<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 2000
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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CROWN MEDIA HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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<TABLE>
<S> <C> <C>
DELAWARE 4841 84-1524410
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
SUITE 500
6430 S. FIDDLERS GREEN CIRCLE
ENGLEWOOD, COLORADO 80111
(303) 220-7990
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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JUDITH C. WHITTAKER, ESQ.
SECRETARY
CROWN MEDIA HOLDINGS, INC.
DEPARTMENT 339
2501 MCGEE
KANSAS CITY, MISSOURI 64108
(816) 274-5583
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
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Copies to:
<TABLE>
<S> <C>
ERIC S. ROBINSON, ESQ. DAVID S. LEFKOWITZ, ESQ.
WACHTELL, LIPTON, ROSEN & KATZ WEIL, GOTSHAL & MANGES LLP
51 WEST 52ND STREET 767 FIFTH AVENUE
NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10153
(212) 403-1000 (212) 310-8000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If the only securities being delivered pursuant to this Form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AGGREGATE
TO BE REGISTERED OFFERING PRICE(1) AMOUNT OF REGISTRATION FEE
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<S> <C> <C>
Class A common stock, par value $.01 per share............. $287,500,000 $75,900
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE
ARE PERMITTED BY US FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING
THIS PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL
THE DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN
DECLARED EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY
JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
SUBJECT TO COMPLETION - JANUARY 28, 2000
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PROSPECTUS
, 2000
[CROWN LOGO]
CROWN MEDIA HOLDINGS, INC.
SHARES OF CLASS A COMMON STOCK
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CROWN MEDIA HOLDINGS, INC.:
- - We own and operate pay television channels dedicated to high quality family
programming with more than 50 million subscribers worldwide.
- - Crown Media Holdings, Inc.
Suite 500
6430 S. Fiddlers Green Circle
Englewood, Colorado 80111
(303) 220-7990
PROPOSED SYMBOL AND MARKET:
- - CRWN/Nasdaq National Market
THE OFFERING:
- - We are offering shares of our Class A common stock.
- - The underwriters have an option to purchase up to an additional shares
from the selling stockholder to cover over-allotments.
- - We anticipate that the initial public offering price will be between $ and
$ per share.
- - This is our initial public offering, and no public market currently exists for
our shares of Class A common stock.
- - We plan to use the proceeds from this offering to expand our distribution, to
expand our advertising sales staff, to license additional programming, to
enhance our technical facilities and to fund general corporate expenditures,
including the payment of accrued and unpaid program license fees to an
affiliate. We will not receive any proceeds from any shares sold by the
selling stockholder.
- - Closing: , 2000.
<TABLE>
<CAPTION>
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Per Share Total
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<S> <C> <C>
Public offering price (Estimated): $ $
Underwriting fees:
Proceeds to Crown Media Holdings, Inc.:
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</TABLE>
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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DONALDSON, LUFKIN & JENRETTE
LEHMAN BROTHERS
SALOMON SMITH BARNEY
DLJDIRECT INC.
<PAGE> 3
[INSIDE COVERPAGE]
[CROWN MEDIA LOGO]
[HALLMARK ENTERTAINMENT NETWORK LOGO]
[ODYSSEY NETWORK LOGO]
CAPITALIZING ON THE
STRENGTH OF OUR FAMILY
[PHOTOGRAPH [PHOTOGRAPH [PHOTOGRAPH [PHOTOGRAPH
OF TED DANSON OF JAMES EARL OF ISABELLA OF PATRICK
FROM "GULLIVER'S JONES FROM ROSELLINI FROM STEWART
TRAVELS"] "WHAT THE DEAF "THE ODYSSEY"] FROM "MOBY
MAN HEARD"] DICK"]
<PAGE> 4
[INSIDE FRONT COVERPAGE FOLD-OUT]
There are stories
WAITING TO BE TOLD
[PHOTOGRAPH OF [PHOTOGRAPH OF [PHOTOGRAPH OF
ADVERTISING FOR ADVERTISING FOR ADVERTISING FOR
"GULLIVER'S TRAVELS" "ARABIAN NIGHTS"] "SARAH, PLAIN &
WITH TED DANSON TALL" WITH GLENN
AND MARY STEENBURGEN] CLOSE AND
CHRISTOPHER
WALKEN]
ONLY A TRUE STORYTELLER CAN
BRING THEM TO LIFE
[HALLMARK ENTERTAINMENT NETWORK LOGO]
Time passes
GOOD STORIES ENDURE
<PAGE> 5
[INSIDE FRONT COVERPAGE FOLD-OUT]
[PHOTOGRAPH OF FAMILY
SAM NEIL FROM ENTERTAINMENT
"MERLIN"] THAT IS ENTERTAINING
[PHOTOGRAPH OF What more could today's family want from a
JESSICA TANDY AND network? We astonish adults, captivate kids and
HUME CRONYN FROM enrich everyone with outstanding family and
"TO DANCE WITH THE spiritually-oriented programming that includes
WHITE DOG"] "The Collection" from the Hallmark Hall of Fame
Library, The Muppet Show, critically
acclaimed Movies and original programming,
heartwarming Series like Doogie Howser, M.D.,
and spiritual Shows like Landmarks of Faith.
[PHOTOGRAPH OF Odyssey is the new force in entertainment that
BRENT CARVER, STAR doesn't just bring families together . . . we
OF "THE LEGEND OF bring them closer. So, for entertainment that has
SLEEPY HOLLOW"] more of the magical, mystical and spiritual
content families want, and want to watch
together, come to Odyssey.
TELEVISION FOR [ODYSSEY NETWORK LOGO]
TODAY'S FAMILY
<PAGE> 6
[INSIDE BACK COVERPAGE]
[CROWN MEDIA LOGO]
[MAP DEPICTING THE COMPANY'S WORLDWIDE CHANNEL DELIVERY PROCESS]
[PHOTOGRAPH [PHOTOGRAPH OF [PHOTOGRAPH [PHOTOGRAPH
OF SATELLITE] ARMAND OF SATELLITE OF TINA MAJORINO,
ASSANTE FROM UPLINK FACILITY] STAR OF "ALICE IN
"THE ODYSSEY"] WONDERLAND"]
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
Prospectus Summary...................... 1
Risk Factors............................ 7
Special Note with Respect to Forward-
Looking Information................... 14
Reorganization Transactions Occurring
Simultaneously with the Closing of
This Offering......................... 15
Use of Proceeds......................... 17
Dividend Policy......................... 17
Capitalization.......................... 18
Dilution................................ 20
Selected Historical Consolidated
Financial Data........................ 21
Selected Unaudited Pro Forma
Consolidated Financial Data........... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 28
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Business................................ 36
Management.............................. 57
Certain Relationships and Related
Transactions.......................... 67
Principal and Selling Stockholders...... 76
Description of Capital Stock............ 78
Shares Eligible for Future Sale......... 81
Material U.S. Federal Income Tax
Considerations for Non-U.S. Holders... 82
Underwriters............................ 85
Legal Matters........................... 87
Experts................................. 87
Where You Can Find More Information..... 87
Index to Consolidated Financial
Statements............................ F-1
</TABLE>
<PAGE> 8
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
before investing in our Class A common stock. You should read the entire
prospectus carefully, especially the risks of investing in our Class A common
stock discussed under "Risk Factors."
In this prospectus, the terms "we," "us" and "our" refer to Crown Media
Holdings, Inc. and, unless the context requires otherwise, Crown Media, Inc. and
Odyssey Holdings, L.L.C., the legal entities that now operate our business and
that, after this offering, will continue to operate our business as subsidiaries
of Crown Media Holdings, Inc.
OUR BUSINESS
OVERVIEW
We own and operate pay television channels dedicated to high quality family
programming, which we believe represents one of the most popular television
formats. We currently operate and distribute the Hallmark Entertainment Network
internationally and the Odyssey Network domestically, primarily through cable
and direct-to-home satellite systems. We have more than 50 million subscribers
worldwide.
Each of our channels benefits from a long-term program agreement with a
subsidiary of Hallmark Entertainment, Inc., our parent company. These program
agreements generally provide exclusive pay television access to Hallmark
Entertainment, Inc.'s first-run presentations and extensive library of original
made-for-television movies and miniseries. Hallmark Entertainment, Inc.'s
library consists of over 4,000 hours of programming, including eight of the 10
most highly rated made-for-television movies for the 1993 through 1999
television seasons, based on A.C. Nielsen ratings. Programs contained in this
library have won more than 90 Emmy Awards, Golden Globe Awards and Peabody
Awards. The Odyssey Network also licenses a substantial amount of programming
produced by The Jim Henson Company, Inc., a producer of popular family and
children's programming, through a long-term program agreement. Programs
contained within The Jim Henson Company's library have won more than 40 Emmy
Awards and Peabody Awards. In addition, we and The Jim Henson Company each own
50% of the Kermit Channel. The Kermit Channel, which we operate primarily in
India, features popular family and children's programming.
We believe that with the programming we license from Hallmark
Entertainment, Inc. and The Jim Henson Company, we are establishing the Hallmark
Entertainment Network and the Odyssey Network as destinations for viewers
seeking high quality family entertainment and as attractive outlets for
advertisers seeking to target these viewers. We believe our programming will
continue to drive the growth in the number of our worldwide subscribers and the
growth of our revenues.
We have distribution agreements with leading pay television distributors in
each of our markets. Internationally, for the Hallmark Entertainment Network,
some of these include British Sky Broadcasting, Ltd., Multicanal, and United
Pan-European Communications. In the United States, the nine largest pay
television distributors account for approximately 80% of all pay television
subscribers. We currently distribute the Odyssey Network on cable systems
operated by each of these nine pay television distributors and have long term
distribution agreements with the AT&T and Time Warner cable systems, the two
largest distributors. We are in discussions to sign long-term agreements with
the other seven pay television distributors. We currently distribute the Odyssey
Network to approximately 35% of all United States pay television subscribers.
1
<PAGE> 9
We derive revenues primarily from subscriber fees paid by television
distributors for the right to carry our channels and from the sale of
advertising time on our channels. We expect to increase the percentage of our
revenues from the sale of advertising time. To date, we have attracted more than
60 of the leading advertisers in the United States, including Hallmark Cards,
America Online, AT&T, Coca-Cola and Procter & Gamble. For the year ended
December 31, 1999, we had revenues of $50.8 million on a pro forma basis.
COMPETITIVE STRENGTHS
Our primary competitive strengths include the following:
- unique collection of branded programming and pay television channels;
- guaranteed access to high quality programming;
- significant strategic benefits from our principal stockholders; and
- experienced management.
BUSINESS STRATEGY
Our principal objectives are to grow revenues and profitability by becoming
the destination of choice for viewers who seek high quality family programming
and for advertisers who target these viewers. The key elements of our business
strategies to achieve these objectives are to:
- capitalize on our unique brands by marketing to pay television
distributors, viewers and advertisers;
- expand distribution of our channels worldwide through leading
distributors in each market;
- increase advertising revenues by targeting leading advertisers,
localizing our channels and expanding our sales staff;
- continue to refine the attractiveness of our channels to viewers and
advertisers;
- capitalize on broadband distribution to create additional revenue streams
for our business; and
- facilitate the implementation of our strategies through the construction
of an advanced digital global network operating center.
RELATIONSHIP WITH HALLMARK CARDS, INCORPORATED
After this offering, Hallmark Entertainment, Inc. will own all of our
shares of Class B common stock. Each share of Class B common stock is entitled
to 10 votes per share. As a result, Hallmark Entertainment, Inc. will hold more
than 80% of our voting power and will continue to control us. Hallmark
Entertainment, Inc. is one of the world's leading producers and distributors of
award-winning made-for-television movies, miniseries and series. Hallmark
Entertainment, Inc. is wholly owned by Hallmark Cards, Incorporated. Hallmark
Cards is the leading U.S. manufacturer of greeting cards and since 1951, has
sponsored the Hallmark Hall of Fame, one of television's most honored and
enduring dramatic series. Hallmark Cards formed Hallmark Entertainment, Inc. in
1994 when it acquired RHI Entertainment, Inc., a producer of television
programming.
THE REORGANIZATION
Crown Media Holdings, Inc., a Delaware corporation, was formed to complete
this offering and the reorganization. After completion of the transactions
described under "Reorganization Transactions Occurring Simultaneously with the
Closing of This Offering," we will own 100% of the Hallmark Entertainment
Network, 77.5% of the Odyssey Network and 50% of the Kermit Channel.
2
<PAGE> 10
The following diagram illustrates the economic interests of our principal
stockholders in the Hallmark Entertainment Network, the Odyssey Network and the
Kermit Channel following the completion of the reorganization. For more details
regarding the reorganization, see "Reorganization Transactions Occurring
Simultaneously with the Closing of This Offering" and "Certain Relationships and
Related Transactions."
[GRAPH]
3
<PAGE> 11
THE OFFERING
Class A common stock offered... Shares (1)
Common stock to be outstanding
after this offering:
Class A common stock...... Shares(1)(2)
Class B common stock...... Shares(3)
Total............... Shares
Voting rights:
Class A common stock...... One vote per share
Class B common stock...... Ten votes per share
Conversion rights.............. Each share of Class B common stock is
convertible at the option of the holder into one
share of Class A common stock. Shares of Class B
common stock are generally automatically
convertible into Class A common stock upon sale
or other transfer by the selling stockholder.
Other common stock
provisions..................... With the exception of voting rights and
conversion rights, shares of Class A common
stock and shares of Class B common stock are
identical.
Dividend policy................ We anticipate that we will retain any earnings
in the foreseeable future to finance the
continued growth and expansion of our business
and as a result, we have no current intention to
pay dividends.
Use of proceeds................ We plan to use the proceeds from this offering
to expand our distribution, to expand our
advertising sales staff, to license additional
programming, to enhance our technical facilities
and to fund general corporate expenditures,
including the payment of accrued and unpaid
program license fees to an affiliate. We will
not receive any proceeds from any shares sold by
the selling stockholder.
- ------------------------------
(1) References in this prospectus to shares of Class A common stock do not
include shares of Class A common stock that would be sold by Hallmark
Entertainment, Inc. if the over-allotment option is exercised in full.
(2) Excludes 8.0 million shares of Class A common stock reserved for issuance in
connection with options that may be granted under our 2000 Long Term
Incentive Plan.
(3) References in this prospectus to shares of Class B common stock include
shares of Class B common stock that would be converted into an equal number
of shares of Class A common stock and sold by Hallmark Entertainment, Inc.
if the over-allotment option is exercised.
4
<PAGE> 12
SUMMARY FINANCIAL AND OTHER DATA
(IN THOUSANDS)
Crown Media, Inc. and Odyssey Holdings, L.L.C. have historically operated
as separate entities and their results will only be reported on a consolidated
basis with Crown Media Holdings following the reorganization that will be
completed simultaneously with the closing of this 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.
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA OF CROWN MEDIA AND ITS
SUBSIDIARIES AND PRO FORMA CONSOLIDATED FINANCIAL AND OTHER DATA OF CROWN MEDIA
HOLDINGS AND ITS SUBSIDIARIES
Crown Media operates the Hallmark Entertainment Network and the Kermit
Channel. In the table below, we provide you with summary historical consolidated
financial and other data of Crown Media and its subsidiaries. The following
summary consolidated statement of operations data for the years ended December
31, 1996, 1997, 1998 and 1999 and the consolidated balance sheet data as of
December 31, 1996, 1997, 1998 and 1999 are derived from the audited financial
statements of Crown Media and its subsidiaries.
Crown Media Holdings' unaudited pro forma as adjusted consolidated
financial information for 1999 reflects the reorganization described under
"Reorganization Transactions Occurring Simultaneously with the Closing of This
Offering" and the completion of this offering and should be read in conjunction
with the selected unaudited pro forma consolidated financial data included
elsewhere in this prospectus.
This data should also be read together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
CROWN MEDIA CROWN MEDIA HOLDINGS
YEARS ENDED DECEMBER 31, PRO FORMA AS ADJUSTED
----------------------------------------- YEAR ENDED
1996 1997 1998 1999 DECEMBER 31, 1999
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................ $ 3,048 $ 9,802 $ 23,687 $ 31,909 $ 50,792
Total cost of sales........... 9,399 25,082 43,325 41,579 93,706
Income (loss) from
operations................. (10,462) (21,399) (31,188) (35,947) (103,072)
Net income (loss)............. (10,491) (21,578) (35,465) (56,697) (94,614)
BALANCE SHEET DATA:
Cash and cash equivalents..... $ 5 $ 209 $ 2,877 $ 3,865 $221,350
Total assets.................. 13,560 30,276 117,674 81,046 686,551
Total long-term debt,
including current
maturities................. -- -- 30,000 22,711 12,711
Stockholders' equity
(deficit).................. (13,236) (34,813) (20,197) (62,967) 501,970
OTHER DATA:
Capital expenditures.......... $ 1,921 $ 1,031 $ 6,665 $ 2,569 $ 7,644
Total subscribers (at year
end):
Hallmark Entertainment
Network................. 1,942 5,121 8,710 20,794 20,794
Kermit Channel............. -- -- -- 6,721 6,721
Odyssey Network............ -- -- -- -- 27,354
-------- -------- -------- -------- --------
Total subscribers.... 1,942 5,121 8,710 27,515 54,869
</TABLE>
5
<PAGE> 13
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA OF ODYSSEY HOLDINGS AND
ITS SUBSIDIARIES
(IN THOUSANDS)
Odyssey Holdings operates the Odyssey Network. In the table below, we
provide you with summary historical consolidated financial and other data of
Odyssey Holdings and its subsidiaries. The following summary consolidated
statement of operations data for the years ended December 31, 1996, 1997, 1998
and 1999 and the consolidated balance sheet data as of December 31, 1996, 1997,
1998 and 1999 are derived from the audited financial statements of Odyssey
Holdings and its subsidiaries. This data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes included
elsewhere in this prospectus. Odyssey Holdings is organized as a limited
liability company with membership interests. Therefore, no share or per share
data is presented.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998 1999
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues...................................... $ 12,981 $ 15,254 $ 18,141 $ 18,883
Total cost of sales................................. 10,988 12,489 15,074 52,127
Income (loss) from operations....................... 45 (270) (3,122) (56,244)
Net income (loss)................................... 19 (421) (3,170) (55,063)
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 202 $ 140 $ 38,980 $ 19,485
Total assets........................................ 3,999 4,814 100,574 137,112
Total long-term debt, including current
maturities....................................... 305 440 797 --
Members' equity (deficit)........................... 157 (263) 13,601 (1,153)
OTHER DATA:
Capital expenditures................................ $ 448 $ 123 $ 260 $ 5,075
Total Odyssey Network subscribers (at year end)..... 26,406 27,776 29,021 27,354
</TABLE>
6
<PAGE> 14
RISK FACTORS
You should carefully consider the following risks and the other information
contained in this prospectus before investing in our Class A common stock. 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, and you could lose all or part of your
investment. We urge you to refer to the other information included in this
prospectus, including the financial statements and related notes. The risks
described below are not the only ones we face.
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. The Hallmark Entertainment Network reported net losses of
$35.5 million and $56.7 million and the Odyssey Network reported net losses of
$3.2 million and $55.1 million, respectively, for the years ended December 31,
1998 and 1999, respectively. As of December 31, 1999 we had a pro forma
accumulated deficit of approximately $131.3 million. We cannot assure you that
we will achieve or sustain profitability. If we are not able to achieve or
sustain profitability, the trading price of our Class A common stock may be
significantly adversely affected. In addition, we could experience increased
capital needs in the future if our losses are greater, or continue for longer,
than we anticipate. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Crown Media and Its
Subsidiaries -- Liquidity and Capital Resources" and "-- Odyssey Holdings and
Its Subsidiaries."
WE DEPEND ON HALLMARK ENTERTAINMENT, INC. FOR A SIGNIFICANT PORTION OF OUR
PROGRAMMING.
A substantial part of our operating strategy depends upon 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. Hallmark Entertainment, Inc.
programming represented approximately 51% of Hallmark Entertainment Network's
broadcast hours in 1999, and 17% of the Odyssey Network's broadcast hours in the
fourth quarter of 1999. If this programming were to become unavailable or
unsuccessful for any reason during the term of the program agreements, we cannot
assure you that we would be able 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 have a material adverse effect on our
business, prospects, financial condition or results of operations.
IF WE ARE UNABLE TO OBTAIN PROGRAMMING FROM PARTIES OTHER THAN HALLMARK
ENTERTAINMENT, INC., OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED.
We compete with other pay television channel providers for the acquisition
of programming. Our ability to renew our distribution agreements with pay
television distributors on favorable terms and attract new pay television
distributors depends, in part, on our ability to provide programming that will
attract a substantial viewing audience. Programming from parties other than
Hallmark Entertainment, Inc., represented approximately 49% of Hallmark
Entertainment Network's broadcast hours in 1999, and 83% of the Odyssey
Network's broadcast hours in the fourth quarter of 1999. Our failure to obtain
such programming on reasonable terms for any reason, including as a result of
competition, could have a material adverse effect on our business, prospects,
financial condition or results of operations.
7
<PAGE> 15
WE MAY BE ADVERSELY AFFECTED BY A DECLINE IN THE POPULARITY OF OUR CURRENT
CONTENT AND CANNOT BE CERTAIN ABOUT THE ACCEPTANCE OF OUR NEW PROGRAMMING.
The success of our programming depends partly upon unpredictable and
volatile factors beyond our control, such as viewer preferences, competing
programming and the availability of other entertainment activities. A shift in
viewer preferences could cause our programming to decline in popularity, which
could cause a decline in both advertising and subscriber fee revenues. We may
not be able to anticipate and react effectively to shifts in tastes and
interests in our markets. In particular, our ability to react effectively may be
limited by our obligation to license programming from Hallmark Entertainment,
Inc., The Jim Henson Company and the National Interfaith Cable Coalition, each
of which has standards that limit the types of programming that they will
provide to us. In addition, our competitors may have more flexible programming
arrangements, as well as greater volumes of production, distribution and capital
resources, and may be able to react more quickly to shifts in tastes and
interests. We cannot assure you as to the continuing commercial success of any
of our current programming, or that we will be successful in generating
sufficient demand and market acceptance for our new programming.
IF WE ARE UNABLE TO INCREASE OUR ADVERTISING REVENUE, OUR BUSINESS COULD BE
MATERIALLY ADVERSELY AFFECTED.
We currently generate approximately 70% of our revenues from subscriber
fees paid by television distributors, and approximately 30% from the sale of
advertising time and other services, each on a pro forma basis. 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 cannot assure you that we will be able to identify,
attract and retain experienced sales and marketing personnel with relevant
experience, or that our sales and marketing organization will be able to
successfully compete against the significantly more extensive and well-funded
sales and marketing operations of our current or potential competitors. If we
fail to increase our advertising revenue, our business, prospects, financial
condition or results of operations will likely be materially adversely affected.
HALLMARK ENTERTAINMENT, INC. WILL CONTROL US AND THIS CONTROL COULD CREATE
CONFLICTS OF INTEREST OR INHIBIT POTENTIAL CHANGES OF CONTROL.
Following this offering, Hallmark Entertainment, Inc. will control all of
our outstanding shares of Class B common stock, representing more than % of
the voting power on all matters submitted to our stockholders ( % of the voting
power if the over-allotment option is exercised in full). Our Class B common
stock has ten votes per share, while our Class A common stock, which is the
stock we are offering in this prospectus, has one vote per share. Because of
this dual-class structure, Hallmark Entertainment, Inc. will continue to be able
to control all matters submitted to our stockholders, including the election and
removal of a majority of our board of directors, any merger, consolidation or
sale of all or substantially all of our assets, and to control our management
and affairs, even if it owns significantly less than 50% of the equity of our
company. 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 Class A common stock or our business
could suffer. In addition, persons serving as directors, officers and employees
of both us and Hallmark Entertainment, Inc. may have conflicting duties to each.
Currently, Robert A. Halmi, Jr. serves as our Chairman of the Board and as
President and Chief Executive Officer of Hallmark Entertainment, Inc. and
William J. Aliber serves as Chief Financial Officer for us and for Hallmark
Entertainment, Inc. It is currently contemplated that, upon completion of this
offering, Mr. Aliber will resign as Chief Financial Officer of Hallmark
Entertainment, Inc. However, it is currently contemplated that Mr. Halmi will
continue in his current positions at both companies, which could create
potential
8
<PAGE> 16
conflicts of interest. In addition, conflicts of interest may arise as a
consequence of Hallmark Entertainment, Inc.'s control relationship with us,
including:
- 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;
- 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
- 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.
WE HAVE LIMITED-DURATION TRADEMARK LICENSE AGREEMENTS TO USE THE NAME
"HALLMARK ENTERTAINMENT."
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 and our failure to comply with Hallmark Cards' programming standards
as determined in their sole discretion, we could experience a material adverse
effect on our business, prospects, financial condition or result of operations.
See "Certain Relationships and Related Transactions -- Hallmark Trademark
License Agreements."
WE DEPEND ON A LIMITED NUMBER OF THIRD PARTIES FOR OUR NETWORK INFRASTRUCTURE
SERVICES.
We currently rely on third parties to supply key network infrastructure
services, including uplink, playback, transmission and satellite services. The
services we require are only available from limited sources. We have
occasionally experienced delays and other problems in receiving communications
equipment, services and facilities. We cannot assure you that we will be able 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, our
business, prospects, financial condition or results of operations could be
materially adversely affected.
WE DO NOT HAVE COMPLETE CONTROL OVER ODYSSEY HOLDINGS.
Under an operating agreement relating to Odyssey Holdings, certain actions
regarding Odyssey Holdings' business require the consent of The Jim Henson
Company, including:
- creating or issuing equity interests;
- incurring debt in excess of $50.0 million;
- transferring assets valued in excess of $500,000; or
- transferring our interests in Odyssey Holdings to a third party.
In addition, under a stockholders agreement to be signed immediately prior to
the completion of this offering, certain actions regarding programming produced
or acquired by the National Interfaith Cable Coalition, including the
requirements that we broadcast at least 10 hours weekly of faith and
values-based programming and that we broadcast at least 30 hours weekly of
programming provided by the National Interfaith Cable Coalition, and our ability
to transfer our interests in Odyssey Holdings, will require the consent of the
National Interfaith Cable Coalition. 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.
9
<PAGE> 17
WE MAY BE UNABLE TO ADAPT TO TECHNOLOGICAL CHANGE.
The pay television industry has been, and is likely to continue to be,
subject to:
- rapid and significant technological change, including continuing
developments in technology which do not presently have widely accepted
standards;
- frequent introductions of new services and alternative technologies,
including new technologies for providing video services; and
- evolving industry standards.
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. Changes in
technology could cause more competitors to enter the industry. Also,
technological changes, including advancements in emerging wireline and wireless
technologies and Internet services and technologies, could result in lower
retail rates for video services. These changes could materially adversely affect
our ability to price services competitively or profitably. We cannot predict
with certainty the effect of technological changes on our business. 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.
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. 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.
WE DEPEND ON KEY EXECUTIVES AND OTHER PERSONNEL.
We are dependent upon the expertise and continued service of Robert A.
Halmi, Jr., David J. Evans and Margaret A. Loesch. In addition, we will be
required to hire additional personnel to accommodate our anticipated growth. We
may not be able to retain existing personnel or hire new, qualified personnel
because of strong competition for qualified executives and personnel 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. If we fail to attract, hire or retain the necessary personnel, or if
we lose the services of our key executives, our business could be adversely
affected.
WE ARE SUBJECT TO THE RISKS OF DOING BUSINESS OUTSIDE THE UNITED STATES.
During 1999, 58% of our pro forma 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. Substantially all of our transactions are
in U.S. dollars; however, to the extent that significant currency fluctuations
result in materially higher costs to a foreign customer, the customer may be
unable or unwilling to make the required payments. We are subject to delays in
access to
10
<PAGE> 18
courts and to the remedies local laws impose in order to collect our payments
and recover our assets. We may experience problems with collecting accounts due
from foreign customers in the future. International collection problems could
have a material adverse effect on our prospects, financial condition and results
of operations. Our revenues and income may be affected by, 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 ADVERSELY
AFFECTED 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. The general trend in the emerging markets in which we operate and intend
to operate has been towards greater openness and the fostering of private
economic activity. However, if a government changes its policies, we may not be
able to continue operating in these markets or to implement our expansion plans
in those markets. More generally, we are exposed to certain risks, many of which
are beyond our control, inherent in operating in emerging market countries.
These risks include changes in laws and policies affecting trade, investment and
taxes (including laws and policies relating to the repatriation of funds and to
withholding taxes), differing degrees of protection for intellectual property
and the instability of emerging market economies, currencies and governments.
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. We
compete with large diversified entertainment companies that have substantial
resources. 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 cannot predict the extent to which we may need to reduce our prices or
license additional programming to remain competitive or whether we will be able
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 have a material adverse effect on our business, prospects, financial
condition and results of operations.
THE EXPANSION OF DIGITAL DISTRIBUTION IN OUR MARKETS MAY INCREASE COMPETITION
FOR VIEWERS, RATINGS AND RELATED ADVERTISING REVENUES.
The increased capacity of digital distribution platforms, including the
introduction of digital terrestrial television, may reduce the competition for
the right to carry channels and allow development of extra services at low
incremental cost. Therefore, increased digital capacity could lower barriers to
entry for competing channels. 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
11
<PAGE> 19
pricing levels, and could therefore materially and adversely affect our
business, prospects, financial condition or results of operations.
OUR FAILURE TO COMPLY WITH APPLICABLE GOVERNMENT REGULATIONS COULD ADVERSELY
AFFECT US.
The provision of television channels in the markets in which we operate is
regulated. The scope of regulation 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. We are unable to predict the timing, scope or outcome
of these reviews, or the extent to which any changes to current broadcasting
legislation or regulations will affect our operations. If we fail to comply with
applicable present or future regulations in any markets in which we operate we
could be prohibited from operating in those markets and subject to monetary
fines, either of which could materially and adversely affect our business,
prospects, financial condition or results of operations.
For more information on the regulations we face, see "Regulation."
RISKS RELATING TO THIS OFFERING
SINCE OUR STOCK HAS NOT PREVIOUSLY BEEN PUBLICLY TRADED, THE PRICE OF OUR
STOCK MAY BE SUBJECT TO WIDE FLUCTUATIONS.
Prior to this offering, you could not buy or sell our Class A common stock
publicly. Although we and the underwriters determined the initial public
offering price after extensive negotiation and based on numerous factors, the
market price of our Class A common stock after this offering may vary from the
initial public offering price. The market price of our Class A common stock
could be subject to wide fluctuations in response to factors such as the
following, some of which are beyond our control:
- quarterly variations in our operating results;
- operating results that vary from the expectations of securities analysts
and investors;
- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- announcements by third parties of significant claims or proceedings
against us;
- future sales of our Class A common stock; and
- overall stock market price and volume fluctuations.
SUBSTANTIAL SALES OF OUR COMMON STOCK FOLLOWING THIS OFFERING COULD ADVERSELY
AFFECT THE MARKET PRICE OF OUR CLASS A COMMON STOCK.
Sales of a substantial number of shares of our common stock after this
offering could adversely affect the market price of our Class A common stock by
introducing a large number of sellers to the market.
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<PAGE> 20
Given the potential volatility in the price of our shares, these sales could
cause the market price of Class A common stock to decline.
After this offering, assuming the over-allotment option is not exercised,
we will have shares of Class A common stock and shares of
Class B common stock outstanding, and we will have reserved an additional
shares of Class A common stock for issuance under outstanding stock
options. All of the shares of Class A common stock to be sold in this offering
will be freely tradable without restriction or further registration under the
federal securities laws unless purchased by one of our "affiliates," as that
term is defined in Rule 144 under the Securities Act of 1933. The remaining
shares of outstanding common stock, including Class A and Class B, representing
approximately % of the outstanding common stock upon completion of this
offering, will be "restricted securities" under the Securities Act of 1933.
These restricted securities will be subject to restrictions under securities
laws on the timing, manner and volume of sales of restricted shares. However,
under the terms of a stockholders agreement to be signed immediately prior to
completion of this offering, each of Hallmark Entertainment, Inc., Chase Equity
Associates, Liberty Media and VISN Management will have rights to require us to
register their shares, subject to a two-year restriction on each to sell not
more than 25% of its shares acquired prior to this offering, without the consent
of the other stockholders who are parties to the stockholders agreement. See
"Certain Relationships and Related Transactions -- Stockholders Agreement and
Registration Rights" for more information on these registration rights.
Our directors, executive officers, key employees and all of our current
stockholders have agreed, subject to limited exceptions, including in connection
with the exercise of the over-allotment option, that, for a period of 180 days
following this offering, they will not, without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation, directly or indirectly,
offer to sell, sell or otherwise dispose of any shares of common stock.
We cannot predict if future sales of our common stock or the availability
of our common stock for sale will adversely affect the market price for Class A
common stock or our ability to raise capital by offering equity securities.
WE WILL HAVE BROAD DISCRETION OVER THE USE OF THE PROCEEDS FROM THIS OFFERING.
Our management will have broad discretion over the use of the net proceeds
from this offering as well as over the timing of their expenditure. Although we
currently intend to use the proceeds of this offering primarily to expand our
distribution, to expand our advertising sales staff, to license additional
programming, to enhance our technical facilities and to fund general corporate
expenditures, including the payment of accrued and unpaid program license fees
to an affiliate, we operate in a dynamic and rapidly changing industry, and it
is possible that unforeseen events will require us to adapt or change our plans
in order to remain competitive. As a result, investors will be relying upon
management's judgment with only limited information about its specific
intentions for the use of proceeds of this offering.
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<PAGE> 21
SPECIAL NOTE WITH RESPECT TO
FORWARD-LOOKING INFORMATION
We have made some statements in this prospectus, including some under
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and elsewhere, which
constitute forward-looking statements. These statements involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance, or achievements to be materially
different from any results, levels of activity, performance or achievements
expressed or implied by any forward-looking statements. These factors include,
among other things, those listed under "Risk Factors" and elsewhere in this
prospectus. 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. We are under no duty to update any of the
forward-looking statements after the date of this prospectus.
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<PAGE> 22
REORGANIZATION TRANSACTIONS OCCURRING
SIMULTANEOUSLY WITH THE CLOSING OF THIS OFFERING
Simultaneously with the closing of this offering, Crown Media, the operator
of the Hallmark Entertainment Network, Odyssey Holdings, the operator of the
Odyssey Network, and H&H Programming-Asia, the operator of the Kermit Channel,
will be owned by the entities identified in the following diagram in the
following percentages. The diagram reflects the ultimate ownership of the
entities that operate the channels, but does not precisely reflect all the legal
entities in the ownership chain.
[CHART BEFORE REORGANIZATION]
The reorganization, which will occur simultaneously with the closing of
this offering, will consist of the following transactions:
- Hallmark Entertainment, Inc. will transfer to us its interests in Crown
Media in exchange for shares of our Class B common stock,
which will represent approximately 61% of our common stock before giving
effect to the offering;
- Chase Equity Associates will transfer to us its interests in Crown Media
in exchange for shares of our Class A common stock, which will
represent approximately 8% of our common stock before giving effect to
the offering;
- Liberty Media will transfer to us its interests in Vision Group
Incorporated in exchange for shares of our Class A common
stock, which will represent approximately 18% of our common stock before
giving effect to the offering; and
- National Interfaith Cable Coalition will transfer to us its common
interests in Odyssey Holdings in exchange for shares of our
Class A common stock, which will represent approximately 13% of our
common stock before giving effect to the offering.
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<PAGE> 23
After completion of the transactions described above, Crown Media, Odyssey
Holdings, and H&H Programming-Asia will be owned by the entities identified in
the following diagram in the following percentages. The diagram reflects the
ultimate ownership of the entities that operate the channels, but does not
precisely reflect all the legal entities in the ownership chain.
[CHART AFTER REORGANIZATION]
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<PAGE> 24
USE OF PROCEEDS
We estimate the net proceeds to us from the sale of the shares of
Class A common stock offered in this prospectus to be approximately $230.0
million, after deducting estimated offering expenses of $20.0 million. We plan
to use approximately $30.0 million of the net proceeds from the offering for the
payment of accrued and unpaid license fees to an affiliate. See "Certain
Relationships and Related Transactions -- Hallmark Program Agreements." We
intend to use the remainder of the net proceeds, over time, to expand our
distribution, to expand our advertising sales staff, to license additional
programming, to enhance our technical facilities, and to fund other general
corporate expenditures.
