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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)

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: 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 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.     o

     As of March 13, 2002, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $110,206,777. This excludes shares held by persons who may be considered affiliates.

     As of March 13, 2002, the number of shares of Class A Common Stock, $.01 par value outstanding was 73,575,830, 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 2002 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”) 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 Annual Report on 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 “we,” “us” and “our” refer to Crown Media Holdings, and, unless the context requires otherwise, Crown Media International, Inc. (“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 (the “Crown Media Trust”), and H&H Programming — Asia, L.L.C. (“H&H Programming”), 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, Crayola and other product or service names are trademarks or registered trademarks of their owners.

PART I

Item 1.     Business

Company Overview

      We own and operate pay television channels, known as the Hallmark Channel, dedicated to high quality, entertainment programming for adults, which is also appealing to children. Based upon research conducted for us, we believe that this format is both important to consumers and much needed by consumers. As a network, we offer great stories with great actors, masterfully written, directed and produced. In addition, we recently purchased more than 700 titles from the Hallmark Entertainment Distribution, LLC (“Hallmark Entertainment Distribution”) library. We believe that with the programming we own (the “Crown Media Library”), together with the programming we license from Hallmark Entertainment Distribution and third parties, we are establishing the Hallmark Channel internationally and in the United States as destinations for viewers seeking high quality family-friendly entertainment and as attractive outlets for advertisers seeking to target these viewers. We have distribution agreements with leading pay television distributors in each of our markets. We distribute the channel internationally and in the United States. The following table shows for our channels, our

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      As of February 28, 2002, our total number of subscribers had increased to approximately 89.5 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 are expected to benefit from our newly acquired Crown Media 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.

      We have distribution agreements with leading pay television distributors in each of our markets. Internationally, these include British Sky Broadcasting, Sky Network, Videoland, Telepiu, Via Digital and Measat. In the United States, the nine largest pay television distributors account for approximately 85% of all pay cable and television subscribers as of December 31, 2001. We currently distribute our U.S. channel on cable and satellite systems operated by each of these nine pay television distributors, and at December 31, 2001, we had long-term distribution agreements with eight of the top nine pay television distributors. We are seeking to increase our subscriber base by signing a long-term distribution agreement with the remaining top nine distributor. No individual pay television distributor accounted for more than 10% of our consolidated revenues or 15% of our consolidated subscribers for the year ended December 31, 2001.

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

      Information concerning revenues, 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 the Report.

Development of Business

      Internationally, the Hallmark Channel is operated and distributed in approximately 110 international countries by Crown Media International, which commenced operations as a Delaware corporation in June

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      On September 28, 2001, Crown Media Holdings completed the acquisition of the Crown Media Library, comprised of approximately 700 film titles and related rights and property, representing over 3,000 hours of programming, from the film assets of Hallmark Entertainment Distribution, a wholly-owned subsidiary of Hallmark Entertainment, LLC (“Hallmark Entertainment”). Under the terms of the agreement, we assumed $220.0 million of Hallmark Entertainment Distribution debt and payables and issued 33,744,528 shares of our Class A common stock. The number of shares of common stock was determined by a formula based on the average closing price of the common stock from November 6, 2000 (the date we announced that we were contemplating the transaction) to September 27, 2001 (the day prior to closing), which average price was $17.78 per share. A committee of directors independent of Hallmark Entertainment and its affiliates considered and negotiated this transaction, including the purchase price, and received a fairness opinion from its financial advisor. Additionally, the stockholders of Crown Media Holdings, other than Hallmark Cards and its affiliates, approved the transaction at a meeting on July 17, 2001. Of the shares issued in the transaction, 425,000 shares were issued into escrow and will be returned to us if a previously announced, proposed settlement of a stockholder lawsuit relating to the transaction becomes final.

      Crown Media Holdings recorded the film assets at carrying cost for financial reporting purposes, which was less than the fair value at the closing date, because the transaction was entered into by entities under common control. In accordance with the Purchase and Sale Agreement with Hallmark Entertainment, Hallmark Entertainment Distribution had 60 days from the close of the transaction to provide Crown Media Holdings with any adjustments to the carrying cost of the film assets. These adjustments have been made and are properly reflected in our financial statements.

      For the first five years of our existence, we relied upon our affiliates and third-party providers to originate and distribute the Hallmark Channel worldwide. Faced with rapid distribution growth throughout Europe, Latin America and Asia, we decided to build a worldwide playback and origination center in Greenwood Village, Colorado. On February 14, 2001, we opened our advanced, fully digital 6,000 square foot global Network Operations Center, with the launch of three channels into Europe. In the following weeks, additional European channels were launched, followed by launches into Israel, Russia, the Middle East and Latin America.

      The Network Operations Center enables us to control signal operations for many of our channels, with the intent of having high on-air transmission quality, achieving economies of scale in production and distribution, facilitating the roll-out of new channels, allowing for distribution of programming in digital and other formats as required in the rapidly evolving broadband environment and enabling us to provide increased support to our advertisers. The Network Operations Center currently has capacity to distribute thirty-two channels and is distributing our programming on twelve feeds throughout Europe, Latin America and the Middle East. We intend to distribute our programming to additional countries (including the U.S.) through the Network Operations Center as our existing arrangements with third party up-link providers expire.

      In order to utilize the synergies between Crown Media International, our international operating subsidiary, and Crown Media United States, our domestic operating subsidiary, approximately 15% of the

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      On September 28, 2001, we entered into a credit agreement with a syndicate of banks, led by JP Morgan Chase Bank (formerly The Chase Manhattan Bank) as Administrative Agent and Issuing Bank, under which the banks extended to us a five-year secured credit facility of up to $285.0 million, later increased in 2001 to $320.0 million. For further information see “— Liquidity and Capital Resources”.

      On December 17, 2001, we completed a $265.0 million private placement to a group of institutional investors. For further information see “— Liquidity and Capital Resources”.

      In August 2001, we completed the re-branding of our international channel, formerly the Hallmark Entertainment Network, and our U.S. channel, formerly the Odyssey Network, as the Hallmark Channel. We believe that this re-branding has enabled us to capitalize on the popularity of the Hallmark brand. We believe that viewers and distributors associate the Hallmark brand with high quality, family friendly entertainment, and we expect that our association with this brand will facilitate our efforts to achieve increased distribution and to attract additional viewers that will lead to higher ratings and advertising revenues.

      In August 2001, Crown Media Holdings and DIRECTV, Inc. entered into a strategic relationship under which the domestic Hallmark Channel was repositioned in DIRECTV’s TOTAL CHOICE® Package.

      With this repositioning, the total distribution of the Hallmark Channel in the United States expanded to approximately 40 million subscribers by the end of September 2001. In addition to this agreement for expanded distribution, the two companies are exploring the distribution of additional programming services, new interactive broadband applications and pay-per-view distribution of programs from the Crown Media Library and additional programs of Hallmark Entertainment. As part of this relationship, DIRECTV received approximately 5.4 million shares of Crown Media Holdings’ Class A common stock.

      In connection with the July 27, 2001, purchase by Hallmark Entertainment of the 5,377,721 shares of Crown Media Holdings Class A common stock held by The Jim Henson Company, a subsidiary of German Media Company EM.TV, Crown Media United States substantially revised its two program agreements with The Jim Henson Company and EM.TV, under which Crown Media United States was obligated to purchase both pre-existing and original programming. The revisions replace all prior obligations. Crown Media United States now licenses only two series from The Jim Henson Company. For the revisions to the agreements, Crown Media United States paid to The Jim Henson Company and EM.TV $13.0 million and wrote-off program license fees totaling $15.2 million. The entire $28.2 million is included in non-affiliate programming costs in the accompanying consolidated statement of operations for the year ended December 31, 2001.

