<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 2000
REGISTRATION NO. 333-95573
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
AMENDMENT NO. 5
TO
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)
------------------
<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)
------------------
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)
------------------
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. [ ]
------------------
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.
================================================================================
<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 - MAY 1, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS
, 2000
[CROWN MEDIA LOGO]
10,000,000 SHARES OF CLASS A COMMON STOCK
- --------------------------------------------------------------------------------
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 10,000,000 shares of our Class A common stock.
- - The underwriters have an option to purchase up to an additional 1,500,000
shares from us to cover over-allotments.
- - We anticipate that the initial public offering price will be between $14.00
and $15.00 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 pay accrued and unpaid
program license fees to an affiliate, to license additional programming, to
enhance our technical facilities, to expand our distribution, to expand our
advertising sales staff and to fund general corporate expenditures.
- - Closing: , 2000.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Per Share Total
- -------------------------------------------------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to Crown Media Holdings, Inc.:
- -------------------------------------------------------------------------------------
</TABLE>
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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 ROSSELLINI 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 www.odysseychannel.com
<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>
<CAPTION>
Page
<S> <C>
Prospectus Summary...................... 1
Risk Factors............................ 8
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
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Page
<S> <C>
Business................................ 39
Management.............................. 59
Certain Relationships and Related
Transactions.......................... 70
Principal Stockholders.................. 80
Description of Capital Stock............ 82
Shares Eligible for Future Sale......... 86
Material U.S. Federal Income Tax
Considerations for Non-U.S. Holders... 87
Underwriters............................ 90
Legal Matters........................... 92
Experts................................. 92
Where You Can Find More Information..... 92
Index to Consolidated Financial
Statements............................ F-1
</TABLE>
----------------------
We are offering shares of Class A common stock of Crown Media Holdings,
Inc. Hallmark Entertainment Network and the Odyssey Network are channels that we
own and operate through our subsidiaries, Crown Media, Inc. and Odyssey
Holdings, L.L.C. The artwork on the adjacent pages depicts frames from motion
pictures and mini-series that we have licensed and aired on our channels. We do
not produce or own these motion pictures or mini-series, nor are the actors
shown our employees. Information contained on the website,
www.odysseychannel.com, is not intended to be a prospectus and is not
incorporated into this prospectus.
<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. The term "common stock" refers to our Class A
common stock and Class B common stock, unless the context requires otherwise.
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 more than 4,000 hours of programming, including eight of the
10 most highly rated made-for-television movies for the 1993 through 1999
television seasons, based on A.C. 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-Europe Communications. In the United States, the nine largest pay television
distributors account for approximately 80% of all pay television subscribers. We
currently distribute the Odyssey Network on cable systems operated by each of
these nine pay television distributors and have long term distribution
agreements with the AT&T, Time Warner and DirecTV distribution systems, the
three largest distributors. No individual pay television distributor accounted
for more than 10% of our revenues or 15% of our subscribers for the year ended
December 31, 1999 on a pro forma basis. We are in discussions to sign long-term
agreements with the other six pay television distributors. We currently
distribute the Odyssey Network to approximately 35% of all United States pay
television subscribers.
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
40 of the leading advertisers in the United States based on total advertising
expenditures, including Hallmark Cards, America Online, AT&T, Coca-Cola and
Procter & Gamble. No individual advertiser accounted for more than 2% of our
revenues for the year ended December 31, 1999. For the year ended December 31,
1999, we had total revenues of $49.8 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 90% 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 and this offering.
For more details regarding the reorganization and interests owned by our
principal stockholders, see "Reorganization Transactions Occurring
Simultaneously with the Closing of This Offering," "Certain Relationships and
Related Transactions" and "Principal Stockholders."
[REORGANIZATION CHART]
[Diagram showing ownership percentage of the Kermit Channel, the Hallmark
Entertainment Network and the Odyssey Network held by Crown Media Holdings,
Inc.; ownership percentage of Crown Media Holdings, Inc. held by Public
Stockholders, Chase Equity Associates, L.P., Hallmark Entertainment, Inc.,
Liberty Media Corporation and National Interfaith Cable Coalition, Inc.; and
ownership percentage of Hallmark Entertainment, Inc. held by Hallmark Cards,
Incorporated.]
Our websites can be found at www.crownmedia.net, www.hallmarknetwork.com
and www.odysseychannel.com. Information contained on our websites is not
intended to be a prospectus and is not incorporated into this prospectus.
3
<PAGE> 11
THE OFFERING
Class A common stock offered... 10,000,000 Shares (1)
Common stock to be outstanding
after this offering:
Class A common stock...... 29,329,578 Shares(1)(2)
Class B common stock...... 30,670,422 Shares
Total............... 60,000,000 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 pay accrued and unpaid program license fees
to an affiliate, to license additional
programming, to enhance our technical
facilities, to expand our distribution, to
expand our advertising sales staff and to fund
general corporate expenditures.
Nasdaq National Market
symbol......................... CRWN
- ------------------------------
(1) References in this prospectus to shares of Class A common stock exclude
1,500,000 shares of Class A common stock that would be sold by us if the
over-allotment option is exercised in full.
(2) Excludes 10.0 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. Of these reserved shares, at the time of this offering, we
expect to issue stock options to acquire 1,035,211 shares of Class A common
stock at an exercise price of $8.33 per share upon conversion of outstanding
share appreciation rights and to issue stock options to acquire an
additional 1,399,500 shares of Class A common stock at an exercise price
equal to the initial public offering price.
4
<PAGE> 12
SUMMARY FINANCIAL AND OTHER DATA
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, 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.
5
<PAGE> 13
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 HOLDINGS
PRO FORMA AS ADJUSTED
CROWN MEDIA YEAR ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31,
----------------------------------------- ---------------------
1996 1997 1998 1999 1999
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................ $ 3,048 $ 9,802 $ 23,687 $ 31,909 $ 49,792
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) (105,767)
Net income (loss)............. (10,491) (21,578) (35,465) (56,697) (97,309)
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>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 3,865 $123,950
Goodwill.................................................. -- 245,404(1)
Total assets.............................................. 81,046 538,799
Total long-term debt, excluding current maturities........ --(2) --
Stockholders' equity (deficit)............................ (62,967) 353,001
</TABLE>
- ---------------
(1) Goodwill represents the goodwill we will generate as a result of the
reorganization, which will be amortized over a 20-year period.
(2) Current maturities include $10.0 million due to Odyssey Holdings as the
final installment of Crown Media's $50.0 million investment in Odyssey
Holdings. This $10.0 million was paid to Odyssey Holdings in February 2000
and was funded through additional equity capital contributions from Hallmark
Entertainment, Inc. and Chase Equity Associates.
6
<PAGE> 14
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, 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 $ 17,883
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)
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>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-----------------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 19,485
Total assets.............................................. 137,112
Total long-term debt, excluding current maturities........ --
Members' equity (deficit)................................. (1,153)
</TABLE>
7
<PAGE> 15
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.
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 and pro forma goodwill of
$245.4 million. On a pro forma basis, amortization of goodwill would have
resulted in a $10.7 million charge to earnings for the year ended December 31,
1999.
As a result of the foregoing we may not achieve or sustain profitability.
If we are not able to achieve or sustain profitability, the trading price of our
Class A common stock may fall significantly. In addition, we could experience
increased capital needs in the future if our losses are greater, or continue for
longer, than we anticipate. 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 MAY NEED TO RAISE ADDITIONAL FUNDS, WHICH MAY NOT BE AVAILABLE.
We expect that the net proceeds from this offering and cash from operations
will be sufficient to meet our working capital and capital expenditure needs for
at least the next 18 months. After that, we will need to raise additional funds
to operate and expand our business.
We may not be able to obtain the needed additional funds, through
borrowings or the issuance of additional equity, on acceptable terms or at all.
If we cannot raise needed funds on acceptable terms, we may not be able to:
- expand our United States and international distribution as anticipated;
- grow our advertising revenues;
- remain current with evolving industry standards;
- take advantage of future opportunities; or
- respond to competitive pressure.
BECAUSE WE DEPEND ON HALLMARK ENTERTAINMENT, INC. FOR A SIGNIFICANT PORTION OF
OUR PROGRAMMING, THE LOSS OR INTERRUPTION OF THAT PROGRAMMING WOULD SEVERELY
DISRUPT OUR OPERATIONS AND SERVICES.
We may be unable to implement our operating strategy successfully without
the continued availability and commercial success of programming from Hallmark
Entertainment, Inc. Under our program agreements with a subsidiary of Hallmark
Entertainment, Inc., we are required to license substantially all of the
programming owned or controlled by Hallmark Entertainment, Inc. for the markets
in which we
8
<PAGE> 16
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 could be unable to obtain alternative programming of equivalent
quality and popularity or on terms as favorable to us. Consequently, any
significant interruption in the supply of programming from Hallmark
Entertainment, Inc. for any reason could hinder our ability to attract and
retain subscribers, generate revenues and achieve profitability.
IF WE ARE UNABLE TO OBTAIN PROGRAMMING FROM PARTIES OTHER THAN HALLMARK
ENTERTAINMENT, INC., WE MAY BE UNABLE TO INCREASE OUR SUBSCRIBER BASE.
We compete with other pay television channel providers for the acquisition
of programming. 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. If we fail to continue to obtain programming on
reasonable terms for any reason, including as a result of competition, we could
be forced to incur additional costs of acquiring alternative programming and the
growth of our subscriber base could be hindered.
IF OUR PROGRAMMING DECLINES IN POPULARITY, OUR SUBSCRIBER FEES AND ADVERTISING
REVENUE COULD FALL.
The success of our programming depends partly upon unpredictable and
volatile factors beyond our control, such as viewer preferences, competing
programming and the availability of other entertainment activities. A shift in
viewer preferences could cause our programming to decline in popularity, which
could cause a decline in both advertising and subscriber fee revenues. We may
not be able to anticipate and react effectively to shifts in tastes and
interests in our markets. In particular, our ability to react effectively may be
limited by our obligation to license programming from Hallmark Entertainment,
Inc., The Jim Henson Company and the National Interfaith Cable Coalition, each
of which has standards that limit the types of programming that they will
provide to us. In addition, our competitors may have more flexible programming
arrangements, as well as greater volumes of production, distribution and capital
resources, and may be able to react more quickly to shifts in tastes and
interests. We may be unable to maintain the commercial success of any of our
current programming, or to generate sufficient demand and market acceptance for
our new programming.
IF WE ARE UNABLE TO INCREASE OUR ADVERTISING REVENUE, WE MAY BE UNABLE TO
ACHIEVE PROFITABILITY.
If we fail to increase our advertising revenue, we may be unable to achieve
and sustain profitability, or expand our business. We 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 may
be unable to identify, attract and retain experienced sales and marketing
personnel with relevant experience, and our sales and marketing organization may
be unable to successfully compete against the significantly more extensive and
well-funded sales and marketing operations of our current or potential
competitors.
9
<PAGE> 17
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 90% of
the voting power on all matters submitted to our stockholders. Hallmark
Entertainment, Inc.'s control could discourage others from initiating potential
merger, takeover or other change of control transactions that may otherwise be
beneficial to our businesses or holders of Class A common stock. As a result,
the market price of our Class A common stock or our business could suffer.
Hallmark Entertainment, Inc.'s control relationship with us also could give rise
to conflicts of interest, including:
- 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.
In addition, persons serving as directors, officers or employees of both us
and Hallmark Entertainment, Inc. may have conflicting duties to each. For
example, it is currently contemplated that Robert A. Halmi, Jr. will continue in
his current positions as our Chairman of the Board and as President and Chief
Executive Officer of Hallmark Entertainment, Inc., which could create potential
conflicts of interest. As a result, it is possible that we may receive less
favorable contractual terms from Hallmark Entertainment, Inc. than if none of
our officers or directors had any affiliation with Hallmark Entertainment, Inc.
WE COULD LOSE THE RIGHT TO USE THE NAME "HALLMARK ENTERTAINMENT" BECAUSE WE
HAVE LIMITED-DURATION TRADEMARK LICENSE AGREEMENTS, WHICH COULD HARM OUR
BUSINESS.
We license the name "Hallmark Entertainment" from Hallmark Cards under a
three-year trademark license agreement dated as of August 1, 1999. Many of our
international subscribers may now associate our programming with the name
"Hallmark Entertainment." If Hallmark Cards fails to renew the trademark license
agreement for any reason, including our failure to meet minimum programming
thresholds dependent on programming provided by its affiliates or to comply with
Hallmark Cards' programming standards as determined in its sole discretion, we
would be forced to significantly revise our business plan and operations, and
could experience a significant erosion of our subscriber base and revenues. See
"Certain Relationships and Related Transactions -- Hallmark Trademark License
Agreements."
IF OUR THIRD-PARTY SUPPLIERS FAIL TO PROVIDE US WITH NETWORK INFRASTRUCTURE
SERVICES ON A TIMELY BASIS, OUR COSTS COULD INCREASE AND OUR GROWTH COULD BE
HINDERED.
We currently rely on third parties to supply key network infrastructure
services, including uplink, playback, transmission and satellite services, which
are available only from limited sources. We have occasionally experienced delays
and other problems in receiving communications equipment, services and
facilities and may, in the future, be unable to obtain such services, equipment
or facilities on the scale and within the time frames required by us on terms we
find acceptable, or at all. If we are unable to obtain, or if we experience a
delay in the delivery of, such services, we may be forced to incur significant
unanticipated expenses to secure alternative third party suppliers or adjust our
operations, which could hinder our growth.
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<PAGE> 18
WE DO NOT HAVE COMPLETE CONTROL OVER ODYSSEY HOLDINGS, WHICH COULD HINDER OUR
ABILITY TO EXPAND THAT BUSINESS.
Our ability to react to business opportunities that may arise for Odyssey
Holdings and our ability to raise capital for it is limited. Under an agreement
relating to Odyssey Holdings, The Jim Henson Company has certain protective
rights requiring its consent, including:
- entering into any merger or consolidation;
- creating or issuing equity interests;
- incurring debt in excess of $50.0 million;
- distributing programming through free broadcast or transmission;
- transferring assets valued in excess of $500,000; and
- transferring our interests in Odyssey Holdings to a third party.
In addition, a stockholders agreement to be signed immediately prior to the
completion of this offering requires:
- that we broadcast at least 10 hours weekly of faith and values-based
programming
- that we broadcast at least 30 hours weekly of programming provided by the
National Interfaith Cable Coalition; and
- that the National Interfaith Cable Coalition consent to the transfer of
our interests in Odyssey Holdings.
Our ability to implement strategies may be limited if we do not receive these
required consents from The Jim Henson Company or the National Interfaith Cable
Coalition.
WE MAY HAVE TO INCUR SIGNIFICANT CAPITAL EXPENDITURES IN ORDER TO ADAPT TO
TECHNOLOGICAL CHANGE.
The pay television industry has been, and is likely to continue to be,
subject to:
- rapid and significant technological change, including continuing
developments in technology which do not presently have widely accepted
standards; and
- frequent introductions of new services and alternative technologies,
including new technologies for providing video services.
We expect that new technologies will emerge that may be superior to, or may not
be compatible with, some of our current technologies, which may require us to
make significant capital expenditures to remain competitive. Our future success
will depend, in part, on our ability to anticipate and adapt to technological
changes and to offer, on a timely basis, services that meet customer demands and
evolving industry standards. We rely in part on third parties for the
development of, and access to, communications and network technology. As a
result, we may be unable to obtain access to new technology on a timely basis or
on satisfactory terms. If we fail to adapt successfully to any technological
change or obsolescence, or fail to obtain access to important technologies, our
business, prospects, financial condition or results of operations could be
materially adversely affected.
IF WE ARE UNABLE TO RETAIN KEY EXECUTIVES AND OTHER PERSONNEL, OUR GROWTH
COULD BE INHIBITED AND OUR BUSINESS HARMED.
Our success depends on the expertise and continued service of Robert A.
Halmi, Jr., David J. Evans and Margaret A. Loesch, and on our ability to hire
additional personnel to accommodate our anticipated
11
<PAGE> 19
growth. If we fail to attract, hire or retain the necessary personnel, or if we
lose the services of our key executives, we may be unable to implement our
business plan or keep pace with developing trends in our industry. We do not
carry key person life insurance on all of our personnel, nor is the insurance
that we do carry necessarily sufficient to cover the losses that we would incur
in the event we lose one of our key executives to death or disability.
WE ARE SUBJECT TO THE RISKS OF DOING BUSINESS OUTSIDE THE UNITED STATES.
During 1999, 59% 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. To the extent that significant currency
fluctuations result in materially higher costs to any of our foreign customers,
those customers may be unable or unwilling to make the required payments. We are
subject to delays in access to courts and to the remedies local laws impose in
order to collect our payments and recover our assets. In the future, we may
experience problems with collecting accounts due from foreign customers, which
would adversely affect our revenues and income. Our growth and profitability may
suffer also as a result of, among other matters, competitive pressures on video
delivery, labor stoppages, recessions and other political or economic events
adversely affecting world or regional trading markets or affecting a particular
customer.
OUR CURRENT AND FUTURE OPERATIONS IN EMERGING MARKETS MAY BE HARMED BY THE
INCREASED POLITICAL AND ECONOMIC RISKS ASSOCIATED WITH THESE MARKETS.
We currently broadcast in several foreign markets where market economies
have only recently begun to develop, and we may expand these operations in the
future. If the governments in these markets adopt more restrictive economic
policies, we may not be able to continue operating, or to implement our
expansion plans, in those markets. More generally, we are exposed to certain
risks, many of which are beyond our control, inherent in operating in emerging
market countries. These risks include changes in laws and policies affecting
trade, investment and taxes (including laws and policies relating to the
repatriation of funds and to withholding taxes), differing degrees of protection
for intellectual property and the instability of emerging market economies,
currencies and governments.
THE AMOUNT OF OUR GOODWILL MAY HINDER OUR ABILITY TO ACHIEVE PROFITABILITY.
As a result of the reorganization, we will generate a significant amount of
goodwill, which we expect to amortize on a straight-line basis over the next 20
years. The amount of goodwill that we amortize in any given year will be treated
as a charge against earnings under generally accepted accounting principles; as
a result, the amortization of our goodwill may hinder our ability to achieve
profitability. As of December 31, 1999, we would have had pro forma goodwill of
$245.4 million, as compared to pro forma total assets of $538.8 million and pro
forma stockholders' equity of $353.0 million. On a pro forma basis, amortization
of goodwill would have resulted in a $10.7 million charge to earnings for the
year ended December 31, 1999, resulting in a net loss of $97.3 million. If we
are required to write-off our goodwill or accelerate the amortization of our
goodwill, our results of operations, stockholders' equity or profitability could
be materially adversely affected.
RISKS RELATING TO OUR INDUSTRY
COMPETITION COULD REDUCE OUR CHANNEL REVENUES AND OUR PROFITABILITY.
We operate in the pay television business, which is highly competitive. If
we are unable to compete effectively with large diversified entertainment
companies that have substantially greater resources than we have, our operating
margins and market share could be reduced, and the growth of our business
inhibited.
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<PAGE> 20
In particular, we compete for distribution with other pay television channels
and, when distribution is obtained, compete for viewers and advertisers with pay
television channels, broadcast television networks, radio, the Internet and
print media. We also compete, in varying degrees, with other leisure-time
activities such as movie theaters, television, the Internet, radio, print media,
personal computers and other alternative sources of entertainment and
information. In addition, future technological developments may affect
competition within this business.
A continuing trend towards business combinations and alliances in both the
domestic and foreign communications industry may create significant new
competitors for us. Many of these combined entities will have resources far
greater than ours. These combined entities may provide bundled packages of
programming, delivery and other services that compete directly with the products
we offer. These entities may also offer services sooner and at more competitive
rates than we do. In addition, these alliances may benefit from both localized
content and the local political climate.