As of the date of this prospectus, except for the payment of accrued and
unpaid program license fees to an affiliate, we cannot specify with certainty
how we will allocate the net proceeds we will receive upon completion of this
offering. Accordingly, our management will have discretion in the application of
the remainder of the net proceeds. Pending these uses, we intend to invest the
remainder of the net proceeds in short-term, interest-bearing, investment-grade
securities.
DIVIDEND POLICY
We anticipate that we will retain all of our earnings in the foreseeable
future to finance the continued growth and expansion of our business, and we
have no current intention to pay cash dividends. Our future dividend policy will
depend on our earnings, capital requirements, requirements of the financing
agreements to which we may be a party, financial condition and other factors
considered relevant by our Board of Directors.
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<PAGE> 25
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999
on actual, pro forma and pro forma as adjusted bases:
- The Crown Media column represents Crown Media historical amounts prior to
the reorganization.
- The pro forma column reflects our capitalization as set forth in the
Crown Media column with the following adjustments as if each had occurred
on December 31, 1999:
-- Hallmark Entertainment Inc. transfers its 88.9% interest in Crown
Media to us in exchange for shares of our Class B common
stock;
-- Chase Equity Associates transfers its 11.1% interest in Crown Media to
us in exchange for shares of our Class A common stock;
-- Liberty Media transfers its interests in Vision Group Incorporated
(which owns a 32.5% interest in Odyssey Holdings) to us in exchange
for shares of our Class A common stock; and
-- National Interfaith Cable Coalition transfers its 22.5% interest in
Odyssey Holdings to us in exchange for shares of our Class
A common stock.
- The pro forma as adjusted column reflects our capitalization as set forth
in the pro forma column, with adjustments to reflect the issuance of the
shares of Class A common stock offered in this prospectus and our
receipt and use of the estimated net proceeds from the sale of these
shares, including the payment of accrued and unpaid program license fees
to an affiliate of $30.0 million, as if this offering had been completed
on December 31, 1999.
Upon completion of the reorganization and this offering, Crown Media will
become our wholly owned subsidiary of Crown Media Holdings. Prior to such time,
we will have no material assets, liabilities, contingent liabilities or
operations.
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<PAGE> 26
This table should be read together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------------
CROWN MEDIA HOLDINGS
-------------------------
CROWN PRO FORMA
MEDIA PRO FORMA AS ADJUSTED
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents........................... $ 3,865 $ 23,350 $ 221,350
========= ========= =========
Long-term debt (including current maturities)(1).... $ 22,711 $ 12,711 $ 12,711
--------- --------- ---------
Minority interest(2)................................ -- 29,241 29,241
--------- --------- ---------
Crown Media Class B common stock subject to put and
call ($0.01 par value) 1,000 shares authorized;
136.1 shares issued and outstanding; no shares
outstanding pro forma and pro forma as adjusted... 60,338 -- --
--------- --------- ---------
Stockholders' equity (deficit):
Crown Media Class A common stock ($0.01 par value)
2,000 shares authorized; 1,088.9 shares issued
and outstanding; no shares outstanding pro
forma and pro forma as adjusted................ -- -- --
Crown Media Holdings Class A common stock ($0.01
par value) shares authorized; shares
issued and outstanding; shares
issued and outstanding pro forma and pro forma
as adjusted.................................... --
Crown Media Holdings Class B common stock ($0.01
par value) shares authorized;
shares issued and outstanding;
shares issued and outstanding pro
forma and pro forma as adjusted................
Paid-in capital................................... 69,902 405,239 635,239
Accumulated deficit............................... (132,869) (131,269) (133,269)
--------- --------- ---------
Total stockholders' equity (deficit).............. (62,967) 273,970 501,970
--------- --------- ---------
Total capitalization................................ $ 20,082 $ 315,922 $ 543,922
========= ========= =========
</TABLE>
- ------------------------------
(1) Pro forma as adjusted long-term debt (including current maturities) consists
of borrowings of $12.7 million as of December 31, 1999 by Crown Media under
a promissory note issued to an affiliate.
(2) Pro forma as adjusted minority interest consists of The Jim Henson Company's
22.5% interest of $4.2 million and VISN Management's $25.0 million preferred
interest in Odyssey Holdings.
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<PAGE> 27
DILUTION
We determine net tangible book value (deficit) per share by subtracting
total liabilities, minority interests and common stock subject to put or call
from total tangible assets, and dividing the remainder by the number of shares
of common stock not subject to put or call. Dilution per share represents the
difference between the price per share to be paid by new stockholders for the
shares issued in this offering and the net tangible book value per share after
this offering.
The net tangible book value (deficit) of Crown Media as of December 31,
1999, prior to giving effect to the reorganization and this offering, was
approximately $(117.2) million or $(107,632) per share based on an aggregate of
1,088.9 shares of common stock outstanding. Net tangible book value per share is
determined by dividing the number of outstanding shares of common stock into
Crown Media's net tangible book value, which is the total tangible assets less
total liabilities. Assuming the reorganization had occurred as of December 31,
1999, our pro forma net tangible book value (deficit) would have been
approximately $(91.5) million or $( ) per share based on an aggregate of
shares of common stock outstanding. Assuming the reorganization and
the sale of shares of Class A common stock offered in this prospectus
had occurred as of December 31, 1999, and after deducting estimated offering
expenses and underwriting discounts and commissions based on an assumed initial
public offering price of $ per share, our net tangible book value (deficit) as
of December 31, 1999 would have been $136.5 million, or $ per share. This
represents an immediate dilution of $ per share to new investors purchasing
shares of Class A common stock at the initial offering price. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Net tangible book value (deficit) per share as of
December 31, 1999...................................... $
Effect of reorganization before giving effect to the
offering...............................................
Increase in net tangible book value (deficit) per share
attributable to new investors in this offering.........
Pro forma net tangible book value (deficit) per share after
the reorganization and this offering......................
Dilution per share to new investors......................... $
</TABLE>
The following table sets forth, as of December 31, 1999, on the pro forma
as adjusted basis described above, the differences between the number of shares
of common stock purchased from us, the total price paid and average price per
share paid by existing stockholders and by the new investors in this offering at
the initial public offering price of $ per share, before deducting
the underwriting discount and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
EFFECTIVE CASH
SHARES PURCHASED CONTRIBUTION AVERAGE
----------------- ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing stockholders................. % $ 69,902 -- $ --
Reorganization........................ % %
New investors......................... % %
------- ------ -----
--------- --------
Total...................... 100.00% $ 100.0% $
</TABLE>
The foregoing discussion and tables assume that the underwriters'
over-allotment is not exercised.
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<PAGE> 28
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Crown Media and Odyssey Holdings have historically operated as separate
entities and their results will only be reported on a consolidated basis with
Crown Media Holdings following the reorganization that will be completed
simultaneously with the closing of this 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.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF CROWN MEDIA AND ITS
SUBSIDIARIES
In the table below, we provide you with selected historical consolidated
financial and other data of Crown Media and its subsidiaries. The following
selected consolidated statement of operations data for the years ended December
31, 1996, 1997, 1998 and 1999 and the consolidated balance sheet data as of
December 31, 1996, 1997, 1998 and 1999 are derived from the audited financial
statements of Crown Media and its subsidiaries. The following selected
consolidated statement of operations data for the period from June 1, 1995
(Inception) to December 31, 1995 and the consolidated balance sheet data as of
December 31, 1995 have been derived from the unaudited consolidated financial
statements of Crown Media and its subsidiaries which, in the opinion of
management, have been prepared on the same basis as the audited financial
statements and reflect all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation. This data should be read
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements and related
notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
JUNE 1
(INCEPTION) TO YEARS ENDED DECEMBER 31,
DECEMBER 31, -----------------------------------------
1995 1996 1997 1998 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Subscriber fees.......................... $ -- $ 3,048 $ 9,100 $ 20,648 $ 27,670
Advertising.............................. -- -- 176 84 1,729
Other.................................... -- -- 526 2,955 2,510
-------------- -------- -------- -------- --------
Total revenues.............................. -- 3,048 9,802 23,687 31,909
-------------- -------- -------- -------- --------
Cost of sales:
Programming costs:
Affiliates............................. 918 5,125 10,322 12,307 12,331
Non-affiliates......................... -- 1,380 7,770 14,187 10,452
Operating costs.......................... 253 2,894 6,990 16,831 18,796
-------------- -------- -------- -------- --------
Total cost of sales......................... 1,171 9,399 25,082 43,325 41,579
General and administrative expenses......... 1,574 4,111 6,119 11,550 26,277
-------------- -------- -------- -------- --------
Loss from operations........................ (2,745) (10,462) (21,399) (31,188) (35,947)
Equity in net losses of unconsolidated
subsidiaries and investment expenses..... -- -- -- 4,918 18,992
Interest (income) expense, net.............. -- -- -- (1,273) (798)
Income tax provision........................ -- 29 179 632 2,556
-------------- -------- -------- -------- --------
Net loss.................................... $ (2,745) $(10,491) $(21,578) $(35,465) $(56,697)
============== ======== ======== ======== ========
Loss per share(1)........................... $(10,491) $(21,578) $(32,868) $(47,926)
======== ======== ======== ========
Weighted average shares outstanding(1)...... 1,000 1,000 1,079 1,183
BALANCE SHEET DATA:
Cash and cash equivalents................... $ -- $ 5 $ 209 $ 2,877 $ 3,865
Total assets................................ 4,269 13,560 30,276 117,674 81,046
Total long-term debt, including current
maturities............................... -- -- -- 30,000 22,711
Stockholders' equity (deficit).............. (2,745) (13,236) (34,813) (20,197) (62,967)
</TABLE>
- ------------------------------
(1) During 1995, Crown Media had not been incorporated and was functioning
solely as a division of Hallmark Entertainment, Inc. As such, no stock was
outstanding as of December 31, 1995.
21
<PAGE> 29
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF ODYSSEY HOLDINGS AND ITS
SUBSIDIARIES
In the table below, we provide you with selected historical consolidated
financial and other data of Odyssey Holdings and its subsidiaries. The following
selected consolidated statement of operations data for the period from July 1
(Inception) to December 31, 1995 and for the years ended December 31, 1996,
1997, 1998 and 1999 and the consolidated balance sheet data as of December 31,
1995, 1996, 1997, 1998 and 1999 are derived from the audited financial
statements of Odyssey Holdings. This data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes included
elsewhere in this prospectus. Odyssey Holdings is organized as a limited
liability company with membership interests. Therefore, no share or per share
data is presented.
<TABLE>
<CAPTION>
JULY 1
(INCEPTION) TO YEARS ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------------
1995 1996 1997 1998 1999
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Subscriber fees.................... $ 2,468 $ 6,582 $ 6,188 $ 6,473 $ 7,844
Advertising........................ 2,531 6,015 8,834 11,542 9,819
Other.............................. 440 384 232 126 1,220
------- -------- -------- -------- ---------
Total revenues........................ 5,439 12,981 15,254 18,141 18,883
Cost of sales:
Programming costs:
Affiliates...................... -- -- -- -- 15,930
Non-affiliates.................. 630 1,380 2,815 3,754 5,882
Other.............................. 4,343 9,608 9,674 11,320 28,715
Amortization of subscriber
acquisition fees................ -- -- -- -- 1,600
------- -------- -------- -------- ---------
Total cost of sales................... 4,973 10,988 12,489 15,074 52,127
General and administrative expenses... 624 1,948 3,035 6,189 23,000
------- -------- -------- -------- ---------
Income (loss) from operations......... (158) 45 (270) (3,122) (56,244)
Interest (income) expense, net........ -- 26 151 48 (1,181)
------- -------- -------- -------- ---------
Net income (loss)..................... $ (158) $ 19 $ (421) $ (3,170) $ (55,063)
======= ======== ======== ======== =========
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 712 $ 202 $ 140 $ 38,980 $ 19,485
Total assets.......................... 2,759 3,999 4,814 100,574 137,112
Total long-term debt, including
current maturities................. 470 305 440 797 --
Members' equity (deficit)............. 138 157 (263) 13,601 (1,153)
</TABLE>
22
<PAGE> 30
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following selected unaudited pro forma financial data of Crown Media
Holdings and its subsidiaries as of and for the year ended December 31, 1999
have been derived from the audited financial statements of Crown Media and its
subsidiaries and Odyssey Holdings and its subsidiaries. We are a holding company
and prior to the completion of the reorganization and the offering will have no
material assets, liabilities, contingent liabilities or operations. The selected
unaudited pro forma financial data and accompanying notes thereto should be read
in conjunction with "Selected Historical Consolidated Financial Data" and the
consolidated financial statements of Crown Media and Odyssey Holdings and other
financial information, including "Management's Discussion and Analysis of
Financial Condition and Results of Operations," included elsewhere in this
prospectus.
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 this offering.
The assets and liabilities of Odyssey Holdings and its subsidiaries
relating to Crown Media's 22.5% interest in Odyssey Holdings which will be 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 will be 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.
Our consolidated financial statements are adjusted on a pro forma basis to
illustrate the effects of the reorganization as if it had occurred on December
31, 1999 for the balance sheet and as if it had occurred on January 1, 1999 for
the statements of operations presented. 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 period
presented or that might be attained in the future.
23
<PAGE> 31
SELECTED UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------------------------------
CROWN MEDIA HOLDINGS
-----------------------------------------------------
PRO
CROWN ODYSSEY FORMA PRO OFFERING PRO FORMA
MEDIA HOLDINGS ADJUSTMENTS FORMA ADJUSTMENTS AS ADJUSTED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Subscriber fees.............. $ 27,670 $ 7,844 $ -- $ 35,514 $ -- $ 35,514
Advertising.................. 1,729 9,819 -- 11,548 -- 11,548
Other........................ 2,510 1,220 -- 3,730 -- 3,730
-------- -------- -------- --------- -------- ---------
Total revenues................. 31,909 18,883 -- 50,792 -- 50,792
Cost of sales:
Programming costs:
Affiliates................ 12,331 15,930 -- 28,261 -- 28,261
Non-affiliates............ 10,452 5,882 -- 16,334 -- 16,334
Subscriber acquisition cost
amortization.............. -- 1,600 -- 1,600 -- 1,600
Other........................ 18,796 28,715 -- 47,511 -- 47,511
-------- -------- -------- --------- -------- ---------
Total cost of sales............ 41,579 52,127 -- 93,706 -- 93,706
General and administrative
expenses..................... 26,277 23,000 (4,000)(1) 45,277 -- 45,277
Amortization of goodwill....... -- -- 13,232 (2) 14,881 -- 14,881
1,649 (3)
-------- -------- -------- --------- -------- ---------
Income (loss) from
operations................... (35,947) (56,244) (10,881) (103,072) -- (103,072)
Equity in net losses of
unconsolidated subsidiaries
and investment expenses...... 18,992 -- (12,389)(4) 4,954 -- 4,954
(1,649)(3)
Minority interest in net
loss......................... -- -- (12,389)(5) (12,389) -- (12,389)
Interest (income) expense,
net.......................... (798) (1,181) -- (1,979) -- (1,979)
-------- -------- -------- --------- -------- ---------
Net loss before income taxes... (54,141) (55,063) 15,546 (93,658) -- (93,658)
Income tax provision........... 2,556 -- (1,600)(6) 956 -- 956
-------- -------- -------- --------- -------- ---------
Net loss....................... $(56,697) $(55,063) $ 17,146 $ (94,614) $ -- $ (94,614)
======== ======== ======== ========= ======== =========
Loss per share................. $(47,926) $ $
======== ========= =========
Weighted average number of
Class A and Class B shares
outstanding.................. 1,183
</TABLE>
See accompanying notes to selected unaudited pro forma consolidated
financial data.
24
<PAGE> 32
SELECTED UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
--------------------------------------------------------------------------------
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........ $ 3,865 $ 19,485 $ -- $ 23,350 $ 230,000 (14) $ 221,350
(2,000)(15)
(30,000)(16)
Accounts receivable, net......... 8,847 5,063 -- 13,910 -- 13,910
Program license fees, net........ 10,846 21,562 -- 32,408 -- 32,408
Subscriber acquisition fees,
net............................ -- 4,268 -- 4,268 -- 4,268
Prepaids and other assets........ 1,829 177 10,000 (7) 12,006 -- 12,006
--------- --------- --------- ---------- --------- ---------
Total current assets........... 25,387 50,555 10,000 85,942 198,000 283,942
Program license fees, net of
current portion................ 7,736 59,992 -- 67,728 -- 67,728
Property and equipment, net...... 7,985 4,663 -- 12,648 -- 12,648
Investment in Odyssey Holdings
and related investment
expenses....................... 35,363 -- (4,241)(8) -- -- --
(31,122)(8)
Prepaids and other assets, net of
current portion................ 4,575 21,902 -- 26,477 -- 26,477
Goodwill......................... -- -- 31,122 (8) 295,756 -- 295,756
264,634 (9)
--------- --------- --------- ---------- --------- ---------
Total assets................... $ 81,046 $ 137,112 $ 270,393 $ 488,551 $ 198,000 $ 686,551
========= ========= ========= ========== ========= =========
LIABILITIES AND
STOCKHOLDERS'/MEMBERS' EQUITY
(DEFICIT):
Accounts payable and accrued
liabilities.................... $ 8,743 $ 8,962 $ -- $ 17,705 $ -- $ 17,705
Payable to affiliates............ 43,848 34,627 -- 78,475 (30,000)(16) 48,475
Notes payable.................... 22,711 -- (10,000)(10) 12,711 -- 12,711
Other current liabilities........ 2,154 3,834 -- 5,988 -- 5,988
--------- --------- --------- ---------- --------- ---------
Total current liabilities...... 77,456 47,423 (10,000) 114,879 (30,000) 84,879
License fees payable to
affiliates, net of current
portion........................ -- 28,744 -- 28,744 -- 28,744
License fees payable to third
parties, net of current
portion........................ -- 6,466 -- 6,466 -- 6,466
Other long-term liabilities...... 6,219 30,632 (1,600)(11) 35,251 -- 35,251
--------- --------- --------- ---------- --------- ---------
Minority interest (including
redeemable preferred
interest)...................... -- 25,000 4,241 (7) 29,241 -- 29,241
Class B common stock subject to
put and call................... 60,338 -- (60,338)(12) -- -- --
STOCKHOLDERS'/MEMBERS' EQUITY
(DEFICIT):
Class A common stock............. -- -- -- -- -- --
Class B common stock............. -- -- -- -- -- --
Paid-in capital.................. 69,902 -- 60,338 (12) 405,239 230,000 (14) 635,239
264,634 (9)
10,365 (13)
Accumulated earnings (deficit)... (132,869) -- 1,600 (11) (131,269) (2,000)(15) (133,269)
Members' equity (deficit)........ -- (1,153) (4,241)(8) -- -- --
5,759 (7)
10,000 (10)
(10,365)(13)
--------- --------- --------- ---------- --------- ---------
Total stockholders'/members'
equity (deficit)............. (62,967) (1,153) 338,090 273,970 228,000 501,970
--------- --------- --------- ---------- --------- ---------
Total liabilities and
stockholders'/ members'
equity (deficit)............. $ 81,046 $ 137,112 $ 270,393 $ 488,551 $ 198,000 $ 686,551
========= ========= ========= ========== ========= =========
</TABLE>
See accompanying notes to selected unaudited pro forma consolidated
financial data.
25
<PAGE> 33
NOTES TO SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The selected unaudited pro forma consolidated balance sheet and statement
of operations give effect to the following adjustments resulting from the
reorganization:
Statement of Operations Adjustments:
(1) Represents the elimination of contractual severance costs of $4.0
million incurred by Crown Media in 1999 related to the termination
of a former senior executive.
(2) Represents amortization of goodwill of $13.2 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 (see (10)
below).
(3) Represents the reclassification of $1.6 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.
(4) Represents the elimination of $12.4 million of equity in net losses
of unconsolidated subsidiaries and investment expenses relating to
Crown Media's share of Odyssey Holdings' net loss for 1999 that was
accounted for by Crown Media under the equity method.
(5) Represents the recording of a minority interest of $12.4 million
relating to The Jim Henson Company's 22.5% Odyssey Holdings' 1999
net loss.
(6) Represents the reversal of $1.6 million of Crown Media's tax
provision which will be offset by the benefit of net operating
losses generated by Odyssey Holdings.
Balance Sheet Adjustments:
(7) Represents the recording of $4.2 million relating to The Jim Henson
Company's 22.5% minority interest in Odyssey Holdings, and the
reclassification of a $10.0 million note receivable from The Jim
Henson Company to Odyssey Holdings.
(8) Represents the elimination of the $4.2 million Crown Media
investment in Odyssey Holdings and the reclassification of $31.1
million existing excess purchase price to goodwill.
(9) Represents $264.6 million of goodwill, the difference between the
book value of Odyssey Holdings and the estimated value of the
contributions to us by Liberty Media and the National Interfaith
Cable Coalition of their interests in Odyssey Holdings.
(10) Represents the elimination of Crown Media's note payable to Odyssey
Holdings and Odyssey Holdings' corresponding note receivable of
$10.0 million.
(11) Represents the reversal of the $1.6 million deferred tax liability
balance that will be offset by the benefits resulting from Odyssey
Holdings' net operating losses.
(12) 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 shares of our Class A common stock.
(13) Represents the elimination of Odyssey Holdings' members' equity of
$10.4 million acquired from Liberty Media and the National
Interfaith Cable Coalition in the reorganization.
26
<PAGE> 34
The selected unaudited pro forma as adjusted balance sheet gives effect to
the following adjustments resulting from the offering:
(14) Represents the receipt of offering proceeds estimated at $250.0
million, less estimated issuance costs of $20.0 million.
(15) Represents a $2.0 million payment that Crown Media will be required
to pay to a former senior executive upon completion of this
offering.
(16) Represents a $30.0 million payment of accrued and unpaid program
license fees to an affiliate.
27
<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations covers the years ended December 31, 1997, 1998 and 1999
and should be read together with "Selected Historical Consolidated Financial
Data," and the consolidated financial statements of Crown Media, Inc. and
Odyssey Holdings, L.L.C. and, in each case, the notes related to these financial
statements, included elsewhere in this prospectus. This discussion contains, in
addition to historical information, forward-looking statements that involve
risks and uncertainties including those set forth under "Risk Factors." Our
actual results may differ significantly from the results discussed in the
forward-looking statements.
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
following the reorganization that will be completed simultaneously with the
closing of this 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. Following the completion of this 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:
- market;
- the relative position in the market of the distributor and the channel;
- the packaging arrangements for the channel; and
- 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:
- expansion of our channels into new markets;
- new distribution agreements for our channels in existing markets; and
- growth in the number of multi-channel homes.
Advertising sales are made on the basis of a price per advertising spot or
per unit of audience measurement (for example, a ratings point). Prices vary on
a market-by-market basis. Rates differ within markets depending on audience
demographics.
In markets where regular audience measurements are available, our
advertising rates are calculated on the basis of an agreed upon price per unit
of audience measurement in return for a guaranteed investment
28
<PAGE> 36
level by the advertiser. In these countries, we commit to provide advertisers
with 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 interstitial and
creative production. 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 interstitial 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.
CROWN MEDIA AND ITS SUBSIDIARIES
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues. Total revenues increased $8.2 million, or 35%, to $31.9 million
for the year ended December 31, 1999, from $23.7 million for the year ended
December 31, 1998. This increase was due primarily to a $7.1 million increase in
subscriber fees resulting from new market launches and expanded distribution in
existing markets. The number of subscribers increased to 20.8 million at
December 31, 1999 from 8.7 million at December 31, 1998, or 139%. During 1999,
Crown Media launched the Hallmark Entertainment Network in the following new
territories: Argentina, India, Philippines, Romania and Russia. Additionally,
advertising revenue increased $1.6 million as Crown Media began the
implementation of its new advertising strategy in 1999.
Cost of sales. Cost of sales decreased $1.7 million, or 4%, to $41.6
million for the year ended December 31, 1999, from $43.3 million for the year
ended December 31, 1998. This decrease was due primarily to a $3.7 million
decrease in programming costs which was partially offset by a $2.0 million
increase in signal distribution and language preparation costs. Programming
costs increased as a result of the refinement of our program acquisition and
scheduling processes which enabled us to more efficiently utilize our licensed
program rights.
General and administrative expenses. General and administrative expenses
increased $14.8 million, or 129%, to $26.3 million for the year ended December
31, 1999, from $11.5 million for the year ended December 31, 1998. This increase
was due to a $4.0 million severance charge related to a former executive of the
company, $2.8 million of expenses related to an SAR plan and the balance due to
new market launches 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 $35.9 million for the year
ended December 31, 1999, as compared to a loss from operations of $31.2 million
for the year ended December 31, 1998. The $4.7 million increase in the loss from
operations for the year ended December 31, 1999 from the year ended December 31,
1998 was attributable to the factors discussed above.
29
<PAGE> 37
Equity in net losses of unconsolidated subsidiaries. Equity in net losses
of unconsolidated subsidiaries of $19.0 million represents Crown Media's
proportionate share of losses for 1999 for the Odyssey Network and the Kermit
Channel and amortization of the step-up in basis of our proportionate share of
all of the underlying assets and liabilities of Odyssey Holdings.
Interest (income) expense, net. Net interest income of $798,000 for the
year ended December 31, 1999 was generated from an interest-bearing note
receivable from Hallmark Entertainment, Inc. The net interest income decreased
for the year ended December 31, 1999 as a result of the repayment of the note.
Income tax provision. Income tax provision increased $2.0 million to $2.6
million for the year ended December 31, 1999, from $632,000 for the year ended
December 31, 1998. The increase was attributable to higher foreign taxes based
on higher revenues derived from foreign tax jurisdictions and the establishment
of a deferred tax liability resulting from the allocation of Odyssey Holdings
tax losses in excess of book losses.
Net loss. Net loss was $56.7 million for the year ended December 31, 1999,
as compared to a net loss of $35.5 million for the year ended December 31, 1998.
The $21.2 million increase in the net loss for the year ended December 31, 1999
was attributable to the factors discussed above.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues. Total revenues increased $13.9 million, or 142%, to $23.7
million for the year ended December 31, 1998, from $9.8 million for the year
ended December 31, 1997. This increase was due primarily to an $11.5 million
increase in subscriber fees resulting from new market launches and expanded
distribution in existing markets. The number of subscribers increased to 8.7
million at December 31, 1998 from 5.1 million at December 31, 1997, or 71%.
During 1998, Crown Media launched the Hallmark Entertainment Network in the
following new territories: Chile, Taiwan, Thailand, Malaysia, Japan, Poland and
the Czech Republic. The remaining increase was due primarily to increased
management fees earned from the Kermit Channel, which was launched in 1998.
Cost of sales. Cost of sales increased $18.2 million, or 73%, to $43.3
million for the year ended December 31, 1998, from $25.1 million for the year
ended December 31, 1997. This increase was due primarily to an $8.4 million
increase in programming costs and a $9.8 million increase in signal distribution
and language preparation costs. These increases resulted primarily from new
market launches and expansion within existing markets.
General and administrative expenses. General and administrative expenses
increased $5.4 million, or 89%, to $11.5 million for the year ended December 31,
1998, from $6.1 million for the year ended December 31, 1997. This increase was
due primarily to higher costs associated with continued development of a
corporate infrastructure to support increased distribution, including expansion
of the management team and increased staffing levels.
Loss from operations. Loss from operations was $31.2 million for the year
ended December 31, 1998, as compared to a loss from operations of $21.4 million
for the year ended December 31, 1997. This increase of $9.8 million was due
primarily to the factors discussed above.
Equity in net losses of unconsolidated subsidiaries. Equity in net losses
of unconsolidated subsidiaries of $4.9 million represents Crown Media's
proportionate share of losses for 1998 for the Odyssey Network and the Kermit
Channel from dates of investment.
Interest (income) expense, net. Net interest income of $1.3 million for
the year ended December 31, 1998, was generated from an interest-bearing note
receivable from Hallmark Entertainment, Inc.
30
<PAGE> 38
Income tax provision. Income tax provision increased $453,000 to $632,000
for the year ended December 31, 1998, from $179,000 for the year ended December
31, 1997. This increase was due primarily to higher revenues derived from
foreign tax jurisdictions.
Net loss. Net loss was $35.5 million for the year ended December 31, 1998,
as compared to a net loss of $21.6 million for the year ended December 31, 1997.
This increase of $13.9 million was due primarily to the factors discussed above.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues. Total revenues increased $6.8 million, or 227%, to $9.8 million
for the year ended December 31, 1997, from $3.0 million for the year ended
December 31, 1996. This increase was due primarily to a $6.1 million increase in
subscriber fees resulting from new market launches and expanded distribution in
existing markets. The number of subscribers increased to 5.1 million at December
31, 1997 from 1.9 million at December 31, 1996, or 168%. During 1997 Crown Media
launched the Hallmark Entertainment Network in the following new territories:
Brazil, Venezuela, Colombia, Italy and Spain.
Cost of sales. Cost of sales increased $15.7 million, or 167%, to $25.1
million for the year ended December 31, 1997 from $9.4 million for the year
ended December 31, 1996. This increase was due primarily to an $11.6 million
increase in programming costs and a $4.1 million increase in signal distribution
and language preparation costs. These increases resulted primarily from new
market launches and expansion within existing markets.
General and administrative expenses. General and administrative expenses
increased $2.0 million, or 49%, to $6.1 million for the year ended December 31,
1997, from $4.1 million for the year ended December 31, 1996. This increase was
due primarily to expanded distribution and the development of a corporate
infrastructure to support increased growth.
Loss from operations. Loss from operations was $21.4 million for the year
ended December 31, 1997, as compared to a loss from operations of $10.5 million
for the year ended December 31, 1996. This increase of $10.9 million was due
primarily to the factors discussed above.
Income tax provision. Income tax provision increased $150,000 to $179,000
for the year ended December 31, 1997, from $29,000 for the year ended December
31, 1996. This increase was attributable to higher foreign taxes based on higher
revenues derived from foreign tax jurisdictions.
Net loss. Net loss was $21.6 million for the year ended December 31, 1997,
as compared to a net loss of $10.5 million for the year ended December 31, 1996.
This increase of $11.1 million was due primarily 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., in addition to the issuance in 1998 of $50.0 million of Class B common
stock to Chase Equity Associates. Following the completion of this offering,
Hallmark Entertainment, Inc. will not have any obligation to provide, and we do
not currently expect to receive, financial support from Hallmark Entertainment,
Inc. beyond $10.0 million in the first quarter of 2000 to fund the final
installment payment on Crown Media's $50.0 million investment in Odyssey
Holdings. As of December 31, 1999, Crown Media had obligations representing
license fees for programming, payables and notes and interest payable to
affiliates of $34.6 million, $9.2 million, and $22.7 million, respectively. As
of December 31, 1999, receivables were $8.8 million, the current portion of
program license fees was $10.8 million and cash and cash equivalents were $3.9
million.
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<PAGE> 39
Cash used in operating activities was $12.3 million, $37.4 million and
$30.2 million for the years ended December 31, 1997, 1998 and 1999,
respectively. Net cash used was used primarily to fund operating expenditures
related to net losses of $21.6 million, $35.5 million and $56.7 million in 1997,
1998 and 1999, respectively. The increase in cash used from 1997 to 1998 was due
primarily to increased payments for programming assets relating to Crown Media's
expansion into new international markets. Crown Media decreased cash used from
1998 to 1999 as it refined its program acquisition and scheduling processes to
more efficiently utilize its licensed program rights and decrease payments for
programming assets.
Cash used in investing activities was $1.0 million and $54.6 million for
the years ended December 31, 1997 and 1998, respectively. Cash provided by
investing activities was $18.4 million for the year ended December 31, 1999. The
increase in cash used in investing activities from 1997 to 1998 resulted
primarily from the first installment payment of $20.0 million relating to Crown
Media's investment in Odyssey Holdings and a $25.0 million short-term loan to
Hallmark Entertainment, Inc. In 1999, cash provided by investing activities
resulted from Hallmark Entertainment, Inc.'s repayment of this $25.0 million
loan.
Cash provided by financing activities was $13.5 million, $94.6 million and
$12.8 million for the years ended December 31, 1997, 1998 and 1999,
respectively. The increase in cash provided by financing activities from 1997 to
1998 resulted primarily from $70.0 million of capital contributions, $50.0
million from the issuance of Class B Common Stock to Chase Equity Associates and
$20.0 million from Hallmark Entertainment, Inc. to fund the second installment
payment of Crown Media's investment in Odyssey Holdings. The decrease in cash
provided by financing activities in 1999 was due to reduced borrowings from
affiliates, as the 1998 capital contributions continued to finance operations in
1999.
In connection with our growth strategy, we expect that we will continue to
make significant investments in programming, distribution and technology, as
well as additional investments in infrastructure and facilities. We are
currently committed to spend more than $60.0 million for programming and more
than $25.0 million for distribution over the next 12 months. We also expect to
make capital expenditures of more than $10.0 million to complete construction of
the network operating center over the same period. We believe that the net
proceeds from the offering, together with cash generated from operations, will
be sufficient to meet our liquidity requirements, including the financing
requirements of both Crown Media and Odyssey Holdings, through at least the next
18 months.
ODYSSEY HOLDINGS AND ITS SUBSIDIARIES
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues. Total revenues increased $800,000, or 4%, to $18.9 million for
the year ended December 31, 1999, from $18.1 million for the year ended December
31, 1998. This increase was due primarily to increased subscriber fees revenue
and other revenue, offset in part by decreased advertising revenue. The
increased subscriber fees revenue was due primarily to higher rates. The
increase in other revenue was due primarily to increased revenue from ministries
to support faith programming. The decrease in advertising revenue was due to a
change in advertising strategy from paid advertising to retail advertising
implemented in 1999. The number of subscribers decreased to 27.4 million at
December 31, 1999 from 29.0 million at December 31, 1998 as the Odyssey Network
relaunched in April 1999.
Cost of sales. Cost of sales increased $37.0 million, or 245%, to $52.1
million for the year ended December 31, 1999, from $15.1 million for the year
ended December 31, 1998. This increase was due primarily to an $18.1 million
increase in programming costs and a $5.9 million increase in production costs,
with the balance attributable to increased marketing and promotion costs
associated with the April 1999 relaunch of the Odyssey Network. The increased
programming costs were due primarily to new multi-year program license
agreements related to the relaunch entered into with subsidiaries of Hallmark
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<PAGE> 40
Entertainment, Inc., The Jim Henson Company, and the National Interfaith Cable
Coalition. The increased production costs were due to an increased number of,
and the improved quality of, in-house productions. The increased marketing and
promotion costs were also attributable primarily to the relaunch.
General and administrative expenses. General and administrative expenses
increased $16.8 million, or 271%, to $23.0 million for the year ended December
31, 1999, from $6.2 million for the year ended December 31, 1998. This increase
was due primarily to expenses related to the relaunch of the network in April
1999. In connection with the relaunch, Odyssey Holdings replaced top operating
personnel, increased staffing levels, relocated headquarters from New York to
Los Angeles, and began to build an operating infrastructure that would support
planned growth. In addition, $6.7 million of the increase was attributable to
SAR plan compensation expense.
Loss from operations. Loss from operations was $56.2 million for the year
ended December 31, 1999, as compared to a loss from operations of $3.1 million
for the year ended December 31, 1998. The $53.1 million increase in loss from
operations for the year ended December 31, 1999 from the year ended December 31,
1998 was attributable to the factors discussed above.
Interest (income) expense, net. Net interest income was $1.2 million for
the year ended December 31, 1999, compared to interest expense of $48,000 for
the year ended December 31, 1998. This increase was due primarily to interest
income earned on increased cash balances from $80.0 million of capital
contributions made in late 1998 and early 1999.
Net loss. Net loss was $55.1 million for the year ended December 31, 1999,
compared to a net loss of $3.2 million for the year ended December 31, 1998. The
$51.9 million increase in net loss for the year ended December 31, 1999 from the
year ended December 31, 1998 was primarily a result of the factors discussed
above.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues. Total revenues increased $2.8 million, or 18%, to $18.1 million
for the year ended December 31, 1998, from $15.3 million for the year ended
December 31, 1997. This increase was due primarily to an increase of $2.7
million in advertising revenues. The increase in advertising revenues was due
primarily to a greater amount of airtime devoted to both infomercial and direct
response advertising as compared to the prior year. The number of subscribers
increased to 29.0 million at December 31, 1998 from 27.8 million at December 31,
1997.