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      We have been engaged in joint efforts with Hallmark Entertainment to develop an interactive television model designed to incorporate a wide array of products and services from Crown Media Holdings, Hallmark Cards, Hallmark Entertainment and others. This new television application involves a graphic user interface, appearing on the television screen that will allow consumers to use several features. These can include video-on-demand (“VOD”), which will allow consumers to select and view films from our library, an interactive arts and crafts channel for kids featuring Crayola® products, and a unique electronic messaging system that will allow consumers to incorporate film clips from our library in their message. We are testing this application in several markets.

      On November 19, 2001, Hallmark Entertainment Distribution, Crown Media Distribution, and iN DEMAND, the nation’s leading pay-per-view network, signed a cable video-on-demand licensing agreement for titles housed in Hallmark Entertainment Distribution’s and Crown Media Distribution’s program libraries. Under terms of the agreement, Hallmark Entertainment and Crown Media Distribution provide iN DEMAND, on a non-exclusive basis, with selected telefilms, miniseries, series and specials housed in their respective libraries for the pay-per-view network’s recently launched VOD service.

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, movies, television miniseries, series and other programming. Due to our recent acquisition of the Crown Media Library, we are now also a program supplier. Program suppliers generate revenues by licensing their programming to broadcasters and 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 free-to-air broadcasters such as ABC, NBC, CBS, FOX, WB and the BBC. Pay television channel providers both produce programming and acquire or license programming from program suppliers and generally package the programming according to an overriding theme. 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 an audience with a certain demographic composition, so that they can then sell advertising to advertisers seeking to reach that audience.

      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 have begun to offer additional broadband services such as Internet access, telephony and video-on-demand over their systems.

      As a result of the recently increased competition for limited analog channel space in the United States, pay television channel providers are often required to pay subscriber acquisition fees to pay television distributors for carriage on their systems. These subscriber acquisition fees are paid to television distributors on a per subscriber basis and generally in advance of the receipt of subscriber fee revenues from such pay television distributors.

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

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Sources of Revenue

      Pay television customers subscribe for 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. In most markets, pay television distributors generally pay a fee per subscriber to channel providers. We are a channel provider.

      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, 2000, 52% of all advertising expenditures were spent on television and 10% 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. Program ratings systems in many non-United States markets are also less developed, and as a result, advertisers rely largely on subscriber counts rather than empirical measurements when buying advertising time.

      Television advertising is sold in a variety of formats. Many pay television channels 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 broadcasts 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.

      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.

      Program suppliers sell or license programming to pay television channel providers who pay a license fee for the right to air the programming over a certain period in their program package. Revenue from television and distribution licensing agreements is recognized 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 as deferred revenue. Long-term receivables arising from licensing agreements are recorded at their net present value.

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Channels

      The international channel commenced 2001 with 33.5 million subscribers and ended the year with 44.4 million subscribers, an increase of 32%. We currently distribute the international channel to 22 geographic markets covering approximately 110 countries, dubbed or subtitled into 26 languages. Our markets include Asia Pacific, with 18.2 million subscribers, Latin America, with 11.0 million subscribers, Europe, Middle East and Africa, with 9.6 million subscribers, and the United Kingdom, with 5.6 million subscribers.

      The international channel offers a range of award-winning programming including made-for-television movies, miniseries, epics, historical dramas, literary classics, romances and contemporary stories. We seek programming that is consistent with our programming theme: “great stories that stay with you.” The high quality, broad appeal, entertainment programming we offer is based on classic literature and universal themes, includes world-renowned actors and actresses, such as Katherine Hepburn, Paul Newman, Gregory Peck, Glenn Close, Sidney Poitier, Whoopi Goldberg, Anjelica Huston, James Earl Jones, and James Coburn 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, 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, 2001, approximately 64% of our international programming was from the Crown Media Library or licensed from Hallmark Entertainment Distribution. 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 Carlton International Media Limited, CBS Broadcast International, Alliance Atlantis International Television Distribution Limited, Beyond Distribution Pty Ltd., Southern Star Sales Limited, Hearst Entertainment, Inc., Paramount Pictures (Australia) Pty Ltd., Columbia Tri-Star International and Buena Vista (Disney).

      During 2001, we aired third-party series such as Star Trek, Judging Amy, and Law and Order and acquired for 2002 The Guardian, Party of Five, Touched by an Angel, and more Law and Order and Judging Amy. 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 partner with international pay television distributors such as BSkyB, Sky Network, Videoland, Telepiu, Via Digital and Measat, and our international distribution agreements with such distributors generally last two to five years. We have the capability to create and deliver our channel in a short period of time through our broadcast infrastructure.

      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

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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, 2001 (except where noted), and the number of our international channel subscribers at year-end 2000 and 2001.

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(1)	Total subscribers include promotional (free) subscribers at December 31, 2000, and December 31, 2001.
(2)	Source: Zenith Media.
(3)	Source: Baskerville Communications Corporation.
(4)	India includes Bangladesh, Brunei, Macau, Mauritius, New Guinea, Republic of Palau, and Sri Lanka
(5)	Other Latin America includes Aruba, Bolivia, Costa Rica, Curacao, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Nicaragua, Panama, Paraguay, Peru, and Uruguay
(6)	Middle East includes Estonia, Kazakhstan, Latvia, Lithuania, Middle East, and Republic of Ukraine

      Like most international pay television channels, we currently derive substantially all of our international revenues 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 significantly increased the number of subscribers to our international channel in the past year, and as a result, have achieved an increase in revenues generated from subscriber fees. International fees per subscriber are expected to experience downward pressure in the future due to the competitive nature of the industry, the growth of digital cable, political and economic turmoil and the shift in the industry from subscriber fees revenue to advertising revenues. For the years ended December 31, 2001, 2000, and 1999 revenues derived from subscriber fees for the international channel were approximately $52.6 million, $39.8 million, and $27.7 million, respectively.

      We also derive revenues from the sale of advertising time on our international channel. We generate revenues directly from advertisers as well as from our pay television distributors under distribution agreements that may provide for a sharing of net revenues from advertising. We believe that the increasing number of subscribers to our international channel and the favorable demographics of its family audience provide us with the opportunity to substantially increase revenues from the sale of advertising time. Currently the advertising revenues from our international channel are derived primarily from activities in a limited number of countries, including certain countries in East Asia, the United Kingdom, Poland, South Africa, Mexico, and certain other countries in Latin America.

      Our core advertising staff has developed and is implementing our advertising sales strategy. We have identified key markets and opened sales offices and identified potential clients in these markets. We have advertising sales offices in Miami, New York, Singapore, and London, and have entered into representation

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      During 2000 and 2001, we increased the number of satellite feeds delivering our channel, which enabled us to further customize our channel in specific markets. For example, we now send multiple signals to Latin America that have been customized to cater to certain key countries of Latin America, rather than sending a single feed to all of Latin America. We believe localized feeds will lead to more opportunities for the sale of advertising to local businesses or to multinational advertisers interested in reaching customers in specific countries. We also built and launched a Network Operations Center, which enables us to control delivery of our channels to our pay television distributors. As a result, we are able to insert commercials into our programming, instead of relying on our affiliates for that service.

      For the years ended December 31, 2001, 2000, and 1999 revenues from the sale of advertising on our international channel were $12.1 million, $6.0 million, and $1.7 million, respectively.

      Our international channel focuses its marketing efforts to maximize our two revenue streams 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 international channel and the potential for the sale of advertising.

      In markets where our international channel has not maximized its carriage with pay television distributors, marketing efforts are primarily directed toward potential new distributors. These marketing 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 and increasing subscribers and viewership. Our efforts in these markets are directed toward adults ages 18 to 49. These consumer-directed marketing efforts are coordinated with and are often partially funded by our pay television distributors in each market. These efforts often include traditional marketing campaigns consisting of print, billboard, cross-channels, radio and television advertising. Additionally, we emphasize our unique relationship with our primary content supplier, Hallmark Entertainment, 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 through schedule information, movie synopses, games and contests.

