10-K 1 crwn-20151231x10k.htm 10-K crwn_Current_Folio_10K

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10‑K

 

 

(Mark One)

 

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

For the fiscal year ended December 31, 2015

or

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

For the transition period from                          to                         .

 

Commission File Number: 000‑30700

Crown Media Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)

84‑1524410
(I.R.S. Employer
Identification No.)

12700 Ventura Boulevard,
Suite 200,
Studio City, California 91604
(Address of Principal Executive Offices) (Zip Code)

 

(818) 755‑2400

(Registrants Telephone Number, Including Area Code)

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

 

 

Title of Each Class

Name of Each Exchange on Which Registered

Class A Common Stock, $0.01 par value

The NASDAQ Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes   No 

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   No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K (§229.405) is not contained herein, and will not be contained, to the best of registrants 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. 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b‑2 of the Exchange Act.

 

 

 

 

Large accelerated filer 

Accelerated filer 

Non‑accelerated filer 
(Do not check if
smaller reporting company)

Smaller reporting company 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12 b‑2 of the Exchange Act). Yes   No 

The aggregate market value of the voting and non‑voting common equity held by non‑affiliates computed by reference to the price at which the common equity was last sold as of June 30, 2015, the last business day of the registrants most recently completed second fiscal quarter, was $156,801,512.

As of February 16, 2016, the number of outstanding shares of Class A Common Stock, $.01 par value per share was 359,675,936.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants Proxy Statement for the 2016 Annual Meeting of Stockholders, to be filed on or prior to April 30, 2016, are incorporated by reference in Part III of this Annual Report on Form 10‑K.

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

 

 

Page

Part I 

 

3

Item 1 

Business

 

3

Item 1A 

Risk Factors

 

13

Item 1B 

Unresolved Staff Comments

 

23

Item 2 

Properties

 

24

Item 3 

Legal Proceedings

 

24

Item 4 

Mine Safety Disclosure

 

24

 

 

 

Part II 

 

25

Item 5 

Market for Our Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

25

Item 6 

Selected Financial Data

 

27

Item 7 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

29

Item 7A 

Quantitative and Qualitative Disclosures About Market Risk

 

45

Item 8 

Financial Statements and Supplementary Data

 

46

Item 9 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

46

Item 9A 

Controls and Procedures

 

46

Item 9B 

Other Information

 

47

 

 

 

Part III 

 

48

Item 10 

Directors, Executive Officers and Corporate Governance

 

48

Item 11 

Executive Compensation

 

48

Item 12 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters

 

48

Item 13 

Certain Relationships and Related Transactions, and Director Independence

 

48

Item 14 

Principal Accountant Fees and Services

 

48

 

 

 

Part IV 

 

49

Item 15 

Exhibits and Financial Statement Schedules

 

49

Signatures 

 

56

 

 

 

ii


 

In this Annual Report on Form 10‑K the terms Crown Media Holdings, the Company, we, us and our refer to Crown Media Holdings, Inc. and, unless the context requires otherwise, subsidiaries of Crown Media Holdings that operate or have operated our businesses, including Crown Media United States, LLC (Crown Media United States).

The name Hallmark and other product or service names are trademarks or registered trademarks of entities owned by Hallmark Cards, Incorporated (Hallmark Cards).

Certain Terms

Certain terms used throughout this Annual Report on Form 10‑K are defined below.

 

 

 

2011 Credit Agreement

 

Our Credit Agreement, dated as of July 14, 2011, with the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, which provided for the 2011 Term Loan and the 2011 Revolver, as amended by Amendment No. 1.

 

 

 

2011 Refinancing

    

The July 14, 2011 transaction pursuant to which we issued the 2011 Term Loan and the Notes to repay certain obligations to Hallmark Cards.

 

 

 

2011 Revolver

 

The five year $30.0 million senior secured revolving credit facility issued pursuant to the 2011 Credit Agreement.

 

 

 

2011 Term Loan

 

The $210.0 million senior secured term loan issued pursuant to the 2011 Credit Agreement.

 

 

 

2015 Credit Agreement

 

Our 2015 Credit Agreement, dated as of June 25, 2015, with the lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, which provides for the 2015 Term Loan and the 2015 Revolver.

 

 

 

2015 Refinancing

 

The June 25, 2015 transaction pursuant to which we issued the 2015 Term Loan and the 2015 Revolver, certain proceeds of which we used to repay outstanding amounts under the 2011 Revolver, the 2011 Term Loan and the Notes.

 

 

 

2015 Revolver

 

The five year $100 million senior secured revolving credit facility issued pursuant to the 2015 Credit Agreement.

 

 

 

2015 Term Loan

 

The five year $325 million senior secured term loan issued pursuant to the 2015 Credit Agreement.

 

 

 

Amendment No. 1

 

Amendment No. 1 to our 2011 Credit Agreement as executed March 29, 2013.

 

 

 

ADUs

 

Audience Deficiency Units, or units of advertising inventory that are made available to advertisers as fulfillment for past advertisements purchased by the advertiser that did not deliver the guaranteed viewership ratings. The liability for these units is called the audience deficiency reserve.

 

 

 

Common Stock

 

Our Class A common stock, $0.01 par value per share, unless the context requires otherwise.

 

 

 

CPM

 

Cost per thousand or advertising rate per thousand viewers.

 

 

 

1


 

Federal Tax Deconsolidation

 

The effect of an agreement dated October 29, 2012, pursuant to which Hallmark Cards caused 40 million shares of our Common Stock to be transferred from HCC to a German subsidiary of Hallmark Cards, which was not part of Hallmark Cards consolidated federal tax group, thus reducing HCCs ownership of our Common Stock from 90.3% to 79.2%. As a result of such transfer, we are no longer part of the Hallmark Cards consolidated federal tax group for federal income tax purposes.

 

 

 

GAAP

 

Generally accepted accounting principles in the United States.

 

 

 

Hallmark Cards or Hallmark

 

Hallmark Cards, Incorporated, our ultimate parent.

 

 

 

Hallmark Channel

 

A 24‑hour cable television destination for family‑friendly programming and a leader in the production of original movies.

 

 

 

Hallmark Movies and Mysteries

 

A 24-hour cable television destination dedicated to offering viewers a collection of movies and long form programming appropriate for the entire family, featuring a mix of original movies and series of the mystery genre, in addition to classic theatrical films, and Hallmark Hall of Fame movie presentations, formerly known as Hallmark Movie Channel.

 

 

 

HCC

 

H C Crown, LLC, formerly H C Crown Corp., a subsidiary of Hallmark Cards and our immediate parent.

 

 

 

Indenture

 

The Indenture, dated as of July 14, 2011, by and among us, our subsidiaries party thereto, and The Bank of New York Mellon Trust Company, N.A., as Trustee, as supplemented by a Supplemental Indenture dated as of June 10, 2014.

 

 

 

Network or Networks

 

Hallmark Channel or Hallmark Movies and Mysteries, individually or collectively, as the context requires.

 

 

 

Nielsen

 

Nielsen Media Research or The Nielsen Company, an information and measurement company that provides television ratings, media measurements and other marketing and consumer information.

 

 

 

Notes

 

$300.0 million of 10.5% senior unsecured notes issued on July 14, 2011, by us pursuant to the terms and conditions of the Indenture.

 

 

 

Recapitalization

 

Exchange of $1.2 billion of debt for $315.0 million of debt, 185,000 shares of preferred stock and common stock on June 29, 2010, with Hallmark Cards and HCC.

 

 

 

Scatter Market

 

The period after the close of the Upfront Season during which advertising is sold in close proximity to its air date.

 

 

 

Subscriber

 

A household that receives, on a full‑ or part‑time basis, a Network as part of a program package or a program tier of a distributor.

 

 

 

Upfront Season

 

The period of time (usually during the month of May) when advertisers commit to a certain volume of advertising for the fourth quarter of the same year and the first three quarters of the following year.

 

2


 

PART I

ITEM 1.  Business

Company Overview

We own and operate two pay television Networks, Hallmark Channel and Hallmark Movies and Mysteries, each of which is dedicated to high-quality entertainment programming for families and an attractive outlet for advertisers seeking to target our viewers.  Consistent with the Hallmark brand, both Networks are preeminent sources of holiday programming, with Hallmark Channel often ranking first among cable networks for movies during the Christmas holiday season.

Hallmark Channel, one of the most widely distributed independent networks in the United States, features popular television series such as Golden Girls,  The Middle and Frasier, as well as original television series such as When Calls the Heart and Good Witch, and movies with compelling stories and internationally recognized stars. It also features “lifestyle” programming with the two hour weekday series, Home and Family.  

We rebranded Hallmark Movie Channel to Hallmark Movies and Mysteries in September 2014 to give this Network a distinctly different identity and programming lineup than that of Hallmark Channel. Prior to the rebranding, Hallmark Movie Channel offered original movies, classic theatrical films and movies from the award winning Hallmark Hall of Fame collection. While we continue to air the Hall of Fame collection and content previously provided under Hallmark Movie Channel, Hallmark Movies and Mysteries emphasizes programming of the mystery genre, including original movies, movie franchises and series.  After the rebranding, the Network’s audience has increased 16% from September 2014 to December 2015, indicating that the rebranded channel appeals to our viewers. Higher ratings and a  greater subscriber count allow us to increase our average advertising CPM.  

The following table shows our Networks’ programming sources, selected pay television distributors and the total number of subscribers as of December 2015.

