<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 March 31, 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 NO X
--- ---
As of June 9, 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
----
<S> <C>
ITEM 1. Financial Statements (Unaudited)
CROWN MEDIA HOLDINGS, INC. AND ITS SUBSIDIARIES
Selected Unaudited Pro Forma Financial Data....................................................... 2
Selected Unaudited Pro Forma Consolidated Statements of Operations- Three Months Ended
March 31, 1999 and 2000........................................................................... 3
Selected Unaudited Pro Forma Consolidated Balance Sheet-
March 31, 2000.................................................................................... 5
Notes to Selected Unaudited Pro Forma Consolidated Financial Data................................. 6
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
Condensed Consolidated Balance Sheets - December 31, 1999 and March 31, 2000...................... 9
Condensed Statements of Operations- Three Months Ended March 31, 1999 and 2000.................... 11
Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 1999 and 2000...... 12
Notes to Condensed Consolidated Financial Statements.............................................. 14
ODYSSEY HOLDINGS, L.L.C. AND ITS SUBSIDIARIES
Condensed Consolidated Balance Sheets - December 31, 1999 and March 31, 2000...................... 21
Condensed Consolidated Statements of Operations- Three Months Ended March 31, 1999 and 2000....... 23
Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 1999 and 2000...... 24
Notes to Condensed Consolidated Financial Statements.............................................. 25
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 28
Risk Factors that May Affect Our Business, Operating Results and Financial Condition.............. 34
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk........................................ 41
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................................. 42
ITEM 2. Changes in Securities and Use of Proceeds......................................................... 42
ITEM 3. Defaults Upon Senior Securities................................................................... 42
ITEM 4. Submission of Matters to a Vote of Security Holders............................................... 42
ITEM 5. Other Information................................................................................. 42
ITEM 6. Exhibits and Reports on Form 8-K.................................................................. 42
Signatures........................................................................................ 45
</TABLE>
<PAGE> 3
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
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, Inc. and 77.5% of Odyssey Holdings, L.L.C. At the same
time, Crown Media Holdings completed a public offering of 10,000,000 shares at
$14 per share. The net proceeds from this offering, after expenses and
underwriting discounts and commissions, were approximately $127.9 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.
The following selected unaudited pro forma consolidated statements of
operations data for the three months ended March 31, 1999 and 2000 and balance
sheet as of March 31, 2000 have been derived from the financial statements of
Crown Media, Inc. and its subsidiaries ("Crown Media") and Odyssey Holdings, LLC
and its subsidiaries ("Odyssey Holdings"). The following pro forma financial
information reflects the combined historical financial information of Crown
Media and Odyssey Holdings, as adjusted to reflect the following transactions
effected as part of the reorganization and offering, as if each had occurred on
January 1, 1999 and 2000 for the statements of operations and as if each had
occurred as of December 31, 1999 and March 31, 2000 for the balance sheets
presented:
o Hallmark Entertainment Inc.'s transfer of its 88.9% interest in Crown
Media to us in exchange for approximately 30.7 million shares of our Class
B common stock;
o Chase Equity Associates' transfer of its 11.1% interest in Crown Media
to us in exchange for approximately 3.8 million shares of our Class A
common stock;
o Liberty Media's transfer of its interests in Vision Group Incorporated
(which owned a 32.5% interest in Odyssey Holdings) to us in exchange for
approximately 9.2 million shares of our Class A common stock;
o National Interfaith Cable Coalition's transfer of its 22.5% interest
in Odyssey Holdings to us in exchange for approximately 6.3 million shares
of our Class A common stock; and
o the issuance of 10,000,000 shares of our Class A common stock in the
initial public offering, resulting in net proceeds of approximately $127.9
million, after payment of underwriting commissions and fees and expenses
of the offering.
The selected unaudited pro forma financial data and accompanying notes
thereto should be read in conjunction with the unaudited condensed consolidated
financial statements of Crown Media and Odyssey Holdings and the related
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included elsewhere in this 10-Q.
Our consolidated financial statements will include the assets and
liabilities of Crown Media at their historical carrying values since both we and
Crown Media are entities under common control before and after the
reorganization.
The assets and liabilities of Odyssey Holdings and its subsidiaries
relating to Crown Media'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, each will be included in Crown
Media Holdings' 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,
will be included in our consolidated financial statements at their fair market
value using purchase accounting as of the date of the reorganization.
The pro forma financial data is not necessarily indicative of results of
operations that would have occurred had the reorganization been completed as of,
or at the beginning of, the periods presented or that might be attained in the
future.
2
<PAGE> 4
SELECTED UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1999
-----------------------------------------------------------------------------
CROWN MEDIA HOLDINGS
---------------------------------------------------
PRO
CROWN ODYSSEY FORMA PRO OFFERING PRO FORMA
MEDIA HOLDINGS ADJUSTMENTS FORMA ADJUSTMENTS AS ADJUSTED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Subscriber fees ........... $ 6,666 $ 1,517 $ -- $ 8,183 $ -- $ 8,183
Advertising ............... 33 3,022 -- 3,055 -- 3,055
Other ..................... 609 276 -- 885 -- 885
--------- -------- -------- -------- -------- --------
Total revenues .............. 7,308 4,815 -- 12,123 -- 12,123
Cost of sales:
Programming costs:
Affiliates ............. 3,328 830 -- 4,158 -- 4,158
Non-affiliates ......... 3,206 340 -- 3,546 -- 3,546
Other ..................... 4,102 4,722 -- 8,824 -- 8,824
--------- -------- -------- -------- -------- --------
Total cost of sales ......... 10,636 5,892 -- 16,528 -- 16,528
General and administrative
expenses .................. 4,478 4,159 -- 8,637 159(6) 8,796
Amortization of goodwill .... -- -- 2,687 (1) 3,099 -- 3,099
412 (2)
--------- -------- -------- -------- -------- --------
Loss from
operations ................ (7,806) (5,236) (3,099) (16,141) (159) (16,300)
Equity in net losses of
unconsolidated subsidiaries
and investment expenses ... 2,572 -- (1,104)(3) 1,056 -- 1,056
(412)(2)
Minority interest in net
loss ...................... -- -- (1,104)(4) (1,104) -- (1,104)
Interest (income) expense,
net ....................... (370) (330) -- (700) -- (700)
--------- -------- -------- -------- -------- --------
Net loss before income
taxes ..................... (10,008) (4,906) (479) (15,393) (159) (15,552)
Income tax provision ........ 626 -- (400)(5) 226 -- 226
--------- -------- -------- -------- -------- --------
Net loss .................... $ (10,634) $ (4,906) $ (79) $(15,619) $ (159) $(15,778)
========= ======== ======== ======== ======== ========
Loss per share .............. $ (10,032) $ (0.31) $ (0.26)
========= ======== ========
Weighted average number of
Class A and Class B shares
outstanding ............... 1 50,000 10,000 60,000
</TABLE>
See accompanying notes to selected unaudited pro forma consolidated financial
data.
3
<PAGE> 5
SELECTED UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 2000
----------------------------------------------------------------------------------
CROWN MEDIA HOLDINGS
------------------------------------------------------
PRO
CROWN ODYSSEY FORMA PRO OFFERING PRO FORMA
MEDIA HOLDINGS ADJUSTMENTS FORMA ADJUSTMENTS AS ADJUSTED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Subscriber fees ........... $ 8,662 $ 2,095 $ -- $ 10,757 $ -- $ 10,757
Advertising ............... 117 2,162 -- 2,279 -- 2,279
Other ..................... 515 79 -- 594 -- 594
----------- -------- -------- -------- -------- --------
Total revenues .............. 9,294 4,336 -- 13,630 -- 13,630
Cost of sales:
Programming costs:
Affiliates ............. 2,880 5,382 -- 8,262 -- 8,262
Non-affiliates ......... 2,099 1,326 -- 3,425 -- 3,425
Subscriber acquisition cost
amortization ........... -- 1,083 -- 1,083 -- 1,083
Other ..................... 5,857 5,759 -- 11,616 -- 11,616
----------- -------- -------- -------- -------- --------
Total cost of sales ......... 10,836 13,550 -- 24,386 -- 24,386
General and administrative
expenses .................. 7,346 6,317 -- 13,663 1,059(12) 14,722
Amortization of goodwill .... -- -- 2,687 (7) 3,099 -- 3,099
412 (8)
----------- -------- -------- -------- -------- --------
Loss from
operations ................ (8,888) (15,531) (3,099) (27,518) (1,059) (28,577)
Equity in net losses of
unconsolidated subsidiaries
and investment expenses ... 5,194 -- (3,428)(9) 1,354 -- 1,354
(412)(8)
Minority interest in net
loss ...................... -- -- (3,428)(10) (3,428) -- (3,428)
Interest (income) expense,
net ....................... 303 (296) -- 7 -- 7
----------- -------- -------- -------- -------- --------
Net loss before income
taxes ..................... (14,385) (15,235) 4,169 (25,451) (1,059) (26,510)
Income tax provision ........ 2,134 -- (1,900)(11) 234 -- 234
----------- -------- -------- -------- -------- --------
Net loss .................... $ (16,519) $(15,235) $ 6,069 $(25,685) $ (1,059) $(26,744)
=========== ======== ======== ======== ======== ========
Loss per share .............. $ (14,178) $ (0.51) $ (0.45)
=========== ======== ========
Weighted average number of
Class A and Class B shares
outstanding ............... 1 50,000 10,000 60,000
</TABLE>
See accompanying notes to selected unaudited pro forma consolidated financial
data.