      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 focus on media planners and buyers and on regional and international advertisers.

      Our domestic channel ended 2001 with 43.5 million subscribers, an increase of 64% for the year. We currently distribute our domestic channel through more than 25 cable operators and satellite providers. By the end of 2001, we had agreements with AT&T, Time Warner, DirecTV, Charter, Echostar, Cox, Adelphia, and Cablevision for the distribution of our channel, which are eight of the nine largest pay television distributors in the United States.

      Our domestic channel offers a range of high quality, broad appeal, entertainment programming including movies, miniseries, epics, historical dramas, romances, literary classics, and contemporary stories. Our primary sources for programming on our domestic channel are the Crown Media Library and programming licensed

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      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” from the Hallmark Hall of Fame library such as William Faulkner’s Old Man, Rose Hill, Sarah Plain and Tall and Night Ride Home. 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 Dr. Quinn Medicine Woman, Northern Exposure, Hart to Hart, I Dream of Jeannie and Bewitched. Other examples of our third party programming include acquired movies and miniseries such as Roots, North and South, Great Gatsby, Animal Farm and Don Quixote. Our license agreements with third parties typically provide for an upfront license fee for the right to exhibit a program in the United States within a specified period of time.

      We currently distribute our domestic channel to approximately 49% 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 nine largest pay television distributors, and all other pay television distributors as a group, in the United States as of December 31, 2001.

(1)	Sources: Nielsen Code and The Nielsen Public U.E. January 2002 and Skyreport November 2001.

      During 2001, we signed or amended long-term distribution agreements with NCTC, DirecTV, Adelphia, Echostar, Cable One, Charter Communications, MediaOne and Buckeye Communications.

      We currently derive all of our revenues of our domestic channel 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 for five to 10 years, and 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. In August 2001, we entered into a strategic relationship with DirecTV under which the Hallmark Channel was repositioned to DirecTV’s TOTAL CHOICE Package,

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      For additional information regarding the DirecTV relationship and discussions with other distributors, please see “Revenues” under Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.

      As a result of our domestic channel’s demographically favorable subscriber base, we generate significant revenues from the sale of advertising time. We have advertising sales offices in New York, Los Angeles, Chicago 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, 2001, 2000, and 1999 revenues from the sale of advertising time on our domestic channel were approximately $25.4 million, $13.7 million, and $9.3 million, respectively.

      Our target demographic is adults 18-49. Our programming, however, is family-friendly. Extensive market research indicated an opportunity for quality programming targeted to adults yet also appealing to children. We believe that such programming encourages families to watch television together, resulting in larger audiences and viewer demographics more attractive to advertisers.

      Access to our library and the Hallmark Entertainment Distribution library and its future output helps to ensure access to high quality programming that is consistent with our brand positioning. In addition, our association with these known and trusted brands:

	•	provides our viewers with tangible evidence of our commitment to provide entertainment appropriate for the entire family;
	•	significantly enhances our ability to attract advertising commitments from the largest advertisers; and
	•	provides a competitive advantage in negotiating long-term distribution agreements with pay television distributors.

      In August 2001, we completed the re-branding of our domestic channel as the Hallmark Channel. We believe this rebranding has enabled us to capitalize on the popularity of the Hallmark brand.

      Our qualitative and quantitative research (Mindy Goldberg Associates national focus groups January and February 2001 and Yankelovich Research 2001) had previously shown that television viewers have a real need for quality television entertainment for adults that the entire family could watch together. Research stated that the “halo effect” of the Hallmark Card brand, as well as the Hallmark Hall of Fame Collection name, paved the way for these viewers to expect high quality family-friendly programming they could trust. In the opinion of viewers, according to research, the four core attributes of the Hallmark Channel are “entertainment,” “quality,” “contemporary,” and “family-friendly.”

      Further, the research indicated that the Hallmark Channel would have two groups of “built-in” “loyalist” viewers eager to watch the channel. They were “soccer moms,” women 25-49 with children under 16 living at home and “empty-nesters,” women 25-54 with no young children at home.

      We re-branded the Hallmark Channel with a multi-media campaign that involved commercials on other channels, national magazines, spot/network radio, outdoor in selected markets and use of advertising on our channel. We also targeted distributors with advertisements in the trade press and advertisers and advertising agencies with trade press advertising as well as targeted out-of-home advertising in New York City areas where the agencies are located. In addition, a major public relations campaign garnered covers of Sunday magazine TV guides and feature articles, while sponsorship of prestigious industry functions (Academy of

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      The re-branding campaign, designed to differentiate the Hallmark Channel as contemporary, fresh and surprising, positioned the network as the one that offers “Great stories that stay with you long after the television set is turned off. Stories with the world’s greatest actors, masterfully written, directed and produced.”

      During the fourth quarter 2001, our domestic channel increased its “time spent viewing” per day (94 minutes vs. 74 minutes) representing a +27% increase over its fourth quarter 2000 results.

Channel Operations

      The programming departments at each of our channels 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 the distinctive appearance of our channels. Since October 2001, the creative services function has been outsourced on an as-needed basis.

      The creation of our channels begins with the acquisition of programming. We recently acquired over 700 titles from the Hallmark Entertainment Distribution library, which now comprise the Crown Media Library. In addition, we license programming from Hallmark Entertainment Distribution and other program suppliers. Our staff reviews and summarizes all potential programming to ensure compliance with our quality and content standards. The acquisitions department licenses programming based on the amount of new programming required on our channels. In order to meet its broad programming requirements, our international channel’s acquisitions department leverages multi-channel acquisitions across many territories to reduce license fees, but remains 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 by our program operations department. Program language elements are typically shipped to the specific region to ensure that nuances in dialect of the particular language are captured. The elements are then returned to our Denver headquarters, where the language elements are combined with the other programming elements.

      The creation of on-air promotional segments or interstitials, which are broadcast between the feature movies, miniseries and series, has been outsourced since October 2001 to external vendors. Promotional segments are prepared in more than 26 languages for broadcast worldwide. These interstitials are intended to invite viewership, guide viewers to specific programming, and promote a “Brand Awareness” image for the Hallmark Channel.

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

      The traffic department inserts promotional segments and advertising into the playlist and creates the daily log, which is the stream of programming that will ultimately be viewed by the subscriber. The daily log, together with digital tapes that contain the corresponding programming, are then forwarded to either our Network Operations Center or to an origination and playback facility, which is operated by a third party. 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 delivered to an uplink facility. The uplink facility then

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      Our global Network Operations Center at our Greenwood Village, Colorado headquarters commenced operations in February 2001 and has the ability to perform origination and playback services for both of our channels 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, thereby enhancing on air quality and reliability, while containing cost;
	•	enhance our ability to generate advertising revenues; and
	•	distribute programming in digital and other formats as required in the rapidly evolving broadband distribution environment, while consolidating our library management.

      In 2001, we launched the Central Europe, Eastern Europe, Russian and Middle East, Israel, Latin America, Spain, Turkey and Scandilux feeds from our Network Operations Center. Currently, all signals from Latin America, Israel and Europe (other than Italy and the United Kingdom) are played out of our Denver facility. The remaining signals will be brought into our facilities as the current playback vendor contracts expire.

      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.

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      The following map details the locations of satellites used by us worldwide.

Film Distribution

      Crown Media Distribution owns the Crown Media Library and generates revenue from the film assets in the library by granting licenses to use the films to third parties. We are also using the films as programming for our television channels and interactive uses.

      Crown Media Distribution oversees sales and distribution of the Crown Media Library to third-party licensees. Third-party licensees purchase available rights, which primarily include all forms of television and home video. Crown Media Distribution has a service agreement with Hallmark Entertainment, providing for services relating to the administration, distribution and other exploitation of the Crown Media Library, and directs the Hallmark sales force worldwide in all sales matters pertaining to the Crown Media Library.