We may need to reduce our prices or license additional programming to
remain competitive, and we may be unable to sustain future pricing levels as
competition increases. Our failure to achieve or sustain market acceptance of
our programming at desired pricing levels could impair our ability to achieve
profitability or positive cash flow, which would harm our business.
NEW DISTRIBUTION TECHNOLOGIES MAY FUNDAMENTALLY CHANGE THE WAY WE DISTRIBUTE
OUR CHANNELS AND COULD SIGNIFICANTLY DECREASE OUR REVENUES.
The advent of digital technology is likely to accelerate the convergence of
broadcast, telecommunications, Internet and other media and could result in
material changes in the economics, regulations, intellectual property usage and
technical platforms on which our business relies, including lower retail rates
for video services. These changes could fundamentally affect the scale, source
and volatility of our revenue streams, cost structures and profitability, and
may require us to significantly change our operations. There is a risk that our
business and prospects will be harmed by these changes or that we will not
identify or adapt to them as quickly as our competitors do.
THE EXPANSION OF DIGITAL DISTRIBUTION IN OUR MARKETS MAY INCREASE COMPETITION
FOR VIEWERS, RATINGS AND RELATED ADVERTISING REVENUES.
The increased capacity of digital distribution platforms, including the
introduction of digital terrestrial television, may reduce the competition for
the right to carry channels and allow development of extra services at low
incremental cost. Therefore, increased digital capacity could lower barriers to
entry for competing channels, and place pressure on our operating margins and
market position. A greater number of channels would likely increase competition
among channels for viewers and advertisers, which could affect our ability to
attract advertising and new distribution at desired pricing levels, and could
therefore hinder or prevent the growth of our subscriber base.
IF WE FAIL TO COMPLY WITH APPLICABLE GOVERNMENT REGULATIONS, OUR BUSINESS
COULD BE HARMED.
If, as a provider of television channels, we fail to comply with applicable
present or future government regulations in any markets in which we operate, we
could be prohibited from operating in those markets and could be subject to
monetary fines, either of which would increase our operating costs, reduce our
revenues and limit our ability to achieve profitability. The scope of regulation
to which we are subject varies from country to country, although in many
significant respects a similar approach is taken to the regulation of
broadcasting across all of the markets in which we operate. Typically,
broadcasting regulation in each of the countries in which we operate requires
that domestic broadcasters and platform providers secure broadcasting licenses
from the domestic broadcasting authority. Additionally, most nations have
broadcasting legislation and regulations which set minimum standards regarding
program content, prescribe
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<PAGE> 21
minimum standards for the content and scheduling of television advertisements
and provide that a certain portion of programming carried by broadcasters be
produced domestically and to some degree be sourced from domestic production
companies who are independent of the broadcaster.
Moreover, broadcasting regulations are generally subject to periodic and
on-going governmental review and legislative initiatives which may, in the
future, affect the nature of programming we are able to offer and the means by
which it is distributed. The timing, scope or outcome of these reviews could be
unfavorable to us, and any changes to current broadcasting legislation or
regulations could require adjustments to our operations.
For more information on the regulations we face, see "Regulation."
RISKS RELATING TO THIS OFFERING
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. Given the potential
volatility in the price of our shares, these sales could cause the market price
of Class A common stock to decline. Some of our 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.
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
Prior to 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.
[REORGANIZATION CHART]
[Diagram showing ownership percentage of Odyssey Holdings, L.L.C. and H&H
Programming-Asia, LLC held by The Jim Henson Company, Inc., Crown Media, Inc.,
National Interfaith Cable Coalition, Inc. and Liberty Media Corporation;
ownership of Crown Media, Inc. held by Chase Equity Associates, L.P. and
Hallmark Entertainment, Inc; and ownership percentage of Hallmark Entertainment,
Inc. held by Hallmark Cards, Incorporated.]
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 that will
represent approximately 61% of our outstanding common stock before giving
effect to this offering;
- Chase Equity Associates will transfer to us its interests in Crown Media
in exchange for shares of our Class A common stock that will represent
approximately 8% of our outstanding common stock before giving effect to
this offering;
- Liberty Media will transfer to us its interests in Vision Group
Incorporated in exchange for shares of our Class A common stock that will
represent approximately 18% of our outstanding common stock before giving
effect to 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 that will represent approximately 13% of our outstanding
common stock before giving effect to this offering.
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<PAGE> 23
After completion of the transactions described above and this offering,
Crown Media, Odyssey Holdings, and H&H Programming-Asia will be owned by the
entities identified in the following diagram in the following percentages of
equity interests. 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.
[REORGANIZATION CHART]
[Diagram showing ownership percentage of H&H Programming-Asia, LLC (Kermit
Channel) and Odyssey Holdings, L.L.C. (Odyssey Network) held by Crown Media,
Inc. (Hallmark Entertainment Network), The Jim Henson Company, Inc., and Crown
Media Holdings, Inc.; ownership percentage of Crown Media Holdings, Inc. held by
Public Stockholders, Chase Equity Associates, L.P., Hallmark Entertainment,
Inc., Liberty Media Corporation and National Interfaith Cable Coalition, Inc.;
and ownership percentage of Hallmark Entertainment, Inc. held by Hallmark Cards,
Incorporated.]
EM. TV & Merchandising AG announced on February 21, 2000 that it has
entered into a definitive agreement to acquire all of the issued and outstanding
stock of The Jim Henson Company. EM. TV is a Munich-based producer and
distributor of children's television programming.
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<PAGE> 24
USE OF PROCEEDS
We estimate the net proceeds to us from the sale of the 10,000,000 shares
of Class A common stock offered in this prospectus to be approximately $132.6
million, after deducting estimated offering expenses and underwriting discounts
and commissions of $12.4 million and assuming no exercise of the underwriters'
over-allotment option. We intend to use the net proceeds, over time, to:
- pay accrued and unpaid license fees to Hallmark Entertainment
Distribution, a wholly owned subsidiary of Hallmark Entertainment, Inc.,
which will account for $30.0 million of the net proceeds, as described
under "Certain Relationships and Related Transactions -- Hallmark Program
Agreements";
- license additional programming, which will account for approximately
$50.0 million of the net proceeds, of which approximately $25.0 million
will be paid to Hallmark Entertainment Distribution during this fiscal
year, as described under "Certain Relationships and Related
Transactions -- Hallmark Program Agreements"; and
- enhance our technical facilities, which will account for approximately
$20.0 million.
We expect to use the remaining $32.6 million of the net proceeds to expand our
distribution, to expand our advertising sales staff and to fund other general
corporate expenditures. We do not presently anticipate using any of the
remaining proceeds to make substantial payments to affiliates.
If the underwriters exercise their over-allotment option in full, we
estimate the net proceeds to us will be approximately $20.3 million, after
deducting related expenses and underwriting discounts and commissions.
We have not yet determined the exact amounts of net proceeds to be used for
all of the foregoing purposes, and it is possible that unforeseen events will
require us to adapt or change our plans in order to remain competitive.
Accordingly, management will have significant flexibility in applying the net
proceeds of this offering. 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 approximately 30.7 million shares of our
Class B common stock;
-- Chase Equity Associates transfers its 11.1% interest in Crown Media to
us in exchange for approximately 3.8 million 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 approximately 9.2 million 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 approximately 6.3 million
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
10,000,000 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. Prior to such time, Crown Media Holdings
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(1) AS ADJUSTED(2)
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
<S> <C> <C> <C>
Cash and cash equivalents................... $ 3,865 $ 23,350 $ 123,950
========= ========= =========
Total long-term debt, excluding current
maturities................................ --(3) -- --
Minority interest........................... -- 29,241(4) 29,241(4)
--------- --------- ---------
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 issued and outstanding pro
forma and pro forma as adjusted........ -- -- --
Crown Media Holdings Class A common stock
($0.01 par value) 150,000,000 shares
authorized; no shares issued and
outstanding; 19,329,578 shares issued
and outstanding pro forma; and
29,329,578 shares issued and
outstanding pro forma as adjusted...... -- 193 293
Crown Media Holdings Class B common stock
($0.01 par value) 120,000,000 shares
authorized; no shares issued and
outstanding; 30,670,422 shares issued
and outstanding pro forma and pro forma
as adjusted............................ -- 307 307
Paid-in capital........................... 69,902 354,387 486,887
Accumulated deficit....................... (132,869) (131,269) (134,486)
--------- --------- ---------
Total stockholders' equity (deficit)...... (62,967) $ 223,618 353,001
--------- --------- ---------
Total capitalization........................ $ (2,629) 252,859 $ 382,242
========= ========= =========
</TABLE>
- ------------------------------
(1) Pro forma excludes the exercise of any Class A common stock options under
our 2000 Long Term Incentive Plan.
(2) Pro forma as adjusted excludes the exercise of the underwriters'
overallotment option, which would result in up to an additional 1,500,000
Class A common shares issued and outstanding and the exercise of any Class A
common stock options under our 2000 Long Term Incentive Plan.
(3) Current maturities include $10.0 million due to Odyssey Holdings as the
final installment of Crown Media's $50.0 million investment in Odyssey
Holdings. This $10.0 million was paid to Odyssey Holdings in February 2000
and was funded through additional equity capital contributions from Hallmark
Entertainment and Chase Equity Associates.
(4) Minority interest consists of The Jim Henson Company's 22.5% interest equal
to $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 of common stock,
treating both Class A common stock and Class B common stock as a single class
for purposes of this discussion of dilution, 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 $(107,669) 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 $(97.3) million or $(1.95) per share based on an aggregate of
50,000,000 shares of common stock outstanding. Assuming the reorganization and
the sale of 10,000,000 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 $14.50 per share, our net tangible book value (deficit)
as of December 31, 1999 would have been $32.1 million, or $0.54 per share. This
represents an immediate dilution of $13.96 per share to new investors purchasing
shares of Class A common stock at the initial offering price. The following
table illustrates this pro forma as adjusted per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $14.50
Pro forma net tangible book value (deficit) per share as
of
December 31, 1999...................................... $(1.95)
Increase in net tangible book value (deficit) per share
attributable to new investors in this offering......... 2.49
------
Pro forma net tangible book value (deficit) per share after
the reorganization and this offering...................... 0.54
------
Dilution per share to new investors......................... $13.96
======
</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 stockholders in the reorganization and by the new investors in
this offering at the assumed initial public offering price of $14.50 per share,
before deducting the underwriting discount and estimated offering expenses
payable by us. Prior to the completion of the contemplated reorganization and
the offering, Crown Media Holdings will have no material assets, liabilities,
contingent liabilities, equity, or operations.
<TABLE>
<CAPTION>
EFFECTIVE CASH
SHARES PURCHASED CONTRIBUTION AVERAGE
------------------------ ------------------------ PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Stockholders after
reorganization.......... 50,000 83.3% $132,878 47.8% $ 2.66
New investors............. 10,000 16.7 145,000 52.2 14.50
------ ----- -------- -----
Total.......... 60,000 100.0% $277,878 100.0%
====== ===== ======== =====
</TABLE>
The above analysis and tables exclude:
- the exercise of the underwriters' overallotment option, which would
result in up to an additional 1,500,000 Class A common shares issued and
outstanding; and
- the exercise of any Class A common stock options under our 2000 Long
Term Incentive Plan.
20
<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 number of Class A and Class B shares
outstanding........................................ --(1) 1,000 1,000 1,079 1,183
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------
1995 1996 1997 1998 1999
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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, excluding current maturities... -- -- -- 10,000(2) --(3)
Stockholders' equity (deficit)....................... (2,745)(1) (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. As such, no stock was
outstanding as of December 31, 1995.
(2) Current maturities includes $20.0 million due to Odyssey Holdings during
1999 as part of Crown Media's $50.0 million investment in Odyssey Holdings.
This $20.0 million was paid by Odyssey Holdings during 1999 and was funded
through additional equity capital contributions from Hallmark Entertainment
and Chase Equity Associates.
(3) Current maturities includes $10.0 million due to Odyssey Holdings as the
final installment of Crown Media's $50.0 million investment in Odyssey
Holdings. This $10.0 million was paid to Odyssey Holdings in February 2000
and was funded through additional equity capital contributions from Hallmark
Entertainment and Chase Equity Associates.
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 9,333
Other.............................. 440 384 232 126 706
------- -------- -------- -------- ---------
Total revenues........................ 5,439 12,981 15,254 18,141 17,883
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 22,000
------- -------- -------- -------- ---------
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)
======= ======== ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------
1995 1996 1997 1998 1999
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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, excluding
current maturities................. 172 -- -- -- --
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, we 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 PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Subscriber fees.............. $ 27,670 $ 7,844 $ -- $ 35,514 $ -- $ 35,514
Advertising.................. 1,729 9,333 -- 11,062 -- 11,062
Other........................ 2,510 706 -- 3,216 -- 3,216
-------- -------- -------- --------- --------- ---------
Total revenues................. 31,909 17,883 -- 49,792 -- 49,792
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 22,000 -- 48,277 1,217(17) 49,494
Amortization of goodwill....... -- -- 10,710(1) 12,359 -- 12,359
1,649(2)
-------- -------- -------- --------- --------- ---------
Income (loss) from
operations................... (35,947) (56,244) (12,359) (104,550) (1,217) (105,767)
Equity in net losses of
unconsolidated subsidiaries
and investment expenses...... 18,992 -- (12,389)(3) 4,954 -- 4,954
(1,649)(2)
Minority interest in net
loss......................... -- -- (12,389)(4) (12,389) -- (12,389)
Interest (income) expense,
net.......................... (798) (1,181) -- (1,979) -- (1,979)
-------- -------- -------- --------- --------- ---------
Net loss before income taxes... (54,141) (55,063) 14,068 (95,136) (1,217) (96,353)
Income tax provision........... 2,556 -- (1,600)(5) 956 -- 956
-------- -------- -------- --------- --------- ---------
Net loss....................... $(56,697) $(55,063) $ 15,668 $ (96,092) $ (1,217) $ (97,309)
======== ======== ======== ========= ========= =========
Loss per share................. $(47,926) $ (1.92) $ (1.62)
======== ========= =========
Weighted average number of
Class A and Class B shares
outstanding.................. 1 50,000 10,000 60,000
</TABLE>
See accompanying notes to selected unaudited pro forma consolidated financial
data.
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 $ 132,600(14) $ 123,950
(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
Prepaids and other assets...... 1,829 177 10,000(6) 12,006 -- 12,006
--------- --------- --------- ---------- --------- ---------
Total current assets......... 25,387 46,287 10,000 81,674 100,600 182,274
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)(7) -- -- --
(31,122)(7)
Prepaids and other assets, net
of current portion........... 4,575 26,170 -- 30,745 -- 30,745
Goodwill....................... -- -- 31,122(7) 245,404 -- 245,404
214,282(8)
--------- --------- --------- ---------- --------- ---------
Total assets................. $ 81,046 $ 137,112 $ 220,041 $ 438,199 $ 100,600 $ 538,799
========= ========= ========= ========== ========= =========
LIABILITIES AND STOCKHOLDERS'/
MEMBERS' EQUITY (DEFICIT):
Accounts payable and accrued
liabilities.................. $ 5,493 $ 5,672 $ -- $ 11,165 $ -- $ 11,165
Payable to affiliates.......... 43,848 34,627 -- 78,475 (30,000)(16) 48,475
Notes payable.................. 22,711 -- (10,000)(9) 12,711 -- 12,711
Other current liabilities...... 5,404 7,124 -- 12,528 535(17) 13,063
--------- --------- --------- ---------- --------- ---------
Total current liabilities.... 77,456 47,423 (10,000) 114,879 (29,465) 85,414
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)(10) 35,251 682(17) 35,933
Minority interest (including
redeemable preferred
interest).................... -- 25,000 4,241(6) 29,241 -- 29,241
Class B common stock subject to
put and call................. 60,338 -- (60,338)(11) -- -- --
STOCKHOLDERS'/MEMBERS' EQUITY
(DEFICIT):
Class A common stock........... -- -- 155(8) 193 100(14) 293
38(11)
Class B common stock........... -- -- 307(12) 307 -- 307
Paid-in capital................ 69,902 -- 214,127(8) 354,387 132,500(14) 486,887
60,300(11)
(307)(12)
10,365(13)
Accumulated earnings
(deficit).................... (132,869) -- 1,600(10) (131,269) (2,000)(15) (134,486)
(1,217)(17)
Members' equity (deficit)...... -- (1,153) 5,759(6) -- -- --
(4,241)(7)
10,000(9)
(10,365)(13)
--------- --------- --------- ---------- --------- ---------
Total stockholders'/members'
equity (deficit)........... (62,967) (1,153) 287,738 223,618 129,383 353,001
--------- --------- --------- ---------- --------- ---------
Total liabilities and
stockholders'/members'
equity (deficit)........... $ 81,046 $ 137,112 $ 220,041 $ 438,199 $ 100,600 $ 538,799
========= ========= ========= ========== ========= =========
</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 amortization of goodwill of $10.7 million based on a
twenty-year life resulting from the step-up in basis of our
proportionate share of all of the underlying assets and liabilities
of Odyssey Holdings at the time of the reorganization (see (8)
below).
(2) 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.
(3) 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.
(4) 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.
(5) 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:
(6) Represents the reclassification of a $10.0 million note receivable
from The Jim Henson Company to Odyssey Holdings and the recording of
$4.2 million relating to The Jim Henson Company's 22.5% minority
interest in Odyssey Holdings.
(7) 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.
(8) Represents $214.2 million of goodwill, the difference between the
net book value of Liberty Media's and the National Interfaith Cable
Coalition's interests in Odyssey Holdings totaling $10.4 million and
the negotiated value of the equity contributions to us by Liberty
Media and the National Interfaith Cable Coalition of their interests
in Odyssey Holdings totaling $224.6 million and the issuance of 15.5
million shares of our Class A common stock. The purchase price for
Liberty Media and the National Interfaith Cable Coalition is based
on the mid-point of the estimated public offering price range. The
fair market value of these shares will be determined once the final
public offering price is determined.
(9) Represents the elimination of Crown Media's note payable to Odyssey
Holdings and Odyssey Holdings' corresponding note receivable of
$10.0 million.
(10) 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.
(11) Represents a reclassification resulting from the conversion by Chase
Equity Associates of its shares of Class B common stock subject to
put and call of Crown Media into 3.8 million shares of our Class A
common stock.
(12) Represents a reclassification resulting from the conversion by
Hallmark Entertainment of its shares of Class A common stock of
Crown Media into 30.7 million shares of our Class B common stock.
(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 and income
statement give effect to the following adjustments resulting from the offering:
(14) Represents the receipt of offering proceeds estimated at $145.0
million, less estimated issuance costs of $12.4 million and the
issuance of 10.0 million shares of our Class A common stock.
(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.
(17) Represents a $1.2 million accrued expense for the vested portion
related to the issuance of 1.0 million Class A stock options upon
the conversion of the outstanding share appreciation rights.
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
certain rating levels in connection with their advertising. Revenue is recorded
net of estimated shortfalls, which are usually settled by providing the
advertiser additional advertising time. In other markets, our advertising rates
are calculated on the basis of cost per advertising spot or package of
advertising spots, and the price varies by audience level expected (but not
measured) during a particular time slot. This is the predominant arrangement in
the countries outside the United States in which we sell advertising time.
Advertising rates also vary by time of year based on seasonal changes in
television viewership.
COST OF SALES
Our cost of sales consist primarily of program license fees and the cost of
signal distribution, dubbing and subtitling, marketing, and creating the
promotional segments that are aired between programs. In the United States, we
pay certain television distributors one-time subscriber acquisition fees to
carry our channels. However, internationally, the market does not require us to
pay these fees. Subscriber acquisition fees are capitalized and amortized over
the term of the applicable distribution agreement. At the time we sign a
distribution agreement, and periodically thereafter, we evaluate the
recoverability of the expenses we incur against the revenues directly associated
with each agreement. New market launches can require significant up front
investments in program license fees, signal distribution, dubbing and
subtitling, marketing, and promotional segments and creative production. Initial
revenues from new market launches generally trail expenses by three to six
months. We expect cost of sales to continue to increase.