4
<PAGE> 6
SELECTED UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
------------------------------------------------------------------------------------------
CROWN MEDIA HOLDINGS
-------------------------------------------------------------
CROWN ODYSSEY PRO FORMA PRO OFFERING PRO FORMA
MEDIA HOLDINGS ADJUSTMENTS FORMA ADJUSTMENTS AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents ..... $ 6,093 $ 19,675 $ -- $ 25,768 $ 127,900 (20) $ 121,668
(2,000)(21)
(30,000)(22)
Accounts receivable, net ...... 9,360 4,652 -- 14,012 -- 14,012
Program license fees, net ..... 11,686 26,155 -- 37,841 -- 37,841
Prepaids and other assets ..... 5,774 388 6,162 -- 6,162
--------- --------- --------- --------- --------- ---------
Total current assets ........ 32,913 50,870 -- 83,783 95,900 179,683
Program license fees, net of
current portion ............. 7,846 59,627 -- 67,473 -- 67,473
Property and equipment, net ... 10,834 5,482 -- 16,316 -- 16,316
Investment in Odyssey Holdings
and related investment
expenses .................... 31,523 -- (813)(14) -- -- --
(30,710)(14)
Prepaids and other assets, net
of current portion .......... 5,122 25,396 -- 30,518 -- 30,518
Goodwill ...................... -- -- 30,710 (14) 245,625 -- 245,625
214,915 (15)
--------- --------- --------- --------- --------- ---------
Total assets ................ $ 88,238 $ 141,375 $ 214,102 $ 443,715 $ 95,900 $ 539,615
========= ========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS'/
MEMBERS' EQUITY (DEFICIT):
Accounts payable and accrued
liabilities ................. $ 10,173 $ 4,112 $ -- $ 14,285 $ -- $ 14,285
Payable to affiliates ......... 45,730 37,767 -- 83,497 (30,000)(22) 53,497
Notes payable ................. 30,347 -- -- 30,347 -- 30,347
Other current liabilities ..... 3,614 38,036 -- 41,650 466 (23) 42,116
--------- --------- --------- --------- --------- ---------
Total current liabilities ... 89,864 79,915 169,779 (29,534) 140,245
License fees payable to
affiliates, net of current
portion ..................... -- 24,243 -- 24,243 -- 24,243
License fees payable to third
parties, net of current
portion ..................... -- 4,475 -- 4,475 -- 4,475
Other long-term liabilities ... 7,522 4,130 (3,500)(16) 8,152 593 (23) 8,745
Minority interest (including
redeemable preferred
interest) ................... -- 25,000 813 (13) 25,813 -- 25,813
Class B common stock subject to
put and call ................ 62,480 -- (62,480)(17) -- -- --
STOCKHOLDERS'/MEMBERS' EQUITY
(DEFICIT):
Class A common stock .......... -- -- 155 (15) 193 100 (20) 293
38 (17)
Class B common stock .......... -- -- 307 (18) 307 -- 307
Paid-in capital ............... 78,790 -- 214,760 (15) 357,671 127,800 (20) 485,471
62,442 (17)
(307)(18)
1,986 (19)
Accumulated earnings
(deficit) ................... (150,418) -- 3,500 (16) (146,918) (2,000)(21) (149,977)
-- -- -- -- (1,059)(23) --
Members' equity ............... -- 3,612 (813)(13) -- -- --
(813)(14)
(1,986)(19)
--------- --------- --------- --------- --------- ---------
Total stockholders'/members'
equity (deficit) .......... (71,628) 3,612 279,269 211,253 124,841 336,094
--------- --------- --------- --------- --------- ---------
Total liabilities and
stockholders'/members'
equity (deficit) .......... $ 88,238 $ 141,375 $ 214,102 $ 443,715 $ 95,900 $ 539,615
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to selected unaudited pro forma consolidated financial
data.
5
<PAGE> 7
NOTES TO SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The selected unaudited pro forma consolidated statements of operations and
balance sheet give effect to the following adjustments resulting from the
reorganization and offering:
Statement of Operations Adjustments for the three months ended March 31,
1999:
(1) Represents amortization of estimated goodwill of $2.7 million
based on a twenty-year life resulting from the step-up in basis
of our proportionate share of all of the underlying assets and
liabilities of Odyssey Holdings at the time of the
reorganization.
(2) Represents the reclassification of $0.4 million of goodwill
amortization, from equity in the net losses in unconsolidated
subsidiaries and investment expenses to amortization of goodwill,
as a result of Crown Media's existing basis difference in Odyssey
Holdings.
(3) Represents the elimination of $1.1 million of equity in net
losses of unconsolidated subsidiaries and investment expenses
relating to Crown Media's share of Odyssey Holdings' net loss for
the three months ended March 31, 1999 that was accounted for by
Crown Media under the equity method.
(4) Represents the recording of a minority interest of $1.1 million
relating to The Jim Henson Company's 22.5% share of Odyssey
Holdings' net loss for the three months ended March 31, 1999.
(5) Represents the reversal of $0.4 million of Crown Media's tax
provision which will be offset by the benefit of net operating
losses generated by Odyssey Holdings.
(6) Represents a $0.2 million accrued expense for the vested portion
related to the issuance of 1.0 million Class A stock options upon
the conversion of the outstanding share appreciation rights.
6
<PAGE> 8
Statement of Operations Adjustments for the three months ended March 31,
2000:
(7) Represents amortization of estimated goodwill of $2.7 million
based on a twenty-year life resulting from the step-up in basis
of our proportionate share of all of the underlying assets and
liabilities of Odyssey Holdings at the time of the
reorganization.
(8) Represents the reclassification of $0.4 million of goodwill
amortization, from equity in the net losses in unconsolidated
subsidiaries and investment expenses to amortization of goodwill,
as a result of Crown Media's existing basis difference in Odyssey
Holdings.
(9) Represents the elimination of $3.4 million of equity in net
losses of unconsolidated subsidiaries and investment expenses
relating to Crown Media's share of Odyssey Holdings' net loss for
the three months ended March 31, 2000 that was accounted for by
Crown Media under the equity method.
(10) Represents the recording of a minority interest of $3.4 million
relating to The Jim Henson Company's 22.5% share of Odyssey
Holdings' net loss for the three months ended March 31, 2000.
(11) Represents the reversal of $1.9 million of Crown Media's tax
provision which will be offset by the benefit of net operating
losses generated by Odyssey Holdings.
(12) Represents a $1.1 million accrued expense for the vested portion
related to the issuance of 1.0 million Class A stock options upon
the conversion of the outstanding share appreciation rights.
7
<PAGE> 9
Balance Sheet Adjustments as of March 31, 2000:
(13) Represents the recording of $0.8 million relating to The Jim
Henson Company's 22.5% minority interest in Odyssey Holdings.
(14) Represents the elimination of the $0.8 million Crown Media
investment in Odyssey Holdings and the reclassification of $30.7
million existing excess purchase price to goodwill.
(15) Represents $214.9 million of estimated goodwill, the difference
between the net book value of Liberty Media's and the National
Interfaith Cable Coalition's interests in Odyssey Holdings
totaling $2.0 million and the negotiated value of the equity
contributions to us by Liberty Media and the National Interfaith
Cable Coalition of their interests in Odyssey Holdings totaling
$216.9 million and the issuance of 15.5 million shares of our
Class A common stock. The purchase price for Liberty Media and
the National Interfaith Cable Coalition is based on an initial
public offering price of $14.00 per share.
(16) Represents the reversal of the $3.5 million deferred tax
liability balance that will be offset by the benefits resulting
from Odyssey Holdings' net operating losses.
(17) Represents a reclassification resulting from the conversion by
Chase Equity Associates of its shares of Class B common stock
subject to put and call of Crown Media into 3.8 million shares of
our Class A common stock.
(18) Represents a reclassification resulting from the conversion by
Hallmark Entertainment of its shares of Class A common stock of
Crown Media into 30.7 million shares of our Class B common stock.
(19) Represents the elimination of Odyssey Holdings' members' equity
of $2.0 million acquired from Liberty Media and the National
Interfaith Cable Coalition in the reorganization.
(20) Represents the receipt of offering proceeds of $140.0 million,
less estimated issuance costs of $12.1 million and the issuance
of 10.0 million shares of our Class A common stock.
(21) Represents a $2.0 million payment that Crown Media will be
required to pay to a former senior executive upon completion of
the offering.
(22) Represents a $30.0 million payment of accrued and unpaid program
license fees to an affiliate.
(23) Represents a $1.1 million accrued expense for the vested portion
related to the issuance of 1.0 million Class A stock options upon
the conversion of the outstanding share appreciation rights.