Competition

      The pay television industry is highly competitive. Our channels compete for distribution, viewers and advertisers with other pay television channels, broadcast television channels and with other general forms of entertainment.

      There are several sources of competition within our industry, each of which affects our business strategy. Our domestic channel competes with other family oriented programming from TNT, USA Network, A&E, ABC Family, Lifetime and other similarly targeted channels. Our international channel competes with family oriented programming from AXN, I-SAT, Canal Fox, TNT, and USA Network. We compete with these channels for viewers and advertising dollars based upon quality of programming, number of subscribers, ratings and subscriber demographics. We compete with all channels for carriage on cable and satellite systems that may have limited capacity.

      Competition continues to intensify as the industry shifts from analog distribution to digital distribution. Many pay television distributors are in the process of upgrading their physical infrastructures to accommodate digital delivery, which will provide significantly more channel capacity. We believe that it will take several years for the majority of current subscribers to convert to, and begin paying for, upgraded services. In an effort to accelerate the conversion, pay television distributors are attempting to place new channels on their digital

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Competitive Strengths

      We have established a track record of providing high quality programming throughout the world. We believe that our primary competitive strengths include the following:

      Our recent purchase of more than 700 titles from the Hallmark Entertainment Distribution library gives us control over a significant amount of popular and award-winning programming that we can either air on our channels or license to third parties. These titles provide us with a portion of our core programming, and by owning these titles, we have the flexibility to use them as needed to create the most effective program schedules. Owning these titles also eliminates the license fees we otherwise would have to pay for these titles and creates a new revenue stream for us from licensing the titles to third parties. As of January 1, 2001, we have also entered into a five-year program agreement with Hallmark Entertainment (renewable at our option for an additional five-year period) that will provide us with access to new quality productions, as well as the titles in the Hallmark Entertainment Distribution library that we did not purchase.

      We have re-branded our international channel, formerly the Hallmark Entertainment Network, and our domestic channel, formerly the Odyssey Network, as the Hallmark Channel. We believe that viewers and distributors will associate the Hallmark brand with family values and high quality content and we expect that our association with this brand will facilitate our efforts to achieve increased distribution and to attract additional viewers that will lead to higher ratings and advertising revenues.

      We currently have long-term distribution agreements with eight of the nine largest pay television distributors in the United States. We are also seeking to enter into a similar long-term distribution agreement with the remaining domestic distributor. The terms of our distribution agreements generally provide for rate increases to us over time, although some provide for lower subscriber fees if certain levels of subscribers are achieved.

      Members of our senior management team have experience launching, promoting and operating channels both domestically and internationally. They have held senior positions at The Discovery Channel, Cable Satellite Public Affairs Network (“C-SPAN”), SCI FI Channel, the News Corporation, Fox Broadcasting Company, Sky Broadcasting, Tele-Communications, Inc., ABC, CBS Sports, Turner Network Television (“TNT”), USA Network, MediaOne, and Granada Medal.

Research

      The research departments at Crown Media Holdings provide strategic and tactical guidance to decision-makers within the company, as well as providing information about the channel to potential advertisers and affiliates.

      Over the past two years, we substantially increased our commitment to serving the needs of our various markets by establishing research departments at Crown Media International and Crown Media United States. These departments provide data on the size and demographics of our audience to our advertising sales group, and information about our audiences, competitors, markets and industry to decision makers in our Company.

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      Our international channel began 2001 subscribing to ratings services in two countries; by the end of the year, we had established subscriptions to nine ratings services in Latin America and Asia. These services provide data on the size and composition of our audience to potential advertising clients, as well as providing information that is used within the company to make knowledge-based decisions regarding programming, marketing, and other issues.

      In early 2001, we completed the two-phase branding study begun the year before. This large study on viewer perceptions of the Hallmark Channel around the world helped us to refine our programming mix and our promotional messages. Its findings have also been used as the basis for many affiliate and advertising sales presentations. Over the course of the year, audience and advertiser research was conducted in four of our five key ad-supported markets — Argentina, India, Mexico, and Taiwan — to help us tailor our product and communication to the needs of those markets.

      Currently, our domestic channel’s research department translates our overall business strategy into a cohesive research program. This information assists our executives to more effectively target, brand, promote, program, and better understand where opportunities lie, in order to increase our domestic channel’s market share.

      Last year the research department was reorganized, acquiring sophisticated ratings systems (Npower, PNF2 and Adviews) and competitive tracking database hardware and software. Trends and changes from these ratings systems are reported to top management for short and long-term strategic planning. Additionally, the research department established a capability to do in-house pilot testing at cost for new or existing original product.

      Our domestic channel’s research department was responsible for the development and execution of all re-branding research that transformed the Odyssey Network to the Hallmark Channel. The research studies successfully repositioned the network with advertisers, cable operators and viewers. In January and February 2001 nineteen Branding Focus groups were conducted among women and men in different life stages to assess the viability of our domestic channel. Yankelovich Partners were then commissioned in March 2001 to conduct a national representative study among cable subscribers in order to assess viewer interest in the new Hallmark Channel.

      Our domestic channel’s performance is tracked through an internal tracking study established in July 2001, which is a monthly telephone survey conducted among a national probability sample of approximately 1000 adults. As of January 2002, the department also subscribes to Equitrends Research for brand data, which includes quality, salience, and equity scores for both television networks and all brands. Another valuable resource is Cable Q, a research service that virtually all advertisers and networks have subscribed to for more than thirty years. Cable Q data is useful for monitoring the level of “viewer satisfaction.” The TVQ/ Cable Q system is distinguished by its ability to measure the “commitment” viewers develop over time to specific shows and cable nets. Historically, this resource has served the industry as a solid indicator of future success.

      In its Cable Q debut in 2001, Hallmark Channel ranked second among “total network viewers” with a Positive Q score that was 57% higher than the average for all cable nets. Hallmark Channel also ranked first among “regular network viewers” (the most loyal and attentive viewers reached by each cablenet). The channel’s score in this viewer group was 72% higher than the average for all cable nets.

      Currently, our domestic channel’s research has contracted Millward Brown, a U.K. market research firm, to conduct a segmentation study that could be used as a template for brand global segmentation. The purpose of this study is to better define, understand and speak to our target audience(s), which will also drive communications strategies for advertising sales, distribution, consumers and the financial community.

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      Advertisers achieved more quality time with viewers who watch our domestic channel, as reported in a Hallmark Channel survey conducted by Opinion Research Corporation International (“ORC International”) in November 2001 among a national probability sample of 1,006 adults, 18 years of age or older. The study found that more than half of viewers surveyed (57%) feel more positive about a company, product or service because it advertises on the Hallmark Channel. The Hallmark Channel came in second following Discovery Network (59%) and preceded The Learning Channel (52%) and the History Channel (51%). According to the ORC International study, Hallmark Channel’s “halo effect” increases the positive perception of companies, products or services because of association with the Hallmark brand. According to viewers, the positive attributes most closely associated with Hallmark Channel are “trustworthy,” “high-quality,” “entertaining,” “positive story” and “contemporary.”

Employees

      We had 412 employees as of December 31, 2001. Neither we nor any of our subsidiaries are parties to collective bargaining agreements. We believe that our relations with our employees are good.

      Substantially all of our international channel’s employees work at our headquarters in Greenwood Village, Colorado. Substantially all of our domestic channel’s employees work at our offices in Studio City, California and New York, New York.

Regulation

      The operations of television channels in the markets in which we operate, including the United States, are regulated. The scope of regulation varies from country to country, although in many significant respects, a similar approach is taken to the regulation of broadcasting across all of the markets in which we operate. For example, throughout most of our Western European markets, broadcasting regulation has been formally harmonized to a substantial degree under the regulatory structure of the European Union. Typically, broadcasting regulation in each of the countries in which we operate requires that domestic broadcasters and platform providers secure broadcasting licenses from the domestic broadcasting authority. Additionally, most nations have broadcasting legislation and regulations which set minimum standards regarding program content, prescribe minimum standards for the content and scheduling of television advertisements. Some provide that a certain portion of programming carried by broadcasters be produced domestically and, to some degree, be sourced from domestic production companies who are independent of the broadcaster.

