Back to GetFilings.com

Use these links to rapidly review the document
TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

Commission File Number: 000-30700

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

        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)

        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 ý    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. ý

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý    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 30, 2003, the last business day of the registrant's most recently completed second fiscal quarter, was $37,645,863.

        As of February 27, 2004, the number of shares of Class A Common Stock, $.01 par value outstanding was 73,863,037, 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 2004 Annual Meeting of Stockholders, to be filed, are incorporated by reference in Part III of this Form 10-K.

TABLE OF CONTENTS

        In this Annual Report on Form 10-K the terms "Crown Media Holdings," or the "Company" refer to Crown Media Holdings, Inc. 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.

PART I

ITEM 1. Description of Business

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.

        As a network, we offer compelling stories, masterfully written, directed and produced with talented actors. 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, 2003. The importance and appeal of this format has been confirmed by the results of ongoing quantitative research conducted for our U.S. Channel during 2001 through 2003. This research involves a number of studies to gauge the impact and appeal of the Hallmark Channel and its format. For example, one study was done by a market research company using quarterly telephone polling.

        As of February 28, 2004, our total number of subscribers had increased to approximately 114.3 million. We view a "subscriber" as a household that receives, on a full or part-time basis, the

1

Hallmark Channel on a program tier of a distributor. We determine our domestic subscribers from subscriber numbers reported by Nielsen Media Research. Our number of subscribers outside the United States are based on monthly reports received from cable, satellite and other distributors around the world which are licensed to distribute the Hallmark Channel. To our knowledge, the distributors of our Channel outside the United States use the same definition for subscribers. Subscribers include both viewers who pay a monthly fee for the tier programming and so-called "promotional" subscribers who are given free access to the tier by the distributor for a limited time with the hope that they will eventually choose to subscribe and pay for the tier. For a more detailed description of our Channels, see "—Channels—The Hallmark Channel—International" and "—Channels—The Hallmark Channel—United States."

        Programming from third parties is an important part of our Channels as we continually develop and refine our programming strategy. Our domestic and international Channels have also benefited from the volume and availability of programming in our Library. Our Channels further 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.

        We have distribution agreements with leading pay television distributors in each of our markets. Internationally, these include British Sky Broadcasting ("BSkyB"), Canal Digital, Foxtel, Measat, Multichoice, and PCTV. We currently distribute our domestic Channel through approximately 4,000 cable systems and communities and satellite providers. By the end of 2003, we had agreements with Adelphia, Cablevision, Charter, Comcast, Cox, DirecTV, EchoStar, Insight, Mediacom, other National Cable Television Cooperative ("NCTC") members, and Time Warner for the distribution of our Channel. In the United States the preceding providers account for approximately 95% of all pay cable and television subscribers as of December 31, 2003. BSkyB accounted for 8% of our consolidated revenue for the year ended December 31, 2003. BSkyB accounted for 20% of our international revenue for the year ended December 31, 2003. No individual pay television distributor or advertiser accounted for 10% of our domestic revenue for the year ended December 31, 2003. No individual pay television distributor accounted for 15% of our consolidated subscribers for the year ended December 31, 2003.

        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 14 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,

2

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 116 countries and are operated by Crown Media International and, in the United Kingdom, by Crown Entertainment Limited. 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. Significant investors in Crown Media Holdings include Hallmark Entertainment Investments Co., a subsidiary of Hallmark Cards, the National Interfaith Cable Coalition, Inc. ("NICC"), and, indirectly through their investments in Hallmark Entertainment Investments, Liberty Media Corporation ("Liberty Media") and J.P. Morgan Partners (BHCA), L. P. ("J.P. Morgan").

        Hallmark Cards controls us through its ownership of more than 80% of the equity interests in Hallmark Entertainment Investments and its control over the voting of our Class A and Class B common stock held by Hallmark Entertainment Investments. See also the description of the Hallmark Entertainment Investments Co. Stockholders Agreement in Item 13 below and Item 12 below regarding beneficial ownership of our securities.

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 providers and distributors generally restrict 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

3

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 satellites by means of a single antenna that is connected to the buildings' headend. The television signals are then distributed to individual units in the building by cable.

Sources of Revenue

Subscriber Fees

        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.

