of total revenue increased to 176.6% for the three months
ended 2000 from 157.1% for the three months ended 1999. This increase was due
primarily to a $3.6 million increase in programming costs and a $8.1 million
increase in operating costs for the aforementioned periods. Programming costs
rose as Crown Media Holdings invested in additional and higher quality
programming. 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 prepared to launch the
Hallmark Entertainment Network 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 152.1% for the six months ended June 30,
2000, from 151.4% for the six months ended June 30, 1999. This increase was
primarily due to a $2.0 million increase in programming costs and a $9.9 million
increase in operating costs for the aforementioned periods. These increases in
programming costs and operating costs were attributable to the factors discussed
above.
General and administrative expenses. General and administrative expenses
for the three and six months ended June 30, 2000 increased $13.6 million and
$16.5 million, respectively, which represent increases of 262.9% and 170.7%,
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 $4.6 million, or 100%, of Odyssey Holdings' general and
administrative expenses for the period May 9 through June 30, 2000. General and
administrative expenses as a percent of total revenue increased to 139.1% and
114.6% for the three and six months ended June 30, 2000 from 70.4% and 65.9% for
the three and six months ended June 30, 1999, respectively. These increases
primarily reflect 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 six months ended June 30, 2000, were $2.0 million and $2.4 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 six months
ended June 30, 2000 increased $21.7 and $23.2, respectively, which represent
increases of 231.5% and 135.1%, respectively, over the comparable periods in
1999. These increases in the loss from operations for the three and six months
ended June 30, 2000 were attributable to the factors discussed above.
Equity in net losses of unconsolidated subsidiaries. Equity in net losses
of unconsolidated subsidiaries for the three months ended June 30, 2000
decreased $2.2 million which represents a decrease of 47.9% over the comparable
period in 1999. This decrease was 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. Consolidated equity in net losses of unconsolidated
subsidiaries for the six months ended June 30, 2000, increased $28,000, or 0.4%,
over the comparable period. This increase was primarily due to higher net losses
incurred by Odyssey Holdings through May 9, 2000, as compared to the first and
second quarters of 1999. Odyssey Holdings net losses continue to increase due to
the ongoing implementation of its growth strategy to reach new subscribers and
advertisers.
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Interest (income) expense, net. Net interest expense of $285,000 for the
six months ended June 30, 2000 is a result of interest on increased borrowing to
fund operations and a decrease in cash available for investment. Net interest
income of $245,000 and $615,000, respectively, were earned for the three and six
months ended June 30, 1999 primarily from a note receivable from Hallmark
Entertainment.
Income tax provision. Income tax provision for the three and six months
ended June 30, 2000 decreased $194,000 and $586,000, respectively, which
represent decreases of 38.0% and 51.5%, 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.
Net loss. Net loss for the three and six months ended June 30, 2000
increased $19.6 million and $23.6 million respectively, which represent
increases of 137.8% and 94.8%, respectively, over the comparable periods in
1999. These increases in net loss for the three and six months ended June 30,
2000 were attributable to the factors discussed above.
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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 subsidiaries of The Jim Henson Company and Crown Media International as
members in 1998, each of these new members agreed to contribute $50.0 million,
payable in installments. Each member received a 22.5% common equity interest in
exchange for its contribution. The new members in each of 1998 and 1999 paid a
total of $40.0 million, and the balance of $20.0 million was paid in February
2000, for a total of $100.0 million.
As of June 30, 2000, Crown Media Holdings had obligations representing
license fees for programming to Hallmark Entertainment Distribution, The Jim
Henson Company, and the National Interfaith Cable Coalition of $68.4 million,
$9.6 million, and $2.6 million, respectively. Additionally, Crown Media Holdings
also had obligations as of June 30, 2000, representing payables and notes
payable to Hallmark Cards, Hallmark Entertainment, and other affiliates of $1.4
million, $8.4 million, and $37.5 million, respectively. As of June 30, 2000,
receivables were $20.1 million, the current portion of program license fees was
$41.1 million and cash and cash equivalents were $98.3 million.