 

 

 

 

 

 

    

Hallmark Channel

    

Hallmark Movies and Mysteries

Programming Sources

 

Original Productions

Other third‑party sources

Hallmark Hall of Fame

 

Original Productions

Other third‑party sources

Hallmark Hall of Fame

Selected Pay Television Distributors

 

AT&T

Cablevision

Charter

Comcast

Cox

DIRECTV

Dish Network

NCTC

Time Warner

Verizon Communication (FiOS)

 

AT&T

Cablevision

Charter

Comcast

Cox

DIRECTV

Dish Network

NCTC

Time Warner

Verizon Communication (FiOS)

 

 

 

 

 

Total Subscribers

 

90.4 million(1)

 

62.2 million(1)


(1)Source: Nielsen Focus and The Nielsen Public U.E. December 2015.

Programming acquired from third parties is an important component of the programming for our Networks as we continually develop and refine our programming strategy. This programming includes original series and movies produced specifically for us by a variety of experienced television production companies and theatrical movies and “off network” television series licensed to us by major studios and distributors. Our agreements for original series and movies typically provide for exclusive rights in the United States in all media for periods ranging from eight years to perpetuity.

3


 

Our license agreements for theatrical films and off network programming usually give us more limited rights for license periods of five or more years to exhibit the programming on our Networks. From time to time, we also exhibit excerpts of certain programming on our website.

We also established Crown Media Productions, LLC (“Crown Media Productions”) as our in-house production company and plan to increase the production of original content for multiple platforms. During 2015, our Networks premiered seven movies produced by Crown Media Productions for which we funded all production costs, owned all worldwide rights and fully controlled the creative and production process. These movies, along with the many other original movies and series which we have previously commissioned and to which we hold exclusive United States rights in all media, are a valuable asset for us.  The original content that we own or hold exclusive rights to gives us the opportunity to meaningfully participate in and profit from new distribution technologies as they are developed.

Hallmark Channel and Hallmark Movies and Mysteries are currently distributed to approximately 91% and 62%, respectively, of all United States pay television subscribers. We currently distribute Hallmark Channel through approximately 5,255 cable, satellite and other pay television distribution systems and Hallmark Movies and Mysteries through approximately 4,040 such systems.

Four of our distributors each accounted for more than 10%, and together accounted for a total of approximately 75%, of our consolidated subscriber fees revenue for the year ended December 31, 2015. Two of our distributors each accounted for approximately 15% or more of the number of our consolidated subscribers for the year ended December 31, 2015, and together accounted for approximately 42% of the number of our consolidated subscribers on that date. The loss of one of these distributors could have a significant impact on our financial condition and operations. Three of our programming content providers each accounted for more than 10% of our total license fees payable for the year ended December 31, 2015, and together accounted for a total of 63% of the consolidated programming liability.

We view a “subscriber” as a household that receives, on a full or part-time basis, a Network as part of a program package or a program tier of a distributor. We determine the number of our Hallmark Channel and Hallmark Movies and Mysteries subscribers from subscriber numbers reported by Nielsen.

We license the trademark “Hallmark” for use on our Networks pursuant to trademark license agreements from a subsidiary of Hallmark Cards. We believe that the use of this trademark is important for our Networks due to the substantial name recognition and favorable characteristics associated with the name.

During 2013, 2014 and 2015, the Networks comprised our sole operating segment.

Company History

Crown Media Holdings was incorporated in the state of Delaware in December 1999. Through its wholly‑owned subsidiary Crown Media United States, Crown Media Holdings owns, operates and distributes the Networks. Our significant investors include HCC and Hallmark Cards GmbH, a German subsidiary of Hallmark Cards. In January 2014, we formed Crown Media Productions, a Delaware limited liability company and wholly‑owned subsidiary of Crown Media United States. Crown Media Productions owns our original programming for which we hold the copyright.

Business Strategy

Based on the current economic environment, we are pursuing the following objectives.

·

High‑quality, family programming.  We plan to continue to offer 24/7 family programming that is trusted by our audience and highly desirable to our advertisers. Hallmark Channel includes lighter, romantic and comedic fare while Hallmark Movies and Mysteries focuses on the light suspense and drama genres.

·

Hallmark Channel lifestyle programming block.  We plan to provide program offerings with content that is consistent with our core values of family, home, and celebration.

4


 

·

Original movies and series.  We plan to develop original movies and series that are uniquely identified with the Networks.

·

Distribution.  We plan to encourage existing distributors to place our Networks in packages with greater numbers of subscribers.

·

Advertising.  We plan to maintain strong relationships with a diverse group of high‑quality, stable advertisers and achieve higher advertising rates through our trusted content, valuable target audience demographics and strong ratings.

·

Content provider.  We plan to position ourselves for future growth as a content provider for new technologies by expanding our library of programming and exploring collaborations in emerging media.

·

Profitability.  We plan to continue to increase our profitability by increasing distribution and focusing on advertising revenue growth.

Intellectual Property

Our business depends on our intellectual property. Our intellectual property assets include copyright interests in television content and other ancillary materials, trademarks in brands, names and logos, and domain names. We attempt to protect these intellectual property rights through a combination of copyright and trademark law and contractual restrictions. We have filed copyright, trademark and other intellectual property registrations.

Pursuant to license agreements, we license the name “Hallmark” from Hallmark Licensing, LLC, a subsidiary of Hallmark Cards, for use in the names of our Networks. In conjunction with the 2015 Credit Agreement, Hallmark Licensing, LLC extended the term of the license agreements for an additional period that terminates on the earlier of (i) June 30, 2021 or (ii) the payment in full of all obligations, and terminations of all commitments under the 2015 Credit Agreement.  We believe that the use of this trademark is critical for our Networks due to the substantial name recognition and favorable characteristics associated with the name in the United States.

Regulatory Matters

Our businesses are subject to and affected by laws and regulations of U.S. federal, state and local governmental authorities as well as the laws and regulations of other countries and international bodies such as the European Union (the “EU”), which laws and regulations are subject to change.

FCC

The FCC regulates cable television, satellite and other video programming distributors. These regulations, in areas such as closed-captioning, commercial loudness and children’s programming, could indirectly affect our cable networks.

Closed Captioning

Our Networks are required by the FCC to provide closed‑captioning of programming for hearing impaired individuals.  We certify on a quarterly basis to our distributors that we are compliant with closed-captioning requirements. The 21st Century Communications and Video Accessibility Act of 2010 also requires us to provide closed captioning on certain video programming that we offer on the Internet.

5


 

Regulation of the Internet and Mobile Applications

We operate numerous websites and offer mobile applications (“apps”) which we use to distribute information about our programs and to engage more deeply with our viewers. The operation of these websites and distribution of these apps are subject to a range of federal, state and local laws such as privacy and consumer protection regulations.

Employees

We had 208 employees at December 31, 2014 and 236 employees at December 31, 2015. Neither we nor any of our subsidiaries are parties to collective bargaining agreements. We believe that our relations with our employees are good. Most of our employees work at our offices in Studio City, California and New York, New York.

Industry Overview

The pay television industry is comprised primarily of program suppliers, pay television network 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, independent production companies and other 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.

We are a pay television provider, similar to all major U.S. cable and satellite networks that 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 network providers and distributors generally restrict viewership through security encryption devices that limit viewership to authorized subscribers. Pay television network providers compete with each other for distribution, as well as for viewers and advertisers, and generally target audiences with a certain demographic composition, so that they can then sell advertising to advertisers seeking to reach these audiences.

Pay television distributors own and operate the platforms used to deliver networks to subscribers. These distributors use several different technologies to reach their subscribers as described below under the heading “Distribution Platforms.” Distributors attempt to create a mix of networks that will be attractive to viewers in an attempt to gain new subscribers and to minimize subscriber turnover. Distributors have different levels of service for subscribers, with each service level containing a different package of networks. Pay television distributors often create “tiers” of programming services, and our services occasionally are offered on family or movie programming tiers. Various distributors offer additional broadband services such as Internet access and video‑on‑demand over their systems.

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 networks from a central facility, known as a headend, to 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, telephone companies (“Telcos”) use a combination of traditional cable and Internet Protocol Television (“IPTV”) technologies to reach their subscribers. For example, Verizon adopted a hybrid model combining traditional cable and IPTV technologies while AT&T launched full‑fledged IPTV networks. While traditional cable systems devote a portion of bandwidth to each network and push all the networks to subscribers at one time, IPTV uses architecture in which only the network being watched at that moment is sent through the distribution system to the viewer, freeing up bandwidth capacity for other features and more interactivity. Lastly, networks can also be distributed through satellite master antenna television (“SMATV”). SMATV is used primarily for buildings such as apartments and hotels that receive programming from satellites by means of a single antenna that is connected to the buildings’ headend. The television signals are then distributed to individual units in the building by coaxial cable or fiber.

6


 

From time to time, for promotional purposes, we exhibit excerpts of certain programming on our website and social media pages controlled by us.

Sources of Revenue

Advertising Revenue

We earn advertising revenue in the form of spot or general rate advertising and direct response advertising. Spot advertisements and direct response advertisements are generally 30 seconds long and are aired during or between programs. Spot advertisements are priced at a rate per thousand viewers (i.e., the CPM) and almost always include our commitment to deliver a specified number of viewers in a particular demographic. Our revenue from direct response advertising varies in proportion to the direct sales achieved by the advertiser in response to the advertising. It is sold without ratings or product sales commitments. Our advertising revenue is affected by the mix of these forms of advertising. Advertising rates also vary by time of year due to seasonal changes in television viewership.

