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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS

          

For the fiscal year ended December 31, 2000

or

For the transition period from           to           .

Commission File Number: 0-29109

Crown Media Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)

6430 S. Fiddlers Green Circle,

(303) 220-7990

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $0.01 par value

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    No 

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

     As of March 2, 2001, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $175,303,064. This excludes shares held by persons who may be considered affiliates.

     As of March 2, 2001, the number of shares of Class A Common Stock, $.01 par value outstanding was 29,373,157, and the number of shares of Class B Common Stock, $.01 par value, outstanding was 30,670,422.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Proxy Statement for the 2001 Annual Meeting of Stockholders, to be filed, of the registrant are incorporated by reference in Part III of this report.

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      The discussions set forth in this Annual Report on Form 10-K contain statements concerning potential future events. Such forward-looking statements are based on assumptions by Crown Media Holdings, Inc.’s (“Crown Media Holdings”) management, as of the date of this Annual Report on Form 10-K, including assumptions about risks and uncertainties faced by Crown Media Holdings. Readers can identify these forward-looking statements by their use of such verbs as expects, anticipates, believes, or similar verbs or conjugations of such verbs. If any of management’s assumptions prove incorrect or should unanticipated circumstances arise, Crown Media Holdings’ actual results, levels of activity, performance, or achievements could materially differ from those anticipated by such forward-looking statements. Among the factors that could cause actual results to differ materially are those discussed in other parts of this Annual Report on Form 10-K. Crown Media Holdings will not update any forward-looking statements in this Annual Report on Form 10-K to reflect future events or developments.

      In this Annual Report on Form 10-K, the terms “we,” “us” and “our” refer to Crown Media Holdings, and, unless the context requires otherwise, Crown Media International, Inc. (“Crown Media International”) and Odyssey Holdings, L.L.C. (“Odyssey Holdings”), subsidiaries of Crown Media Holdings that operate our business. The term “common stock” refers to our Class A common stock and Class B common stock, unless the context requires otherwise.

PART I

ITEM 1.  Business

      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. (“Hallmark Entertainment”) and The Jim Henson Company, Inc. (“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, 2000.

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      As of March 2, 2001, our total number of subscribers had increased to approximately 65.0 million. For a more detailed description of our channels, see “— Channels — The Hallmark Entertainment Network” and “— Channels — The Odyssey Network.”

      On May 9, 2000, Crown Media Holdings completed a reorganization in which Crown Media Holdings’ shares were exchanged for 100% of Crown Media International, formerly known as Crown Media, Inc., and 77.5% of Odyssey Holdings. At the same time, Crown Media Holdings completed a public offering of 10,000,000 shares of Class A Common Stock at $14 per share. The net proceeds from this offering, after expenses and underwriting discounts and commissions, were approximately $125.4 million. We are a holding company, and, prior to the completion of the reorganization and the offering on May 9, 2000, we had no material assets, liabilities, contingent liabilities or operations. Crown Media Holdings considers Crown Media International as a predecessor corporation for financial reporting purposes.

      Our consolidated financial statements include the assets and liabilities of Crown Media International at their historical carrying values since both we and Crown Media International are entities under common control before and after the reorganization. The accompanying consolidated financial statements also include the assets and liabilities and results of operations of Crown Media Holdings’ other indirect, wholly and majority-owned subsidiaries.

      The assets and liabilities of Odyssey Holdings and its subsidiaries relating to Crown Media International’s 22.5% interest in Odyssey Holdings, acquired as part of the reorganization, and the 22.5% interest acquired by us in March 2001, are included in Crown Media Holdings’ consolidated financial statements at their historical carrying values. The acquisition of Liberty Media Corporation’s (“Liberty Media”) 32.5% interest in Odyssey Holdings and the National Interfaith Cable Coalition’s (“NICC”) 22.5% interest in Odyssey Holdings, both of which were transferred to us as part of the reorganization, are included in our consolidated financial statements at their fair market value using purchase accounting as of the date of the reorganization.