8
<PAGE> 10
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
1999 2000
------------------ ---------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 3,865,455 $ 6,092,852
Receivables:
Accounts receivable, less allowance for doubtful
accounts of $695,409 and $854,773,
respectively .................................. 7,184,999 9,360,061
Receivables from unconsolidated subsidiaries .... 1,628,642 3,172,016
Demand note and interest receivable from
affiliate ..................................... 33,625 --
----------- -----------
Total receivables ......................... 8,847,266 12,532,077
----------- -----------
Program license fees, net of accumulated
amortization ..................................... 10,845,675 11,686,219
Subtitling and dubbing, net of accumulated
amortization ..................................... 976,431 1,022,866
Prepaids and other assets:
Prepaid satellite services ...................... 590,992 788,158
Other ........................................... 261,404 791,114
----------- -----------
Total prepaids and other assets ........... 852,396 1,579,272
----------- -----------
Total current assets ...................... 25,387,223 32,913,286
Program license fees, net of current portion ......... 7,735,657 7,845,652
Subtitling and dubbing, net of current portion ....... 3,594,659 3,671,505
Property and equipment, net .......................... 7,984,587 10,833,763
Investment in Odyssey Holdings ....................... 35,362,626 31,522,527
Prepaids and other assets, net of current portion:
Prepaid satellite services ......................... 423,968 923,968
Other .............................................. 557,494 527,518
----------- -----------
Total prepaids and other assets ........... 981,462 1,451,486
----------- -----------
Total assets .............................. $81,046,214 $88,238,219
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements.
Note: The condensed balance sheet as of December 31, 1999 has been derived from
the audited consolidated financial statements at that date but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
9
<PAGE> 11
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
1999 2000
------------------ ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ..... $ 5,493,053 $ 10,173,495
License fees payable to Hallmark
Entertainment Distribution ................ 34,605,831 37,951,786
Payable to Hallmark Entertainment ............ 9,242,744 7,778,219
Notes and interest payable to affiliates ..... 22,710,670 30,347,056
Deferred compensation ........................ 3,250,000 1,875,000
Deferred programming revenue ................. 2,153,786 1,738,778
------------- -------------
Total current liabilities ........... 77,456,084 89,864,334
LONG-TERM LIABILITIES:
Accrued liabilities and other ................ 18,491 18,491
Investment in the Kermit Channel ............. 1,043,322 2,397,744
Deferred compensation ........................ 3,556,988 1,605,619
Deferred income taxes ........................ 1,600,000 3,500,000
Commitments and contingencies
Class B common stock subject to put and call,
$.01 par value; 1,000 shares authorized;
issued and outstanding shares of 136.1
and 138.9 as of December 31, 1999 and
March 31, 2000, respectively ................. 60,338,173 62,480,054
STOCKHOLDERS' EQUITY (DEFICIT):
Class A common stock, $.01 par value; 2,000
shares authorized; issued and outstanding
shares of 1,088.9 and 1,111.1 as of
December 31, 1999 and March 31, 2000,
respectively .............................. 11 11
Paid-in capital .............................. 69,901,504 78,790,393
Accumulated deficit .......................... (132,868,359) (150,418,427)
------------- -------------
Total stockholders' equity (deficit) (62,966,844) (71,628,023)
------------- -------------
Total liabilities and stockholders'
equity (deficit) .................. $ 81,046,214 $ 88,238,219
============= =============
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements.
10
<PAGE> 12
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 2000
<S> <C> <C>
REVENUES:
Subscriber fees ................................................. $ 6,665,785 $ 8,661,804
Advertising ..................................................... 32,539 116,731
Management fees from unconsolidated subsidiary................... 610,071 514,550
------------ ------------
Total revenues ......................................... 7,308,395 9,293,085
------------ ------------
COST OF SALES:
Programming costs:
Affiliate .................................................... 3,327,854 2,880,499
Non-affiliates ............................................... 3,205,851 2,098,717
Operating costs ................................................. 4,102,771 5,856,772
------------ ------------
Total cost of sales .................................... 10,636,476 10,835,988
General and administrative expenses ............................... 4,477,660 7,345,051
------------ ------------
Loss from operations ................................... (7,805,741) (8,887,954)
Equity in net losses of unconsolidated
subsidiaries and investment expenses ............................ 2,572,061 5,194,521
Interest (income) expense, net .................................... (370,314) 302,553
------------ ------------
Net loss before income taxes ........................... (10,007,488) (14,385,028)
Income tax provision .............................................. 626,184 2,134,268
------------ ------------
Net loss ............................................... $(10,633,672) $(16,519,296)
============ ============
Loss per share .................................................... $ (10,032) $ (14,178)
============ ============
Weighted average number of Class A and B shares
outstanding ..................................................... 1,149 1,238
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements are
an integral part of these financial statements.
11
<PAGE> 13
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 2000
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................... $(10,633,671) $(16,519,296)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of program license fees .......... 6,533,705 4,979,216
Depreciation and amortization of property and
equipment .................................. 582,549 659,574
Amortization of subtitling and dubbing and
other assets ............................... 692,629 510,629
Provision for losses on accounts receivable ... 172,322 159,364
Equity in net losses of unconsolidated
subsidiaries ............................... 2,159,837 4,782,297
Amortization of equity investment basis
difference ................................. 412,224 412,224
Deferred compensation ......................... 2,806,988 673,631
Provisions for deferred taxes ................. 400,000 1,900,000
Changes in operating assets and liabilities:
Increase in accounts receivable ............ (1,972,232) (2,334,426)
Increase in receivables from unconsolidated
subsidiaries ............................ (1,449,913) (1,543,375)
Decrease in interest receivable ............ 141,703 33,625
Gross additions to program license fees .... (9,376,184) (5,929,755)
Increase in subtitling and dubbing ......... (831,694) (633,911)
(Increase) decrease in prepaids and other
assets .................................. 83,615 (1,196,901)
Increase (decrease) in accounts payable and
accrued liabilities ..................... (5,405,565) 680,445
Increase in payable to Hallmark
Entertainment Distribution .............. 4,360,549 3,345,955
Decrease in deferred revenue ............... (658,668) (415,008)
------------ ------------
Net cash used in operating activities ... (11,981,806) (10,435,712)
------------ ------------
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements.
12
<PAGE> 14
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 2000
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................... $ (1,142,030) $ (3,508,750)
Proceeds from note receivable
from Hallmark Entertainment ........................ 10,000,000 --
------------ ------------
Net cash provided by (used in)
investing activities ...................... 8,857,970 (3,508,750)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on Odyssey Holdings note payable ............. -- (10,000,000)
Capital contributions ................................ -- 10,000,000
Borrowings from affiliates ........................... 2,424,223 16,171,860
------------ ------------
Net cash provided by financing
activities ................................ 2,424,223 16,171,860
------------ ------------
Net increase (decrease) in cash and cash
equivalents ............................... (699,613) 2,227,398
Cash and cash equivalents, beginning of period.......... 2,876,779 3,865,454
------------ ------------
Cash and cash equivalents, end of period ............... $ 2,177,166 $ 6,092,852
============ ============
Supplemental disclosure of cash and non-cash
activities:
Income taxes paid .................................... $ 226,184 $ 234,268
============ ============
Accretion related to Class B common stock
subject to put and call ........................... $ 892,460 $ 1,030,770
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements.
13
<PAGE> 15
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS AND ORGANIZATION
ORGANIZATION
Crown Media, Inc., a Delaware corporation ("Crown Media"), 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 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 began operations in June 1995 and is
a majority-owned subsidiary of Hallmark Entertainment, Inc. ("Hallmark
Entertainment").
The accompanying condensed financial statements also include the assets and
liabilities and results of operations of Crown Media's wholly and majority-owned
subsidiaries.
LIQUIDITY
On May 9, 2000 Crown Media Holdings Inc. ("Crown Media Holdings") completed
transactions that resulted in a reorganization and initial public offering of
its stock. As a result of the transactions, Crown Media Holdings owns 100% of
Crown Media and 77.5% of Odyssey Holdings. Crown Media Holdings' initial public
offering resulted in net proceeds of approximately $127.9 million (See note 9).
In addition, Crown Media Holdings is currently negotiating with a group of
banks to obtain a $100.0 million credit facility ("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 and Odyssey Holdings, through at least the next 18 months. There is no
assurance that Crown Media will be able to obtain additional funds, either
through borrowings or the issuance of additional equity, on satisfactory terms
or at all.
Crown Media has incurred significant recurring losses since inception and
through March 31, 2000 as it acquired programming rights and expanded into new
international markets. Crown Media expects to incur losses in the future.
14
<PAGE> 16
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The unaudited condensed consolidated financial statements include the
consolidated accounts of Crown Media and those of its majority-owned and
controlled subsidiaries. Investments in entities which are not majority-owned
and controlled by Crown Media 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) considered necessary for a
fair presentation have been included. Operating results for the three months
ended March 31, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000. Crown Media's unaudited condensed
consolidated financial statements should be read in conjunction with Crown
Media's audited consolidated financial statements and notes. For further
information, refer to the audited consolidated financial statements and notes
for the year ended December 31, 1999 included in Crown Media Holdings'
prospectus dated May 3, 2000.
COMPREHENSIVE INCOME
Crown Media has adopted SFAS No. 130, "Reporting Comprehensive Income,"
effective for the year ended December 31, 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. Aside from net loss, there are no
other comprehensive income items for the three months ended March 31, 1999 and
2000.
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 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 2,388,000 stock options have been excluded from the
calculations below for the three months ended March 31, 2000, as their effect
would have been anti-dilutive.
The following table sets forth the computation of basic and diluted net
loss per share for the periods presented:
<TABLE>
<CAPTION>
(In thousands, except share and per
share amounts) THREE MONTHS ENDED MARCH 31,
----------------------------
1999 2000
------------- -------------
<S> <C> <C>
Numerator:
Net loss............................... $ (10,634) $ (16,519)
Accretion related to Class B Common
Stock subject to put and call........ (892) (1,031)
------------ ------------
(11,526) (17,550)
Denominator:
Weighted average common shares......... 1,149 1,238
Net loss per share:
Basic and diluted...................... $ (10,032) $ (14,178)
</TABLE>
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 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.