Advertising revenue is recorded net of ADUs. Whenever spot advertising is aired in programs that do not achieve promised viewership ratings, we issue ADUs which provide the advertiser with additional spots at no additional cost to make up for the shortfall. We defer a pro rata amount of advertising revenue and recognize a like amount as a liability for advertisements that do not achieve promised viewership ratings. When the make-good spots are subsequently aired, revenue is recognized and the liability is reduced. The level of inventory that is utilized for our ADU liability varies over time and is influenced by prior fluctuations in our under-delivery, if any, of viewers against promised ratings as well as the rate at which we and our customers mutually agree to utilize the ADUs.

We typically commit approximately 40% of Hallmark Channel’s advertising inventory and 30% of Hallmark Movies and Mysteries’ advertising inventory in the broadcast Upfront Season based on guaranteed demographic delivery. We hold back a small percentage of our inventory for ADUs and commit the remainder to the Scatter Market, calendar year upfront and the direct response market.

According to Nielsen, there were 106 and 107 advertising‑supported cable networks in the United States during 2014 and 2015, respectively. The Networks’ ratings and industry rankings for the years ended December 2014 and 2015 are presented below.

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2015

 

 

    

Rating

    

Rank

    

Rating

    

Rank

 

Hallmark Channel

 

 

 

 

 

 

 

 

 

Subscribers at year end (rating in millions)

 

85.3

 

39

 

90.4

 

31

 

Household

 

 

 

 

 

 

 

 

 

Total day viewership

 

0.5

 

14

 

0.5

 

13

 

Prime time household rating

 

0.8

 

15

 

0.8

 

13

 

Women 25 – 54

 

 

 

 

 

 

 

 

 

Total day viewership

 

0.3

 

8

 

0.3

 

8

 

Prime time household rating

 

0.4

 

18

 

0.4

 

16

 

Hallmark Movies and Mysteries

 

 

 

 

 

 

 

 

 

Subscribers at year end (rating in millions)

 

55.6

 

88

 

62.2

 

77

 

Household

 

 

 

 

 

 

 

 

 

Total day viewership

 

0.4

 

20

 

0.4

 

18

 

Prime time household rating

 

0.5

 

26

 

0.6

 

23

 

Women 25 – 54

 

 

 

 

 

 

 

 

 

Total day viewership

 

0.1

 

34

 

0.2

 

17

 

Prime time household rating

 

0.2

 

35

 

0.2

 

35

 

Total day means the time period that Nielsen measures each day, 6 a.m. to 6 a.m.

7


 

The volume of advertising inventory that we have available for sale is determined by our chosen commercial load per hour and the number of broadcast hours. Our Networks currently broadcast 24 hours per day. Our need to reserve inventory for the use of ADUs reduces the amount of advertising inventory available for cash sales.

We have advertising sales offices in New York, Los Angeles, Chicago, and Atlanta.

For each of the years ended December 31, 2013, 2014 and 2015, revenue from the sale of advertising time on our Networks was approximately $294.8 million, $327.7 million and $386.2 million, respectively. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation” in this Annual Report on Form 10‑K for further information on advertising and ratings.

Subscriber Fees

Subscriber fees are payable to us on a per subscriber basis by pay television distributors for the right to carry our Networks. The fees we receive per subscriber vary with changes in the following factors, among others:

·

the degree of competition in the market;

·

the relative position in the market of the distributor and the popularity of the Network;

·

the packaging arrangements for the Network; and

·

length of the distribution contract and other commercial terms.

We are in continuous negotiations with our existing distributors to have our Networks placed in packages with the greatest number of subscribers, thereby increasing our subscriber base and enhancing our opportunities to generate advertising revenue. At the time we sign a distribution agreement, and periodically thereafter, we evaluate the recoverability of the costs we incur against the incremental revenue directly and indirectly associated with each agreement.

Our Networks are usually offered as one of a number of networks on either a basic tier or part of other program packages and are not generally offered on a stand-alone basis. Thus, while cable or satellite customers may subscribe and unsubscribe to the tiers and program packages in which one of our Networks is placed, these customers do not subscribe and unsubscribe to our Networks on an individual basis.

Each Network’s subscriber count depends on the number of distributors carrying the Network, the size of such distributors, and the program tiers on which the Network is carried by these distributors. From time to time, we experience increases or decreases in the number of subscribers as promotional periods end, as distributors reposition the Networks from one tier or package to another, or as a distributor arrangement is amended or terminated by us or the distributor. Management analyzes the estimated effect each new or amended distribution agreement will have on revenue and costs.

For each of the years ended December 31, 2013, 2014 and 2015, revenue derived from subscriber fees for the Networks was approximately $81.8 million, $82.9 million and $85.3 million, respectively. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this Annual Report on Form 10‑K for information regarding subscriber fees.

Segment Information

We have one reporting segment, the Networks, through which we conduct all of our business. Please see our Consolidated Financial Statements included in this Annual Report on Form 10‑K for financial information regarding this segment.

8


 

Programming

Our Networks offer a range of high‑quality entertainment programming for adults and families including original series, lifestyle programming, popular television series, movies, miniseries, theatricals, romances, literary classics, television specials and contemporary stories. Original programming for the channels is produced both in-house and by independent producers. This production takes place largely in Canada to take advantage of lower production facilities and personnel costs and tax incentives. Off-network and syndicated movies and series programming for the channels is licensed from distributors such as Buena Vista Television, CBS Television Distribution, Hallmark Hall of Fame, MGM, NBCU, Paramount Pictures, Sonar Entertainment, Sony Pictures Television, Twentieth Television, Warner Bros. and others.

Examples of programming include Hallmark Channel original movies Cloudy with a Chance of Love,  Just the Way You Are,  A Country Wedding,  Harvest Moon and A  Crown for Christmas. Examples of other third party programming shown on our Networks include the popular series The Middle,  Last Man Standing,  Little House on the Prairie, I Love Lucy, The Golden Girls, The Waltons, Cheers, Frasier, Matlock and Murder She Wrote (on Hallmark Movies and Mysteries only). Examples of family‑friendly movies licensed from major studios include Father of the Bride,  Big, Ever After: A Cinderella Story and Hope Floats. Our license agreements with third parties typically provide for a license fee paid out over the term of the license for the right to exhibit a program in the United States during a specified period of time. Original movies can be exhibited an unlimited number of times in the United States.

Hallmark Channel debuted one new original series in 2015,  Good Witch.  In addition, the series When Calls the Heart returned for a second season and Cedar Cove returned for a third season.

Our Networks air, and benefit from, Hallmark Hall of Fame programming such as In My Dreams, The Lost Valentine and Loving Leah.  In  December 2015,  Just in Time for Christmas, a Hallmark Hall of Fame, premiered on Hallmark Channel.

Distribution

Hallmark Channel

Hallmark Channel ended 2014 and 2015 with approximately 85.3 million subscribers and approximately 90.4 million subscribers, respectively. We currently distribute Hallmark Channel to 91% of all United States pay television subscribers. The following table shows the number of subscribers served by each of the nine largest pay television distributors and all other pay television distributors as a group as well as the number and percentage of those subscribers that receive the Hallmark Channel as of December 31, 2015.

 

 

 

 

 

 

 

 

 

    

 

    

 

    

% OF TOTAL

 

 

 

 

 

 

 

SUBSCRIBERS

 

 

 

 

 

HALLMARK

 

THAT RECEIVE

 

 

 

TOTAL

 

CHANNEL

 

HALLMARK

 

PAY TELEVISION DISTRIBUTOR

 

SUBSCRIBERS(1)

 

SUBSCRIBERS(1)

 

CHANNEL

 

 

 

(In thousands, except percentages)

 

Comcast

 

19,644

 

18,423

 

93.8

%

DIRECTV

 

20,688

 

19,906

 

96.2

%

Dish Network

 

13,579

 

10,293

 

75.8

%

Time Warner

 

12,588

 

11,177

 

88.8

%

AT&T (U-verse)

 

6,565

 

6,434

 

98.0

%

Verizon Communications (FiOS)

 

6,481

 

6,102

 

94.2

%

Charter

 

4,456

 

4,378

 

98.2

%

Cox

 

3,756

 

3,041

 

81.0

%

Cablevision

 

2,622

 

1,847

 

70.4

%

NCTC and all others

 

9,332

 

8,797

 

94.3

%

Total

 

99,711

 

90,398

 

90.7

%


(1)

Source: Nielsen Focus and The Nielsen Public U.E. December 2015.

Our subscribers in the United States have grown from approximately 16.0 million full time subscribers at January 1, 2001 to 90.4 million at December 2015. Our major distribution agreements have terms which expire at

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various times from September 2017 through December 2032. As of December 2015, Hallmark Channel was distributed in all 210 demographic market areas.

Hallmark Movies and Mysteries

We launched Hallmark Movie Channel in 2008 and rebranded it as Hallmark Movies and Mysteries in 2014. At December 2015, Hallmark Movies and Mysteries was distributed to 62.2 million subscribers, an increase of 6.6 million as compared to 55.6 million subscribers at December 2014. As of December 2015, Hallmark Movies and Mysteries was distributed in all 210 demographic market areas.

The following table shows the number of subscribers served by each of the nine largest pay television distributors and all other pay television distributors as a group as well as the number and percentage of those subscribers that receive the Hallmark Movies and Mysteries as of December 31, 2015.