Advertising Revenue

        The advertising market differs greatly around the world. In the United States, the most developed television market, there is a growing sentiment among advertisers that advertising expenditures are shifting from broadcast television to cable television according to TNS Media Intelligence/Comepetitive Media Reporting when comparing expenditures in 2003 to those in 2002. As of December 31, 2003, according to TNS Media Intelligence/Competitive Media Reporting, 35% of all advertising expenditures were spent on cable television and 65% of all advertising expenditures were spent on broadcast television in the United States. 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

4

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 and also on our domestic Channel.

Ratings

        For the year, the domestic Hallmark Channel was rated the fastest growing cable network in terms of annual audience percentage growth in ratings for 2003 compared to 2002, with a 67% increase in ratings for total day and a two-fold increase in household impressions. The Channel experienced increases of more than 50% over 2002 in all of its key demographics for adults and women for total day. These comparisons are from data of Nielsen Media Research for 2003 and 2002 for the 52 ad-supported cable channels in the United States market. Among the 52 ad-supported cable channels in the United States market, the Hallmark Channel ranked 16th in total day with a 0.503 household rating for the 2003 year and 22nd for prime time with a 0.718 household rating for the 2003 year, according to Nielsen Media Research. In 2002 among the approximately 50 ad-supported cable channels in the United States market, the Hallmark Channel ranked 27th in total day with 0.2980 household rating for the 2002 year and 27th for primetime with 0.5450 household rating for the 2002 year, according to Nielsen Media Research. Total day means the time period measured from the time each day the broadcast of commercially-sponsored programming commences to the time such commercially-sponsored programming ends. Household impressions are the average number of television households watching a channel during a specific time period. We believe that the key demographics for the Hallmark Channel are the viewers in the groups Adults 25-54 and Women 25-54.

        Internationally, during 2003 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, increasing its television rating among adults by 36% from 2002 and its share, or percentage of viewing audience, among adults by 34%. The Channel is the 5th most watched commercial non-terrestrial channel in Poland according to AGB Polska for the 2003 year. In Denmark, ratings have grown 33% from December 2002 to December 2003 according to Gallup. The Channel ranks among the top ten multi-channel networks in Hungary according to AGB Hungary for the 2003 year.

Licensing Revenue

        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. Our licensing of film assets is an important contributor to our revenues and, because the amortization of our film assets is a non-cash expense, also to our cash flow.

5

Channels

The Hallmark Channel—United States

Overview

        Our domestic Channel ended 2003 with 56.0 million subscribers, an increase of 15% from 48.8 million at the 2002 year-end. By the end of 2003, we had agreements with Adelphia, Cablevision, Charter, Comcast, Cox, DirecTV, EchoStar, Insight, Mediacom, the National Cable Television Cooperative ("NCTC"), and Time Warner for the distribution of our Channel as well as a number of smaller pay television providers and systems.

Programming

        Our domestic Channel offers a range of high quality, entertainment programming for adults and families including movies, miniseries, epics, historical dramas, romances, literary classics, and contemporary stories. Sources for programming on our domestic Channel include the Crown Media Library, programming licensed from Hallmark Entertainment Distribution, and programming licensed from third parties. Prior to the purchase of the Crown Media Library, we licensed substantially all of the titles in that library from Hallmark Entertainment Distribution.

        Examples of programming from our Library and the Hallmark Entertainment library include, Larry McMurtry's Lonesome Dove, 10th Kingdom, Sabrina the Teenage Witch, Dog of the Yukon: Call of the Wild and Larry McMurtry's Dead Man's Walk as well as programming from "The Collection" in the Hallmark Hall of Fame library such as William Faulkner's Old Man, Rose Hill, Sarah Plain and Tall and What the Deaf Man Heard. We benefit from these original Hallmark Entertainment productions, which are sometimes premiered and often aired on our domestic Channel. Examples of third party programming shown on our domestic Channel include the popular drama series M*A*S*H, Magnum, P.I., Matlock, Touched By An Angel, Rawhide, Bonanza, and Perry Mason. Other examples of our third party programming include acquired movies and miniseries such as Roots, North and South, The Thorn Birds and Shogun. Our license agreements with third parties typically provide for a license fee paid out over the term of the license for the right to exhibit a program in the United States within a specified period of time.

Distribution

        We currently distribute our domestic Channel to approximately 62% of all United States pay television subscribers. The following table shows the approximate number of pay television households and domestic Channel subscribers for each of the eight largest pay television distributors, and all other pay television distributors as a group, in the United States as of December 31, 2003.

