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Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO

Commission file number: 000-30700

Crown Media Holdings, Inc.

6430 S. Fiddlers Green Circle,

(303) 220-7990

Securities registered pursuant to Section 12(b) of the Act:

Securities registered Pursuant to Section 12(g) of the Act:

      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 þ          No o

      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.     þ

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes þ          No o

      The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of June 28, 2002, the last business day of the registrant’s most recently completed second fiscal quarter was $581,262,414.

      As of March 3, 2003, the number of shares of Class A Common Stock, $.01 par value outstanding was 73,794,606, 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 Registrant’s Proxy Statement for the 2003 Annual Meeting of Stockholders, to be filed, are incorporated by reference in Part III of this report.

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      The discussion set forth in this Annual Report on Form 10-K contains statements concerning potential future events. Such forward-looking statements are based on assumptions by Crown Media Holdings, Inc.’s (“Crown Media Holdings” or the “Company”) 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 this Form 10-K under the heading “Forward-Looking Statements and Risk Factors.” Crown Media Holdings will not update any forward-looking statements contained in this Annual Report on Form 10-K to reflect future events or developments.

      In this Annual Report on Form 10-K the terms “Crown Media Holdings,” “we,” “us” and “our” refer to Crown Media Holdings, and, unless the context requires otherwise, Crown Media International, LLC (“Crown Media International”), Crown Media United States, LLC (“Crown Media United States”), Crown Media Distribution, LLC (“Crown Media Distribution”), Crown Entertainment Limited (“Crown Entertainment”), Crown Media Trust (“Crown Media Trust”), and H&H Programming — Asia, L.L.C. (“H&H Programming — Asia”), subsidiaries of Crown Media Holdings that operate our businesses. The term “common stock” refers to our Class A common stock and Class B common stock, unless the context requires otherwise.

      The names Hallmark, Hallmark Entertainment, TOTAL CHOICE and other product or service names are trademarks or registered trademarks of their owners.

Company Overview

      We own and operate pay television channels, known around the world as the Hallmark Channel, dedicated to high-quality, entertainment programming for adults and families. The importance and appeal of this format has been confirmed by the results of a quantitative research conducted for our U.S. channel.

      As a network, we offer compelling stories with talented actors, masterfully written, directed and produced. In addition, we purchased more than 700 titles from the Hallmark Entertainment Distribution, LLC (“Hallmark Entertainment Distribution”) library in September 2001. We believe that with the programming we own (the “Crown Media Library,” the “Library” or the “film assets”), together with the programming we license from Hallmark Entertainment Distribution and third parties, we have established the Hallmark Channel internationally and in the United States as destinations for viewers seeking high-quality, entertainment for adults and families, 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 our channels: our programming sources, selected pay television distributors and the total number of our subscribers as of December 31, 2002.

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     As of February 28, 2003, our total number of subscribers had increased to approximately 103.6 million. For a more detailed description of our channels, see “— Channels — The Hallmark Channel — International” and “— Channels — The Hallmark Channel — United States.”

      Our domestic and international channels have benefited from the volume and availability of programming in our Library. Our channels also enjoy the benefits of long-term program agreements with Hallmark Entertainment Distribution, which generally provide exclusive pay television access to the Hallmark Entertainment Distribution library titles we did not purchase and to new production and first-run presentations controlled by Hallmark Entertainment Distribution. Our library and the programming that we have access to through our program license agreements with Hallmark Entertainment Distribution consist of some of the most highly rated made-for-television movies, based on A.C. Nielson ratings. These programs have also won numerous Emmy Awards, Golden Globe Awards and Peabody Awards. Programming from third parties has also become an important part of our channels as we continually develop and refine our programming strategy.

      We have distribution agreements with leading pay television distributors in each of our markets. Internationally, these include British Sky Broadcasting (“BskyB”), Measat, Pramer, Sky Network, Telepiu, Via Digital and Videoland. We currently distribute our domestic channel through approximately 3,500 cable systems and communities and satellite providers. By the end of 2002, we had agreements with Adelphia, Cablevision, Charter, Cox, DirecTV, EchoStar, Mediacom, NCTC, and Time Warner for the distribution of our channel. Because of the acquisition of AT&T by Comcast during 2002, our contract with AT&T is now being administered by Comcast. We continue to provide programming to former AT&T subscribers now with Comcast. In the United States, Adelphia, Cablevision, Charter, Comcast, Cox, DirecTV, EchoStar and Time Warner account for approximately 88% of all pay cable and television subscribers as of December 31, 2002. BskyB accounted for 17% of our consolidated revenue for the year ended December 31, 2002. BskyB accounted for 36% of our international revenue for the year ended December 31, 2002. No individual pay television distributor or advertiser accounted for 10% of our domestic revenue for the year ended December 31, 2002. No individual pay television distributor accounted for 10% of our consolidated subscribers for the year ended December 31, 2002.