 

 

 

 

 

 

 

 

 

    

 

    

 

    

% OF TOTAL

 

 

 

 

 

 

 

SUBSCRIBERS

 

 

 

 

 

HALLMARK

 

THAT RECEIVE

 

 

 

 

 

MOVIES

 

HALLMARK

 

 

 

TOTAL

 

AND MYSTERIES

 

MOVIES

 

PAY TELEVISION DISTRIBUTOR

 

SUBSCRIBERS(1)

 

SUBSCRIBERS(1)

 

AND MYSTERIES

 

 

 

(In thousands, except percentages)

 

Comcast

 

19,644

    

17,129

    

87.2

%

DIRECTV

 

20,688

 

5,414

 

26.2

%

Dish Network

 

13,579

 

5,603

 

41.3

%

Time Warner

 

12,588

 

8,147

 

64.7

%

AT&T (U-verse)

 

6,565

 

5,567

 

84.8

%

Verizon Communications (FiOS)

 

6,481

 

5,735

 

88.5

%

Charter

 

4,456

 

4,357

 

97.8

%

Cox

 

3,756

 

2,833

 

75.4

%

Cablevision

 

2,622

 

1,620

 

61.8

%

NCTC and all others

 

9,332

 

5,805

 

62.2

%

Total

 

99,711

 

62,210

 

62.4

%


(1)

Source: Nielsen Focus and The Nielsen Public U.E. December 2015.

Distribution through New Media

A number of our original movies and series have been released on DVD and sold by major retailers, such as Wal-Mart, and are also available for streaming or downloaded viewing from online stores, such as Amazon and iTunes, and on Subscription Video‑On‑Demand services such as Netflix. Our original movies and primetime series, as well as the lifestyle series Home and Family may also be viewed on the “TV Everywhere” or “Authenticated” platforms of many of our distributors.

Sales and Marketing

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

For over sixty years, Hallmark has been a leader in high‑quality original television production. Hallmark Channel and Hallmark Movies and Mysteries have the exclusive cable license to broadcast the movies previously shown as Hallmark Hall of Fame, a selection of movies from an award‑winning entertainment series.

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We believe the power of the Hallmark brand and the quality of our programming combine to:

·

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

·

enhance our ability to attract advertising commitments and higher CPMs from the largest advertisers; and

·

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

Our websites www.hallmarkchannel.com and www.hallmarkmoviesandmysteries.com are used to promote the Networks and their programming and to provide information to consumers. These websites promote major programming events, such as original movie and series premieres and program acquisitions, as well as provide information regarding the regular programs on the respective Networks. Further, the sites provide a venue for viewer participation in Network sweepstakes, promotions and community areas. The sites have advertiser imaging, including banner messages and video content. We also promote our programming and promotion activities on social networking sites, such as Facebook, Pinterest, Twitter, tvtag, Instagram, YouTube and Tumblr.

Network Operations

Our programming department is responsible for ensuring the consistent quality of the programming we offer. Our programming, scheduling and acquisitions departments work in conjunction with the marketing, publicity and creative services departments to create the distinctive appearance of our Networks. Some of these functions are outsourced on an as‑needed basis.

The ongoing production of our Networks is dependent upon our development of original movies and series and acquisition of programming from third parties. Our staff or third parties review all potential programming to ensure that programming is appropriate for the Networks and complies with our quality and content standards.

Our employees or external vendors are typically responsible for the creation of on‑air promotional segments and interstitials (i.e., short entertainment segments related to our movies and series). These interstitials are intended to invite viewership, guide viewers to specific programming with tune‑in information, and promote “brand awareness” for the Networks. Occasionally, these interstitials are sponsored by advertisers, resulting in additional advertising revenue.

Our scheduling department creates the schedule, which contains a list of daily programming. The scheduling department works with advertising sales, research, distribution and marketing personnel to continuously monitor the effectiveness of programming content and sequence. The schedule is then forwarded to the traffic department.

Our traffic department inserts promotional segments and advertising into the schedule and creates the daily log, which contains a detailed schedule of the stream of programming, commercials and promotional materials that will ultimately be distributed to the subscribers of the Networks. The daily log is then converted to a machine readable play list.

Network Delivery

We deliver the play list and electronic files of Hallmark Channel and Hallmark Movies and Mysteries programming, commercials and promotional messages to a third party network operations center, Encompass Digital Media, in Stamford, Connecticut, where the programming, advertising and promotional elements are combined and compressed. Each Network’s broadcast stream is compiled in high definition, after which a standard definition version is created. The Stamford facility transmits the combined signals to a satellite transponder, SES AMC 11/T5, that covers the United States. Cable head‑end facilities, Telcos and direct‑to‑home satellite services receive and decode our broadcast streams and transmit our Networks to their subscribers.

The contracts with these parties providing origination, uplink, satellite and other services for the delivery of our Networks in the United States expire from December 2019 through March 2020. Such contracts may be terminated by the vendors prior to the expiration of the contracts under conditions that are customary to contracts of this type. Amounts

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payable under these contracts are reflected in “Operating Leases” and “Capital Leases” in the schedule of contractual commitments as of December 31, 2015, as shown in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this Annual Report on Form 10‑K.

Competition

The pay television industry is highly competitive. Our Networks compete for distribution, viewers and advertisers with other pay television networks, broadcast television networks, new online distributors of content and with other general forms of entertainment.

There are several sources of competition within our industry, each of which affects our business strategy. Our Networks compete with other general entertainment programming from cable networks including, TNT, TCM, USA Network, HGTV, TV Land, Lifetime, Lifetime Movie Network, OWN, Freeform, and other networks targeting our audience. We compete with these networks for viewers and advertising dollars based upon quality of programming, number of subscribers, ratings and subscriber demographics. We compete with all networks for carriage on cable, satellite and telco systems that may have limited capacity.

Competitive strengths

We believe that our primary competitive strengths include the following:

·

Programming.  We have established a track record of providing high‑quality family programming. Our programming includes high‑quality original movies and series, original lifestyle programming, as well as popular television series.

·

Pay television networks branded with the well‑known Hallmark name.  Our Networks are branded with the Hallmark name. We believe that viewers and distributors associate the Hallmark brand with family values and high‑quality content. We believe our association with this brand facilitates our efforts to achieve increased distribution and attract additional viewers, which in turn positively affects our ratings and advertising revenue.

·

Dual revenue stream.  We generate our revenue through subscriber fees under long‑term distribution agreements and robust advertising sales driven by our attractive audience demographic and trusted content and brand association.

·

Broad distribution.  Our Networks are widely distributed throughout the United States, with Hallmark Channel reaching 91% of the United States pay television audience, which provides us with the necessary reach to attract advertisers.

·

Experienced management.  Members of our senior management team have experience promoting and operating networks. They have held senior positions at such companies as ABC, Fox Family, and Twentieth Television.

Competitive risks

We believe that our primary competitive risks include the following:

·

Two networks distributed domestically.  We operate only two networks and we only distribute our networks domestically. Many of our competitors are also diversified entertainment companies that have more than two networks and are distributed internationally, giving them an advantage in dealing with distributors and advertisers. Additionally, such companies are distributed more widely on various digital platforms, such as through mobile devices and other authenticated distribution platforms in collaboration with their distributors. These companies are also able to leverage costs across multiple networks.

·

Entertainment programming.  Our programming is entertainment designed for adults and families and is intended to meet quality standards that are associated with the Hallmark trademark and its brand image. Many of our competitors may have more flexibility in selecting programming.

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·

Ratings which affect advertising.  Our ratings are a significant and generally positive factor. Nevertheless, our competitors include networks with more subscribers and higher ratings, which affect rates that we can charge for advertising.

Research

Our research department provides strategic and tactical guidance to management, as well as supplying information about the Networks to our potential advertisers and distributors. This department collects and provides data about the size, demographics and product/brand interest and purchase patterns of our audience and information about our competitors, markets and the industry as a whole. Our 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 various opportunities lie, in order to increase our Networks’ market share. Furthermore, the research department tracks the performance of our Networks daily, weekly, monthly, and quarterly through an internal tracking system using the Nielsen ratings service and a number of other services and sophisticated tools useful in obtaining information on viewers of our Networks. From time to time, we conduct focus group studies to assess and analyze sample audience reaction to certain upcoming programming.

Available Information

Our principal executive offices are located at 12700 Ventura Boulevard, Studio City, California 91604 and our telephone number is (818) 755‑2400. We will make available free of charge through our website, www.hallmarkchannel.com, this Annual Report on Form 10‑K, 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 “SEC”).

The public may read and copy any materials that Crown Media Holdings, Inc. files with the SEC at the SEC’s Public Reference Room at 100 F Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1‑800‑SEC‑0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

Additionally, we will make available, free of charge upon request, a copy of our Business Conduct and Ethics Policy, which is applicable to all of our employees, including our senior financial officers. Our code is available through our website. Copies may be requested by contacting our General Counsel at 12700 Ventura Boulevard, Studio City, California 91604.

ITEM 1A.  Risk Factors

Risk Factors and Forward‑Looking Statements

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 our management, as of the date of this Annual Report on Form 10‑K, including, without limitation, assumptions about risks and uncertainties faced by us. Readers can identify these forward‑looking statements by their use of such verbs as expects, anticipates, believes, plans or similar verbs or conjugations of such verbs. If any of managements assumptions prove incorrect or should unanticipated circumstances arise, our 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 below in this Annual Report on Form 10‑K. We will not update any forward‑looking statements contained in this Annual Report on Form 10‑K to reflect future events or developments.

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 Common Stock could decline because of any of these risks.

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Risks Relating to Our Business

Our business previously incurred net losses and may incur losses in the future.

