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Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO

Commission file number: 000-30700

Crown Media Holdings, Inc.

6430 S. Fiddlers Green Circle,

(303) 220-7990

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

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

      Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ

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

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

      As of March 3, 2003, the number of shares of Class A Common Stock, $.01 par value outstanding was 73,794,606, and the number of shares of Class B Common Stock, $.01 par value, outstanding was 30,670,422.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Registrant’s Proxy Statement for the 2003 Annual Meeting of Stockholders, to be filed, are incorporated by reference in Part III of this report.

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      The discussion set forth in this Annual Report on Form 10-K contains statements concerning potential future events. Such forward-looking statements are based on assumptions by Crown Media Holdings, Inc.’s (“Crown Media Holdings” or the “Company”) management, as of the date of this Annual Report on Form 10-K including assumptions about risks and uncertainties faced by Crown Media Holdings. Readers can identify these forward-looking statements by their use of such verbs as “expects,” “anticipates,” “believes,” or similar verbs or conjugations of such verbs. If any of management’s assumptions prove incorrect or should unanticipated circumstances arise, Crown Media Holdings’ actual results, levels of activity, performance, or achievements could materially differ from those anticipated by such forward-looking statements. Among the factors that could cause actual results to differ materially are those discussed in this Form 10-K under the heading “Forward-Looking Statements and Risk Factors.” Crown Media Holdings will not update any forward-looking statements contained in this Annual Report on Form 10-K to reflect future events or developments.

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

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

Company Overview

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

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

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

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

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

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

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

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

Development of Business

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

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

Industry Overview

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

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

      Pay television distributors own and operate the platforms used to deliver channels to subscribers. These distributors use several different technologies to reach their subscribers as described below. Distributors attempt to create a mix of channels that will be attractive to their subscriber population in an attempt to gain new subscribers and to reduce subscriber turnover. Distributors have different levels of service for subscribers, with each service level containing some different channels. More recently, distributors, particularly in the U.S., have begun to offer additional broadband services such as Internet access, telephony and video-on-demand over their systems.

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

Distribution Platforms

      Four major distribution platforms are currently used to transmit programming. First, cable television systems use coaxial or fiber optic cable to transmit multiple channels between a central facility, known as a headend, and the individual subscriber’s television set. Second, analog and digital satellite broadcast systems (such as direct-to-home or “DTH”) use satellite transponders to broadcast television programming to individual dwellings with satellite reception equipment, including a dish and a decoder. Third, digital terrestrial television broadcasters (“DTT”) typically broadcast locally or through regional or national ground-based transmission networks. In general, such broadcasters use landline, microwave or satellite transmission systems to distribute programming to terrestrial transmission facilities for broadcast directly to viewers’ homes. Finally, channels can also be distributed through satellite master antenna television (“SMATV”). SMATV is used primarily for buildings, such as apartments and hotels that receive programming from

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Sources of Revenue

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

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

      Television advertising is sold in a variety of formats. Many pay television channels rely largely upon the spot advertisement format. Spot advertisements are normally 30 seconds long and air during or between programs. They are often sold in packages of a certain number of spots or to deliver a certain number of viewers. An alternative to spot advertising is sponsorship, by which a company sponsors a program or selection of programs on a channel by applying their branding around the programming.

      The ability of a television channel to generate advertising revenue largely depends on estimated or actual viewing levels, primarily based on ratings, and on advertising rates. Typically, in the United States and some other markets, independent ratings systems on which advertising sales can be based are well established and widely accepted within the industry. In addition, pay television channel providers and distributors may also provide estimated or actual subscriber information. Our U.S. channel sells the majority of its advertising in the “up-front” season, generally in August, for the last quarter of the same year and the first three quarters of the following year. We hold back a small percentage of our inventory for audience deficiency units, “ADUs,” and sell the remainder in the spot market. ADUs are units of inventory that are made available to advertisers as compensation for inventory the advertiser purchased that ran in programs that under-delivered on the guaranteed ratings.

      Historically, advertisers have spent more on advertising through traditional broadcast television than through pay television. We believe that as pay television continues to gain viewership relative to broadcast television, it should attract a larger percentage of the total available dollars spent on television advertising. Also, as pay television draws audience share from broadcast television, audience demographics become fragmented; and, as a result, advertisers are able to target groups of viewers with specific demographic profiles.