Cash used in operating activities was $60.3 million and $19.4 million for
the six months ended June 30, 2000 and 1999, respectively. Net cash used was
used primarily to fund operating expenditures related to net losses of $48.4
million and $24.8 million for the six months ended June 30, 2000 and 1999,
respectively. The increase in cash used was also impacted by the purchase of
$19.7 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 $5.9 million and $3.0 million, respectively, for the six
months ended June 30, 2000 and 1999.
Cash provided by investing activities was $3.1 and $15.2 for the six months
ended June 30, 2000 and 1999. The decrease in cash provided was due to the $10.0
million increase in purchases of property and equipment for the six months ended
June 30, 2000, as compared to the $1.4 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 $151.6 million and $4.2 million
for the six months ended June 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 $27.7 million increase in borrowings from an affiliate.
Additionally, during the six months ended June 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 $25.0 million for distribution over the next 12
months. Crown Media Holdings also expects to make capital expenditures of more
than $10.0 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. Subsequently, we may need 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.
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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 June 30, 2000, we had an accumulated deficit of
approximately $182.8 million and goodwill of $246.4 million. Amortization of
goodwill resulted in a $2.4 million charge to earnings for the six months ended
June 30, 2000.
As a result of the foregoing we may not achieve or sustain profitability.
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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 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.
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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.
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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.
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.
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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.
A significant portion of our revenues were generated from foreign
operations. 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.
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<PAGE> 28
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.
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
the 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 June 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.
27
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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
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 August
1, 2000, we have used $30.0 million of the net proceeds to pay outstanding
programming payables to Hallmark Entertainment, an affiliate, and 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
We have announced changes in our management and key employees during
the second and third quarter of 2000. Attached as Exhibit 99 are copies of
press releases regarding the employment of Jeff Henry, the employment of Lana
Corbi, the promotion of Russel H. Givins, Jr. to President and Chief Executive
Officer of Crown Media International, Inc., the employment of Chris Moseley and
the employment of Andre Carey.
On June 26, 2000, Liberty Media Corporation ("Liberty") and
UnitedGlobalCom ("United"), the parent company of UPC, United Pan-Europe
Communications ("UPC"), announced that they had entered into an agreement to
combine many of their broadband interests outside the United States. The
agreement calls for Liberty to acquire shares of United that represent a 38%
economic and a 72% voting interest in United. Among other assets, United may
acquire from Liberty the stake of Liberty in Crown Media Holdings, Inc.
In late July, 2000, we agreed in principle with EM.TV Merchandising
AG for the acquisition by us of EM.TV's 22.5% ownership interest in Odyssey
Holdings and its 50% interest in H&H Programming Asia, LLC operating as the
Kermit Channel. As a result of this transaction, we will own 100% of the common
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. Based on our outstanding shares at July 31, 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.
On August 8, 2000, the Class A Common Stock of Crown Media Holdings
was listed for trading on the Stock Market of Amsterdam Exchanges under the
ticker symbol "CRWN."
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 June 15, 2000,
June 28, 2000, June 29, 2000, July 10, 2000, July 17, 2000, July
20, 2000, and August 8, 2000.
28
<PAGE> 30
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: August 14, 2000 /s/ David J. Evans
--------------------------------------------
David J. Evans
President, Chief Executive Officer and
Director
(PRINCIPAL EXECUTIVE OFFICER)
Date: August 14, 2000 /s/ William J. Aliber
--------------------------------------------
William J. Aliber
Executive Vice President and
Chief Financial Officer
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
29
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<TABLE>
<CAPTION>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
99 Press Releases of Crown Media Holdings, Inc. dated June 15, 2000,
June 28, 2000, June 29, 2000, July 10, 2000, July 17, 2000, July
20, 2000, and August 8, 2000.
</TABLE>