Our business had a history of net losses through September 30, 2010. As of December 31, 2015, we had an accumulated deficit of $1.5 billion, total stockholders equity of $579.6 million, and goodwill of $314.0 million. For the year ended December 31, 2015, we had net income of $86.1 million and $77.5 million of net cash provided by operating activities. However, we cannot provide assurance that we will sustain an operating profit or a positive cash flow. If we are not able to do so, the trading price of our Common Stock may fall significantly and we may not be able to meet our debt obligations, working capital requirements, capital expenditure plans, or other cash needs. Our inability to meet those needs and any decrease in the trading prices of our Common Stock could have a material adverse effect on our business, financial condition, operating results and liquidity.

We believe to continue to be profitable before interest expense and to continue to generate a positive cash flow, we must maintain or increase the positive margin of our advertising and subscriber revenue over our (i) programming expenses, (ii) selling, general and administrative expenses and (iii) marketing expenses. We expect this to require, among other things, maintaining or increasing the distribution of our Networks, attracting younger viewers to our Networks, attracting more advertisers, increasing our ratings and maintaining or increasing our subscriber and advertising rates.

We, and our subsidiaries, each a guarantor of our 2015 Credit Agreement, may incur additional indebtedness, which could adversely affect our business.

As of December 31, 2015, we had total debt outstanding of $322.4 million, all of which was secured, and borrowing availability of approximately $99.1 million under our 2015 Credit Agreement.

The amount of our indebtedness, as well as the associated restrictive covenants, may adversely affect the operation of our business by limiting our ability to do a number of things, including, but not limited to, the following:

·

Use operating cash flow to fund future programming, to complete strategic transactions, to develop properties, for working capital and for other business activities, because we must dedicate a substantial portion of these funds to service our debt;

·

Obtain additional financing to fund our working capital needs, acquisitions, capital expenditures or other debt service requirements or for other purposes;

·

Compete with other companies who are not as highly leveraged, as we may be less capable of responding to adverse economic and industry conditions; and

·

Avoid vulnerabilities if confronted with downturns in the pricing of our programming, market conditions in our industry or our customers industries or general economic conditions.

Subject to the restrictions in our 2015 Credit Agreement, we and our subsidiary guarantors may incur significant additional indebtedness, including additional secured indebtedness. Although the terms of our 2015 Credit Agreement contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and additional indebtedness incurred in compliance with these restrictions could be significant. If we or any of our subsidiary guarantors should incur additional debt, the risks described above could increase.

Our liquidity could be dependent on external funds.

Unanticipated significant costs or expenses or any developments that decrease or otherwise hamper the growth in our revenue may result in the need for additional external funds in order to continue operations. There can be no assurance that external funds will be available or available under acceptable terms. In addition, any new debt financing would require the cooperation and agreement of existing lenders.

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We may not be able to generate sufficient cash to service all of our indebtedness and ongoing investments in our business and may be forced to take other actions to satisfy such obligations that may not be successful.

In addition to our debt service obligations, our operations require substantial investments on a continuing basis. Our ability to satisfy our debt obligations and to fund capital and non‑capital expenditures necessary to maintain the condition of our operating assets and properties, as well as to provide capacity for the growth of our business, will depend upon, among other things, the following:

·

our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, competitive, regulatory, legal and other factors, many of which are beyond our control; and

·

our future ability to borrow under our 2015 Credit Agreement, the availability of which depends on, among other things, our complying with the covenants in the 2015 Credit Agreement.

We cannot provide assurance that our business will generate sufficient cash flow from operations or that we will be able to draw under our 2015 Credit Agreement in an amount sufficient to fund our liquidity needs.

If our cash flows and capital resources are insufficient to service our indebtedness or other capital needs, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not be adequate to meet our scheduled debt service obligations or other capital needs. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, the terms of existing or future debt agreements may restrict us from adopting some of these alternatives. If we are required to dispose of material assets or operations, sell equity, or negotiate with our lenders to restructure the applicable debt, in order to meet our debt service and other obligations, our liquidity would be diminished which could have a material adverse effect on our business. Furthermore, we may not be able to consummate those dispositions for fair market value or at all, which could have a material adverse effect on our financial condition.

Our debt agreements contain restrictions that limit our flexibility in operating our business.

Our 2015 Credit Agreement contains a number of covenants that impose significant operating and financial restrictions on us which, among other things, limit our ability to do the following:

·

incur additional debt;

·

pay dividends on or make distributions in respect of our capital stock or make other restricted payments;

·

make certain payments on debt that is subordinated or secured on a junior basis;

·

make certain investments;

·

sell certain assets;

·

create liens on certain assets;

·

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

·

enter into certain transactions with our affiliates;

·

enter into new unrelated lines of business;

·

enter into sale and leaseback transactions; and

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·

consolidate, merge, liquidate or dissolve any unrestricted subsidiaries.

Also, the 2015 Credit Agreement requires us to maintain compliance with certain financial covenants, including a requirement to maintain a Consolidated Leverage Ratio (as defined in the 2015 Credit Agreement) of less than 4.50 to 1.00 and a Consolidated Secured Leverage Ratio (as defined in the 2015 Credit Agreement) of less than 3.00 to 1.00. Our ability to comply with these financial covenants may be affected by events beyond our control, and, as a result, we may be unable to meet these financial covenants. Any of the foregoing restrictions could limit our ability to plan for or react to market conditions and could otherwise restrict corporate activities. Any failure to comply with these covenants could result in a default under our 2015 Credit Agreement. Upon a default, unless waived or cured, the lenders under our 2015 Credit Agreement could elect to terminate their commitments, cease making further loans, foreclose on our assets pledged to such lenders to secure our obligations under the 2015 Credit Agreement and force us into bankruptcy or liquidation as more fully described under the heading If we default on our obligations to pay our indebtedness, we may not be able to make payments on other indebtedness below.

If we default on our obligations to pay our indebtedness, we may not be able to make payments on our other indebtedness.

If our operating performance declines, we may in the future need to seek waivers from the required lenders under our 2015 Credit Agreement to avoid being in default. We cannot assure that such waivers will be granted or that we will otherwise be able to avoid a default. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, or interest on such indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, including our 2015 Credit Agreement, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all of the funds borrowed thereunder to be due and payable, together with any accrued and unpaid interest, the lenders under our 2015 Credit Agreement could elect to terminate their commitments, cease making further loans, foreclose on our assets pledged to such lenders to secure our obligations under the 2015 Credit Agreement, in each case, which could force us into voluntary or involuntary bankruptcy or cause us to discontinue operations or seek a purchaser of our business or assets. In addition, a default under our 2015 Credit Agreement would trigger a cross default under our other agreements and could trigger a cross default under any agreements governing our future indebtedness.

Most Favored Nations provisions may require modification of existing distribution agreements which could adversely affect subscriber revenue.

A number of our existing distribution agreements contain most favored nations or MFN clauses. These clauses typically provide that, in the event we enter into an agreement with another distributor on more favorable terms, these terms must be offered to the distributor holding the MFN right, subject to certain exceptions and conditions. These clauses cover matters such as subscriber fees, launch support, local advertising time and other financial and operating provisions. In the past, after entering into new distribution agreements, we have been asked by some of the distributors holding MFN rights to modify their distribution agreements to incorporate financial and other terms similar to those in the new agreements. Any claims of this type in the future could result in lower overall subscriber revenue or cash outlays; however, if our subscription base is increased as a result of such modifications, it could result in overall higher advertising revenue.

If we are unable to obtain programming from third parties, we may be unable to increase our subscriber base.

Programming acquired from third parties is an important component of our business. We compete with other pay television network providers to acquire programming. If we fail 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 decrease our subscriber base or hinder the growth of our subscriber base.

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If our programming declines in popularity, our subscriber fees and advertising revenue could fall.

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. For example, we continue to strive to meet the preferences of our target audience demographic. Our competitors may have greater numbers of original productions, better distribution, and greater capital resources, and may be able to react more quickly to shifts in consumer 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 cause a decline in both advertising and subscriber fees revenue. The decline in revenue could hinder or prevent us from achieving profitability or maintaining a positive cash flow and could adversely affect the market price of our Common Stock.

In addition, our delivery of the Networks continues to be impacted by industry developments. One potentially significant factor is the continued growth of time‑shifting digital video recording devices (DVRs). DVRs heighten the impact of competition as viewers are able to increase their access to their preferred content. The use of DVRs and other technologies that allow viewers to fast‑forward or skip programming, including commercials, have caused changes in viewer behavior that may affect the attractiveness of our offerings to advertisers and could, therefore, negatively affect our revenues. If our distribution methods and content are not responsive to our target audience, our business could be adversely affected.

If we are unable to increase our advertising revenue, we may be unable to achieve improved results.

If we fail to significantly increase our advertising revenue, we may be unable to achieve or sustain improved results or to expand our business. A failure to increase advertising revenue may be a result of any or all of the following, among other factors: (i) a decline in viewer ratings; (ii) uncertainty caused by the current economic environment regarding the condition of the advertising marketplace and the financial health of many industry segments and individual companies, including those which advertise on our Networks; (iii) inability to reduce our average viewer age to be within our target audience; (iv) inability to identify, attract and retain experienced sales and marketing personnel with relevant experience; (v) inability to successfully compete against the significantly more extensive and well‑funded sales and marketing operations of our current or future competitors; (vi) shift in expenditures by advertisers triggered by advancement of new technologies; and (vii) inability to increase our advertising sales rates or obligation to run additional advertising spots to fulfill guaranteed delivery numbers which affect the availability of advertising inventory for future sales. Success in increasing our advertising revenue also depends upon the number and coverage of the distributors who carry our Networks and our number of subscribers.