INCOME TAX PROVISION
We account for income taxes using the liability method. Under this method,
we recognize deferred tax assets and liabilities for future tax consequences
attributable to the difference between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.
Crown Media has not recorded a tax benefit for federal or state tax losses
since these losses have been used by our parent and will not be available to us.
Crown Media has recorded a tax provision related to foreign taxes and to
establish a deferred tax liability as required for certain timing items.
Subscriber fees are subject to withholding tax in many of the foreign
jurisdictions in which we currently operate at rates ranging from 5% to 20%.
Crown Media attempts to take advantage of reduced withholding rates pursuant to
any treaties between the United States and foreign taxing jurisdictions to the
extent available.
Foreign withholding tax may be claimed as a credit against Crown Media's
U.S. tax liability, subject to certain limitations. Any amounts not allowed as a
credit in the year generated may be carried back to the two preceding tax years
and then forward to the five succeeding tax years. Alternatively, if taxes
cannot be claimed as a credit during these carry back and carryover periods, an
election may be made to claim these taxes as a deduction, thus resulting in a
tax benefit to the extent of Crown Media's tax rate and its ability to use such
deductions. Tax losses may only be used to offset taxable income. To the extent
losses are limited, such excess losses may be carried back to the two preceding
tax years and then forward to the 20 succeeding tax years.
Crown Media has generated tax losses since its inception and there is no
certainty that Crown Media will generate taxable income in the future. Crown
Media policy is to establish a valuation allowance against its tax credits and
tax losses until such time that realization is reasonably assured.
29
<PAGE> 37
We will generate goodwill as a result of the reorganization and any
amortization of such goodwill for financial reporting purposes is not deductible
for tax purposes. Consequently, our effective tax rate will be higher than the
statutory rate as a result of such non-deductible goodwill.
Following the reorganization, Odyssey Holdings will be consolidated with us
for financial reporting purposes but not for tax purposes. Odyssey Holdings is
treated as a partnership for tax purposes and we will be allocated income and
losses pursuant to the amended and restated company agreement of Odyssey
Holdings.
CROWN MEDIA AND ITS SUBSIDIARIES
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 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 $7.0 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. Crown Media's
average monthly per subscriber fees decreased from $0.25 in 1998 to $0.16 in
1999, due primarily to the addition of a large number of promotional subscribers
in Latin America and Asia. Crown Media's promotional subscribers will either
cancel their subscriptions or convert to paying subscribers over time, based on
the specific terms of these distribution contracts. Additionally, advertising
revenue increased $1.6 million as Crown Media began the implementation of its
new advertising strategy in 1999. During 1999, 92% of total revenues were earned
internationally.
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. Cost of sales as a percent of total revenue decreased
from 183% in 1998 to 130% in 1999. 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 decreased 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 $14.7 million, or 128%, to $26.3 million for the year ended December
31, 1999, from $11.6 million for the year ended December 31, 1998. General and
administrative expenses as a percent of total revenue increased from 49% in 1998
to 82% in 1999. 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.
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.
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<PAGE> 38
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. During 1999, 29% of total revenues were
subject to foreign withholding taxes.
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.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 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. Crown Media's average monthly per subscriber fees increased
from $0.22 in 1997 to $0.25 in 1998, due primarily to the growth of Crown
Media's distribution in territories with high subscriber fees such as Central
and Western Europe. The remaining revenue increase was due primarily to
increased management fees earned from the Kermit Channel, which was launched in
1998. During 1998, 88% of total revenues were earned internationally.
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. Cost of sales as a
percent of total revenue decreased from 256% in 1997 to 183% in 1998, due
primarily to a 142% increase in total revenue from 1997 to 1998.
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. General and administrative
expenses as a percent of total revenue decreased from 62% in 1997 to 49% in
1998, due primarily to a 142% increase in total revenue from 1997 to 1998.
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.
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
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<PAGE> 39
to higher revenues derived from foreign tax jurisdictions. During 1998, 27% of
total revenues were subject to foreign withholding taxes.
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.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 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. Crown Media's average
monthly per subscriber fees increased from $0.18 in 1996 to $0.22 in 1997, due
primarily to the growth of Crown Media's distribution in regions with high
subscriber fees such as Western Europe. During 1997, 100% of total revenues were
earned internationally.
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. Cost of sales as a
percent of total revenue decreased from 308% in 1996 to 256% in 1997, due
primarily to a 227% increase in total revenue from 1996 to 1997.
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. General and administrative expenses
as a percent of total revenue decreased from 135% in 1996 to 62% in 1997, due
primarily to a 227% increase in total revenue from 1996 to 1997.
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. During 1997, 18% of total
revenues were subject to foreign withholding taxes.
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. As of December 31, 1999, Crown Media had obligations representing license
fees for programming, payables and notes payable to affiliates of
32
<PAGE> 40
$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.
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 $50.0 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 $20.0 million to complete construction of
the network operating center over the same period. We believe that the net
proceeds from this 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. After that, we will need to raise additional funds to operate and
expand our business. We cannot assure you that we will be able to obtain such
additional capital, either through borrowings or the issuance of additional
equity, on terms we believe are satisfactory, or at all.
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<PAGE> 41
ODYSSEY HOLDINGS AND ITS SUBSIDIARIES
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues. Total revenues decreased $200,000, or 1%, to $17.9 million for
the year ended December 31, 1999, from $18.1 million for the year ended December
31, 1998. This decrease was due primarily to decreased advertising revenue of
$2.2 million, offset in part by increased subscriber fees revenue of $1.4
million and increased other revenue of $580,000. The increased subscriber fees
revenue was due primarily to higher rates. The average annual revenue per
subscriber increased by $0.05. The decrease in advertising revenue was due to a
change in advertising strategy from paid advertising to retail advertising
implemented in 1999. Advertising revenue is recorded net of agency fees,
typically 15%, and audience deficiency reserves, which totaled $1.8 million 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. The increase in other revenue was due primarily to royalty income of
$308,000. During 1999, 100% of total revenues were earned domestically.
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. Cost of sales as a percent of total revenue increased
from 83% in 1998 to 291% in 1999. 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 ($13.0 million) primarily attributable to $11.5 million
of 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 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, including promotional segments and billboards that are aired
between programs. The increased marketing and promotion costs were also
attributable to the relaunch. Odyssey Holdings expects that these cost of sales
expenses will continue at these higher levels as we pursue our aggressive growth
strategy.
General and administrative expenses. General and administrative expenses
increased $15.8 million, or 255%, to $22.0 million, for the year ended December
31, 1999, from $6.2 million, for the year ended December 31, 1998. General and
administrative expense as a percent of revenue increased from 34% in 1998 to
123% in 1999. This increase was due primarily to increased staffing levels
related to the relaunch of the network in April 1999. Compensation expense
increased $6.7 million in 1999. This increase was attributable to SAR plan
compensation expense. The remainder of the increase is due primarily to other
increased costs due to higher staffing levels. Odyssey Holdings expects that
this increased level of general and administrative expense will continue as we
pursue our aggressive growth strategy.
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
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<PAGE> 42
ended December 31, 1999 from the year ended December 31, 1998 was primarily a
result of the factors discussed above.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 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. During 1998, 100% of total revenues were earned domestically.
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. Cost of sales as a percent of total revenue increased
from 82% in 1997 to 83% in 1998. This increase was due primarily to a $939,000
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. General and
administrative expenses as a percent of total revenue increased from 20% in 1997
to 34% in 1998. This increase was due primarily to the cost of increased
staffing levels totaling $2.8 million 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, which process began late in 1998, relocating the headquarters from
New York to Los Angeles in February 1999 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.
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.
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<PAGE> 43
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 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 a decrease of approximately $1.2 million in subscriber fees paid
by a subsidiary of AT&T under a previous carriage agreement, partially offset by
increased revenue from additional subscribers. The number of subscribers
increased to 27.8 million at December 31, 1997 from 26.4 million at December 31,
1996. During 1997, 100% of total revenues were earned domestically.
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. Cost of sales as a percent of total revenue decreased
from 85% in 1996 to 82% in 1997. This change 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 56%, 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 as a percent of total revenue increased from 15% in 1996
to 20% in 1997. This increase was 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.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Odyssey Holdings has financed its operations primarily
through equity contributions from its members. In connection with the admittance
of subsidiaries of The Jim Henson Company and Crown Media as members in 1998,
each of these new members agreed to contribute $50.0 million, payable in
installments. The final installment was paid in February 2000. Each member
received a 22.5% common equity interest in exchange for its contribution. A
total of $40.0 million was paid by the new members in each of 1998 and 1999, and
the balance of $20.0 million was paid in February 2000, for a total of $100.0
million. The entire amount of equity contributions was received according to
this payment schedule. As of December 31, 1999, Odyssey Holdings had current
liabilities of $47.4 million, consisting of license fees payable to affiliates
totaling $34.6 million, license fees payable to third parties totaling $3.8
million, accounts payable and accrued liabilities totaling $5.7 million, and
deferred compensation totaling $3.3 million. As of December 31, 1999, Odyssey
Holdings had current assets of
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<PAGE> 44
$46.3 million, consisting primarily of cash of $19.5 million, accounts
receivable of $5.1 million and program license fees of $21.6 million.
Cash used in operating activities was $0.1 million, $1.3 million and $53.3
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 $0.4 million, $3.2 million and $55.1 million for the years ended
December 31, 1997, 1998 and 1999, respectively.
Cash used in investing activities was $0.1 million, $0.3 million and $5.1
million for the years ended December 31, 1997, 1998 and 1999, respectively. Net
cash used was used for capital expenditures. The increase in capital
expenditures in 1999 was due primarily to investments in post-production and
computer equipment in connection with the relaunch of the Odyssey Network in
1999.
Cash provided by financing activities was $0.1 million, $40.4 million and
$38.9 million for the years ended December 31, 1997, 1998 and 1999,
respectively. Cash received for equity contributions from members totaled $40.0
million in 1998 and $40.0 million in 1999.
We expect to continue to make significant investments in programming,
marketing and subscriber acquisitions over the next several years. Following
completion of the reorganization and this offering, our liquidity and capital
resources will be funded as a part of Crown Media Holdings. See "-- Crown Media
and Its Subsidiaries -- Liquidity and Capital Resources." Under the contemplated
reorganization and initial public offering, Odyssey Holdings anticipates that
its senior credit facility, as described in Note 4 to Odyssey Holdings
consolidated financial statements, will be terminated.
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.
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 our financial statements.
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<PAGE> 45
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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<PAGE> 46
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 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 have distribution agreements
with leading pay television distributors in each of our markets. The following
table shows, for each of our channels, programming sources, selected pay
television distributors, territories in which we operate and the total number of
our subscribers as of December 31, 1999.
<TABLE>
<CAPTION>
HALLMARK ODYSSEY
ENTERTAINMENT NETWORK NETWORK KERMIT CHANNEL
<S> <C> <C> <C>
Programming - Hallmark - Hallmark - Hallmark
Sources Entertainment, Inc. Entertainment, Entertainment,
Inc. Inc.
- Third party - The Jim Henson - The Jim Henson
sources Company Company
- National - Third party
Interfaith sources
Cable Coalition
- Third party
sources
Selected Pay - BSkyB - AT&T - Modi
Television - Cablevision - Time Warner Entertainment
Distributors - Modi Entertainment Cable
- United Pan-Europe - DirecTV
Communications
Territories International Domestic India
Total 20.8 million 27.4 million 6.0 million
Subscribers
</TABLE>
For a more detailed description of our channels, see "-- Channels -- The
Hallmark Entertainment Network," "-- Channels -- The Odyssey Network" and
"-- Channels -- The Kermit Channel."
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., an 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 A. Halmi, Jr. Mr. Halmi is currently the
President and Chief Executive Officer of Hallmark Entertainment, Inc. and the
Chairman of our Board of Directors.
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<PAGE> 47
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 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 media, communications and entertainment 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,
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......................... 91,800 102,900 14,039 25,404 15.3% 24.7%
Asia Pacific(1)....................... 177,198 220,595 50,001 108,472 28.2 49.2
Europe................................ 117,834 125,261 22,602 36,482 19.2 29.1
Scandinavia/Benelux................... 20,866 21,718 16,517 18,503 79.2 85.2
South Africa(2)....................... 5,616 6,638 1,210 1,367 21.5 20.6
United States(3)...................... 99,000 104,000 79,500 90,800 80.3 87.3
------- ------- ------- -------
TOTAL...................... 512,314 581,112 183,869 281,028 35.9% 48.4%
======= ======= ======= ======= ===== =====
</TABLE>
- ------------------------------
(1) Excluding China, Pakistan and Bangladesh, for which comparable data is not
available.
(2) Source: Baskerville Communications Corporation.
(3) Source: 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.
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<PAGE> 48
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.
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
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<PAGE> 49
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.
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.
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. The Odyssey Network
also has access to family and values-based programming from the National
Interfaith Cable Coalition. See "Business -- Channels -- The Hallmark
Entertainment Network -- Programming" and "-- The Odyssey
Network -- Programming."
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
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<PAGE> 50
and HBO. Additionally, members of our senior management team have held senior
positions at the 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. Based on a 1998
television viewers survey, we believe that viewers consider it 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.
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.
For a more detailed description of how we distribute our channels, see
"-- Channels -- The Hallmark Entertainment Network -- Distribution" and
"-- Channels -- The Odyssey Channel."
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 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 40 of the leading advertisers in the United States based on total
advertising expenditures, including Hallmark Cards, America Online, AT&T,
Coca-Cola and Procter & Gamble. No individual advertiser accounted for more than
2% of our revenues for the year ended December 31, 1999. As we continue to
implement our strategy, we intend to leverage our relationships with these
advertisers in
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<PAGE> 51
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.
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%.
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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, 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. 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. Our
international distribution agreements generally last two to four years. Some of
our international distributors are BSkyB, Multicanal and United Pan-Europe
Communications.
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 potential advertisers on
the channel by creating more targeted advertising opportunities for local or
regional businesses in the markets in which we operate.
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The following chart shows the Hallmark Entertainment Network launch date,
the approximate number of television households and pay television households,
as estimated by Kagan World Media 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(1) 1999 AVERAGE
TOTAL TV TELEVISION -------------- % OF MONTHLY
LAUNCH HOUSEHOLDS HOUSEHOLDS % PAY TV 1997 1999 PAY TELEVISION SUBSCRIBER
MARKETS DATE (000'S) (000'S) PENETRATION (000'S) HOUSEHOLDS RATE(2)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LATIN AMERICA:
Argentina.............. 1999 10,000 5,231 52.1% 300 3,592 68.7% $.05
Mexico................. 1995 17,100 3,327 19.4 1,260 1,985 59.7 .09
Brazil................. 1997 36,900 3,000 8.1 356 511 17.0 .32
Venezuela.............. 1997 3,700 772 20.6 -- 439 56.9 .31
Chile.................. 1998 4,200 814 19.6 60 320 39.3 .15
Colombia............... 1997 8,000 382 4.8 -- 301 78.8 .30
Other Latin America.... Various 14,005 2,083 14.9 590 699 33.6 .21
------- ------- ----- ------
Subtotal........ 93,905 15,609 16.6 2,566 7,847 50.3
ASIA PACIFIC:
India.................. 1999 68,020 24,016 35.3 -- 5,200 21.7 .00(3)
Taiwan................. 1998 5,950 4,711 79.2 -- 1,200 25.5 .00(3)
Philippines............ 1999 8,650 783 9.1 285 457 58.4 .18
Thailand............... 1998 13,230 470 3.6 100 286 60.9 .10
Malaysia............... 1998 3,330 516 15.5 120 237 45.9 .67
Australia.............. 1996 6,800 1,236 18.2 105 335 27.1 .47
Japan.................. 1998 47,200 23,110 49.0 75 114 0.5 .55
New Zealand............ 1996 1,240 530 42.7 50 79 14.9 .08
Indonesia/Singapore.... Various 29,420 1,651 5.6 110 248 15.0 .32
Other Asia
Pacific(4)........... Various -- -- -- 355 103 .29
------- ------- ----- ------
Subtotal........ 183,840 57,023 31.0 1,200 8,259
EUROPE:
Poland................. 1998 12,381 6,000 48.5 -- 912 15.2 .11
Romania................ 1999 7,556 3,405 45.1 -- 655 19.2 .02
Czech Republic......... 1998 3,986 1,572 39.4 -- 330 21.0 .13
Bulgaria/Slovakia...... Various 4,776 1,953 40.9 -- 200 10.2 .25
Russia................. 1997 58,037 7,010 12.1 150 233 3.3 .18
Italy.................. 1997 20,054 1,970 9.8 150 600 30.5 .51
Spain.................. 1997 12,791 2,798 21.9 250 513 18.3 .48
------- ------- ----- ------
Subtotal........ 119,581 24,708 20.7 550 3,443 13.9
SCANDINAVIA/BENELUX:
Sweden................. 1996 4,109 2,707 65.9 260 290 10.7 .16
Denmark................ 1996 2,418 1,792 74.1 125 151 8.4 .13
Norway................. 1996 1,853 1,101 59.4 75 105 9.5 .13
Finland................ 1996 2,050 1,156 56.4 95 99 8.6 .13
Belgium/Netherlands.... 1996 10,589 10,223 96.5 80 125 1.2 .15
------- ------- ----- ------
Subtotal........ 21,019 16,979 80.8 635 770 4.5
SOUTH AFRICA(5).......... 1996 5,841(5) 1,290(5) 22.1 170 475 36.8% .42
------- ------- ----- ------
TOTAL........... 424,186 115,609 27.3% 5,121 20,794
======= ======= ===== ===== ====== =====
</TABLE>
- ------------------------------
(1) Total subscribers includes promotional subscribers at December 31 of each
period presented.
(2) Represents the average subscriber contract rates in each country.
(3) Rates appear as zero due to rounding.
(4) Represents Bangladesh, Pakistan and Middle East subscribers; television
household data not available.
(5) Source: Baskerville Communications Corporation.
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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. We are also in discussions with pay television distributors in
Hungary, Turkey and Greece.
United Kingdom. The United Kingdom is a developed television market with
nearly 23.9 million television households. Cable penetration is approximately
14% of television households with 3.3 million basic subscribers. However, DTH
continues to be the primary platform with approximately 3.7 million 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 approximately 2.8 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. For the year ended
December 31, 1999, subscriber fee revenues were $27.7 million, an increase of
$7.1 million from the year ended 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 agreements
with third parties to increase advertising sales in India, Argentina, Poland and
Romania, South Africa and the United Kingdom.
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<PAGE> 55
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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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, Time
Warner and DirecTV distribution systems, the three largest distributors, and are
seeking to increase our subscriber base by signing long-term distribution
agreements with the other six pay television distributors. No individual pay
television distributor accounted for more than 10% of our revenues or 15% of our
subscribers for the year ended December 31, 1999 on a pro forma basis.
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, based on a 1998 television viewers
survey, we believe that viewers consider it 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 78%, while
viewership among adults over 55 decreased by 30%, 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 188%, and viewership among women ages
18-49 late night ratings increased by over 67%.
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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- significantly enhances our ability to attract advertising commitments
from the largest advertisers. We were able to attract more than 40 of the
largest 200 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. Programs contained within The Jim Henson Company library have won
more than 40 Emmy Awards and Peabody Awards. 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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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. 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, Time Warner and
DirecTV distribution systems, the three largest distributors, and are currently
in discussions with the other six pay television distributors. No individual pay
television distributor accounted for more than 10% of our revenues or 15% of our
subscribers for the year ended December 31, 1999 on a pro forma basis. We
currently distribute the Odyssey Network to approximately 35% of all United
States pay television subscribers.
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 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 $9.3 million.
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.