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

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

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

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

Channels

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

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

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

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

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

      We regularly review existing and potential markets to assess their prospects. As the number of international channel subscribers increases in a market, we assess our ability to increase revenue or develop new revenue sources by subdividing the market through the addition of satellite signals to individual countries within that market as opportunities — particularly advertising — arise. When we subdivide a market, we are able to customize the channel to appeal to a more specific audience. The delivery of the international channel to more targeted audiences also increases the number of potential advertisers on the channel by creating more targeted advertising opportunities for local or regional businesses in the markets in which we operate.

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      The following chart shows the approximate number of television households and pay television households, as estimated by Kagan World Media at December 31, 2002 (except where noted), and the number of our international channel subscribers at year-end 2001 and 2002.

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(1)	Total subscribers include promotional (free) subscribers at December 31, 2001, and December 31, 2002.
(2)	India includes Bangladesh, Brunei, Macau, Mauritius, New Guinea, Republic of Palau, and Sri Lanka.
(3)	Source: Zenith Media.
(4)	Middle East includes Estonia, Kazakhstan, Latvia, Lithuania, Middle East, and Republic of Ukraine.
(5)	Other Latin America includes Bolivia, Costa Rica, Curacao, Dominican Republic, Ecuador, El Salvador, and Guatemala.

      Like most international pay television channels, we currently derive the majority of our international revenue from subscriber fees and, to a lesser extent, advertising sales. We generally charge our pay television distributors a fee per subscriber for the right to broadcast our international channel. We have increased the number of subscribers to our international channel in the past year, and as a result, have achieved an increase in revenue generated from subscriber fees. International fees per subscriber have and will continue to experience downward pressure due to the competitive nature of the industry, the growth of digital cable, political and economic turmoil in Latin America and the shift in the industry in the more developed countries from subscriber fee revenue to advertising revenue. We also expect our international fees to decline as we exit certain markets and utilize strategic alliances in other markets. For the years ended December 31, 2002, 2001, and 2000 revenue derived from subscriber fees for the international channel were approximately $54.4 million, $52.6 million, and $39.8 million, respectively.

      We also derive revenue from the sale of advertising time on our international channel. We generate revenue directly from advertisers as well as from our pay television distributors under distribution agreements that may provide for a sharing of net revenue from advertising. We believe that the number of subscribers to our international channel and the favorable demographics of its family-focused audience provide us with the opportunity to substantially increase revenue from the sale of advertising time. Currently advertising revenue from our international channel is derived primarily from activities in a limited number of countries, including East Asia, Mexico, Poland, South Africa, the United Kingdom and certain countries in Latin America. For the years ended December 31, 2002, 2001, and 2000 revenue from the sale of advertising on our international channel were $23.1 million, $12.1 million, and $6.0 million, respectively.

      During 2000 and 2001, we built and commenced operation of 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 from a central point and we can deploy new feeds quickly while benefiting from economies of scale.

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

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      Our international channel focuses its marketing efforts on maximizing 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 Channel and the potential for the sale of advertising.

      In markets where our international channel is not being carried by substantially all of the pay television distributors, marketing efforts are primarily directed toward potential new distributors. These efforts include advertising in trade publications and participating in industry trade shows, as well as direct mail and public relations campaigns. In these markets, efforts are also made to market the channel to potential viewers to drive consumer demand for carriage of the Channel by local affiliates.

      In markets where our international channel has obtained substantial distribution or has exclusive agreements with primary distributors, marketing efforts are primarily directed toward maintaining subscribers and viewership. Our efforts in these markets are directed toward a primary target of men and women aged 18 to 49 and a secondary target of men and women aged 25 to 54. 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 Distribution, through the use of premier screening events, press tours with actors and actresses and viewer trips to movie sets. We also use our website to market and promote the channel 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 2002 with 48.8 million subscribers, an increase of 12% from 43.5 million at the 2001 year-end. We currently distribute our domestic channel through approximately 3,500 cable systems and communities and satellite providers. By the end of 2002, we had agreements with Adelphia, Cablevision, Charter, Cox, DirecTV, EchoStar, Mediacom, NCTC, and Time Warner for the distribution of our channel as well as a number of smaller pay television providers and systems. Because of the acquisition of AT&T by Comcast during 2002, our contract with AT&T is now being administered by Comcast. We continue to provide programming to former AT&T subscribers now with Comcast.