Cost of sales. Cost of sales increased $2.6 million, or 21%, to $15.1
million for the year ended December 31, 1998, from $12.5 million for the year
ended December 31, 1997. This increase was due primarily to a $938,000 increase
in programming costs and a $2.0 million increase in production costs, in each
case to improve the quantity and quality of Odyssey Holdings' programming.
General and administrative expenses. General and administrative expenses
increased $3.2 million, or 107%, to $6.2 million for the year ended December 31,
1998, from $3.0 million for the year ended December 31, 1997. This increase was
primarily a result of expenses incurred in connection with a change in the
strategy for the Odyssey Network following Crown Media's investment in Odyssey
Holdings in November 1998. This change included replacing top operating
personnel, relocating the headquarters from New York to Los Angeles and
relaunching the channel in April 1999 with a different programming mix intended
to shift the audience and attract a more favorable viewing demographic.
Loss from operations. Loss from operations was $3.1 million for the year
ended December 31, 1998, as compared to a loss from operations of $270,000 for
the year ended December 31, 1997. The $2.8 million increase in the loss from
operations in the year ended December 31, 1998 from the year ended December 31,
1997 was primarily a result of the factors discussed above.
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<PAGE> 41
Interest (income) expense, net. Net interest expense decreased $103,000,
or 68%, to $48,000 for the year ended December 31, 1998, from $151,000 for the
year ended December 31, 1997. This decrease was due primarily to the favorable
impact of interest income earned on a $40 million capital contribution received
in 1998.
Net loss. Net loss was $3.2 million for the year ended December 31, 1998,
compared to a net loss of $421,000 for the year ended December 31, 1997. The
$2.8 million increase in the net loss for the year ended December 31, 1998 from
the year ended December 31, 1997 was primarily a result of the factors discussed
above.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues. Total revenues increased $2.3 million, or 18%, to $15.3 million
for the year ended December 31, 1997, from $13.0 million for the year ended
December 31, 1996. This increase was due primarily to a $2.8 million increase in
advertising revenues which was partially offset by a decrease in subscriber fee
revenue. The increase in advertising revenues was due primarily to a higher
amount of airtime devoted to both infomercial and direct response advertising in
1999 as compared to 1998. The decrease in subscriber fee revenue results
primarily from an increase in promotional subscribers added as part of Odyssey
Holdings' strategy to maintain and grow its subscriber base. The number of
subscribers increased to 27.8 million at December 31, 1997 from 26.4 million at
December 31, 1996.
Cost of sales. Cost of sales increased $1.5 million, or 14%, to $12.5
million for the year ended December 31, 1997, from $11.0 million for the year
ended December 31, 1996. This increase was due primarily to a $1.4 million
increase in programming costs as Odyssey Holdings began investing in more and
higher quality programming.
General and administrative expenses. General and administrative expenses
increased $1.1 million, or 58%, to $3.0 million for the year ended December 31,
1997, from $1.9 million for the year ended December 31, 1996. General and
administrative expenses increased due primarily to increased staffing and
overhead costs as Odyssey Holdings expanded the scope of its operations.
Loss from operations. Loss from operations was $270,000 for the year ended
December 31, 1997, as compared to income from operations of $45,000 for the year
ended December 31, 1996. The change in the net income (loss) in the year ended
December 31, 1997 from the year ended December 31, 1996 was primarily a result
of the factors discussed above.
Interest (income) expense, net. Net interest expense increased $125,000,
or 481%, to $151,000 for the year ended December 31, 1997, from $26,000 for the
year ended December 31, 1996. This increase was due primarily to interest
expense on increased borrowings by Odyssey Holdings during the year to finance
its operations.
Net income (loss). Net loss was $421,000 for the year ended December 31,
1997 as compared to net income of $19,000 for the year ended December 31, 1996.
The $440,000 change in net income (loss) in the year ended December 31, 1997
from the year ended December 31, 1996 was primarily a result of the factors
discussed above.
SIGNIFICANT ACCOUNTING POLICIES
Subscriber fee revenues derived from pay television distributors are
recognized when services are provided. Subscriber fees are recognized based upon
the reported level of subscribers by the pay television distributors and are
recorded net of promotional subscribers.
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Advertising revenues are recognized as earned in the period in which the
advertising commercials are telecast. Advertising revenues are recorded net of
agency commissions and estimated advertising deficiency reserves.
The asset, program license fees, represents costs paid for the rights to
air programming licensed from others. In accordance with SFAS No. 63, "Financial
Reporting by Broadcasters," program license fees are capitalized and amortized
over each program's license period or anticipated usage, whichever is shorter.
The asset, subtitling and dubbing costs, represent costs incurred to
prepare programming for airing in international markets. These costs are
capitalized as incurred and are amortized over each programming license period
or anticipated usage, whichever is shorter.
In the United States, we pay some television distributors one-time
subscriber acquisition fees to carry our channels. Subscriber acquisition fees
are capitalized and amortized over the term of the applicable distribution
agreement.
New Accounting Principles
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. We intend to adopt the new accounting
standard in the year ending December 31, 2001, but do not expect it to have a
material effect on its financial statements.
Foreign Currency Exchange and Inflation
In general, we have not entered into hedging transactions to reduce our
exposure to foreign currency exchange rate risks. Accordingly, we may experience
economic loss and a negative effect on earnings and equity with respect to our
holdings solely as a result of foreign currency exchange rate fluctuations. See
"Risk Factors -- We are subject to the risks of doing business outside the
United States."
The functional currency for our operations generally is the U.S. dollar.
Assets and liabilities of foreign subsidiaries are translated at the exchange
rates in effect at year-end, and the statements of operations are translated at
the average exchange rates during the period. Exchange rate fluctuations in
translating foreign currency financial statements into U.S. dollars result in
unrealized gains or losses that are not material. Cumulative translation
adjustments are not material. Transactions denominated in currencies other than
the local currency are recorded based on exchange rates at the time such
transactions arise. Subsequent changes in exchange rates result in transaction
gains and losses which are reflected in income as realized upon settlement of
the transactions.
We have not been materially affected by inflation.
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BUSINESS
COMPANY OVERVIEW
We own and operate pay television channels dedicated to high quality family
programming, which we believe represents one of the most popular television
formats. We currently operate and distribute the Hallmark Entertainment Network
internationally and the Odyssey Network domestically, primarily through cable
and direct-to-home satellite systems. We have more than 50 million subscribers
worldwide.
Each of our channels benefits from a long-term program agreement with a
subsidiary of Hallmark Entertainment, Inc. These program agreements generally
provide exclusive pay television access to Hallmark Entertainment, Inc.'s
first-run presentations and extensive library of original made-for-television
movies and miniseries. Hallmark Entertainment, Inc.'s library consists of over
4,000 hours of programming, including eight of the 10 most highly rated
made-for-television movies for the 1993 through 1999 television seasons, based
on A.C. Nielsen ratings. Programs contained in this library have won more than
90 Emmy Awards, Golden Globe Awards and Peabody Awards. The Odyssey Network also
licenses a substantial amount of programming produced by The Jim Henson Company,
a producer of popular family and children's programming, through a long-term
program agreement. Programs contained within The Jim Henson Company's library
have won more than 40 Emmy Awards and Peabody Awards. In addition, we and The
Jim Henson Company each own 50% of the Kermit Channel. The Kermit Channel, which
we operate primarily in India, features popular family and children's
programming.
The programming we license from a subsidiary of Hallmark Entertainment,
Inc. and The Jim Henson Company has established the Hallmark Entertainment
Network and the Odyssey Network as destinations for viewers seeking high quality
family entertainment and as attractive outlets for advertisers seeking to target
these viewers. We believe that this programming will continue to drive the
growth in the number of our worldwide subscribers and the growth of our
revenues.
We have distribution agreements with leading pay television distributors in
each of our markets. Internationally, for the Hallmark Entertainment Network,
some of these include British Sky Broadcasting, Ltd., Multicanal, and United
Pan-European Communications. In the United States, the nine largest pay
television distributors account for approximately 80% of all pay television
subscribers. We currently distribute the Odyssey Network on cable systems
operated by each of these nine pay television distributors and have long term
distribution agreements with the AT&T and Time Warner cable systems, the two
largest distributors. We are in discussions to sign long-term agreements with
the other seven pay television distributors. We currently distribute the Odyssey
Network to approximately 35% of all United States pay television subscribers.
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The following table shows programming sources, selected pay television
distributors, territories in which we operate and the total number of our
subscribers as of December 31, 1999 for each of our channels.
<TABLE>
<CAPTION>
HALLMARK ODYSSEY
ENTERTAINMENT NETWORK NETWORK KERMIT CHANNEL
<S> <C> <C> <C>
Programming Hallmark Hallmark Hallmark
Sources Entertainment, Inc. Entertainment, Inc. Entertainment,
Inc.
Third party sources The Jim Henson The Jim Henson
Company Company
National Interfaith Third party
Cable Coalition sources
Third party sources
Selected Pay BSkyB AT&T Modi Entertainment
Television Cablevision Time Warner Cable
Distributors Modi Entertainment
United Pan-European
Communications
Territories International Domestic India
Total 20.8 million 27.4 million 6.0 million
Subscribers
</TABLE>
HISTORICAL OVERVIEW
Hallmark Cards, founded in 1910, is the largest manufacturer of greeting
cards in the U.S., and the owner of Binney & Smith, the maker of Crayola
Crayons. In addition, since 1951, Hallmark Cards has sponsored the Hallmark Hall
of Fame, one of television's most honored and enduring dramatic series.
Beginning in 1990, Hallmark Cards began an extensive strategic review of
its business units. As a result, Hallmark Cards created a family entertainment
platform in 1991 as part of its overall corporate strategy.
In 1994, Hallmark Cards further expanded its commitment to family
entertainment with the acquisition of RHI Entertainment, Inc., the leading
independent producer of movies-of-the-week and miniseries in the United States.
In addition to having produced such highly regarded programs as Lonesome Dove,
Scarlett and Gypsy, RHI Entertainment owned an extensive production library
containing more than 1,800 hours of widely appealing programming, including
Laurel & Hardy and The Little Rascals. In connection with the acquisition of RHI
Entertainment, Hallmark Cards formed Hallmark Entertainment, Inc. to own RHI
Entertainment. RHI Entertainment was previously a publicly traded company, whose
President and Chief Executive Officer was Robert Halmi, Jr. Mr. Halmi is
currently the President and Chief Executive Officer of Hallmark Entertainment,
Inc. and the Chairman of our Board of Directors.
In June 1995, Hallmark Entertainment, Inc. expanded its business with the
formation of Crown Media (formerly Hallmark Entertainment Networks, Inc.) and
launched its first pay television channel, the Hallmark Entertainment Network,
in Belgium, The Netherlands and Luxembourg.
In November 1998, Crown Media continued to expand its family entertainment
business with the acquisition of 22.5% of Odyssey Holdings, which operates the
Odyssey Network. The predecessor of the Odyssey Network, the Vision Interfaith
Satellite Network, was formed by the National Interfaith Cable Coalition in
1988. The National Interfaith Cable Coalition is a consortium of more than 70
religious faith
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<PAGE> 45
groups that produce, acquire and license programming for the Odyssey Network. In
April 1999, we relaunched the Odyssey Network as "the first network for today's
family."
Liberty Media acquired an interest in the Odyssey Network in July 1995.
Liberty Media is a leading media, entertainment and communications company with
interests in a diverse group of public and private companies. Its subsidiaries
and business affiliates are engaged in a broad range of programming,
communications, technology and Internet businesses.
Additionally, in 1998, we and The Jim Henson Company formed the Kermit
Channel. The Kermit Channel offers popular family and children's programming,
including programming produced by Hallmark Entertainment, Inc. and The Jim
Henson Company. The Jim Henson Company is a producer of popular family and
children's programming, including programs such as The Muppet Show, The Muppet
Movie, and Fraggle Rock.
INDUSTRY OVERVIEW
The pay television industry is comprised of program suppliers, pay
television channel providers and distributors. The following table shows the
estimated and projected number of television households and pay television
households for each of the markets specified, as estimated by Kagan World Media,
Inc., except where noted, for the years indicated.
<TABLE>
<CAPTION>
TOTAL TV TOTAL PAY TV % PAY TV
HOUSEHOLDS HOUSEHOLDS PENETRATION
----------------- ----------------- -------------
1998E 2003P 1998E 2003P 1998E 2003P
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Latin America......................... 109,800 119,400 14,039 25,404 12.8% 21.3%
Asia Pacific(1)....................... 180,128 223,525 50,091 108,562 27.8 48.6
Europe................................ 117,834 125,185 22,673 36,481 19.2 29.1
Scandinavia/Benelux................... 20,866 21,718 16,517 18,502 79.2 85.2
Africa(2)............................. 5,616 6,638 1,210 1,357 21.6 20.4
United States(3)...................... 99,000 104,000 79,200 93,400 80.0 89.8
------- ------- ------- -------
TOTAL...................... 533,244 600,466 183,730 283,706 34.5% 47.2%
======= ======= ======= ======= ===== =====
</TABLE>
- ------------------------------
(1) Excluding China, for which comparable data is not available.
(2) Baskerville Communications Corporation.
(3) Paul Kagan Associates, Inc.
Program suppliers, from whom we license our programming, include all of the
major production studios and independent production companies, such as Hallmark
Entertainment, Inc., The Jim Henson Company and the National Interfaith Cable
Coalition. These program suppliers create, develop and finance the production of
movies, television miniseries and series and other programming. Program
suppliers receive revenues by licensing this programming to broadcasters and
channel providers around the world. These licenses are typically specific by
territory and are limited to a certain number of showings within specified
periods of time.
We are a pay television channel provider. Pay television channel providers
include all channel providers except free-to-air broadcasters, such as ABC, NBC,
CBS, FOX and the BBC. These pay television channel providers acquire or license
programming from program suppliers and generally package the programming
according to an overriding theme. Pay television channel providers compete with
each other for distribution and to attract viewers and advertisers. Pay
television providers generally target an audience with a certain demographic
composition, so that they can then sell that audience to advertisers.
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Pay television distributors own and operate the platforms used to deliver
channels to subscribers. These distributors use several different technologies
to reach their subscribers as described below. Distributors attempt to create a
mix of channels that will be attractive to their subscriber population in an
attempt to gain new subscribers and to reduce subscriber turnover. More
recently, distributors have begun to offer additional broadband services such as
Internet access, telephony, and video-on-demand over their systems.
As a result of the recently increased competition for limited analog
channel space in the United States, pay television channel providers are often
required to pay up-front subscriber acquisition fees to pay television
distributors for carriage on their systems. These subscriber acquisition fees
are paid to television distributors on a per subscriber basis and generally in
advance of the receipt of subscriber fee revenues from such pay television
distributors.
DISTRIBUTION PLATFORMS
Four distribution platforms are currently used to transmit programming.
First, cable television systems use coaxial or fiber optic cable to transmit
multiple channels between a central facility, known as a headend, and the
individual subscriber's television set. Second, analog and digital DTH systems
use satellite transponders to broadcast television programming to individual
dwellings with satellite reception equipment, including a dish and a decoder.
Third, terrestrial television broadcasters typically broadcast locally or
through regional or national ground-based transmission networks. In general,
such broadcasters use landline, microwave or satellite transmission systems to
distribute programming to terrestrial transmission facilities for broadcast
directly to viewers' homes. Finally, channels can also be distributed through
satellite master antenna television (SMATV). SMATV is used primarily for
buildings, such as apartments and other buildings, that receive programming from
satellites by means of a single antenna that is connected to a pay television
distributor's headend. The television signals are then distributed to individual
units in the building by cable.
SOURCES OF REVENUE
Subscriber Fees
Pay television customers subscribe for basic services by paying monthly
fees for basic channels. The customers can also subscribe to additional packages
of premium or pay-per-view services upon payment of additional fees. In most
markets, pay television distributors generally pay a fee per subscriber to
channel providers.
Advertising Revenue
The advertising market differs greatly around the world. In the United
States, the most developed television market, it is estimated by Advertising Age
that 39% of all advertising expenditures are spent on television. In other parts
of the world, the amount spent by advertisers on television varies according to
the development of each country's television market. Program ratings systems in
many non-United States markets are also less developed, and as a result,
advertisers rely largely on subscriber counts rather than empirical measurements
when buying advertising time. We believe that the market opportunity for
television advertising outside the United States is growing even faster than
inside the United States, as foreign markets increase television penetration and
develop advanced program ratings systems.
Television advertising is sold in a variety of formats. Many pay television
channels largely rely upon the spot advertisement format. Spot advertisements
are normally 30 seconds long and air during or between programs. They are often
sold in packages of a certain number of broadcasts or to deliver a certain
number of viewers. An alternative to spot advertising is sponsorship, which
involves companies sponsoring a program or selection of programs on a channel by
applying their branding around the programming.
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The ability of a television channel to generate advertising revenue largely
depends on estimated or actual viewing levels, primarily based on ratings, and
on advertising rates. Typically, in the United States and some other markets,
independent ratings systems on which advertising sales can be based are well
established and widely accepted within the industry. In addition, pay television
channel providers and distributors may also provide estimated or actual
subscriber information.
Historically, advertisers have spent more on advertising through
traditional broadcast television than through pay television. We believe that as
pay television continues to gain viewership relative to broadcast television, it
should attract a larger percentage of the total available dollars spent on
television advertising.
COMPETITIVE STRENGTHS
We have established a track record of providing high quality family
programming throughout the world. We believe that our primary competitive
strengths include the following:
UNIQUE COLLECTION OF BRANDED PROGRAMMING AND PAY TELEVISION CHANNELS
Our channels benefit from high quality family programming licensed from
Hallmark Entertainment, Inc. and The Jim Henson Company. Our programming
distinguishes our channels as destinations for viewers seeking high quality
family entertainment and as attractive outlets for advertisers seeking to target
these viewers. We believe our branded channels will differentiate us as new
digital technologies provide many more channels and create additional ways to
distribute programming to viewers. We offer three branded pay television
channels: the Hallmark Entertainment Network and the Kermit Channel
internationally, and the Odyssey Network domestically. Each of these channels
features family entertainment produced by Hallmark Entertainment, Inc.
Additionally, the Kermit Channel and the Odyssey Network include programming
from The Jim Henson Company.
GUARANTEED ACCESS TO HIGH QUALITY PROGRAMMING
We have five-year program agreements under which we license substantially
all of the programming Hallmark Entertainment, Inc. owns or controls. We have
also signed long-term program agreements with The Jim Henson Company for
programming for the Odyssey Network and the Kermit Channel. These program
agreements ensure that our channels have access to these libraries of popular
high quality existing and new productions. Hallmark Entertainment, Inc.'s
library consists of over 4,000 hours of programming. In addition, Hallmark
Entertainment, Inc. typically produces 40 to 50 films annually, representing
approximately 150 hours of new production. The Odyssey Network also has access
to family and values-based programming from the National Interfaith Cable
Coalition.
SIGNIFICANT STRATEGIC BENEFITS FROM OUR PRINCIPAL STOCKHOLDERS
We receive significant benefits from our principal stockholders: Hallmark
Entertainment, Inc., Liberty Media, and the National Interfaith Cable Coalition.
For example, we gain access to programming from Hallmark Entertainment, Inc. and
the National Interfaith Cable Coalition. Liberty Media's industry contacts
facilitate our relationships with certain pay television distributors. We
believe we are able to attract advertisers who seek companies associated with
established brand names like those of our principal stockholders.
EXPERIENCED MANAGEMENT
Members of our senior management team have experience launching, promoting
and operating channels both domestically and internationally, having held senior
positions at ESPN, Fox Kids Network and HBO. Additionally, members of our senior
management team have held senior positions at the
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following major media companies: The News Corporation, Fox Broadcasting Company,
Sky Broadcasting, Tele-Communications, Inc., ABC, Inc. and MediaOne.
BUSINESS STRATEGY
Our principal objective is to be the destination of choice for viewers who
seek high quality family programming and for advertisers who target these
viewers, with the goal of maximizing the profitability of our existing business
and leveraging our opportunities to develop new sources of revenue. The key
elements of our business strategy to achieve this objective are to capitalize on
our unique brands; increase advertising revenues; continue to refine the
attractiveness of our channels; capitalize on broadband distribution; and
facilitate our overall business strategies through the construction of an
advanced digital global network operating center.
We intend to pursue the following strategies, which are aimed at maximizing
our opportunities for additional growth, increasing our revenues and improving
our operating performance.
CAPITALIZE ON OUR UNIQUE BRANDS BY MARKETING TO PAY TELEVISION DISTRIBUTORS,
VIEWERS AND ADVERTISERS
We intend to capitalize on our unique branded content by marketing to pay
television distributors, viewers and advertisers. We believe family programming
represents one of the most popular television formats. According to a 1998
television viewers survey, 92% of viewers believe it is important to have
television that the whole family can watch together. We believe our branded
content attracts these viewers and makes us attractive to pay television
distributors who seek these viewers. We also believe our branded content
attracts advertisers because of the demographic attributes of these viewers. For
example, since we relaunched the Odyssey Network in April 1999, we have
attracted more than 60 of the leading advertisers in the United States.
EXPAND DISTRIBUTION OF OUR CHANNELS WORLDWIDE THROUGH THE LEADING DISTRIBUTORS
IN EACH MARKET
We seek to gain access to the largest number of potential subscribers. To
do this, we intend to expand the distribution of our channels by capitalizing on
our brands and the popularity of our programming. We also intend to expand
distribution by targeting the leading pay television distributors in each of the
markets we serve. We tailor the technical and economic terms of our distribution
agreements to meet the needs of our distributors, and often receive minimum
subscriber guarantees throughout the term of our distribution agreements.
We intend to continue to expand aggressively our international channels
into new markets. For example, we recently signed a distribution agreement to
launch the Hallmark Entertainment Network in the United Kingdom on BSkyB in the
first half of 2000. In addition, we expect to enter into additional distribution
agreements in markets we currently serve to expand our penetration in these
markets. Our international distribution agreements generally last two to four
years.
In the United States, the nine largest pay television distributors account
for approximately 80% of all pay television subscribers. We currently distribute
the Odyssey Network through each of these pay television distributors. We
currently have long-term distribution agreements with two of the largest pay
television distributors and we are currently in discussions to sign long-term
distribution agreements with the other seven. Our distribution agreements in the
United States are generally for a term of six to ten years.
INCREASE REVENUE FROM THE SALE OF ADVERTISING
We intend to increase revenue from the sale of advertising time by
targeting leading advertisers, localizing our channels and expanding our sales
staff. We recently have opened advertising sales offices in Miami, Florida,
Singapore, Taipei City and London. We also have representation agreements with
leading advertising sales representatives in India, Argentina, Mexico, Thailand,
Malaysia, South Africa, and the
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<PAGE> 49
United Kingdom, to provide us with advertising and marketing services. We
believe their leadership position will enable us to sell advertising in these
markets.
We intend to continue to invest in programming designed to maximize
advertising opportunities. Since the relaunch of the Odyssey Network in April
1999 and the implementation of our advertising strategy, we have attracted more
than 60 of the leading advertisers in the United States, including Hallmark
Cards, America Online, AT&T, Coca-Cola and Procter & Gamble. As we continue to
implement our strategy, we intend to leverage our relationships with these
advertisers in our international markets. Our international focus will initially
be in Latin America, Asia Pacific and the United Kingdom.
CONTINUE TO REFINE THE ATTRACTIVENESS OF OUR CHANNELS TO VIEWERS AND
ADVERTISERS
We intend to continue to refine the attractiveness of our channels. We
believe we can capitalize on our access to the high quality programming produced
by Hallmark Entertainment, Inc., The Jim Henson Company and the National
Interfaith Cable Coalition. In addition, we will refine the appearance of our
channels and tailor them to meet local market preferences by adjusting our
programming mix and schedule, reducing the number of repeat broadcasts on our
channels, and improving the quality of our promotional segments. We believe
these efforts will increase viewership and further attract advertisers in each
of our markets.
CAPITALIZE ON BROADBAND DISTRIBUTION
We intend to capitalize on our unique branded content and established
audience base to expand the distribution of our channels and to create new
revenue opportunities through the use of new technologies created by broadband
distribution. Digital technology, the Internet and interactive television will
allow us to provide many more channels and create additional ways for people to
view our programming and to interact with us. We believe the convergence of
these new technologies will enable audiences to have a better experience than is
currently possible, using interactive features available through advanced analog
or digital set-top boxes. Pioneers in the delivery of interactive television
features have independently proven that the opportunity exists for us to keep
the attention of our audiences longer and to create additional revenue streams
for our business such as e-commerce, interactive advertising and
video-on-demand. We believe we are positioned to capitalize on these
opportunities because we can format our programming content such that it can be
distributed in formats that these technologies require.
COMPLETE THE CONSTRUCTION OF AN ADVANCED DIGITAL GLOBAL NETWORK OPERATING
CENTER
We are building an advanced digital global network operating center in
Englewood, Colorado that will be operational in late 2000 to facilitate the
implementation of our overall business strategy. The facility will enable us to:
- efficiently expand distribution into new markets;
- enhance on air quality and reliability;
- insert regional and local advertising into programming; and
- distribute programming in digital and other formats as required in the
rapidly evolving broadband distribution environment.
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<PAGE> 50
CHANNELS
THE HALLMARK ENTERTAINMENT NETWORK
Overview
We currently distribute the Hallmark Entertainment Network to 10 geographic
markets covering more than 70 countries, dubbed or subtitled into more than 20
languages according to local market practices, viewer preferences and cost
considerations. Our largest markets include Asia Pacific, with more than eight
million subscribers, Latin America, with more than seven million subscribers,
and Central Europe, with more than two million subscribers. We also have a
significant presence in Italy, Spain, Sweden, Denmark, and Africa. We began 1999
with 8.7 million Hallmark Entertainment Network subscribers and ended the year
with 20.8 million subscribers, an increase of 139%.
Programming
The Hallmark Entertainment Network offers a range of award-winning family
programming including made-for-television movies and miniseries from the
Hallmark Entertainment, Inc. library. This library consists of epics, historical
dramas, literary classics, romances and contemporary stories. We seek
programming that is consistent with our programming theme to provide "great
stories, well told." The high quality family programming we offer is based on
classic literature and universal themes, includes world-renowned actors and
actresses, such as Ted Danson, Paul Newman, Danny Glover, Tommy Lee Jones,
Isabella Rossellini, Robert Duvall and Vanessa Williams, and is often filmed in
international locations.
Our primary source for programming is Hallmark Entertainment, Inc., our
parent company. Hallmark Entertainment, Inc. is a worldwide leader in the
production of movies for television. Hallmark Entertainment, Inc. produces
approximately 40-50 movies each year, and has an extensive library with more
than 4,000 hours of quality family programming. Hallmark Entertainment, Inc.
productions generally account for between 50% and 60% of the programming on the
Hallmark Entertainment Network. We license the remaining portion of the Hallmark
Entertainment Network's programming line-up from third parties. This third party
programming is consistent with the themes and quality of the material licensed
from Hallmark Entertainment, Inc. We license programming from third party
suppliers such as Aurum Producciones, S.A., CBS Broadcast International, and
Polygram Television International.
Examples of programming from the Hallmark Entertainment, Inc. library
include Gulliver's Travels, The Odyssey, Merlin, Alice in Wonderland and
Lonesome Dove, as well as programming from "The Collection," from the Hallmark
Hall of Fame library, such as What the Deaf Man Heard and To Dance with the
White Dog. Examples of third party productions on the Hallmark Entertainment
Network include Joan of Arc, Anne of Green Gables, and Little Men.
We enjoy preferred access to Hallmark Entertainment, Inc.'s programming
through a five-year program agreement. For more details regarding the program
agreements, see "Certain Relationships and Related Transactions -- Program
Agreements -- Hallmark Program Agreements."
Distribution
In the countries where we offer the Hallmark Entertainment Network, we
distribute the channel through a variety of distribution platforms, such as
cable and DTH. We seek to partner with the dominant pay television distributor
in the market in order to quickly establish a substantial subscriber base.
We regularly review existing and potential markets to assess their
prospects. As the number of Hallmark Entertainment Network subscribers increases
in a market, we assess our ability to grow revenue or develop new revenue
sources by subdividing the market through the addition of satellite signals.
When we subdivide a market, we are able to customize the channel to appeal to a
more specific audience. The delivery of the Hallmark Entertainment Network to
more targeted audiences also increases the number of
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<PAGE> 51
potential advertisers on the channel by creating more targeted advertising
opportunities for local or regional businesses in the markets in which we
operate.
The following chart shows the Hallmark Entertainment Network launch date,
the approximate number of television households and pay televisions households,
as estimated by Kagan World Media, Inc. for 1999 (except where noted), the
number of Hallmark Entertainment Network subscribers at year end 1997 and 1999,
and the average subscriber rate, in each of the markets in which we operate the
Hallmark Entertainment Network.
<TABLE>
<CAPTION>
HALLMARK HALLMARK
ENTERTAINMENT ENTERTAINMENT
NETWORK NETWORK 1999
PAY SUBSCRIBERS 1999 AVERAGE
TOTAL TV TELEVISION -------------- % OF MONTHLY
LAUNCH HOUSEHOLDS HOUSEHOLD % PAY TV 1997 1999 MULTICHANNEL SUBSCRIBER
MARKETS DATE (000'S) (000'S) PENETRATION (000'S) HOUSEHOLDS RATE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LATIN AMERICA:
Argentina............... 1999 9,800 5,105 52.1% 300 3,592 70.4% $.05
Mexico.................. 1995 16,500 2,802 17.0 1,260 1,985 70.8 .09
Brazil.................. 1997 36,400 2,763 7.6 356 511 18.5 .32
Venezuela............... 1997 3,700 597 16.1 -- 439 73.5 .31
Chile................... 1998 4,100 737 18.0 60 320 43.4 .15
Colombia................ 1997 7,800 310 4.0 -- 301 97.1 .30
Other Latin America..... Various 31,500 1,725 5.5 590 699 40.5 .21
------- ------- ----- ------
Subtotal......... 109,800 14,039 12.8 2,566 7,847 55.9
ASIA PACIFIC:
India................... 1999 63,200 20,016 31.7 -- 5,200 26.0 .00(1)
Taiwan.................. 1998 5,800 4,560 78.6 -- 1,200 26.3 .00(1)
Philippines............. 1999 8,410 640 7.6 285 457 71.4 .18
Thailand................ 1998 12,970 376 2.9 100 286 76.1 .10
Malaysia................ 1998 3,240 332 10.2 120 237 71.4 .67
Australia............... 1996 6,698 911 13.6 105 335 36.8 .47
Japan................... 1998 46,780 21,200 45.3 75 114 0.5 .55
New Zealand............. 1996 1,220 468 38.4 50 79 16.9 .08
Other Asia Pacific(2)... Various 31,810 1,588 5.0 465 351 22.1 .47
------- ------- ----- ------
Subtotal......... 180,128 50,091 27.8 1,200 8,259 16.5
EUROPE:
Poland.................. 1998 12,283 5,624 45.8 -- 912 16.2 .11
Romania................. 1999 7,504 3,291 43.9 -- 655 19.9 .02
Other Central Europe.... Various 4,730 1,848 39.1 -- 200 10.8 .25
Czech Republic.......... 1998 3,950 1,496 37.9 -- 330 22.1 .13
Russia/Middle East...... 1997 57,462 6,470 11.3 150 233 3.6 .18
Italy................... 1997 19,305 1,578 8.2 150 600 38.0 .51
Spain................... 1997 12,600 2,366 18.8 250 513 21.7 .48
------- ------- ----- ------
Subtotal......... 117,834 22,673 19.2 550 3,443 15.2
SCANDINAVIA/BENELUX
Sweden.................. 1996 4,076 2,581 63.3 260 290 11.2 .16
Denmark................. 1996 2,398 1,717 71.6 125 151 8.8 .13
Norway.................. 1996 1,836 1,023 55.7 75 105 10.3 .13
Finland................. 1996 2,030 1,107 54.5 95 99 9.0 .13
Benelux................. 1996 10,526 10,089 95.9 80 125 1.2 .15
------- ------- ----- ------
Subtotal......... 20,866 16,517 79.2 635 770 4.7
AFRICA.................... 1996 5,616(3) 1,210(3) 21.6 170 475 39.3 .42
------- ------- ----- ------
TOTAL............ 434,244 104,530 24.1% 5,121 20,794 19.9%
======= ======= ===== ===== ====== =====
</TABLE>
- ------------------------------
(1) Rates appear as zero due to rounding.
(2) Includes Middle East subscribers.
(3) Source: Baskerville Communications Corporation.
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<PAGE> 52
In 1999, we signed agreements to distribute the Hallmark Entertainment
Network in two significant markets, the United Kingdom and Israel, and are
scheduled to launch the channel in these territories in 2000. These launches are
expected to significantly increase the number of Hallmark Entertainment Network
subscribers.
United Kingdom. The United Kingdom is a developed television market with
nearly 24.0 million television households. Cable penetration is approximately
13% of television households with 3.1 million basic subscribers. However,
satellite continues to be the primary platform with approximately 3.5 million
digital subscribers.
In August 1999, we completed a distribution agreement with BSkyB, a large
pay television distributor in the United Kingdom. Pursuant to this agreement,
the Hallmark Entertainment Network will be carried on BSkyB's digital DTH
service for five years following the launch of the service. The contract
provides the Hallmark Entertainment Network a minimum number of subscribers as a
percent of BSkyB's total basic digital residential subscribers, and provides
BSkyB an 18-month period of exclusive distribution of the Hallmark Entertainment
Network in the United Kingdom. We intend to launch the Hallmark Entertainment
Network under this agreement in the United Kingdom in the second quarter of
2000.
Following the October 1998 launch of its BSkyB's digital package of over
100 channels, and the reduction in the pricing of its service to consumers in
mid-1999, BSkyB has converted a significant portion of its analog subscribers to
digital, and had more than 3 million digital subscribers.
Israel. Israel is a technologically advanced market with 1.6 million
television households. Cable penetration is approximately 70% of television
households with more than 1.1 million cable television households. In December
1999, we completed a distribution agreement with Tevel International
Communications Ltd. Under this agreement, Tevel will provide distribution of the
Hallmark Entertainment Network to more than 400,000 subscribers. We intend to
launch the Hallmark Entertainment Network in Israel during 2000.
Sources of Revenues
Like most pay television channels, we currently derive substantially all of
our revenues from subscriber fees and advertising sales. Subscriber fees are
currently our primary source of revenue. We charge our pay television
distributors a fee per subscriber for the right to broadcast the Hallmark
Entertainment Network. We have significantly increased the number of subscribers
to the Hallmark Entertainment Network in the past year, and have consequently
seen an increase in revenues generated from subscriber fees. At December 31,
1999 we had 20.8 million Hallmark Entertainment Network subscribers, an increase
of 12.1 million subscribers from December 31, 1998. For the year ended December
31, 1999, subscriber fee revenues were $27.7 million, an increase of $7.1
million from December 31, 1998.
We also derive revenues from the sale of advertising time on the Hallmark
Entertainment Network. We generate revenues directly from advertisers as well as
from our pay television distributors under distribution agreements that
typically provide for a sharing of net revenues from advertising. We believe
that the increasing number of subscribers to the Hallmark Entertainment Network
and the favorable demographics of its family audience provide us with the
opportunity to substantially increase revenues from the sale of advertising
time.
We are expanding our advertising sales staff to take advantage of the
opportunities that have been created through our growing family oriented
subscriber base. We have hired a core advertising staff that has developed and
is implementing our advertising sales strategy. They have identified key
markets, opened sales offices in these key markets, and identified potential
clients in these markets. We have opened advertising sales offices in Miami,
Singapore, Taipei City and London, and entered into representation
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<PAGE> 53
agreements with third parties to increase advertising sales in India, Argentina,
Poland and Romania, South Africa and the United Kingdom.
We also expect to increase our advertising revenues following the
introduction of two new initiatives planned for 2000. First, we intend to
increase the number of satellite feeds delivering our channel, which will enable
us to further customize our channel in specific markets. For example, instead of
sending the same signal to all of Latin America as we have done thus far, we
will soon be able to send multiple signals to Latin America that will each be
customized to cater to the specific sub-regions of Latin America that they
cover. We believe localized feeds will lead to more opportunities for the sale
of advertising to local businesses or to multinational advertisers interested in
reaching specific regions. Second, we are building a network operating center
which will allow us to originate and compress the channel. We will be able to
insert commercials into our programming, instead of relying on our affiliates
for that service, and thus, we will reduce our expenses.