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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. Cooperative
marketing, common in the entertainment industry, is typically structured to
provide that each party contributes 50% of the total marketing expenditures. Our
strategy is to enter into these arrangements for local marketing efforts which,
absent these arrangements, we would have funded entirely on our own.
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 40 of the leading advertisers based on total advertising
expenditures.
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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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 that are aired
between the movies, miniseries and series. These promotional segments help 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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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.
[CHANNEL DELIVERY PROCESS DIAGRAM]
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[Diagram showing box that contains "origination and playback center", box
that contains "Compression and encryption", satellites, box that contains
"integrated receiver/decoder and television]
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 America Portuguese Productions
Cablevision Miami, Florida
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 Europe 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, Italy
Spain DBS Via Digital Castillian Via Digital Hispasat
Portuguese Madrid, Spain
Africa DBS Multichoice English Multichoice PanAmSat 4
Johannesburg,
SAF
Czech Republic Cable Kabel Plus Czech Kabel Plus Kopernicus 2
Cable Association Slovak Prague, Czech
Australia Cable Foxtel English Foxtel Optus B3
DBS Austar Sydney,
Australia
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>
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,
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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.
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.
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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.
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
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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 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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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
William M. Haber.......................... 57 Director
Donald J. Hall, Jr........................ 44 Director
Irvine O. Hockaday, Jr.*.................. 63 Director
David B. Koff............................. 41 Director
Peter A. Lund............................. 59 Director
John P. Mascotte.......................... 60 Director
</TABLE>
- ----------
* These individuals have been serving as our directors since December 1999 and
will be our only directors prior to this offering.
Each of our directors and executive officers can be reached c/o Crown Media
Holdings, Inc., Suite 500, 6430 S. Fiddlers Green Circle, Englewood, Colorado
80111.
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
and the Non-Executive Chairman of the Governance Committee of Odyssey Holdings
since March 1999, and a Director of Crown Media since July 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 June 1996.
Mr. Aliber has been the Vice President and Chief Financial Officer of Crown
Media since March 1997 and a Director of Crown Media since May 1998. He has also
been the Vice President and Chief Financial Officer of Hallmark Entertainment,
Inc. since June 1996. Prior to that, he was the Director of Corporate Finance
for Hallmark Cards from January 1995 until June 1996. It is currently
contemplated that, upon completion of this offering, Mr. Aliber will resign as
Chief Financial Officer of Hallmark Entertainment, Inc. and resign as a director
of us.
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 October 1994
until July 1998.
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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 January 1980 until July 1996, Mr. Brilliant was the General Counsel
and Executive Vice President, International, of ESPN, Inc.
Mr. Bane has been a Representative on the Governance Committee of Odyssey
Holdings since November 1998. He has also been the Associate General Secretary
of United Methodist Communications, the communications agency for the United
Methodist Church, since October 1990. Mr. Bane also serves as chair of VISN
Management. He 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.
Mr. Chavkin has been a Director of Crown Media since 1998 and a
Representative on the Governance Committee of Odyssey Holdings since March 1999.
He has also been a General Partner of Chase Capital Partners, a general
partnership which invests in private equity opportunities with a significant
concentration on the media and telecommunications industries, 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., Triton Cellular
Partners, L.P., Triton 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 also
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. Haber has been the President of OSTAR Enterprises, Inc., a theatrical
holding company, since 1995. Mr. Haber co-founded the Creative Artist Agency in
1975. He is a member of the board of directors of Jim Henson Productions, Inc.
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 March 1995 until
September 1997. Mr. Hall is a member of the board of directors of Hallmark
Entertainment, Inc. and Business Men's Assurance Company of America.
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 & Company, 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 a Representative on the Governance Committee of Odyssey
Holdings since November 1998. He has also been a Senior Vice President of
Liberty Media since February 1998. Prior to that, Mr. Koff was the Vice
President, Corporate Development, of Liberty Media from August 1994 until
February 1998. He also served as the interim President and Chief Executive
Officer of Liberty Digital, Inc. from May 1997 until January 1998. Mr. Koff has
served as a member of the board of directors of Liberty Digital since May 1997.
Mr. Lund has been a private investor and a media consultant since June
1997. He was the President and Chief Executive Officer of CBS, Inc. from October
1995 until June 1997. Prior to that, Mr. Lund
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served in a variety of positions with CBS since 1977. He is a member of the
board of directors of dreamlife, inc. and Lycos, Inc.
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 of Johnson & Higgins of Missouri, Inc., a privately held
insurance services and employee benefits consulting firm, from January 1996
until June 1997. Mr. Mascotte also served as a consultant to CNA Insurance from
May 1995 until December 1995. From 1983 until May 1995, he was the Chairman and
Chief Executive Officer of Continental Corporation, an insurance holding
company. Mr. Mascotte is a member of the board of directors of American Home
Products Corporation, Hallmark Cards, Hallmark Entertainment, Inc., Blue Cross
and Blue Shield of Kansas City, Inc., Blue Cross and Blue Shield Association and
Business Men's Assurance Company of America.
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
Lana E. Corbi............................. 44 Chief Operating Officer
Susan A. G. Frank......................... 50 General Manager and Executive Vice
President
</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. Ms. Loesch was not employed from
December 1997 through January 1998. Prior to that, she was the Vice Chairman of
Fox Kids Worldwide from May 1997 until November 1997. Ms. Loesch was the
President and Chief Executive Officer of Fox Kids Networks Worldwide from March
1990 until May 1997.
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 September 1995 until May 1996. Prior to that, Ms. Corbi
was Senior Vice President, Network Distribution, for Fox Broadcasting Company
from October 1994 until September 1995.
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. She was not employed from December 1997 through
January 1998. Prior to that, Ms. Frank was Executive Vice President, Marketing
and Promotions Worldwide, for Fox Kids Worldwide from October 1996 until
November 1997. From April 1995 until October 1996, she was Senior Vice President
at Hanna Barbera. Prior to that, Ms. Frank served in a variety of positions for
McDonald's Corp. from March 1979 until April 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
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Hallmark Entertainment, Inc., Liberty Media, the National Interfaith Cable
Coalition or Chase Equity Associates.
Under our by-laws, our directors are elected at the annual stockholders
meeting upon the vote of a plurality of the voting power of shares of our
outstanding common stock cast in the election. Our directors may be removed with
or without cause upon the vote of holders of a majority of the voting power of
shares of our outstanding common stock.
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;
- prepare a report for our annual proxy statement; and
- comply with any additional requirements set forth in the Audit
Committee's charter.
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.
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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 ($) COMPENSATION
<S> <C> <C> <C>
David J. Evans........................................ 604,791 -- --
President and Chief Executive Officer
Russel H. Givens, Jr. ................................ 354,571 34,631 --
Executive Vice President and Chief Operating Officer
Andrew P. Brilliant................................... 316,859 47,120 --
Executive Vice President - Sales and Marketing
Jeffrey J. Johnson(1)................................. 287,081(2) -- 130,476(3)
Vice President, Marketing Director - Asia Pacific
Mark N. Grenside...................................... 237,954 24,460 --
Senior Vice President, Managing Director, Sales -
Europe/ Middle East/Africa
</TABLE>
- ------------------------------
(1) Mr. Johnson voluntarily terminated his employment with Crown Media effective
February 24, 2000.
(2) 1999 salary includes 1998 compensation paid in 1999.
(3) Represents auto allowance, relocation expense, tax equalization and
expatriate cost of living adjustment.
STOCK APPRECIATION RIGHT EXERCISES AND HOLDINGS
The following tables provide information regarding grants and holdings of
stock appreciation rights by Crown Media's Chief Executive Officer and its other
four most highly compensated executive officers for the fiscal year ended
December 31, 1999. We did not grant any options to, and no options were
exercised by, any of the named executive officers in 1999. Upon completion of
the offering, the SARs will be converted into stock options. See "-- Executive
Employment Arrangements -- Share Appreciation Rights Plan."
SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT
SARS ASSUMED ANNUAL RATES OF
NUMBER OF GRANTED STOCK
SECURITIES TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES BASE SAR TERM
SARS IN FISCAL PRICE EXPIRATION -----------------------
NAME GRANTED(#) YEAR ($/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.
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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, but it 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 guaranteed a performance bonus of
$337,500 for the period ending on February 28, 2000, and it paid Mr. Evans that
amount on March 1, 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 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, but it 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
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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 it 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.
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 was scheduled to expire on November
30, 2002. Mr. Johnson voluntarily terminated his employment with Crown Media
effective February 24, 2000. 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 was entitled to
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, but
it 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
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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 (which it
paid to Mr. Stein on January 18, 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.
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; Jeffrey J. Johnson -- 0 SARs; Mark N. Grenside -- 100,000 SARs; and other
officers -- 300,000 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.
Upon the completion of this offering, each officer's outstanding SARs will
be converted into stock options to acquire shares of our Class A common stock
under our Amended and Restated 2000 Long Term Incentive Plan, which is described
below. Each holder of an SAR will receive stock options with respect to that
number of shares of our Class A common stock equal to the product of (1) the
percentage of total SARs held by the holder, times (2) the product of (A) 3%,
times (B) the number of shares of our common stock owned by Hallmark
Entertainment, Inc. and Chase Equity Associates, in each case immediately after
this offering. The shares of our Class A common stock subject to the stock
options to be granted to Crown Media's Chief Executive Officer, its other four
most highly compensated executive officers and the other officers as a group
upon cancellation of all their SARs, are as follows: Mr. Evans, 690,141; Mr.
Givens, 103,521; Mr. Brilliant, 103,521; Mr. Johnson, 0; Mr. Grenside, 34,507;
and the other officers as a group, 103,521.
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The exercise price per share of Class A common stock subject to the stock
options will be $8.33. Each officer's stock option will retain the original
vesting provisions of the SARs. Following completion of this offering, the other
terms of these stock options will be generally the same as the terms of stock
options granted under any Amended and Restated 2000 Long Term Incentive Plan.
The stock options will generally expire on January 1, 2009. No awards will be
granted under this plan following this offering.
THE AMENDED AND RESTATED 2000 LONG TERM INCENTIVE PLAN
We have adopted and approved our Amended and Restated 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 our 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 10 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 five 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.
The option exercise price per share will be determined by our Compensation
Committee in accordance with the 2000 plan. 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.
At the time of this offering, we expect to grant stock options to acquire
1,399,500 shares of Class A common stock under the 2000 plan at an exercise
price equal to the initial public offering price.
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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.
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
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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 who are not employees of Hallmark Cards
or its subsidiaries 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 who
is not an employee of Hallmark Cards or its subsidiaries 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 million 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 of
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.
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
$375,000 of advertising time on the Odyssey Network.
HALLMARK DEMAND NOTES
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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On February 23, 2000, Crown Media entered into another agreement, as
amended on April 14, 2000, with HC Crown under which HC Crown agreed to lend
Crown Media up to an additional $20.0 million, on terms similar to the November
19, 1999 agreement.
REAL PROPERTY LEASES
In connection with our lease of office facilities at 6430 S. 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 $210,000 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 S.
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.
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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 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
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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 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 either:
- are 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
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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
- 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 us by Hallmark Entertainment, Inc. If we determine not
to pursue or fail 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.
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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 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. $8.2 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
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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 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. Our program license
agreement with Hallmark Entertainment Distribution does not require it to make
available to us a minimum amount of programming. If Hallmark Entertainment
Distribution fails to provide us with sufficient programming to meet the minimum
thresholds required under the trademark license agreement, that failure could
cause us to be in default under the trademark license agreement. 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
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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.
SECURITIES PURCHASE AGREEMENTS
Crown Media signed a securities purchase agreement dated as of February 18,
1999, with Hallmark Entertainment, Inc. and Chase Equity Associates, a
stockholder of Crown Media, under which Chase Equity Associates paid Crown Media
approximately $2.2 million in exchange for approximately 5.6 shares of Crown
Media Class B common stock. Crown Media signed similar agreements dated as of
June 17, 1999 and February 15, 2000, with Hallmark Entertainment, Inc. and Chase
Equity Associates, under which Chase Equity Associates paid Crown Media
approximately $2.2 million and $1.1 million, respectively, in exchange for
approximately 5.6 shares and 2.8 shares, respectively, of Crown Media Class B
common stock.
In connection with the securities purchase agreements, Hallmark
Entertainment, Inc. paid Crown Media on February 18, 1999, June 17, 1999 and
February 15, 2000, approximately $17.8 million, $17.8 million and $8.9 million,
respectively, in exchange for approximately 44.4 shares, 44.4 shares and 22.2
shares, respectively, of Crown Media Class A common stock.
CERTAIN BUSINESS RELATIONSHIPS
Our directors who are also directors or officers of Hallmark Entertainment,
Inc. will have fiduciary duties, including duties of loyalty, to both companies
and may have conflicts of interest with respect to matters potentially involving
or affecting us. See "Risk Factors -- Risk relating to our business -- Hallmark
Entertainment, Inc. will control us and this control could create conflicts of
interests or inhibit potential changes of control." Other than as disclosed
under -- "Stockholders Agreement and Registration Rights -- Corporate
Opportunities Policy" and "Description of Capital Stock -- Corporate
Opportunities," there are no specific policies in place with respect to any
conflicts that may arise. We expect conflicts to be resolved on a case-by-case
basis, and in a manner consistent with applicable law.
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<PAGE> 87
PRINCIPAL STOCKHOLDERS
The following tables sets forth certain information with respect to
beneficial ownership of our Class A common stock and Class B common stock,
including the percent of total voting power, as adjusted giving effect to the
transactions contemplated by the reorganization, 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>
SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING
--------------------------------------------
CLASS A CLASS B % TOTAL
COMMON COMMON VOTING
STOCK STOCK POWER
------------------- --------------------- -------
5% STOCKHOLDERS: SHARES % SHARES %
<S> <C> <C> <C> <C> <C>
Hallmark Entertainment, Inc. .... -- -- 30,670,422 100.0 94.1
1325 Avenue of the Americas
New York, NY 10019
Liberty Media Corporation........ 9,154,930 47.3 -- -- 2.8
9197 South Peoria Street
Englewood, CO 80112
National Interfaith Cable
Coalition, Inc. .............. 6,338,028 32.8 -- -- 1.9
810 12th Avenue South
Nashville, TN 37203
Chase Equity Associates, L.P. ... 3,836,620 19.8 -- -- 1.2
380 Madison Avenue
New York, NY 10017
DIRECTORS AND OFFICERS:
Robert A. Halmi, Jr. ............ -- -- -- -- --
Arnold L. Chavkin(1)............. 3,836,620 19.8 -- -- 1.2
Wilford V. Bane, Jr. ............ -- -- -- -- --
Robert J. Druten................. -- -- -- -- --
William M. Haber................. -- -- -- -- --
Donald J. Hall, Jr. ............. -- -- -- -- --
Irvine O. Hockaday, Jr. ......... -- -- -- -- --
David B. Koff.................... -- -- -- -- --
Peter A. Lund.................... -- -- -- -- --
John P. Mascotte................. -- -- -- -- --
David J. Evans................... -- -- -- -- --
Russel H. Givens, Jr. ........... -- -- -- -- --
Andrew P. Brilliant.............. -- -- -- -- --
William J. Aliber................ -- -- -- -- --
Mark N. Grenside................. -- -- -- -- --
All directors and executive
officers as a group (15
persons)...................... 3,836,620 19.8 -- -- 1.2
</TABLE>
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<PAGE> 88
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
AFTER THE OFFERING
-------------------------------------
CLASS A CLASS B % TOTAL
COMMON COMMON VOTING
STOCK STOCK POWER
---------------- ------------------ -------
5% STOCKHOLDERS: SHARES % SHARES %
<S> <C> <C> <C> <C> <C>
Hallmark Entertainment, Inc. ........... -- -- 30,670,422 100.0 91.3
1325 Avenue of the Americas
New York, NY 10019
Liberty Media Corporation............... 9,154,930 31.2 -- -- 2.7
9197 South Peoria Street
Englewood, CO 80112
National Interfaith Cable Coalition,
Inc. ................................ 6,338,028 21.6 -- -- 1.9
810 12th Avenue South
Nashville, TN 37203
Chase Equity Associates, L.P. .......... 3,836,620 13.1 -- -- 1.1
380 Madison Avenue
New York, NY 10017
DIRECTORS AND OFFICERS:
Robert A. Halmi, Jr. ................... -- -- -- -- --
Arnold L. Chavkin(1).................... 3,836,620 13.1 -- -- 1.1
Wilford V. Bane, Jr. ................... -- -- -- -- --
Robert J. Druten........................ -- -- -- -- --
William M. Haber........................ -- -- -- -- --
Donald J. Hall, Jr. .................... -- -- -- -- --
Irvine O. Hockaday, Jr. ................ -- -- -- -- --
David B. Koff........................... -- -- -- -- --
Peter A. Lund........................... -- -- -- -- --
John P. Mascotte........................ -- -- -- -- --
David J. Evans(2)....................... 325,899 * -- -- *
Russel H. Givens, Jr.(3)................ 48,884 * -- -- *
Andrew P. Brilliant(4).................. 48,884 * -- -- *
William J. Aliber(5).................... -- -- -- -- --
Mark N. Grenside(6)..................... 16,294 * -- -- *
All directors and executive officers as
a group (15 persons)................. 4,276,581 14.6 -- -- 1.3
</TABLE>
- ------------------------------
* The percentage of shares or voting power beneficially owned does not exceed
1% of the class.
(1) 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,
except to the extent of his pecuniary interest therein.
(2) Consists of stock options to acquire 325,899 shares of Class A common stock
that are vested or will vest within 60 days. Does not include unvested stock
options to acquire 601,742 shares of Class A common stock.
(3) Consists of stock options to acquire 48,884 shares of Class A common stock
that are vested or will vest within 60 days. Does not include unvested stock
options to acquire 179,637 shares of Class A common stock.
(4) Consists of stock options to acquire 48,884 shares of Class A common stock
that are vested or will vest within 60 days. Does not include unvested stock
options to acquire 154,637 shares of Class A common stock.
(5) Does not include unvested stock options to acquire 100,000 shares of Class A
common stock.
(6) Consists of stock options to acquire 16,294 shares of Class A common stock
that are vested or will vest within 60 days. Does not include unvested stock
options to acquire 68,213 shares of Class A common stock.
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<PAGE> 89
DESCRIPTION OF CAPITAL STOCK
The following summary description of provisions in our amended and restated
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.
GENERAL
We filed our original certificate of incorporation on December 15, 1999.
Our amended and restated certificate of incorporation and bylaws will become
effective upon the closing of this offering. Under Article III of our
certificate of incorporation, our purpose is to engage in any lawful act or
activity for which corporations may be organized and incorporated under the
Delaware General Corporation Law. In accordance with Delaware General
Corporation Law and except as described below, provisions in our certificate of
incorporation regarding capitalization and stockholder rights may be amended
only with the approval of our board of directors and of a majority of each class
of our stock outstanding entitled to vote on these amendments, except that the
number of authorized shares of any class or classes of stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
vote of the majority of voting power of our stock outstanding entitled to vote.
Our authorized capital stock consists of 150,000,000 shares of Class A
common stock, par value $0.01 per share and 120,000,000 shares of Class B common
stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par
value $0.01 per share. Assuming completion of the reorganization, we will have
19,329,578 shares of Class A common stock and 30,670,422 shares of Class B
common stock and no shares of preferred stock outstanding. After this offering,
there will be an additional 10,000,000 shares of Class A common stock
outstanding.
Prior to this offering, you could not buy or sell our Class A common stock
publicly. The market price of our Class A common stock after this offering may
vary from the initial public offering price and 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.
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
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<PAGE> 90
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 of Hallmark Cards 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.
PREFERRED STOCK
Our certificate of incorporation authorizes 10,000,000 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.