(1)

Source: Nielsen Code and The Nielsen Public U.E. December 2003.

6

        During 2003, we amended our long-term distribution agreement with Comcast. During 2002, we amended our long-term distribution agreement with Time Warner. During 2001, we signed or amended long-term distribution agreements with NCTC, DirecTV, Adelphia, Echostar, Cable One, Charter Communications, and Buckeye Communications.

Sources of Revenue

        We currently derive all of our domestic Channel revenue from subscriber fees and advertising sales. We charge our pay television distributors a monthly per subscriber fee for the right to broadcast our domestic Channel. Generally, these distribution agreements last from five to ten years, and sometimes include annual increases of both subscribers and per subscriber fees. A distribution agreement may also involve a payment by us for the establishment of the relationship or, together with or in lieu of any payment, the free carriage of our Channel to subscribers for a period of time and discounts or no fees if certain subscriber levels are achieved. Please see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for information regarding subscriber fees. For the years ended December 31, 2003, 2002, and 2001 revenue derived from subscriber fees for the domestic Channel were approximately $6.6 million, $13.5 million, and $13.9 million, respectively.

        We have advertising sales offices in New York, Los Angeles, Chicago, Atlanta and Detroit. In addition, we have made significant investments in programming, research, marketing and promotions, all specifically designed to support the sale of advertising time on our domestic Channel. For the years ended December 31, 2003, 2002, and 2001 revenue from the sale of advertising time on our domestic Channel were approximately $77.6 million, $46.0 million, and $25.4 million, respectively.

Sales and Marketing

        Our primary target demographic is adults aged 25 to 54 and our secondary target is adults aged 18 to 49. Our programming is targeted to adults, but is generally appropriate for viewing by the entire family, which is important to viewers, advertisers and affiliates alike.

        For over fifty years Hallmark has been a leader in high-quality original television production. The Hallmark Channel is the only home on cable television for the Hallmark Hall of Fame Collection, a selection of movies from an award-winning entertainment series. Much of the Hallmark Channel's unique programming comes from Hallmark Entertainment, including Moby Dick, Alice in Wonderland and Dinotopia. Hallmark Entertainment original productions rank among the highest-rated programs on U.S. broadcast network television.

        The power of the Hallmark brand and the quality of Hallmark Entertainment combine to:

•

provide our viewers with tangible evidence of our commitment to the best in entertainment for the entire family;



•

enhance our ability to attract advertising commitments and higher Cost-Per-Thousands ("CPM") from the largest advertisers; and



•

provide a competitive advantage in negotiating long-term distribution agreements with pay television distributors.

Hallmark Movie Channel

        In January 2004, we launched our first digital service, the Hallmark Movie Channel. The Movie Channel will feature top-rated movies and miniseries from the 4,000 hours of programming in the Crown Media Library, including such programming as Moby Dick, Oldest Living Confederate Widow Tells All and Storm in Summer. In addition, the Movie Channel will showcase Hallmark Hall of Fame Collection movies and will also feature movies from sources other than Hallmark and the Crown Media Library.

7

The Hallmark Channel—International

Overview

        The international Channel commenced 2003 with 49.5 million subscribers and ended the year with 57.3 million subscribers, an increase of 16%. We currently distribute the international Channel to 17 geographic markets covering approximately 116 countries, dubbed or subtitled into 26 languages compared to 16 geographic markets covering approximately 122 countries, dubbed or subtitled into 26 languages as of December 31, 2002. Our markets include Asia Pacific, with approximately 23.6 million subscribers, Europe, Middle East and Africa, with more than 13.4 million subscribers, Latin America, with more than 11.7 million subscribers, and the United Kingdom, with more than 8.6 million subscribers.

Programming

        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 forty projects each year. We licensed for that same time period the remaining portion of the international Channel's programming line-up from third parties. This third party programming is consistent with the themes and quality of the material we own or license from Hallmark Entertainment Distribution. We license programming from third party suppliers such as Alliance Atlantis, Beyond Distribution Pty Ltd., Carlton International Media Limited, CBS Broadcast International, Southern Star Sales Limited, Hearst Entertainment, Inc., Paramount Pictures (Australia) Pty Ltd., Columbia Tri-Star International and Buena Vista (Disney).

        During 2003, 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, The Color of Money, Judy Garland: Me and My Shadows, and Blonde: The Marilyn Monroe Story.