      Local pay television distributors in foreign countries typically have a statutory duty to ensure that the programming and advertising that they re-transmit on behalf of foreign broadcasters conforms to the regulatory scheme under which each local platform provider is licensed. Our contracts with many of our local platform providers require that our programming comply with domestic broadcasting regulations. Generally, each of our pay television distributors and thus our programming carried on their systems must adhere to the broadcasting and advertising regulations of each platform provider’s licensing jurisdiction.

      Within the United States, program access rules applicable to channel providers with ownership ties to pay television distributors limit business combinations between these two types of companies that do not comply with these rules.

Financial Information about Geographic Areas

      Information concerning revenues and long-lived assets attributable to external customers, domestically and internationally, may be found in Note 15 of our Notes to Consolidated Financial Statements in the Report.

Forward-Looking Statements and Risk Factors

      We have made some statements, which constitute forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity,

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      If we do not successfully address the risks described below, our business, prospects, financial condition, results of operations or cash flow could be materially adversely affected. The trading price of our Class A common stock could decline because of any of these risks.

Risks Relating to Our Business

      Both our international and domestic channels have a history of net losses and we expect to continue to report net losses for the foreseeable future. As of December 31, 2001, we had an accumulated deficit of approximately $480.3 million and net goodwill and other intangibles of approximately $314.0 million. Amortization of goodwill and other intangibles resulted in an $8.6 million and $20.0 million charge to earnings for the years ended December 31, 2000 and 2001, respectively.

      We cannot assure you that we will achieve or sustain profitability. If we are not able to achieve or sustain profitability, the trading price of our Class A common stock may fall significantly. To diminish our losses and become profitable, we will need to substantially increase our revenues, particularly advertising and licensing revenues. This will require, among other things, increasing the distribution of our channels, attracting more viewers to our channels and attracting more advertisers. Risks associated with these areas of our business are described below.

      We have a substantial amount of indebtedness. As of December 31, 2001, our total debt was $319.1 million and we had $13.9 million of cash and cash equivalents. In conjunction with our private placement transaction, $111.6 million was placed into an escrow account to repay a portion of our credit facility on January 7, 2002. In addition, subject to the restrictions under our various debt agreements, we may borrow additional amounts under our existing credit facility to cover the negative cash flow resulting from our current operations, and incur additional indebtedness from time to time to cover our operating losses, to finance acquisitions or capital expenditures or for other purposes. We expect that our principal sources of funds during 2002 will be cash generated from operating activities and borrowings under our senior credit facility.

      As a result of our level of debt and the terms of our debt instruments:

	•	our vulnerability to adverse general economic conditions is heightened;
	•	we will be required to dedicate a portion of our cash flow from operations to repayment of debt, limiting the availability of cash for other purposes;
	•	we are and will continue to be limited by financial and other restrictive covenants in our ability to borrow additional funds, consummate asset sales, enter into transactions with affiliates or conduct mergers and acquisitions;
	•	our flexibility in planning for, or reacting to, changes in our business and industry will be limited;

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	•	we are sensitive to fluctuations in interest rates; and
	•	our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired.

      Our ability to meet our debt and other obligations and to reduce our total debt depends on our future operating performances and on economic, financial, competitive and other factors. There can be no assurance that our leverage and such restrictions will not materially and adversely affect our ability to finance our future operations or capital needs or to engage in other business activities.

      High levels of interest expense could have negative effects on our future operations. Interest expense, which is net of interest income and includes amortization of debt issuance costs and interest expense on borrowings under our demand notes, credit facility and private placement, increased $12.3 million to $11.8 million for the year ended December 31, 2001, from net interest income of $523,000 for the year ended December 31, 2000. The increase in interest expense in the past year resulted from an increase in the average borrowings outstanding, due to cash generated from operations being insufficient to cover operating expenses and capital expenditures. Consequently, we were required to make borrowings under our demand notes, credit facility and a private placement during 2001. A substantial portion of our cash flow from operations must be used to pay our interest expense and will not be available for other business purposes. In addition, we may need to incur additional indebtedness in the future. We cannot assure you that our business will generate sufficient cash flow or that future financings will be available to provide sufficient proceeds to meet our obligations or to service our total debt.

      We believe that our current bank credit facility and line of credit with HC Crown, together with cash generated from operations and cash on hand, will be sufficient for our liquidity needs through at least March 31, 2003. However, because we currently operate at a loss and have a negative cash flow, any significant expense not included in our internal budget or any development that hampers our growth in revenues or decreases any of our revenues, would result in the need for additional external funds in order to continue operations. We have no arrangements for any external financings, whether debt or equity, and are not certain whether any such new external financing would be available on acceptable terms. Any new debt financing would require the cooperation and agreement of existing lenders.

      Several of the Crown Media United States’ existing distribution agreements contain “most favored nations” clauses. These clauses typically provide that, in the event the Crown Media United States enters into a subsequent agreement with another distributor on more favorable terms, these terms must be offered to the existing distributor, subject to certain exceptions and conditions. In August 2001, Crown Media United States entered into a new distribution agreement with DirecTV, Inc. under which the Hallmark Channel was repositioned to DirecTV’s TOTAL CHOICE Package and our subscribers increased significantly. Several other distributors, whose agreements contain “most favored nations” provisions, have indicated an interest in some or all of the DirecTV terms, and Crown Media United States is currently in discussions with these distributors. Any modification of these existing agreements to adopt the DirecTV terms, or any other new terms could result in the payment of cash or the issuance of stock by Crown Media Holdings and could affect subscriber and advertising revenues.

      We compete with other pay television channel providers to acquire programming. If we fail to continue to obtain programming on reasonable terms for any reason, including as a result of competition, we could be

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      Our success depends partly upon unpredictable and volatile factors beyond our control, such as viewer preferences, competing programming and the availability of other entertainment activities. We may not be able to anticipate and react effectively to shifts in tastes and interests in our markets. In particular, our ability to react effectively may be limited by our obligation to license programming from Hallmark Entertainment Distribution, which has standards that limit the types of programming that it will provide to us. Our competitors may have more flexible programming arrangements, as well as greater amounts of production, better distribution, and greater capital resources, and may be able to react more quickly to shifts in tastes and interests. As a result, we may be unable to maintain the commercial success of any of our current programming, or to generate sufficient demand and market acceptance for our new programming. A shift in viewer preferences in programming or alternative entertainment activities could also reduce the amount of revenues we anticipate receiving from licensing the Crown Media Library and cause a decline in both advertising and subscriber fees revenue. The decline in revenues could hinder or prevent us from achieving profitability and could adversely affect the market price of our Class A common stock.

      Currently, we are dependent on Hallmark Entertainment to distribute and license the Crown Media Library to third parties for us under the terms of a three-year service agreement. This arrangement reduces our control over the sales and distribution of the film assets and might delay our realization of the full revenue stream from the film assets. We and Hallmark Entertainment each have the right to terminate the service agreement after the first year. If Hallmark Entertainment elects to terminate the agreement before we have established our own distribution network, we may not be able to establish our own or obtain alternative distribution services of equivalent quality or on terms as favorable to us. This could hinder our ability, at least in the short-term, to achieve the amount of additional revenues anticipated from these activities and could adversely affect the market price of our Class A common stock.

      We anticipate that in due course we will develop our own distribution/sales network and hire employees to perform the services currently performed by Hallmark Entertainment under the service agreement. Our ability to do so is unproven and will require financial, operational and management resources. We may not be able to hire the number of employees, or employees who are sufficiently qualified, to perform these services, or do so in a cost efficient manner. If the cost to develop and maintain this employee base is greater, or if this process takes longer than anticipated, it could have a negative impact on the revenues we anticipate generating from the film assets.