CORPORATE OPPORTUNITIES
Our certificate of incorporation provides that Hallmark Cards will have no
duty to refrain from engaging in activities or lines of business that are the
same as or similar to the activities or lines of business in which we engage,
and neither Hallmark Cards nor any officer or director of Hallmark Cards, except
as provided below, will be liable to us or to our stockholders for breach of any
fiduciary duty by
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<PAGE> 91
reason of any such activities of Hallmark Cards. In the event that Hallmark
Cards acquires knowledge of a potential transaction or matter which may be a
corporate opportunity for both Hallmark Cards and us, Hallmark Cards will have
no duty to communicate or offer that corporate opportunity to us and will not be
liable to us or our stockholders for breach of any fiduciary duty as a
stockholder by reason of the fact that Hallmark Cards pursues or acquires that
corporate opportunity for itself, directs that corporate opportunity to another
person, or does not communicate information regarding that corporate opportunity
to us.
In the event that one of our directors or officers who is also a director
or officer of Hallmark Cards acquires knowledge of a potential transaction or
matter which may be a corporate opportunity for both us and Hallmark Cards, that
director or officer will have fully satisfied his or her fiduciary duty to us
and our stockholders with respect to that corporate opportunity if that director
or officer acts in a manner consistent with the following policy:
- a corporate opportunity offered to any person who is one of our officers,
and who is also a director but not an officer of Hallmark Cards, will
belong to us;
- a corporate opportunity offered to any person who is one of our directors
but not one of our officers, and who is also a director or officer of
Hallmark Cards, will belong to us if that opportunity is expressly
offered to that person in his or her capacity as one of our directors,
and otherwise will belong to Hallmark Cards; and
- a corporate opportunity offered to any person who is one of our officers
and an officer of Hallmark Cards will belong to us if that opportunity is
expressly offered to that person in his or her capacity as one of our
officers, and otherwise will belong to Hallmark Cards.
For purposes of the policy:
- a director who is our Chairman of the Board of Directors or Chairman of a
committee of the Board of Directors will not be deemed to be one of our
officers by reason of holding that position, unless that person is one of
our full-time employees;
- references to us shall mean us and all corporations, partnerships, joint
ventures, associations and other entities in which we beneficially own,
directly or indirectly, 50% or more of the outstanding voting stock,
voting power, partnership interests or similar voting interests; and
- the term "Hallmark Cards" shall mean Hallmark Cards and all corporations,
partnerships, joint ventures, associations and other entities, other than
us, as we are defined in this paragraph, in which Hallmark Cards
beneficially owns, directly or indirectly, 50% or more of the outstanding
voting stock, voting power, partnership interests or similar voting
interests.
The foregoing provisions of our certificate of incorporation will expire on
the date that Hallmark Cards ceases to own beneficially common stock
representing at least 20% of the total voting power of all of our classes of
outstanding capital stock and no person who is one of our directors or officers
is also a director or officer of Hallmark Cards or any of its subsidiaries.
Any person purchasing or otherwise acquiring Class A common stock will be
deemed to have notice of, and to have consented to, the foregoing provisions of
our certificate of incorporation.
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
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<PAGE> 92
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 more than 90% 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.
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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<PAGE> 93
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
29,329,578 shares of Class A common stock outstanding, of which the 10,000,000
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 30,670,422 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, 293,295 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, Hallmark Entertainment, Inc. will own
30,670,422 shares of Class B common stock, Liberty Media will own 9,154,930
shares of Class A common stock, the National Interfaith Cable Coalition will own
6,338,028 shares of Class A common stock and Chase Equity Associates will own
3,836,620 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 signed 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> 94
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.
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<PAGE> 95
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.
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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.
89
<PAGE> 97
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 our Class A 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............................................ 10,000,000
===========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of Class A 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 Class A 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 Class A 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
Class A 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.
We have 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 1,500,000 additional shares of Class A 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 Class A 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 $3.3 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.
90
<PAGE> 98
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 our prior written consent and 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 except for a registration statement on Form S-8. 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
Class A common stock. The initial public offering price for the shares of Class
A 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 to have our Class A common stock approved for quotation 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 Class A common
stock offered by this prospectus in any jurisdiction where action for that
purpose is required. The shares of Class A 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 Class A 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 Class A 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 Class A 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 Class A
common stock in the open market to cover the syndicate short position or to
stabilize the price of our Class A common stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members if the
syndicate repurchases previously distributed shares of our Class A common stock
in syndicate covering transactions,
91
<PAGE> 99
in stabilization transactions or in other transactions. Any of these activities
may stabilize or maintain the market price of our Class A common stock above
independent market levels. The underwriters may engage in these activities
through the Nasdaq National Market. The underwriters are not required to engage
in these activities, and may end any of these activities at any time, and in any
event will discontinue these activities no later than 30 days after the closing
of this offering.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed 5% of the total number of shares of Class A
common stock offered by them.
The underwriters, at our request, have reserved for sale at the initial
public offering price up to 8% of the shares of Class A common stock to be sold
in this offering for sale to our employees, directors and other persons we
designate, including Hallmark Cards. 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.
In June 1999, we retained Donaldson, Lufkin & Jenrette Securities
Corporation to provide us certain financial advisory services and paid them a
$100,000 fee for these services.
LEGAL MATTERS
Certain legal matters will be passed upon for us by Wachtell, Lipton, Rosen
& Katz, New York, New York, Judith C. Whittaker, Esq., Vice President and
General Counsel of Hallmark Cards, Charles Stanford, Esq., Senior Vice
President -- Legal and Business Affairs of Crown Media and Harriet Beck, Esq.,
Los Angeles, California, 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. The description of each contract or document
contained in this prospectus is qualified in its entirety by reference to the
copy of such contract or document filed as an exhibit to the registration
statement. 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.
92
<PAGE> 100
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.
93
<PAGE> 101
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
Report of Independent Public Accountants.................. F-3
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-23
Consolidated Balance Sheets as of December 31, 1998 and
1999................................................... F-24
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999....................... F-26
Consolidated Statements of Members' Equity (Deficit) for
the years ended December 31, 1997, 1998 and 1999....... F-27
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999....................... F-28
Notes to Consolidated Financial Statements................ F-29
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> 102
(This page intentionally left blank)
F-2
<PAGE> 103
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-3
<PAGE> 104
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> 105
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
<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> 106
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> 107
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> 108
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> 109
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> 110
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> 111
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 programming distribution expenses and amortization
of program license fees, subtitling and dubbing.
F-11
<PAGE> 112
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.
TRANSLATION OF FOREIGN CURRENCY
The balance sheets and statements of operations of Crown Media's foreign
subsidiaries are measured using local currency as the functional currency.
Revenues and expenses of such subsidiaries are translated into U.S. dollars at
the average exchange rates prevailing during the period. Assets and liabilities
are translated at the rates of exchange at the balance sheet date. Translation
gains and losses are deferred as a component of stockholders' equity. Aggregate
foreign currency transaction gains and losses are included in determining net
income.
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. Translation adjustments for the years ended December
31, 1997, 1998 and 1999 were $9,489, $37,304 and $(6,846), respectively. There
are no other comprehensive income items for the years presented.
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 years ended December 31, 1997,
1998 and 1999.
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. Investments in private companies and
partnerships are recorded at fair value as of the date of investment. Crown
Media periodically reviews the projected undiscounted cash flows related to its
investments. If a review indicates that the carrying value of an asset is not
recoverable, the carrying value is reduced to its estimated fair value.
F-12
<PAGE> 113
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 services to the Kermit Channel in exchange for a fee
as provided in an agreement between Crown Media and the Kermit Channel. This
fee, which was approximately $1.5 million and $2.5 million for the years ended
December 31, 1998 and 1999, respectively, includes direct and indirect
F-13
<PAGE> 114
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
costs incurred on behalf of the Kermit Channels, as provided by the agreements.
Additionally, Hallmark Entertainment Distribution provides programming to the
Kermit Channel in exchange for a fee through a license agreement.
Effective December 1998, HHPLA discontinued all operations and committed to
a plan of dissolution. HHPLA 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.
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, L.P. ("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
F-14
<PAGE> 115
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 Hallmark
Entertainment 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. Unreimbursed costs of
F-15
<PAGE> 116
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$9.2 million are included in payable to Hallmark Entertainment in the
accompanying consolidated balance sheets as of December 31, 1998 and 1999.
NOTE RECEIVABLE -- HALLMARK ENTERTAINMENT
During 1998, Crown Media invested $25 million of the proceeds from the
issuance of Class B common stock to Chase, as described in note (6), in a note
receivable from Hallmark Entertainment. The interest rate on this note is 7%,
and payment of the outstanding principal and interest is due on demand. Included
in the demand note and interest receivables from affiliate in the accompanying
December 31, 1998 and 1999 consolidated balance sheets is principal of $25.0
million and $0, respectively. 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.
PROGRAM LICENSE AGREEMENT WITH HALLMARK ENTERTAINMENT DISTRIBUTION
The primary supplier of programming to Crown Media is Hallmark
Entertainment Distribution. Crown Media has a program agreement with Hallmark
Entertainment Distribution through December 31, 2004, which is renewable through
December 31, 2009 at Hallmark Entertainment Distribution's option. Under the
terms of the agreement, Crown Media has the exclusive right to exhibit Hallmark
Entertainment Distribution's programming in the territories in which Crown Media
operates during three distinct 18-month time periods. Crown Media also has the
exclusive right to exhibit programming in markets where it does not currently
operate, subject to any third party agreement existing at the time Crown Media
launches in those markets. In addition, under the agreement, Hallmark
Entertainment Distribution is generally obligated to sell to Crown Media and
Crown Media is obligated to purchase all of the programming it produces during
the term of the agreement.
Programming costs related to the program agreement were $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
borne by Hallmark Entertainment or 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.
F-16
<PAGE> 117
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 has established 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> 118
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> 119
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 (which was paid on
January 18, 2000), $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> 120
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All of Crown Media's material operations are part of the international pay
television programming service industry and therefore Crown Media reports as a
single industry segment. Crown Media does not have operating decision authority
through its minority investments in the Kermit Channel (note 4) and Odyssey
Holdings (note 5). Consequently, selected operating and asset data of the Kermit
Channel and Odyssey Holdings are not included in the following table.
Foreign operations 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>
F-20
<PAGE> 121
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The countries in the Asia Pacific region and Latin America region have
experienced illiquidity, volatile currency exchange rates and interest rates,
and reduced economic activity. Crown Media will be affected in the foreseeable
future by economic conditions in these regions, although it is not possible to
predict the extent of such impact.
No customer accounted for more than 10% of Crown Media's revenue for the
year ended December 31, 1999.
14. SUBSEQUENT EVENTS
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.
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.
F-21
<PAGE> 122
(This page intentionally left blank)
F-22
<PAGE> 123
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-23
<PAGE> 124
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
Other current assets...................................... 46,395 176,707
------------ ------------
Total current assets............................. 55,328,444 46,286,769
------------ ------------
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............................ -- 25,610,000
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-24
<PAGE> 125
ODYSSEY HOLDINGS, L.L.C. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
<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-25
<PAGE> 126
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 9,333,089
Other.............................................. 230,755 126,147 706,318
----------- ----------- ------------
Total revenues............................ 15,253,653 18,140,950 17,883,410
----------- ----------- ------------
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 22,000,685
----------- ----------- ------------
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-26
<PAGE> 127
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-27
<PAGE> 128
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-28
<PAGE> 129
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 51% and 49%, respectively, of the membership interests in
F&V. In November 1996, F&V formed a wholly-owned subsidiary, Odyssey
Productions, Ltd., to produce a number of its television programs. During 1997,
F&V changed its name to Odyssey Holdings, L.L.C. ("Odyssey Holdings").
On November 13, 1998, Odyssey Holdings entered into an amended and restated
operating agreement (the "Company Agreement") with its members. The Company
Agreement provided for the admittance of Henson Cable Networks, Inc. ("HCN"), a
wholly owned subsidiary of The Jim Henson Company, Inc. ("The Jim Henson
Company"), and Crown Media, Inc. ("Crown Media"), through a wholly owned
subsidiary. Under the terms of the Company Agreement, HCN and Crown Media each
agreed to pay $50.0 million, payable in installments, for a 22.5% common equity
interest in Odyssey Holdings. As a result of these transactions, the common
equity interest for VISN Management Corp., VGI, The Jim Henson Company and Crown
Media (collectively the "Members") 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 primarily to 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-29
<PAGE> 130
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-30
<PAGE> 131
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-31
<PAGE> 132
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-32
<PAGE> 133
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-33
<PAGE> 134
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 of 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.
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.
F-34
<PAGE> 135
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-35
<PAGE> 136
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, which Odyssey Holdings accounts for as an operating lease, minimum
lease payments of $192,500 per month are required. 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, respectively. 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-36
<PAGE> 137
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
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. Under the contemplated
reorganization and initial public offering, Odyssey Holdings anticipates that
the Senior Credit Facility (see Note 4) will be terminated.
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 their
respective 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.
F-37
<PAGE> 138
The map on the adjacent page shows the locations of the satellites and
up-link and down-link facilities that we use to transmit our channels. The
artwork on the adjacent page depicts frames from motion pictures and mini-series
that we have licensed and aired on our channels, as well as a satellite and
up-link facility representative of those we use to transmit our channels. We do
not produce or own these motion pictures or mini-series, nor are the actors
shown our employees. We also do not own any satellites or up-link or down-link
facilities other than the Denver NOC.
<PAGE> 139
================================================================================
, 2000
[CROWN MEDIA LOGO]
10,000,000 SHARES OF CLASS A COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
LEHMAN BROTHERS
SALOMON SMITH BARNEY
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 in this offering or when
selling previously unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE> 140
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
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving expenses............................. 500,000
Legal fees and expenses..................................... 1,500,000
Accounting fees and expenses................................ 1,000,000
Blue sky fees and expenses (including legal fees)........... 3,500
Transfer agent and registrar fees and expenses.............. 25,000
Miscellaneous............................................... 71,350
----------
Total............................................ $3,300,000
==========
</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
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<PAGE> 141
indemnification shall be made in respect to any claim, issue or matter as
to which such person shall 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.P. 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) 30,670,422
shares of its Class B Common Stock to Hallmark Entertainment, Inc. in exchange
for all the shares of common stock of Crown Media, Inc. held by Hallmark
Entertainment, Inc.; (2) 3,836,620 shares of its Class A Common Stock to Chase
Equity Associates, L.P. in exchange for all the shares of common stock of Crown
Media, Inc. held by Chase
II-2
<PAGE> 142
Equity Associates, L.P., which, together with the Crown Media, Inc. common stock
being exchanged by Hallmark Entertainment, Inc., represent all of the issued and
outstanding shares of Crown Media, Inc. common stock; (3) 9,154,930 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)
6,338,028 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
<C> <S>
1.1 -- Form of Underwriting Agreement.
2.1 -- 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.P. and
Crown Media Holdings, Inc.++
3.1 -- Form of Registrant's Amended and Restated Certificate of
Incorporation.+++
3.2 -- Form of Registrant's Amended and Restated By-Laws.++++
4.1 -- Form of Specimen Certificate for Registrant's Class A
Common Stock.++
5.1 -- Form of Opinion of Wachtell, Lipton, Rosen & Katz.++++
10.1 -- Form of Stockholders' Agreement.++
10.2 -- Securities Purchase Agreement, dated as of May 29, 1998,
by and among Hallmark Entertainment Network, Inc.,
Hallmark Entertainment Distribution Company, Hallmark
Entertainment, Inc., and Chase Equity Associates, L.P.++
10.3 -- Securities Purchase Agreement, dated as of February 18,
1999, by and among Hallmark Entertainment Network, Inc.,
Hallmark Entertainment Distribution Company, Hallmark
Entertainment, Inc., and Chase Equity Associates, L.P.++
10.4 -- Securities Purchase Agreement, dated as of June 17, 1999,
by and among Hallmark Entertainment Network, Inc.,
Hallmark Entertainment Distribution Company, Hallmark
Entertainment, Inc., and Chase Equity Associates, L.P.++
10.5 -- Securities Purchase Agreement, dated as of February 15,
2000, by and among Crown Media, Inc., Hallmark
Entertainment, Inc., and Chase Equity Associates, L.P.++
10.6 -- Program License Agreement, dated as of July 1, 1999,
between Hallmark Entertainment Distribution, LLC,
successor to Hallmark Entertainment Distribution Company
and Hallmark Entertainment Networks, Inc.++
10.7 -- Form of Tax Sharing Agreement.++
10.8 -- Amended and Restated Trademark License Agreement, dated
as of January 26, 2000, by and between Hallmark Cards,
Incorporated and Hallmark Entertainment Networks, Inc.++
10.9 -- Amended and Restated Trademark License Agreement (UK),
dated as of January 1, 2000, by and between Hallmark
Cards, Inc. and Hallmark Entertainment Networks (UK)
Limited.++
</TABLE>
II-3
<PAGE> 143
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
<C> <S>
10.10 -- Security Agreement, dated as of August 1, 1999, by and
between Hallmark Entertainment Networks, Inc. and
Hallmark Cards, Inc.++
10.11 -- Amended and Restated Company Agreement of Odyssey
Holdings, L.L.C.++
10.12 -- Amended and Restated Intercompany Services Agreement,
dated as of January 1, 2000, between Crown Media
Holdings, Inc. and Hallmark Cards, Incorporated.++
10.13 -- Hallmark Entertainment Networks, Inc. Share Appreciation
Rights Plan.++
10.14 -- Crown Media Holdings, Inc. 2000 Long Term Incentive
Plan.+++
10.15 -- Program License Agreement, dated as of November 13, 1998,
between Hallmark Entertainment Distribution Company and
Odyssey Holdings, L.L.C.++
10.16 -- Program License Agreement, dated as of November 13, 1998,
between The Jim Henson Company, Inc. and Odyssey
Holdings, L.L.C.++
10.17 -- Program License Agreement, dated as of November 13, 1998,
between National Interfaith Cable Coalition, Inc. and
Odyssey Holdings, L.L.C.++
10.18 -- Trademark Sublicense Agreement, dated as of May 12, 1998,
by and between Hallmark Entertainment Networks, Inc. and
H&H Programming - Asia, LLC.++
10.19 -- Program License Agreement, dated as of May 12, 1998,
between Hallmark Entertainment Distribution Company and
H&H Programming - Asia, LLC.++
10.20 -- Lease, dated as of June 1, 1998, by and between High
Pointe I Development Group L.L.C. and Hallmark
Entertainment Network, Inc.++
10.21 -- First Amendment to Lease, dated as of March 23, 1999, by
and between High Pointe Development Group L.L.C. and
Hallmark Entertainment Network, Inc.++
10.22 -- Second Amendment to Lease, dated as of August 17, 1999,
by and between High Pointe I Development Group L.L.C. and
Hallmark Entertainment Networks, Inc.++
10.23 -- Guaranty of Lease Obligations, dated June 1, 1998, by
Hallmark Entertainment, Inc. for High Pointe I
Development Group L.L.C.++
10.24 -- Employment Agreement, dated as of March 1, 1999, between
Hallmark Entertainment Networks, Inc, and David Evans.++
10.25 -- 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.++
10.26 -- 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.++
10.27 -- Employment Agreement, dated as of November 28, 1998,
between Hallmark Entertainment Networks, Inc. and Jeffrey
J. Johnson.++
10.28 -- Employment Agreement, dated as of January 1, 1999,
between Hallmark Entertainment Networks (UK) Limited and
Mark Grenside.++
10.29 -- Separation Agreement, dated January 28, 1999, between
Hallmark Entertainment Networks and George Stein.++
10.30 -- $20,000,000 Promissory Note, dated November 19, 1999, of
Crown Media, Inc. to HC Crown Corporation.++
10.31 -- $10,000,000 Promissory Note, dated February 23, 2000, of
Crown Media, Inc. to HC Crown Corporation.++
10.32 -- Amendment to $10,000,000 Promissory Note, dated April 14,
2000, between Crown Media, Inc. and HC Crown Corporation.