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

      Examples of programming from our library and the Hallmark Entertainment library include, Larry McMurtry’s Lonesome Dove, 10th Kingdom, Sabrina the Teenage Witch, Dog of the Yukon: Call of the Wild and Larry McMurtry’s Dead Man’s Walk as well as programming from “The Collection” in the Hallmark Hall of Fame library such as William Faulkner’s Old Man, Rose Hill, Sarah Plain and Tall and What the Deaf Man Heard. We benefit from these original Hallmark Entertainment productions, which are sometimes premiered and often aired on our domestic channel. Examples of third party programming shown on our domestic channel include the popular drama series Dr. Quinn Medicine Woman, Touched By An Angel, Rawhide, Bonanza, and Hawaii 5-0. Other examples of our third party programming include acquired movies

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      We currently distribute our domestic channel to approximately 54% of all United States pay television subscribers. The following table shows the approximate number of pay television households and domestic channel subscribers for each of the eight largest pay television distributors, and all other pay television distributors as a group, in the United States as of December 31, 2002.

(1)	Source: Nielsen Code and The Nielsen Public U.E. December 2002 and Skyreport November 2002.

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

      We currently derive all of our domestic channel revenue from subscriber fees and advertising sales. We charge our pay television distributors a monthly per subscriber fee for the right to broadcast our domestic channel. Generally, these distribution agreements last from five to 10 years, and sometimes include annual increases of both subscribers and per subscriber fees. A distribution agreement may also involve a payment by us for the establishment of the relationship or, together with or in lieu of any payment, the free carriage of our channel to subscribers for a period of time and discounts or no fees if certain subscriber levels are achieved. Please see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for information regarding subscriber fees. For the years ended December 31, 2002, 2001, and 2000 revenue derived from subscriber fees for the domestic channel were approximately $13.5 million, $13.9 million, and $11.1 million, respectively.

      We have advertising sales offices in New York, Los Angeles, Chicago, Atlanta and Detroit. In addition, we have made significant investments in programming, research, marketing and promotions, all specifically designed to support the sale of advertising time on our domestic channel. For the years ended December 31, 2002, 2001, and 2000 revenue from the sale of advertising time on our domestic channel were approximately $46.0 million, $25.4 million, and $13.7 million, respectively.

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

      For over 50 years Hallmark has been a leader in high-quality original television production. The Hallmark Channel is the only home on cable television for the Hallmark Hall of Fame Collection, a selection of movies from an award-winning entertainment series. Much of the Hallmark Channel’s unique programming comes from Hallmark Entertainment, including Moby Dick, Alice in Wonderland and Dinotopia. Hallmark Entertainment original productions rank among the highest-rated programs on U.S. broadcast network television.

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

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

      In November and December of 2002, Hallmark and the Hallmark Channel launched the Hallmark Keepsake Sweepstakes, the largest cable/retail promotion in U.S. cable television history. It featured six holiday-themed original programming events, which resulted in the network’s then-highest ratings ever for a December monthly period; the primetime average increased 40% over December 2001. This multi-media advertising campaign, which included television, print and radio displays throughout the 4,500 Hallmark Gold Crown stores, and the distribution of over 145 million game pieces in conjunction with the airing of six holiday-themed programming events.

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. Some of these functions are outsourced on an as-needed basis.

      The creation of our channels begins with the acquisition of programming. We acquired in 2001 over 700 titles from the Hallmark Entertainment Distribution library, which comprise the Crown Media Library. In addition, we license programming from Hallmark Entertainment Distribution and other program suppliers. Our staff or contractors review and summarize all potential programming to ensure compliance with our quality and content standards. The acquisitions staff in our regional offices licenses programming based on the amount of new programming required on the channels. Each of the acquisitions offices work together to leverage multi-channel acquisitions across many territories to reduce license fees, but remain sensitive to specific markets with targeted localized programming.

      In most of our international markets, we customize the Hallmark Channel by dubbing or subtitling program elements into local languages. The decision to customize the Channel into local languages is based on local market practices, viewer preferences and cost considerations. Language preparation is coordinated in the regional headquarters in London and Hong Kong and by Pramer in Buenos Aires. Program language elements are typically shipped to the specific region to ensure that nuances in dialect of the particular language are captured. The language versions are then combined with the other programming elements.