      If we fail to increase our advertising revenue, we may be unable to achieve or sustain profitability, or expand our business. We expect that over time the portion of our revenues derived from the sale of advertising time on our channels will increase. We have a limited history of marketing and selling advertising time, particularly internationally. We may be unable to identify, attract and retain experienced sales and marketing personnel with relevant experience, and our sales and marketing organization may be unable to successfully compete against the significantly more extensive and well-funded sales and marketing operations of our current or potential competitors. Success in increasing our advertising revenue also depends upon the number and coverage of the distributors who carry our channels, our number of subscribers, and the viewership ratings for our programming.

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      Hallmark Entertainment Holdings controls all of our outstanding shares of Class B common stock and owns shares of Class A common stock, representing approximately 90% of the voting power on all matters submitted to our stockholders. Hallmark Entertainment Holdings’ control could discourage others from initiating potential merger, takeover or other change of control transactions that may otherwise be beneficial to our business or holders of Class A common stock. As a result, the market price of our Class A common stock could suffer, and our business could suffer. Hallmark Entertainment Holdings’ control relationship with us also could give rise to conflicts of interest, including:

	•	conflicts between Hallmark Entertainment Holdings, as our controlling stockholder, and our other stockholders, whose interests may differ with respect to, among other things, our strategic direction or significant corporate transactions;
	•	conflicts related to corporate opportunities that could be pursued by us, on the one hand, or by Hallmark Entertainment Holdings or its other affiliates, on the other hand; or
	•	conflicts related to existing or new contractual relationships between us, on the one hand, and Hallmark Entertainment Holdings and its affiliates, on the other hand.

      In addition, persons serving as directors, officers or employees of both us and Hallmark Entertainment Holdings may have conflicting duties to each. For example, Robert A. Halmi, Jr. is Chairman of our Board and is a Director and the President of Hallmark Entertainment Holdings and the President and Chief Executive Officer of Hallmark Entertainment, which could create potential conflicts of interest. As a result, it is possible that we may receive less favorable contractual terms from Hallmark Entertainment Holdings and its affiliates than if none of our officers or directors had any affiliation with Hallmark Entertainment Holdings.

      We license the name “Hallmark” from Hallmark Cards, for various uses, including in the name of our international and domestic channels. The two-year license agreement for our international channel, dated as of December 1, 2000, permits the use of the Hallmark trademarks outside the United States and Canada so long as Hallmark Cards and its wholly owned subsidiaries collectively own at least 51% of our voting interest and at least 35% of our equity interest and designate a majority of our board of directors, and so long as there is no event of default under the agreement. The license agreement for our domestic channel, dated as of March 27, 2001, permits the use of the Hallmark trademarks in the United States through August 30, 2003, under terms substantially similar to the terms applicable to the license of our international channel. If Hallmark Cards determines not to renew the trademark license agreements for any reason, including our failure to meet minimum programming thresholds dependent on programming provided by affiliates of Hallmark Cards or to comply with Hallmark Cards’ programming standards, we would be forced to significantly revise our business plan and operations, and could experience a significant erosion of our subscriber base and revenues.

      We currently rely on third parties to supply key network infrastructure services, including uplink, playback, transmission and satellite services to certain of our markets, which are available only from limited sources. We have occasionally experienced delays and other problems in receiving communications equipment, services and facilities and may, in the future, be unable to obtain such services, equipment or facilities on the scale and within the time frames required by us on terms we find acceptable, or at all. If we are unable to obtain, or if we experience a delay in the delivery of, such services, we may be forced to incur significant unanticipated expenses to secure alternative third party suppliers or adjust our operations, which could hinder our growth and reduce our revenues and profitability.

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      We commenced operations at the Network Operations Center in February 2001. We are currently using the Network Operations Center for the origination and playback of signals for the Hallmark Channel internationally in Europe, Latin America and the Middle East and intend to expand our use of the Network Operations Center as existing contracts with third-party providers expire. Like other single-point facilities, the Network Operations Center is subject to interruption from fire, tornadoes, lightning and other unexpected natural causes. Although we have redundant systems in place, equipment failure, employee misconduct or outside interference could also disrupt the Network Operations Center’s services. We currently do not have and are not planning a duplicate operations facility. Any significant interruption at the Network Operations Center affecting the distribution of our channels could have an adverse effect on our operating results and financial condition.

      Our success depends on the expertise and continued service of our executive officers and key employees of our subsidiaries. If we fail to attract, hire or retain the necessary personnel, or if we lose the services of our key executives, we may be unable to implement our business plan or keep pace with developing trends in our industry.

      Historically, a significant portion of our revenues has been generated from foreign operations. In order to maintain or expand our presence in foreign markets, we have entered and may in the future enter into joint ventures or other strategic relationships with local operators in those markets. Certain foreign laws, regulations and judicial procedures may not be as protective of programmer rights as those applicable in the United States. In addition, many foreign countries have currency and exchange laws regulating the international transfer of currencies. To the extent that significant currency fluctuations result in materially higher costs to any of our foreign customers, those customers may be unable or unwilling to make the required payments. We may be subject to delays in access to courts and to the remedies local laws impose in order to collect our payments and recover our assets. We also may experience problems with collecting accounts due from foreign customers, which would adversely affect our revenues and income. Our growth and profitability may also suffer as a result of, among other matters, competitive pressures on video delivery, labor stoppages, recessions and other political or economic events adversely affecting world or regional trading markets or affecting a particular customer.

      We currently broadcast in several foreign markets where market economies have only recently begun to develop, and we may expand these operations in the future. If the governments in these markets adopt more restrictive economic policies, we may not be able to continue operating, or to implement our expansion plans, in those markets. More generally, we are exposed to certain risks, many of which are beyond our control, inherent in operating in emerging market countries. These risks include changes in laws and policies affecting trade, investment and taxes (including laws and policies relating to the repatriation of funds and to withholding taxes), differing degrees of protection for intellectual property and the instability of emerging market economies, currencies, and governments.

      As a result of our acquisitions of all the common interests in Crown Media United States and H&H Programming-Asia, we have generated a significant amount of goodwill and other intangibles. We have

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      Commencing with the fourth quarter of 2001, we also have a film cost relating to the amortization of the purchase price for the Crown Media Library that we use and license to others. This film cost will be a significant component of our cost of services each quarter.

      The stock market has, from time to time, experienced extreme price and volume fluctuations. Many factors may cause the market price for our Class A common stock to decline, including:

	•	our operating results failing to meet the expectations of securities analysts or investors in any quarter;
	•	downward revisions in securities analysts’ estimates;
	•	material announcements by us or our competitors;
	•	governmental regulatory action;
	•	technological innovations by competitors or competing technologies;
	•	investor perceptions of our industry or prospects, or those of our customers; and
	•	changes in general market conditions or economic trends.

      In the past, companies that have experienced volatility in the market price of their securities have been the subject of securities class action litigation. If we become involved in a securities class action litigation in the future, it could result in substantial costs and diversion of management attention and resources, harming our business.

      The market price of our Class A common stock could decline as a result of sales, after applicable lock-up agreements have expired in May 2002, by our existing stockholders in the future or the perception that these sales could occur. These sales also might make it difficult for us to sell equity securities in the future at a time and price that we deem appropriate. In addition, some of our existing stockholders who hold restricted stock have the ability to require us to register their shares for public sale. Similarly, holders of contingent appreciation certificates issued in connection with preferred securities of Crown Media Trust, have the ability to require us to register for public sale shares of our Class A common stock that these holders receive upon exercise of the contingent appreciation certificates.

