Crown Media Holdings, Inc.

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Crown Media Holdings, Inc.

6430 S. Fiddlers Green Circle, Suite 500
Greenwood Village, Colorado 80111
U.S.A.
Telephone: (303) 220-7990
Toll Free: (800) 820-7990
Fax: (303) 220-7660
Web site: http://www.crownmedia.net

Public Subsidiary of Hallmark Entertainment, Inc.
Incorporated: 1991 as Crown Media Inc.
Employees: 420
Sales: $66.8 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: CRWN
NAIC: 512120 Motion Picture and Video Distribution; 513210 Cable Networks; 513220 Cable and Other Program Distribution

Crown Media Holdings, Inc. operates the Hallmark Channel, a pay television network available over cable or satellite in the United States and more than 100 international markets. The company is a public subsidiary of Hallmark Entertainment, Inc., which in turn is a subsidiary of Hallmark Cards, Inc. Internationally, the Hallmark brand has been associated with pay television services since 1995. In the United States, the Hallmark Channel was launched in 2001.

1991-94: Acquiring and Operating Cable TV Systems

Crown Media Inc. was established in 1991 by Hallmark Cards Inc. to acquire cable television systems and programming ventures. The company was 98 percent owned by Hallmark, with Crown Chairman and CEO James Hoak owning the remaining 2 percent. Hoak was a veteran of the cable TV industry and the former chairman of MSO Heritage Communications.

Crown’s initial objective was to establish three geographic cable system clusters with a total of 500,000 subscribers by the end of 1994. The Dallas-based company’s first purchase involved ten cable systems owned by Jones Crown Partners, a partnership between Jones Intercable and Hallmark Cards that was established in 1989. Also included in the acquisition was one system owned by Jones Intercable. Altogether, the newly acquired cable systems had about 140,000 subscribers and were small-market systems located in Wisconsin.

Before the end of 1991, Crown Media acquired St. Louis-based Cencom Cable Associates Inc. Cencom controlled cable systems serving about 550,000 subscribers. Cencom managed systems serving 390,000 of those subscribers and owned and operated systems serving 160,000 of those subscribers. Following the acquisition of Cencom, Crown Media was one of the top 20 multi-system operators (MSO) in the United States.

When Crown Media planned to move Cencom’s headquarters from St. Louis to Dallas, Cencom’s top executives—including president and CEO Howard Woods, COO Barry Babcock, and CFO Jerry Kent—broke away to form a new cable company, Charter Communications, Inc., in January 1993. In 1998, Charter Communications was acquired by Microsoft co-founder Paul Allen for $4.5 billion.

Toward the end of 1993, Hallmark Cards hired investment banker Goldman, Sachs to evaluate Crown Media, which had grown to 800,000 subscribers. In June 1994, Hallmark Cards broke up Crown Media and sold its cable systems to Charter Communications and Marcus Cable for $900 million.

1994-2000: Hallmark’s Pay Television Channels Evolving into Crown Media Holdings

The sale of Crown Media’s cable systems marked a change in direction for Hallmark Cards’ cable strategy from a multisystem operator to a content provider and developer of pay television channels. In 1994, Hallmark Cards acquired RHI Entertainment, Inc., for $365 million. RHI was a leading producer of long-form television programming, including made-for-television movies and miniseries. RHI and Hallmark had been frequent television production partners in the past, and together they had co-produced five Hallmark Hall of Fame television specials. Other well-known RHI productions included Lonesome Dove, Scarlett, and Gypsy.In addition, RHI owned a film library of more than 1,800 hours of programming, including Laurel & Hardy and The Little Rascals.

Following the acquisition of RHI Entertainment, Hallmark Cards formed Hallmark Entertainment, Inc. in 1994 as a private subsidiary and parent company of RHI Entertainment. In mid-1995 Hallmark Entertainment expanded its business into pay television by forming Hallmark Entertainment Network, Inc. and launching its first pay television channel, the Hallmark Entertainment Network, in Belgium, the Netherlands, and Luxembourg. The Hallmark Entertainment Network held off from launching a domestic pay channel because of a lack of carriage space and because the domestic rights for much of its programming was held by others.