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

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

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

Channel Delivery

      We deliver the daily log and digital tapes to our Network Operations Center or to a third party origination and playback facility for each market, where the programming, promotional and advertising elements are combined and compressed into a single signal, and delivered to an uplink facility. The uplink facility then transmits the signal to the satellite transponder that covers the relevant geographic market, and the transponder reflects the signal back within its designated geographic area to head-end facilities and Direct-to-Home satellite services operated by pay television distributors who receive and decode our signal and transmit our channel.

      Our global Network Operations Center consisting of 6,000 square feet at our Greenwood Village, Colorado headquarters commenced operations in February 2001 and has the ability to perform origination and playback services for up to 32 programming channels. The Network Operations Center is an efficient, state of the art broadcasting operation. The facility enables us to:

	•	efficiently expand distribution into new markets;
	•	control delivery of our channels to our pay television distributors, thereby enhancing on air quality and reliability, while containing cost;
	•	enhance our ability to generate advertising revenue;
	•	distribute programming in digital and other formats as required in the rapidly evolving broadband distribution environment, while consolidating our library management; and
	•	offer playback services to other channel providers.

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

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      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.

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.

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      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 Entertainment sales force worldwide in all sales matters pertaining to the Crown Media Library. The term of this service agreement with Hallmark Entertainment expires at the end of 2003, but we expect that the agreement will be extended.

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 general entertainment programming from TNT, USA Network, A&E, the Discovery Channel, Lifetime, ABC Family and other similarly targeted channels. Our international channel competes with general entertainment programming from AXN, I-SAT, Canal Fox, TNT, UK Gold 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 have upgraded their physical infrastructures to accommodate digital delivery, which provides 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 tier as opposed to their limited, yet more widely distributed, analog tiers. As a result, the competition for the remaining widely distributed analog channel space is intense. However, as more and more subscribers are converted, the digital tier is expected to become the dominant platform.

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 channels are branded with the Hallmark name. We believe that viewers and distributors associate the Hallmark brand with family values and high quality content and that our association with this brand facilitates our efforts to achieve increased distribution and to attract additional viewers that leads to higher ratings and advertising revenue.

      We currently have long-term distribution agreements with AT&T, Adelphia, Cablevision, Charter, Cox, DirecTV, EchoStar, Mediacom, NCTC, and Time Warner in the United States, as well as a number of other distributors. We are also seeking to enter into a similar long-term distribution agreement with Comcast. The terms of our major distribution agreements generally provide for subscriber count increases and rate increases to us over time, although some provide for lower or no subscriber fees if certain levels of subscribers are achieved.

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      Our Library of more than 700 titles 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 provides a revenue stream for us from licensing the titles to third parties. We have a five-year program agreement with Hallmark Entertainment ending December 31, 2005, that provides us with access to new quality productions, as well as the titles in the Hallmark Entertainment Distribution library that we did not purchase.

      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”), the News Corporation, Telecommunications International, Inc., ABC, CBS Sports, Turner Network Television (“TNT”), MediaOne, International, the Golf Channel and USA Networks (“USA”).

Research

      The research department at Crown Media Holdings provides strategic and tactical guidance to decision-makers within the Company, as well as providing information about the channel to potential advertisers and affiliates. This department provides 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 within our Company.

      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.

      In 2001 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.

      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 1,000 adults. Since January 2002, the department has also subscribed 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 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 networks. Historically, this resource has served the industry as a solid indicator of future success.

Employees

      We had 356 employees as of December 31, 2002, compared to 412 employees at 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 and London, England. Substantially all of our domestic channel’s employees work at our offices in Studio City, California and New York, New York.

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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, many nations have broadcasting legislation and regulations, which set minimum standards regarding program 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 which 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 revenue 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 this Report.

Risk Factors

      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.

      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, 2002, we had an accumulated deficit of approximately $793.3 million, net goodwill of approximately $314.0 million, and film assets of $786.8 million.

      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 revenue, particularly advertising and licensing revenue. This will require, among other things, increasing the distribution of our channels, attracting more viewers to our channels, attracting more advertisers, and increasing our advertising rates. Risks associated with these areas of our business are described below.

      In addition, in order to accomplish these goals, the management of Crown Media Holdings continues to believe that it is necessary to increase subscribers and enhance our programming, which results in increased subscriber acquisition fees and higher costs for programming. Over the last three years, these actions have resulted in increased net losses for Crown Media Holdings.