Distribution

        In the countries where we offer the international Channel, we distribute the Channel through a variety of distribution platforms, including cable, satellite broadcast systems, digital terrestrial television and satellite master antenna television. We distribute the Channel through distribution agreements with local pay television operators such as BSkyB, Canal Digital, Foxtel, Measat, Multichoice, and PCTV. Our distribution agreements with such operators generally last from 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., which performs 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.

8

        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.

        The following chart shows the approximate number of television households and pay television households, as estimated by Kagan World Media at December 31, 2003 (except where noted), and the number of our international Channel subscribers at year-end 2002 and 2003.

9

(1)

Total subscribers include promotional (free) subscribers at December 31, 2002, and December 31, 2003.

(2)

India includes Bangladesh, Brunei, Macau, Maldives, New Guinea, Republic of Palau, and Sri Lanka

(3)

Source: Zenith Optimedia.

(4)

Middle East includes Byelorussia, Estonia, Kazakhstan, Kyrgystan, Latvia, Lithuania, Macedonia, Middle East, Republic of Moldova and Republic of Ukraine

(5)

Other Latin America includes Aruba, Bolivia, Costa Rica, Curacao, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Nicaragua, Panama, Paraguay, Peru, and Uruguay

Sources of Revenue

        Like most international pay television channels, we currently derive the majority of our international revenue from subscriber fees and, to a lesser extent, advertising sales. We generally charge our pay television distributors a fee per subscriber for the right to broadcast our international Channel. We have increased the number of subscribers to our international Channel in the past year, and as a result, have achieved an increase in revenue generated from subscriber fees. For the years ended December 31, 2003, 2002, and 2001 revenue derived from subscriber fees for the international Channel were approximately $62.3 million, $54.4 million, and $52.6 million, respectively. International fees per subscriber have and will continue to experience downward pressure due to the competitive nature of the industry, the growth of digital cable, political and economic turmoil in Latin America and the shift in the industry in the more developed countries from subscriber fee revenue to advertising revenue. Our international fees may decline if we exit certain markets and utilize strategic alliances in other markets.

        We also derive revenue from the sale of advertising time on our international Channel. We generate revenue directly from advertisers as well as from our pay television distributors under distribution agreements that may provide for a sharing of revenue from advertising. We believe that the number of subscribers to our international Channel and the favorable demographics of its family-focused audience provide us with the opportunity to increase revenue from the sale of advertising time. Lower guaranteed advertising revenue in our United Kingdom market and fluctuating foreign exchange rates may hinder increases in certain markets. Currently advertising revenue from our international Channel is derived primarily from activities in a limited number of countries, including East Asia, Mexico, Poland, South Africa, the United Kingdom and certain countries in Latin America. For the

10

years ended December 31, 2003, 2002, and 2001 revenue from the sale of advertising on our international Channel were $20.5 million, $23.1 million, and $12.1 million, respectively.

        Our Network Operations Center, which enables us to control delivery of our Channels to our pay television distributors, allows us to insert commercials into our programming from a central point and we can deploy new feeds quickly while benefiting from economies of scale. Insertion of a commercial can also take place in a country, which sometimes occurs in South Africa, the United Kingdom and Argentina.

        The Company currently has international sales offices in Buenos Aires, Hong Kong, London, Mumbai, Sydney and Taipei.

Sales and Marketing

        Our international Channel focuses its marketing efforts on maximizing our two revenue streams, distribution and advertising sales, in the individual markets in which the Channel is distributed. Our international Channel's marketing efforts vary by market depending on the maturity of the local television industry, the level of distribution of our Channel and the potential for the sale of advertising.

        In markets where our international Channel is not carried by all the pay television distributors, marketing efforts are primarily directed toward potential new distributors. These 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 our international Channel has obtained substantial distribution or has exclusive agreements with primary distributors, marketing efforts are primarily directed toward maintaining subscribers and viewership. Our efforts in these markets are primarily directed toward a target of adults 25 to 54. These efforts often include traditional marketing campaigns consisting of on-air promotion; print, billboard, cross-channels, radio and television advertising and sometimes these efforts are partially funded by our pay television distributors in each market. Additionally, we emphasize our unique relationship with our primary content supplier, Hallmark Entertainment Distribution, through the use of premier screening events, press tours with actors and actresses and viewer trips to movie sets. We also use our website to market and promote the Channel to consumers through schedule information, movie synopses, games and contests all of which are localized across the region. This is addition to a comprehensive business to business website for our external customers such as journalists, affiliates and local agents.