Risks Relating to Our Industry

      We operate in the pay television business, which is highly competitive. If we are unable to compete effectively with large diversified entertainment companies that have substantially greater resources than we have, our operating margins and market share could be reduced, and the growth of our business inhibited. In particular, we compete for distribution with other pay television channels and, when distribution is obtained, for viewers and advertisers with pay television channels, broadcast television networks, radio, the Internet and other media. We also compete, to varying degrees, with other leisure-time activities such as movie theaters,

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      A continuing trend towards business combinations and alliances in both the domestic and foreign communications industries may create significant new competitors for us or intensify existing competition. Many of these combined entities will have resources far greater than ours. These combined entities may provide bundled packages of programming, delivery and other services that compete directly with the products we offer. These entities may also offer services sooner and at more competitive rates than we do. In addition, these alliances may benefit from both localized content and the local political climate.

      We may need to reduce our prices or license additional programming to remain competitive, and we may be unable to sustain future pricing levels as competition increases. Our failure to achieve or sustain market acceptance of our programming at desired pricing levels could impair our ability to achieve profitability or positive cash flow, which would harm our business.

      Distributors in the United States may attempt to pressure smaller pay TV channels in terms of viewership, such as our domestic Hallmark Channel, to accept decreasing amounts for subscriber fees, to pay higher subscriber acquisition fees or to allow carriage of the Channel without the payment of subscriber fees. Factors that may lead to this pressure include the number of competing pay TV channels, the limited space available on services of distributors in the United States and the desire of distributors to maintain or reduce costs. Any reduction in subscriber fees now or in the future could have a material impact on our ability to achieve profitability and cash flow.

      Our future success will depend, in part, on our ability to anticipate and adapt to technological changes and to offer, on a timely basis, services that meet customer demands and evolving industry standards. The pay television industry has been, and is likely to continue to be, subject to:

	•	rapid and significant technological change, including continuing developments in technology which do not presently have widely accepted standards; and
	•	frequent introductions of new services and alternative technologies, including new technologies for providing video services.

      For example, the advent of digital technology is likely to accelerate the convergence of broadcast, telecommunications, Internet and other media and could result in material changes in the economics, regulations, intellectual property usage and technical platforms on which our business relies, including lower retail rates for video services. These changes could fundamentally affect the scale, source, and volatility of our revenue streams, cost structures, and profitability, and may require us to significantly change our operations.

      We also rely in part on third parties for the development of, and access to, communications and network technology. As a result, we may be unable to obtain access to new technology on a timely basis or on satisfactory terms, which could harm our business and prospects.

      Moreover, the increased capacity of digital distribution platforms, including the introduction of digital terrestrial television, may reduce the competition for the right to carry channels and allow development of extra services at low incremental cost. These lower incremental costs could lower barriers to entry for competing channels, and place pressure on our operating margins and market position. In addition, a greater number of channels would likely increase competition among channels for viewers and advertisers, which could affect our ability to attract advertising and new distribution at desired pricing levels, and could therefore hinder or prevent the growth of our subscriber base.

      If, as a provider of television channels, we fail to comply with applicable present or future government regulations in any markets in which we operate, we could be prohibited from operating in those markets and

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      Moreover, broadcasting regulations are generally subject to periodic and on-going governmental review and legislative initiatives, which may, in the future, affect the nature of programming we are able to offer and the means by which it is distributed. The timing, scope or outcome of these reviews could be unfavorable to us, and any changes to current broadcasting legislation or regulations could require adjustments to our operations.

Item 2.     Properties

      The following table provides certain summary information with respect to the principal real properties leased by the Company. We do not own any real property. The leases for these offices and facilities expire between April 2002 and June 2010. The Company believes the facilities, office space and other real properties leased are adequate for its current operations.

Hallmark Channel — International

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Hallmark Channel — United States

      We own most of the equipment and furnishings used in our businesses, except for satellite transponders, which are leased. See Note 8 of Notes to Consolidated Financial Statements for information on our leasing of property and equipment.

Item 3.     Legal Proceedings

      On June 6, 2001, we received a legal complaint from a stockholder regarding our then proposed purchase of the Crown Media Library, referred to as the films transaction. The lawsuit was filed on that date in the Court of Chancery in the State of Delaware for New Castle County and names as defendants us, all of our directors (including one director who had previously resigned on May 3, 2001, due to new employment responsibilities), Hallmark Cards, Hallmark Entertainment Distribution and Hallmark Entertainment. The complaint, filed as a purported class action on behalf of holders of the Company’s Class A common stock as well as a derivative action on behalf of Crown Media Holdings, requests rescission of the films transaction, an award of damages to the purported class or other relief. The plaintiff alleges that the proposed films transaction is the product of an unfair process designed to advantage Hallmark Cards as the controlling stockholder and that the price being paid to Hallmark Entertainment Distribution is not entirely fair. In that regard, the complaint alleges that the independent committee formed by our Board of Directors did not function properly and failed to provide a disinterested mechanism to obtain a fair arm’s length transaction with Hallmark Entertainment Distribution, that the financial adviser and counsel were not independent and that the financial adviser’s opinion was insufficient and unreliable. The complaint also alleges that the issuance of shares of Class A common stock to Hallmark Entertainment Distribution in the transaction will allow Hallmark Cards to have control of the vote of our Class A common stock in the event of a separate class vote. In addition, the complaint alleges that the defendants breached a duty of disclosure by failing to disclose in the proxy statement all material facts in connection with the films transaction. A copy of the complaint is available from the Register’s office of the Delaware Court of Chancery for New Castle County, Civil Action No. 18949.

      In June 2001, we, Hallmark Cards and the other defendants and the plaintiff entered into a memorandum of understanding stating an agreement in principle on a settlement of the lawsuit concerning the films transaction. In accordance with the memorandum of understanding, we conferred with the plaintiff’s counsel regarding information disclosed in a supplement to the proxy statement for the annual meeting of stockholders at which the films transaction was considered. Our stockholders (excluding Hallmark Entertainment Distribution and its affiliates) approved of the films transaction at the reconvened annual meeting on July 17, 2001. As permitted by the memorandum of understanding, the films transaction closed on September 28, 2001.

      As of February 20, 2002, we and the other parties to the lawsuit entered into a settlement agreement concerning the lawsuit, with terms contemplated by the memorandum of understanding. The settlement agreement provides that the purchase price of the film assets will be reduced by 425,000 shares of Class A common stock. In accordance with the memorandum of understanding and the settlement agreement, 425,000 shares of Class A common stock have been placed in escrow pending release to us if there is final court approval of the settlement or to Hallmark Cards if the settlement is not approved by the court. The settlement agreement also provides that all claims, rights and causes of actions against us, our officers, directors, employees, agents, attorneys, investment bankers and other related parties that arise out of the events alleged in the lawsuit will be released if the settlement receives final court approval. The settlement

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      As required by the settlement agreement, the parties have presented the settlement to the court for approval. A hearing regarding the settlement is scheduled in April, 2002. However, the court reserves the rights to adjourn the settlement hearing from time to time. At the settlement hearing, the court will be asked to determine whether, among other things: (1) to approve the settlement as fair and reasonable, and in the best interest of a class consisting of all record owners and beneficial owners of our common stock on any day from November 6, 2000 (the date that the films transaction was publicly announced) to and including September 28, 2001, the effective date of closing the films transaction; (2) to dismiss the lawsuit such that no plaintiff or class member could sue on their claims again; (3) to certify the lawsuit as a class action; and (4) if the court approves the settlement, to grant the request of the plaintiff’s counsel for attorneys fees and reimbursement of expenses in connection with the lawsuit.

      All the defendants have denied, and have continued to deny, that they have committed any violations of law. The memorandum of understanding permitted the films transaction, viewed by us as important, to proceed without risk of injunction or other relief. As stated in the settlement agreement, the defendants entered into the settlement in order to avoid the substantial expense, inconvenience and distraction of continued litigation, to dispose of potentially burdensome and protracted litigation, and to finally put to rest and terminate the claims arising out of the films transaction.