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      We have a substantial amount of indebtedness. As of December 31, 2002, our total debt was $384.5 million and we had $335,000 of cash and cash equivalents. In addition, subject to the restrictions under our various debt agreements, we may borrow additional amounts under our line of credit with HC Crown Corp. (“HC Crown”) 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. Our principal sources of funds for the next 15 months will be cash generated from operating activities, borrowings under the HC Crown line of credit, and cash generated from the tax sharing agreement with Hallmark Cards. For further information on the HC Crown line of credit and the tax sharing agreement, see Part III — Item 13 — Certain Relationships and Related Transactions — “Hallmark Demand Notes and Line of Credit” and “Tax Sharing Agreement.”

      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;
	•	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 $38.0 million to $49.8 million for the year ended December 31, 2002, from $11.8 for the year ended December 31, 2001. Interest expense increased $12.3 million to $11.8 million for the year ended December 31, 2001, from interest income of $523,000 for the year ended December 31, 2000. The increase in interest expense in the past twelve months 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 and credit facility during 2001 and 2002 and to enter into the private placement in December 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.

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      We believe that our line of credit with HC Crown and our tax sharing agreement, together with cash generated from operations and cash on hand, will be sufficient for our liquidity needs through at least March 31, 2004. However, because we currently operate at a loss and have a negative cash flow, any unanticipated significant expense or any development that hampers our growth in revenue or decreases any of our revenue, 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 and preferred securities holders.

      Several of the Crown Media United States’ existing distribution agreements contain “most favored nations” clauses. These clauses typically provide that, in the event Crown Media United States enters into an 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. Crown Media United States is currently in discussions with several other of these distributors and has already amended its agreement with one of the distributors to incorporate some of the DirectTV terms. For information concerning this amendment to an existing distribution agreement with a large domestic distributor, please see “Revenue” under Item 7 below. Any further 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 us and will negatively affect subscriber revenue.

      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 forced to incur additional costs to acquire such programming or look for alternative programming, which may hinder the growth of our subscriber base.

      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 revenue we anticipate receiving from licensing of our film assets and cause a decline in both advertising and subscriber fees revenue. The decline in revenue could hinder or prevent us from achieving profitability and could adversely affect the market price of our Class A common stock.

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      Currently, we are dependent on Hallmark Entertainment to distribute and license our film assets to third parties for us under the terms of a three-year service agreement, which commenced January 1, 2001. 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 revenue 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 revenue 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 revenue 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 for our U.S. channel, 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. In addition, if we fail to improve our ratings, we will not be able to increase our advertising sales rate-card or may be required to run additional advertising spots which detract from our available advertising inventory for future sales.

      The international cable advertising market is much less developed than in the United States, the United Kingdom and Central Europe. We believe that only certain international markets have the potential for growth in advertising revenues and intend to emphasize those markets. Most of our international advertising revenue is derived from operations in the United Kingdom, Poland and South Africa.

      Hallmark Entertainment Investments controls all of our outstanding shares of Class B common stock and owns shares of Class A common stock, representing approximately 91% of the voting power on all matters submitted to our stockholders. Hallmark Entertainment Investments’ 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 Investments’ control relationship with us also could give rise to conflicts of interest, including:

	•	conflicts between Hallmark Entertainment Investments, 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;

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	•	conflicts related to corporate opportunities that could be pursued by us, on the one hand, or by Hallmark Entertainment Investments 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 Investments and its affiliates, on the other hand.

      In addition, persons serving as directors, officers or employees of both Hallmark Entertainment Investments and us may have conflicting duties to each. For example, Robert A. Halmi, Jr. is Chairman of our Board and is a Director and the Chairman of Hallmark Entertainment Investments 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 Investments and its affiliates than if none of our officers or directors had any affiliation with Hallmark Entertainment Investments.

      We license the name “Hallmark” from Hallmark Cards and Hallmark Licensing, Inc., for various uses, including in the name of our international and domestic channels. The license agreement for our international channel permits the use of the Hallmark trademarks outside the United States and Canada through November 30, 2003, 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 permits the use of the Hallmark trademarks in the United States through November 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 advertising revenue, particularly in the United States.

      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 revenue and profitability.

      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 and the Middle East and will, in 2003, also use the facility for origination and playback of our domestic and Asian feeds. 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.