15
<PAGE> 17
Program license fees consist of the following:
<TABLE>
<CAPTION>
As Of
-----
December 31, 1999 March 31, 2000
<S> <C> <C>
Program license fees -- affiliates .................... $ 17,361,575 $ 16,393,483
Program license fees -- non-affiliates................. 11,195,652 11,223,102
Prepaid program license fees .......................... 6,750,000 6,750,000
------------ ------------
Program license fees, at cost .................... 35,307,227 34,366,585
Accumulated amortization .............................. (16,725,895) (14,834,714)
------------ ------------
Program license fees .... .................... $ 18,581,332 $ 19,531,871
============ ============
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
As Of
-----
December 31, 1999 March 31, 2000
<S> <C> <C>
Technical equipment and computers ..................... $ 10,329,767 $ 11,332,607
Furniture and fixtures ................................ 966,306 983,044
Leasehold improvements ................................ 460,701 530,575
Construction-in-progress .............................. 1,065,397 3,451,492
------------ ------------
Property and equipment at cost ...................... 12,822,171 16,297,718
Less -- Accumulated depreciation and amortization ..... (4,837,584) (5,463,955)
------------ ------------
Property and equipment, net ......................... $ 7,984,587 $ 10,833,763
============ ============
</TABLE>
5. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
THE KERMIT CHANNEL
In May 1998, Crown Media formed two New York limited liability companies,
H&H Programming-Latin America, LLC ("HHPLA") and H&H Programming-Asia, LLC
(collectively operating as the "Kermit Channel") with The Jim Henson Company,
Inc. ("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 and
The Jim Henson Company holds a 50% interest in each of the limited liability
companies. The Kermit Channel is reflected in Crown Media's financial statements
using the equity method of accounting for investments. Crown Media's equity in
the net loss of the Kermit Channel of approximately $1.1 million and $1.4
million for the three months ended March 31, 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 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 $610,000 and $515,000 for the three months ended
March 31, 1999 and 2000, respectively, includes direct and indirect
16
<PAGE> 18
costs incurred on behalf of the Kermit Channels, as provided by the agreements.
Additionally, Hallmark Entertainment Distribution 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, through its wholly-owned subsidiary Hallmark
Domestic Holdings, Inc., entered into an agreement to acquire a 22.5% common
equity interest in Odyssey Holdings, L.L.C. ("Odyssey Holdings"), a Delaware
limited liability company. Odyssey Holdings was formed to develop, own and
operate the Odyssey Network. The purchase price for Crown Media's interest in
Odyssey Holdings was $50.0 million. Crown Media 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 had an outstanding note payable related to this
investment, included in notes and interest payable to affiliates in the
accompanying condensed consolidated balance sheets of $10.0 million.
Crown Media funded its 2000 capital contribution to Odyssey Holdings with
the proceeds of additional investments of $8.9 million and $1.1 million in Crown
Media by its stockholders, Hallmark Entertainment and Chase Equity Associates,
L.P. ("Chase"), respectively. Hallmark Entertainment and Chase were issued
22.222 shares of Class A common stock and 2.7775 shares of Class B common stock,
respectively, related to the additional funding.
Crown Media's investment in Odyssey Holdings is reflected in the financial
statements using the equity method of accounting. Crown Media's equity in the
net loss of Odyssey Holdings was approximately $1.1 million and $3.4 million for
the three months ended March 31, 1999 and 2000, respectively. These amounts are
included in the condensed consolidated statements of operations as equity in net
losses of unconsolidated subsidiaries and investment expenses. Crown Media's
investment in Odyssey Holdings exceeded the underlying equity in the net assets
of Odyssey Holdings as of the date of the investment. This goodwill is being
amortized over 20 years. For the three months ended March 31, 1999 and 2000
approximately $412,000, respectively, was amortized related to this difference
and is reflected in equity in net losses of unconsolidated subsidiaries and
investment expenses in the accompanying condensed consolidated statements of
operations.
6. INCOME TAXES
Crown Media accounts for income taxes using the liability method. Under
this method, Crown Media 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.
17
<PAGE> 19
Since its inception, Crown Media has been included in the consolidated
federal income tax return of Hallmark Cards, Inc. ("Hallmark"). Crown Media has
also been included in combined state income tax returns of Hallmark or Hallmark
Entertainment. Crown Media does 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. Hallmark and Hallmark Entertainment have
used state tax losses relating to Crown Media in combined state income tax
returns. Hallmark and Hallmark Entertainment will not reimburse Crown Media for
the use of such tax benefits. Accordingly, Crown Media has not recorded a tax
benefit for federal or state tax losses. Crown Media has recorded a tax
provision related to foreign taxes and has established a deferred tax liability
as required for certain timing items.
Total income tax provision consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------
1999 2000
<S> <C> <C>
Current:
Federal ............................... $ -- $ --
Foreign ............................... 226,184 234,268
State and local ....................... -- --
----------- -----------
Total current ...................... 226,184 234,268
Deferred:
Federal ............................... 400,000 1,900,000
State and local ....................... -- --
----------- -----------
Total deferred ..................... -- --
----------- -----------
Total .............................. $ 626,184 $ 2,134,268
=========== ===========
</TABLE>
The following table reconciles the income tax provision at the U.S.
statutory rate to that in the financial statements:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------
1999 2000
<S> <C> <C>
Taxes computed at 35% ................... $(3,502,620) $(5,034,759)
Net operating losses not benefiting Crown
Media ................................. 3,102,620 3,134,759
Additional tax on foreign income ........ (226,184) (234,268)
----------- -----------
Income tax provision ............... $ (626,184) $(2,134,268)
=========== ===========
</TABLE>
18
<PAGE> 20
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of Crown Media's deferred tax assets and liabilities were as
follows:
<TABLE>
<CAPTION>
AS OF
--------------------------------------
DECEMBER 31, 1999 MARCH 31, 2000
<S> <C> <C>
Deferred tax assets:
Deferred revenue ...................... $ 861,514 $ 695,511
Unconsolidated subsidiaries' losses ... -- --
Bad debt reserve ...................... 278,164 341,909
Accrued compensation .................. 1,922,795 1,801,259
Valuation allowance ................... -- --
----------- -----------
Total deferred tax assets .......... 3,062,473 2,838,679
Deferred tax liabilities:
Depreciation .......................... (555,982) (551,056)
Unconsolidated subsidiaries' losses ... (4,014,660) (5,654,895)
Other ................................. (91,831) (132,628)
----------- -----------
Total deferred tax liabilities ..... (4,662,473) (6,338,679)
----------- -----------
Net deferred taxes .............. $(1,600,000) $(3,500,000)
=========== ===========
</TABLE>
7. OPERATIONS IN DIFFERENT GEOGRAPHIC AREAS
Crown Media 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's material operations are part of the international pay
television programming service industry and therefore Crown Media reports as a
single industry segment. Crown Media does not have operating decision authority
through its minority investments in the Kermit Channel (note 5) and Odyssey
Holdings (note 5). Consequently, selected operating and asset data of the Kermit
Channel and Odyssey Holdings are not included in the following table.
Foreign operations for the three months ended March 31, 2000 were conducted
in 7 countries in the Scandinavia/Benelux region, 16 countries in the Asia
Pacific region, 19 countries in the Latin America region, 15 countries in the
Europe region and 2 countries in the Africa region. Information relating to
Crown Media's continuing operations is set forth in the following table
(operating income (loss) is defined as revenue less costs of goods sold and
general and administrative expenses; home office costs are reflected in the
United States' operating income (loss) and are not allocated to other geographic
regions):
<TABLE>
<CAPTION>
REVENUE FROM REVENUE FROM OPERATING IDENTIFIABLE
UNRELATED ENTITIES RELATED ENTITIES INCOME (LOSS) ASSETS
(IN MILLIONS)
<S> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31,
1999:
United States .............. $ 0.0 $ 0.6 $ (5.5) $ 7.8
Scandinavia/Benelux ........ 1.0 0.0 (0.5) 4.8
Asia Pacific ............... 1.6 0.0 (0.5) 4.5
Latin America .............. 1.9 0.0 (0.3) 4.5
Europe ..................... 1.6 0.0 (1.2) 15.6
Africa ..................... 0.6 0.0 0.2 1.0
--------------- --------------- --------------- ---------------
$ 6.7 $ 0.6 $ (7.8) $ 38.2
=============== =============== =============== ===============
THREE MONTHS ENDED MARCH 31,
2000:
United States .............. $ 0.0 $ 0.5 $ (8.7) $ 13.1
Scandinavia/Benelux ........ 1.0 0.0 (0.0) 2.6
Asia Pacific ............... 1.3 0.0 (0.8) 4.8
Latin America .............. 2.9 0.0 0.4 3.5
Europe ..................... 3.0 0.0 0.0 12.9
Africa ..................... 0.6 0.0 0.2 1.2
--------------- --------------- --------------- ---------------
$ 8.8 $ 0.5 $ (8.9) $ 38.1
=============== =============== =============== ===============
</TABLE>
19
<PAGE> 21
CROWN MEDIA, 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 reduced economic activity. Crown Media 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's revenue for the
three months ended March 31, 1999 and 2000.