21.1 -- Subsidiaries.+++
</TABLE>
II-4
<PAGE> 144
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
<C> <S>
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.+
99.1 -- Consent of Wilford V. Bane, Jr.+++
99.2 -- Consent of Arnold L. Chavkin.+++
99.3 -- Consent of Donald J. Hall, Jr.++
99.4 -- Consent of David B. Koff.+++
99.5 -- Consent of John P. Mascotte.++
99.6 -- Consent of William Haber.+++
99.7 -- Consent of Peter A. Lund.+++
</TABLE>
- ------------------------------
+ Previously filed as an exhibit to the initial Registration Statement.
++ Previously filed as an exhibit to Amendment No. 1 to the Registration
Statement.
+++ Previously filed as an exhibit to Amendment No. 2 to the Registration
Statement.
++++ Previously filed as an exhibit to Amendment No. 3 to the Registration
Statement.
(B) Financial Statement Schedules
Auditors' Report on Crown Media, Inc.'s Schedule
Crown Media, Inc.'s Schedule II -- Valuation and Qualifying Accounts
Auditors' Report on Odyssey Holdings, L.L.C.'s Schedule
Odyssey Holdings, L.L.C.'s Schedule II -- Valuation and Qualifying Accounts
All schedules not identified above have been omitted because they are not
required, are not applicable or the information is included in the financial
statements or the notes thereto.
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.
(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
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<PAGE> 145
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-6
<PAGE> 146
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 5 to 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 1st day of May 2000.
CROWN MEDIA HOLDINGS, INC.
By: /s/ William J. Aliber
------------------------------------
Name: William J. Aliber
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 5 to Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<C> <S>
* Chairman of the Board
- -----------------------------------------------------
Robert A. Halmi, Jr.
* 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
* Director
- -----------------------------------------------------
Irvine O. Hockaday, Jr.
* Director
- -----------------------------------------------------
Robert J. Druten
/s/ William J. Aliber As attorney-in-fact for the officers and/or
- ----------------------------------------------------- directors marked by an asterisk.
William J. Aliber
</TABLE>
May 1, 2000
II-7
<PAGE> 147
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Crown Media, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Crown Media, Inc. and its subsidiaries
as of December 31, 1998 and 1999, and for the years ended December 31, 1997,
1998 and 1999 included in this Registration Statement, and have issued our
report thereon dated January 18, 2000. Our audits were made for the purpose of
forming an opinion on these financial statements taken as a whole. The
supplemental schedule included in this Registration Statement is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the financial statements. The schedule has been subjected to the auditing
procedures applied in the audits of these financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to these financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Denver, Colorado
January 18, 2000
S-1
<PAGE> 148
CROWN MEDIA, INC. AND ITS SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------------------------------------------------------------------------------------------
ADDITIONS
------------------------
(2)
(1) CHARGED TO
BALANCE AT CHARGED TO OTHER WRITE-OFF
BEGINNING COSTS AND ACCOUNTS -- OF ACCOUNTS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DESCRIBE RECEIVABLE END OF PERIOD
----------- ---------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
1999......................................... $70,877 $672,306 $-- $47,774 $695,409
1998......................................... 48,706 38,160 -- 15,989 70,877
1997......................................... -- 143,978 -- 95,272 48,706
</TABLE>
S-2
<PAGE> 149
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of Odyssey Holdings, L.L.C.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Odyssey Holdings, L.L.C. and its
subsidiaries as of December 31, 1998 and 1999, and for the years ended December
31, 1997, 1998 and 1999 included in this Registration Statement, and have issued
our report thereon dated January 12, 2000. Our audits were made for the purpose
of forming an opinion on these financial statements taken as a whole. The
supplemental schedule included in this Registration Statement is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the financial statements. The schedule has been subjected to the auditing
procedures applied in the audits of these financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to these financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Los Angeles, California
January 12, 2000
S-3
<PAGE> 150
ODYSSEY HOLDINGS, LLC AND ITS SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------------------------------------------------------------------------------------
ADDITIONS
------------------------
(2)
(1) CHARGED TO
BALANCE AT CHARGED TO OTHER WRITE-OFF
BEGINNING COSTS AND ACCOUNTS -- OF ACCOUNTS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES REVENUE RECEIVABLE END OF PERIOD
----------- ---------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
1999........................................ $183,379 $655,863 $ -- $102,642 $ 736,600
1998........................................ 27,000 203,956 -- 47,577 183,379
1997........................................ 24,000 8,000 -- 5,000 27,000
Advertising deficiency reserve
1999........................................ $ -- $ -- $1,800,000 $ -- $1,800,000
1998........................................ -- -- -- -- --
1997........................................ -- -- -- -- --
</TABLE>
S-4
<PAGE> 151
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT TITLE
<C> <S>
1.1 -- Form of Underwriting Agreement.
2.1 -- 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.P. and
Crown Media Holdings, Inc.++
3.1 -- Form of Registrant's Amended and Restated Certificate of
Incorporation.+++
3.2 -- Form of Registrant's Amended and Restated By-Laws.++++
4.1 -- Form of Specimen Certificate for Registrant's Class A
Common Stock.++
5.1 -- Form of Opinion of Wachtell, Lipton, Rosen & Katz.++++
10.1 -- Form of Stockholders' Agreement.++
10.2 -- Securities Purchase Agreement, dated as of May 29, 1998,
by and among Hallmark Entertainment Network, Inc.,
Hallmark Entertainment Distribution Company, Hallmark
Entertainment, Inc., and Chase Equity Associates, L.P.++
10.3 -- Securities Purchase Agreement, dated as of February 18,
1999, by and among Hallmark Entertainment Network, Inc.,
Hallmark Entertainment Distribution Company, Hallmark
Entertainment, Inc., and Chase Equity Associates, L.P.++
10.4 -- Securities Purchase Agreement, dated as of June 17, 1999,
by and among Hallmark Entertainment Network, Inc.,
Hallmark Entertainment Distribution Company, Hallmark
Entertainment, Inc., and Chase Equity Associates, L.P.++
10.5 -- Securities Purchase Agreement, dated as of February 15,
2000, by and among Crown Media, Inc., Hallmark
Entertainment, Inc., and Chase Equity Associates, L.P.++
10.6 -- Program License Agreement, dated as of July 1, 1999,
between Hallmark Entertainment Distribution, LLC,
successor to Hallmark Entertainment Distribution Company
and Hallmark Entertainment Networks, Inc.++
10.7 -- Form of Tax Sharing Agreement.++
10.8 -- Amended and Restated Trademark License Agreement, dated
as of January 26, 2000, by and between Hallmark Cards,
Incorporated and Hallmark Entertainment Networks, Inc.++
10.9 -- Amended and Restated Trademark License Agreement (UK),
dated as of January 1, 2000, by and between Hallmark
Cards, Inc. and Hallmark Entertainment Networks (UK)
Limited++
10.10 -- Security Agreement, dated as of August 1, 1999, by and
between Hallmark Entertainment Networks, Inc. and
Hallmark Cards, Inc.++
10.11 -- Amended and Restated Company Agreement of Odyssey
Holdings, L.L.C.++
10.12 -- Amended and Restated Intercompany Services Agreement,
dated as of January 1, 2000, between Crown Media
Holdings, Inc. and Hallmark Cards, Incorporated.++
10.13 -- Hallmark Entertainment Networks, Inc. Share Appreciation
Rights Plan.++
10.14 -- Crown Media Holdings, Inc. 2000 Long Term Incentive
Plan.+++
10.15 -- Program License Agreement, dated as of November 13, 1998,
between Hallmark Entertainment Distribution Company and
Odyssey Holdings, L.L.C.++
</TABLE>
<PAGE> 152
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT TITLE
<C> <S>
10.16 -- Program License Agreement, dated as of November 13, 1998,
between The Jim Henson Company, Inc. and Odyssey
Holdings, L.L.C. ++
10.17 -- Program License Agreement, dated as of November 13, 1998,
between National Interfaith Cable Coalition, Inc. and
Odyssey Holdings, L.L.C. ++
10.18 -- Trademark Sublicense Agreement, dated as of May 12, 1998,
by and between Hallmark Entertainment Networks, Inc. and
H&H Programming - Asia, LLC. ++
10.19 -- Program License Agreement, dated as of May 12, 1998,
between Hallmark Entertainment Distribution Company and
H&H Programming - Asia, LLC. ++
10.20 -- Lease, dated as of June 1, 1998, by and between High
Pointe I Development Group L.L.C. and Hallmark
Entertainment Network, Inc. ++
10.21 -- First Amendment to Lease, dated as of March 23, 1999, by
and between High Pointe Development Group L.L.C. and
Hallmark Entertainment Network, Inc. ++
10.22 -- Second Amendment to Lease, dated as of August 17, 1999,
by and between High Pointe I Development Group L.L.C. and
Hallmark Entertainment Networks, Inc. ++
10.23 -- Guaranty of Lease Obligations, dated June 1, 1998, by
Hallmark Entertainment, Inc. for High Pointe I
Development Group L.L.C. ++
10.24 -- Employment Agreement, dated as of March 1, 1999, between
Hallmark Entertainment Networks, Inc, and David Evans. ++
10.25 -- 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. ++
10.26 -- 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. ++
10.27 -- Employment Agreement, dated as of November 28, 1998,
between Hallmark Entertainment Networks, Inc. and Jeffrey
J. Johnson. ++
10.28 -- Employment Agreement, dated as of January 1, 1999,
between Hallmark Entertainment Networks (UK) Limited and
Mark Grenside. ++
10.29 -- Separation Agreement, dated January 28, 1999, between
Hallmark Entertainment Networks and George Stein. ++
10.30 -- $20,000,000 Promissory Note, dated November 19, 1999, of
Crown Media, Inc. to HC Crown Corporation. ++
10.31 -- $10,000,000 Promissory Note, dated February 23, 2000, of
Crown Media, Inc. to HC Crown Corporation. ++
10.32 -- Amendment to $10,000,000 Promissory Note, dated April 14,
2000, between Crown Media, Inc. and HC Crown Corporation.
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).
</TABLE>
<PAGE> 153
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT TITLE
<C> <S>
27.1 -- Financial Data Schedule.+
99.1 -- Consent of Wilford V. Bane, Jr.+++
99.2 -- Consent of Arnold L. Chavkin.+++
99.3 -- Consent of Donald J. Hall, Jr.++
99.4 -- Consent of David B. Koff.+++
99.5 -- Consent of John P. Mascotte.++
99.6 -- Consent of William Haber.+++
99.7 -- Consent of Peter A. Lund.+++
</TABLE>
- ------------------------------
+ Previously filed as an exhibit to the initial Registration Statement.
++ Previously filed as an exhibit to Amendment No. 1 to the Registration
Statement.
+++ Previously filed as an exhibit to Amendment No. 2 to the Registration
Statement.
++++ Previously filed as an exhibit to Amendment No. 3 to the Registration
Statement.
<PAGE> 1
EXHIBIT 1.1
10,000,000 Shares
CROWN MEDIA HOLDINGS, INC.
Class A Common Stock
UNDERWRITING AGREEMENT
May __, 2000
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEHMAN BROTHERS INC.
SALOMON SMITH BARNEY INC.
DLJDIRECT INC.
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
Crown Media Holdings, Inc., a Delaware corporation (the "COMPANY"),
proposes to issue and sell 10,000,000 shares of its Class A Common Stock, par
value $.01 per share (the "FIRM SHARES") to the several underwriters named in
Schedule I hereto (the "UNDERWRITERS"). Donaldson, Lufkin & Jenrette Securities
Corporation, Lehman Brothers Inc., Salomon Smith Barney Inc. and DLJDirect Inc.
shall act as representatives (the "REPRESENTATIVES") of the several
Underwriters.
The Company also proposes to issue and sell not more than an additional
1,500,000 shares of its Class A Common Stock, par value $.01 per share (the
"ADDITIONAL SHARES") if requested by the Underwriters as provided in Section 2
hereof. The Firm Shares and the Additional Shares are hereinafter referred to
collectively as the "SHARES." The shares of all classes of common stock of the
Company to be outstanding after giving effect to the sales contemplated hereby
are hereinafter referred to as the "COMMON STOCK."
Section 1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"COMMISSION") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "ACT"), a registration statement on Form S-1, including a
prospectus, relating to the Shares.
The registration statement, as amended at the time it became effective,
including the information (if any) deemed to be part of the registration
statement at the
<PAGE> 2
time of effectiveness pursuant to Rule 430A under the Act, is hereinafter
referred to as the "REGISTRATION STATEMENT;" and the prospectus in the form
first used to confirm sales of Shares is hereinafter referred to as the
"PROSPECTUS." If the Company has filed or is required pursuant to the terms
hereof to file a registration statement pursuant to Rule 462(b) under the Act
registering additional shares of Common Stock (a "RULE 462(B) REGISTRATION
STATEMENT"), then, unless otherwise specified, any reference herein to the term
"REGISTRATION STATEMENT" shall be deemed to include such Rule 462(b)
Registration Statement.
Section 2. Agreements to Sell and Purchase and Lock-Up Agreements . On
the basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, the Company agrees to issue and sell, and
each Underwriter agrees, severally and not jointly, to purchase from the
Company, at a price per Share of $ (the "PURCHASE PRICE") the number of Firm
Shares (subject to such adjustments to eliminate fractional shares as you may
determine) set forth opposite the name of such Underwriter in Schedule I hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell to the Underwriters the Additional Shares and the Underwriters shall
have the right to purchase, severally and not jointly, up to 1,500,000
Additional Shares from the Company at the Purchase Price. Additional Shares may
be purchased solely for the purpose of covering over-allotments made in
connection with the offering of the Firm Shares. The Underwriters may exercise
their right to purchase Additional Shares in whole or in part from time to time
by giving written notice thereof to the Company within 30 days after the date of
this Agreement. You shall give any such notice on behalf of the Underwriters and
such notice shall specify the aggregate number of Additional Shares to be
purchased pursuant to such exercise and the date for payment and delivery
thereof, which date shall be a business day (i) no earlier than two business
days after such notice has been given (and, in any event, no earlier than the
Closing Date (as hereinafter defined)) and (ii) no later than ten business days
after such notice has been given. If any Additional Shares are to be purchased,
each Underwriter, severally and not jointly, agrees to purchase from the Company
the number of Additional Shares (subject to such adjustments to eliminate
fractional shares as you may determine) which bears the same proportion to the
total number of Additional Shares to be purchased from the Company as the number
of Firm Shares set forth opposite the name of such Underwriter in Schedule I
bears to the total number of Firm Shares.
The Company hereby agrees not to (i) 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 otherwise 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
(ii) 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
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash
2
<PAGE> 3
or otherwise), except to the Underwriters pursuant to this Agreement, for a
period of 180 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding
the foregoing, during such period (i) the Company may grant stock options or
restricted stock pursuant to Company stock-based compensation plans and (ii) the
Company may issue shares of Common Stock upon the exercise of an option or
warrant or the conversion of a security outstanding on the date hereof. The
Company also agrees not to file any registration statement with respect to any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock for a period of 180 days after the date of the
Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation except for a registration statement on Form S-8. The
Company shall, prior to or concurrently with the execution of this Agreement,
deliver an agreement executed by (i) each of the directors and officers of the
Company listed on Annex I and (ii) each stockholder listed on Annex II hereto to
the effect that such person will not, during the period commencing on the date
such person signs such agreement and ending 180 days after the date of the
Prospectus, without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation, (A) engage in any of the transactions described in the
first sentence of this paragraph or (B) make any demand for, or exercise any
right with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock,
except that such agreement shall provide that such individuals may nonetheless
(i) transfer shares of Common Stock by way of testate or intestate succession or
by operation of law, (ii) transfer shares to members of the individual's
immediate family or to a trust, partnership, limited liability company or other
entity, all of the beneficial interests of which are held by such individual or
members of the individual's immediate family, and (iii) transfer shares to
charitable organizations; provided, however, that, in the case of transfers
pursuant to clauses (i), (ii) and (iii) of this sentence, the transferee shall
have agreed to be bound by the restrictions on transfer contained in this
paragraph and such transfer is not effective until the agreement to be bound by
the restrictions on transfer is executed by the transferee and a copy of such
agreement is received by Donaldson, Lufkin & Jenrette Securities Corporation.
Section 3. Terms of Public Offering. The Company is advised by you that
the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
Section 4. Delivery and Payment. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation
shall request no later than two business days prior to the Closing Date or the
applicable Option Closing Date (as defined below), as the case may be. The
Company shall deliver the Shares with any transfer taxes thereon duly paid by
the Company, to Donaldson, Lufkin & Jenrette Securities Corporation through the
facilities of The Depository Trust Company ("DTC"), for the respective accounts
of the several Underwriters, against payment to the Company
3
<PAGE> 4
of the Purchase Price therefore by wire transfer of Federal or other funds
immediately available in New York City. The certificates representing the
Shares shall be made available for inspection not later than 9:30 A.M., New
York City time, on the business day prior to the Closing Date or the applicable
Option Closing Date, as the case may be, at the office of DTC or its designated
custodian (the "DESIGNATED OFFICE"). The time and date of delivery and payment
for the Firm Shares shall be 9:00 A.M., New York City time, on May __, 2000 or
such other time on the same or such other date as Donaldson, Lufkin & Jenrette
Securities Corporation and the Company shall agree in writing. The time and
date of delivery and payment for the Firm Shares are hereinafter referred to as
the "CLOSING DATE." The time and date of delivery and payment for any
Additional Shares to be purchased by the Underwriters shall be 9:00 A.M., New
York City time, on the date specified in the applicable exercise notice given
by you pursuant to Section 2 or such other time on the same or such other date
as Donaldson, Lufkin & Jenrette Securities Corporation and the Company shall
agree in writing. The time and date of delivery and payment for any Additional
Shares are hereinafter referred to as the "OPTION CLOSING DATE."
The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 8 of this Agreement
shall be delivered at the offices of Weil, Gotshal & Manges LLP, 767 Fifth
Avenue, New York, New York, and the Shares shall be delivered at the Designated
Office, all on the Closing Date or such Option Closing Date, as the case may be.
Section 5. Agreements of the Company. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires any additions to or changes
in the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(b) To furnish to you four signed copies of the Registration Statement
as first filed with the Commission and of each amendment to it, including all
exhibits, and to furnish to you and each Underwriter designated by you such
number of conformed
4
<PAGE> 5
copies of the Registration Statement as so filed and of each amendment to it,
without exhibits, as you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall be
reasonably satisfactory to you, and to file the Prospectus in such form with the
Commission within the applicable period specified in Rule 424(b) under the Act;
during the period specified in Section 5(d) below, not to file any further
amendment to the Registration Statement and not to make any amendment or
supplement to the Prospectus of which you shall not previously have been advised
or to which you shall reasonably object after being so advised; and, during such
period, to prepare and file with the Commission, promptly upon your reasonable
request, any amendment to the Registration Statement or amendment or supplement
to the Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.
(d) (x) Prior to 10:00 A.M., New York City time, on the first business
day after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request.
(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of counsel
for the Underwriters, it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the circumstances when
the Prospectus is delivered to a purchaser, not misleading, or if, in the
opinion of counsel for the Underwriters, it is necessary to amend or supplement
the Prospectus to comply with applicable law, forthwith to prepare and file with
the Commission an appropriate amendment or supplement to the Prospectus so that
the statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may reasonably request (or obtain exemptions from the application thereof),
to continue such registration or qualification in effect so long as required for
distribution of the Shares and to file such consents to service of process or
other documents as may be necessary in order to effect such registration or
qualification; provided, however, that the Company shall not be required in
connection therewith to qualify as a foreign corporation in any jurisdiction in
which it is not now so qualified or to take any action that would subject it to
general consent to
5
<PAGE> 6
service of process or taxation other than as to matters and transactions
relating to the Prospectus, the Registration Statement, any preliminary
prospectus or the offering or sale of the Shares, in any jurisdiction in which
it is not now so subject.