In May 1998, Hallmark Entertainment and The Jim Henson Company formed a partnership for the purpose of launching The Kermit Channel in Asia and Latin America in September 1998. Distribution for the 24-hour pay television channel would be handled by the Hallmark Entertainment Network, which had about six million subscribers worldwide. Programming on Kermit consisted of The Muppet Show and other children’s programs.

In November 1998, Hallmark Entertainment expanded its family entertainment business when it acquired a 22.5 percent interest in Odyssey Holdings, operator of the Odyssey Network. The Odyssey Network was established as the Vision Interfaith Satellite Network in 1988 by the National Interfaith Cable Coalition, a consortium of religious groups. Margaret Loesch, former worldwide vice-chairman of Fox Kids Network, was hired in 1998 to transform Odyssey into a family-oriented network. In April 1999, Hallmark Entertainment relaunched the Odyssey Network as “the first network for today’s family.”

2000: Crown Media Holdings Created

Crown Media Holdings was created in 2000 by Hallmark Entertainment for the purpose of going public and reorganizing the company’s ownership structure. Crown Media Holdings was created as a subsidiary of Hallmark Entertainment. As part of the reorganization and Crown Media’s initial public offering (IPO), Crown Media became the parent company of the Hallmark Entertainment Network and gained a 77.5 percent interest in the Odyssey Network. It did so when Hallmark Entertainment, Chase Equity Associates, Liberty Media, and the National Interfaith Cable Coalition transferred their interests in entities that owned and operated the Hallmark Entertainment Network and the Odyssey Network to Crown Media Holdings in exchange for its shares.

At the time of its IPO, Crown Media had more than 50 million subscribers worldwide. It operated two international networks: the international Hallmark Entertainment Network and The Kermit Channel, and it was part owner of the Odyssey Network. Due to conditions in the U.S. stock market, Crown Media delayed its IPO from April to May 2000 and reduced the number of shares offered from 12.5 million to ten million. The offering price was $14 a share, and the IPO raised about $140 million.

Following Crown Media’s IPO, Hallmark Entertainment retained control of the company through its ownership of all of Crown Media’s Class B shares, which were worth ten votes each. Robert Halmi, Jr., the president and CEO of Hallmark Entertainment, became chairman of Crown Media. He joined Hallmark Entertainment when it acquired RHI Entertainment, where he was the president and CEO. David Evans, who joined Hallmark Entertainment in 1999 to help take what became Crown Media Holdings public, was named president and CEO of Crown Media Holdings.

At the time of its IPO, Crown Media had yet to turn a profit, and its prospectus warned that there were no guarantees that Crown Media would achieve or sustain profitability. Crown Media (as Hallmark Entertainment Network, Inc.) lost $35.5 million in 1998 on revenue of $23.7 million, and in 1999 it lost $56.7 million on revenue of $31.9 million.

As part of Crown Media’s reorganization of the Hallmark Entertainment Network, programming on The Kermit Channel in Asia was transferred in November 2000 to the Hallmark Network, where it would air for six hours a day. Most of The Kermit Channel’s Asian audience lived in the Philippines. In addition, The Kermit Channel would continue to air in India, where it was distributed by Modi Entertainment Network.

2001: New Ventures and Acquisitions

At the beginning of 2001, Crown Media formed a new company, Crown Interactive, to make programming from its affiliated companies available to interactive television viewers. Crown Interactive’s first test involved a video-on-demand service in Singapore, where customers could view movies from the Hallmark Entertainment library. The company planned to add an e-commerce site in the future.

Company Perspectives:

Crown Media Holdings, Inc. owns and operates pay television channels dedicated to high quality, broad appeal, entertainment programming. The company currently operates and distributes the Hallmark Channel in the U.S. and the Hallmark Channel in more than 100 international markets. The combined channels have more than 73 million subscribers worldwide.

Our channels benefit from a long-term program agreement with a subsidiary of Hallmark Entertainment, Inc., our parent company. These program agreements generally provide exclusive pay television access to Hallmark Entertainment, Inc. ’s first-run presentations and extensive library of original made-for-television movies and miniseries. Hallmark Entertainment, Inc.’s library consists of more than 4,000 hours of programming, including eight of the 10 most highly rated made-for-television movies for the 1993 through 1999 television seasons, based on A.C. Nielsen ratings. Programs contained in the library have won more than 110 Emmy Awards, Golden Globe Awards, and Peabody Awards.