        In markets where we are developing our international Channel's advertising business, marketing efforts are also directed toward potential advertisers. When marketing the Hallmark Channel to potential advertisers, we use local representation to target media planners and buyers and international advertisers.

Network Operations Center

        Crown Media International reached an agreement with KSE Media Ventures, LLC to be the playback and uplink services provider for KMV regional sports channel, which will launch in August 2004, from the Company's Network Operations Center in Denver, Colorado.

Channel Operations

        The programming departments at each of our regional offices or partners are responsible for ensuring the consistent quality of the programming we offer. The programming, scheduling and acquisitions departments work in conjunction with the traffic department and creative services to create

11

the distinctive appearance of our Channels. Some of these functions are outsourced on an as-needed basis.

        The creation of our Channels begins with the acquisition of programming. We have over 700 titles in the Crown Media Library. In addition, we license programming from Hallmark Entertainment Distribution and other program suppliers. Our staff or third parties review and summarize all potential programming to ensure compliance with our quality and content standards. The acquisitions staff in our regional offices licenses programming based on the amount of new programming required on the Channels. Each of the acquisitions offices work together to leverage multi-channel acquisitions across many territories to reduce license fees, but remain sensitive to specific markets with targeted localized programming.

        In most of our international markets, we customize the Hallmark Channel 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 in the regional offices in London and Hong Kong and by Pramer in Buenos Aires. Program language elements are typically shipped to the specific region to ensure that nuances in dialect of the particular language are captured. The language versions are then combined with the other programming elements.

        The creation of on-air promotional segments "interstitials", which are broadcast between the feature movies, miniseries and series, are typically outsourced to external vendors. Promotional segments are prepared in many languages for broadcast worldwide. These interstitials are intended to invite viewership, guide viewers to specific programming, and promote "brand awareness" for the Hallmark Channel.

        The scheduling department in each region creates the play list, which contains a list of daily programming. The scheduling department works with marketing personnel to continuously monitor the programming mix. The play list is then forwarded to the traffic department.

        The traffic department inserts promotional segments and advertising into the play list and creates the daily log, which contains a detailed schedule of the stream of programming, commercials and promotional materials that will ultimately be viewed by the subscriber for each regional feed of the Hallmark Channel. The daily log, together with digital tapes that contain the corresponding programming, are then forwarded to either our Network Operations Center or, to the third party facility, which is performing the playback and uplink services for the feed. Digital tapes that contain the promotional segments are forwarded to either our Network Operations Center or to the third party origination and playback facility separately.

Channel Delivery

        We deliver the daily log and digital tapes to our Network Operations Center or to a third party origination and playback facility for each market, where the programming, promotional and advertising elements are combined and compressed into a single signal, and transported 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 and Direct-to-Home satellite services operated by pay television distributors who receive and decode our signal and transmit our Channel.

        Our global Network Operations Center consisting of 6,000 square feet at our Greenwood Village, Colorado headquarters commenced operations in February 2001 and has the ability to perform origination and playback services for up to 32 programming Channels. The Network Operations Center is an efficient, state of the art broadcasting operation. The facility enables us to efficiently expand distribution into new markets, control delivery of our Channels to our pay television distributors,

12

thereby enhancing on air quality and reliability, while containing cost, enhance our ability to generate advertising revenue, distribute programming in digital and other formats as required in the rapidly evolving broadband distribution environment, while consolidating our library management; and offer playback and related services to other channel providers.

        In 2001, we launched the Central Europe, Eastern Europe, Russia, Middle East, Israel, Latin America, Spain, Turkey and Scandilux feeds from our Network Operations Center. In February 2003, the playback operations for the two domestic feeds of the Hallmark Channel were transferred from a facility in Los Angeles to the Network Operations Center in Denver. By the end of the second quarter of 2003, the playback operations of all the Channel's Asian feeds were moved from a facility in Hong Kong to the Network Operations Center. Also in the second quarter of 2003, Pramer started producing the Channel's four feeds for Latin America at a facility in Buenos Aires, however, three of the feeds are then be transmitted back to our Network Operations Center for distribution over our satellite capacity to our affiliates in most of Latin America. The remaining feed is uplinked by Pramer from Buenos Aires for distribution to subscribers in Argentina, Uruguay and Paraguay.

        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.