Failure to renew our long‑term distribution agreements, or renewal on less favorable terms, the termination of those agreements or consolidation of our distributors, could have a material adverse effect on our business.

Currently our major distribution agreements have terms which expire at various times from September 2017 through December 2032. Failure to renew these distribution agreements, or renewal on less favorable terms, or the termination of those agreements could have a material adverse effect on our business, financial condition or results of operations. A reduced distribution of our Networks would adversely affect our subscriber fee revenue, and impact our ability to sell advertising or the rates we charge for such advertising. Even if our distributor agreements are renewed, we cannot assure that the renewal rates will equal or exceed the rates that we currently charge these distributors.

In some cases, if a distributor is acquired, the distribution agreement of the acquiring distributor will govern following the acquisition. In those circumstances, the acquisition of a distributor that is party to one or more distributor agreements with our Networks on terms that are more favorable to us could adversely impact our business, financial condition and results of operations. The cable and satellite distributors have undergone a period of consolidation over approximately the past ten years that has resulted in fewer distributors of content. This consolidation among cable and satellite operators has given the largest operators in the industry, including AT&T since it recently acquired DIRECTV, considerable leverage in their relationships with programmers, including us. As a result of this industry consolidation, we face increasing pressure to lower the rates we charge distributors or may face reduced distribution of our Networks. The

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majority of our subscriber revenues come from a handful of our largest distributors. Approximately 75% of our subscriber revenues were from our four largest distributors for the year ended December 31, 2015. Continued consolidation within the industry could further reduce the number of distributors available to carry our content and increase the negotiating leverage of our distributors which could adversely affect our revenue.

Hallmark Cards controls us and this control could create conflicts of interest or inhibit potential changes of control.

Hallmark Cards, through its wholly‑owned subsidiaries, HCC and Hallmark Cards GmbH, beneficially owns an aggregate of approximately 90.3% of the outstanding shares of our Common Stock. This control gives Hallmark Cards and its subsidiaries substantial influence over us and on matters requiring approval from our stockholders, including the election of our directors, amendments to our certificate of incorporation and the approval of significant transactions. Furthermore, others may be discouraged from initiating potential merger, takeover or other change of control transactions that may otherwise be beneficial to our business or holders of our Common Stock. As a result, the market price of our Common Stock could suffer, and our business could suffer. In addition, the control that Hallmark Cards or these specific wholly‑owned affiliates may exert over us, either directly or indirectly, could give rise to conflicts of interest in certain situations, including, without limitation:

·

conflicts between Hallmark Cards, as our controlling stockholder, and our other stockholders, whose interests may differ with respect to, among other things, our strategic direction or significant corporate transactions;

·

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

In addition, our directors also may be officers or directors of Hallmark Cards or its affiliates, which may create, or create the appearance of, conflicts of interest when those directors are allocating time between the companies and when they are faced with decisions that could have different implications for Hallmark Cards, including its affiliates, and us. Such directors have fiduciary duties, including duties of loyalty, to both companies.

Our certificate of incorporation provides that Hallmark Cards will have no duty to refrain from engaging in activities or lines of business that are the same as or similar to the activities or lines of business in which we engage, and neither Hallmark Cards nor any officer or director of Hallmark Cards, except as described under Impact of Related Party AgreementsCertain Business Relationships and Conflicts of Interest below, will be liable to us or to our stockholders for breach of any fiduciary duty by reason of any such activities of Hallmark Cards. In the event that Hallmark Cards acquires knowledge of a potential transaction or matter which may be a corporate opportunity for both Hallmark Cards and us, Hallmark Cards will have no duty to communicate or offer that corporate opportunity to us and will not be liable to us or our stockholders for breach of any fiduciary duty as a stockholder by reason of the fact that Hallmark Cards pursues or acquires that corporate opportunity for itself, directs that corporate opportunity to another person, or does not communicate information regarding that corporate opportunity to us.

Hallmark Cards standstill restrictions placed on ownership of our Common Stock pursuant to the Stockholders Agreement expired on December 31, 2013. Consequently, Hallmark Cards is now allowed to pursue certain transactions related to the sale and disposition of our Common Stock that it was previously prohibited from pursuing under certain conditions. On June 24, 2013, Hallmark Cards filed a Schedule 13D/A disclosing possible options it may consider with respect to its ownership of our Common Stock upon expiration of the standstill restriction, which included among other things: maintaining their investment in us; purchasing additional shares of our Common Stock, either on the market or in privately negotiated transactions; engaging in a short‑form merger to eliminate our minority stockholders or proposing another form of going private transaction; proposing that our Board of Directors consider implementing a stock repurchase program; proposing that our Board of Directors consider delisting our Common Stock from the Nasdaq Global Market and terminating our registration under the Securities Exchange Act of 1934, as amended; and disposing, subject to the continuing limitations in the Stockholders Agreement, all or a portion of their investment in the Company in a privately negotiated transaction or series of transactions. Should Hallmark Cards pursue any of the preceding options, the market for and price of our Common Stock could suffer, and our business could be adversely affected.

18


 

If we are unable to protect or maintain intellectual property rights upon which our business relies, and if we lose intellectual property protection or lose the right to use the name Hallmark, our business could be materially harmed.

Our business depends on our intellectual property. We attempt to protect these intellectual property rights through a combination of our copyright, trade secret, and trademark law and contractual restrictions, such as confidentiality agreements. We also depend on our trade names and domain names. We have filed trademarks and other intellectual property registrations. Even if such registrations are issued, they may not fully protect important aspects of our business and there is no guarantee that our business does not or will not infringe upon intellectual property rights of others. Furthermore, intellectual property laws vary from country to country, and it may be more difficult to protect and enforce our intellectual property in some foreign jurisdictions. In addition, piracy, which encompasses the theft of our signal, and unauthorized use of our content in the digital environment continues to present a threat to our revenues. As a result, it may be possible, for unauthorized third parties to copy and distribute our productions, which could have a material adverse effect on our business. Moreover, in the future, we may need to litigate to enforce our intellectual property rights or determine the validity and scope of the proprietary rights of others. Any such litigation could affect our cash flows and divert the attention of our management. 

Pursuant to license agreements, we license the name Hallmark from Hallmark Licensing, LLC, a subsidiary of Hallmark Cards, for use in the names of our Networks. In conjunction with the 2015 Credit Agreement, Hallmark Licensing, LLC, extended the term of the license agreements for an additional period that terminates on the earlier of (i) June 30, 2021 or (ii) the payment in full of all obligations and terminations of all commitments. We believe that the use of this trademark is critical for our Networks due to the substantial name recognition and favorable characteristics associated with the name in the United States. Should these licenses expire without renewal or if otherwise become unavailable to us, our business could be materially harmed.

Despite Hallmark Licensing, LLCs efforts to protect its trademark in the name Hallmark, third parties may infringe or misappropriate the name Hallmark, which could harm our business and cause us to divert time and resources to litigate to enforce our rights. Further, in the event of bankruptcy proceedings relating to Hallmark Licensing, LLC or Hallmark Cards, a bankruptcy court could conclude that the license agreements are executory contracts and, subject to certain legal requirements, the bankruptcy trustee may either assume or reject the license agreements. Rejection of the license agreements could prevent us from continuing to use the Hallmark name. The loss of our license rights to use the name Hallmark could substantially harm our business.

Others may assert intellectual property infringement claims against us.

Others may claim that our productions or production techniques misappropriate or infringe the intellectual property rights of third parties. Regardless of whether such claims are valid or successful, we could incur significant costs and diversion of time and resources in defending against such claims, which could have a material adverse effect on our reputation, cash flows and results of operations.

If our Federal Tax Deconsolidation is challenged, we could be obligated to reimburse Hallmark Cards for substantial tax payments.

The Federal Tax Deconsolidation had a significant impact on our cash flows. Amounts previously budgeted for cash payments for taxable amounts due under the Tax Sharing Agreement (as defined below) have been used for the pay down of debt and other uses. Under the terms of the Federal Tax Deconsolidation, however, we agreed that if any taxing authority determines that the Federal Tax Deconsolidation did not result in us no longer being a member of the Hallmark Cards consolidated federal tax group, then the Tax Sharing Agreement will be deemed to have been continuously in effect. If, in the future, the Tax Sharing Agreement is deemed to have been continuously in effect, we would not be permitted to access its NOLs and could be obligated to reimburse substantial tax payments to Hallmark Cards, which could have a material adverse effect on our cash flows and results of operations.

If our third‑party suppliers fail to provide us with network infrastructure services on a timely basis, our costs could increase and our growth could be hindered.

We currently rely on third parties to supply key network infrastructure services, including uplink, playback, transmission and satellite services to our market, which are available only from limited sources. We have occasionally experienced outages, 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

19


 

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 potential profitability. Additionally, if we experience a failure of AMC 11, the satellite currently transmitting our channels, our channels would be moved to another satellite operated by our current satellite provider, which transition would require a reacquisition by our distributors.

If we are unable to retain key executives and other personnel, our growth could be inhibited and our business harmed.

We believe our success depends on the expertise and continued service of our executive officers and key employees of our subsidiaries. There can be no assurance that these employees will remain with us or our subsidiaries. If we fail to attract, hire or retain the necessary personnel, we may be unable to implement our business plan or keep pace with developing trends in our industry.

The seasonality of our business could exacerbate negative impacts on our operations.