8. RELATED PARTY TRANSACTIONS
NOTE RECEIVABLE - HALLMARK ENTERTAINMENT
During 1998, Crown Media invested $25.0 million of the proceeds from the
issuance of Class B common stock to Chase, in a note receivable from Hallmark
Entertainment. The interest rate on this note is 7%, and payment of the
outstanding principal and interest is due on demand. Included in the demand note
and interest receivables from affiliate in the accompanying March 31, 2000
consolidated balance sheet is principal of $17.3 million. Interest receivable
of $400,000 was included in demand note and interest receivable from affiliate
in the accompanying condensed consolidated balance sheet as of March 31, 2000.
PROGRAM LICENSE AGREEMENT WITH HALLMARK ENTERTAINMENT DISTRIBUTION
The primary supplier of programming to Crown Media is Hallmark
Entertainment Distribution. Crown Media has a program agreement with Hallmark
Entertainment Distribution through December 31, 2004, which is renewable through
December 31, 2009 at Hallmark Entertainment Distribution's option. Under the
terms of the agreement, Crown Media has the exclusive right to exhibit Hallmark
Entertainment Distribution's programming in the territories in which Crown Media
operates during three distinct 18-month time periods. Crown Media 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
launches in those markets. In addition, under the agreement, Hallmark
Entertainment Distribution is generally obligated to sell to Crown Media and
Crown Media is obligated to purchase all of the programming it produces during
the term of the agreement.
Programming costs related to the program agreement were $2.8 million and
$3.3 million for the three months ended March 31, 1999 and 2000, respectively.
As of December 31, 1999 and March 31, 2000, $34.6 million and $38.0 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 with services that include payroll, legal, financial, tax and other
general corporate services. For each of the three months ended March 31, 1999
and 2000, Crown Media has accrued $125,000 under the agreement.
DEMAND NOTE
In November 1999, Crown Media 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 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 March
31, 2000, principal and accrued interest under the agreement were approximately
$12.7 million and $30.4 million, respectively, both of which are included in
notes and interest payable to affiliates on the accompanying condensed
consolidated balance sheets.
9. SUBSEQUENT EVENTS
CROWN MEDIA HOLDINGS, INC. REORGANIZATION AND INITIAL PUBLIC OFFERING
On May 9, 2000 Crown Media Holdings completed transactions that resulted in
a reorganization and initial public offering of its stock. As a result of the
transactions, Crown Media Holdings owns 100% of Crown Media and 77.5% of Odyssey
Holdings. Crown Media Holdings initial public offering resulted in net proceeds
of approximately $128 million. Crown Media Holdings intends to use the net
proceeds to fund investment in or advances to Crown Media and Odyssey Holdings
to fund their businesses. For further information, refer to Crown Media Holdings
prospectus dated May 3, 2000.
20
<PAGE> 22
ODYSSEY HOLDINGS, L.L.C. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31, As of March 31,
1999 2000
----------------- ---------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 19,485,074 $ 19,674,908
Accounts receivable, less allowance
for doubtful 5,063,473 4,651,662
accounts of $737,000 and $762,000,
respectively
Program license fees, net of
accumulated amortization 21,561,515 26,155,000
Other current assets 176,707 388,000
--------------- ---------------
Total current assets 46,286,769 50,869,570
--------------- ---------------
Restricted cash 339,535 339,535
Program license fees, net of current portion 59,991,936 59,627,000
Property and equipment, net 4,662,692 5,481,762
Subscriber acquisition fees, net 25,610,000 24,812,467
Other assets, net of current portion 220,833 244,001
--------------- ---------------
Total assets $ 137,111,765 $ 141,374,335
=============== ===============
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements.
Note: The condensed consolidated balance sheet as of December 31, 1999 has been
derived from the audited consolidated financial statements at that date but does
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
21
<PAGE> 23
ODYSSEY HOLDINGS, L.L.C. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
<TABLE>
<CAPTION>
As of December 31, As of March 31,
1999 2000
------------------ ---------------
LIABILITIES & EQUITY (UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 176,664 $ 102,156
Accrued liabilities 5,495,314 4,010,232
Deferred compensation 3,290,000 3,429,000
License fees payable to affiliates:
The Jim Henson Company 7,500,000 7,500,000
Hallmark Entertainment Distribution 27,126,921 30,267,000
License fees payable to third parties 3,834,281 7,165,000
Subscriber acquisition fee payable 27,210,000
Other 231,064
--------------- ---------------
Total current liabilities 47,423,180 79,914,452
--------------- ---------------
LONG-TERM LIABILITIES:
Deferred compensation 3,421,000 4,130,000
License fees payable to affiliates:
The Jim Henson Company 8,214,286 714,286
Hallmark Entertainment Distribution 20,530,040 23,528,711
License fees payable to third parties 6,466,312 4,474,938
Subscriber acquisition fees payable 27,210,000
Commitments and contingencies
Redeemable preferred interest 25,000,000 25,000,000
Members' equity (deficit) (1,153,053) 3,611,948
--------------- ---------------
Total liabilities and members'
equity (deficit) $ 137,111,765 $ 141,374,335
=============== ===============
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements.
22
<PAGE> 24
ODYSSEY HOLDINGS L.L.C. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1999 2000
<S> <C> <C>
REVENUES:
Subscriber Fees:
Affiliates $ 825,000 $ 1,343,529
Non-affiliates 691,649 751,936
------------ ------------
Total subscriber fees 1,516,649 2,095,465
Advertising 3,021,703 2,162,259
Other 276,729 78,742
------------ ------------
Total revenues 4,815,081 4,336,466
------------ ------------
COST OF SALES:
Programming costs:
Affiliates 830,000 5,381,988
Non-affiliates 340,000 1,326,101
Production costs 1,473,861 1,300,097
Marketing and promotion costs 3,247,783 4,459,199
Amortization of subscriber acquisition
fees -- 1,082,612
------------ ------------
Total cost of sales 5,891,644 13,549,997
General and administrative expenses 4,158,750 6,317,501
------------ ------------
Loss from operations (5,235,313) (15,531,032)
Interest income, net (329,603) (296,033)
------------ ------------
Net loss $ (4,905,710) $(15,234,999)
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements.
23
<PAGE> 25
ODYSSEY HOLDINGS, L.L.C. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1999 2000
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................ $ (4,905,710) $(15,234,999)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of program license fees .................. 1,170,000 6,708,089
Amortization of subscriber acquisition fees ........... -- 1,082,612
Depreciation and amortization of property and
equipment .......................................... 62,265 389,340
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ........ (256,869) 411,811
Decrease in due to/from affiliates................. (75,237) --
Gross additions to program license fees ........... (12,221,804) (10,936,638)
Increase in subscriber acquisition fees ........... -- (285,079)
Increase in prepaid and other current assets ...... (789,138) (234,461)
Decrease in accounts payable and accrued
liabilities ..................................... (751,987) (1,328,526)
Increase in deferred compensation.................. 1,617,231 848,000
Decrease in license fee payable.................... (581,494) (21,905)
------------ ------------
Net cash used in operating activities ....... (16,732,743) (18,601,756)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................... (394,031) (1,208,410)
------------ ------------
Net cash used in investing
activities ............................... (394,031) (1,208,410)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions ................................. -- 20,000,000
Payments on term loans................................. (500,000) --
------------ ------------
Net cash (used in) provided by financing
activities ............................... (500,000) 20,000,000
------------ ------------
Net increase (decrease) in cash and
cash equivalents ......................... (17,626,774) 189,834
Cash and cash equivalents, beginning of period ............. 38,979,682 19,485,074
------------ ------------
Cash and cash equivalents, end of period ................... $ 21,352,908 $ 19,674,908
============ ============
Supplemental disclosure of cash and non-cash activities:
Interest paid ......................................... $ (11,996) $ --
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements.
24
<PAGE> 26
ODYSSEY HOLDINGS L.L.C. AND ITS SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS AND ORGANIZATION
ORGANIZATION
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. ("Odyssey Holdings").
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, Inc. ("Crown Media"), through a wholly-owned
subsidiary. Under the terms of the Company Agreement, HCN and Crown Media 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 (collectively the "Members") were 22.5%, 32.5%, 22.5% and 22.5%,
respectively.
On May 9, 2000 Crown Media Holdings, Inc. ("Crown Media Holdings")
acquired 77.5% of the common equity interest in Odyssey Holdings (see Note 9).
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.
LIQUIDITY
On May 9, 2000 Crown Media Holdings completed transactions that resulted in
a reorganization and initial public offering of its stock. As a result of the
transactions, Crown Media Holdings owns 100% of Crown Media and 77.5% of Odyssey
Holdings. Crown Media Holdings' initial public offering resulted in net proceeds
of approximately $127.9 million (see note 9).
In addition, Crown Media Holdings is currently negotiating with a group of
banks to obtain a $100.0 million credit facility ("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 and
Odyssey Holdings, through at least the next 18 months. There is no assurance
that Crown Media will be able to obtain additional funds, either through
borrowings or the issuance of additional equity, on satisfactory terms or at
all.
Odyssey Holdings has incurred substantial net losses through March 31, 2000
as it acquired programming rights and expanded its distribution. Odyssey
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
accounts of Odyssey Holdings consolidated with the accounts of its wholly-owned
and controlled subsidiaries. All significant intercompany balances and
transactions have been eliminated.
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles 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
generally
25
<PAGE> 27
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 2000 are not necessarily indicative
of the results that may be expected for the year ended December 31, 2000.
Odyssey Holdings' unaudited condensed consolidated financial statements should
be read in conjunction with Odyssey Holdings' audited consolidated financial
statements and notes. For further information, refer to the audited consolidated
financial statements and notes for the year ended December 31, 1999 included in
Crown Media Holdings' prospectus dated May 3, 2000.