For the year ended December 31, 1999, revenues from the sale of advertising
on the Hallmark Entertainment Network were $1.7 million. We expect that figure
to grow as we become more focused on advertising sales as a source of revenue.
Sales and Marketing
Hallmark Entertainment Network focuses its marketing efforts to maximize
our two revenue streams in the individual markets in which the channel is
distributed. Hallmark Entertainment Network's marketing efforts vary by market
depending on the maturity of the local television industry, the level of
distribution of the Hallmark Entertainment Network and the potential for the
sale of advertising.
In markets where the Hallmark Entertainment Network has not maximized its
carriage with pay television distributors, marketing efforts are primarily
directed toward potential new distributors. These marketing efforts include
advertising in trade publications and participating in industry trade shows, as
well as direct mail and public relations campaigns. In these markets, efforts
are also made to market the channel to potential viewers to drive consumer
demand for carriage of the channel by local affiliates.
In markets where the Hallmark Entertainment Network has obtained
substantial distribution or has exclusive agreements with primary distributors,
marketing efforts are primarily directed toward maintaining and increasing
subscribers and viewers. Our efforts in these markets are directed toward adults
18 to 54 years old, with an emphasis on females and heads-of-households of that
group. These consumer directed marketing efforts are coordinated with and are
often partially funded by our pay television distributors in each market. These
efforts often include traditional marketing campaigns consisting of print,
billboard, radio and television advertising. Additionally, we emphasize our
unique relationship with our primary content supplier, Hallmark Entertainment,
Inc., through the use of premier screening events, press tours with actors and
actresses and viewer trips to movie sets. We also use Hallmark Entertainment
Network's website, www.hallmarknetwork.com, to market and promote the channel
though schedule information, movie synopses, games and contests.
In markets where we are developing Hallmark Entertainment Network's
advertising business, marketing efforts are also directed toward potential
advertisers. When marketing the Hallmark Entertainment Network to potential
advertisers, we focus on media planners and buyers and on regional and
international advertisers.
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<PAGE> 54
THE ODYSSEY NETWORK
Overview
We distribute the Odyssey Network in the United States to 27.4 million
subscribers through more than 50 pay television distributors. The nine largest
pay television distributors in the United States account for approximately 80%
of all pay television subscribers. We have signed agreements with the AT&T and
Time Warner cable systems, the two largest distributors, and are seeking to
increase our subscriber base by signing long-term distribution agreements with
the other large pay television distributors.
Predecessors of the Odyssey Network operated under various names as a
primarily religious network. Ratings were generally flat and the viewer
demographics were 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. In 1998, we performed extensive market research on the potential
of an enhanced Odyssey Network featuring family and values-based programming. We
found that most of the existing family-based programming was designed primarily
to appeal to children. We believe that this strategy limits the potential
audience and revenue potential for several reasons. First, most adults do not
want to watch children's programming, thus limiting its appeal to the largest
group of potential viewers. Second, the children's market is already a mature
market with significant competition. We believe that family programming that is
targeted to adults yet is also appealing to children will encourage families to
watch television together, resulting in larger audiences and viewer demographics
more attractive to advertisers. In addition, a 1998 Television Viewers Survey
indicated that 92% of viewers feel that it is important to have television that
the whole family can watch together.
Our research also indicated that the American family had changed
significantly over the past twenty to thirty years and now consists of many
variations of the traditional family, including extended families. Most existing
family-based programming has been targeted at the traditional family. We believe
that family-based programming targeted at this new American family, which we
call "today's family," would significantly increase the market potential of the
Odyssey Network. Other research supported this brand positioning.
As a result, we began operating the Odyssey Network in November 1998 and
relaunched the channel in April 1999 with a strategy to make it "the first
network for today's family." This relaunch featured programming from the
Hallmark Entertainment, Inc. and The Jim Henson Company libraries, which
promotes family viewing and appeals to "today's family." We also added an
additional programming feed which allowed us to provide primetime programming
nationwide. This relaunch resulted in an immediate positive shift in audience
demographics without the loss of ratings which typically occurs when a pay
television network changes its target audience. According to A.C. Nielsen
ratings, viewership among adults aged 18-49 increased more than 44%, while
viewership among adults over 55 decreased by 26%, when comparing the third
quarter of 1999 with the third quarter of 1998. During this same period,
primetime viewership among women aged 25-54 ratings increased by more than 90%,
daytime households delivered increased by more than 187%, and viewership among
women ages 18-49 late night ratings increased by over 83%.
We believe that the Odyssey Network is uniquely positioned to become a
leading provider of family-oriented pay television programming and enjoys
significant competitive advantages.
Our access to the Hallmark Entertainment, Inc. and The Jim Henson Company
libraries and their future output provides guaranteed access to high quality
family programming that is consistent with our brand positioning. In addition,
our association with these known and trusted brands:
- provides our viewers with tangible evidence of our commitment to provide
entertainment appropriate for the entire family;
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<PAGE> 55
- significantly enhances our ability to attract advertising commitments
from the largest advertisers. We were able to attract more than 60 of the
largest 100 advertisers within eight months of our relaunch; and
- provides a competitive advantage in negotiating long-term distribution
agreements with pay television distributors.
Our relationship with the National Interfaith Cable Coalition provides us
with a unique advantage due to the National Interfaith Cable Coalition's
national presence and affiliations with local community groups. These groups
provide a grass-roots means of promoting the Odyssey Network to local pay
television distributors through community events and these groups' relationships
with local business and community leaders. National Interfaith Cable Coalition's
programming is produced to be relevant to today's family, to inspire and to
bring families together.
Programming
The Odyssey Network offers a range of high quality family and values-based
programming including historical dramas, romances, literary classics,
contemporary stories and animated series that is consistent with its programming
theme to provide "magical, mystical, spiritual and always entertaining"
programming. Our primary sources for programming on the Odyssey Network are
Hallmark Entertainment, Inc., The Jim Henson Company and the National Interfaith
Cable Coalition. We also license programming from third parties for exhibition
on the Odyssey Network. Programming from Hallmark Entertainment, Inc. accounted
for 17% of the Odyssey Network's programming in the fourth quarter of 1999, and
programming from The Jim Henson Company accounted for 8% of the Odyssey
Network's programming in the fourth quarter of 1999.
Examples of programming from the Hallmark Entertainment, Inc. library
include Gulliver's Travels and The Odyssey, as well as programming from "The
Collection" from the Hallmark Hall of Fame library such as What the Deaf Man
Heard. In addition to the Hallmark Entertainment, Inc. library of movies and
miniseries we license programming from the extensive and popular library of The
Jim Henson Company, which includes award-winning theatrical and children's
productions. Examples of The Jim Henson Company programming include The Muppet
Show, The Muppet Movie, and Fraggle Rock. We also have the benefit of a
selection of values-based programming, such as News Odyssey, and programming
from the National Interfaith Cable Coalition, such as Today's Life Choices.
Examples of third party programming shown on the Odyssey Network include the
popular drama series Beauty and the Beast, Snowy River: The McGregor Saga,
Avonlea and The Young Riders, and the hit comedy series Doogie Howser, M.D.,
Sister Kate and ALF.
We also benefit from premiering and airing original movies, miniseries and
series on the Odyssey Network. Hallmark Entertainment, Inc., The Jim Henson
Company, and the National Interfaith Cable Coalition each produce original
programs that will premier, and sometimes air exclusively, on the Odyssey
Network. For example, the Odyssey Network recently began featuring new episodes
of the award-winning creative parenting series Donna's Day, produced by The Jim
Henson Company, and new episodes of the inspiring Quiet Triumphs, hosted by Mary
Alice Williams and produced by Odyssey Holdings. In addition, the Odyssey
Network recently aired The Legend of Sleepy Hollow, produced exclusively for the
Odyssey Network by Hallmark Entertainment, Inc. The Legend of Sleepy Hollow
generated our highest-ever rating for a movie, with an overall rating of 1.0.
This original movie also generated ratings as high as 3.6 in markets where we
targeted our local marketing campaign.
Our program agreements with a subsidiary of Hallmark Entertainment, Inc.
and The Jim Henson Company typically provide for a one-time license fee for the
right to exhibit a program in the United
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<PAGE> 56
States within a specified period of time. Generally, our program agreements with
third parties are structured similarly.
Distribution
The nine largest pay television distributors account for approximately 80%
of all United States pay television subscribers. The Odyssey Network is
currently carried by more than 50 pay television distributors, including all
nine of these pay television distributors, to approximately 27.4 million
subscribers. Our distribution growth strategy is to enter into new long-term
distribution contracts with these nine pay television distributors. We have
signed contracts with the AT&T and Time Warner cable systems, the two largest
distributors, and are currently in discussions with the other large pay
television distributors.
The following table shows the approximate number of pay television
households and Odyssey Network subscribers for each of the nine largest pay
television distributors, and all other pay television distributors as a group,
in the United States.
<TABLE>
<CAPTION>
ODYSSEY ODYSSEY NETWORK
TOTAL PAY TV NETWORK % OF PAY TV
HOUSEHOLDS(1) SUBSCRIBERS(1) HOUSEHOLDS
PAY TELEVISION DISTRIBUTOR (IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Time Warner Cable........................... 12,543 7,478 59.6%
AT&T Broadband and Internet Services........ 12,283 7,104 57.8%
DirecTV..................................... 8,079 1,524 18.9%
Comcast..................................... 5,831 1,489 25.5%
Charter..................................... 5,359 1,603 29.9%
Cox......................................... 5,156 1,841 35.7%
Adelphia.................................... 4,685 1,034 22.1%
MediaOne.................................... 4,647 731 15.7%
Cablevision................................. 3,445 1,184 34.4%
All Others.................................. 17,166 3,366 19.6%
------ ------
Total............................ 79,194 27,354 34.5%
====== ====== ====
</TABLE>
- ------------------------------
(1) Source: Nielsen Media Research and Media Business Corp., December 1999.
Sources of Revenues
We currently derive substantially all of our revenues from subscriber fees
and advertising sales. We charge our pay television distributors a monthly per
subscriber fee for the right to broadcast the Odyssey Network. Generally, these
distribution agreements last for six to ten years, and include annual increases
of both subscribers and per subscriber fees. For the year ended December 31,
1999, revenues derived from subscriber fees for the Odyssey Network were
approximately $7.8 million.
As a result of the Odyssey Network's large and demographically favorable
subscriber base, which currently totals approximately 27.4 million, we generate
significant revenues from the sale of advertising time on the channel. We have
also established an advertising infrastructure with sales offices in New York,
Los Angeles and Chicago. In addition, we have also made significant investments
in programming, research, marketing and promotions, all specifically designed to
support the sale of advertising time on the Odyssey Network. In the year ended
December 31, 1999, revenues from the sale of advertising time on the Odyssey
Network were approximately $9.8 million.
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Sales and Marketing
We focus our marketing efforts on subscribers, pay television distributors
and advertisers. Odyssey Network's subscriber marketing efforts reflect Odyssey
Network's brand positioning and target audience. Our target audience is adults
ages 18-54 with an emphasis on women, and children ages 2-11. We believe that
Odyssey Network's unique blend of programming is designed to encourage family
viewing, as it is designed to appeal to adults and to encourage children to view
together with parents. We believe our marketing efforts will enable us to
maintain and increase our subscriber and viewer levels while improving the
demographic composition of our audience. We use traditional marketing campaigns
consisting of print, billboard, radio and television advertising. In addition,
subscribers can learn more about Odyssey Network's programming by logging on to
our website www.odysseychannel.com, where they can access our programming
schedule, view programming clips and read synopses of our programming.
When marketing the Odyssey Network to pay television distributors, we focus
on the nine largest pay television distributors and on local cable operators.
Our marketing efforts include advertising in trade publications and
participating in industry trade shows, as well as direct mail and public
relations campaigns. We often target local cable operators by earmarking a
portion of our local advertising budget for cooperative marketing and as a
result, we can purchase twice as much advertising for each dollar we spend.
When marketing the Odyssey Network to advertisers, we focus on media
planners and buyers and on national and regional brands. We have already
attracted more than 60 of the leading advertisers to the Odyssey Network.
Our primary marketing goals in the first year since our relaunch have been
to build the Odyssey Network brand, increase awareness of the Odyssey Network,
retain existing viewers, grow our distribution, build a solid base of blue-chip
advertisers, and maintain and grow ratings. Our Odyssey Network marketing staff
is working closely with the other Odyssey Network departments to help achieve
all of these goals.
KERMIT CHANNEL
We and The Jim Henson Company each own 50% of the Kermit Channel. The
Kermit Channel, which we operate primarily in India, features popular family and
children's programming.
We broadcast a range of family entertainment and children's programming on
the Kermit Channel. A majority of that programming is provided pursuant to
program agreements with a subsidiary of Hallmark Entertainment, Inc. and The Jim
Henson Company. The Kermit Channel program agreements, typically provide for a
one-time license fee for the right to exhibit a program on a country-by-country
basis during three distinct 18-month periods. Examples of children's programming
from The Jim Henson Company shown on the Kermit Channel include The Muppet Show,
Muppets Tonight, and Fraggle Rock. Examples of programming from Hallmark
Entertainment, Inc. shown on the Kermit Channel include Gulliver's Travels and
Moby Dick, and animated series such as Fat Albert, The Archies, and She-Ra. We
also license programming produced by third parties.
Most of the revenues derived by the Kermit Channel are generated from
subscriber fees. We distribute the Kermit Channel in generally the same manner
as we distribute and market the Hallmark Entertainment Network in our Asia
Pacific market.
CHANNEL OPERATIONS
CHANNEL CREATION
The programming departments at each of our channels are responsible for
ensuring the consistent quality of the family programming we offer. The
programming, scheduling and acquisitions departments work in conjunction with
the creative services and traffic departments to create the distinctive
appearance of our channels.
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<PAGE> 58
The creation of our channels begins with the acquisition of programming.
The acquisitions department licenses programming from Hallmark Entertainment,
Inc., The Jim Henson Company, the National Interfaith Cable Coalition, and other
program suppliers. The acquisitions department's screening staff reviews and
summarizes all potential programming to ensure compliance with our quality and
content standards. The acquisitions department licenses programming based on the
amount of new programming required on our channels as well as cost
considerations.
In most of our international markets, we customize the Hallmark
Entertainment Network by dubbing or subtitling program elements into local
languages. The decision to customize the channel into local languages is based
on local market practices, viewer preferences and cost considerations. Language
preparation is coordinated by our program operations department. Program
language elements are typically shipped to the specific region to ensure that
nuances in dialect of the particular language are captured. The elements are
then returned to our Denver headquarters, where the language elements are
combined with the other programming elements.
The creative services department is responsible for all of the non-licensed
programming (other than advertisements) on each channel. For example, the
creative services department creates the promotional segments and billboards
that are aired between the movies, miniseries and series. This interstitial
material helps to enhance each channel's brand. The creative services department
at the Odyssey Network also develops scripts for the original programming
produced for the Odyssey Network.
The scheduling department creates the playlist which contains a list of
daily programming. The scheduling department works with the creative services
and marketing personnel to continuously monitor the programming mix. The
playlist is then forwarded to the traffic department.
The traffic department inserts promotional segments into the playlist and
creates the daily log, which is the stream of programming that will ultimately
be viewed by the subscriber. The daily log, together with digital tapes that
contain the corresponding programming, are then forwarded to an origination and
playback facility, which is operated by a third party. Digital tapes that
contain the promotional segments are forwarded to the third party origination
and playback facility separately.
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<PAGE> 59
CHANNEL DELIVERY
We deliver the daily log and digital tapes to the third party origination
and playback facility for each market, where the programming and promotional
segments are compressed into a single signal, and delivered to an uplink
facility. The uplink facility then transmits the signal to the satellite
transponder that covers the relevant geographic market, and the transponder
reflects the signal back within its designated geographic area to head-end
facilities operated by pay television distributors who receive and decode our
signal and transmit our channel. Our origination, playback and uplink services
are currently provided by third parties.
We are building an advanced global network operating center at our
Englewood, Colorado headquarters, which will have the ability to perform
origination and playback services for the Hallmark Entertainment Network for up
to 36 programming channels. The facility will enable us to:
- efficiently expand distribution into new markets;
- enhance on air quality and reliability;
- insert regional and local advertising into programming; and
- distribute programming in digital and other formats as required in the
rapidly evolving broadband distribution environment.
We intend to consolidate origination and playback for most of our Hallmark
Entertainment Network signals into our headquarters by mid-2001.
The diagram below illustrates our channel delivery process.
[Chart]
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<PAGE> 60
The following chart summarizes, for each of our markets, the distribution
platforms through which we deliver our channels, our primary pay television
distributors, the various languages in which our channels are broadcast, and the
uplink and satellites we currently use to deliver our channels.
<TABLE>
<CAPTION>
PRIMARY PRIMARY UPLINK
DISTRIBUTION PAY TV PROVIDERS/
MARKET PLATFORMS DISTRIBUTORS LANGUAGES LOCATIONS SATELLITES
<S> <C> <C> <C> <C> <C>
Latin America Cable Direct TV Spanish Hero NSS 806
DBS Sky Latin Portuguese Productions,
America Miami, Florida
Cablevision
Asia Pacific Cable Modi Mandarin WTCI Apstar IIR
DBS Rebar MSO Arabic Hong Kong
UBC MSO Thai
Japanese JCSat-3
English
Central Europe Cable United Pan- Polish Hero Telstar 12
DBS European Hungarian Productions,
Communications Croatian Miami, Florida
Romanian
Scandinavia/ Cable Via Sat Swedish Hero Telstar 12
Benelux DBS Stjarn-TV Dutch Productions,
Norwegian Miami, Florida
Danish
Italy DBS Telepiu Italian Telepiu Hot Bird
Milan
Spain DBS Via Digital Castillian Via Digial Hispasat
Portuguese Madrid
Africa DBS Multichoice English Multichoice PanAmSat 4
Johannesburg
Czech Republic Cable Kabel Plus Czech Kabel Plus Kopernicus 2
Cable Association Slovak Prague
Australia Cable Foxtel English Foxtel Optus B3
DBS Austar Sydney
Russia and Cable NTV Russian Hero Telstar 12
Middle East DBS Metromedia Arabic Productions,
Miami, Florida
United Kingdom DBS BSkyB English BSkyB Telstar 12
London
Israel Cable Tevel English Hero Telstar 12
Productions,
Miami, Florida
United States Cable AT&T English AT&T GE C-3
Time Warner Los Angeles,
Cable California
</TABLE>
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<PAGE> 61
COMPETITION
The pay television industry is highly competitive. Our channels compete for
distribution, viewers and advertisers with other pay television channels,
broadcast television channels and with other general forms of entertainment.
There are several sources of competition within our industry, each of which
affects our business strategy. Our channels compete with other family oriented
programming from TNT, USA Network, Discovery, A&E, Fox Family, Lifetime and
other similarly targeted channels. We compete with these channels for carriage
on cable and satellite systems that may have limited capacity. We also compete
with these channels for viewers and advertising dollars based upon quality of
programming, number of subscribers, ratings and subscriber demographics.
Competition recently has intensified as the industry shifts from analog
distribution to digital distribution. Many pay television distributors are in
the process of upgrading their physical infrastructures to accommodate digital
delivery, which will provide significantly more channel capacity. We believe
that it will take several years for the majority of current subscribers to
convert to, and begin paying for, upgraded services. In an effort to accelerate
the conversion, pay television distributors are attempting to place channels on
their digital tier as opposed to their limited, yet more widely distributed,
analog tiers. As a result, the competition for the remaining widely distributed
analog channel space is intense. However, as more and more subscribers are
converted, the digital tier is expected to become the dominant platform.
EMPLOYEES
We had 310 employees as of December 31, 1999. Neither we nor any of our
subsidiaries are parties to collective bargaining agreements. We believe that
our relations with our employees are good.
Substantially all of our Hallmark Entertainment Network employees work at
our headquarters in Englewood, Colorado. Substantially all of our Odyssey
Network employees work at our offices in Studio City, California and New York,
New York.
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<PAGE> 62
PROPERTIES
A description of the location, use and approximate square footage of our
principal offices and facilities, all of which are leased, is set forth below.
HALLMARK ENTERTAINMENT NETWORK LOCATIONS
<TABLE>
<CAPTION>
APPROXIMATE AREA
LOCATION USE IN SQUARE FEET
<S> <C> <C>
6430 South Fiddlers Executive and administrative 50,310
Green Circle, offices
Englewood, Colorado
5670 Greenwood Plaza Post production and editing 5,344
Englewood, Colorado facilities
12700 Ventura Blvd. Administrative offices 3,183
Studio City, California
1325 Avenue of the Americas Advertising sales and program 3,600
New York, New York acquisition
95 Merrick Way Sales and administrative office 2,179
Coral Gables, Florida
234 A Kings Road Scheduling and sales 5,786
London, England
</TABLE>
We intend to relocate our post-production and editing facilities from the
5670 Greenwood Plaza location to the network operations center located at 6430
South Fiddlers Green Circle prior to July 2000.
ODYSSEY NETWORK LOCATIONS
<TABLE>
<CAPTION>
APPROXIMATE AREA
LOCATION USE IN SQUARE FEET
<S> <C> <C>
12700 Ventura Blvd. Executive and administrative 29,467
Studio City, California offices and post production
and editing facilities
1177 Avenue of the Americas Sales and administrative 15,000
New York, New York offices
205 N. Michigan Ave. Sales offices 1,172
Chicago, Illinois
</TABLE>
The leases for these offices and facilities expire between July 2000 and
August 2008. We believe our properties are sufficient for our foreseeable
business needs.
LEGAL PROCEEDINGS
We are not involved in any material pending legal proceedings.
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REGULATION
The provision of television channels in the markets in which we operate,
including the United States, is regulated. The scope of regulation 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. For example, throughout most of our Western European markets
broadcasting regulation has been formally harmonized to a substantial degree
under the regulatory structure of the European Union. 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.
The content regulations concerning programming generally prohibit
pornographic, exploitative and gratuitously violent material and usually provide
for heightened protection where children may form part of the audience. Many
nations also specifically proscribe material which may cause offense or incite
racial or religious hatred. The general scheme of regulations governing the
content of television advertising focus on prohibiting fraudulent, misleading
and subliminal advertising and require that advertising is readily
distinguishable from normal programming. The promotion of illegal goods and
services is universally prohibited and many nations also prohibit television
advertising of tobacco products and restrict alcohol and prescription drug
advertising. Generally, the responsibility for enforcing and monitoring
compliance with broadcasting and advertising laws and regulations is vested in
the domestic broadcasting licensing authorities.
Within the European Union, broadcasters are required to secure a
broadcasting license in those member states in which they are established. Under
European Union law, broadcasters validly licensed in one member state may freely
broadcast to or retransmit their programming in other member states. Outside of
the European Union, broadcasters are generally required to secure a broadcasting
license only if they physically broadcast programs from within the country
concerned. Foreign licensed broadcasters who transmit their programming
unaltered into another country from outside of that country, or whose programs
are retransmitted unaltered by a domestic cable or satellite distributor, are
generally not subject to local licensing requirements. Accordingly, foreign
broadcasters are not directly subject to the broadcasting and advertising laws
of foreign countries in which their programs are broadcast or retransmitted.
However, in each of the countries in which we operate local pay television
distributors which retransmit foreign broadcasters' programming are required
under local broadcasting laws to obtain a broadcasting license and hence are
subject to local broadcasting and advertising laws. Consequently, local pay
television distributors have a statutory duty to ensure that the programming and
advertising they retransmit on behalf of foreign broadcasters conforms to the
regulatory scheme under which each local platform provider is licensed. Our
contracts with many of our local platform providers require that our programming
comply with domestic broadcasting regulations.
With the exceptions of the United Kingdom and the United States, we are a
foreign broadcaster in every market in which we operate. We use our Englewood,
Colorado facility in the United States to prepare programming tapes for
rebroadcast in each of our foreign markets via by local satellite and cable
platform providers. However, each of these pay television distributors and
consequently, in most cases, our programming carried on their systems, must
adhere to the broadcasting and advertising regulations of each platform
provider's licensing jurisdiction.
Within the United States, program access rules applicable to channel
providers with ownership ties to pay television distributors limit business
combinations between these two types of companies that do not comply with these
rules.
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<PAGE> 64
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The individuals who will be our directors and executive officers
immediately following this offering, as well as their ages and positions, are
listed below.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
<S> <C> <C>
Robert A. Halmi, Jr....................... 42 Chairman of the Board of Directors
David J. Evans............................ 59 President, Chief Executive Officer and
Director
William J. Aliber......................... 38 Executive Vice President and Chief
Financial Officer
Russel H. Givens, Jr...................... 53 Executive Vice President and Chief
Operating Officer
Andrew P. Brilliant....................... 53 Executive Vice President, Sales and
Marketing
Wilford V. Bane, Jr....................... 61 Director
Arnold L. Chavkin......................... 48 Director
Robert J. Druten.......................... 52 Director
Donald J. Hall, Jr........................ 44 Director
Irvine O. Hockaday, Jr.................... 63 Director
David B. Koff............................. 41 Director
John P. Mascotte.......................... 60 Director
</TABLE>
Mr. Halmi has been the Chairman of the Board of Directors of Crown Media
since April 1996. He has also been the President and Chief Executive Officer of
Hallmark Entertainment, Inc. since April 1994. Mr. Halmi has been an executive
producer of award-winning television programming, such as Lonesome Dove, which
won several Emmy awards, a Golden Globe award, and a Peabody award. Prior to
joining Hallmark Entertainment, Inc., he was with RHI Entertainment since its
inception in 1989.
Mr. Evans has been the President and Chief Executive Officer of Crown Media
since March 1999. Prior to that, he was the President and Chief Executive
Officer of Telecommunications International, Inc. from September 1997 until
February 1999. From July 1996 until August 1997, Mr. Evans was the Executive
Vice President of News Corp. and also the President and Chief Executive Officer
of Sky Latin America. Prior to that, he was the President and Chief Operating
Officer for Fox Television from August 1994 until May 1996.
Mr. Aliber has been the Vice President and Chief Financial Officer of
Hallmark Entertainment, Inc. since June 1997. Prior to that, he was the Director
of Corporate Finance for Hallmark Cards from January 1995 until June 1997. It is
currently contemplated that, upon completion of this offering, Mr. Aliber will
resign as Chief Financial Officer of Hallmark Entertainment, Inc.
Mr. Givens has been the Executive Vice President and Chief Operating
Officer of Crown Media since July 1998. Prior to that, Mr. Givens served as the
Vice President, European Cable/Telephony, for Media One, Intl. from 1994 until
1998.
Mr. Brilliant has been the Executive Vice President, Sales and Marketing of
Crown Media since June 1998. Prior to that, he was the Senior Vice President,
International, of Cable Network Services, Inc. from September 1996 until June
1998. From 1980 until 1996, Mr. Brilliant was the General Counsel and Executive
Vice President, International of ESPN, Inc.
Mr. Bane has been the Associate General Secretary of United Methodist
Communications, the communications agency for the United Methodist Church, since
October 1990. He also serves as chair of VISN Management. Mr. Bane helped found
and launch the Vision Interfaith Satellite Network, the predecessor of Odyssey
Network, and served as the interim Chief Executive Officer for its first two
years.
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<PAGE> 65
Mr. Chavkin has been a Director of Crown Media since 1998. He has also been
a General Partner of Chase Capital Partners since April 1991. Prior to that, Mr.
Chavkin was a member of Chemical Bank's merchant banking group and a generalist
in its corporate finance group. He is a member of the board of directors of
American Tower Corporation, Encore Acquisition Partners, Inc., R&B Falcon
Corporation, SMG, Inc., TeleCorp PCS, Inc., U.S. Silica Company, Carrizo Oil &
Gas, Inc., and Wireless One, Inc.
Mr. Druten has been a Director of Crown Media since April 1996. He has been
the Vice President and Chief Financial Officer of Hallmark Cards since November
1994. Mr. Druten is the Trustee of Entertainment Properties Trust. He is also a
member of the board of directors of Hallmark Entertainment, Inc. and Hallmark
Cards Holdings Limited.
Mr. Hall has been the Vice President, Strategy and Development, of Hallmark
Cards since September 1999. He has also been the Vice Chairman of the board of
directors of Hallmark Cards since 1996. Mr. Hall has served in a variety of
positions for Hallmark Cards since 1971. Mr. Hall was the Vice President,
Product Development, of Hallmark Cards from September 1997 until September 1999.
Prior to that, he was the Vice President, Creative, from 1995 until September
1997. Mr. Hall is a member of the board of directors of Hallmark Entertainment,
Inc., Business Men's Assurance, Midwest Research Institute, Heart of America
United Way, and Kansas University School of Business.
Mr. Hockaday has been a Director of Crown Media since April 1996. He has
also been the President and Chief Executive Officer of Hallmark Cards since
January 1986. Prior to joining Hallmark Cards in 1983, Mr. Hockaday served as
President and Chief Executive Officer of Kansas City Southern Industries, Inc.,
from 1971 until 1983. He is a member of the board of directors of Hallmark
Cards, Ford Motor Company, Dow Jones, Inc., Sprint Corporation, and UtiliCorp
United, Inc. Mr. Hockaday is a trustee of the Hall Family Foundations, the Aspen
Institute, and Princeton University.
Mr. Koff has been the Senior Vice President of Liberty Media since February
1998. Prior to that, he was the Vice President, Corporate Development, of
Liberty Media from August 1994 until February 1998. Mr. Koff also served as the
interim President and Chief Executive Officer of Liberty Digital, Inc. from May
1997 until January 1998. He has served as a member of the board of directors of
Liberty Digital since May 1997.
Mr. Mascotte has been the President and Chief Executive Officer of Blue
Cross and Blue Shield of Kansas City, Inc. since July 1997. Prior to that, he
was the Chairman and Chief Executive Officer of Continental Corporation from
December 1982 until December 1995. Mr. Mascotte is a member of the board of
directors of American Home Products, Inc., AMC Entertainment, Inc.,
Businessmen's Assurance Company, Hallmark Cards, Hallmark Entertainment, Inc.,
Blue Cross and Blue Shield of Kansas City, Inc., and Blue Cross Blue Shield
Association.
ODYSSEY HOLDINGS KEY PERSONNEL
The key personnel of Odyssey Holdings, including their ages and positions,
are listed below:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
<S> <C> <C>
Margaret A. Loesch........................ 53 President and Chief Executive Officer
Susan A. G. Frank......................... 50 General Manager and Executive Vice
President
Lana E. Corbi............................. 44 Chief Operating Officer
</TABLE>
Ms. Loesch has been the President and Chief Executive Officer of Odyssey
Holdings since November 1998. She was the President of Jim Henson Television
from February 1998 until November 1998. Prior to that, Ms. Loesch was the Vice
Chairman of Fox Kids Worldwide from May 1997 until November 1997. She was the
President and Chief Executive Officer of Fox Kids Networks Worldwide from March
1990 until May 1997.
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Ms. Frank has been the General Manager and Executive Vice President of
Odyssey Holdings since February 1999. She was the Executive Vice President,
Corporate Marketing Worldwide, for The Jim Henson Company from May 1998 until
February 1999. Ms. Frank was a Consultant at The Jim Henson Company from
February 1998 until May 1998. Prior to that, she was Executive Vice President,
Marketing and Promotions Worldwide, for Fox Kids Worldwide from October 1996
until November 1997. From April 1995 until October 1996, Ms. Frank was Senior
Vice President at Hanna Barbera. Prior to that, she served in a variety of
positions for McDonald's Corp. from March 1979 until April 1995.
Ms. Corbi has been the Chief Operating Officer of Odyssey Holdings since
April 1999. She was the President, Network Distribution, of Fox Broadcasting
Company from May 1997 until April 1999. Prior to that, Ms. Corbi was the
Executive Vice President, Network Distribution, of Fox Broadcasting Company from
May 1996 until May 1997. She was the President and Chief Operating Officer of
Blackstar, L.L.C. from May 1995 until May 1996. Prior to that, Ms. Corbi was
Senior Vice President, Network Distribution, for Fox Broadcasting Company from
1993 until 1995.
BOARD OF DIRECTORS
Our Board of Directors is currently comprised of five individuals, four of
whom are directors or officers of Hallmark Entertainment, Inc. or its affiliates
and one of whom is an employee of ours. Pursuant to a stockholders agreement,
upon completion of the offering, we will have a Board of Directors comprised of
11 individuals, nominated as follows: six nominated by Hallmark Entertainment,
Inc., one nominated by each of Liberty Media, the National Interfaith Cable
Coalition and Chase Equity Associates and two independent directors nominated by
the Board of Directors who will not be officers or employees of Hallmark
Entertainment, Inc., Liberty Media, the National Interfaith Cable Coalition or
Chase Equity Associates.
Directors who are our employees will receive no compensation for their
service as members of our Board of Directors or its committees. Directors who
are not our employees will receive compensation and stock options under plans we
describe below. We reimburse all directors for expenses incurred in connection
with attendance at meetings. See "Management -- Compensation of Outside
Directors."
COMMITTEES OF THE BOARD OF DIRECTORS
Upon completion of this offering, our Board of Directors will establish an
Audit Committee and a Compensation Committee. The functions of the Audit
Committee will be to:
- recommend annually to our Board of Directors the appointment of our
independent auditors;
- discuss and review in advance the scope and the fees of our annual audit
and review the results thereof with our independent auditors;
- review and approve non-audit services of our independent auditors;
- review compliance with our existing major accounting and financial
reporting policies;
- review the adequacy of major accounting and financial reporting policies;
- review our management's procedures and policies relating to the adequacy
of our internal accounting controls and compliance with applicable laws
relating to accounting practices;
- review compliance with applicable Securities and Exchange Commission and
Nasdaq rules regarding audit committees; and
- prepare a report for our annual proxy statement.
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We anticipate the Audit Committee will consist solely of directors who are
independent directors as defined under the rules of the National Association of
Securities Dealers, Inc.
The functions of the Compensation Committee will be to review and approve
annual salaries, bonuses, and grants of stock options, if any, for all executive
officers and key members of our management staff, and to review and approve the
terms and conditions of all employee benefit plans or changes to these plans. We
anticipate the Compensation Committee will consist of directors who are not our
employees.
In addition, our Board of Directors will form an Executive Committee, which
will have the authority to exercise the powers of our Board of Directors, other
than those reserved to the Audit Committee and the Compensation Committee or to
our full Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As noted above, our Board of Directors does not currently have a
Compensation Committee, but our Board of Directors anticipates establishing one
as described above. Prior to this offering, our principals and senior management
were directly involved in setting compensation for our executives.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid to the Chief
Executive Officer and the other four most highly compensated executive officers
of Crown Media for the fiscal year ended December 31, 1999. Following the
closing of the offering, we anticipate that the executive officers named below
will be our executive officers, except as otherwise noted.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1999 1999 OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION
<S> <C> <C> <C>
David J. Evans........................................ 604,791 -- --
President and Chief Executive Officer
Russel H. Givens, Jr.................................. 354,571 34,631 --
Executive Vice President and Chief Operating Officer
Andrew P. Brilliant................................... 316,859 47,120 --
Executive Vice President - Sales and Marketing
Jeffrey J. Johnson(1)................................. 287,081(2) -- 130,476(3)
Vice President, Marketing Director - Asia Pacific
Mark N. Grenside...................................... 237,954 24,460 --
Senior Vice President, Managing Director, Sales -
Europe/ Middle East/Africa
</TABLE>
- ------------------------------
(1) Mr. Johnson voluntarily terminated his employment with Crown Media effective
February 18, 2000.
(2) 1999 salary includes 1998 compensation paid in 1999.
(3) Represents auto allowance, relocation expense, tax equalization and
expatriate cost of living adjustment.
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STOCK APPRECIATION RIGHT EXERCISES AND HOLDINGS
The following tables provide information regarding grants and holdings of
stock appreciation rights by Crown Media's Chief Executive Officer and its other
four most highly compensated executive officers for the fiscal year ended
December 31, 1999. We did not grant any options to, and no options were
exercised by, any of the named executive officers in 1999. Upon completion of
the offering, the SARs will be converted into stock options.
SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT
SARS ASSUMED ANNUAL RATES OF
NUMBER OF GRANTED STOCK
SECURITIES TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES BASE SAR TERM
NAME SARS IN FISCAL PRICE EXPIRATION -----------------------
(1) GRANTED(#) YEAR ($/SH) DATE 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
David J. Evans........ 2,000,000 66.67% 4.50 December 31, 2002 1,852,734 3,977,254
Russel H. Givens,
Jr.................. 300,000 10.00% 4.50 December 31, 2002 277,910 596,588
Andrew P. Brilliant... 300,000 10.00% 4.50 December 31, 2002 277,910 596,588
Jeffrey J. Johnson.... -- -- -- -- --
Mark N. Grenside...... 100,000 3.33% 4.50 December 31, 2002 92,637 198,863
</TABLE>
No stock appreciation rights were exercised by any of the named executive
officers in 1999.
The following summary descriptions of employment agreements and
compensation plans are qualified in their entirety by reference to those plans,
copies of which we have filed as exhibits to the registration statement of which
this prospectus is a part.
EXECUTIVE EMPLOYMENT ARRANGEMENTS
EMPLOYMENT AGREEMENT WITH DAVID J. EVANS
On March 1, 1999, Crown Media entered into an employment agreement with Mr.
Evans that provides for his employment as its President and Chief Executive
Officer. The term of this agreement is three years and may be extended by mutual
consent. The agreement provides for an annual base salary of $675,000.
Additionally, Mr. Evans will receive a performance bonus based on the growth in
its net revenues from its fully or partially owned channels, for each
twelve-month period beginning on March 1, 1999. If this net revenue growth
during a twelve-month period is 20% or more, the performance bonus will be 50%
of Mr. Evans' annual base salary. Crown Media will prorate the bonus if this net
revenue growth is under 20% and Mr. Evans will not receive a performance bonus
if there is no net revenue growth. Crown Media has guaranteed a performance
bonus of $337,500 for the period ending on February 28, 2000. Under the
agreement, Crown Media may also pay an additional bonus as it determines in its
discretion.
The agreement provides that if Crown Media terminates Mr. Evans' employment
other than for cause or disability, or if Mr. Evans resigns for good reason,
then he will be entitled to a discounted lump sum cash payment equal to the
amount of the base salary due through the end of the term of the agreement and,
except for any annual bonus that is due to Mr. Evans under the agreement, Crown
Media will have no further obligations under the agreement. However, if Crown
Media terminates Mr. Evans' employment other than for cause within the 180-day
period before the end of the term of the agreement, the discounted lump sum
payment will be equal to the amount of the base salary for 180 days following
the date of the termination.
Under the employment agreement, Mr. Evans cannot compete with Crown Media,
or solicit its employees, during the term of his employment. Additionally, for
the one-year period following his
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termination of employment for any reason, Mr. Evans may not solicit any person
who is working for Crown Media as an officer, policymaker or who is involved in
high-level creative development or distribution.
EMPLOYMENT AGREEMENT WITH RUSSEL H. GIVENS, JR.
Crown Media entered into an employment agreement on July 27, 1998 with Mr.
Givens that provides for his employment as its Executive Vice President, Chief
Operating Officer, and Crown Media amended the agreement on July 1, 1999. The
agreement expires on June 30, 2002 and may be extended by mutual consent. The
agreement provides for an annual base salary of $387,500 and for minimum annual
increases of the base salary that are the greater of: (1) 7% and (2) the annual
increase in the Consumer Price Index. Additionally, the agreement provides for
annual bonuses that Crown Media determines. The minimum guaranteed bonus for the
1999 year is 30% of the base salary and the minimum guaranteed bonus for each
year during the remainder of the term of the agreement is 20% of the base
salary.
The agreement provides that if Crown Media terminates Mr. Givens'
employment other than for cause or disability, then he will be entitled to a
discounted lump sum cash payment equal to the sum of the base salary due through
the later of 180 days from the date of termination and the end of the term of
the agreement and, except for any pro-rated annual bonus that is due to Mr.
Givens under the agreement, Crown Media will have no further obligations under
the agreement.
Under the employment agreement, Mr. Givens cannot compete with Crown Media,
or solicit its employees, during the term of his employment. Additionally, for
the one-year period following his termination of employment for any reason, Mr.
Givens may not solicit any person who is working for Crown Media as an officer,
policymaker or who is involved in high-level creative development or
distribution.
EMPLOYMENT AGREEMENT WITH ANDREW P. BRILLIANT
Crown Media entered into an employment agreement on June 23, 1998 with Mr.
Brilliant that provides for his employment as its Executive Vice President,
Sales and Marketing, and Crown Media amended the agreement on July 1, 1999. The
agreement expires on June 30, 2002, but may be extended by mutual consent.
During the term of the employment agreement, Mr. Brilliant's annual base salary
is $350,000, and he will be entitled to minimum annual increases of the base
salary that are the greater of: (1) 7% and (2) the annual increase in the
Consumer Price Index. Additionally, the agreement provides for annual bonuses
that Crown Media determines. The minimum guaranteed bonus for the 1999 year is
30% of the base salary and the minimum guaranteed annual bonus for each year
during the remainder of the term of the agreement is 20% of the annual base
salary.
The agreement provides that if Crown Media terminates Mr. Brilliant's
employment other than for cause, then he will be entitled to a discounted lump
sum cash payment equal to the sum of the base salary due through the later of
180 days from the date of termination and the end of the term of the agreement
and reasonable relocation expenses to move back to New York and, except for any
pro-rated annual bonus that is due to Mr. Brilliant under the agreement, Crown
Media will have no further obligations under the agreement.
Under the employment agreement, Mr. Brilliant cannot compete with Crown
Media, or solicit its employees, during the term of his employment.
Additionally, for the one-year period following his termination of employment
for any reason, Mr. Brilliant may not solicit any person who is working for
Crown Media as an officer, policymaker or who is involved in high-level creative
development or distribution.
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EMPLOYMENT AGREEMENT WITH JEFFREY J. JOHNSON
Crown Media entered into an employment agreement on November 28, 1998 with
Mr. Johnson that provides for his employment as its Vice President and Managing
Director -- HEN Asia Pacific. The agreement expires on November 30, 2002 and may
be extended by mutual consent. The agreement provides for an annual base salary
of $200,000 and for annual increases of the base salary and annual bonuses at
Crown Media's discretion. During the employment period, Mr. Johnson will receive
tax assistance, tax equalization and cost of living adjustments not to exceed
$110,000 per year.
Under the employment agreement, Mr. Johnson cannot compete with Crown
Media, or solicit its employees, during the term of his employment. For the
one-year period following his termination of employment for any reason, Mr.
Johnson may not solicit any person who is working for Crown Media as an officer,
policymaker or who is involved in high-level creative development or
distribution.
EMPLOYMENT AGREEMENT WITH MARK N. GRENSIDE
Hallmark Entertainment Networks (UK) Limited, a subsidiary of Crown Media,
signed an employment agreement on January 1, 1999 with Mr. Grenside that
provides for his employment as its Senior Vice President, Managing Director
Sales-Europe/Middle East/Africa. The agreement expires on December 31, 2000 and
may be extended by mutual consent. The agreement provides for an annual base
salary of $250,000 which may be increased at its discretion. Additionally, the
agreement also provides for annual bonuses of up to 30% of Mr. Grenside's base
salary. Under the agreement, 17.5% of the bonus is based on the performance of
Crown Media, 7.5% of the bonus is based on Mr. Grenside's achievement of
personal objectives and 5% of the bonus is based on Mr. Grenside's achievement
of specified tasks.
The agreement provides that if Hallmark Entertainment Networks (UK)
terminates Mr. Grenside's employment other than for cause, then he will be
entitled to a lump sum cash payment equal to the sum of the base salary payments
due through the end of the term of the agreement and, except for any pro-rated
annual bonus that is due to Mr. Grenside under the agreement, Hallmark
Entertainment Networks (UK) will have no further obligations under the
agreement.
Under the employment agreement, Mr. Grenside cannot compete with Crown
Media, or solicit its employees, during the term of his employment. For the
one-year period following his termination of employment for any reason, Mr.
Grenside may not solicit any person who is working for Crown Media as an
officer, policymaker or who is involved in high-level creative development or
distribution.
SEPARATION AGREEMENT WITH GEORGE STEIN
Crown Media entered into a separation agreement with George Stein, its
former Chief Executive Officer, on January 28, 1999. Under this agreement, it is
obligated to pay Mr. Stein the following amounts:
- $2.0 million within 15 business days after January 31, 2000 and $1.0
million within 15 business days after each of January 31, 2001 and
January 31, 2002, and
- an additional payment of (1) $2.0 million if Crown Media completes an
initial public offering before January 31, 2001, (2) $1.0 million if an
initial public offering is completed between January 31, 2001 and January
31, 2002, or (3) no additional payment if Crown Media does not complete
an initial public offering by January 31, 2002.
Mr. Stein may not solicit any of its employees before January 31, 2001 and
if he solicits any of its employees before this date, he will forfeit $250,000
of the above payments.
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SHARE APPRECIATION RIGHTS PLAN
Crown Media established a Share Appreciation Rights Plan in 1999, under
which ten of its officers were granted the following numbers of phantom share
appreciation rights, also referred to as SARs: David J. Evans -- 2.0 million
SARs; Russel H. Givens, Jr. -- 300,000 SARs; Andrew P. Brilliant -- 300,000
SARs; and other officers -- 400,000 SARs in the aggregate. Each SAR represents
the right to a cash payment equal to a percentage of the increase in the value
of Crown Media following the grant date of the SAR and is exercisable in 36
equal monthly installments. The value of Crown Media is generally defined as the
price which could reasonably be expected to be obtained for the shares of Crown
Media in an arms-length transaction; however, if at least 10% of Crown Media is
publicly-traded, the value of Crown Media is its market capitalization. No SARs
will be granted under this plan following the offering.
If Crown Media terminates a participant's employment without cause or if a
participant terminates his or her employment for good reason, one-half of the
participant's unvested SARs will vest. If Crown Media terminates the
participant's employment with cause or if the participant terminates his or her
employment without good reason, all SARs will be forfeited. All SARs will be
vested upon a participant's death or disability. In the event of a sale of a
controlling interest in Crown Media or of substantially all of its assets, the
SARs will vest and Crown Media may purchase the outstanding SARs for an amount
equal to the appreciation in the value of the SARs. The maximum aggregate amount
that may be paid pursuant to the plan is $15.0 million and the aggregate
distribution that may be made to any individual is $10.0 million. The plan
provides that its terms may be modified with respect to a participant pursuant
to the terms of the participant's employment agreement.
THE 2000 LONG TERM INCENTIVE PLAN
We have adopted and approved our 2000 Long Term Incentive Plan. This plan
is designed to promote our success and enhance our value by linking the
interests of our officers, employees and directors to those of our stockholders
and by providing participants with an incentive for outstanding performance.
This plan is further intended to provide flexibility in its ability to motivate,
attract and retain employees upon whose judgement, interest and special efforts
our business is largely dependent. Our officers, employees and directors,
including non-employee directors, and officers, employees and directors of our
subsidiaries and affiliates are eligible to participate in this plan. This plan
is intended to remain in effect until 2010. The description below summarizes the
material terms of this plan.
General
The 2000 plan will be administered by the Compensation Committee of our
Board of Directors, or another committee designated by our Board of Directors,
and will provide for the grant to officers and employees of non-qualified and
incentive stock options and other types of equity-based and cash-based awards.
The only awards that we will grant to non-employee directors will be stock
options and deferred stock units with respect to the number of shares of Class A
common stock determined by the Board of Directors.
The 2000 plan provides that the maximum number of shares of Class A common
stock available for issuance under the 2000 plan is eight million. No more than
one million of these shares may be used for grants of restricted stock. The
maximum number of shares that may be issued under incentive stock options will
not exceed four million.
The term of options granted under the 2000 plan may not exceed 10 years.
Unless otherwise determined by our Compensation Committee, any options granted
to an employee or consultant after the date of this offering will vest ratably
on each of the first five anniversaries after the grant date and options granted
to a non-employee director will vest on the first anniversary of the grant date.
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A participant exercising an option may pay the exercise price in cash. If
approved by our Compensation Committee, a participant may pay the exercise price
with previously acquired shares of Class A common stock that the participant has
either purchased on the open market or held for six months or longer, or in a
combination of cash and stock. Our Compensation Committee, in its discretion,
may allow the broker-assisted cashless exercise of options.
Options are generally nontransferable other than by will or the laws of
descent and distribution. At the discretion of our Compensation Committee,
options may be transferable by a written beneficiary designation or, in the case
of a non-qualified option, by a gift to members of the holder's immediate
family. The gift may be made directly or indirectly or by means of a trust or
partnership or limited liability company and, during the participant's lifetime,
may be exercised only by the participant, any such permitted transferee or a
guardian, legal representative or beneficiary.
Other Awards
A stock appreciation right, or SAR, permits a participant to receive cash
or shares of Class A common stock, or a combination thereof, as determined by
our Board of Directors or our Compensation Committee. We may grant freestanding
SARs or SARs in connection with options. The amount of cash or the value of the
shares is equal to the excess of the fair market value of a share of Class A
common stock on the date of exercise over the SAR exercise price, multiplied by
the number of shares with respect to which the SAR is exercised. Restricted
stock may be granted subject to performance or service-based goals upon which
restrictions will lapse. Performance units may be granted subject to performance
goals and/or service-based restrictions, and will be payable in cash or shares
of Class A common stock or a combination as determined by our Board of Directors
or our Compensation Committee. We may also grant other awards of Class A common
stock and other stock-based awards, including dividend equivalents.
Additionally, a non-employee director may defer all or a portion of his or her
fees into a deferred share account which will also accrue additional shares to
reflect dividends that would have been paid on the shares credited to the share
account.
Additionally, any non-employee directors will receive a number of shares of
Class A Common Stock equal to the number of shares in the non-employee
director's share account, plus cash for fractional shares.
Change in Control
In the event of a change in control, any option or SAR that is not then
exercisable or vested shall become exercisable and vested and restrictions on
restricted stock will lapse and performance units will be deemed earned at
targeted performance levels and will be paid on a pro rata basis for the portion
of the related performance period that has elapsed as of the date of the change
in control. Change in control generally means:
- the acquisition of at least 20% of the outstanding common stock or voting
power unless, after the acquisition, Hallmark Entertainment, Inc. owns,
directly or indirectly, at least 50% of our outstanding voting power;
- a change in the majority of the members of the Board of Directors, unless
approved by the incumbent directors;
- the completion of a merger, reorganization, consolidation or sale of
assets involving Crown Media Holdings in which our stockholders do not
retain more than 50% of the voting power of the resulting entity, or
pursuant to which certain other events constituting a change in control
occur; and
- approval by our stockholders or a liquidation or dissolution.
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Amendments
Our Board of Directors may at any time amend or terminate the 2000 plan and
may amend the terms of any outstanding option or other award, except that no
termination or amendment may impair the rights of the participants as they
relate to outstanding options or awards. However, no such amendment to the 2000
plan will be made without the approval of our stockholders to the extent such
approval is required by law or stock exchange rule.
U.S. Federal Income Tax Consequences of Stock Options
The grant of an option will create no tax consequences for the participant
or us. Upon exercising an option, other than an incentive stock option, the
participant will generally recognize ordinary income equal to the difference
between the exercise price and the fair market value of the shares acquired on
the date of exercise and we generally will be entitled to a tax deduction in the
same amount. A participant generally will not recognize taxable income upon
exercising an incentive stock option and we will not be entitled to any tax
deduction with respect to an incentive stock option if the participant holds the
shares for the applicable periods specified in the Internal Revenue Code.
COMPENSATION OF OUTSIDE DIRECTORS
Each of our non-employee directors will receive a single annual retainer
fee of $28,000 for serving on our Board of Directors and an additional meeting
fee of $1,000 per meeting for each extraordinary meeting or meeting in excess of
the number of regularly-scheduled meetings. All directors will receive
reimbursement of expenses incurred in connection with participation in Board of
Directors meetings.
On the day of the pricing of this offering, each non-employee director will
be granted options for 7,800 shares of Class A common stock under our 2000 Long
Term Incentive Plan exercisable at the initial public offering price. Following
the offering, each new non-employee director will receive an initial grant of an
option, at an exercise price equal to the fair market value of such shares at
the date of grant, for a number of shares of Class A common stock with an
aggregate fair market value of $120,000 upon being elected or appointed to our
Board of Directors and, after each annual meeting of stockholders, each
continuing non-employee director will be granted options, at an exercise price
equal to the fair market value of the Class A common stock on the date of grant,
for a number of shares of Class A common stock with a fair market value of
$40,000.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by applicable Delaware law, we have included in our
certificate of incorporation a provision to eliminate the personal liability of
our directors for monetary damages for breach or alleged breach of their
fiduciary duties as directors, subject to certain exceptions. In addition, our
by-laws provide that we are required to indemnify our officers and directors
under certain circumstances, including those circumstances in which
indemnification would otherwise be discretionary, and we are required to advance
expenses to our officers and directors as incurred in connection with
proceedings against them for which they may be indemnified. At present, we are
not aware of any pending or threatened litigation or proceeding involving a
director, officer, employee or agent of ours in which indemnification would be
required or permitted. We believe that these indemnification provisions are
necessary to attract and retain qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be granted to directors, officers or persons controlling us under
the foregoing provisions, we have been informed that in the opinion of the SEC
this indemnification is against public policy as expressed in the Securities Act
of 1933 and is therefore unenforceable.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following summary descriptions of agreements to which we are a party
are qualified in their entirety by reference to the agreement to which each
summary description relates, each of which we have filed as an exhibit to the
registration statement of which this prospectus is a part.
PROGRAM AGREEMENTS
HALLMARK PROGRAM AGREEMENTS
Crown Media. Crown Media licenses programming from Hallmark Entertainment
Distribution, a subsidiary of Hallmark Entertainment, Inc. for distribution on a
country-by-country basis outside the United States and Canada. Under a program
agreement dated as of July 1, 1999, we are required to license from Hallmark
Entertainment Distribution and it is required to license to us substantially all
of the television motion pictures and miniseries it owns or controls during the
term of the agreement, which ends on December 31, 2004. The program agreement is
renewable at Hallmark Entertainment Distribution's option for an additional
period beginning on January 1, 2005 and ending on December 31, 2009. Hallmark
Entertainment Distribution has agreed to renew the program agreement unless we
are in default under the program agreement or any other agreement we have with
Hallmark Entertainment Distribution.
Hallmark Entertainment Distribution has existing contractual relationships
with distributors that preclude us from obtaining programming under the program
agreement in several territories in which we do not currently operate, the most
significant of which is Germany. Hallmark Entertainment Distribution is
expressly permitted to renew indefinitely its contracts with distributors in
Germany, Italy and Spain and may renew contracts with other distributors to the
extent the existing contracts afford the distributor renewal rights.
We have the right to distribute the programming we license under the
program agreement through cable and DTH systems. However, we do not license
programming for distribution on a pay-per-view basis. In addition, we and
Hallmark Entertainment Distribution have agreed to negotiate in good faith on a
product-by-product basis for pay television license rights to programming not
covered under the program agreement, including documentaries, series and
specials.
Under the program agreement we generally license each movie or miniseries
for a minimum of three time periods of 18 months or 12 months, with each 18 or
12-month period separated by a period of one to three years depending on whether
Hallmark Entertainment Distribution licenses the programming to a third party
during the interim periods. The first 18 or 12-month time period begins on the
later of the date specified in the program agreement or the date we launch in a
country. The number of times we can telecast a movie or miniseries is determined
by viewer preferences and industry practices on a country-by-country basis.
We pay license fees to Hallmark Entertainment Distribution on a
country-by-country, program-by-program basis for each of the three time periods
for which we license programming. The fees generally increase 5% per year and
are payable in four equal installments for the first time period and in six
equal installments for subsequent time periods. During the year ended December
31, 1999, we paid Hallmark Entertainment Distribution $6.8 million in fees under
the program agreement. As of December 31, 1999, we had $34.6 in accrued and
unpaid fees, $30.0 million of which we expect to pay with a portion of the
proceeds we receive from this offering.
Odyssey Holdings. Odyssey Holdings licenses programming from Hallmark
Entertainment Distribution under a program agreement, dated as of November 13,
1998, for distribution within the United States. Under the program agreement,
Odyssey Holdings generally licenses made-for-television movies and miniseries
owned or controlled by Hallmark Entertainment Distribution, as well as all
programming produced by or on behalf of Hallmark Entertainment Distribution for
Odyssey Holdings. The agreement
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has a term of five years, and is automatically renewable for additional
three-year periods subject to rate adjustments, so long as Hallmark
Entertainment, Inc. or its affiliates own 10% or more of Odyssey Holdings. In
the event that Hallmark Entertainment, Inc. owns less than 10% of Odyssey
Holdings, the remaining term of the program agreement will be two years from the
date of that event.
Odyssey Holdings has the right to telecast the programming it licenses
under the program agreement through all forms of television, except on a
pay-per-view basis. Under the program agreement we generally license each movie
or miniseries for a period of five years and have the right to telecast the
movie or miniseries 30 times during that period. Odyssey Holdings and Hallmark
Entertainment Distribution have agreed to negotiate in good faith on a
product-by-product basis for pay television license rights to programming not
covered under the program agreement, including documentaries and specials. In
addition, under the program agreement, Odyssey Holdings has the right to order,
and Hallmark Entertainment Distribution is required to produce, four two-hour
movies and one series during the term of the program agreement.
Odyssey Holdings pays license fees to Hallmark Entertainment Distribution
in equal annual installments over the five-year period that it telecasts the
movie or miniseries. The fees generally increase 5% per year. During the year
ended December 31, 1999, Odyssey Holdings paid Hallmark Entertainment
Distribution $4.4 million in fees under the program agreement. As of December
31, 1999, Odyssey Holdings had $47.2 million in accrued and unpaid program
license fees under the program agreement.
H&H Programming - Asia. H&H Programming - Asia, which owns the Kermit
Channel, licenses programming from Hallmark Entertainment Distribution under a
program agreement dated as of May 12, 1998. Under the program agreement, H&H
Programming - Asia licenses specified made-for-television movies, miniseries and
series owned or controlled by Hallmark Entertainment Distribution for
distribution within certain countries in Asia, including India, during three
time periods of 18 months. Each 18-month period is generally separated by a
period of one to two years depending on whether Hallmark Entertainment
Distribution licenses the programming to a third party during the interim
periods. The first 18 month time period begins on the date specified in the
program agreement. The program agreement ends when the last of 18-month time
period ends. H&H Programming - Asia also has a right of first negotiation in
connection with programming not covered by the program agreement in the
countries covered by the agreement, except for to prior agreements.
H&H Programming - Asia pays license fees to Hallmark Entertainment
Distribution on a program-by-program basis for each of the three time periods
for which it licenses programming. The fees generally increase 5% per year and
are payable in six equal installments. During the year ended December 31, 1999,
H&H Programming - Asia paid Hallmark Entertainment Distribution $800,000 in fees
under the program agreement. As of December 31, 1999, H&H Programming - Asia had
$1.2 million in accrued and unpaid fees under the program agreement.
NATIONAL INTERFAITH CABLE COALITION PROGRAM AGREEMENT
Odyssey Holdings licenses programming owned or controlled by the National
Interfaith Cable Coalition, under a program agreement dated as of November 13,
1998, for distribution within the United States. The National Interfaith Cable
Coalition is obligated to furnish a minimum of 200 hours of programming each
year under the programming agreement. The agreement terminates upon termination
of the Odyssey Holdings amended and restated company agreement discussed below.
Under the program agreement, Odyssey Holdings has agreed to pay any
required residual or step-up payments if it telecasts any over-the-air
programming. In addition, Odyssey Holdings pays the National Interfaith Cable
Coalition fees under the Odyssey Holdings amended and restated company agreement
to be used solely for programming related purposes. See "-- Odyssey Holdings
Amended and Restated Company Agreement."
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ODYSSEY HOLDINGS AMENDED AND RESTATED COMPANY AGREEMENT
In connection with our investment in Odyssey Holdings on November 13, 1998,
our wholly owned subsidiary, HEN Domestic Holdings, Inc., and Vision Group, VISN
Management and Henson Cable Networks, Inc. signed an amended and restated
company agreement governing the operation of Odyssey Holdings.
VISN Management, a subsidiary of the National Interfaith Cable Coalition,
owns a $25.0 million preferred interest in Odyssey Holdings. Under the amended
and restated company agreement, the members agreed that if during any year
ending after January 1, 2005 and prior to December 31, 2009, Odyssey Holdings
has net profits in excess of $10.0 million, and the preferred interest has not
been redeemed, Odyssey Holdings will redeem the preferred interest in an amount
equal to the lesser of
- such excess;
- $5.0 million; or
- the amount equal to the preferred liquidation preference on the date of
redemption.
The members also agreed that Odyssey Holdings will redeem the preferred interest
at the preferred interest liquidation preference on the date of redemption by
December 31, 2010.
Under the amended and restated company agreement, Odyssey Holdings will pay
to the National Interfaith Cable Coalition annually in equal quarterly
installments an amount equal to $3.5 million and, so long as VISN Management
owns the preferred interest, $1.5 million multiplied by the quotient of the
preferred liquidation preference divided by $25.0 million. The $3.5 million
portion of the fees described above 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.
In addition, Odyssey Holdings must broadcast a minimum of 30 hours of
programming from the National Interfaith Cable Coalition and an additional 10
hours of values-based programming.
Under the amended and restated company agreement, we may not transfer our
interests in Odyssey Holdings until the fifth anniversary of the agreement,
except to one of our affiliates or to another member or one of its affiliates.
In addition, any transaction between us or any of our affiliates and Odyssey
Holdings must be approved by the Odyssey Holdings governance committee.
Hallmark Entertainment, Inc. is required to contribute an additional $10.0
million to Odyssey Holdings before February 14, 2000. Following the completion
of the reorganization, we will own 77.5% of Odyssey Holdings and The Jim Henson
Company will own the remaining 22.5%.
HALLMARK ADVERTISING
Hallmark Cards made a $2.5 million advertising commitment to Odyssey
Holdings covering a one-year period from the fourth quarter of 1999 through the
third quarter of 2000. As of December 31, 1999, Hallmark Cards had purchased
$365,000 of advertising time on the Odyssey Network.
HALLMARK DEMAND NOTE
On November 19, 1999, Crown Media entered into an agreement with HC Crown
Corporation, an affiliate of Hallmark Cards, under which HC Crown agreed to lend
Crown Media up to $20.0 million. Amounts borrowed under this agreement bear
interest at 130% of the applicable federal rate, as set forth in the Internal
Revenue Code, and are payable on demand. The aggregate balance outstanding as of
December 31, 1999 was $12.7 million, including accrued interest. This agreement
can be terminated by either party at any time.
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REAL PROPERTY LEASES
In connection with our lease of office facilities at 6430 South Fiddlers
Green Circle, Englewood, Colorado, Hallmark Entertainment, Inc. signed a
guaranty of lease obligations on June 1, 1998. Under the guaranty, Hallmark
Entertainment, Inc. agreed to guarantee full and timely performance of all of
our obligations during our lease term. The lease is for 50,310 square feet and
has a term of 10 years that ends in August 2008. The lease provides for a rate
of $22.64 per square foot during the first year of the lease and increases
annually to $26.06 per square foot in 2008.
We sublease office space and our post production and editing facilities at
5670 Greenwood Plaza, Englewood, Colorado from Hallmark Entertainment, Inc.
Under three separate leases, we paid a total of approximately $303,000 for the
year ended December 31, 1999, on the same terms as the underlying lease. We do
not intend to renew the leases which expire on July 31, 2000. We expect to
relocate our operations from these facilities to our facilities at 6430 South
Fiddlers Green Circle prior to the end of the leases.
CONTRIBUTION AGREEMENT
In connection with the reorganization referred to below, we entered into a
contribution agreement with Hallmark Entertainment, Inc., Crown Media, Liberty
Media, Vision Group, VISN Management, the National Interfaith Cable Coalition
and Chase Equity Associates under which some of the parties will contribute
equity interests in various legal entities to us in exchange for our equity
interests. Specifically, the following exchanges, which we refer to as the
reorganization, will occur if the conditions to the contribution agreement are
satisfied:
- Hallmark Entertainment, Inc. will transfer to us its interests in Crown
Media in exchange for shares of our Class B common stock representing
approximately 61% of our common stock outstanding before the completion
of this offering;
- Chase Equity Associates will transfer to us its interests in Crown Media
in exchange for shares of our Class A common stock representing
approximately 8% of our common stock outstanding before the completion of
this offering;
- Liberty Media will transfer to us its interests in Vision Group in
exchange for shares of our Class A common stock representing
approximately 18% of our common stock outstanding before the completion
of this offering; and
- National Interfaith Cable Coalition, will transfer to us its common
interests in Odyssey Holdings in exchange for shares of our Class A
common stock representing approximately 13% of our common stock
outstanding before the completion of this offering.
Under the contribution agreement, the parties agree that, during the period
from the date of the contribution agreement until the completion of the
reorganization, they will comply with certain covenants, including those in
connection with the conduct of our business, and the signing of a stockholders
agreement and a tax sharing agreement prior to the completion of the
reorganization.
The respective obligations of the parties to complete the reorganization
are subject to the satisfaction of several conditions, including that this
offering must be completed simultaneously with the completion of the
reorganization and that each of the parties to the stockholders agreement must
have executed and delivered that agreement.
Under the contribution agreement, we have agreed to indemnify the other
parties and certain of their affiliates, other than Hallmark Entertainment,
Inc., against any liabilities resulting from any untrue statement of a material
fact made in this prospectus, or any omission of a material fact from this
prospectus, required to make the statements made in this prospectus, in light of
the circumstances under
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which they were made, not misleading, during the period of the applicable
statute of limitations. In addition, the parties to the contribution agreement
have agreed to indemnify other parties and certain of their affiliates against
liabilities resulting from the breach or inaccuracy of representations made by
them regarding corporate existence, power and authority to sign the contribution
agreement, capitalization and the retention of brokers. Hallmark Entertainment,
Inc. has agreed to indemnify us against consolidated, combined or unitary income
taxes of Crown Media for the period prior to the completion of the
reorganization and Liberty Media has agreed to indemnify us against all taxes of
Vision Group for the period prior to the completion of the reorganization. If we
or Crown Media actually realize a tax benefit as the result of an adjustment of
a tax for which Hallmark Entertainment, Inc. or Liberty Media is required to
indemnify us, we are required under the contribution agreement to pay Hallmark
Entertainment, Inc. or Liberty Media, as applicable, the amount of such tax
benefit.
We have agreed to reimburse each of the other parties to the contribution
agreement for reasonable costs and expenses related to the contribution
agreement, up to $150,000 for parties other than Hallmark Entertainment, Inc.,
and up to $2.0 million for Hallmark Entertainment, Inc.
STOCKHOLDERS AGREEMENT AND REGISTRATION RIGHTS
GENERAL
In connection with the reorganization, we will enter into a stockholders
agreement with Hallmark Entertainment, Inc., Liberty Media, VISN Management and
Chase Equity Associates. The stockholders agreement will provide that our Board
of Directors will consist of not less than 11 directors, with six nominated by
Hallmark Entertainment, Inc., one nominated by each of Liberty Media, VISN
Management and Chase Equity Associates and two independent directors who will
not be officers or employees of any of the parties or their affiliates nominated
by the Board of Directors. The rights of the parties to nominate a director will
terminate on the later of (1) such party owning less than 5% of our common stock
then outstanding or (2) such party ceasing to own at least 75% of our common
stock such party owns immediately following the completion of the
reorganization.
The stockholders agreement will also provide that we will not enter into
any material transactions, except for specified transactions, with any of the
other parties or their affiliates involving an aggregate value of (1) $35.0
million or less, unless such transactions are approved by a majority of our
independent directors and (2) more than $35.0 million, unless such transactions
are approved by a majority of the members of our Board of Directors not
nominated by the interested party.
The other parties to the stockholders agreement will agree not to transfer
any shares of our common stock until after 180 days from the completion of this
offering. They will also agree not to transfer more than 25% of our common stock
owned by them immediately following the reorganization until after the second
anniversary of the stockholders agreement, except to their affiliates, another
party to the stockholder agreement or their affiliates, to their executives
under a stock-based compensation package, or in a transaction involving a
merger, consolidation or business combination with, or sale of all of our common
stock to a third party that is not affiliated with us.
In addition, the stockholders agreement will provide that, in the event
Hallmark Entertainment, Inc. proposes to transfer 20% or more of our outstanding
common stock to an unaffiliated third party, each other party to the
stockholders agreement will have the right to participate on the same terms in
that transaction with respect to a proportionate number of such other party's
shares. The stockholders agreement will also provide that if we issue for cash
an amount of our common stock, in either a public offering or private
transaction, that causes Liberty Media and its affiliates to own, in the
aggregate, less than 10% of our outstanding common stock, Liberty Media will
have the right to purchase, at such public offering price or the average closing
price of the Class A common stock over a five day period prior to the closing of
such private transaction, as applicable, an amount of our Class A common stock
so as to restore
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its 10% ownership interest. Liberty Media must exercise such right not less than
seven days prior to the closing of such issuance.
REGISTRATION RIGHTS
Under the stockholders agreement, Hallmark Entertainment, Inc. will have
the right to require us on four occasions, and the other parties, as a group,
will have the right to require us on two occasions, to register for sale the
shares of our common stock they hold, so long as the number of shares they
require us to register in each case is at least 7% of our common stock then
outstanding. The other parties will also have an unlimited number of "piggy
back" registration rights. This means that any time we register our common stock
for sale, they will have the right to include their common stock in that
offering and sale.
We will be obligated to pay all expenses that result from the registration
of the other parties' common stock under the stockholders agreement, other than
registration and filing fees, attorneys fees, underwriter fees or expenses and
underwriting discounts and commissions. We will also agree to indemnify the
other parties against any liabilities that may result from their sale of common
stock they hold, including Securities Act liabilities.
RIGHTS RELATING TO ODYSSEY HOLDINGS AMENDED AND RESTATED COMPANY AGREEMENT
Under the stockholders agreement, we will also agree that, for so long as
we or any of our affiliates are entitled to have a representative on the Odyssey
Holdings governance committee and VISN Management and its affiliates are either:
- entitled to nominate to, or designate a member of, our Board of Directors
or
- beneficially own any preferred interests in Odyssey Holdings,
neither we nor any of our affiliates will, without the consent of the member of
our Board of Directors nominated by VISN Management or a representative of the
National Interfaith Cable Coalition, vote in favor of:
- any specified change in, or action described in, the Odyssey Holdings
amended and restated company agreement that relates to VISN Management's
preferred interest in Odyssey Holdings or that relates to VISN
Management's rights to programming on the Odyssey Network or its
programming budget;
- any repayment or redemption of specified equity interests in Odyssey
Holdings;
- any transfer of all of Odyssey Holdings' assets or any business
combination involving Odyssey Holdings where Odyssey Holdings is not the
surviving entity, unless the transferee assumes specified obligations
under the Odyssey Holdings amended and restated company agreement until
the later of the fifth anniversary of this offering or the second
anniversary of the transfer or business combination;
- the dissolution of Odyssey Holdings, except in connection with a complete
liquidation;
- any transfer of all of Odyssey Holdings' assets to, or any business
combination involving Odyssey Holdings' with, us or any of our
affiliates, or any other material transaction with us or any of our
affiliates, unless we comply with specified restrictions relating to any
financial benefit we receive from the transaction that is more than what
we would have received had the transaction been on an arm's length basis
or on commercially reasonable terms;
- any transfer of all of Odyssey Holdings' assets or any business
combination involving Odyssey Holdings where Odyssey Holdings is not the
surviving entity, prior to the second anniversary of this offering; or
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- any amendment to the Odyssey Holdings' amended and restated company
agreement that would result in none of us or our affiliates having the
right to consent to take any of the actions listed in the above bullet
points.
We will agree under the stockholders agreement not to transfer any of our
interests in Odyssey Holdings prior to the second anniversary of this offering
without the consent of VISN Management or the National Interfaith Cable
Coalition. In addition, we will agree not to transfer any of our interests in
Odyssey Holdings after the second anniversary of this offering unless the
transfer is conditioned on the requirement that the transferee assume our
obligations described above. Under the terms of the stockholders agreement, the
transferee's obligations will generally expire on the later of (1) the fifth
anniversary of this offering, (2) the second anniversary of the transfer or (3)
the repayment of VISN Management's preferred interest in Odyssey Holdings,
except that the obligations of the transferee will expire upon dissolution of
Odyssey Holdings.