Item 4.     Submission of Matters to a Vote of Security Holders

      None.

Executive Officers of Registrant

      The following lists our executive officers and information regarding their principal occupations during at least the last five years.

      David J. Evans, 61, has been the President and Chief Executive Officer of Crown Media Holdings and a Director of Crown Media Holdings since May 2000. He also has served on BskyB’s board of directors since November 2001. Prior to that, he served as President and Chief Executive Officer of Crown Media International from March 1999 to May 2000, the Non-Executive Chairman of the Governance Committee of Crown Media United States since March 1999, and a Director of Crown Media International from July 1999 until May 2000. Prior to that, he was the President and Chief Executive Officer of Telecommunications International, Inc. from September 1997 until February 1999. From July 1996 until August 1997, Mr. Evans was the Executive Vice President of News Corp. and also the President and Chief Executive Officer of Sky Latin America. Prior to that, he was the President and Chief Operating Officer for Fox Television from August 1994 until June 1996.

      William J. Aliber, 40, has been the Executive Vice President and Chief Financial Officer of Crown Media Holdings since May 2000. Prior to that, he was Executive Vice President and Chief Financial Officer of Crown Media International from March 1997 through May 2000 and a Director of Crown Media International from May 1998 through May 2000. He also served as the Vice President and Chief Financial Officer of Hallmark Entertainment, Inc. from June 1996 through May 2000. Prior to that, he was the Director of Corporate Finance for Hallmark Cards from January 1995 until June 1996.

      Lana E. Corbi, 47, has been President and Chief Executive Officer of Crown Media United States since October 2001. Prior to that, she served as Executive Vice President and Chief Operating Officer of Crown Media Holdings from June 2000 through October 2001. Prior to that, she was the Chief Operating Officer of Odyssey Holdings from April 1999 through June 2000. She was President, Network Distribution, of Fox

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      Paul A. FitzPatrick, 55, has been Executive Vice President and Chief Operating Officer of Crown Media Holdings since October 2001. Prior to that, he was Chief Operating Officer of Crown Media United States from September 2000 through October 2001. Prior to joining Crown Media United States, Mr. FitzPatrick served as Chief Operating Officer of the Golf Channel from April 1997 through April 2000. He also was the President, Chief Executive Officer and Founder of News Talk Television from March 1988 through April 1997. Between 1991 and 1993, Mr. FitzPatrick was also President and Chief Operating Officer of The Weather Channel. He also served as President and Chief Operating Officer of Cable Satellite Public Affairs Network (C-SPAN) during his career.

      Russel H. Givens, 55, has been President and Chief Executive Officer of Crown Media International since July 2000. Prior to that, he served as Executive Vice President and Chief Operating Officer of Crown Media International commencing in July 1998. From October 1994 until July 1998, he served as the Vice President, European Cable/ Telephony for MediaOne, International.

      Chris R. Moseley, 51, has been Executive Vice President, Worldwide Marketing and Brand Strategy of Crown Media Holdings, Inc. since July 2000. Prior to joining Crown Media Holdings, Ms. Moseley worked as Executive Vice President of ABC, Inc. Network Marketing. From 1989 to October 1999, Ms. Moseley worked as Senior Vice President of Marketing for Discovery Communications, Inc.

      Charles L. Stanford, 56, has been Executive Vice President, Legal and Business Affairs and General Counsel of Crown Media Holdings since May 2001. Prior to that, he was Senior Vice President, Business Affairs and General Counsel of Crown Media Holdings from October 2000 to May 2001. He also served as Senior Vice President, Legal and Business Affairs of Crown Media International from November 1999 through October 2000. Mr. Stanford served as Vice President, Legal and Business Affairs of Cable and New Media of ABC, Inc. from January 1996 until October 1999.

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PART II

Item 5.     Market for Our Common Equity and Related Stockholder Matters

Market Information

      Our Class A common stock is listed on the Nasdaq National Market System (“NASDAQ”) under the ticker symbol “CRWN.” Set forth below are the high and low sales prices for our Class A common stock for the period May 9, 2000, the date of our initial public offering, to June 30, 2000, and for each subsequent quarterly period in 2000 and 2001, as reported on the Nasdaq National Market System.

Holders

      As of March 13, 2002, there were approximately 49 record holders of the Class A common stock and one record holder of the Class B common stock.

Dividends

      We have not paid any cash dividends on our common stock since inception. We anticipate that we will retain all of our earnings, if any, in the foreseeable future to finance the continued growth and expansion of our business, and we have no current intention to pay cash dividends. Our bank credit facility also contains limitations on declaring or paying any cash dividends.

Recent Sales of Unregistered Securities

      On December 17, 2001, we completed a $265.0 million private placement to a group of institutional investors. Under the terms of the private placement, Crown Media Holdings issued to the investors an aggregate of 265,000 units, each unit being comprised of one preferred security of Crown Media Trust and one contingent appreciation certificate issued by Crown Media Holdings. Crown Media Trust issued the preferred securities to us in exchange for our 6.75% subordinated debentures due 2007. We will pay interest on the debentures at the same rate and at the same time as Crown Media Trust will make distributions on the preferred securities. We have guaranteed on a subordinated basis Crown Media Trust’s obligations under the preferred securities.

      Each preferred security of Crown Media Trust has a stated liquidation amount of $1,000 and each contingent appreciation certificate issued by the Company entitles the holder to receive cash, or at the holder’s option, purchase approximately 38.3 shares of the Company’s Class A common stock at a price of $13.07 per share, subject to adjustment. Distributions on the preferred securities are cumulative, payable quarterly in arrears, and accumulate from the date of issuance at the annual rate of 6.75% of the $1,000 liquidation amount. The contingent appreciation certificates issued by Crown Media Holdings will expire on March 15, 2008. On or after the occurrence of certain defined purchase or liquidation events, the holders will be entitled, at their option, (i) to a cash payment for a minimum return amount, or (ii) to purchase approximately

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      The placement agents for the private placement were Credit Suisse First Boston and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated. In the private placement, we received $252.4 million in net proceeds after commissions of $12.6 million paid to the placement agents.

      The issuance of the units was exempt from registration under the Securities Act of 1933 as a non-public offering pursuant to Section 4(2) of the Act and Regulation D thereunder. In relying upon this exemption, we relied upon representations and warranties made by the purchasers as well as a review of the circumstances of the transaction, including the fact that no public advertising or announcements were used in the private placement.

Item 6.     Selected Financial Data

Selected Historical Consolidated Financial Data of Crown Media Holdings

      In the table below, we provide you with selected historical consolidated financial and other data of Crown Media Holdings and its subsidiaries. The following selected consolidated statement of operations data for the years ended December 31, 1997, 1998, 1999, 2000, and 2001, and the consolidated balance sheet data as of December 31, 1997, 1998, 1999, 2000, and 2001 are derived from the audited financial statements of Crown Media Holdings and its subsidiaries. This data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

      On May 9, 2000, Crown Media Holdings completed its initial public offering. At the same time, Crown Media Holdings acquired 100% of Crown Media International, Inc., and as part of this acquisition acquired the 22.5% common interests in Crown Media United States, LLC (formerly known as Odyssey Holdings, LLC) and 50% common interests of H&H Programming-Asia, LLC then owned by Crown Media International, and separately acquired an additional 55% of the common interests in Crown Media United States. Prior to that date, Crown Media Holdings did not have any significant operations. On March 15, 2001, Crown Media Holdings acquired the remaining 22.5% of the common interests in Crown Media United States and the remaining 50% interest in H&H Programming-Asia, which operated The Kermit Channel, which were held by The Jim Henson Company, Inc. The consolidated historical financial statements of Crown Media Holdings include the results of operation for Crown Media International as a predecessor corporation for all periods presented, including its initial ownership of 22.5% of the common interests in Crown Media United States, and include each of the other interests described above from the date of their acquisition.