      Through Crown Media Distribution, we exploit the Library to the extent not used by us. We license the use of Library films and programming to third parties around the world including terrestrial broadcasters in return for license fees.

      We license the trademark “Hallmark” for use on our channels pursuant to certain trademark license agreements with Hallmark Cards, Incorporated (“Hallmark Cards”). We believe that the use of this trademark is extremely important, particularly for our domestic channel, due to the substantial name recognition and favorable characteristics associated with the name in the United States. For further information concerning these trademark license agreements, see Part III — Item 13. Certain Relationships and Related Transactions — Hallmark Trademark License Agreements.

      Information concerning revenue, operating losses and identifiable assets attributable to each of our domestic and international pay television programming services and our distribution of films may be found in Note 15 of Notes to Consolidated Financial Statements in this Report.

Development of Business

      Crown Media Holdings, Inc., which was incorporated in the state of Delaware in December 1999, through its subsidiaries, owns and operates pay television channels dedicated to high quality, entertainment programming for adults and families, in the United States and in various countries throughout the world. The international operations of the Hallmark Channel now extend to approximately 122 countries and are operated by Crown Media International and, in the United Kingdom, by Crown Entertainment. Crown Media International commenced its operations outside the United States in 1995. Domestically, the Hallmark Channel is operated and distributed by Crown Media United States. Crown Media International acquired an interest in Crown Media United States in 1998, and as a result of several transactions, Crown Media Holdings owned 100% of the common interests of Crown Media United States by March 2001. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. Significant

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      Please see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for information regarding a reorganization in 2002, a write-down of certain programming and a tax sharing agreement with Hallmark Cards.

Industry Overview

      The pay television industry is comprised primarily of program suppliers, pay television channel providers and pay television distributors. Program suppliers, from whom we acquire or license a portion of our programming, include many of the major production studios and other independent production companies and independent owners of programming. These program suppliers create, develop and finance the production of, or control rights to, movies, television miniseries, series and other programming. Due to our acquisition of the Crown Media Library, we are a program supplier. Program suppliers generate revenue by licensing their programming to broadcasters and video distributors (pay television channel providers) around the world. These licenses are typically specific by territory and are limited to a certain number of showings within specified periods of time.

      We are also a pay television channel provider. Pay television channel providers include all channel providers (except over-the-air broadcasters) and major U.S. and international networks. Pay television channel providers often produce programming and acquire or license programming from program suppliers and generally package the programming according to an overriding theme and brand strategy. Pay television restricts viewership through security encryption devices that limit viewership to paying subscribers. Pay television channel providers compete with each other for distribution and to attract viewers and advertisers. Pay television providers generally target audiences with a certain demographic composition, so that they can then sell advertising to advertisers seeking to reach the providers’ demographic audiences.

      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. Distributors have different levels of service for subscribers, with each service level containing some different channels. More recently, distributors, particularly in the U.S., 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 and increased use of the digital cable capacity for new broadband services, pay television channel providers are often required to pay 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 any receipt of subscriber fee revenue from such pay television distributors.

Distribution Platforms

      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 satellite broadcast systems (such as direct-to-home or “DTH”) use satellite transponders to broadcast television programming to individual dwellings with satellite reception equipment, including a dish and a decoder. Third, digital 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 hotels that receive programming from

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Sources of Revenue

      Pay television customers subscribe to basic services by paying monthly fees for basic channels to pay television distributors. The customers can also subscribe to additional packages of premium or pay-per-view services upon payment of additional fees. Primarily in international markets, pay television distributors generally pay a fee per subscriber for all or some subscribers to channel providers. We are a channel provider. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

      The advertising market differs greatly around the world. In the United States, the most developed television market, it was estimated by Advertising Age that, as of December 31, 2002, 22% of all advertising expenditures were spent on broadcast television and 17% of all advertising expenditures were spent on cable 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. In general, advertising expenditures are less in other countries than in the United States, both in terms of percentage of advertising expenditures as well as absolute dollars. Program ratings systems in many non-United States markets are growing rapidly, and as a result, advertisers are relying less on subscriber counts and more on empirical measurements when buying advertising time.

      Television advertising is sold in a variety of formats. Many pay television channels rely largely 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 spots or to deliver a certain number of viewers. An alternative to spot advertising is sponsorship, by which a company sponsors 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. Our U.S. channel sells the majority of its advertising in the “up-front” season, generally in August, for the last quarter of the same year and the first three quarters of the following year. We hold back a small percentage of our inventory for audience deficiency units, “ADUs,” and sell the remainder in the spot market. ADUs are units of inventory that are made available to advertisers as compensation for inventory the advertiser purchased that ran in programs that under-delivered on the guaranteed ratings.