COMPREHENSIVE INCOME
Odyssey Holdings has adopted SFAS No. 130, "Reporting Comprehensive
Income," effective for the year ended December 31, 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. Aside from net loss, there
are no other comprehensive income items for the months ended March 31, 1999 and
2000.
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. Odyssey 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 our financial statements.
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, Odyssey Holdings evaluates the
recoverability of these costs versus the revenues associated with the program
and related expense. Where an evaluation indicates that a programming contract
will result in an ultimate loss, additional amortization is provided to
currently recognize that loss.
Program license fees consist of the following:
<TABLE>
<CAPTION>
As Of
-----
December 31, 1999 March 31, 2000
<S> <C> <C>
Program license fees --- affiliates ........ $ 90,479,710 $ 90,976,795
Program license fees --- non-affiliates .... 19,399,539 14,869,833
--------------- ---------------
Program license fees, at cost .............. 109,879,249 105,846,628
Accumulated amortization ................... (28,325,798) (20,064,628)
--------------- ---------------
Program license fees, net .................. $ 81,553,451 $ 85,782,000
=============== ===============
</TABLE>
26
<PAGE> 28
4. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
As Of
-----
December 31, 1999 March 31, 2000
<S> <C> <C>
Furniture, fixtures and equipment ............... $ 2,865,970 $ 3,350,312
Production equipment ............................ 2,294,003 2,296,067
Exhibit booth ................................... 667,038 419,103
Leasehold improvements .......................... 377,460 658,230
--------------- ---------------
Property and equipment, at cost .............. 6,204,471 6,723,712
Less -- Accumulated depreciation and amortization
(1,541,779) (1,241,950)
--------------- ---------------
Property and equipment, net ................. $ 4,662,692 $ 5,481,762
=============== ===============
</TABLE>
5. Income Taxes
No provision has been made in the accompanying consolidated financial
statements for federal or state income taxes as the liability for such income
taxes is the responsibility of the Members.
6. Senior Credit Facility
In May 1999, Odyssey Holdings obtained from The Bank of New York Company,
Inc. ("BNY"), a $30.0 million Senior Credit Facility (as amended, the "Senior
Credit Facility"), including a $10.0 million sublimit for letters of credit, for
a term of five years. There were no borrowings under the Senior Credit Facility
and it was terminated by Odyssey Holdings in May 2000.
7. Capital Contributions
In February 2000, both Crown Media and The Jim Henson Company each
contributed $10.0 million to Odyssey Holdings as required by the Company
Agreement. These contributions were the final scheduled installments by both
Crown Media and The Jim Henson Company as required under the Company Agreement.
8. Related Party Transactions
On November 13, 1998, Odyssey Holdings entered into a program license
agreement with the National Interfaith Cable Coalition ("NICC Program License
Agreement") under which Odyssey Holdings licenses programming from the National
Interfaith Cable Coalition for distribution within the United States. The
agreement terminates upon termination of the Company Agreement. The National
Interfaith Cable Coalition is obligated to furnish a minimum of 200 hours of
programming each year under the program license agreement.
Under the NICC Program License Agreement, Odyssey Holdings has agreed to
advance an annual program license fee of $5.0 million, payable in quarterly
installments and subject to adjustment in accordance with the terms of the
Company Agreement as discussed below. The advance is treated as an advance
payment against programs undertaken to be produced or acquired by the National
Interfaith Cable Coalition.
Under the Company Agreement, the advance will be an amount equal to the sum
of $3.5 million and, so long as VISN Management Corp. owns the preferred
interest in the Company, $1.5 million multiplied by the quotient of the
preferred liquidation preference (as adjusted under certain circumstances)
divided by $25.0 million. The $3.5 million portion of this 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 Hallmark Entertainment Distribution and The Jim Henson Company under
separate program license agreements, each dated as of November 13, 1998. Under
each program agreement, Odyssey Holdings generally licenses made-for-television
movies and miniseries owned or controlled by Hallmark Entertainment Distribution
and The Jim Henson Company, as well as all programming produced by or on behalf
of Hallmark Entertainment Distribution or The Jim Henson Company for Odyssey
Holdings. Each program agreement has a term of five years and is automatically
renewable for additional three-year periods, subject to rate adjustments, so
long as Hallmark Entertainment Distribution or The Jim Henson Company, as
applicable, or their affiliates, own 10% or more of Odyssey Holdings. In the
event that either Hallmark Entertainment Distribution or The Jim Henson Company
own 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.
9. Subsequent Events
CROWN MEDIA HOLDINGS, INC. REORGANIZATION AND INITIAL PUBLIC OFFERING
On May 9, 2000 Crown Media Holdings completed transactions that resulted in
a reorganization and initial public offering of its stock. As a result of the
transactions Crown Media Holdings owns 100% of Crown Media and 77.5% of Odyssey
Holdings. Crown Media Holdings initial public offering resulted in net proceeds
of approximately $127.9 million. Crown Media Holdings intends to use the net
proceeds to fund investment in or advances to Crown Media and Odyssey Holdings
to fund their businesses. For further information, refer to Crown Media
Holdings' prospectus dated May 3, 2000.
27
<PAGE> 29
CROWN MEDIA HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached pro
forma financial information, condensed financial statements and the prospectus
of Crown Media Holdings dated May 3, 2000.
OVERVIEW
Crown Media and Odyssey Holdings have historically operated as separate
entities and their results will only be reported on a consolidated basis with us
from the effective date of the reorganization and offering. As a result, and in
accordance with generally accepted accounting principles, we have presented
separate, rather than combined, historical financial data for Crown Media and
Odyssey Holdings. Crown Media accounts for H&H Programming-Asia, of which it
owns a 50% interest, and Odyssey Holdings, of which it owns a 22.5% interest, in
the consolidated financial statements of Crown Media using the equity method of
accounting.
Crown Media Holdings' acquisition of Crown Media will be accounted for as a
reorganization of entities under common control. Our acquisition of the
additional 55% interest in Odyssey Holdings will be accounted for using the
purchase method of accounting. With the completion of the offering and the
reorganization, Odyssey Holdings will be consolidated with us and will no longer
be accounted for using the equity method of accounting.
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.
28
<PAGE> 30
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.
COST OF SALES
Our 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 believe 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 have engaged an independent firm to complete a valuation of Odyssey
Holdings that will provide the basis for the allocation of its purchase price.
Our final calculation of goodwill is anticipated to be completed by June 30,
2000, however, the calculation is subject to further adjustments under the
provisions of Accounting Principles Board Opinion 16 and related accounting
pronouncements.
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.
Crown Media has not recorded a tax benefit for federal or state tax losses
since these losses have been used by our parent and will not be available to us.
Crown Media 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 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's
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's 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.
29
<PAGE> 31
Crown Media has generated tax losses since its inception and there is no
certainty that Crown Media will generate taxable income in the future. Crown
Media's policy is to establish a valuation allowance against its tax credits and
tax losses until such time that realization is reasonably assured.
We will generate goodwill 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 will be consolidated
for financial reporting purposes but not for tax purposes. Odyssey Holdings is
treated as a partnership for tax purposes and will be allocated income and
losses pursuant to the amended and restated company agreement of Odyssey
Holdings.
CROWN MEDIA AND ITS SUBSIDIARIES
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
2000
Revenues. Total revenues increased $2.0 million, or 27%, to $9.3 million
for the three months ended March 31, 2000, from $7.3 million for the three
months ended March 31, 1999. This increase was due primarily to a $2.0 million
increase in subscriber fees resulting from new market launches and expanded
distribution in existing markets. The number of subscribers increased to 22.5
million at March 31, 2000 from 12.2 million at March 31, 1999, or 84%.
Subscribers increased at a higher rate than subscriber revenues as we added
additional subscribers with initial promotional periods. During 1999, Crown
Media launched the Hallmark Entertainment Network in the following new
territories: Argentina, India, Philippines, Romania and Russia. No new
territories were launched in the first quarter of 2000. Ninety-four percent of
total revenues in the first quarter of 2000 were earned internationally.
Cost of sales. Cost of sales increased $200,000, or 2%, to $10.8 million
for the three months ended March 31, 2000, from $10.6 million for the three
months ended March 31, 1999. Cost of sales as a percent of total revenue
decreased from 146% in first quarter 1999 to 117% in first quarter 2000. This
decrease was due primarily to a $1.6 million decrease in programming costs which
was offset by a $1.8 million increase in signal distribution and language
preparation costs. Programming costs decreased as a result of the continued
refinement of our program acquisition and scheduling processes which enabled us
to more efficiently utilize our licensed program rights. Signal distribution and
language preparation costs increased primarily due to new territories served.
General and administrative expenses. General and administrative expenses
increased $2.8 million, or 64%, to $7.3 million for the three months ended March
31, 2000, from $4.5 million for the three months ended March 31, 1999. General
and administrative expenses as a percent of total revenue increased from 61% in
first quarter 1999 to 79% in first quarter 2000. This increase primarily
reflects increased costs associated with supporting new markets and the
continued development of a corporate infrastructure to support increased
distribution and advertising, including expansion of the management team and
increased staffing levels.
Loss from operations. Loss from operations was $8.9 million for the three
months ended March 31, 2000, as compared to a loss from operations of $7.8
million for the three months ended March 31, 1999. The $1.1 million increase in
the loss from operations for the three months ended March 31, 2000 from the
three months ended March 31, 1999 was attributable to the factors discussed
above.