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      In the first quarter of 2003, we are moving the majority of our operations concerning the distribution of the Hallmark Channel in Mexico, Central and South America to a local distribution partner in Argentina, Pramer. One purpose of the action is to substantially reduce our expenses for operations in this region. If Pramer is unable to adequately perform the functions of selling our Channel to local operators, to gain sufficient advertising sales and to appropriately market the Channel, we may not improve our performance in the region and our business in the region could be detrimentally affected. In addition, Pramer will perform locally the origination and playback services currently performed under our control in the Network Operations Center for our feeds to Latin America, although all but one of these the feeds will be sent by Pramer back to Denver for uplink and distribution to affiliates over our satellite capacity on PAS-9. Any significant interruption of Pramer’s services, which affects the Latin American feeds of our Channel, could have an adverse effect on the results of our business in the region.

      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 revenue 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 revenue 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.

      The United States foreign relations and the war with Iraq also can affect our revenue from foreign operations. Distributors in the Middle East and possibly those outside of that region may delay payments or attempt to use economic uncertainties as a reason to delay or halt payments to us for our channel.

      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.

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      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. We have amortized the goodwill from these acquisitions on a straight-line basis over 20 years and 10 years, respectively. The amount of goodwill that we amortized was treated as a charge against earnings under accounting principles generally accepted in the United States. In accordance with recent accounting pronouncements, we have ceased as of January 1, 2002, the amortization of this acquired goodwill, and we are required to periodically review whether the value of our goodwill has been impaired. If we are required to write down our goodwill, our results of operations, stockholders’ equity or profitability could be materially adversely affected.

      Commencing with the fourth quarter of 2001, we also have a film cost relating to the amortization of the purchase price for the film assets that we use and license to others. This film cost is, and will continue to 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 by our larger, 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.

      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 have more than one channel and 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 increasingly 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 revenue 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.

      We will make available free of charge through our website, www.hallmarkchannel.com, this Annual Report, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and amendments to such reports, as soon as reasonably practicable after we electronically file or furnish such material with the Securities and Exchange Commission.

      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 June 2003 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.

      None.

      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, 62, 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.

      William J. Aliber, 41, 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 from June 1996 through May 2000.

      Paul A. FitzPatrick, 56, 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 C-SPAN during his career.

      Russel H. Givens, 56, 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.

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      Chris R. Moseley, 52, 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, 57, 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.

PART II

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 each quarterly period in 2001 and 2002, as reported on the Nasdaq National Market System.

Holders

      As of March 3, 2003, there were approximately 92 record holders of our Class A common stock and one record holder of our 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.

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Securities Authorized for Issuance Under Equity Compensation Plans

      The following table provides as of December 31, 2002, information for our only equity compensation plan, which is the Amended and Restated 2000 Long Term Incentive Plan and an option granted by a Hallmark Cards subsidiary, Hallmark Entertainment Holdings, Inc. (“Hallmark Entertainment Holdings”) to the Chairman of Crown Media Holdings.

Equity Compensation Plan Information

(1)

Pursuant to a provision in an employment agreement between Hallmark Entertainment Holdings and Robert A. Halmi, Jr., dated October 1, 2001, Hallmark Entertainment Holdings agreed to grant Mr. Halmi stock options to purchase from Hallmark Entertainment Holdings up to 3.4 million shares of Class A common stock of Crown Media Holdings at a price per share of $11.13. The employment agreement also contains put rights for Mr. Halmi. See item “Option of Robert A. Halmi, Jr.” in Item 13 below for additional information.

Recent Sales of Unregistered Securities

      On December 30, 2002, Crown Media Holdings, Inc. issued 123,831 shares of its Class A common stock to Hallmark Entertainment Holdings. These shares were issued as payment of a portion of the commitment fee payable by Crown Media Holdings under, and in accordance with the terms of, a Promissory Note dated December 14, 2001, made by Crown Media Holdings in favor of HC Crown. The amount of the commitment fee owing and satisfied by this share issuance was $843,750. The issuance of the shares were exempt from registration under the Securities Act of 1933 as a non-public offering pursuant to Section 4(2) of the Act. We based our reliance upon this exemption on the facts of the transaction, including that the issuance and offering of the shares were made only to an affiliate of Hallmark Cards that owns more than a majority of our shares.

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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, 1998, 1999, 2000, 2001 and 2002, and the consolidated balance sheet data as of December 31, 1998, 1999, 2000, 2001 and 2002 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, and as part of this acquisition acquired the 22.5% common interests in Crown Media United States and 50% common interests of H&H Programming-Asia 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 Jim Henson Company”). 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.