      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. Also, as pay television draws audience share from broadcast television, audience demographics become fragmented; and, as a result, advertisers are able to target groups of viewers with specific demographic profiles.

      Since February 2002, paid commercial programming, “infomercials,” has been carried on a limited basis in several international regional feeds of the Hallmark Channel.

      For the year, the domestic Hallmark Channel was rated the fastest growing cable network in terms of annual audience percentage growth in ratings for 2002 compared to 2001 according to Nielsen Media Research, with a 50% increase in ratings for total day and nearly a two-fold increase in household impressions.

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      Internationally, during 2002 the international Hallmark Channel ranked in the top ten cable and satellite channels in the U.K. according to the Broadcaster Audience Research Board. In the U.K., the Channel enjoyed a strong and sustained increase in ratings over the past two years, and the most recent research shows that the Channel has by far the highest loyalty index of any entertainment channel. Additionally, significant ratings growth has been achieved in the Scandinavian market with the quadrupling of audience share in Denmark over the last two years according to Gallup. The Channel in Poland, our most important Central and East European territory, experienced a 185% increase in viewing levels during the same period according to AGB Polska. Australia continues to be an important market for us, with a loyal audience that improved throughout 2002 resulting in the channel delivering its highest ratings to date in January 2003.

      Program suppliers sell or license programming to broadcasters and video distributors (pay television channel providers) who pay a license fee for the right to exploit (air) the programming over a certain period in their program package. As a program supplier, we recognize revenue from television and distribution licensing agreements when the film is available for exhibition by the licensee, the license fee is known, collectibility is reasonably assured and the cost of each film is known or reasonably determinable. Payments received from licensees prior to the availability of a film are recorded by us as deferred revenue. Long-term receivables arising from licensing agreements are recorded at their net present value.

Channels

      The international channel commenced 2002 with 44.4 million subscribers and ended the year with 49.5 million subscribers, an increase of 11%. We currently distribute the international channel to 16 geographic markets covering approximately 122 countries, dubbed or subtitled into 26 languages compared to 22 geographic markets covering 110 countries as of December 31, 2001. Our markets include Asia Pacific, with approximately 19.0 million subscribers, Europe, Middle East and Africa, with more than 12.3 million subscribers, Latin America, with more than 11.1 million subscribers, and the United Kingdom, with more than 7.1 million subscribers.

      The international channel offers a range of award-winning programming including made-for-television movies, miniseries, epics, historical dramas and series. We seek programming that is consistent with our programming theme: “great stories that stay with you.” The high quality, entertainment programming for adults and families that we offer is based on universal themes, includes world-renowned actors and actresses, such as Katherine Hepburn, Paul Newman, Gregory Peck, Glenn Close, Sidney Poitier, Whoopi Goldberg, Anjelica Huston, and James Earl Jones and is often filmed in international locations.

      Significant sources for our programming are the Crown Media Library and programming produced since January 1, 2001, by Hallmark Entertainment, Inc. (“Hallmark Entertainment”), which is available to us through our program agreements. Prior to the purchase of the Crown Media Library, we licensed substantially all of the titles in that library from Hallmark Entertainment Distribution. We enjoy access to new Hallmark Entertainment programming through an amended five-year program license agreement with Hallmark Entertainment Distribution. For more information regarding the program license agreements with Hallmark Entertainment Distribution, please see Part III below. Hallmark Entertainment currently provides family programming for audiences worldwide, generally delivering more than 40 projects each year. For the year ended December 31, 2002, approximately 54% of our international programming was from the Crown Media Library or licensed from Hallmark Entertainment Distribution. We licensed for that same time period the

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      During 2002, we aired third-party series such as Star Trek, Judging Amy, Law and Order, The Guardian, Party of Five, and Touched by an Angel. We also aired third-party movies and mini-series including Pretty Woman, Princess Bride, Mission Impossible I, Color of Money, Judy Garland: Me and My Shadows, and Blonde: The Marilyn Monroe Story.

      In the countries where we offer the international channel, we distribute the channel through a variety of distribution platforms, including cable, DTH, DTT and SMATV. We distribute the channel through distribution agreements with local pay television operators such as BskyB, Measat, Pramer, Sky Network, Telepiu, Via Digital and Videoland. Our distribution agreements with such operators generally last two to five years. We have the capability to create and deliver our channel to new platforms in a short period of time through our broadcast infrastructure based in Greenwood Village, Colorado. We have entered into a strategic relationship with Pramer, S.C.A. (“Pramer”), which perform all day-to-day operations including program acquisitions, scheduling, marketing, advertising and affiliate sales, playback and uplink for our operations in Mexico, Central and South America.

      We regularly review existing and potential markets to assess their prospects. As the number of international channel 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 international channel 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 approximate number of television households and pay television households, as estimated by Kagan World Media at December 31, 2002 (except where noted), and the number of our international channel subscribers at year-end 2001 and 2002.

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