In March 2001, Crown Media assumed full ownership of the Odyssey Network. It acquired the remaining 22.5 percent interest in Odyssey from German media company EM.TV & Merchandising, which gained the interest when it acquired The Jim Henson Company in February 2000. Crown Media exchanged 5.4 million shares, which represented an 8.2 percent interest in Crown Media, for the German firm’s interest in the Odyssey Network.

Once Crown Media gained full control of the Odyssey Network, the company announced that the network would be renamed the Hallmark Channel in August 2001. At the time of the announcement in April, Odyssey reached 29.5 million homes. While Odyssey had gained virtually no recognition among consumers, Hallmark was a well-known brand. To facilitate the rebirth of Odyssey as the Hallmark Network, Crown Media had to renegotiate its agreement with the National Interfaith Cable Coalition, which still retained the right to run 40 hours of weekly programming on Odyssey. As part of its new agreement with the religious consortium, Crown agreed to help the coalition create and distribute a religious digital cable network. In addition, the religious group agreed to cut back its programming to 14 hours a week—including a seven-hour block on Sunday morning—and make it less overtly church-related and more broadly spiritual. Later in the year Crown Media entered into a relationship with satellite TV operator DirecTV that expanded the Hallmark Channel’s distribution to some 40 million subscribers.

Crown Media also planned other original programming for the Hallmark Channel. Projects announced for 2001-02 included two miniseries: Johnson County War, written by Lonesome Dove author Larry McMurtry, and Stranded, a four-hour family adventure inspired by the classic novel Swiss Family Robinson. Scandal in Bohemia, the third movie in a series of films based on the Sherlock Holmes short stories, was scheduled to be shown on the Hallmark Network. In addition, three series were in the works, including Telling Stories with Tomie dePaola from The Jim Henson Co., The Neverending Story based on Michael Ende’s bestselling novel, and a high school drama.

In April 2001, Crown Media acquired 700 titles from the film library of Hallmark Entertainment Distribution, a wholly owned subsidiary of Hallmark Entertainment, Inc. The films would be shown on Crown Media’s cable networks and could also be licensed to other distributors. In addition, Crown Media planned to use the titles as part of Crown Interactive. As a result of the transaction, which involved Crown Media assuming $220 million in debt and issuing more than 30 million shares of stock, Hallmark Cards and Hallmark Entertainment would own about 65 percent of the outstanding common stock of Crown Media. The transaction, which required stockholder approval, was completed on October 1, 2001.

After reporting quarterly losses in the first half of 2001, Crown Media announced a new initiative and reorganization of its domestic and international operations in October. The company planned to capitalize on opportunities for operating efficiencies and to realize economies of scale with its global brand. The plan called for more regional input throughout the world, with greater sensitivity to regional and local distribution and programming issues. The company planned to further strengthen the global Hallmark Channel brand. Overall, Crown Media anticipated a 15 percent reduction in its global workforce as it sought to achieve greater efficiencies in its operations.

Principal Subsidiaries

Crown Media Distribution; Crown Media International; Crown Media United States; Crown Entertainment; H&H Programming—Asia.

Principal Competitors

A&E Television Networks; AOL Time Warner Inc.; Discovery Communications Inc.; Fox Entertainment Group, Inc.; USA Networks Inc.; Walt Disney Company; Viacom Inc.

Key Dates:

1991:: Crown Media Inc. is formed by Hallmark Cards to acquire cable television systems and programming ventures.
1994:: Cable systems owned by Crown Media Inc. are sold to Charter Communications and Marcus Cable; Hallmark Cards acquires RHI Entertainment Inc. and forms Hallmark Entertainment, Inc.
1995:: Hallmark Entertainment, Inc. establishes Hallmark Entertainment Network, Inc. and launches its first pay television channel.
1998:: Hallmark Entertainment Network acquires a 22.5 percent interest in Odyssey Holdings, the operator of the Odyssey Network.
2000:: Hallmark Entertainment, Inc. creates Crown Media Holdings as a public subsidiary.
2001:: The Odyssey Network is rebranded and relaunched as the Hallmark Channel.