Our advertising revenues are subject to seasonal advertising patterns and changes in viewership levels. Typically, our advertising rates, and, in turn, advertising revenues are highest during the fourth quarter. While advertising revenue, net of agency commissions, is recognized in the period in which related commercial spots or long form programming are aired, we typically commit approximately 40% of our Networks advertising in the Upfront Season. In addition, advertising rates also vary by time of year due to seasonal changes in television viewership. Due to the seasonality of our business, if a short term negative impact on our business occurs during the time of high seasonal demand, the effect could have a disproportionate effect on the results of our business for the year.

The amount of our goodwill may hinder our ability to achieve profitability.

As a result of our acquisitions of all the common interests in Crown Media United States, we have recorded a significant amount of goodwill. 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 and stockholders equity could be materially adversely affected.

Our stock price may be volatile and could decline substantially.

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

·

failure of our operating results to meet the expectations of investors in any quarter;

·

economic conditions that adversely affect our advertising rates or our number of subscribers;

·

material announcements by us or our competitors;

·

governmental regulatory action;

·

technological innovations by competitors or competing technologies;

·

perceptions by the investing community or our customers with respect to the prospects of our company or our industry;

·

changes in general market conditions or economic trends; and

·

failure by us to renew major distribution agreements.

Additionally, of the approximately 359.7 million outstanding shares of our Common Stock, only 34.8 million shares (approximately 9.7%), are held by non‑affiliates. The ownership of our Common Stock may also be a cause of volatility in the market price of our Common Stock.

20


 

Our use of certain hedging techniques may expose us to counterparty risks.

We have entered into interest rate swap arrangements to manage our exposure to our cash flows from increasing interest rates on our floating rate debt. If an interest rate swap counterparty cannot perform under the terms of the interest rate swap, we may not receive payments due under that swap, and thus, the instrument would no longer serve as an effective hedge against future cash flows, and we may lose any unrealized gain associated with the interest rate swap. Additionally, we may also risk the loss of any collateral we may be required to pledge to secure our obligations under the interest rate swap if the counterparty becomes insolvent or files for bankruptcy. If we are required to sell our derivatives under these circumstances, we may incur losses.

Risks Relating to Our Industry

The change in the television rating system in the United States could reduce our Networks revenue and our ability to achieve profitability.

Our domestic advertising revenue is partially dependent on television ratings provided by Nielsen. Nielsen continually modifies its ratings system to accommodate emerging technologies and ongoing changes in the U.S. population. As the impact of the changes take effect, our ratings could either be positively or negatively affected by these changes, depending on the demographic characteristics of the households added to the Nielsen sample and the nature of any changes to their measurement systems. We continue to factor the new rating information into our advertising rates as Nielsen continues modifying its ratings system to accommodate emerging technologies.

Competition could reduce our Networks revenue and our ability to achieve profitability.

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 networks and, when distribution is obtained, for viewers and advertisers with pay television networks, broadcast television networks, radio, the Internet and other emerging media. We also compete, to varying degrees, with other leisure‑time activities such as movie theaters, the Internet, radio, print media, electronic games and other alternative sources of entertainment and information. Future technological developments may affect competition within this business.

A continuing trend towards business combinations and alliances in the entertainment industry may create significant new competitors for us or intensify existing competition. Many of these combined entities have more than one network and resources far greater than ours. These combined entities may provide bundled packages of programming, delivery and other services that compete directly with the programming we offer. We cannot assure that we will be able to compete successfully in the future against existing or future competitors or that competition will not have a material adverse effect on our business.

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

Distributors in the United States may attempt to pressure pay TV networks having lower viewership, such as our Networks, to accept decreasing amounts for subscriber fees or to allow carriage of the Networks without the payment of subscriber fees. Factors that may lead to this pressure include the number of competing pay TV networks, 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 operating results and cash flow.

Changes in public and consumer tastes and preferences, including changes resulting from new technologies and distribution platforms, could reduce demand for our services and reduce profitability of our businesses.

Each of our Networks provides content and services whose success is primarily dependent upon acceptance by the public, which is difficult to predict. Technology and business models in our industry continue to evolve rapidly. Consumer preferences and behaviors related to changes in content distribution and technological innovation change frequently and it is a challenge to anticipate what content will be successful at any point in time.

21


 

While we aim to consistently create and distribute programming that appeals to our target consumer group at any point in time, some of our content and services may not be accepted by our target audience. Other factors, including the availability of alternative forms of entertainment or leisure time activities, general economic conditions and the growing competition for consumer discretionary spending may also affect our target audience’s acceptance of our content and services.

Consumers are increasingly viewing content on a time-delayed or on-demand basis from traditional distributors, from connected apps and websites and on a wide variety of screens, such as televisions, tablets, mobile phones and other devices. Time-shifting technologies that enable users to fast-forward or skip programming, including commercials, affect the attractiveness of our programming to advertisers and could therefore adversely affect our revenues. All of these factors create uncertainty in the marketplace, and there can be no assurance that the strategies we develop to address them will be effective. If our Networks do not achieve sufficient consumer acceptance as a result of any of the foregoing factors, revenues may decline and adversely affect our profitability.

We face cybersecurity and similar risks, which could result in the disclosure of confidential information, disruption of our programming services, damage to our brands and reputation, legal exposure and financial losses.

Our online, mobile and app offerings, as well as our internal systems, involve the storage and transmission of our and our users proprietary information, and we and our partners rely on various technology systems in connection with the production and distribution of our programming. Despite our efforts, our security measures may be breached due to employee error, computer malware, viruses, hacking and phishing attacks, or otherwise. Additionally, outside parties may attempt to fraudulently induce employees or users to disclose sensitive or confidential information in order to gain access to our data or our users data. Moreover, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any such breach or unauthorized access could result in a loss of our or our users proprietary information, a disruption of our services or a reduction of the revenues we are able to generate from such services, damage to our brands and reputation, a loss of confidence in the security of our offerings and services, and significant legal and financial exposure, each of which could potentially have a material adverse effect on our business.

New distribution technologies may fundamentally change the way we distribute our Networks and could significantly decrease our revenue or require us to incur significant capital expenditures.

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 operating results, and may require us to significantly change our operations. If we fail to adapt to these changes, there could be a material adverse effect on our business, financial condition and results of 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 distribute our content via 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, may reduce the competition for the right to carry networks and allow development of extra services at low incremental cost. These lower incremental costs could lower barriers to entry for competing networks, and place pressure on our operating margins and market position.

22


 

Competition from program suppliers and digital media companies that provide or facilitate the delivery of video content directly to viewers via the Internet may adversely affect the number of subscribers provided and fees paid to us by traditional cable, satellite and telco distributors, which could result in less revenue to us.

Our channels are primarily distributed by satellite, cable and telco systems to home television devices.  To the extent that viewers are able to receive programming directly over the internet from online services such as Netflix, Hulu, Apple, Amazon, Sony, Microsoft and Google and view this programming on computer, mobile phone and other portable devices both inside and outside the home, they may decide to eliminate their cable, satellite and telco subscriptions or to reduce the number of channels they purchase from these traditional distributors (“cord-cutting” or “cord shaving”).  This trend could result in a decrease in the number of subscribers available to us through traditional distribution and therefore adversely affect our advertising and distribution fee revenue.  Our ability to recapture these subscribers by distributing our programming over the internet and other new media platforms could be affected both by the investment required and by restrictions in our current distribution agreements.

Economic problems in the United States or in other parts of the world could adversely affect our results of operations.

Our business is significantly affected by prevailing economic conditions and by disruption to financial markets. In particular, we derive substantial revenues from advertisers, and these expenditures are sensitive to general economic conditions and consumer buying patterns. Financial instability or a general decline in economic conditions in areas where our Networks are distributed could adversely affect advertising rates and volume, resulting in a decrease in our advertising revenues. In addition, decreases in consumer discretionary spending may affect television subscriptions. This could lead to a decrease in the number of subscribers receiving our programming from our distributors. Similarly, a decrease in viewing subscribers would also have a negative effect on our ratings, which may impact the rates we are able to charge our advertisers. Although we believe that our operating cash flow and current access to capital and credit markets, including our 2015 Credit Agreement, will give us the ability to meet our financial needs through 2016, there can be no assurance that future volatility and disruption in the global capital and credit markets will not impair our liquidity or increase our cost of borrowing.

Economic conditions also affect the business of our partners. The companies who purchase advertising on our Networks may reduce their spending on advertising or our business partners may default on obligations owed to us.

Our business is subject to risks of adverse changes in laws and regulations, which could result in reduced distribution of our Networks and have a material adverse effect on our business.

Our programming and the distributors of our Networks are regulated by U.S. federal laws and regulations issued and administered by various federal agencies, including the Federal Communications Commission (FCC), as well as by state and local governments. While we believe we are in material compliance with applicable laws, there can be no assurance that our operations will continue to materially comply with all applicable laws. In addition, Congress and the FCC currently have under consideration and may in the future adopt new laws, regulations and policies regarding a wide variety of matters that could, directly or indirectly, affect our operations. For example, regulations that would require the unbundling of program services could reduce the distribution of our Networks, thereby leading to reduced ratings, increased marketing expenses, and lower subscription and advertising revenue. Any noncompliance with laws, regulations or policies currently applicable to our business or the enactment or adoption of new laws, regulations or policies applicable to our business could have a material adverse effect on our business.

ITEM 1B.  Unresolved Staff Comments

Not applicable.