CORPORATE OPPORTUNITIES POLICY
The following is a description of a general policy adopted by the Hallmark
Entertainment, Inc. board of directors in connection with the stockholders
agreement and this offering. The policy provides that we will be the primary
(but not exclusive) vehicle for the pursuit of corporate opportunities relating
to the ownership and operation of pay television channels dedicated to family
programming , "Pay Television Opportunities," that are provided or otherwise
made available to Hallmark Entertainment, Inc. and its subsidiaries. However,
Pay Television Opportunities do not include opportunities: (1) developed by or
made available to any public company that is a subsidiary of Hallmark
Entertainment, Inc. or any of Hallmark Entertainment, Inc.'s subsidiaries (other
than us and our subsidiaries), (2) relating to the production or distribution of
programming that are developed by, or provided or made available to, a
subsidiary of Hallmark Entertainment, Inc. that does not own or operate pay
television channels dedicated to family programming and whose primary business
is the production or distribution of programming, (3) arising out of or relating
to Pay Television Opportunities that have been provided or made available to us
but which we have determined not to pursue or have failed to pursue within the
applicable time period reasonably specified by Hallmark Entertainment, Inc., or
(4) that Hallmark Entertainment, Inc. or any of its subsidiaries is legally or
contractually obligated to provide or make available to a person other than us.
Under the policy, we are not obligated to pursue any Pay Television
Opportunity presented to it by Hallmark Entertainment, Inc. If we determine not
to pursue or fails to pursue an opportunity, in each case within such time as
Hallmark Entertainment, Inc. may reasonably specify (taking into account the
type and nature of the Pay Television Opportunity provided or made available) in
its communication to us relating to such Pay Television Opportunity, then
Hallmark Entertainment, Inc. and its subsidiaries may pursue such Pay Television
Opportunity.
The policy is effective from the closing of this offering. The policy
automatically terminates upon the first to occur of: (1) Hallmark Entertainment,
Inc. and its subsidiaries ceasing to beneficially own, in the aggregate, at
least a majority in voting power of our outstanding voting securities entitled
to vote generally upon all matters submitted to common stockholders and (2) the
third anniversary of the completion of this offering.
The policy provides that the Hallmark Entertainment, Inc. board of
directors is required to act in accordance with its fiduciary duties owed to
Hallmark Entertainment, Inc. and Hallmark Entertainment, Inc.'s fiduciary
duties, if any, to its subsidiaries in making all determinations in connection
with the policy. With respect to any Pay Television Opportunity that may be
subject to the policy and any obligation (fiduciary or otherwise) to one or more
other subsidiaries, the Hallmark Entertainment, Inc. board of directors will
have discretion to determine, without reference to the policy, to which of us or
such other subsidiary of Hallmark Entertainment, Inc. such Pay Television
Opportunity will be provided or made
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available. Notwithstanding anything set forth in the policy, Hallmark
Entertainment, Inc. will have no obligation to exercise any rights it may have
as a shareholder, partner or member of any entity that is not a wholly owned
subsidiary or to exercise any rights available to it under agreements with other
shareholders, partners or members, in order to implement determinations under
the policy. All determinations of the Hallmark Entertainment, Inc. board of
directors with respect to the Hallmark Entertainment, Inc. policy and the
interpretation of the Hallmark Entertainment, Inc. policy are conclusive and
binding.
The policy further provides that Hallmark Entertainment, Inc.'s board of
directors from time to time may amend, modify or rescind the policy or adopt
additional or other policies or make exceptions with respect to the application
of the policy in connection with particular facts and circumstances, all as the
Hallmark Entertainment, Inc. board of directors may determine, consistent with
its fiduciary duties and in accordance with the stockholders agreement.
The policy provides that the transactions contemplated by the contribution
agreement shall not create any inference or course of dealing as to the
opportunities to which the policy applies.
INTERCOMPANY SERVICES AGREEMENT
We signed an intercompany services agreement dated as of January 1, 2000
with Hallmark Cards under which Hallmark Cards has agreed for a term of three
years to provide us with the following services:
- tax services;
- risk management, health, safety and environmental services and insurance;
- legal services;
- treasury and cash management services; and
- real estate consulting services.
We have agreed to pay Hallmark Cards $500,000 per year for these services,
plus out-of-pocket expenses and third party fees, payable in arrears on the last
business day of each quarter.
In addition to the services described above, we have incurred costs that
have been paid by Hallmark Entertainment, Inc. on our behalf related to payroll
and benefits, insurance, and operating, financial and capital expenditures.
These costs are reflected on our financial statements, and to the extent that we
have not reimbursed Hallmark Entertainment, Inc., the costs are reflected as a
payable to Hallmark Entertainment, Inc. We reimbursed Hallmark Entertainment,
Inc. $8.3 million for the year ended December 31, 1999. The balance of the
payable as of December 31, 1999 was approximately $9.2 million.
HALLMARK TRADEMARK LICENSE AGREEMENTS
We are permitted to use the Hallmark Entertainment trademark in accordance
with the terms of a royalty-free three-year trademark license agreement dated as
of August 1, 1999 between Hallmark Cards and Crown Media. Under that agreement,
we may use the Hallmark Entertainment trademark outside the United States and
Canada only for so long as Hallmark Cards and its wholly owned subsidiaries
collectively own at least 51% of the voting interest and at least 35% of the
equity interest of Crown Media and there is no event of default under the
agreement.
We have the non-exclusive right to use the Hallmark Entertainment trademark
to promote, market, advertise, distribute and sell television motion pictures
and miniseries produced by or at the direction of Hallmark Entertainment
Productions, LLC or its subsidiaries. We also have the non-exclusive right to
use the Hallmark Entertainment trademark to promote, market, advertise,
distribute and sell our networks and channels so long as these television motion
pictures and miniseries along with other television motion pictures and
miniseries acquired under our program agreement with Hallmark Entertainment
Distribution
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represent at least 50% of the monthly programming of that network or channel or
20% of the monthly programming during the first six months that we launch the
Hallmark Entertainment Network in a territory. Except for the Hallmark
Entertainment trademark, we are not permitted to use the Hallmark name alone or
with any other names.
Under the agreement, if Hallmark Cards notifies us in writing that it has
determined that we have failed to comply with the usage standards set forth in
the agreement or have otherwise breached our obligations under the agreement, we
must stop any non-complying activity within 10 days of that notice or we will be
in default of the agreement. We will also be in default if Hallmark Cards
delivers such a written notice to us with respect to its standards three or more
times in any 12-month period. In addition, we will be in default of the
agreement if we fail to cure any breach of our program agreement with Hallmark
Entertainment Distribution if we fail to make any payments due under loan
agreements within five days of the due date or if our auditors determine that
Crown Media is no longer a going concern.
The license agreement can be terminated immediately and without notice if
we transfer in any way our rights under the license agreement, as a result of an
event of default under the agreement or in events of bankruptcy, insolvency or
similar proceedings. With respect to a particular country in which we use the
Hallmark Entertainment trademark, the license agreement will terminate if the
network or channel using the mark fails to program at least 50% of its scheduled
programming.
There is a similar trademark license agreement between Hallmark Cards and a
subsidiary of Crown Media that permits the use of the Hallmark Entertainment,
Inc. trademark in the United Kingdom for five years from the date of the launch
of the Hallmark Entertainment Network in the United Kingdom.
TAX SHARING AGREEMENT
Hallmark Entertainment, Inc. will enter into a tax sharing agreement with
us and certain of our subsidiaries (collectively, Crown Group) that will provide
for tax sharing payments between Hallmark Entertainment, Inc. and the Crown
Group with respect to any consolidated, combined or unitary tax return in which
the Crown Group, or any member of the Crown Group, joins Hallmark Cards or
certain of its subsidiaries (collectively, Hallmark Group) that is filed after
the closing of this offering. Such tax sharing payments will not be made in
respect of United States federal income taxes of the Crown Group because the
Crown Group will not be part of the Hallmark Cards affiliated group of
corporations filing consolidated returns for United States federal income tax
purposes.
Under the tax sharing agreement, where the Hallmark Group and the Crown
Group do file consolidated, combined or unitary tax returns, Crown Group will
make tax sharing payments to Hallmark Entertainment, Inc. (or receive from
Hallmark Entertainment, Inc.) equal to the taxes (or tax refunds) that Crown
Group would have paid (or received) if it filed on a stand-alone basis. Such
payments will be computed based upon Crown Group's income, loss and other tax
items after the day following the closing of this offering.
The Crown Group will appoint Hallmark Entertainment, Inc. as its agent in
connection with any tax return or proceeding involving both one or more members
of the Hallmark Group and one or more members of the Crown Group for any
pre-closing or post-closing period.
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<PAGE> 83
PRINCIPAL AND SELLING STOCKHOLDERS
The following tables sets forth certain information with respect to
beneficial ownership of our Class A common stock and Class B common stock,
giving effect to the transactions contemplated by the reorganization, including
the percent of the total voting power, as of , and as adjusted
to reflect completion of this offering, by
- each of our five most highly compensated officers;
- each director;
- each holder of more than 5% of either class of common stock; and
- all current directors and executive officers as a group.
Except as indicated in the footnotes to this table, the individuals named
in this table have sole voting and investment power with respect to all shares
of Class A common stock and Class B common stock shown as beneficially owned by
them, subject to community property laws where applicable.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BEFORE
OFFERING
-----------------------------------
CLASS A CLASS B
COMMON STOCK COMMON STOCK % TOTAL
---------------- ---------------- VOTING
NAME SHARES % SHARES % POWER
<S> <C> <C> <C> <C> <C>
Hallmark Entertainment, Inc. .................. -- --
1325 Avenue of the Americas
New York, NY 10019
Liberty Media Corporation...................... -- --
9197 South Peoria Street
Englewood, CO 80112
National Interfaith Cable Coalition, Inc. ..... -- --
810 12th Avenue South
Nashville, TN 37203
Chase Equity Associates, L.L.C. ............... -- -- --
380 Madison Avenue
New York, NY 10017
Robert A. Halmi, Jr. .......................... -- -- -- -- --
Arnold L. Chavkin.............................. -- -- -- -- --
Robert J. Druten............................... -- -- -- -- --
Irvine O. Hockaday, Jr. ....................... -- -- -- -- --
Donald J. Hall, Jr. ........................... -- -- -- -- --
John P. Mascotte............................... -- -- -- -- --
Wilford V. Bane, Jr. .......................... -- -- -- -- --
David B. Koff.................................. -- -- -- -- --
David J. Evans................................. -- -- -- -- --
Russel H. Givens, Jr. ......................... -- -- -- -- --
Andrew P. Brilliant............................ -- -- -- -- --
Jeffrey J. Johnson............................. -- -- -- -- --
Mark N. Grenside............................... -- -- -- -- --
All directors and executive officers as a group
( persons).................................. -- -- -- -- --
</TABLE>
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<PAGE> 84
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP AFTER
OFFERING
-----------------------------------
CLASS A CLASS B
COMMON STOCK COMMON STOCK % TOTAL
---------------- ---------------- VOTING
NAME SHARES % SHARES % POWER
<S> <C> <C> <C> <C> <C>
Hallmark Entertainment, Inc. .................. -- --
1325 Avenue of the Americas
New York, NY 10019
Liberty Media Corporation...................... -- --
9197 South Peoria Street
Englewood, CO 80112
National Interfaith Cable Coalition, Inc. ..... -- --
810 12th Avenue South
Nashville, TN 37203
Chase Equity Associates, L.L.C. ............... -- -- --
380 Madison Avenue
New York, NY 10017
Robert A. Halmi, Jr. .......................... -- -- -- -- --
Arnold L. Chavkin(2)........................... -- -- -- -- --
Robert J. Druten............................... -- -- -- -- --
Irvine O. Hockaday, Jr. ....................... -- -- -- -- --
Donald J. Hall, Jr. ........................... -- -- -- -- --
John P. Mascotte............................... -- -- -- -- --
Wilford V. Bane, Jr. .......................... -- -- -- -- --
David B. Koff.................................. -- -- -- -- --
David J. Evans................................. -- -- -- -- --
Russel H. Givens, Jr. ......................... -- -- -- -- --
Andrew P. Brilliant............................ -- -- -- -- --
Jeffrey J. Johnson............................. -- -- -- -- --
Mark N. Grenside............................... -- -- -- -- --
All directors and executive officers as a group
( persons).................................. -- -- -- -- --
</TABLE>
- ------------------------------
(1) If the over-allotment option is fully exercised, Hallmark Entertainment,
Inc. would own shares of Class B common stock representing %
of our total voting power.
(2) The amounts shown consist of shares to be received by Chase Equity
Associates following the reorganization that will be completed
simultaneously with the closing of this offering. Mr. Chavkin is a general
partner of Chase Capital Partners, which is an affiliate of Chase Equity
Associates. Mr. Chavkin exercises shared investment and voting power with
respect to such shares, but disclaims beneficial ownership of such shares.
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<PAGE> 85
DESCRIPTION OF CAPITAL STOCK
The following summary description of provisions in our certificate of
incorporation and by-laws is qualified in its entirety by reference to our
certificate of incorporation and by-laws, which we have filed as exhibits to the
registration statement of which this prospectus is a part.
Our authorized capital stock consists of shares of Class A
common stock, par value $0.01 per share and shares of Class B
common stock, par value $0.01 per share, and shares of preferred
stock, par value $0.01 per share. As of , 2000, assuming completion
of the reorganization, we will have shares of Class A common
stock and shares of Class B common stock and no shares of
preferred stock outstanding. After this offering, there will be an additional
shares of Class A common stock outstanding.
COMMON STOCK
Subject to the rights of the holders of any preferred stock that may be
outstanding, holders of Class A common stock are entitled to receive, share for
share with holders of Class B common stock, dividends as may be declared by our
Board of Directors out of funds legally available to pay dividends, and, in the
event of liquidation, to share pro rata with the holders of Class B common stock
in any distribution of our assets after payment or providing for the payment of
liabilities and the liquidation preference of any outstanding preferred stock.
Except as required by Delaware law, Class A common stock and Class B common
stock will vote together as a single class on all matters presented to a vote of
stockholders, including the election of directors. Each holder of Class A common
stock is entitled to one vote for each share held of record on the applicable
record date for all of these matters. Holders of Class A common stock have no
cumulative voting rights or preemptive rights to purchase or subscribe for any
stock or other securities, and there are no conversion rights or redemption or
sinking fund provisions with respect to Class A common stock. All outstanding
shares of Class A common stock are, and the shares of Class A common stock
offered hereby will be when issued, fully paid and nonassessable. Additionally,
our certificate of incorporation requires that we reserve and keep available out
of authorized but unissued Class A common stock, solely for effecting conversion
of Class B common stock, sufficient shares to effect conversion of all
outstanding shares of Class B common stock.
Class B common stock is identical in all respects to Class A common stock,
except with respect to voting and conversion rights. Class A common stock and
Class B common stock will vote together as a single class on all matters
presented to a vote of stockholders, including the election of directors. Each
holder of Class B common stock is entitled to ten votes for each share held of
record on the applicable record date for all of these matters. After this
offering, Hallmark Entertainment, Inc. will own all of our outstanding shares of
Class B common stock.
Each share of Class B common stock will be automatically converted into one
share of Class A common stock upon transfer of such share of Class B common
stock, whether or not for value, by any registered holder of that share, except
transfers by that holder to a nominee of that holder (without any change in
beneficial ownership, within the meaning of Section 13(d) of the Securities
Exchange Act of 1934). Further, any transfer by any registered holder to any
affiliate of that holder who remains an affiliate will not result in conversion.
Lastly, any bona fide pledge by a registered holder to a financial
institution in connection with a borrowing will not result in any conversion.
Any subsequent transfer by the pledgor to a person other than an affiliate of
such registered holder which remains such will be subject to automatic
conversion upon these terms and conditions. In addition, each share of Class B
common stock may be converted at any time into one share of Class A common stock
at the option of the holder.
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<PAGE> 86
PREFERRED STOCK
Our certificate of incorporation authorizes shares of
preferred stock. Our Board of Directors has the authority to issue shares of
preferred stock in one or more class or series and to fix, by resolution, the
powers, designations, preferences, rights and qualifications, limitations and
restrictions thereof, if any, including the number of shares in each series
(which our Board of Directors may increase or decrease as permitted by Delaware
law), liquidation preferences, dividend rates, conversion rights and redemption
provisions of the shares constituting any class or series, without any further
vote or action by the stockholders. Any shares of preferred stock so issued
would have priority over the common stock with respect to dividend or
liquidation rights or both. As of the time of this offering, we will have no
shares of preferred stock outstanding.
STOCKHOLDERS MEETINGS
Subject to the rights of holders of preferred stock, of whom there are
currently none, only a majority of our Board of Directors may call a special
meeting of stockholders.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATION AND PROPOSALS
Our by-laws establish advance notice procedures with regard to stockholder
proposals and the nomination, other than by or at the direction of our Board of
Directors or a committee thereof, of candidates for election as directors.
EFFECT OF DELAWARE ANTI-TAKEOVER STATUTE
We are subject to Section 203 of the Delaware General Corporation Law,
which regulates corporate acquisitions. Section 203 prevents certain Delaware
corporations, including those with securities quoted on the Nasdaq National
Market, from engaging under certain circumstances in a business combination with
any interested stockholder for three years following the date that the
stockholder became an interested stockholder. For purposes of Section 203, a
"business combination" includes, among other things, a merger or consolidation
involving us and the interested stockholder and a sale of more than 10% of our
assets. In general, the anti-takeover law defines an "interested stockholder" as
any entity or person beneficially owning 15% or more of our outstanding voting
stock and any entity or person affiliated with or controlling or controlled by
that entity or person. A Delaware corporation may "opt out" of Section 203 with
an express provision in its original certificate of incorporation or an express
provision in its certificate of incorporation or by-laws resulting from
amendments approved by holders of at least a majority of a corporation's
outstanding voting shares. We have not "opted out" of the provisions of Section
203. Hallmark Entertainment, Inc. is not an interested stockholder for purposes
of Section 203.
ACTION BY WRITTEN CONSENT
Under the Delaware General Corporation Law, unless the certificate of
incorporation expressly prohibits action by the written consent of stockholders,
any action required or permitted to be taken by our stockholders at a duly
called annual or special meeting of stockholders may be taken by a consent in
writing executed by stockholders possessing the requisite votes for the action
to be taken. Our certificate of incorporation does not expressly prohibit action
by the written consent of stockholders. As a result, Hallmark Entertainment,
Inc., as holder of % of our total voting power after this offering, will be
able to take any action to be taken by stockholders without the necessity of
holding a stockholder meeting. We intend, however, to hold annual meetings of
stockholders.
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TRANSFER AGENT AND REGISTRAR
The transfer agent for Class A common stock is ChaseMellon Shareholder
Services, Inc.
LISTING
We expect our Class A common stock to be quoted on the Nasdaq National
Market under the symbol "CRWN."
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for any of our
Class A common stock or Class B common stock. Future sales of substantial
amounts of our Class A common stock in the public market could adversely affect
prevailing market prices. Upon the closing of this offering, we will have
shares of Class A common stock outstanding, of which the shares offered
hereby will be freely tradable, unless purchased by our affiliates, as that term
is defined in Rule 144 under the Securities Act of 1933. All other shares,
including all shares of Class B common stock outstanding, will be
"restricted shares" for purposes of the Securities Act of 1933 and subject to
the volume and other limitations set forth in Rule 144.
In general, under Rule 144, as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned shares for at least one
year, including the holding period of any prior owner, except an affiliate from
whom these shares were purchased, is entitled to sell in "brokers' transactions"
or to market makers, within any three-month period commencing 90 days after the
date of this prospectus, a number of shares that does not exceed the greater of
- 1% of the then outstanding shares of Class A common stock, shares
immediately after this offering, without giving effect to the
over-allotment option; or
- the average weekly trading volume of our common stock during the four
calendar weeks preceding the required filing of a Form 144 with respect
to this sale.
Sales under Rule 144 are generally subject to the availability of current public
information about us. Under Rule 144(k), a person who is not deemed to have been
our affiliate at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate from
whom these shares were purchased, is entitled to sell these shares without
having to comply with the manner of sale, public information, volume limitation
or notice provisions of Rule 144.
Immediately after the offering, assuming no exercise of the over-allotment
option, Hallmark Entertainment, Inc. will own shares of Class B common
stock, Liberty Media will own shares of Class A common stock, the National
Interfaith Cable Coalition will own shares of Class A common stock and
Chase Equity Associates will own shares of Class A common stock. We have
granted to these entities the right to demand registration under the Securities
Act of 1933 of all or a portion of the shares of Class A common stock they own
prior to this offering, or into which Hallmark Entertainment, Inc.'s shares of
Class B common stock are convertible, subject to a two-year transfer restriction
with respect to most of such shares, without the consent of the other
stockholders who are parties to the stockholders agreement. See "Certain
Relationships and Related Transactions -- Stockholders Agreement and
Registration Rights" for more information on these registration rights.
Our executive officers and directors and all of our existing stockholders
have entered into lock-up agreements with the Representatives of the
underwriters wherein they have agreed not to sell any of their shares within 180
days after the date of this prospectus without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation on behalf of the
underwriters. These agreements have certain exceptions. For more information,
see "Underwriters."
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<PAGE> 89
MATERIAL U.S. FEDERAL INCOME TAX
CONSIDERATIONS FOR NON-U.S. HOLDERS
The following is a general discussion of certain U.S. federal income and
estate tax considerations with respect to the ownership and disposition of Class
A common stock applicable to Non-U.S. Holders. In general, a "Non-U.S. Holder"
is any holder other than:
- a citizen or resident of the United States;
- a corporation created or organized in the United States or under the laws
of the United States or of any state;
- an estate, the income of which is includible in gross income for U.S.
federal income tax purposes regardless of its source; and
- a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more U.S.
persons have the authority to control all substantial decisions of the
trust.
This discussion is based on current provisions of the Internal Revenue
Code, Treasury Regulations promulgated thereunder, judicial opinions, published
positions of the Internal Revenue Service, and all other applicable authorities,
all of which are subject to change (possibly with retroactive effect). This
discussion does not address all aspects of income and estate taxation or any
aspects of state, local, or non-U.S. taxes, nor does it consider any specific
facts or circumstances that may apply to a particular Non-U.S. Holder that may
be subject to special treatment under the U.S. federal income tax laws (such as
insurance companies, tax-exempt organizations, financial institutions, brokers,
dealers in securities, and certain U.S. expatriates). Accordingly, prospective
investors are urged to consult their tax advisors regarding the U.S. federal,
state, local and non-U.S. income and other tax considerations of acquiring,
holding and disposing of shares of common stock.
DIVIDENDS
In general, dividends paid to a Non-U.S. Holder will be subject to U.S.
withholding tax at a 30% rate of the gross amount (or a lower rate prescribed by
an applicable income tax treaty) unless the dividends are effectively connected
with a trade or business carried on by the Non-U.S. Holder within the United
States. Dividends effectively connected with such a U.S. trade or business
generally will not be subject to U.S. withholding tax if the Non-U.S. Holder
files certain forms, including Internal Revenue Service Form 4224 (or any
successor form, including a Form W-8ECI), with the payor of the dividend, and
generally will be subject to U.S. federal income tax on a net income basis, in
the same manner as if the Non-U.S. Holder were a resident of the United States.
A Non-U.S. Holder that is a corporation may be subject to an additional branch
profits tax at a rate of 30% (or such lower rate as may be specified by an
applicable income tax treaty) on the repatriation from the United States of its
"effectively connected earnings and profits," subject to certain adjustments. To
determine the applicability of a tax treaty providing for a lower rate of
withholding under the currently effective Treasury Regulations (Current
Regulations) and published Internal Revenue Service positions, dividends paid to
an address in a foreign country are presumed to be paid to a resident of that
country absent knowledge to the contrary. Under Treasury Regulations issued in
October 1997 (Final Regulations), and generally effective for payments made
after December 31, 2000, however, a Non-U.S. Holder (including, in certain cases
of Non-U.S. Holders that are entities, the owner or owners of such entities)
will be required to satisfy certain certification requirements in order to claim
a reduced rate of withholding under an applicable income tax treaty.
82
<PAGE> 90
GAIN OR SALE OR OTHER DISPOSITION OF COMMON STOCK
In general, a Non-U.S. Holder will not be subject to U.S. federal income
tax on any gain realized upon the sale or other disposition of the holder's
shares of Class A common stock unless:
- the gain is effectively connected with a trade or business carried on by
the Non-U.S. Holder within the United States (in which case the branch
profits tax discussed above may also apply if the Non-U.S. Holder is a
corporation);
- the Non-U.S. Holder is an individual who holds shares of Class A common
stock as a capital asset and is present in the United States for 183 days
or more in the taxable year of disposition and certain other tests are
met;
- the Non-U.S. Holder is subject to tax under the provisions of the
Internal Revenue Code regarding the taxation of U.S. expatriates; or
- We are or have been a U.S. real property holding corporation (USRPHC) for
U.S. federal income tax purposes (which we do not believe that we
currently are, or will become) at any time within the shorter of the
five-year period preceding such disposition and such Non-U.S. Holder's
holding period. If we were or were to become a USRPHC at any time during
this period, gains realized upon a disposition of Class A common stock by
a Non-U.S. Holder that did not directly or indirectly own more than 5% of
the Class A common stock during this period generally would not be
subject to U.S. federal income tax, provided that Class A common stock is
"regularly traded on an established securities market" (within the
meaning of Section 897(c)(3) of the Code).
ESTATE TAX
Class A common stock owned or treated as owned by an individual who is not
a citizen or resident (as defined for U.S. federal estate tax purposes) of the
United States at the time of death will be includible in the individual's gross
estate for U.S. federal estate tax purposes, unless an applicable estate tax
treaty provided otherwise, and therefore may be subject to U.S. federal estate
tax.
BACKUP WITHHOLDING, INFORMATION REPORTING AND OTHER REPORTING REQUIREMENTS
We must report annually to the Internal Revenue Service and to each
Non-U.S. Holder the amount of dividends paid to, and the tax withheld with
respect to, each Non-U.S. Holder. These reporting requirements apply regardless
of whether withholding was reduced or eliminated by an applicable tax treaty.
Copies of this information also may be made available under the provisions of a
specific treaty or agreement with the tax authorities in the country in which
the Non-U.S. Holder resides or is established.
Under the Current Regulations, U.S. backup withholding tax (which generally
is imposed at the rate of 31% on certain payments to persons that fail to
furnish the information required under the U.S. information reporting
requirements) and information reporting requirements (other than those discussed
in the previous paragraph) generally will not apply to dividends paid on Class A
common stock to a Non-U.S. Holder at an address outside the United States.
Backup withholding and information reporting generally will apply, however, to
dividends paid on shares of Class A common stock to a Non-U.S. Holder at an
address in the United States if the holder fails to establish an exemption or to
provide certain other information to the payor.
83
<PAGE> 91
Under the Current Regulations, the payment of proceeds from the disposition
of Class A common stock to or through a U.S. office of a broker will be subject
to information reporting and backup withholding, unless the beneficial owner,
under penalties of perjury, certifies, among other things, its status as a
Non-U.S. Holder or otherwise establishes an exemption. The payment of proceeds
from the disposition of Class A common stock to or through a Non-U.S. office of
a broker generally will not be subject to backup withholding and information
reporting, except as noted below. In the case of proceeds from a disposition of
Class A common stock paid to or though a non-U.S. office of a broker that is:
- a U.S. person;
- a "controlled foreign corporation" for U.S. federal income tax purposes;
or
- a foreign person 50% or more of whose gross income from certain periods
is effectively connected with a U.S. trade or business;
information reporting (but not backup withholding) will apply unless the broker
has documentary evidence in its files that the owner is a Non-U.S. Holder and
certain other conditions are satisfied, or the beneficial owner otherwise
establishes an exemption (and the broker has no actual knowledge to the
contrary).
Under the Final Regulations, generally effective for payments made after
December 31, 2000, the payment of dividends or the payment of proceeds from the
disposition of Class A common stock to a Non-U.S. Holder may be subject to
information reporting and backup withholding unless the recipient satisfies the
certification requirements of the Final Regulations or otherwise establishes an
exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to a Non-U.S. Holder can be refunded or
credited against the Non-U.S. Holder's U.S. federal income tax liability, if
any, provided that the required information is furnished to the Internal Revenue
Service in a timely manner.
THE FOREGOING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH
PROSPECTIVE NON-U.S. HOLDER OF CLASS A COMMON STOCK SHOULD CONSULT THAT HOLDER'S
OWN TAX ADVISER WITH RESPECT TO THE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF COMMON STOCK.
84
<PAGE> 92
UNDERWRITERS
Subject to the terms and conditions in the underwriting agreement, dated
, 2000, the underwriters named below, for whom Donaldson, Lufkin
& Jenrette Securities Corporation, Lehman Brothers Inc., Salomon Smith Barney
Inc. and DLJdirect Inc. are acting as representatives, have each agreed to
purchase from us the number of shares of common stock indicated opposite each of
their names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Lehman Brothers Inc. .......................................
Salomon Smith Barney Inc. ..................................
DLJdirect Inc. .............................................
Total............................................
</TABLE>
The underwriting agreement provides that the obligations of each of the
underwriters to purchase and accept delivery of the shares of common stock
offered by this prospectus are subject to approval by their counsel of legal
matters and to other specified conditions. The underwriters are obligated to
purchase and accept delivery of all the shares of common stock offered by this
prospectus, other than those shares covered by the over-allotment option
described below, if any are purchased.
The underwriters initially propose to offer the shares of common stock in
part directly to the public at the initial public offering price indicated on
the cover page of this prospectus and in part to dealers, including the
underwriters, at that price less a concession not in excess of $ per share. The
underwriters may allow, and the dealers may re-allow, to other dealers a
concession not in excess of $ per share. After the initial offering of the
common stock, the public offering price and other selling terms may be changed
by the representatives at any time without notice. The underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
Hallmark Entertainment, Inc. has granted to the underwriters an option,
exercisable within 30 days after the date of this prospectus, to purchase, from
time to time, in whole or in part, up to an aggregate of
additional shares of common stock at the initial public offering price less
underwriting discounts and commissions. The underwriters may exercise this
option solely to cover over-allotments, if any, made in connection with this
offering. To the extent that the underwriters exercise this option, each
underwriter will become obligated, subject to specified conditions, to purchase
its pro rata portion of the additional shares based on the underwriter's
percentage underwriting commitment as indicated in the preceding table.
The following table shows the underwriting fees to be paid to the
underwriters by us in this offering. These amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase additional
shares of our common stock to cover over-allotments.
<TABLE>
<CAPTION>
NO FULL
EXERCISE EXERCISE
<S> <C> <C>
Per Share................................................... $ $
Total....................................................... $ $
</TABLE>
We will pay the offering expenses, estimated to be $2.0 million.
An electronic prospectus is available on the Internet site maintained by
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation. Other than the prospectus in electronic format, the information on
the Internet site relating to our offering is not a part of this prospectus, has
not been approved or endorsed by us or any underwriter and should not be relied
on by prospective purchasers.
85
<PAGE> 93
We have agreed to indemnify the underwriters against specified liabilities,
including liabilities under the Securities Act, or to contribute to payments
that the underwriters may be required to make in connection with these
liabilities.
Our executive officers and directors and all of our existing stockholders
have agreed, for a period of 180 days after the date of this prospectus, with
some exceptions, that without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation, they will not:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or transfer or dispose of, directly or
indirectly, any shares of common stock or any securities convertible into
or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock.
In addition, during this 180-day period, we have also agreed not to file
any registration statement for the registration of any shares of common stock or
any securities convertible into or exercisable or exchangeable for common stock
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. Likewise, each of our executive officers, directors and
stockholders has agreed not to make any demand for, or exercise any right for,
registration of any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock without Donaldson, Lufkin &
Jenrette Securities Corporation's written consent.
Before this offering, there has been no established trading market for our
common stock. The initial public offering price for the shares of common stock
offered by this prospectus will be determined by negotiation among us and the
representatives. The factors to be considered in determining the initial public
offering price include the history of and the prospects for the industry in
which we compete, our past and present operations, our historical results of
operations, our prospects for future earnings, the recent market prices of
securities of generally comparable companies and the general condition of the
securities markets at the time of this offering.
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol, "CRWN."
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
offered by this prospectus in any jurisdiction where action for that purpose is
required. The shares of common stock offered by this prospectus may not be
offered or sold, directly or indirectly, nor may this prospectus or any other
offering material or advertisements in connection with the offer and sale of any
of the shares of common stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of the jurisdiction. Persons into whose possession this
prospectus comes are advised to inform themselves about and to observe any
restrictions relating to this offering and the distribution of this prospectus.
This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any shares of common stock offered by this prospectus in any
jurisdiction in which an offer or a solicitation is unlawful.
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or affect the price of our common stock.
Specifically, the underwriters may over-allot this offering, meaning syndicate
sales may be in excess of the offering size which creates a syndicate short
position. The underwriters may bid for and purchase shares of common stock in
the open market to cover the syndicate short position or to stabilize the price
of our common stock. In addition, the underwriting syndicate may reclaim selling
concessions from syndicate members if the syndicate repurchases previously
distributed common stock in syndicate covering transactions, in stabilization
transactions or in other transactions. Any
86
<PAGE> 94
of these activities may stabilize or maintain the market price of our common
stock above independent market levels. The underwriters are not required to
engage in these activities, and may end any of these activities at any time.
The underwriters, at our request, have reserved for sale at the initial
public offering price up to 8% of the shares of common stock to be sold in this
offering for sale to our employees, directors and other persons we designate.
The number of shares available for sale to the general public will be reduced to
the extent that any reserved shares are purchased. Any reserved shares not
purchased will be offered by the underwriters on the same basis as the other
shares offered by this prospectus.
LEGAL MATTERS
Certain legal matters will be passed upon for us by Wachtell, Lipton, Rosen
& Katz, New York, New York and Judith C. Whittaker, Esq., Vice President and
General Counsel of Hallmark Cards, Incorporated, and for the underwriters by
Weil, Gotshal & Manges LLP, New York, New York.
EXPERTS
The consolidated financial statements of Crown Media and Odyssey Holdings
included in this prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, a registration
statement on Form S-1 under the Securities Act with respect to the Class A
common stock offered in this prospectus. This prospectus does not contain all of
the information set forth in the registration statement and the exhibits and
schedules to that registration statement. For further information with respect
to us and the Class A common stock, we refer you to this registration statement
and its exhibits and schedules. Statements contained in this prospectus as to
the contents of any contract or other document are not necessarily complete and,
in each instance, reference is made to the copy of that contract or document
filed as an exhibit to the registration statement, each of these statements
being qualified in all respects by that reference. The registration statement,
including exhibits thereto, may be inspected and copied at the public reference
facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549 and at the SEC's Regional Offices located at
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and Seven World
Trade Center, 13th Floor, New York, New York 10048. Copies of these materials
may be obtained from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The SEC also maintains
a world wide web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants such as us
which file electronically with the SEC. The registration statement, including
all exhibits thereto and amendments thereof, is available on that website.
Upon completion of this offering, we will be subject to the informational
requirements of the Securities Exchange Act of 1934 and, in accordance
therewith, will file reports, proxy and information statements with the SEC. You
may inspect and copy these reports, proxy and information statements and other
information at the addresses set forth above.
87
<PAGE> 95
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999................................................... F-4
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999....................... F-6
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1997, 1998 and 1999... F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999....................... F-8
Notes to Consolidated Financial Statements................ F-10
ODYSSEY HOLDINGS, L.L.C. AND ITS SUBSIDIARIES
Report of Independent Public Accountants.................. F-22
Consolidated Balance Sheets as of December 31, 1998 and
1999................................................... F-23
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999....................... F-25
Consolidated Statements of Members' Equity (Deficit) for
the years ended December 31, 1997, 1998 and 1999....... F-26
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999....................... F-27
Notes to Consolidated Financial Statements................ F-28
NOTE -- Upon completion of a reorganization pursuant to
which shares of Crown Media Holdings will be
issued in exchange for shares of Crown Media
and Odyssey Holdings stock and a public
offering of shares of Class A common stock of
Crown Media Holdings:
- Crown Media Holdings will directly own
100% of Crown Media, and
- Crown Media Holdings will directly and
indirectly, through Crown Media, own 77.5%
of Odyssey Holdings.
Prior to the completion of the contemplated
reorganization and offering, Crown Media Holdings
will have no material assets, liabilities,
contingent liabilities or operations.