      In February 2000, EM.TV Merchandising AG (“EM.TV”) acquired The Jim Henson Company. In July 2000, we agreed in principle with EM.TV to acquire EM.TV’s 22.5% ownership interest in Odyssey Holdings and its 50% interest in the Kermit Channel. On March 15, 2001, we completed the transaction, and we now own 100% of the members’ common interests in Odyssey Holdings and 100% of the Kermit Channel. In consideration for these ownership interests, we issued 5,377,721 shares of our Class A Common Stock to The Jim Henson Company, a wholly owned subsidiary of EM.TV. The newly issued shares to EM.TV represent after the transaction approximately 8.2% of our outstanding Class A and Class B Common Stock and 15.5% of our Class A Common Stock based on our outstanding shares at March 15, 2001. The Jim Henson Company became a party to the stockholders agreement among our original stockholders, but does not have the right to designate a Board member pursuant to that agreement. The stockholders agreement contains, among other things, certain restrictions on the transfer of common stock by the parties until May 9, 2002. See a description of this agreement in Part III of this Report. In connection with the acquisition, we and EM.TV entered into a license agreement providing for our use of family programming of EM.TV on the Hallmark Entertainment Network or the Odyssey Network.

      During the fourth quarter of 2000, we and Hallmark Cards, Incorporated (“Hallmark Cards”) agreed to rebrand our international channel operated by Crown Media International from the Hallmark Entertainment Network to the Hallmark Channel. The new branding is being rolled out during 2001.

      In November 2000, we announced that we were investigating the possibility of acquiring certain film assets from Hallmark Entertainment. We formed an independent committee of directors to review this potential transaction.

      We have recently launched a test of Crown Interactive. Crown Interactive is designed to use a wide array of products and services from us, Hallmark Cards and Hallmark Entertainment in the interactive television marketplace. The Crown Interactive model is intended to allow consumers to view full screen streaming video of some of the best titles from the Hallmark Entertainment library. We are currently testing Crown Interactive

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      Liberty Media and UnitedGlobalCom, Inc. (“United”), the parent company of United Pan-Europe Communications, have announced that they entered into an agreement pursuant to which Liberty Media would transfer to United its interests in various international broadband distribution and programming assets and cash in exchange for convertible preferred stock of United. Upon closing of the entire transaction, which may occur in stages but which the parties anticipate will occur in the second quarter of 2001, Liberty Media would have a 43% economic interest and, following the occurrence of certain specified events, an 81% voting interest in United. Until such events occur, Liberty Media’s voting interest would be limited to 50%. As part of this transaction, United will acquire Liberty Media’s interest in us.

      Each of our channels benefits from a long-term program agreement with a subsidiary of Hallmark Entertainment, our parent company. These program agreements generally provide exclusive pay television access to Hallmark Entertainment’s first-run presentations and extensive library of original made-for-television movies and miniseries. Hallmark Entertainment’s library consists of more than 4,000 hours of programming, including eight of the 10 most highly rated made-for-television movies for the 1993 through 1999 television seasons, based on A.C. Nielson ratings. Programs contained in this library have won more than 110 Emmy Awards, Golden Globe Awards and Peabody Awards. The Odyssey Network also licenses a substantial amount of programming produced by The Jim Henson Company, a producer of popular family and children’s programming, through a long-term program agreement. Programs contained within The Jim Henson Company’s library have won more than 40 Emmy Awards and Peabody Awards.

      We believe that with the programming we license from Hallmark Entertainment and The Jim Henson Company, we are establishing the Hallmark Entertainment Network and the Odyssey Network as destinations for viewers seeking high quality family entertainment and as attractive outlets for advertisers seeking to target these viewers. We believe our programming will continue to drive the growth in the number of our worldwide subscribers and the growth of our revenues.

      We have distribution agreements with leading pay television distributors in each of our markets. Internationally, for the Hallmark Entertainment Network, some of these include British Sky Broadcasting, Ltd., Multicanal, and United Pan-Europe Communications. In the United States, the nine largest pay television distributors account for approximately 90% of all pay cable and television subscribers in 2000. We currently distribute the Odyssey Network on cable systems operated by each of these nine pay television distributors, and at December 31, 2000, we had long-term distribution agreements with six of the top nine pay television distributors. Although there can be no assurance that we will be able to reach agreement with any of them, we are in discussions to sign long-term distribution agreements with the remaining top three pay television distributors. No individual pay television distributor accounted for more than 10% of our consolidated revenues or 15% of our consolidated subscribers for the year ended December 31, 2000.

      All of our material operations are part of the domestic and international pay television programming service industry. Information concerning revenues, operating losses and identifiable assets attributable separately to each of our domestic and international operations may be found in Note 14 of our Notes to Consolidated Financial Statements located on page F-28.

