CROWN MEDIA HOLDINGS INC - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 000-30700

Crown Media Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)


Delaware		84-1524410
(State or Other Jurisdiction of
Incorporation or Organization)		(I.R.S. Employer Identification No.)

6430 S. Fiddlers Green Circle,
Suite 225,
Greenwood Village, Colorado 80111
(Address of Principal Executive Offices and Zip Code)

(303) 220-7990
(Registrant’s Telephone Number, Including Area Code)

6430 S. Fiddlers Green Circle,
Suite 500,
Greenwood Village, Colorado 80111

(Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report.)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 [X] No [ ]

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

As of August 6, 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.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements (Unaudited)
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures.
PART II. OTHER INFORMATION
	Item 2. Changes in Securities and Use of Proceeds
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
INDEX TO EXHIBITS
INDEX TO EXHIBITS
EX-10.4 Amendment to Federal Income Tax Agreement
EX-31 Rule 13a-14(a) Certifications
EX-32 Section 1350 Certifications

TABLE OF CONTENTS


		Page

PART I	Financial Information
Item 1	Financial Statements (Unaudited)		3
	CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES
	Consolidated Balance Sheets — December 31, 2002 and June 30, 2003 (Unaudited)		3
	Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
	- Three and Six Months Ended June 30, 2002 and 2003		4
	Consolidated Statements of Cash Flows (Unaudited)
	- Six Months Ended June 30, 2002 and 2003		5
	Condensed Notes to Unaudited Consolidated Financial Statements		6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3	Quantitative and Qualitative Disclosures About Market Risk		36
Item 4	Controls and Procedures		37
PART II	Other Information
Item 2	Changes in Securities and Use of Proceeds		38
Item 4	Submission of Matters to a Vote of Security Holders		38
Item 6	Exhibits and Reports on Form 8-K		39
Signatures			40

The discussion set forth in this Form 10-Q 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 Form 10-Q 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-Q under the heading “Risk Factors.” Crown Media Holdings will not update any forward-looking statements contained in this Form 10-Q to reflect future events or developments.

In this Form 10-Q the terms “Crown Media Holdings,” “we,” “us” and “our” refer to Crown Media Holdings, and, unless the context requires otherwise, subsidiaries of Crown Media Holdings that operate our businesses, 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”) . 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.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)


			As of December 31,			As of June 30,
			2002			2003

						(Unaudited)
		ASSETS
Cash and cash equivalents			$	335		$	8,286
Accounts receivable, less allowance for doubtful accounts of $7,516 and $8,016, respectively				41,629			45,895
Program license fees — affiliates, net of accumulated amortization				12,632			24,720
Program license fees — non-affiliates, net of accumulated amortization				46,557			52,838
Subtitling and dubbing, net of accumulated amortization				3,265			2,830
Prepaids and other assets				12,837			12,067

	Total current assets			117,255			146,636
Restricted cash				340			340
Program license fees — affiliates, net of current portion				37,318			32,416
Program license fees — non-affiliates, net of current portion				51,470			55,987
Subtitling and dubbing, net of current portion				1,051			938
Film assets, net of accumulated amortization				786,826			775,260
Subscriber acquisition fees, net of accumulated amortization				140,265			125,981
Property and equipment, net of accumulated depreciation				35,612			31,733
Goodwill				314,033			314,033
Debt issuance costs, net of accumulated amortization				6,309			5,555
Prepaids and other assets, net of current portion				1,783			1,556

	Total assets		$	1,492,262		$	1,490,435

		LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Accounts payable and accrued liabilities			$	47,425		$	38,641
Subscriber acquisition fees payable				45,930			24,030
License fees payable to affiliates				8,104			28,053
License fees payable to non-affiliates				50,652			49,939
Payables to affiliates				6,680			7,702
Interest payable to HC Crown				10			1,069
Credit facility and other interest payable				871			592
Capital lease obligation				1,433			1,495
Deferred film asset license fees				599			402

	Total current liabilities			161,704			151,923
Accrued liabilities, net of current portion				31,385			24,311
Subscriber acquisition fees payable, net of current portion				2,624			1,500
License fees payable to affiliates, net of current portion				60,229			60,229
License fees payable to non-affiliates, net of current portion				39,206			41,465
Note payable to HC Crown				5,000			75,000
Payable to Hallmark Entertainment Holdings, Inc.				52,052			52,052
Payable to Hallmark Entertainment, Inc.				47,948			47,948
Credit facility				320,000			320,000
Capital lease obligation, net of current portion				9,290			8,526
Convertible debt				47,916			50,816
Derivative liability				762			1,962

	Total liabilities			778,116			835,732
COMMITMENTS AND CONTINGENCIES
GUARANTEED PREFERRED BENEFICIAL INTEREST IN CROWN MEDIA TRUST’S DEBENTURES				221,551			236,162
REDEEMABLE PREFERRED MINORITY INTEREST				25,000			25,000
STOCKHOLDERS’ EQUITY:
Class A common stock, $.01 par value; 200,000,000 shares authorized; 73,794,606 shares issued and outstanding; as of December 31, 2002 and June 30, 2003				738			738
Class B common stock, $.01 par value; 120,000,000 shares authorized; 30,670,422 shares issued and outstanding as of December 31, 2002 and June 30, 2003				307			307
Paid-in capital				1,259,242			1,280,865
Accumulated other comprehensive income				647			1,057
Accumulated deficit				(793,339	)		(889,426	)

	Total stockholders’ equity			467,595			393,541

	Total liabilities and stockholders’ equity		$	1,492,262		$	1,490,435

The accompanying notes are an integral part of these consolidated balance sheets.

CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)


				Three Months Ended June 30,						Six Months Ended June 30,

				2002			2003			2002			2003

				(Unaudited)
Revenue:
	Subscriber fees			$	16,961		$	17,864		$	34,868		$	33,890
	Advertising				17,313			23,321			30,713			45,330
	Advertising by Hallmark Cards				1,540			350			2,710			700
	Film asset license fees				3,472			3,865			10,451			7,404
	Other revenue				21			23			34			57

			Total revenue		39,307			45,423			78,776			87,381
Cost of Services:
	Programming costs:
		Affiliates			9,380			9,987			19,762			18,724
		Non-affiliates			12,855			14,087			26,224			28,793
	Amortization of film assets				5,467			6,809			12,715			13,586
	Subscriber acquisition fee expense				5,265			6,610			9,512			12,606
	Depreciation and amortization of technical facilities				1,186			1,186			2,372			2,371
	Operating costs				16,305			11,591			29,530			22,083

			Total cost of services		50,458			50,270			100,115			98,163
Selling, general and administrative expense					12,414			12,285			28,981			26,450
Marketing expense					10,569			8,732			20,363			14,171
Depreciation and amortization expense					2,421			2,648			4,641			5,071

			Loss from operations		(36,555	)		(28,512	)		(75,324	)		(56,474	)
Guaranteed preferred beneficial interest accretion					(1,176	)		(12,171	)		(11,778	)		(23,218	)
Interest expense and other, net					(5,673	)		(7,514	)		(11,763	)		(14,856	)

			Loss before income taxes		(43,404	)		(48,197	)		(98,865	)		(94,548	)
Income tax provision					(643	)		(1,200	)		(1,192	)		(1,539	)

			Net loss	$	(44,047	)	$	(49,397	)	$	(100,057	)	$	(96,087	)

Other comprehensive income (loss):
	Gain (loss) on fair value of derivative asset				920			—			863			—
	Foreign currency translation adjustment				517			635			314			410

			Comprehensive loss	$	(42,610	)	$	(48,762	)	$	(98,880	)	$	(95,677	)
Weighted average number of Class A and Class B shares outstanding, basic and diluted					104,328			104,465			104,227			104,465

Net loss per share, basic and diluted				$	(0.42	)	$	(0.47	)	$	(0.96	)	$	(0.92	)

The accompanying notes are an integral part of these
consolidated statements of operations and comprehensive loss.

CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)


					Six Months Ended June 30,

					2002			2003

					(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
		Net loss			$	(100,057	)	$	(96,087	)
		Adjustments to reconcile net loss to net cash used in operating activities:
			Depreciation and amortization			78,875			84,795
			Accretion on guaranteed preferred beneficial interest			17,186			22,018
			(Gain) loss on change in fair value of derivative liability			(5,408	)		1,200
			Accretion on convertible debt			4,023			5,191
			Provision for allowance for doubtful accounts			3,310			1,566
			Gain on sale of property and equipment			(7	)		(15	)
			Stock-based and restricted stock compensation			12			323
			Changes in operating assets and liabilities:
				Increase in accounts receivable		(14,893	)		(5,732	)
				Additions to program license fees		(59,328	)		(65,813	)
				Increase in subtitling and dubbing		(2,923	)		(1,767	)
				Additions to subscriber acquisition fees		(5,848	)		(1,224	)
				Increase in prepaids and other assets		(1,479	)		(474	)
				Decrease in accounts payable and accrued liabilities		(11,077	)		(11,710	)
				Decrease in interest payable		(1,832	)		(768	)
				Decrease in subscriber acquisition fees payable		(14,617	)		(23,024	)
				Increase in license fees payable to affiliates		20,442			17,264
				(Decrease) increase in payables to affiliates		(1,144	)		1,007
				Increase (decrease) in deferred film asset license fees		332			(197	)

				Net cash used in operating activities		(94,433	)		(73,447	)

CASH FLOWS FROM INVESTING ACTIVITIES:
		Purchases of property and equipment				(803	)		(1,781	)
		Proceeds from disposition of property and equipment				43			38

				Net cash used in investing activities		(760	)		(1,743	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from the issuance of common stock upon exercise of stock options					1,629			—
	Proceeds from tax sharing agreement with Hallmark Cards					—			21,300
	Borrowings under the HC Crown note payable					—			70,000
	Borrowings under the credit facility					92,000			—
	Payments on the credit facility					(110,587	)		—
	Decrease in cash in escrow					111,625			—
	Distribution to holders of guaranteed preferred beneficial interest					(7,324	)		(7,406	)
	Principal payments under capital lease obligation					(645	)		(702	)

				Net cash provided by financing activities		86,698			83,192
Effect of exchange rate changes on cash						(81	)		(51	)

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