</TABLE>
F-1
<PAGE> 96
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Crown Media, Inc.:
We have audited the accompanying consolidated balance sheets of Crown
Media, Inc. (a Delaware corporation) and its subsidiaries as of December 31,
1998 and 1999, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of Crown Media, Inc.'s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Crown Media,
Inc. and its subsidiaries as of December 31, 1998 and 1999, and the results of
its operations and its cash flows for the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
January 18, 2000
F-2
<PAGE> 97
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-3
<PAGE> 98
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------
1998 1999
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,876,779 $ 3,865,455
Receivables:
Accounts receivable, less allowance for doubtful
accounts of $70,877 and $695,409, respectively....... 4,643,395 7,184,999
Receivables from unconsolidated subsidiaries........... 563,332 1,628,642
Demand note and interest receivable from affiliate..... 25,450,222 33,625
------------ -----------
Total receivables................................ 30,656,949 8,847,266
------------ -----------
Program license fees, net of accumulated amortization..... 15,721,307 10,845,675
Subtitling and dubbing, net of accumulated amortization... 1,252,086 976,431
Prepaids and other assets:
Prepaid satellite services............................. 968,004 590,992
Other.................................................. 155,450 261,404
------------ -----------
Total prepaids and other assets.................. 1,123,454 852,396
------------ -----------
Total current assets............................. 51,630,575 25,387,223
Program license fees, net of current portion................ 4,459,611 7,735,657
Subtitling and dubbing, net of current portion.............. 3,250,950 3,594,659
Property and equipment, net................................. 7,795,164 7,984,587
Investment in Odyssey Holdings.............................. 49,400,604 35,362,626
Prepaids and other assets, net of current portion:
Prepaid satellite services................................ 838,492 423,968
Other..................................................... 298,683 557,494
------------ -----------
Total prepaids and other assets.................. 1,137,175 981,462
------------ -----------
Total assets..................................... $117,674,079 $81,046,214
============ ===========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these financial statements.
F-4
<PAGE> 99
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1998 1999
<S> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities.................. $ 9,285,345 $ 5,493,053
License fees payable to Hallmark Entertainment
Distribution........................................... 30,245,282 34,605,831
Payable to Hallmark Entertainment......................... 9,171,567 9,242,744
Notes and interest payable to affiliates.................. 20,000,000 22,710,670
Deferred compensation..................................... -- 3,250,000
Deferred programming revenue.............................. 2,634,667 2,153,786
------------ -------------
Total current liabilities........................ 71,336,861 77,456,084
Long-term liabilities:
Accrued liabilities....................................... -- 18,491
Deferred programming revenue, net of current portion...... 2,150,666 --
Note payable to affiliate, net of current portion......... 10,000,000 --
Investment in the Kermit Channel.......................... 118,633 1,043,322
Deferred compensation..................................... -- 3,556,988
Deferred income taxes..................................... -- 1,600,000
Commitments and contingencies...............................
Class B common stock subject to put and call, $.01 par
value; 1,000 shares authorized; issued and outstanding
shares of 130.6 and 136.1 as of December 31, 1998 and 1999,
respectively................................................ 54,264,795 60,338,173
Stockholders' equity (deficit):
Class A common stock, $.01 par value; 2,000 shares
authorized; issued and outstanding shares of 1,044.4
and 1,088.9 as of December 31, 1998 and 1999,
respectively........................................... 10 11
Paid-in capital........................................... 52,123,727 69,901,504
Accumulated deficit....................................... (72,320,613) (132,868,359)
------------ -------------
Total stockholders' equity (deficit)............. (20,196,876) (62,966,844)
------------ -------------
Total liabilities and stockholders' equity
(deficit)...................................... $117,674,079 $ 81,046,214
============ =============
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these financial statements.
F-5
<PAGE> 100
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Revenues:
Subscriber fees................................ $ 9,100,305 $ 20,648,242 $ 27,669,571
Advertising.................................... 176,310 84,358 1,729,454
Other:
Management fees from unconsolidated
subsidiary............................... -- 1,529,200 2,509,891
Sublicensing fees........................... 525,000 1,425,000 --
------------ ------------ ------------
Total other........................... 525,000 2,954,200 2,509,891
------------ ------------ ------------
Total revenues........................ 9,801,615 23,686,800 31,908,916
------------ ------------ ------------
Cost of sales:
Programming costs:
Affiliate................................... 10,321,805 12,306,668 12,331,157
Non-affiliates.............................. 7,770,004 14,187,307 10,451,996
Operating costs................................ 6,989,881 16,831,150 18,795,432
------------ ------------ ------------
Total cost of sales................... 25,081,690 43,325,125 41,578,585
General and administrative expenses.............. 6,118,117 11,549,537 26,277,462
------------ ------------ ------------
Loss from operations.................. (21,398,192) (31,187,862) (35,947,131)
Equity in net losses of unconsolidated
subsidiaries and investment expenses........... -- 4,918,029 18,991,667
Interest (income) expense, net................... -- (1,272,867) (798,390)
------------ ------------ ------------
Net loss before income taxes.......... (21,398,192) (34,833,024) (54,140,408)
Income tax provision............................. 179,352 631,690 2,556,182
------------ ------------ ------------
Net loss.............................. $(21,577,544) $(35,464,714) $(56,696,590)
============ ============ ============
Loss per share................................... $ (21,578) $ (32,868) $ (47,926)
============ ============ ============
Weighted average number of Class A and B shares
outstanding.................................... 1,000 1,079 1,183
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-6
<PAGE> 101
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CLASS A TOTAL
CLASS A COMMON PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES STOCK CAPITAL DEFICIT EQUITY (DEFICIT)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996...... 1,000.0 $10 $ -- $ (13,235,782) $(13,235,772)
Net loss...................... -- -- -- (21,577,544) (21,577,544)
------- --- ----------- ------------- ------------
Balance, December 31, 1997...... 1,000.0 10 -- (34,813,326) (34,813,316)
Conversion of Hallmark
Entertainment debt into
equity..................... -- -- 34,345,949 -- 34,345,949
Hallmark Entertainment capital
contribution related to
investment in Odyssey
Holdings................... 44.4 -- 17,777,778 -- 17,777,778
Accretion related to Class B
common stock subject to put
and call................... -- -- -- (2,042,573) (2,042,573)
Net loss...................... -- -- -- (35,464,714) (35,464,714)
------- --- ----------- ------------- ------------
Balance, December 31, 1998...... 1,044.4 10 52,123,727 (72,320,613) (20,196,876)
Hallmark Entertainment capital
contribution related to
investment in Odyssey
Holdings................... 44.5 1 17,777,777 -- 17,777,778
Accretion related to Class B
common stock subject to put
and call................... -- -- -- (3,851,156) (3,851,156)
Net loss...................... -- -- -- (56,696,590) (56,696,590)
------- --- ----------- ------------- ------------
Balance, December 31, 1999...... 1,088.9 $11 $69,901,504 $(132,868,359) $(62,966,844)
======= === =========== ============= ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-7
<PAGE> 102
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(21,577,544) $(35,464,714) $(56,696,590)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of program license fees........... 18,091,809 26,493,975 22,783,153
Depreciation and amortization of property and
equipment................................... 737,458 1,504,392 2,379,481
Amortization of subtitling and dubbing and
other assets................................ 1,296,824 1,372,674 2,528,366
Provision for losses on accounts receivable.... 143,978 38,160 672,306
Equity in net losses of unconsolidated
subsidiaries................................ -- 3,480,621 17,342,775
Amortization of equity investment basis
difference.................................. -- 137,408 1,648,892
Deferred compensation.......................... -- -- 6,806,988
Provisions for deferred taxes.................. -- -- 1,600,000
Changes in operating assets and liabilities:
Increase in accounts receivable............. (1,407,382) (2,415,878) (3,213,910)
Increase in receivables from unconsolidated
subsidiaries............................. -- (563,332) (1,065,310)
(Increase) decrease in interest
receivable............................... -- (450,222) 416,597
Gross additions to program license fees..... (27,058,914) (25,668,456) (21,183,567)
Increase in subtitling and dubbing.......... (2,619,493) (3,156,032) (2,596,420)
(Increase) decrease in prepaids and other
assets................................... (4,665,731) (820,372) 426,771
Increase (decrease) in accounts payable and
accrued liabilities...................... 4,209,852 1,991,333 (3,773,801)
Increase in payable to Hallmark
Entertainment Distribution............... 11,156,947 720,635 4,360,549
Increase (decrease) in deferred revenue..... 9,386,666 (4,601,333) (2,631,547)
------------ ------------ ------------
Net cash used in operating activities.... (12,305,530) (37,401,141) (30,195,267)
------------ ------------ ------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-8
<PAGE> 103
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Cash flows from investing activities:
Purchases of property and equipment............. $(1,030,880) $ (6,664,519) $ (2,568,904)
Proceeds from (investment in) note receivable
from Hallmark Entertainment.................. -- (25,000,000) 25,000,000
Investment in Odyssey Holdings ................. -- (20,000,000) --
Investment in the Kermit Channel................ -- (2,900,000) (4,029,000)
----------- ------------ ------------
Net cash provided by (used in)
investing activities................. (1,030,880) (54,564,519) 18,402,096
----------- ------------ ------------
Cash flows from financing activities:
Payment on Odyssey Holdings note payable........ -- -- (20,000,000)
Capital contributions........................... -- 70,000,000 20,000,000
Borrowings from affiliates...................... 13,540,239 24,633,610 12,781,847
----------- ------------ ------------
Net cash provided by financing
activities........................... 13,540,239 94,633,610 12,781,847
----------- ------------ ------------
Net increase in cash and cash
equivalents.......................... 203,829 2,667,950 988,676
Cash and cash equivalents, beginning of year...... 5,000 208,829 2,876,779
----------- ------------ ------------
Cash and cash equivalents, end of year............ $ 208,829 $ 2,876,779 $ 3,865,455
=========== ============ ============
Supplemental disclosure of cash and non-cash
activities:
Income taxes paid............................... $ 179,352 $ 631,690 $ 956,182
=========== ============ ============
Investment in Odyssey Holdings through issuance
of note payable.............................. $ -- $ 30,000,000 $ --
=========== ============ ============
Accretion related to Class B common stock
subject to put and call...................... $ -- $ 2,042,573 $ 3,851,156
=========== ============ ============
Conversion of Hallmark Entertainment
Distribution program license fee payable into
contributed capital.......................... $ -- $ 34,345,949 $ --
=========== ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-9
<PAGE> 104
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
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 financial statements also include the assets and
liabilities and results of operations of Crown Media's wholly and majority-owned
subsidiaries.
LIQUIDITY
Crown Media has incurred significant recurring losses since inception as it
acquired programming rights and expanded into new international markets.
Hallmark Entertainment currently is contemplating an initial public offering of
shares of Class A common stock of Crown Media Holdings, Inc. ("Crown Media
Holdings") (see Note 14) and believes that the proceeds from that offering,
together with cash generated from operations, will be sufficient to meet Crown
Media's liquidity requirements through 2001. However, in the event a public
offering does not occur or alternative financing is not obtained, Hallmark
Entertainment has committed to provide funding, to the extent necessary, until
the earlier of the completion of the public offering or March 31, 2001.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The 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.
CASH AND CASH EQUIVALENTS
Crown Media considers all highly liquid debt instruments purchased with an
initial maturity of three months or less to be cash equivalents. The carrying
value of Crown Media's cash equivalents approximates cost at each balance sheet
date.
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 over their license periods (the "airing window") 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 ultimately will result in a
loss, additional amortization is provided to currently recognize that loss.
SFAS No. 63 also requires an entity providing programming to report an
asset and liability for the rights licensed under a programming agreement only
when the license period begins and when certain other
F-10
<PAGE> 105
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
defined requirements are met. As such, the accompanying consolidated balance
sheets do not reflect assets and liabilities of $12.9 million and $42.8 million
as of December 31, 1998 and 1999, respectively, related to program license fees
with airing windows to begin subsequent to period-end.
Program license fees consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------
1998 1999
<S> <C> <C>
Program license fees -- affiliates....................... $ 16,795,395 $ 17,361,575
Program license fees -- non-affiliates................... 17,919,174 11,195,652
Prepaid program license fees............................. 3,250,000 6,750,000
------------ ------------
Program license fees, at cost....................... 37,964,569 35,307,227
Accumulated amortization................................. (17,783,651) (16,725,895)
------------ ------------
Program license fees, net........................... $ 20,180,918 $ 18,581,332
============ ============
</TABLE>
SUBTITLING AND DUBBING
Subtitling and dubbing costs represent costs incurred to prepare
programming for airing in international markets. These costs are capitalized as
incurred and are amortized over the shorter of the program's airing window (for
programming licensed from unaffiliated third-parties), the program's estimated
life (for programming licensed from Hallmark Entertainment Distribution LLC
("Hallmark Entertainment Distribution"), a wholly-owned subsidiary of Hallmark
Entertainment) or 10 years. Accumulated amortization related to subtitling and
dubbing as of December 31, 1998 and 1999 was $3.0 million and $2.4 million,
respectively.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
of property and equipment are provided for by the straight-line method over the
estimated useful lives of the respective assets, ranging from five to seven
years. When property is sold or otherwise disposed of, the cost and related
accumulated depreciation is removed from the accounts and any resulting gain or
loss is included in income. The costs of normal maintenance and repairs are
charged to expense when incurred.
REVENUE RECOGNITION
Subscriber fees are recognized as revenue when programming is provided to
pay television distributors and collectibility is reasonably assured. Subscriber
fee revenues are recorded net of promotional subscribers.
Advertising revenues are recognized as earned in the period in which the
advertising commercials are telecast. Advertising revenues are recorded net of
agency commissions.
Foreign revenues for each of the years ended December 31, 1997, 1998 and
1999 represented 100% of total subscriber fee revenues. Such revenues, generally
denominated in United States dollars, were primarily from sales to customers in
Australia, Benelux, Italy, New Zealand, South Africa, Spain, and certain
countries in Asia, the Middle East and Latin America.
COST OF SALES
Cost of sales includes amortization of program license fees, certain
advertising and marketing costs and other expenses incurred in distributing
Crown Media's programming. Also included are all direct selling expenses for the
international satellite and cable distribution business.
F-11
<PAGE> 106
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MINORITY INTEREST
The minority interest in the net income or loss of Crown Media's non
wholly-owned, consolidated subsidiaries is insignificant and therefore not
separately reflected in the accompanying financial statements. To the extent the
minority interest in the net losses of Crown Media's consolidated subsidiaries
exceeds the minority investment in those subsidiaries, such excess losses are
charged to Crown Media.
COMPREHENSIVE INCOME
Crown Media has adopted SFAS No. 130, "Reporting Comprehensive Income,"
effective the year ended December 31, 1998. This statement establishes standards
for the reporting and display 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 years ended December 31, 1997, 1998 and 1999.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." This statement provides computation,
presentation and disclosure requirements for earnings per share. There was no
dilutive impact to weighted average shares for any of the periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires Crown Media to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE
The carrying amounts of financial instruments, including amounts payable
and receivable, are reasonable estimates of their fair value. The fair values
were estimated using the current rates at which loans would be made to Crown
Media for similar remaining maturities.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject Crown Media to a
concentration of credit risk consist primarily of accounts receivable. At
December 31, 1998 and 1999, 100% of Crown Media's accounts receivable were due
from entities with foreign operations. Generally, Crown Media does not require
collateral to secure receivables.
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
F-12
<PAGE> 107
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
embedded in other contracts, and for hedging activities. Crown Media intends to
adopt the new accounting standard in the year ended December 31, 2001, but does
not expect it to have a material effect on its financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1998 1999
<S> <C> <C>
Technical equipment and computers.......................... $ 8,874,796 $10,329,767
Furniture and fixtures..................................... 879,306 966,306
Leasehold improvements..................................... 325,459 460,701
Construction-in-progress................................... 246,378 1,065,397
----------- -----------
Property and equipment at cost........................... 10,325,939 12,822,171
Less -- Accumulated depreciation and amortization.......... (2,530,775) (4,837,584)
----------- -----------
Property and equipment, net.............................. $ 7,795,164 $ 7,984,587
=========== ===========
</TABLE>
4. 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. 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 $3.0 million and $5.0 million for the years ended
December 31, 1998 and 1999, respectively, is included in the consolidated
statements of operations as equity in net losses of unconsolidated subsidiaries
and investment expenses.
Crown Media provides management services to the Kermit Channel in exchange
for a management fee as provided in the Management Services Agreement between
Crown Media and the Kermit Channel. This management fee, which was approximately
$1.5 million and $2.5 million for the years ended December 31, 1998 and 1999,
respectively, includes direct and indirect costs incurred on behalf of the
Kermit Channels, as provided by the Management Services Agreements.
Additionally, Hallmark Entertainment Distribution provides programming to the
Kermit Channel in exchange for a fee through a license agreement.
Effective December 1998, HHPLA discontinued all operations and was
dissolved in December 1999. All dissolution costs have been accrued and included
in equity in net losses of unconsolidated subsidiaries and investment expenses
in the accompanying 1998 consolidated statement of operations to the extent of
Crown Media's economic interest. Crown Media also incurred $1.3 million in costs
on behalf of HHPLA in 1998. These costs were not charged to HHPLA and are
included in equity in net losses of unconsolidated subsidiaries and investment
expenses for the year ended December 31, 1998.
Crown Media made capital contributions, through cash advances and/or
conversion of receivables in the Kermit Channel, of $2.9 million and $4.0
million during 1998 and 1999, respectively.
F-13
<PAGE> 108
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and an additional $20.0 million in May 1999. The
final payment of $10.0 million is due no earlier than January 1, 2000 and no
later than March 31, 2000. Consequently, at December 31, 1998 and 1999, Crown
Media had an outstanding note payable related to this investment, included in
notes and interest payable to affiliates in the accompanying consolidated
balance sheets, of $30.0 million and $10.0 million, respectively.
Crown Media funded its 1998 capital contribution to Odyssey Holdings with
the proceeds of additional investments of $17.8 million and $2.2 million in
Crown Media by its stockholders, Hallmark Entertainment and Chase Equity
Associates ("Chase"), respectively. Hallmark Entertainment and Chase were issued
44.444 shares of Class A common stock and 5.555 shares of Class B common stock,
respectively, related to the additional funding. In May 1999, Hallmark
Entertainment and Chase provided Crown Media with additional funding of $17.8
million and $2.2 million, respectively, to fund Crown Media's additional capital
contribution to Odyssey Holdings. In connection with this funding, Crown Media
issued 44.444 shares of Class A common stock to Hallmark Entertainment and 5.555
shares of Class B common stock to Chase. Crown Media anticipates funding its
remaining obligation through additional contributions from its shareholders. The
Class B shares issued in connection with this funding provided by Chase are
subject to the put and call arrangement discussed in Note 6.
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 $462,000 for the period from the
date of investment through December 31, 1998 and approximately $12,389,000 as of
the year ended December 31, 1999. These amounts are included in the consolidated
statements of operations as equity in net losses of unconsolidated subsidiaries
and investment expenses. Crown Media's investment in Odyssey Holdings as of
December 31, 1998 exceeded the underlying equity in the net assets of Odyssey
Holdings by approximately $33.0 million. This amount represents goodwill and is
being amortized over a 20 year life. For the year ended December 31, 1998 and
1999, $137,000 and $1.6 million, respectively, was amortized related to this
difference and is reflected in equity in net losses of unconsolidated
subsidiaries and investment expenses in the accompanying consolidated statements
of operations. Additionally, Hallmark Entertainment Distribution provides
programming to Odyssey Holdings in exchange for a fee through a license
agreement.
5. DEFERRED PROGRAMMING REVENUE
In December 1997, Crown Media renegotiated a distribution agreement with a
pay television distributor which extends through December 2000. As a result of
the renegotiation, the pay television distributor paid Crown Media $5.0 million
and agreed to provide Crown Media with approximately $4.3 million in future
transponder services and playback and uplink services. The entire $9.3 million
from the renegotiated agreement was initially included in deferred revenue. At
December 31, 1998 and 1999, amounts deferred were approximately $4.8 million and
$2.2 million, respectively. Revenue is recognized in subscriber fees as services
are provided and over the life of the contract. Revenues recognized under the
renegotiated agreement were approximately $4.5 million and $2.6 million for the
years ended December 31, 1998 and 1999, respectively.
F-14
<PAGE> 109
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. CLASS B COMMON STOCK SUBJECT TO PUT AND CALL
On May 28, 1998, Crown Media obtained financing through the sale and
issuance of 125 shares of Class B Common Stock to Chase. The 125 shares of
nonvoting Class B common stock, comprising 100% of the total Class B common
stock issued and outstanding and representing an 11.11% equity interest in Crown
Media, were sold to Chase for $50.0 million. Prior to the transaction, Hallmark
Entertainment was the sole stockholder of Crown Media, and continues to hold
1,088.9 shares of the total outstanding Class A common stock, representing an
88.89% equity interest in Crown Media.
Chase has the option to put its Class B common stock to Crown Media within
120 days after December 31, 2001, at the then fair market value of the shares or
at a price to provide Chase with a defined rate of return. After December 31,
2003, Chase may only put at a price equal to the fair market value. Chase may
also put the shares at any time upon the occurrence of certain triggering
events, as defined by the Securities Purchase Agreement. At December 31, 1998
and 1999, $2.0 million and $5.9 million, respectively, had been cumulatively
accreted related to this put.
Pursuant to the terms of the Securities Purchase Agreement, Crown Media has
the right, after December 31, 2004, to call the securities held by Chase at the
then fair market value.
Based on the put and call features, these securities have been presented
outside the equity section in the consolidated balance sheets. The put and call
options expire upon the completion of an initial public offering.
7. CONVERSION OF DEBT INTO EQUITY
Pursuant to the Securities Purchase Agreement, in May 1998 Hallmark
Entertainment Distribution (for the benefit of Hallmark Entertainment) converted
$34.3 million of amounts due from Crown Media related to program license fees
and operating advances into equity in Crown Media.
8. RELATED PARTY TRANSACTIONS
COSTS INCURRED ON CROWN MEDIA'S BEHALF
Since inception, Hallmark Entertainment has paid certain costs related to
payroll and benefits, insurance, operational and financing expenditures and
capital expenditures on behalf of Crown Media. These transactions are recorded
in the books and records of Crown Media, and to the extent that Crown Media has
not reimbursed Hallmark Entertainment, they are reflected as a payable to
Hallmark Entertainment in the accompanying consolidated balance sheets.
NOTE RECEIVABLE -- HALLMARK ENTERTAINMENT
Included in the accompanying December 31, 1998 and 1999 consolidated
balance sheets is a note receivable of $25.0 million and $0, respectively, from
Hallmark Entertainment. The interest rate on this note is 7%, and payment of the
outstanding principal and interest is due on demand. For the years ended
December 31, 1998 and 1999, approximately $957,000 and $691,000, respectively,
of interest income was recorded related to interest earned under this note.
Interest receivable of $450,000 and $34,000 is included in demand note and
interest receivable from affiliate in the accompanying consolidated balance
sheets as of December 31, 1998 and 1999, respectively.
F-15
<PAGE> 110
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 agreement.
Programming costs related to the program agreement were $10.3 million,
$12.3 million, and $12.3 million, respectively for the years ended December 31,
1997, 1998 and 1999, respectively. As of December 31, 1998 and 1999, $30.2
million and $34.6 million, respectively, are included in license fees payable to
Hallmark Entertainment Distribution in the accompanying 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 years ended December 31, 1997, 1998
and 1999, Crown Media has accrued $1.0 million, $1.0 million and $500,000,
respectively, under the agreement. At December 31, 1998 and 1999, unpaid accrued
service fees of $3.0 million and $3.5 million, respectively, are included in
payable to Hallmark Entertainment in the accompanying consolidated balance
sheets.
EMPLOYEE HEALTH INSURANCE
All risk of loss related to employee health insurance of Crown Media is
born by Hallmark Entertainment through its reinsurers. Crown Media paid Hallmark
Entertainment $247,000, $443,000 and $1.1 million for the years ended December
31, 1997, 1998 and 1999, respectively, as consideration to Hallmark
Entertainment for the transfer of risk related to health insurance provided to
employees of Crown Media.
DEMAND NOTE
In November 1999, Crown Media entered into an agreement with HC Crown
Corporation, an affiliate of Hallmark Cards, under which HC Crown agreed to lend
Crown Media up to $20.0 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, principal borrowings
under the note were approximately $12.7 million with accrued interest of
$49,000, both of which are included in notes and interest payable to affiliates
on the accompanying consolidated balance sheets.
9. 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
F-16
<PAGE> 111
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Since its inception, 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 to establish a deferred tax liability as
required for certain timing items.
Total income tax provision consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Current:
Federal..................................... $ -- $ -- $ --
Foreign..................................... 179,352 631,690 956,182
State and local............................. -- -- --
-------- -------- ----------
Total current............................ 179,352 631,690 956,182
Deferred:
Federal..................................... -- -- 1,600,000
State and local............................. -- -- --
-------- -------- ----------
Total deferred........................... -- -- 1,600,000
-------- -------- ----------
Total.................................... $179,352 $631,690 $2,556,182
======== ======== ==========
</TABLE>
The following table reconciles the income tax provision at the U.S.
statutory rate to that in the financial statements:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Taxes computed at 35%........................ $(7,489,367) $(12,191,558) $(18,949,143)
Net operating losses not benefiting Crown
Media...................................... 7,489,367 12,191,558 17,349,143
Additional tax on foreign income............. (179,352) (631,690) (956,182)
----------- ------------ ------------
Income tax provision.................... $ (179,352) $ (631,690) $ (2,556,182)
=========== ============ ============
</TABLE>
F-17
<PAGE> 112
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,
-------------------------
1998 1999
<S> <C> <C>
Deferred tax assets:
Deferred revenue......................................... $ 1,914,133 $ 861,514
Unconsolidated subsidiaries' losses...................... 590,129 --
Bad debt reserve......................................... 28,351 278,164
Accrued compensation..................................... -- 1,922,795
Valuation allowance...................................... (2,100,631) --
----------- -----------
Total deferred tax assets............................. 431,982 3,062,473
Deferred tax liabilities:
Depreciation............................................. (431,982) (555,982)
Unconsolidated subsidiaries' losses...................... -- (4,014,660)
Other.................................................... -- (91,831)
----------- -----------
Total deferred tax liabilities........................ (431,982) (4,662,473)
----------- -----------
Net deferred taxes................................. $ -- $(1,600,000)
=========== ===========
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Crown Media leases transponders, office facilities, and various office
equipment under operating leases that generally are not cancelable. The leases
expire at various dates through August 2008, and some contain escalation clauses
and renewal options.
Rent expense under these agreements was $654,000, $5.6 million and $6.7
million, respectively, for the years ended December 31, 1997, 1998 and 1999,
respectively. At December 31, 1999, the minimum annual rental commitments under
the leases are as follows:
<TABLE>
<S> <C>
2000.................................................... $ 6,789,000
2001.................................................... 7,149,000
2002.................................................... 7,227,000
2003.................................................... 6,279,000
2004.................................................... 5,127,000
Thereafter.............................................. 18,600,000
-----------
$51,171,000
===========
</TABLE>
Certain of the above amounts related to transponder leases are directly
allocable, by contract, to the Kermit Channel. Future allocations to the Kermit
Channel are expected to be $2.0 million, $2.0 million, $2.0 million, $1.6
million, $1.1 million and $3.9 million for 2000, 2001, 2002, 2003, 2004 and
thereafter, respectively.
F-18
<PAGE> 113
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEVERANCE AGREEMENT
In January 1999, under the terms of a severance agreement with a former
senior executive, Crown Media recorded $4.0 million of expense which is
reflected in general and administrative expenses for the year ended December 31,
1999. The $4.0 million remains accrued in deferred compensation at December 31,
1999. The agreement requires a payment of $2.0 million, $1.0 million and $1.0
million in January 2000, 2001 and 2002, respectively. The agreement requires an
additional payment of $2.0 million contingent upon an initial public offering of
Crown Media's shares prior to January 31, 2001 or $1.0 million contingent upon
an initial public offering after January 31, 2001 but prior to January 31, 2002.
11. SHARE APPRECIATION RIGHTS PLAN
In March 1999, Crown Media adopted a Share Appreciation Rights Plan (the
"SAR Plan") to provide key officers of Crown Media incentives linked to the
increase in Crown Media's market value. The SAR Plan allows for the issuance of
up to 3 million rights that accrete value over an initial valuation and vest
over a period of thirty-six months. The SAR Plan expires on December 31, 2002.
The maximum distributions under the SAR Plan are $15.0 million in aggregate and
$10.0 million to any individual. As of December 31, 1999, Crown Media had issued
3 million rights and accrued $2.8 million in deferred compensation under the SAR
Plan.
12. BENEFIT PLANS
Crown Media's employees may participate in the Company's 401(k) Plan (the
"Plan"). Employees that qualify for participation can contribute up to 15% of
their salary, on a before tax basis, subject to a maximum contribution limit as
determined by the Internal Revenue Service.
Crown Media may make matching contributions on behalf of all participants
who make elective deferrals in an amount equal to a variable percentage of
participants' pre-tax contributions. This percentage is decided upon annually by
the Plan administration committee. Crown Media contributed $0, $34,000 and
$32,000 for the years ended December 31, 1997, 1998 and 1999, respectively. In
addition, Crown Media may make profit sharing contributions on behalf of
employees, other than highly compensated employees, in an amount determined by
Crown Media, to be allocated in proportion to each employee's compensation as a
percentage of total employee compensation. For the years ended December 31,
1997, 1998 and 1999, there were no profit sharing contributions.
13. 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.
F-19
<PAGE> 114
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All of Crown Media's material operations are part of the pay television
programming service industry and therefore Crown Media reports as a single
industry segment. Foreign operations in 1999 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>
YEAR ENDED DECEMBER 31,
1997:
United States......... $ 0.0 $0.0 $ (9.7) $ 5.5
Scandinavia/Benelux... 3.2 0.0 (2.5) 10.5
Asia Pacific.......... 2.3 0.0 (1.6) 3.3
Latin America......... 2.3 0.0 (4.1) 3.5
Europe................ 1.0 0.0 (2.9) 6.3
Africa................ 1.0 0.0 (0.6) 1.2
----- ---- ------ ------
$ 9.8 $0.0 $(21.4) $ 30.3
===== ==== ====== ======
YEAR ENDED DECEMBER 31,
1998:
United States......... $ 0.0 $1.5 $(18.6) $ 11.5
Scandinavia/Benelux... 5.5 0.0 (3.8) 5.3
Asia Pacific.......... 4.7 0.0 (2.0) 4.5
Latin America......... 5.4 0.0 (3.5) 4.9
Europe................ 5.1 0.0 (3.6) 7.5
Africa................ 1.5 0.0 0.3 1.0
----- ---- ------ ------
$22.2 $1.5 $(31.2) $ 34.7
===== ==== ====== ======
YEAR ENDED DECEMBER 31,
1999:
United States......... $ 0.0 $2.5 $(30.1) $ 8.2
Scandinavia/Benelux... 3.7 0.0 (1.2) 3.0
Asia Pacific.......... 6.2 0.0 (2.5) 4.4
Latin America......... 9.7 0.0 (0.2) 3.3
Europe................ 7.8 0.0 (2.5) 13.1
Africa................ 2.0 0.0 0.6 1.0
----- ---- ------ ------
$29.4 $2.5 $(35.9) $ 33.0
===== ==== ====== ======
</TABLE>
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.
F-20
<PAGE> 115
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No customer accounted for more than 10% of Crown Media's revenue for the
year ended December 31, 1999.
14. SUBSEQUENT EVENTS
DEMAND FOR PAYMENT ON ODYSSEY HOLDINGS NOTE
On January 18, 2000, Crown Media received notification from Odyssey
Holdings of the exercise by Odyssey Holdings of its right to demand payment of
the remaining $10.0 million due from Crown Media's 1998 investment in Odyssey
Holdings. The $10.0 million payment is due on or before February 14, 2000, and
Crown Media anticipates funding this payment through additional contributions
from its stockholders.
PLANNED REORGANIZATION AND INITIAL PUBLIC OFFERING
Crown Media is currently contemplating a transaction whereby a holding
company ("Crown Media Holdings") will be created, and stock in Crown Media
Holdings will be exchanged for certain member interests in Odyssey Holdings.
Crown Media also currently contemplates that stock of Crown Media Holdings will
be sold in an initial public offering. Upon completion of the contemplated
reorganization and the initial public offering, Crown Media Holdings will own
100% of Crown Media and 77.5% of Odyssey Holdings.
F-21
<PAGE> 116
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
Odyssey Holdings, L.L.C.:
We have audited the accompanying consolidated balance sheets of Odyssey
Holdings, L.L.C. (a Delaware limited liability company) and its subsidiaries, as
of December 31, 1998 and 1999, and the related consolidated statements of
operations, members' equity (deficit) and cash flows for each of the three years
in the period ended December 31, 1999. These financial statements are the
responsibility of Odyssey Holdings, L.L.C.'s management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Odyssey
Holdings, L.L.C. and its subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
January 12, 2000
F-22
<PAGE> 117
ODYSSEY HOLDINGS, L.L.C. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------
1998 1999
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 38,979,682 $ 19,485,074
Accounts receivable, less allowance for doubtful accounts
of $183,379 and $736,600, respectively................. 2,730,137 5,063,473
Due from affiliates....................................... 1,800 --
Program license fees, net of accumulated amortization..... 13,570,430 21,561,515
Subscriber acquisition fees, net of accumulated
amortization........................................... -- 4,268,000
Other current assets...................................... 46,395 176,707
------------ ------------
Total current assets............................. 55,328,444 50,554,769
------------ ------------
Restricted cash............................................. -- 339,535
Program license fees, net of current portion................ 44,893,377 59,991,936
Property and equipment, net................................. 352,600 4,662,692
Subscriber acquisition fees, net of current portion......... -- 21,342,000
Other assets, net of current portion........................ -- 220,833
------------ ------------
Total assets..................................... $100,574,421 $137,111,765
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these financial statements.
F-23
<PAGE> 118
ODYSSEY HOLDINGS, L.L.C. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------
1998 1999
<S> <C> <C>
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 1,265,471 $ 176,664
Accrued liabilities....................................... 1,683,229 5,495,314
Deferred compensation..................................... -- 3,290,000
License fees payable to affiliates:
The Jim Henson Company................................. 10,000,000 7,500,000
Hallmark Entertainment Distribution.................... 3,286,000 27,126,921
License fees payable to third parties..................... 1,761,440 3,834,281
Notes payable............................................. 797,413 --
Due to VISN Management Corp. ............................. 77,037 --
------------ ------------
Total current liabilities........................ 18,870,590 47,423,180
------------ ------------
Long-term liabilities:
Deferred compensation..................................... -- 3,421,000
License fees payable to affiliates:
The Jim Henson Company................................. 8,226,060 8,214,286
Hallmark Entertainment Distribution.................... 34,481,202 20,530,040
License fees payable to third parties..................... 395,840 6,466,312
Subscriber acquisition fees payable....................... -- 27,210,000
Commitments and contingencies...............................
Redeemable preferred interest............................... 25,000,000 25,000,000
Members' equity (deficit)................................... 13,600,729 (1,153,053)
------------ ------------
Total liabilities and members' equity
(deficit)...................................... $100,574,421 $137,111,765
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these financial statements.