Equity in net losses of unconsolidated subsidiaries. Equity in net losses
of unconsolidated subsidiaries increased $2.6 million, or 102%, to $5.2 million
for the three months ended March 31, 2000, from $2.6 million for the three
months ended March 31, 1999. This increase was primarily due to higher net
losses incurred by Odyssey Holdings during the first quarter of 2000 as compared
to first quarter 1999. Equity in net losses of unconsolidated subsidiaries
increased by $2.3 million due to Odyssey Holdings increased net losses as it
implements its strategy to reach new subscribers and advertisers. See Odyssey
Holdings' Management's Discussion and Analysis of Financial Condition and
Results of Operations.
30
<PAGE> 32
Interest (income) expense, net. Net interest expense of $303,000 for the
three months ended March 31, 2000 is a result of interest on increased borrowing
to fund operations. Net interest income of $370,000 was earned for the three
months ended March 31, 1999 was earned primarily from a note receivable from
Hallmark Entertainment.
Income tax provision. Income tax provision increased $1.5 million to $2.1
million for the three months ended March 31, 2000, from $626,000 for the three
months ended March 31, 1999. The increase was attributable to deferred tax
liabilities resulting from the allocation to Crown Media of Odyssey Holdings tax
losses in excess of book losses.
Net loss. Net loss was $15.5 million for the three months ended March 31,
2000 as compared to a net loss of $10.6 million for the three months ended March
31, 1999. The $4.9 million increase in the net loss for three months ended March
31, 2000 was attributable to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Crown Media has financed its operations primarily
through loans, advances and equity contributions from Hallmark Entertainment,
Inc. and its affiliates, in addition to the issuance in 1998 of $50.0 million
of Class B common stock to Chase Equity Associates. Hallmark Entertainment,
Inc. does not have any obligation to provide, and we do not currently expect to
receive, financial support from Hallmark Entertainment, Inc. As of March 31,
2000 Crown Media had obligations representing license fees for programming,
payables and notes payable to affiliates of $38.0 million, $7.8 million, and
$30.3 million, respectively. As of March 31, 2000, receivables were $12.5
million, the current portion of program license fees was $11.7 million and cash
and cash equivalents were $6.1 million.
Cash used in operating activities was $12.0 million and $10.4 million for
the three months ended March 31, 1999 and 2000, respectively. Net cash used was
used primarily to fund operating expenditures related to net losses of $10.6
million and $15.5 million in the first quarter of 1999 and 2000, respectively.
The decrease in cash used from 1999 to 2000 was due primarily to lower payments
for programming assets as Crown Media refined its program acquisition and
scheduling processes to more efficiently utilize its licensed program rights
and decrease payments for programming assets. Additionally Crown Media
increased its accounts payable and accrued expenses balances.
Cash provided by investing activities was $8.9 million for the three months
ended March 31, 1999 and cash used in investing activities was $3.5 million for
the three months ended March 31, 2000. Cash used in investing activities in 2000
was for the purchase of property and equipment. Cash provided by investing
activities in 1999 resulted from Hallmark Entertainment, Inc.'s $10.0 million
repayment on a loan.
Cash provided by financing activities was $2.4 million and $16.2 million
for the three months ended March 31, 1999 and 2000, respectively. The increase
in cash provided by financing activities from 1999 to 2000 resulted primarily
from a $16.2 million borrowing from an affiliate. Additionally, during the three
months ended March 31, 2000 Crown Media received $10.0 million in capital
contributions, which were used to fund the obligation to Odyssey Holdings of
$10.0 million.
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 $20.0 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 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. There is no assurance that Crown Media will be able to obtain
additional funds, either through borrowings or the issuance of additional
equity, on satisfactory terms or at all.
31
<PAGE> 33
expand our business. We cannot assure you that we will be able to obtain the
needed additional funds, either through borrowings or the issuance of additional
equity, on terms we believe are satisfactory, or at all. 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.
ODYSSEY HOLDINGS, L.L.C.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached pro
forma financial information, condensed financial statements and the prospectus
of Crown Media Holdings dated May 3, 2000.
OVERVIEW
Odyssey Holdings distributes the Odyssey Network in the United States to
26.7 million subscribers as of March 31, 2000 through more than 50 pay
television distributors. The Company has signed long-term agreements with AT&T,
Time Warner and DirecTV, the three largest distributors. The nine largest pay
television distributors in the United States account for approximately 80% of
all pay television subscribers. Odyssey Holdings plans to enter into long-term
distribution contracts with the remaining six pay television distributors with
which no signed agreement exists currently.
Predecessors of Odyssey Holdings operated under various names as a
primarily religious network, with viewer demographics skewed to viewers over the
age of 55, which are not generally targeted as broadly by advertisers. Most
advertising was in the form of infomercials. After extensive market analysis in
1998, Odyssey Holdings discovered that most family-based programming was
designed to appeal to children and that potential audience and revenue
opportunities were being limited. Odyssey Holdings concluded that family
programming targeting adults and also appealing to children leads to families
watching television together, resulting in larger audiences and viewer
demographics that were more attractive to advertisers.
Odyssey Holdings relaunched the network in April 1999 with a strategy to
make it "the first network for today's family." This includes featured
programming from Hallmark Entertainment and The Jim Henson Company libraries, as
well as programming from the National Interfaith Cable Coalition for 30 hours of
weekly faith and values-based programming. The Company also licenses programming
from third-party providers.
REVENUES
The Company derives substantially all of its revenues from subscriber fees
and advertising sales. Subscriber fees come in the form of charges to the
various pay television distributors on a monthly basis for the right to
broadcast the Odyssey Network. Generally, these distribution agreements last six
to ten years and include annual increases of both subscribers and the
per-subscriber fee. Advertising sales are generated on the basis of a price per
advertising spot and per unit of audience rating.
COST OF SALES
Odyssey Holdings' cost of sales consists of program license fees, cost of
signal distribution, interstitial and creative production, marketing expenses
and subscriber acquisition fees. Program license fees are capitalized and
amortized based on the term of the applicable program contract. One-time
subscriber acquisition fees are paid to certain cable television distributors
who will carry the network. These fees are capitalized and amortized over the
term of the applicable distribution agreement.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
2000
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Revenues. Total revenues decreased $479,000, or 9.9%, to $4.3 million in
the first quarter 2000, from $4.8 million in the first quarter 1999. Subscriber
revenue in the first quarter of 2000 increased 40.0% to $2.1 million, from $1.5
million in the prior year's period, reflecting the increase in paying
subscribers and rates. The number of subscribers decreased to 26.7 million at
March 31, 2000 from 28.0 million at March 31, 1999, or 4.6 %. This decrease in
subscribers is the result of discontinuing distribution to the C-band market and
refocusing efforts on cable and DBS markets. Advertising and other revenue
declined to $2.2 million during the quarter, from $3.3 million in the first
quarter of 1999, reflecting an intentional shift at the Odyssey Network away
from paid programming and infomercials to traditional retail advertising and, in
connection with the retail advertising, the establishment in the first quarter
of 2000 of a $1.5 million reserve for audience deficiency units.
Cost of sales. Cost of sales increased $7.7 million or 130%, to $13.6
million in the first quarter 2000 from $5.9 million in the first quarter 1999.
The increase was primarily due to increases in affiliated programming costs,
marketing and promotion costs and subscriber acquisition fees. Affiliated
programming costs increased $4.6 million due to Odyssey Holdings' investments in
additional and higher quality programming. Marketing and promotional costs
increased $1.2 million due to a larger print/media advertising campaign as
compared to the prior quarter. The $1.1 million increase in subscriber
acquisition fees was due to fees to be paid on a distribution contract that was
entered into subsequent to the first quarter 1999.
General and administrative expenses. General and administrative expenses
increased $2.2 million or 51.9%, to $6.3 million in the first quarter 2000 from
$4.2 million in the first quarter 2000. This increase was primarily due to
increased staffing levels related to the relaunch of the network in April 1999.
Loss from operations. Loss from operations increased $10.3 million or 197%,
to $15.5 million in the first quarter 2000 from $5.2 million in the first
quarter 1999. The increase in the operating loss in the current year was
attributable to the factors discussed above.
Interest income net. Net interest income was $296,000 in the first quarter
2000 as compared to $330,000 in the first quarter 1999. Invested cash balances
were somewhat lower in the first quarter 2000 as compared to the first quarter
1999.
Net loss. Net loss increased $10.3 million or 211%, to $15.3 million in the
first quarter 2000 from $4.9 million in the first quarter 1999. The increase in
net loss in the current year was primarily a result of the factors discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
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 as members in 1998,
each of these new members agreed to contribute $50.0 million, payable in
installments. The final installment was paid in February 2000. Each member
received a 22.5% common equity interest in exchange for its contribution. A
total of $40.0 million was paid by the new members in each of 1998 and 1999, and
the balance of $20.0 million was paid in February 2000, for a total of $100.0
million. The entire amount of equity contributions was received according to
this payment schedule. As of March 31, 2000, Odyssey Holdings had current
liabilities of $79.9 million, consisting of license fees payable to affiliates
totaling $37.8 million, license fees payable to third parties totaling $7.2
million, accounts payable and accrued liabilities totaling $4.1 million, and
deferred compensation totaling $3.4 million. As of March 31, 2000, Odyssey
Holdings had current assets of $50.9 million, consisting primarily of cash of
$19.7 million, accounts receivable of $4.7 million and program license fees of
$26.2 million.