(g) To make generally available to its stockholders as soon as
practicable an earnings statement (which need not be audited) covering the
twelve-month period ending [June 30], 2001 that shall satisfy the provisions of
Section 11(a) of the Act, and to advise you in writing when such statement has
been so made available.
(h) During the period of three years after the date of this Agreement,
to furnish to you as soon as practicable copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company and its subsidiaries as you may reasonably
request.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses of the Company incident to the performance of the Company's obligations
under this Agreement, including: (i) the fees, disbursements and expenses of the
Company's counsel and the Company's accountants in connection with the
registration and delivery of the Shares under the Act and all other fees and
expenses in connection with the preparation, printing, filing and distribution
of the Registration Statement (including financial statements and exhibits), any
preliminary prospectus, the Prospectus and all amendments and supplements to any
of the foregoing, including the mailing and delivering of copies thereof to the
Underwriters and dealers in the quantities specified herein, (ii) all costs and
expenses related to the transfer and delivery of the Shares to the Underwriters,
including any transfer or other taxes payable thereon, (iii) all costs of
printing or producing this Agreement and any other agreements or documents in
connection with the offering, purchase, sale or delivery of the Shares, (iv) all
expenses in connection with the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of the several states and
any foreign jurisdiction in which the Shares are to be offered and all costs of
printing or producing any Preliminary and Supplemental Blue Sky Memoranda in
connection therewith (including the filing fees and reasonable fees and
disbursements of counsel for the Underwriters in connection with such
registration or qualification and memoranda relating thereto), (v) the filing
fees and reasonable disbursements of counsel for the Underwriters in connection
with the review and clearance of the offering of the Shares by the National
Association of Securities Dealers, Inc., (vi) all fees and expenses in
connection with the preparation and filing of the registration statement on Form
8-A relating to the Common Stock and all costs and expenses incident to the
listing of the Shares on the Nasdaq National Market, (vii) the cost of printing
certificates representing the Shares, (viii) the costs and charges of any
transfer agent, registrar and/or depositary, and (ix) all other costs and
expenses of the Company incident to the performance of the obligations of the
Company hereunder for which provision is not otherwise made in this Section
5(i), including all roadshow
6
<PAGE> 7
expenses. Except as provided in this Section 5, the Underwriters shall pay their
own costs and expenses, including the fees and disbursements of their counsel.
(j) To use its best efforts to list for quotation the Shares on the
Nasdaq National Market and use its reasonable best efforts to maintain the
listing of the Shares on the Nasdaq National Market for a period of three years
after the date of this Agreement.
(k) To use its reasonable best efforts to do and perform all things
required or necessary to be done and performed under this Agreement by the
Company prior to the Closing Date or any Option Closing Date, as the case may
be, and to satisfy all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so covered
in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
Section 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any
Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement); any Rule 462(b) Registration Statement filed
after the effectiveness of this Agreement will become effective no later than
10:00 P.M., New York City time, on the date of this Agreement; and no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or, to the best of the Company's
knowledge, threatened by the Commission.
(b) The Registration Statement (other than any Rule 462(b) Registration
Statement to be filed by the Company after the effectiveness of this Agreement),
when it became effective, did not contain and, as amended, if applicable, will
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, (ii) the Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement) and the Prospectus comply in all material respects and, as
amended or supplemented, if applicable, will comply in all material respects
with the Act, (iii) if the Company is required to file a Rule 462(b)
Registration Statement after the effectiveness of this Agreement, such Rule
462(b) Registration Statement and any amendments thereto, when they become
effective (A) will not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading and (B) will comply in all material respects
with the Act and (iv) the Prospectus does not contain and,
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<PAGE> 8
as amended or supplemented, if applicable, will not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except that the representations and warranties set forth
in this paragraph do not apply to statements or omissions in the Registration
Statement or the Prospectus, or any amendments or supplements thereto, based
upon information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph do not apply to statements or omissions in any
preliminary prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
(d) Each of the Company and its Significant Subsidiaries (as defined in
Regulation S-X promulgated by the Commission) has been duly incorporated, is
validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and has the corporate power and authority to carry
on its business as described in the Prospectus and to own, lease and operate its
properties, and each is duly qualified and is in good standing as a foreign
corporation authorized to do business in each jurisdiction in which the nature
of its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole (a
"MATERIAL ADVERSE EFFECT").
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company or any of its subsidiaries relating to or entitling any person to
purchase or otherwise to acquire any shares of the capital stock of the Company
or any of its subsidiaries, except as otherwise disclosed in the Registration
Statement.
(f) All the outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights; and the Shares to be issued and
sold by the Company have been duly authorized and, when issued and delivered to
the Underwriters against payment therefor as provided by this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights.
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<PAGE> 9
(g) All of the outstanding shares of capital stock, including member
interests, of each of the Company's subsidiaries have been duly authorized and
validly issued and are fully paid and non-assessable, and are owned by the
Company, directly or indirectly through one or more subsidiaries, free and clear
of any security interest, claim, lien, encumbrance or adverse interest of any
nature, except as otherwise disclosed in the Registration Statement.
(h) The authorized capital stock of the Company conforms in all
material respects as to legal matters to the description thereof contained in
the Prospectus.
(i) Neither the Company nor any of its subsidiaries is (A) in violation
of its respective charter or by-laws or (B) in default in the performance of any
obligation, agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument to which the Company
or any of its subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective property is bound, except, with respect to
clause (B) only, such defaults as would not have a Material Adverse Effect.
(j) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as have been obtained or made
by the Company or such as may be required under the securities or Blue Sky laws
of the various states or the Nasdaq National Market), (ii) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or any of its subsidiaries or any
indenture, loan agreement, mortgage, lease or other agreement or instrument that
is material to the Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or their respective property is bound, (iii) violate or
conflict with any material law or any rule, regulation, judgment, order or
decree of any court or any governmental body or agency having jurisdiction over
the Company, any of its subsidiaries or their respective property, or (iv)
result in the suspension, termination or revocation of any Authorization (as
defined below) of the Company or any of its subsidiaries or any other impairment
of the rights of the holder of any such Authorization.
(k) There are no legal or governmental proceedings pending or, to the
best of the Company's knowledge, threatened to which the Company or any of its
subsidiaries is a party or to which any of their respective property is subject
that are required to be described in the Registration Statement or the
Prospectus and are not so described; nor are there any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not so described or filed as required.
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<PAGE> 10
(l) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), any provisions of the
Employee Retirement Income Security Act of 1974, as amended, or any provisions
of the Foreign Corrupt Practices Act or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the aggregate, would
not have a Material Adverse Effect.
(m) Each of the Company and its subsidiaries has such permits,
licenses, consents, exemptions, franchises, authorizations and other approvals
(each, an "AUTHORIZATION") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business, except where the failure to
have any such Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a Material Adverse Effect. Each such
Authorization is valid and in full force and effect and each of the Company and
its subsidiaries is in compliance with all the terms and conditions thereof and
with the rules and regulations of the authorities and governing bodies having
jurisdiction with respect thereto; and the Company is not aware that any event
has occurred (including, without limitation, the receipt of any notice from any
authority or governing body) which allows or, after notice or lapse of time or
both, would allow, revocation, suspension or termination of any such
Authorization or results or, after notice or lapse of time or both, would result
in any other impairment of the rights of the holder of any such Authorization;
except where such failure to be valid and in full force and effect or to be in
compliance, the occurrence of any such event or the presence of any such
restriction would not, singly or in the aggregate, have a Material Adverse
Effect.
(n) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), any provisions of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or any
provisions of the Foreign Corrupt Practices Act or the rules and regulations
promulgated thereunder, except for such violations which, singly or in the
aggregate, would not have a Material Adverse Effect.
(o) Except with respect to obligations that may arise if the Company is
a member of a group of corporations or trades or businesses under common control
or treated as a single employer (the "CONTROL GROUP") with respect to the Cash
Balance Retirement Plan of Hallmark Cards, Incorporated, the Binney & Smith
Employees' Retirement Plan and the Litho-Krome Company Retirement Plan, neither
the Company nor its subsidiaries has any obligation or liability, contingent or
otherwise, with respect to any pension plan subject to Section 412 of the
Internal Revenue Code of 1986, as amended (the "CODE") or under Title IV of
ERISA. The Company has executed an ERISA-sharing agreement with Hallmark Cards,
Incorporated and each of its subsidiaries
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<PAGE> 11
that may be members of the Control Group, which agreement provides that the
Company will be indemnified by the other members of the Control Group, including
Hallmark Cards, Incorporated, for any amounts paid by the Company in respect of
obligations under pension plans of such other members of the Control Group that
may arise under the Code and ERISA.
(p) This Agreement has been duly authorized, executed and delivered by
the Company.
(q) Arthur Andersen LLP are independent public accountants with respect
to the Company and its subsidiaries as required by the Act.
(r) The historical and pro forma consolidated financial statements
included in the Registration Statement and the Prospectus (and any amendment or
supplement thereto), together with related schedules and notes, present fairly
in all material respects the consolidated financial position, results of
operations and changes in financial position of the Company and its subsidiaries
on the basis stated therein at the respective dates or for the respective
periods to which they apply; such statements and related schedules and notes
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; the supporting schedules, if any, included in the Registration
Statement present fairly in all material respects in accordance with generally
accepted accounting principles the information required to be stated therein;
and the other financial and statistical information and data set forth in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) present fairly, in all material respects the information set forth
therein and are prepared on a basis consistent with such financial statements
and the books and records of the Company. The pro forma financial statements
have been prepared on a basis consistent with such historical statements of the
Company, and give effect to assumptions made on a reasonable basis and in good
faith and present fairly in all material respects the historical and proposed
transactions contemplated by the Prospectus and this Agreement. The other
financial and statistical information and data included in the Prospectus,
historical and pro forma, have been derived from the financial records of the
Company (or its predecessors) and, in all material respects, have been prepared
on a basis consistent with such books and records of the Company (or its
predecessors).
(s) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be, an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended.
(t) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities of
the Company or to require the Company to include such securities with the Shares
registered pursuant to the Registration Statement, except as disclosed in the
Prospectus.
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<PAGE> 12
(u) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, management or operations of the Company and its
subsidiaries, taken as a whole, (ii) there has not been any material adverse
change or any development involving a prospective material adverse change in the
capital stock or in the long-term debt of the Company or any of its subsidiaries
and (iii) neither the Company nor any of its subsidiaries has incurred any
material liability or obligation, direct or contingent.
(v) Each certificate signed by any officer of the Company and delivered
to the Underwriters or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the matters
covered thereby.
Section 7. Indemnification. (a) The Company agrees to indemnify and
hold harmless each Underwriter, its directors, its officers and each person, if
any, who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), from and against any and all losses, claims, damages, liabilities and
judgments (including, without limitation, any legal or other expenses reasonably
incurred in connection with investigating or defending any matter, including any
action, that could give rise to any such losses, claims, damages, liabilities or
judgments) (i) caused by any untrue statement or alleged untrue statement of a
material fact contained in (A) the Registration Statement (or any amendment
thereto), the Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus or (B) in any documents, materials or other information
provided to investors or potential investors by, or with the approval of, the
Company in connection with the marketing of the offering of the Shares,
including any roadshow or investor presentations made to investors by the
Company (whether in person or electronically), or (ii) caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages, liabilities or judgments are caused by any such
untrue statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished in writing to the Company by
such Underwriter through you expressly for use therein; provided, however, that
the foregoing indemnity agreement with respect to any preliminary prospectus
shall not inure to the benefit of any Underwriter who failed to deliver a
Prospectus, as then amended or supplemented, (so long as the Prospectus and any
amendment or supplement thereto was provided by the Company to the several
Underwriters in the quantity requested and on a timely basis following such
request to permit proper delivery on or prior to the Closing Date) to the person
asserting any losses, claims, damages, liabilities or judgments caused by any
untrue statement or alleged untrue statement of a material fact contained in
such preliminary prospectus, or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, if such material misstatement or omission
or alleged material misstatement or
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<PAGE> 13
omission was cured in the Prospectus, as so amended or supplemented, and such
Prospectus was required by law to be delivered at or prior to the written
confirmation of sale to such person.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act to the
same extent as the foregoing indemnity from the Company to such Underwriter but
only with reference to information relating to such Underwriter furnished in
writing to the Company by such Underwriter through you expressly for use in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 7(a) or 7(b) (the
"INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all reasonable fees and expenses of such counsel, as incurred
(except that in the case of any action in respect of which indemnity may be
sought pursuant to both Sections 7(a) and 7(b), the Underwriter shall not be
required to assume the defense of such action pursuant to this Section 7(c), but
may employ separate counsel and participate in the defense thereof, but the fees
and expenses of such counsel, except as provided below, shall be at the expense
of such Underwriter). Any indemnified party shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of the indemnified
party unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed after notice to assume the defense of such action or employ
counsel reasonably satisfactory to the indemnified party or (iii) the named
parties to any such action (including any impleaded parties) include both the
indemnified party and the indemnifying party, and the indemnified party shall
have been advised by such counsel that there may be one or more legal defenses
available to it which are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party).
In any such case, the indemnifying party shall not, in connection with any one
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for (i) the fees and expenses of more than one separate firm of attorneys
(in addition to any local counsel) for all Underwriters, their officers and
directors and all persons, if any, who control any Underwriter within the
meaning of either Section 15 of the Act or Section 20 of the Exchange Act and
(ii) the fees and expenses of more than one separate firm of attorneys (in
addition to any local counsel) for the Company, its directors and officers who
sign the Registration Statement
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<PAGE> 14
and all persons, if any, who control the Company within the meaning of either
such Section, and all such fees and expenses shall be reimbursed as they are
incurred. In the case of any such separate firm for the Underwriters, their
officers and directors and such control persons of any Underwriters, such firm
shall be designated in writing by Donaldson, Lufkin & Jenrette Securities
Corporation. In the case of any such separate firm for the Company and such
directors, officers and control persons of the Company, such firm shall be
designated in writing by the Company. The indemnifying party shall indemnify and
hold harmless the indemnified party from and against any and all losses, claims,
damages, liabilities and judgments by reason of any settlement of any action (i)
effected with its written consent or (ii) effected without its written consent
if the settlement is entered into more than twenty business days after the
indemnifying party shall have received a request from the indemnified party for
reimbursement for the fees and expenses of counsel (in any case where such fees
and expenses are at the expense of the indemnifying party) and, prior to the
date of such settlement, the indemnifying party shall have failed to comply with
such reimbursement request unless the indemnifying party is disputing in good
faith the reasonableness of such fees and expenses. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement or compromise of, or consent to the entry of judgment with respect
to, any pending or threatened action in respect of which the indemnified party
is or could have been a party and indemnity or contribution may be or could have
been sought hereunder by the indemnified party, unless such settlement,
compromise or judgment (i) includes an unconditional release of the indemnified
party from all liability on claims that are or could have been the subject
matter of such action and (ii) does not include a statement as to or an
admission of fault, culpability or a failure to act, by or on behalf of the
indemnified party.
(d) To the extent the indemnification provided for in this Section 7 is
unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 7(d)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 7(d)(i) above but also the
relative fault of the Company on the one hand and the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (after deducting
underwriting discounts and commissions, but before deducting expenses) received
by the Company, and the total underwriting discounts and commissions received by
the Underwriters, bear to the total price to the public of the Shares, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Company
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<PAGE> 15
on the one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the
Underwriters on the other hand and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 7, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 7(d) are several in proportion to the respective number
of Shares purchased by each of the Underwriters hereunder and not joint.
(e) The remedies provided for in this Section 7 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
Section 8. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same force
and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
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<PAGE> 16
(c) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by David J. Evans and William J. Aliber, in their
capacities as the President and Chief Executive Officer and Chief Financial
Officer of the Company, respectively, confirming the matters set forth in
Sections 6(u), 8(a) and 8(b) and that the Company has complied with all of the
agreements and satisfied all of the conditions herein contained and required to
be complied with or satisfied by the Company on or prior to the Closing Date.
(d) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company and its subsidiaries, taken as
a whole, (ii) there shall not have been any change or any development involving
a prospective change in the capital stock or in the long-term debt of the
Company or any of its subsidiaries and (iii) neither the Company nor any of its
subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 8(d)(i),
8(d)(ii) or 8(d)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
(e) You shall have received on the Closing Date an opinion, reasonably
satisfactory to you and counsel for the Underwriters, dated the Closing Date, of
Wachtell, Lipton, Rosen & Katz, counsel for the Company, to the effect that:
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and has the corporate power and authority
to carry on its business as described in the Prospectus and to own,
lease and operate its properties;
(ii) the Company is duly qualified and is in good standing as
a foreign corporation authorized to do business in each jurisdiction in
the United States in which the nature of its business or its ownership
or leasing of property requires such qualification, except where the
failure to be so qualified would not have a Material Adverse Effect;
(iii) all the outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully
paid, non-assessable and, except as referenced in the Prospectus, not
subject to any preemptive or similar rights;
(iv) the Shares to be issued and sold by the Company hereunder
have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement,
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<PAGE> 17
will be validly issued, fully paid and non-assessable, and the issuance
of such Shares will not be subject to any preemptive or similar rights;
(v) this Agreement has been duly authorized, executed and
delivered by the Company;
(vi) the authorized capital stock of the Company conforms as
to legal matters in all material respects to the description thereof
contained in the Prospectus under the caption "Description of Capital
Stock";
(vii) the Registration Statement has become effective under
the Act, no stop order suspending its effectiveness has been issued and
no proceedings for that purpose are, to the best of such counsel's
knowledge after due inquiry, pending before the Commission;
(viii) the statements under the captions "Reorganization
Transactions Occurring Simultaneously with the Closing of This
Offering," "Material U.S. Federal Income Tax Considerations for
Non-U.S. Holders" and "Description of Capital Stock" in the Prospectus
and Items 14 and 15 of Part II of the Registration Statement, insofar
as such statements constitute a summary of the legal matters, documents
or proceedings referred to therein, accurately summarize the matters
referred to therein in all material respects;
(ix) the Company is not (A) in violation of its charter or
by-laws and (B) to the best of such counsel's knowledge after due
inquiry, the Company is not in default in the performance of any
obligation, agreement, covenant or condition contained in any
indenture, loan agreement, mortgage, lease or other agreement or
instrument to which the Company is bound, except, with respect to
clause (B) only, such defaults as would not have a Material Adverse
Effect;
(x) the execution, delivery and performance of this Agreement
by the Company, the compliance by the Company with all the provisions
hereof and the consummation of the transactions contemplated hereby
will not, (A) require any consent, approval, authorization or other
order of, or qualification with, any U.S. federal, New York or Delaware
(with respect to matters relating to the Company's incorporation under
the Delaware General Corporate Law (the "DGCL")) court or governmental
body or agency (except such as have been obtained or made by the
Company or such as may be required under the securities or Blue Sky
laws of the various states), (B) conflict with or constitute a breach
of any of the terms or provisions of, or a default under, the charter
or by-laws of the Company or (C) violate or conflict with any provision
of the laws of the State of New York (other than its securities or Blue
Sky laws), the DGCL or the federal laws of the United States, that such
counsel, in the case of clause
17
<PAGE> 18
(C), in such counsel's experience are customarily applicable to
transactions of the type contemplated in, and companies of the type
executing, this Agreement;
(xi) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be, an "investment
company" as such term is defined in the Investment Company Act of 1940,
as amended;
(xii) (A) the Registration Statement and the Prospectus and
any supplement or amendment thereto (except for the financial
statements, financial statement schedules and other financial and
statistical data included therein as to which no opinion need be
expressed) comply as to form in all material respects with the Act, (B)
no facts have come to such counsel's attention that lead them to
believe that at the time the Registration Statement became effective
the Registration Statement and the prospectus included therein (except
for the financial statements, financial statement schedules and other
financial and statistical data as to which such counsel need not
express any belief) contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (C) no
facts have come to such counsel's attention that lead them to believe
that the Prospectus, as amended or supplemented, if applicable (except
for the financial statements, financial statement schedules and other
financial and statistical data, as aforesaid) contains any untrue
statement of a material fact or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
In rendering this opinion, such counsel may state that such opinion is
limited to matters arising under the laws of the State of New York, the DGCL and
the federal laws of the United States.