      The pay television industry is comprised of program suppliers, pay television channel providers and distributors. Program suppliers, from whom we license our programming, include all of the major production studios and independent production companies, such as Hallmark Entertainment, The Jim Henson Company and NICC. These program suppliers create, develop and finance the production of movies, television miniseries, 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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      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.

      Four major 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 broadcast systems (such as DTH) use satellite transponders to broadcast television programming to individual dwellings with satellite reception equipment, including a dish and a decoder. Third, terrestrial television broadcasters (DTT) 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.

      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.

      The advertising market differs greatly around the world. In the United States, the most developed television market, it was estimated by Advertising Age in 1999 that 39% of all advertising expenditures were 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.

      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

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      The ability of a television channel to generate advertising revenue largely depends on estimated or actual viewing levels, primarily based on ratings, and on advertising rates. Typically, in the United States and some other markets, independent ratings systems on which advertising sales can be based are well established and widely accepted within the industry. In addition, pay television channel providers and distributors may also provide estimated or actual subscriber information.

      Historically, advertisers have spent more on advertising through traditional broadcast television than through pay television. We believe that as pay television continues to gain viewership relative to broadcast television, it should attract a larger percentage of the total available dollars spent on television advertising.

      The Hallmark Entertainment Network commenced 2000 with 20.8 million subscribers and ended the year with 33.5 million subscribers, an increase of 61%. We currently distribute the Hallmark Entertainment Network to 18 geographic markets covering more than 100 countries, dubbed or subtitled into more than 24 languages according to local market practices, viewer preferences and cost considerations. Our largest markets include Asia Pacific, with more than 11 million subscribers, Latin America, with more than 10 million subscribers, United Kingdom, with more than four million subscribers, and Central Europe, with more than two million subscribers. We also have a significant presence in Italy, Spain, Sweden, Denmark and Africa.

      The Hallmark Entertainment Network offers a range of award-winning family programming including made-for-television movies and miniseries from the Hallmark Entertainment 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 Katherine Hepburn, Paul Newman, Gregory Peck, Glenn Close, Peter O’Toole, Robert Duvall, Sidney Poitier, Whoopi Goldberg, Jon Voight, Anjelica Huston, Sam Neill, Patrick Stewart, James Earl Jones, Tommy Lee Jones and James Coburn and is often filmed in international locations.

      Our primary source for programming is Hallmark Entertainment, our parent company. Hallmark Entertainment is a worldwide leader in the production of movies for television. Hallmark Entertainment produces approximately 45-50 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 Nielsen Media Research ratings. Programs contained in this library have won more than 110 Emmy Awards, Golden Globe Awards and Peabody Awards. Hallmark Entertainment 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. We license programming from third party suppliers such as Carlton International Media Limited, Granada Media Group Limited, CBS Broadcast International, Pearson Television International Ltd., Alliance Atlantis International Television Distribution Limited, Can West Entertainment International Distribution (formerly Endemol International Distribution B.V., Beyond Distribution Pty Ltd., Chrysalis TV & Film (Overseas) Ltd., Southern Star Sales Limited and Hearst Entertainment, Inc. We enjoy access to Hallmark Entertainment’s programming through a five-year program agreement with a subsidiary of Hallmark Entertainment. For more information regarding the program agreements with Hallmark Entertainment, please see Part III below.

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      Examples of programming from the Hallmark Entertainment library include Arabian Nights, Cleopatra, Don Quixote, Jason and The Argonauts, Hound of the Baskervilles, On The Beach, Prince and the Pauper and David Copperfield, as well as programming from “The Collection,” from the Hallmark Hall of Fame library, such as Season For Miracles, Love Letter, Cupid & Cate and The Lost Child. Examples of third party productions on the Hallmark Entertainment Network include The Audrey Hepburn Story, Joan of Arc, Love Is Strange, Moby Dick and Time and Tide.

      In the countries where we offer the Hallmark Entertainment Network, we distribute the channel through a variety of distribution platforms, such as cable, DTH and SMATV. We partner with international pay television distributors such as BSkyB, Multicanal, United Pan-Europe Communications, Cablevision, Foxtel, Telepiu, PCTV, Multichoice, Via Digital and United Communication Group (“Videoland”), and our international distribution agreements with such distributors generally last two to five years.

      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 increase revenue or develop new revenue sources by subdividing the market through the addition of satellite signals to individual countries within that market as opportunities, particularly advertising, arise. 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.

      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 at December 31, 2000 (except where noted), and the number of Hallmark Entertainment Network subscribers at year end 1999 and 2000.

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