F-24
<PAGE> 119
ODYSSEY HOLDINGS, L.L.C. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1998 1999
<S> <C> <C> <C>
Revenues:
Subscriber fees:
Affiliate....................................... $ 3,000,000 $ 3,000,000 $ 3,687,606
Non-affiliates.................................. 3,188,486 3,473,302 4,156,397
----------- ----------- ------------
Total subscriber fees..................... 6,188,486 6,473,302 7,844,003
Advertising........................................ 8,834,412 11,541,501 9,819,089
Other.............................................. 230,755 126,147 1,220,318
----------- ----------- ------------
Total revenues............................ 15,253,653 18,140,950 18,883,410
----------- ----------- ------------
Cost of sales:
Programming costs:
Affiliates...................................... -- -- 15,929,537
Non-affiliates.................................. 2,815,282 3,753,511 5,882,096
Production costs................................... 6,017,301 8,021,404 13,955,801
Marketing and promotion costs...................... 3,656,622 3,298,863 14,759,491
Amortization of subscriber acquisition fees........ -- -- 1,600,000
----------- ----------- ------------
Total cost of sales....................... 12,489,205 15,073,778 52,126,925
General and administrative expenses.................. 3,034,380 6,189,272 23,000,685
----------- ----------- ------------
Loss from operations...................... (269,932) (3,122,100) (56,244,200)
Interest (income) expense, net....................... 150,569 47,882 (1,181,610)
----------- ----------- ------------
Net loss.................................. $ (420,501) $(3,169,982) $(55,062,590)
=========== =========== ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-25
<PAGE> 120
ODYSSEY HOLDINGS, L.L.C. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
MEMBERS' NOTES
EQUITY (DEFICIT) RECEIVABLES TOTAL
<S> <C> <C> <C>
Balance, December 31, 1996...................... $ 157,380 $ -- $ 157,380
Net loss...................................... (420,501) -- (420,501)
------------ ------------ ------------
Balance, December 31, 1997...................... (263,121) -- (263,121)
Capital contribution.......................... 102,033,832 (60,000,000) 42,033,832
Preferred interest............................ (25,000,000) -- (25,000,000)
Net loss...................................... (3,169,982) -- (3,169,982)
------------ ------------ ------------
Balance, December 31, 1998...................... 73,600,729 (60,000,000) 13,600,729
Payments of notes receivables................. -- 40,000,000 40,000,000
Capital contribution.......................... 308,808 -- 308,808
Net loss...................................... (55,062,590) -- (55,062,590)
------------ ------------ ------------
Balance, December 31, 1999...................... $ 18,846,947 $(20,000,000) $ (1,153,053)
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-26
<PAGE> 121
ODYSSEY HOLDINGS, L.L.C. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $ (420,501) $ (3,169,982) $(55,062,590)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of program license fees........... 2,815,282 3,753,511 21,811,633
Amortization of subscriber acquisition fees.... -- -- 1,600,000
Amortization of debt issuance costs............ -- -- 29,167
Depreciation and amortization of property
and equipment............................... 210,761 415,249 765,407
Changes in operating assets and liabilities:
Increase in accounts receivable............. (559,843) (368,168) (2,333,336)
Increase (decrease) in due to/from
affiliates............................... 49,298 4,955 (75,237)
Gross additions to program license fees..... (3,231,413) (60,505,540) (44,901,277)
(Increase) decrease in other current
assets................................... (17,911) 45,516 (130,312)
Increase in subscriber acquisition fees..... -- -- (27,210,000)
Increase in accounts payable and
accrued liabilities...................... 1,230,529 1,299,070 2,734,673
Increase in deferred compensation........... -- -- 6,711,000
(Decrease) increase in license fees
payable.................................. (150,966) 57,267,900 15,521,298
Increase in subscriber acquisition fees
payable.................................. -- -- 27,210,000
----------- ------------ ------------
Net cash used in operating activities.......... (74,764) (1,257,489) (53,329,574)
----------- ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment............... (122,720) (259,733) (5,075,499)
----------- ------------ ------------
Net cash used in investing activities.......... (122,720) (259,733) (5,075,499)
----------- ------------ ------------
Cash flows from financing activities:
Capital contributions............................. -- 40,000,000 40,000,000
Payments on term loans............................ (864,460) (142,857) (500,000)
Proceeds from term loans.......................... 1,000,000 500,000 --
Increase in restricted funds...................... -- -- (339,535)
Deferred debt issuance costs...................... -- -- (250,000)
----------- ------------ ------------
Net cash provided by financing activities...... 135,540 40,357,143 38,910,465
----------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents................................. (61,944) 38,839,921 (19,494,608)
Cash and cash equivalents, beginning of year........ 201,705 139,761 38,979,682
----------- ------------ ------------
Cash and cash equivalents, end of year.............. $ 139,761 $ 38,979,682 $ 19,485,074
=========== ============ ============
Supplemental disclosure of cash and non-cash
activities:
Interest paid..................................... $ 92,747 $ 55,153 $ 9,022
=========== ============ ============
Non-cash capital contribution..................... $ -- $ 2,033,832 $ 308,808
=========== ============ ============
Redeemable preferred interest..................... $ -- $ 25,000,000 $ --
=========== ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-27
<PAGE> 122
ODYSSEY HOLDINGS, L.L.C. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
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 5% 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") are 22.5%, 32.5%, 22.5% and 22.5%,
respectively.
Odyssey Holdings initially operated the Odyssey Network as a pay television
channel in the United States dedicated to purely religious programming. In April
1999, Odyssey Holdings relaunched the Odyssey Network as a channel dedicated to
high quality family programming.
LIQUIDITY
Odyssey Holdings incurred substantial net losses during 1998 and 1999 as it
acquired programming rights and expanded its distribution. Odyssey Holdings
expects to incur losses in the future. Historically, Odyssey Holdings' losses
have been financed from capital contributions from the Members. These
contributions were $42.0 million in 1998 and $40.3 million in 1999. Odyssey
Holdings believes it will need to raise additional capital through equity
financing or borrowings to finance its operations. As indicated in Note 10,
Odyssey Holdings is contemplating a reorganization pursuant to which it will
become a subsidiary of a new holding company that will provide it with financing
in the future. If the reorganization is not completed and additional financing
is not provided, Odyssey Holdings believes it will be able to significantly
reduce its planned expenditures in order to meet its financial obligations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The 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.
F-28
<PAGE> 123
ODYSSEY HOLDINGS, L.L.C. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS
Odyssey Holdings considers all highly liquid debt instruments, purchased
with an initial maturity of three months or less, to be cash equivalents. The
carrying value of Odyssey Holdings' cash equivalents approximated cost at each
balance sheet date.
RESTRICTED CASH
Restricted cash includes amounts deposited to secure a letter of credit in
accordance with certain lease agreements.
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.
SFAS No. 63 also requires an entity providing programming to report an
asset and liability for the rights licensed under a programming agreement only
when the license period begins and when certain other defined requirements are
met. As such, the accompanying consolidated balance sheets do not reflect assets
and liabilities of $49.5 million and $41.8 million as of December 31, 1998 and
1999, respectively, related to program license fees with airing windows to begin
subsequent to period-end.
Program license fees consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------
1998 1999
<S> <C> <C>
Program license fees -- affiliates........................ $59,654,829 $ 90,479,710
Program license fees -- non-affiliates.................... 5,323,143 19,399,539
----------- ------------
Program license fees, at cost........................... 64,977,972 109,879,249
Accumulated amortization.................................. (6,514,165) (28,325,798)
----------- ------------
Program license fees, net............................... $58,463,807 $ 81,553,451
=========== ============
</TABLE>
SUBSCRIBER ACQUISITION FEES
In July 1999, Odyssey Holdings entered into a distribution agreement with a
pay television distributor which will carry the Odyssey Network on some of its
cable systems. The initial term of the agreement is from August 15, 1999 through
December 31, 2005. Odyssey Holdings is obligated to pay subscriber acquisition
fees if certain subscriber levels are met, as defined. The total cost to Odyssey
Holdings is estimated to be $27.2 million, which is payable on January 1, 2001.
Odyssey Holdings believes that the subscriber levels will be met. Subscriber
acquisition fees are capitalized and amortized on a straight-line basis over the
term of the distribution agreement. At the time Odyssey Holdings enters into a
distribution agreement, and periodically thereafter, Odyssey Holdings evaluates
the recoverability of the subscriber acquisition fees against the revenues
directly associated with each agreement.
F-29
<PAGE> 124
ODYSSEY HOLDINGS, L.L.C. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER ASSETS
Other assets include $250,000 of debt issuance costs related to the Senior
Credit Facility discussed in Note 4, net of amortization. These costs are
amortized using the effective interest method over the term of the Senior Credit
Facility.
PROPERTY AND EQUIPMENT
Furniture, fixtures and equipment, including exhibit booths, are stated at
cost and depreciated on a straight-line basis over the estimated useful lives of
the assets, which are usually five years. Leasehold improvements are amortized
on a straight-line basis over the estimated useful life of the improvement or
the length of the lease, whichever is shorter. When property is sold or
otherwise disposed of, the cost and related accumulated depreciation is removed
from the accounts, and any resulting gain or loss is included in income. The
costs of normal maintenance and repairs are charged to expense when incurred.
REVENUE RECOGNITION
Subscriber fees are recognized as revenue when services are provided and
collectibility is reasonably assured. Subscriber fees are based upon the
reported level of subscribers and are recorded net of promotional subscribers.
Advertising revenues are recognized as earned in the period in which the
advertising commercials or infomercials are telecast and are net of estimated
advertising deficiency reserves.
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.
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 years ended December 31, 1997,
1998, and 1999.
SEGMENT REPORTING
Odyssey Holdings adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" in 1998. This statement requires companies
to report certain information about operating segments in a financial statement
and information about their services, the geographic areas in which they
operate, and their major customers. Odyssey Holdings has only one reportable
operating segment of its business and it operates only in the United States. As
a result, there is no segment information to report for the years ended December
31, 1997, 1998, and 1999.
F-30
<PAGE> 125
ODYSSEY HOLDINGS, L.L.C. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
FAIR VALUE
The carrying amounts of financial instruments, including amounts payable
and receivable, are reasonable estimates of their fair value. The fair values
were estimated using the current rates at which loans would be made to Odyssey
Holdings for similar remaining maturities.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject Odyssey Holdings to a
concentration of credit risk consist primarily of accounts receivable. Odyssey
Holdings generally does not require collateral to secure receivables.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform
to current year presentation.
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 year ended December 31, 2001, but does not expect it
to have a material effect on its financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1998 1999
<S> <C> <C>
Furniture, fixtures and equipment.......................... $ 637,562 $ 2,865,970
Production equipment....................................... -- 2,294,003
Exhibit booth.............................................. 462,184 667,038
Leasehold improvements..................................... 29,226 377,460
---------- -----------
Property and equipment, at cost.......................... 1,128,972 6,204,471
Less -- Accumulated depreciation and amortization.......... (776,372) (1,541,779)
---------- -----------
Property and equipment, net.............................. $ 352,600 $ 4,662,692
========== ===========
</TABLE>
F-31
<PAGE> 126
ODYSSEY HOLDINGS, L.L.C. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. NOTES PAYABLE
Notes payable are comprised of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------
1998 1999
<S> <C> <C>
Note payable to VGI......................................... $297,413 $ --
Term loans.................................................. 500,000 --
-------- --------
$797,413 $ --
======== ========
</TABLE>
NOTE PAYABLE TO VGI
A note payable to VGI in the amount of $297,413 was originally due October
31, 1996. The interest rate was adjusted to 12% beginning November 1, 1996. As
of December 31, 1998, the note remained outstanding. In September 1999, VGI
forgave the loan and accrued interest of $11,395, and this has been accounted
for as a capital contribution.
TERM LOANS
In June 1997, Odyssey Holdings borrowed $1.0 million from First Union
National Bank. This loan bore interest at a rate of 9.5% per annum and was
payable on December 15, 1997. Proceeds from this loan were to be used to fund
programming costs and expenses. Odyssey Holdings repaid this loan in January
1998. On March 16, 1998, Odyssey Holdings established a $500,000 unsecured line
of credit with the Bank of New York for short-term working capital requirements.
The line of credit was available until March 31, 1999. Odyssey Holdings repaid
its borrowings under the line of credit in February 1999. Borrowings under the
line of credit bore interest at the prime rate.
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. Borrowings under the Senior Credit Facility bear interest
at a rate per annum equal to the greater of: (a) the prime rate or (b) the
Federal Funds rate plus 1/2%, plus the applicable margin as defined in the
Senior Credit Facility. There were no borrowings outstanding under the Senior
Credit Facility during the year ended December 31, 1999.
The Senior Credit Facility will be unsecured unless: (a) usage under the
Senior Credit Facility exceeds $10.0 million, and $100.0 million of aggregate
equity has not been contributed by the Members, or (b) subsequent equity
contributions are not contributed as scheduled. If either event occurs, the
Senior Credit Facility will be secured by the assets of Odyssey Holdings, all
member interests of Odyssey Holdings, all intercompany notes and all proceeds
from the foregoing. BNY will have second priority interest in HCN's equity
interests. The Senior Credit Facility contains various covenants relating to:
minimum capital contributions to Odyssey Holdings by certain members,
consolidated EBITDA levels and the maintenance of certain financial ratios.
Odyssey Holdings was in compliance with the covenants as of December 31, 1999.
F-32
<PAGE> 127
ODYSSEY HOLDINGS, L.L.C. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. SHARE APPRECIATION RIGHTS PLAN
In November 1998, Odyssey Holdings adopted the Odyssey Holdings, L.L.C.
Share Appreciation Rights Plan (the "SAR Plan") to provide key officers and
employees with incentives linked to the increase in Odyssey Holdings' market
value. The SAR Plan allows for the issuance of up to 5.0 million rights that
vest over a three to five year period. The SAR Plan expires on December 31,
2005. On November 11, 1998 and January 1, 1999, Odyssey Holdings' granted
2,500,000 and 1,750,000 SARs, respectively at $2.22 per SAR. Compensation
expense of $6.7 million has been recorded through December 31, 1999 with respect
to vested SARs.
6. 401(k) PLAN
Odyssey Holdings implemented a defined contribution plan under section
401(k) of the Internal Revenue Code (the "401(k) Plan") covering most of the
employees of Odyssey Holdings. Odyssey Holdings makes contributions to the
401(k) Plan based on a percentage of employee contributions. Maximum employee
and company contributions are limited by Internal Revenue Code regulations and
by the terms of the 401(k) Plan. For the years ended December 31, 1997, 1998 and
1999, Odyssey Holdings contributed $202,613, $314,903 and $534,987,
respectively, to the 401(k) Plan.
7. REDEEMABLE PREFERRED INTEREST AND MEMBERS' EQUITY
PREFERRED INTEREST
In connection with the November 1998 investments by Crown Media and The Jim
Henson Company discussed in Note 1, VISN Management Corp. received a redeemable
preferred interest of $25.0 million, which ranks senior to the common equity
interests of Odyssey Holdings. Odyssey Holdings has the right to redeem the
preferred interest in whole (but not in part) for cash at 100% of the Preferred
Liquidation Preference, as defined by the agreement. If during any fiscal year
subsequent to January 1, 2005 or prior to December 31, 2009, Odyssey Holdings
has net profits in excess of $10.0 million and the preferred interest has not
been redeemed, Odyssey Holdings will redeem the preferred interest in an amount
equal to the lesser of such excess, or $5.0 million. Odyssey Holdings shall
redeem the entire preferred interest at the Preferred Liquidation Preference on
the redemption date by December 31, 2010.
CAPITAL CONTRIBUTIONS
On November 13, 1998, each of Crown Media and HCN agreed to pay $50.0
million, in three installments, for 22.5% equity interests in Odyssey Holdings,
respectively. As of December 31, 1998 and 1999, each of Crown Media's and HCN's
unfunded capital commitments to Odyssey Holdings was $30.0 million and $10.0
million, respectively. Under the terms of the Company Agreement, Crown Media and
HCN are each required to contribute $10.0 million no earlier than January 1,
2000 and no later than March 31, 2000.
Under the terms of the Company Agreement, VGI has made an additional
capital contribution of $2.0 million, by paying all amounts due and payable to
National Digital Television Center ("NDTC") as of October 31, 1998 pursuant to
the C-3 Satellite Transponder Service Agreement("C-3 Agreement") previously
entered into (see Note 8).
In September 1999, VGI forgave a note payable and accrued interest of
$308,808 as discussed in Note 4.
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<PAGE> 128
ODYSSEY HOLDINGS, L.L.C. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ALLOCATION OF NET INCOME AND LOSSES
Net income earned prior to November 13, 1998 was allocated 51% to VMC and
49% to VGI, and net losses were allocated 99% to VGI and 1% to VISN Management
Corp.
Following the admittance of Crown Media and HCN as members of Odyssey
Holdings on November 13, 1998, the net income and losses of Odyssey Holdings are
allocated based on the economic interest of the Members.
8. RELATED PARTY TRANSACTIONS
Odyssey Holdings has entered into the following transactions with its
affiliates that Odyssey Holdings believes to be on an arms-length basis.
SUBSCRIBER FEES -- AFFILIATE
Subscriber fees -- affiliate represents revenue earned in connection with a
distribution agreement with a subsidiary of AT&T, which purchased Liberty Media
in 1999.
PROGRAM LICENSE AGREEMENTS
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 paid the National Interfaith Cable Coalition $5.0
million in 1999 in accordance with the Company Agreement. No amounts were paid
in 1998.
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
F-34
<PAGE> 129
ODYSSEY HOLDINGS, L.L.C. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
SERVICE AGREEMENTS
Odyssey Holdings paid VISN Management Corp. $3.8 million, $5.0 million and
$1.4 million for management services for the years ended December 31, 1997,
1998, and 1999, respectively.
On December 20, 1990, VGI entered into a Service Agreement with NDTC, which
was assigned to the National Interfaith Cable Coalition and subsequently
assigned to Odyssey Holdings. Under the terms of the Service Agreement, NDTC
provides production, transmission and reception services as defined in the
Service Agreement. The Service Agreement had an initial term of five years. The
Service Agreement was subsequently amended on July 19, 1995 to extend the term
for six years beginning September 1, 1995. The amended Service Agreement
requires Odyssey Holdings to pay a minimum of $59,600 per month in service fees
to NDTC. This agreement was superseded by a master service agreement with NDTC
on November 9, 1999. The agreement has an initial term of six years and
automatically renews for successive one-year periods and requires Odyssey
Holdings to pay a minimum of $68,609 per month in service fees to NTDC.
OTHER
Odyssey Holdings leased space from The Parish of Trinity Church whose
Rector is the Chairman of the Board of National Interfaith Cable Coalition. This
lease terminated in November 1999. The aggregate lease payments for the years
ended December 31, 1997, 1998, and 1999 were $238,390, $355,115, and $186,756,
respectively.
On June 30, 1995, VGI assigned its rights with respect to the C-3
Transponder Agreement with NDTC to the National Interfaith Cable Coalition, and
subsequently to Odyssey Holdings. Under the terms of the C-3 Transponder
Agreement, Odyssey Holdings paid minimum lease payments of $192,500 per month. A
four year option period of the lease has been exercised by Odyssey Holdings, and
the required monthly payments will increase to $202,500 through the lease
expiration in 2004.
As discussed in Note 7, VGI made an additional capital contribution on
November 13, 1998 which settled all outstanding commitments under the C-3
Agreement and Service Agreement through October 31, 1998. Fees paid to NDTC were
$504,200 and $2.6 million for the two months ended December 31, 1998 and the
year ended December 31, 1999. VGI also forgave a note from Odyssey Holdings,
which is discussed further in Note 4.
Hallmark Cards, Incorporated made an advertising commitment to Odyssey
Holdings totaling $2.5 million covering a one-year period from the fourth
quarter of 1999 through the third quarter of 2000. As of December 31, 1999,
Hallmark Cards, Incorporated purchased $365,000 of advertising time on the
Odyssey Network. No amounts were paid as of December 31, 1999.
F-35
<PAGE> 130
ODYSSEY HOLDINGS, L.L.C. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Odyssey Holdings leases office space and equipment under operating leases.
Total lease expense was $295,873, $394,779, and $1.1 million for the years ended
December 31, 1997, 1998, and 1999, respectively. At December 31, 1999, the
minimum annual rental commitments under the leases are as follows:
<TABLE>
<S> <C>
2000........................................................ $1,484,585
2001........................................................ 1,414,041
2002........................................................ 1,364,662
2003........................................................ 1,066,761
2004........................................................ 268,007
----------
$5,598,056
==========
</TABLE>
ASCAP
The American Society of Composers, Authors and Publishers ("ASCAP"), the
organization that collects performance royalties on behalf of its writer and
publisher members, is involved in proceedings with the cable industry to
determine the royalty rate applicable for the cable industry. Odyssey Holdings
is paying fees on an interim basis subject to a retroactive adjustment when
final fees are arrived at by agreement or court decision. In management's
opinion, disposition of this matter is not expected to have a material effect on
the Odyssey Holdings' financial position or results of operations.
10. SUBSEQUENT EVENTS
DEMAND OF PAYMENT OF NOTES RECEIVABLE FROM MEMBERS
Odyssey Holdings anticipates demanding, in January 2000, payment of the $10
million receivables from each of Crown Media and HCN, representing each's final
installment on their investments in Odyssey Holdings (see Note 7). In the event
the demand is made, receipt of these funds, totaling $20.0 million, would be
expected in February 2000.
PLANNED REORGANIZATION AND INITIAL PUBLIC OFFERING
Crown Media is currently contemplating a transaction whereby a holding
company ("Crown Media Holdings") will be created, and stock in Crown Media
Holdings will be exchanged for certain member interests in Odyssey Holdings. It
is also currently contemplated that stock of Crown Media Holdings will be sold
in an initial public offering. Upon completion of the contemplated
reorganization and the initial public offering, Crown Media Holdings will own
100% of Crown Media and 77.5% of Odyssey Holdings.
F-36
<PAGE> 131
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 2000
[CROWN LOGO]
CROWN MEDIA HOLDINGS, INC.
SHARES OF CLASS A COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
LEHMAN BROTHERS
SALOMON SMITH BARNEY INC.
DLJDIRECT INC.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of Crown Media
Holdings, Inc. have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 2000 (25 days after the date of this prospectus), all dealers
that effect transactions in these shares of Class A common stock may be required
to deliver a prospectus. This is in addition to the dealer's obligation to
deliver a prospectus when acting as an underwriter and with respect to their
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE> 132
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale of
common stock being registered, all of which will be paid by the Registrant:
<TABLE>
<CAPTION>
AMOUNT
<S> <C>
SEC registration fee........................................ $ 75,900
NASD filing fee............................................. 29,250
Printing expenses........................................... 175,000
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue sky fees and expenses.................................. 2,500
Transfer agent and registrar fees and expenses.............. 25,000
Miscellaneous............................................... *
--------
Total............................................ $ *
========
</TABLE>
- ------------------------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
provides as follows:
A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interest of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction
or upon a plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request
of the corporation, as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorney's fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect to any claim, issue or matter as
to which such person shall
II-1
<PAGE> 133
have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person
is fairly and reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper.
As permitted by the DGCL, the Registrant has included in its certificate of
incorporation a provision to eliminate the personal liability of its directors
for monetary damages for breach of their fiduciary duties as directors, subject
to certain exceptions. In addition, the Registrant's certificate of
incorporation and by-laws provide that the Registrant is required to indemnify
its officers and directors under certain circumstances, including those
circumstances in which indemnification would otherwise be discretionary, and the
Registrant is required to advance expenses to its officers and directors as
incurred in connection with proceedings against them for which they may be
indemnified.
Under the Contribution Agreement, dated as of January 27, 2000, by and
among Hallmark Entertainment, Inc., Crown Media, Inc., Liberty Media
Corporation, Vision Group Incorporated, VISN Management Corp., National
Interfaith Cable Coalition, Inc., Chase Equity Associates, L.L.C. and the
Registrant, the Registrant has agreed to indemnify the other parties and certain
of their affiliates, other than Hallmark Entertainment, Inc., against any
liabilities resulting from any untrue statement of material fact from the
prospectus contained herein, or any omission of a material fact from the
prospectus contained herein, required to make the statements made therein, not
misleading, during the period of the applicable statute of limitations.
Under the Stockholders Agreement, which will be dated as of the closing
date of the offering, , 2000, the Registrant will indemnify any
stockholder that demands or participates and any underwriter that participates
in a registration pursuant to the terms of the Stockholders Agreement, as well
as each of their respective officers, directors and control persons, from and
against any losses, claims, damages or liabilities, joint or several, to which
such indemnified persons may become subject under the Securities Act, the
Exchange Act or otherwise, insofar as such losses, claims, damages or
liabilities arise out of or are based upon any untrue statement of material fact
contained in any registration statement relating to such registration, or any
prospectus contained therein, or arise out of or are based on the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading.
The Underwriting Agreement is expected to provide that the Underwriters are
obligated, under certain circumstances, to indemnify directors, officers and
controlling persons of the Registrant against certain liabilities, including
liabilities under the Securities Act of 1933. Reference is made to the form of
Underwriting Agreement to be filed as Exhibit 1.1 hereto.
The Registrant maintains directors and officers liability insurance for the
benefit of its directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of the transactions by the Registrant during the
past three years involving sales of the Registrant's securities that were not
registered under the Securities Act of 1933:
In connection with a reorganization to be completed simultaneously with the
closing of the offering, Crown Media Holdings, Inc. will issue: (1)
shares of its Class B Common Stock to Hallmark Entertainment, Inc. in exchange
for all shares of common stock of Crown Media, Inc. held by Hallmark
Entertainment, Inc.; (2) shares of its Class A Common Stock to Chase
Equity Associates, L.L.C. in exchange for all shares of common stock
of Crown Media, Inc. held by Chase Equity Associates, L.L.C., which, together
with the Crown Media, Inc. common stock being
II-2
<PAGE> 134
exchanged by Hallmark Entertainment, Inc., represent all of the issued and
outstanding shares of Crown Media, Inc. common stock; (3) shares of
its Class A Common Stock to Liberty Media Corporation in exchange for the 32.5%
membership interest in Odyssey Holdings, L.L.C. held by Vision Group
Incorporated, a wholly owned subsidiary of Liberty Media Corporation; and (4)
shares of its Class A Common Stock to VISN Management Corp. in
exchange for the 22.5% interest in Odyssey Holdings, L.L.C. held by VISN
Management Corp. There were no underwriters, brokers or finders employed in
connection with these transactions. The sales of the above securities were
deemed to be exempt from registration under the Securities Act of 1933 in
reliance on Section 4(2) of the Securities Act of 1933, as transactions by an
issuer not involving a public offering. The Contribution Agreement is filed as
an exhibit to this Registration Statement.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
<S> <C>
1.1 -- Form of Underwriting Agreement.*
2.1 -- Contribution Agreement, dated as of January 28, 2000, by
and among Hallmark Entertainment, Inc., Crown Media,
Inc., Liberty Media Corporation, Vision Group
Incorporated, VISN Management Corp., National Interfaith
Cable Coalition, Inc., Chase Equity Associates, L.L.C.
and Crown Media Holdings, Inc.*
3.1 -- Registrant's Certificate of Incorporation.*
3.2 -- Registrant's By-Laws.*
4.1 -- Form of Specimen Certificate for Registrant's Common
Stock.*
5.1 -- Form of Opinion of Wachtell, Lipton, Rosen & Katz.*
10.1 -- Form of Stockholders' Agreement.*
10.2 -- Program License Agreement, dated as of July 1, 1999,
between Hallmark Entertainment Distribution, LLC,
successor to Hallmark Entertainment Distribution
Company.*
10.3 -- Form of Tax Sharing Agreement.*
10.4 -- Trademark License Agreement, dated as of August 1, 1999,
by and between Hallmark Cards, Incorporated and Hallmark
Entertainment Networks, Inc.*
10.5 -- Amended and Restated Company Agreement of Odyssey
Holdings, L.L.C.*
10.6 -- Intercompany Services Agreement, dated as of January 1,
2000, between Crown Media Holdings, Inc. and Hallmark
Cards, Incorporated.*
10.7 -- Crown Media Share Appreciation Rights Plan.*
10.8 -- Crown Media 2000 Long Term Incentive Plan.*
10.9 -- Program License Agreement, dated as of November 13, 1998,
between Hallmark Entertainment Distribution Company and
Odyssey Holdings, L.L.C.*
10.10 -- Program License Agreement, dated as of November 13, 1998,
between The Jim Henson Company, Inc. and Odyssey
Holdings, L.L.C.*
10.11 -- Program License Agreement, dated as of November 13, 1998,
between National Interfaith Cable Coalition, Inc. and
Odyssey Holdings, L.L.C.*
10.12 -- Trademark Sublicense Agreement, dated as of May 12, 1998,
by and between Hallmark Entertainment Networks, Inc. and
H&H Programming - Asia, LLC.*
</TABLE>
II-3
<PAGE> 135
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
<S> <C>
10.13 -- Program License Agreement, dated as of May 12, 1998,
between Hallmark Entertainment Distribution Company and
H&H Programming - Asia, LLC.*
10.14 -- Guaranty of Lease Obligations, dated June 1, 1998, by
Hallmark Entertainment, Inc. for High Pointe I
Development Group L.L.C.*
10.15 -- Employment Agreement, dated as of March 1, 1999, between
Hallmark Entertainment Networks, Inc and David Evans.*
10.16 -- Employment Agreement, dated as of July 27, 1998, and
Amendment to Employment Agreement, dated as of July 1,
1999, between Hallmark Entertainment Networks and Russ
Givens.*
10.17 -- Employment Agreement, dated as of June 23, 1998, and
Amendment to Employment Agreement, dated as of July 1,
1999, between Hallmark Entertainment Networks and Andy
Brilliant.*
10.18 -- Employment Agreement, dated as of November 28, 1998,
between Hallmark Entertainment Networks, Inc. and Jeffrey
J. Johnson.*
10.19 -- Employment Agreement, dated as of January 1, 1999,
between Hallmark Entertainment Networks (UK) Limited and
Mark Grenside.*
10.20 -- Separation Agreement, dated January 28, 1999, between
Hallmark Entertainment Networks and George Stein.*
10.21 -- $20,000,000 Promissory Note, dated November 19, 1999, of
Crown Media, Inc. to HC Crown Corporation.*
11.1 -- Computation of Per Share Earnings.*
21.1 -- Subsidiaries.*
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Arthur Andersen LLP.
23.3 -- Consent of Wachtell, Lipton, Rosen & Katz (included in
Exhibit 5.1).
24.1 -- Powers of Attorney (included in signature page hereof).
27.1 -- Financial Data Schedule.
</TABLE>
- ------------------------------
* To be provided by amendment.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed
to be part of this Registration Statement as of the time it was declared
effective.
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 136
(3) To provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to
each purchaser.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of
such issue.
II-5
<PAGE> 137
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on the 28th day of January 2000.
CROWN MEDIA HOLDINGS, INC.
By: /s/ William J. Aliber
---------------------------------------
Name: William J. Aliber
Title: Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Judith C. Whittaker, Deanne R. Stedam, William J. Aliber and Charles Stanford,
and each acting alone, his/her true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him/her and in his/her
name, place and stead, in any and all capacities, to sign any or all amendments
or supplements to this Registration Statement, whether pre-effective or
post-effective, and to file the same with all exhibits thereto and other
documents in connection therewith, with the SEC, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing necessary or appropriate to be done with respect to this
Registration Statement or any amendments or supplements thereto in the premises,
as fully to all intents and purposes as he/she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<C> <S>
/s/ Robert A. Halmi, Jr. Chairman of the Board
- -----------------------------------------------------
Robert A. Halmi, Jr.
/s/ David J. Evans President, Chief Executive Officer and Director
- ----------------------------------------------------- (Principal Executive Officer)
David J. Evans
/s/ William J. Aliber Chief Financial Officer and Director
- ----------------------------------------------------- (Principal Financial and Accounting Officer)
William J. Aliber
/s/ Irvine O. Hockaday, Jr. Director
- -----------------------------------------------------
Irvine O. Hockaday, Jr.
/s/ Robert J. Druten Director
- -----------------------------------------------------
Robert J. Druten
</TABLE>
January 28, 2000
II-6
<PAGE> 138
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT TITLE
<C> <S>
1.1 -- Form of Underwriting Agreement.*
2.1 -- Contribution Agreement, dated as of January 28, 2000, by
and among Hallmark Entertainment, Inc., Crown Media,
Inc., Liberty Media Corporation, Vision Group
Incorporated, VISN Management Corp., National Interfaith
Cable Coalition, Inc., Chase Equity Associates, L.L.C.
and Crown Media Holdings, Inc.*
3.1 -- Registrant's Certificate of Incorporation.*
3.2 -- Registrant's By-Laws.*
4.1 -- Form of Specimen Certificate for Registrant's Common
Stock.*
5.1 -- Form of Opinion of Wachtell, Lipton, Rosen & Katz.*
10.1 -- Form of Stockholders' Agreement.*
10.2 -- Program License Agreement, dated as of July 1, 1999,
between Hallmark Entertainment Distribution LLC,
successor to Hallmark Entertainment Distribution
Company.*
10.3 -- Form of Tax Sharing Agreement.*
10.4 -- Trademark License Agreement, dated as of August 1, 1999,
by and between Hallmark Cards, Incorporated and Hallmark
Entertainment Networks, Inc.*
10.5 -- Amended and Restated Company Agreement of Odyssey
Holdings, L.L.C.*
10.6 -- Intercompany Services Agreement, dated as of January 1,
2000, between Crown Media Holdings, Inc. and Hallmark
Cards, Incorporated.*
10.7 -- Crown Media Share Appreciation Rights Plan.*
10.8 -- Crown Media 2000 Long Term Incentive Plan.*
10.9 -- Program License Agreement, dated as of November 13, 1998,
between Hallmark Entertainment Distribution Company and
Odyssey Holdings, L.L.C.*
10.10 -- Program License Agreement, dated as of November 13, 1998,
between The Jim Henson Company, Inc. and Odyssey
Holdings, L.L.C.*
10.11 -- Program License Agreement, dated as of November 13, 1998,
between National Interfaith Cable Coalition, Inc. and
Odyssey Holdings, L.L.C.*
10.12 -- Trademark Sublicense Agreement, dated as of May 12, 1998,
by and between Hallmark Entertainment Networks, Inc. and
H&H Programming - Asia, LLC.*
10.13 -- Program License Agreement, dated as of May 12, 1998,
between Hallmark Entertainment Distribution Company and
H&H Programming - Asia, LLC.*
10.14 -- Guaranty of Lease Obligations, dated June 1, 1998, by
Hallmark Entertainment, Inc. for High Pointe I
Development Group L.L.C.*
10.15 -- Employment Agreement, dated as of March 1, 1999, between
Hallmark Entertainment Networks, Inc and David Evans.*
10.16 -- Employment Agreement, dated as of July 27, 1998, and
Amendment to Employment Agreement, dated as of July 1,
1999, between Hallmark Entertainment Networks and Russ
Givens.*
10.17 -- Employment Agreement, dated as of June 23, 1998, and
Amendment to Employment Agreement, dated as of July 1,
1999, between Hallmark Entertainment Networks and Andy
Brilliant.*
</TABLE>
<PAGE> 139
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT TITLE
<C> <S>
10.18 -- Employment Agreement, dated as of November 28, 1998,
between Hallmark Entertainment Networks, Inc. and Jeffrey
J. Johnson.*
10.19 -- Employment Agreement, dated as of January 1, 1999,
between Hallmark Entertainment Networks (UK) Limited and
Mark Grenside.*
10.20 -- Separation Agreement, dated January 28, 1999, between
Hallmark Entertainment Networks and George Stein.*
10.21 -- $20,000,000 Promissory Note, dated November 19, 1999, of
Crown Media, Inc. to HC Crown Corporation.*
11.1 -- Computation of Per Share Earnings.*
21.1 -- Subsidiaries*
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Arthur Andersen LLP.
23.3 -- Consent of Wachtell, Lipton, Rosen & Katz (included in
Exhibit 5.1).
24.1 -- Powers of Attorney (included in signature page hereof).
27.1 -- Financial Data Schedule.
</TABLE>
- ------------------------------
* To be provided by amendment.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm), with respect to the financial statements of
Crown Media, Inc. and its subsidiaries, included in or made part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado
January 27, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm), with respect to the financial statements of
Odyssey Holdings, L.L.C. and its subsidiaries, included in or made part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
January 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,865,455
<SECURITIES> 0
<RECEIVABLES> 9,509,050
<ALLOWANCES> 695,409
<INVENTORY> 0
<CURRENT-ASSETS> 25,387,223
<PP&E> 12,822,171
<DEPRECIATION> 4,837,584
<TOTAL-ASSETS> 81,046,214
<CURRENT-LIABILITIES> 77,456,084
<BONDS> 0
60,338,173
0
<COMMON> 11
<OTHER-SE> (62,966,855)
<TOTAL-LIABILITY-AND-EQUITY> 81,046,214
<SALES> 0
<TOTAL-REVENUES> 31,908,916
<CGS> 0
<TOTAL-COSTS> 41,578,585
<OTHER-EXPENSES> 25,605,156
<LOSS-PROVISION> 672,306
<INTEREST-EXPENSE> (798,390)
<INCOME-PRETAX> (54,140,408)
<INCOME-TAX> 2,556,182
<INCOME-CONTINUING> (56,696,590)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (56,696,590)
<EPS-BASIC> (47,926)
<EPS-DILUTED> (47,926)
</TABLE>