The opinion of Wachtell, Lipton, Rosen & Katz described in Section 8(e)
above shall be rendered to you at the request of the Company and shall so state
therein.
(f) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Judith C. Whittaker, Vice President and General Counsel of
Hallmark Cards, Incorporated, to the effect that:
(i) each of Crown Media, Inc. ("CROWN MEDIA") and Odyssey
Holdings L.L.C. ("ODYSSEY") has been duly incorporated or formed, is
validly existing as a corporation or other entity in good standing
under the laws of the State of Delaware and has the power and authority
to carry on its business as described in the Prospectus and to own,
lease and operate its properties;
18
<PAGE> 19
(ii) each of Crown Media and Odyssey is duly qualified and is
in good standing as a foreign corporation or other entity authorized to
do business in each jurisdiction in the United States in which the
nature of its business or its ownership or leasing of property requires
such qualification, except where the failure to be so qualified would
not have a Material Adverse Effect;
(iii) all of the outstanding shares of capital stock or
ownership interests of each of Crown Media and Odyssey have been duly
authorized and validly issued and are fully paid and non-assessable, in
accordance with the laws of the State of Delaware and, except as
otherwise disclosed in the Prospectus, are owned by the Company,
directly or indirectly through one or more subsidiaries, free and clear
of any security interest, claim, lien, encumbrance or adverse interest
of any nature.
In rendering this opinion, except as noted above, such counsel may
state that such opinion is limited to matters arising under the laws of the
State of Missouri and that such counsel does not opine as to matters arising
under the laws of any other state or foreign jurisdiction.
The opinion of Judith C. Whittaker described in Section 8(f) above
shall be rendered to you at the request of the Company and shall so state
therein.
(g) You shall have received on the Closing Date an opinion, dated as of
the Closing Date, of Charles Stanford, Senior Vice President - Legal and
Business Affairs of Crown Media, to the effect that:
(i) Crown Media is not (A) in violation of its charter or
by-laws and (B) is not in default in the performance of any obligation,
agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument to which
Crown Media is bound, except, with respect to clause (B) only, such
defaults as would not have a Material Adverse Effect;
(ii) the execution, delivery and performance of this Agreement
by the Company, the compliance by the Company with all the provisions
hereof and the consummation of the transactions contemplated hereby
will not (A) conflict with or constitute a breach of any of the terms
or provisions of, or a default under, the charter or by-laws of Crown
Media or any indenture, loan agreement, mortgage, lease or other
agreement or instrument listed as an exhibit to the Registration
Statement, to which Crown Media is a party or by which the Company or
Crown Media or their respective property is bound, (B) violate or
conflict with any applicable law or any rule, regulation, judgment,
order or decree of any court or any governmental body or agency having
jurisdiction over the Company or Crown Media or their respective
property or (C) based on a
19
<PAGE> 20
review of materials prepared by, discussions with and advice of counsel
practicing in foreign jurisdictions in which Crown Media operates,
result in the suspension, termination or revocation of any
authorization, approval, consent, license, order, qualification or
decree under any foreign broadcasting or similar law or of any
governmental entity responsible for enforcing such laws (a "FOREIGN
AUTHORIZATION") of the Company or Crown Media or any impairment of the
rights of the holder of any such Foreign Authorization in those
jurisdictions;
(iii) after due inquiry, such counsel does not know of any
legal or governmental proceedings pending or threatened to which the
Company or Crown Media is or could be a party or to which any of their
respective property is or could be subject, that are required to be
described in the Registration Statement or the Prospectus and are not
so described; and
(iv) to the best of such counsel's knowledge after due
inquiry, except as otherwise disclosed in the Registration Statement or
the Prospectus, there are no contracts, agreements or understandings
between the Company and any person granting such person the right to
require the Company to file a registration statement under the Act with
respect to any securities of the Company or to require the Company to
include such securities with the Shares registered pursuant to the
Registration Statement, except as disclosed in the Prospectus; and
(v) based on a review of materials prepared by, discussions
with and advice of counsel practicing in foreign jurisdictions in which
Crown Media operates, each of the Company and Crown Media has Foreign
Authorizations of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory
organizations and all courts and other tribunals under any applicable
laws relating to broadcasting, as are necessary to own, lease, license
and operate its respective properties and to conduct its business,
except where the failure to have any such Foreign Authorizations or to
make any such filing or notice would not, singly or in the aggregate,
have a Material Adverse Effect. Based on a review of materials prepared
by, discussions with and advice of counsel practicing in foreign
jurisdictions in which Crown Media operates, and based on such
counsel's understanding of the operations of the business of the
Company and Crown Media, each such Foreign Authorization is valid and
in full force and effect and each of the Company and Crown Media is in
compliance with all the terms and conditions thereof and with the rules
and regulations of the authorities and governing bodies having
jurisdiction with respect thereto; and no event has occurred
(including, without limitation, the receipt of any notice from any
authority or governing body) which allows or, after notice or lapse of
time or both, would allow, revocation, suspension or termination of any
such Foreign Authorizations or results or, after notice or lapse of
time or
20
<PAGE> 21
both, would result in any other impairment of the rights of the holder
of any such Foreign Authorizations; and such Foreign Authorizations
contain no restrictions that are burdensome to the Company or Crown
Media, except where such failure to be valid and in full force and
effect or to be in compliance, the occurrence of any such event or the
presence of any such restriction would not, singly or in the aggregate,
have a Material Adverse Effect.
In rendering this opinion, such counsel may state that such opinion is
limited to matters arising under the laws of the States of Massachusetts and New
York and under the DGCL and that such counsel does not opine as to matters
arising under the laws of any other state or foreign jurisdiction.
The opinion of Charles Stanford described in Section 8(g) above shall
be rendered to you at the request of the Company and shall so state therein.
(h) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Harriet Beck, counsel for Odyssey, to the effect that:
(i) Odyssey is not (A) in violation of its organizational
agreement and (B) Odyssey is not in default in the performance of any
obligation, agreement, covenant or condition contained in any
indenture, loan agreement, mortgage, lease or other agreement or
instrument listed as an exhibit to the Registration Statement to which
Odyssey is a party or by which Odyssey or its property is bound, except
for such as would not have a Material Adverse Effect;
(ii) the execution, delivery and performance of this Agreement
by the Company, the compliance by the Company with all the provisions
hereof and the consummation of the transactions contemplated hereby
will not (A) conflict with or constitute a breach of any of the terms
or provisions of, or a default under, the organizational documents of
Odyssey or any indenture, loan agreement, mortgage, lease or other
agreement or instrument listed as an exhibit to the Registration
Statement, to which Odyssey is a party or by which Odyssey or its
property is bound or (B) violate or conflict with any applicable law or
any rule, regulation, judgment, order or decree of any court or any
governmental body or agency having jurisdiction over Odyssey or their
respective property.
(iii) after due inquiry, such counsel does not know of any
legal or governmental proceedings pending or threatened to which
Odyssey is or could be a party or to which any of its property is or
could be subject, that are required to be described in the Registration
Statement or the Prospectus and are not so described;
21
<PAGE> 22
In rendering this opinion, such counsel may state that such opinion is
limited to matters arising under the laws of the State of California and under
the DGCL and that such counsel does not opine as to matters arising under the
laws of any other state or foreign jurisdiction.
The opinion of Harriet Beck described in Section 8(h) above shall be
rendered to you at the request of the Company and shall so state therein.
(i) The Underwriters shall have received on the Closing Date an
opinion, dated the Closing Date, of Wiley, Rein & Fielding, special counsel to
the Company, to the effect that:
(i) the execution, delivery and performance of this Agreement
by the Company, the compliance by the Company with all the provisions
hereof and the consummation of the transactions contemplated hereby
will not result in the suspension, termination or revocation of any
authorization, approval, consent, license, order, qualification or
decree of the Federal Communications Commission (the "FCC") or require
any filing or registration with, or authorization, approval, consent,
license, order, qualification or decree of the FCC under the
Communications Act of 1934, as amended, and the rules, regulations and
administrative orders promulgated thereunder (collectively, the
"FEDERAL COMMUNICATIONS LAWS").
(ii) to our knowledge after due inquiry, each of the Company,
Crown Media and Odyssey has obtained all authorizations, approvals,
consents, licenses, orders, qualifications or decrees of the FCC under
the Federal Communications Laws ("FCC AUTHORIZATIONS"), and has made
all filings with and notices to, the FCC, as are necessary to own,
lease, license and operate its respective properties and to conduct its
business, except where the failure to have any such FCC Authorization
or to make any such filing or notice would not, singly or in the
aggregate, have a Material Adverse Effect; each such FCC Authorization
is valid and in full force and effect and each of the Company, Crown
Media and Odyssey is in compliance with all the terms and conditions
thereof and with the rules and regulations of the FCC; and no event has
occurred (including, without limitation, the receipt of any notice from
the FCC) which allows or, after notice or lapse of time or both, would
allow, revocation, suspension or termination of any such FCC
Authorization or results or, after notice or lapse of time or both,
would result in any other impairment of the rights of the holder of any
such FCC Authorization; and such FCC Authorizations contain no
restrictions that are burdensome to the Company, Crown Media or
Odyssey, except where such failure to be valid and in full force and
effect or to be in compliance, the occurrence of any such event or the
presence of any such restriction would not, singly or in the aggregate,
have a Material Adverse Effect.
22
<PAGE> 23
The opinion of Wiley, Rein & Fielding described in Section 8(j) above
shall be rendered to you at the request of the Company and shall so state
therein.
(j) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Weil, Gotshal & Manges LLP, counsel for the Underwriters, as to
the matters referred to in Sections 8(e)(iv), 8(e)(v) (but only with respect to
the Company), 8(e)(viii) (but only with respect to the statements under the
caption "Description of Capital Stock" and "Underwriting") and 8(e)(xii).
In giving such opinions with respect to the matters covered by Section
8(e)(xii), counsel for the Company and counsel for the Underwriters may state
that their opinion and belief are based upon their participation in the
preparation of the Registration Statement and Prospectus and any amendments or
supplements thereto and review and discussion of the contents thereof, but are
without independent check or verification except as specified.
(k) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be, in
form and substance reasonably satisfactory to you, from Arthur Andersen LLP,
independent public accountants, containing the information and statements of the
type ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(l) The Company shall have delivered to you the agreements specified in
Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(m) The Shares shall have been duly listed for quotation on the Nasdaq
National Market, subject to official notice of issuance.
(n) The Company shall not have failed on or prior to the Closing Date
to perform or comply with any of the agreements herein contained and required to
be performed or complied with by the Company on or prior to the Closing Date.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents prepared, provided or executed by the Company as
you may reasonably request with respect to the good standing of the Company, the
due authorization and issuance of such Additional Shares and other matters
related to the issuance of such Additional Shares.
Section 9. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
23
<PAGE> 24
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Company if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects, or will materially and adversely affect, the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by
either federal or New York State authorities or (vi) the taking of any action by
any federal, state or local government or agency in respect of its monetary or
fiscal affairs which in your opinion has a material adverse effect on the
financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, to be purchased on such date by all Underwriters, each
non-defaulting Underwriter shall be obligated severally, in the proportion which
the number of Firm Shares set forth opposite its name in Schedule I bears to the
total number of Firm Shares which all the non-defaulting Underwriters have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided, however, that in no event shall the number of Firm Shares or
Additional Shares, as the case may be, which any Underwriter has agreed to
purchase pursuant to Section 2 hereof be increased pursuant to this Section 9 by
an amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased by all Underwriters and arrangements satisfactory to you
and the Company for purchase of such Firm Shares are not made within 48 hours
after such default, this Agreement will terminate without liability on the part
of any non-defaulting Underwriter or the Company.
24
<PAGE> 25
In any such case which does not result in termination of this Agreement, either
you or the Company shall have the right to postpone the Closing Date, but in no
event for longer than seven days, in order that the required changes, if any, in
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected. If, on an Option Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Additional Shares and the
aggregate number of Additional Shares with respect to which such default occurs
is more than one-tenth of the aggregate number of Additional Shares to be
purchased on such date, the non-defaulting Underwriters shall have the option to
(i) terminate their obligation hereunder to purchase such Additional Shares or
(ii) purchase not less than the number of Additional Shares that such
non-defaulting Underwriters would have been obligated to purchase on such date
in the absence of such default. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
any such Underwriter under this Agreement.
Section 10. Directed Share Program. It is understood that approximately
of the Firm Shares ("DIRECTED SHARES") will initially be reserved by the
Underwriters for offer and sale to employees and persons having business
relationships with the Company and its subsidiaries or affiliates ("DIRECTED
SHARE PARTICIPANTS") upon the terms and conditions set forth in the Prospectus
and in accordance with the rules and regulations of the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc.
(a) Under no circumstances will any Underwriter be liable to the
Company or to any Directed Share Participant for any action taken or omitted to
be taken in good faith in connection with such Directed Share Program. To the
extent that any Directed Shares are not affirmatively reconfirmed for purchase
by any Directed Share Participant on or immediately after the date of this
Agreement, such Directed Shares may be offered to the public as part of the
public offering contemplated hereby.
(b) The Company agrees to pay all reasonable fees and disbursements
incurred by the Underwriters in connection with the Directed Share Program,
including counsel fees, filing expenses and any stamp duties or other taxes
incurred by the Underwriters in connection with the Directed Share Program.
(c) In connection with the offer and sale of the Directed Shares, the
Company agrees, promptly upon a request in writing, to indemnify and hold
harmless each Underwriter from and against any loss, claim, damage, expense,
liability or action which (i) arises out of, or is based upon, any untrue
statement or alleged untrue statement of a material fact contained in any
material prepared by or with the approval of the Company for distribution to
Directed Share Participants in connection with the Directed Share Program or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, (ii)
arises out of the failure of any Directed Share Participant to pay for and
accept delivery of Directed Shares that such Participant agreed to purchase, or
(iii) is otherwise related to the Directed Share Program, other than losses,
claims, damages or liabilities (or expenses relating thereto) that are finally
judicially determined to have resulted directly
25
<PAGE> 26
from the gross negligence or willful misconduct of any Underwriter, except
insofar as such loss, claim, damage, expense, liability or action is caused by
any such untrue statement or omission or alleged untrue statement or omission
based upon information relating to any Underwriter furnished in writing to the
Company by such Underwriter through you expressly for use therein.
Section 11. Miscellaneous. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to Crown
Media Holdings, Inc., Department 339, 2501 McGee, Kansas City, Missouri 64108,
Attention Judith C. Whittaker, Esq., with copies to Crown Media Holdings, Inc.,
6430 S. Fiddlers Green Circle, Englewood, Colorado 80111, and to Wachtell,
Lipton, Rosen & Katz, 51 West 52nd Street, New York, New York 10019, Attention
Eric S. Robinson, Esq. and (ii) if to any Underwriter or to you, to you c/o
Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York,
New York 10172, Attention: Syndicate Department, with a copy to Weil, Gotshal &
Manges LLP, 767 Fifth Avenue, New York, New York 10153, Attention David S.
Lefkowitz, or in any case to such other address as the person to be notified may
have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company and the several Underwriters set
forth in or made pursuant to this Agreement shall remain operative and in full
force and effect, and will survive delivery of and payment for the Shares,
regardless of (i) any investigation, or statement as to the results thereof,
made by or on behalf of any Underwriter, the officers or directors of any
Underwriter, any person controlling any Underwriter, the Company, the officers
or directors of the Company, or any person controlling the Company, (ii)
acceptance of the Shares and payment for them hereunder and (iii) termination of
this Agreement.
If for any reason the Shares are not delivered by or on behalf of the
Company as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 9), the Company agrees to reimburse the several
Underwriters for all out-of-pocket expenses (including the reasonable fees and
disbursements of counsel) incurred by them in connection with the proposed
offering. Notwithstanding any termination of this Agreement, the Company shall
be liable for all expenses which it has agreed to pay pursuant to Section 5(i)
hereof. The Company also agrees to reimburse the several Underwriters, their
directors and officers and any persons controlling any of the Underwriters for
any and all fees and expenses (including, without limitation, the reasonable
fees and disbursements of counsel) incurred by them in connection with enforcing
their rights hereunder (including, without limitation, pursuant to Section 7
hereof).
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the
Underwriters, the Underwriters' directors and officers, any controlling persons
referred to herein, the Company's directors and the Company's officers who sign
the Registration Statement, and their respective successors and assigns, all as
and to the extent provided in this
26
<PAGE> 27
Agreement, and no other person shall acquire or have any right under or by
virtue of this Agreement. The term "successors and assigns" shall not include a
purchaser of any of the Shares from any of the several Underwriters merely
because of such purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
27
<PAGE> 28
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
CROWN MEDIA HOLDINGS, INC.
By:
-----------------------------------
Name:
Title:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEHMAN BROTHERS INC.
SALOMON SMITH BARNEY INC.
DLJDIRECT INC.
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By
-----------------------------
-----------------------------
S-1
<PAGE> 29
SCHEDULE I
<TABLE>
<CAPTION>
Underwriters Number of Firm Shares to be
Purchased
<S> <C>
Donaldson, Lufkin & Jenrette Securities
Corporation
Lehman Brothers Inc.
Salomon Smith Barney Inc.
DLJDirect Inc.
Total
</TABLE>
<PAGE> 30
Annex I
Robert A. Halmi, Jr.
Arnold L. Chavkin
Wilford V. Bane, Jr.
Robert J. Druten
William M. Haber
Donald J. Hall, Jr.
Irvine O. Hockaday, Jr.
David B. Koff
Peter A. Lund
John P. Mascotte
David J. Evans
Russel H. Givens, Jr.
Andrew P. Brilliant
William J. Aliber
Mark N. Grenside
Margaret A. Loesch
Lana E. Corbi
Susan A. G. Frank
<PAGE> 31
Annex II
Liberty Media Corporation
LMC Capital LLC
Vision Group Incorporated
VISN Management Corp.
National Interfaith Cable Coalition, Inc.
Chase Equity Associates, LP
ii
<PAGE> 1
EXHIBIT 10.32
Original Date: February 23, 2000
Amended Date: April 14, 2000
CROWN MEDIA, INC.
CROWN MEDIA LOAN NOTE
AMENDMENT TO LOAN NOTE
AMENDMENT, effective April 14, 2000 (this "Amendment"), to LOAN NOTE, dated
February 23, 2000, as amended (the "Loan Note") between CROWN MEDIA, INC.
("Borrower") and HC CROWN, CORP. ("Lender").
WITNESSETH:
WHEREAS, Borrower executed the Loan Note dated February 23, 2000, in the
maximum principal amount of $10,000,000.00, payable to the Lender;
WHEREAS, the parties hereto, desire to further amend the Loan Note, to
increase the maximum principal amount thereof to $20,000,000.00;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the sufficiency of which is hereby acknowledged, the
parties agree as follows:
The Loan Note is hereby amended to delete "$10,000,000.00" as the maximum
principal amount of the Loan Note, and substitute "$20,000,000.00" therefor.
All other terms and conditions of the Loan Note shall remain unaffected and in
full force and effect.
H C CROWN CORP. CROWN MEDIA, INC.
By: /s/ WILLIAM D. JARVIS By: /s/ WILLIAM J. ALIBER
----------------------- -----------------------
William D. Jarvis William J. Aliber
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm), with respect to the financial statements
and schedule of Crown Media, Inc. and its subsidiaries, included in or made part
of this Amendment No. 5 to Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado
May 1, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm), with respect to the financial statements
and schedule of Odyssey Holdings, L.L.C. and its subsidiaries, included in or
made part of this Amendment No. 5 to Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
April 10, 2000.