Cash used in operating activities was $16.7 million and $18.6 million for
the three months ended March 31, 1999 and 2000, respectively. Net cash used was
used primarily to fund operating expenditures related to net losses of $4.9
million, and $15.2 million for the three months ended March 31, 1999 and 2000,
respectively.
Cash used in investing activities was $0.4 million and $1.2 million for the
three months ended March 31, 1999 and 2000, respectively. Net cash used was used
for capital expenditures. The increase in capital expenditures was due primarily
to investments in post-production and computer equipment in connection with the
relaunch of the Odyssey Network in 1999.
Cash used by financing activities was $0.5 million term loan repayments for
the three months ended March 31, 1999. Cash provided by financing activities was
$20.0 million of capital contributions for the three months ended March 31,
2000.
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Odyssey Holdings expects to continue to make significant investments in
programming, marketing and subscriber acquisitions over the next several years.
On May 9, 2000 Crown Media Holdings Inc. ("Crown Media Holdings") completed
transactions that resulted in a reorganization and initial public offering of
its stock. As a result of the transactions, Crown Media Holdings owns 100% of
Crown Media and 77.5% of Odyssey Holdings. Crown Media Holdings' initial public
offering resulted in net proceeds of approximately $127.9 million.
Crown Media Holdings is currently negotiating with a group of banks to
obtain a $100.0 million credit facility ("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 and
Odyssey Holdings, through at least the next 18 months. There is no assurance
that Crown Media will be able to obtain additional funds, either through
borrowings or the issuance of additional equity, on satisfactory terms or at
all.
For information regarding planned expenditures and possible future
financings, please see "Crown Media and Its Subsidiaries - Liquidity and Capital
Resources" on page 31.
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 March 31, 2000, we had a pro forma accumulated deficit
of approximately $150.0 million and pro forma goodwill of $245.6 million. On a
pro forma basis, amortization of goodwill would have resulted in a $3.1 million
charge to earnings for the three months ended March 31, 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 will 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
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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.
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
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HAVE LIMITED-DURATION TRADEMARK LICENSE AGREEMENTS, WHICH COULD HARM OUR
BUSINESS.
We license the name "Hallmark Entertainment" from Hallmark Cards under a
three-year trademark license agreement dated as of August 1, 1999. Many of our
international subscribers may now associate our programming with the name
"Hallmark Entertainment." If Hallmark Cards fails to renew the trademark license
agreement for any reason, including our failure to meet minimum programming
thresholds dependent on programming provided by its affiliates or to comply with
Hallmark Cards' programming standards as determined in its sole discretion, we
would be forced to significantly revise our business plan and operations, and
could experience a significant erosion of our subscriber base and revenues.
IF OUR THIRD-PARTY SUPPLIERS FAIL TO PROVIDE US WITH NETWORK INFRASTRUCTURE
SERVICES ON A TIMELY BASIS, OUR COSTS COULD INCREASE AND OUR GROWTH COULD
BE HINDERED.
We currently rely on third parties to supply key network infrastructure
services, including uplink, playback, transmission and satellite services, which
are available only from limited sources. We have occasionally experienced delays
and other problems in receiving communications equipment, services and
facilities and may, in the future, be unable to obtain such services, equipment
or facilities on the scale and within the time frames required by us on terms we
find acceptable, or at all. If we are unable to obtain, or if we experience a
delay in the delivery of, such services, we may be forced to incur significant
unanticipated expenses to secure alternative third party suppliers or adjust our
operations, which could hinder our growth and reduce our revenues and
profitability.
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
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TECHNOLOGICAL CHANGE.
The pay television industry has been, and is likely to continue to be,
subject to:
o rapid and significant technological change, including continuing
developments in technology which do not presently have widely accepted
standards; and
o frequent introductions of new services and alternative technologies,
including new technologies for providing video services.
We expect that new technologies will emerge that may be superior to, or may not
be compatible with, some of our current technologies, which may require us to
make significant capital expenditures to remain competitive. Our future success
will depend, in part, on our ability to anticipate and adapt to technological
changes and to offer, on a timely basis, services that meet customer demands and
evolving industry standards. We rely in part on third parties for the
development of, and access to, communications and network technology. As a
result, we may be unable to obtain access to new technology on a timely basis or
on satisfactory terms. If we fail to adapt successfully to any technological
change or obsolescence, or fail to obtain access to important technologies, our
business, prospects, financial condition or results of operations could be
materially adversely affected.
IF WE ARE UNABLE TO RETAIN KEY EXECUTIVES AND OTHER PERSONNEL, OUR GROWTH
COULD BE INHIBITED AND OUR BUSINESS HARMED.
Our success depends on the expertise and continued service of Robert A.
Halmi, Jr., David J. Evans and Margaret A. Loesch, 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
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repatriation of funds and to withholding taxes), differing degrees of protection
for intellectual property and the instability of emerging market economies,
currencies and governments.
THE AMOUNT OF OUR GOODWILL MAY HINDER OUR ABILITY TO ACHIEVE PROFITABILITY.
As a result of the reorganization, we have generated a significant amount
of goodwill, which we expect to amortize on a straight-line basis over the next
20 years. The amount of goodwill that we amortize in any given year will be
treated as a charge against earnings under generally accepted accounting
principles; as a result, the amortization of our goodwill may hinder our ability
to achieve profitability. If we are required to write-off our goodwill or
accelerate the amortization of our goodwill, our results of operations,
stockholders' equity or profitability could be materially adversely affected.
RISKS RELATING TO OUR INDUSTRY
COMPETITION COULD REDUCE OUR CHANNEL REVENUES AND OUR PROFITABILITY.
We operate in the pay television business, which is highly competitive. If
we are unable to compete effectively with large diversified entertainment
companies that have substantially greater resources than we have, our operating
margins and market share could be reduced, and the growth of our business
inhibited. In particular, we compete for distribution with other pay television
channels and, when distribution is obtained, compete for viewers and advertisers
with pay television channels, broadcast television networks, radio, the Internet
and print media. We also compete, in varying degrees, with other leisure-time
activities such as movie theaters, television, the Internet, radio, print media,
personal computers and other alternative sources of entertainment and
information. In addition, future technological developments may affect
competition within this business.
A continuing trend towards business combinations and alliances in both the
domestic and foreign communications industry may create significant new
competitors for us. Many of these combined entities will have resources far
greater than ours. These combined entities may provide bundled packages of
programming, delivery and other services that compete directly with the products
we offer. These entities may also offer services sooner and at more competitive
rates than we do. In addition, these alliances may benefit from both localized
content and the local political climate.
We may need to reduce our prices or license additional programming to
remain competitive, and we may be unable to sustain future pricing levels as
competition increases. Our failure to achieve or sustain market acceptance of
our programming at desired pricing levels could impair our ability to achieve
profitability or positive cash flow, which would harm our business.
NEW DISTRIBUTION TECHNOLOGIES MAY FUNDAMENTALLY CHANGE THE WAY WE
DISTRIBUTE OUR CHANNELS AND COULD SIGNIFICANTLY DECREASE OUR REVENUES.
The advent of digital technology is likely to accelerate the convergence of
broadcast, telecommunications, Internet and other media and could result in
material changes in the economics, regulations, intellectual property usage and
technical platforms on which our business relies, including lower retail rates
for video services. These changes could fundamentally affect the scale, source
and volatility of our revenue streams, cost structures and profitability, and
may require us to significantly change our operations. There is a risk that our
business and prospects will be harmed by these changes or that we will not
identify or adapt to them as quickly as our competitors do.
THE EXPANSION OF DIGITAL DISTRIBUTION IN OUR MARKETS MAY INCREASE
COMPETITION FOR VIEWERS, RATINGS AND RELATED ADVERTISING REVENUES.
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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
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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 March 31, 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.
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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 $12.1 million of estimated additional expenses, our
total net proceeds from the offering were approximately $127.9 million.
Since the effective date of the registration statement through June
9, 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.
Reorganization
In connection with the initial public offering, we entered into a
reorganization transaction pursuant to which we issued an aggregate of
19,329,578 shares of our Class A common stock and 30,670,422 shares of our Class
B common stock. All of these shares were issued in exchange for outstanding
direct and indirect ownership interests in Odyssey Holdings, Crown Media, and
the Kermit Channel. The shares were issued to accredited investors only in a
transaction exempt from registration under the Securities Act of 1933 pursuant
to Rule 506 of Regulation D promulgated under the Securities Act and Section
4(2) of that Act. In order to rely upon this exemption, we made inquiries into
the status of each investor, made no general solicitation or offering of the
shares, and placed restrictions upon transfer of the shares issued, among other
things.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On May 1, 2000, we launched the Hallmark Entertainment Network in the
United Kingdom to approximately 3.5 million digital subscribers under an
exclusive agreement with BSkyB, a large pay television distributor in the U.K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CROWN MEDIA HOLDINGS, INC.
(Registrant)
Date: June 9, 2000 /s/ David J. Evans
--------------------------------------------
David J. Evans
President, Chief Executive Officer and
Director
(PRINCIPAL EXECUTIVE OFFICER)
Date: June 9, 2000 /s/ William J. Aliber
--------------------------------------------
William J. Aliber
Chief Financial Officer and Secretary
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
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EXHIBIT INDEX
EXHIBIT # DESCRIPTION
--------- -----------
27 FINANCIAL DATA SCHEDULE