23


 

ITEM 2.  Properties

The following table provides certain summary information with respect to the principal real properties leased by us. We do not own any real property. The leases for these offices and facilities expire between 2016 and 2026. We believe the facilities, office space and other real properties leased are adequate for our current operations.

 

 

 

 

 

 

 

    

 

    

Approximate

 

 

 

 

 

Area in

 

Location

 

Use

 

Square Feet

 

12700 Ventura Blvd.
Studio City, California

 

Executive and administrative office and post production and editing facilities

 

41,423

 

1325 Avenue of the Americas
New York, New York

 

Advertising sales and administrative office and advertising traffic

 

24,909

 

6025 S. Quebec St.
Centennial, Colorado

 

Administrative office

 

4,528

 

205 N. Michigan Ave.
Chicago, Illinois

 

Advertising sales office

 

4,313

 

1170 Peachtree
Street Atlanta, Georgia

 

Advertising sales office

 

193

 

We own most of the equipment and furnishings used in our businesses, except for satellite transponders and compression and uplink facilities, which are leased. See Note 5 of the Notes to Consolidated Financial Statements for information on our leasing of property and equipment.

ITEM 3.  Legal Proceedings

Not applicable.

ITEM 4.  Mine Safety Disclosures

Not applicable.

24


 

PART II

ITEM 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our Common Stock is listed on the NASDAQ Global Market under the ticker symbol CRWN. Set forth below are the high and low sales prices for our Common Stock for each quarterly period in 2014 and 2015, as reported on the NASDAQ Global Market.

 

 

 

 

 

 

 

 

 

 

Price Range

 

Common Stock

    

High

    

Low

 

2014

 

 

 

 

 

 

 

First Quarter

 

$

3.94

 

$

2.80

 

Second Quarter

 

$

3.98

 

$

3.29

 

Third Quarter

 

$

3.82

 

$

2.96

 

Fourth Quarter

 

$

3.65

 

$

2.93

 

2015

 

 

 

 

 

 

 

First Quarter

 

$

4.40

 

$

3.03

 

Second Quarter

 

$

4.67

 

$

3.68

 

Third Quarter

 

$

5.50

 

$

4.25

 

Fourth Quarter

 

$

6.16

 

$

4.90

 

Holders

As of February 9, 2016, there were 48 record holders of our Common Stock.

Dividends

We have not paid any cash dividends on our Common Stock since inception and there are currently no plans to do so. In 2011 we paid cash dividends of $13.8 million on our redeemable preferred stock through July 14, 2011, at which time all of our outstanding preferred stock was redeemed.

Securities Authorized for Issuance under Equity Incentive Plans

Item 12 – “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report on Form 10-K is incorporated by reference to information in the Definitive Proxy Statement on Schedule 14A for our 2016 Annual Meeting of stockholders.  

Performance Graph

The following graph presents the total stockholder return of $100 invested in our Common Stock for the period from December 31, 2010, through December 31, 2015. It also presents comparative results for (i) $100 invested in a peer group index comprising initially equal dollar investments in the common stocks of Discovery Communications, Inc. (DISCA), Scripps Networks Interactive, Inc. (SNI) and The Walt Disney Company (DIS) and (ii) the relative performance of the NASDAQ Composite index, each relative to an initial investment of $100 in our Common Stock. Dividends, if any, are assumed to have been reinvested in shares of the respective companys stock at the closing price on the related dividend payment date. The closing price of our Common Stock on December 31, 2010, the last trading day of that year, was $2.62. The closing price of our Common Stock on December 31, 2015, the last trading day of that year, was $5.61.

 

25


 

H:\2015\4Q15\Form 10-K Drafts\Stock Chart.png

26


 

ITEM 6.  Selected Financial Data

Selected Historical Consolidated Financial Data of Crown Media Holdings

In the table below, we have provided historical consolidated financial and other data of Crown Media Holdings and its subsidiaries. The following selected consolidated statements of operations and comprehensive income (loss) data for the years ended December 31, 2011, 2012, 2013, 2014 and 2015, and selected consolidated balance sheet data as of December 31, 2011, 2012, 2013, 2014 and 2015, are derived from the audited financial statements of Crown Media Holdings and its subsidiaries. This data should be read together with Managements Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this Annual Report on Form 10‑K and our consolidated financial statements and related notes for the years ended December 31, 2013, 2014 and 2015 included in this Annual Report on Form 10‑K.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

    

2011

    

2012

    

2013

    

2014

    

2015

 

 

 

(In thousands, except per share amounts)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

$

251,325

 

$

271,242

 

$

294,805

 

$

327,691

 

$

386,244

 

Subscriber fees

 

 

71,668

 

 

78,005

 

 

81,818

 

 

82,903

 

 

85,324

 

Other revenue

 

 

368

 

 

623

 

 

1,178

 

 

5,002

 

 

7,166

 

Total revenue, net

 

 

323,361

 

 

349,870

 

 

377,801

 

 

415,596

 

 

478,734

 

Cost of Services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Programming costs

 

 

136,782

 

 

134,549

 

 

134,001

 

 

148,596

 

 

176,191

 

Other costs of services

 

 

12,266

 

 

13,704

 

 

15,148

 

 

16,533

 

 

23,004

 

Total cost of services

 

 

149,048

 

 

148,253

 

 

149,149

 

 

165,129

 

 

199,195

 

Selling, general and administrative expense

 

 

55,679

 

 

60,633

 

 

65,288

 

 

71,038

 

 

78,865

 

Marketing expense

 

 

9,816

 

 

10,179

 

 

11,544

 

 

12,436

 

 

15,423

 

Gain from extinguishment

 

 

(1,246)

 

 

 

 

(121)

 

 

 

 

 

Income from continuing operations before interest and income tax expense

 

 

110,064

 

 

130,805

 

 

151,941

 

 

166,993

 

 

185,251

 

Interest expense, net

 

 

(25,857)

 

 

(46,056)

 

 

(42,577)

 

 

(39,263)

 

 

(25,028)

 

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

(3,668)

 

 

(22,478)

 

Income from continuing operations before income tax expense

 

 

84,207

 

 

84,749

 

 

109,364

 

 

124,062

 

 

137,745

 

Income tax benefit (expense)

 

 

234,589

 

 

22,604

 

 

(41,649)

 

 

(28,936)

 

 

(51,662)

 

Income from continuing operations

 

 

318,796

 

 

107,353

 

 

67,715

 

 

95,126

 

 

86,083

 

Gain (loss) from sale of discontinued operations, net of tax

 

 

189

 

 

 

 

 

 

(629)

 

 

 —

 

Net income

 

 

318,985

 

 

107,353

 

 

67,715

 

 

94,497

 

 

86,083

 

Income allocable to preferred stockholder

 

 

(69,974)

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

249,011

 

$

107,353

 

$

67,715

 

$

94,497

 

$

86,083

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on derivatives, net of tax

 

 

 

 

 

 

 

 

 

 

(158)

 

Comprehensive income (loss)

 

$

249,011

 

$

107,353

 

$

67,715

 

$

94,497

 

$

85,925

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares of common stock outstanding, basic and diluted

 

 

359,676

 

 

359,676

 

 

359,676

 

 

359,676

 

 

359,676

 

Income per share from continuing operations, net of income allocable to preferred stockholder, basic and diluted

 

$

0.69

 

$

0.30

 

$

0.19

 

$

0.26

 

$

0.24

 

Gain (loss) per share from discontinued operations, basic and diluted

 

 

 

 

 

 

 

 

 

 

 

Net income per share of common stock, basic and diluted

 

$

0.69

 

$

0.30

 

$

0.19

 

$

0.26

 

$

0.24

 

 

27


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

 

    

2011

    

2012

    

2013

    

2014

    

2015

 

 

 

(In thousands)

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

35,181

 

$

43,705

 

$

63,750

 

$

60,888

 

$

50,604

 

Goodwill

 

 

314,033

 

 

314,033

 

 

314,033

 

 

314,033

 

 

314,033

 

Total assets

 

 

947,253

 

 

1,014,626

 

 

1,028,485

 

 

1,054,462

 

 

1,088,137

 

Total long-term debt, net of current maturities

 

 

487,247

 

 

470,357

 

 

429,438

 

 

369,173

 

 

315,783

 

Stockholders’ equity

 

 

243,496

 

 

331,359

 

 

399,141

 

 

493,638

 

 

579,563

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

41,482

 

$

30,680

 

$

57,578

 

$

69,310

 

$

77,470

 

Capital expenditures

 

 

(957)

 

 

(1,376)

 

 

(1,530)

 

 

(2,729)

 

 

(2,133)

 

Net cash used in investing activities

 

 

(1,145)

 

 

(1,376)

 

 

(1,511)

 

 

(2,719)

 

 

(2,115)

 

Net cash used in financing activities

 

 

(35,721)

 

 

(20,780)

 

 

(36,022)

 

 

(69,453)

 

 

(85,639)

 

 

 

 

28


 

ITEM 7.  Managements Discussion and Analysis of Financial Condition and Results of Operations

Our Consolidated Financial Statements and accompanying notes included in this Annual Report on Form 10‑K should be read in conjunction with the discussion and analysis that follows.

Current Challenges

We face numerous operating challenges. Among such challenges are increasing viewership ratings, maintaining and increasing advertising revenue, maintaining and expanding the distribution of the Networks, broadening viewership demographics to meet our target audience, and controlling costs and expenses.

Ratings

Ratings success plays a significant role in our ability to achieve our distribution and advertising goals. We believe our ratings are affected by our ability to: (i) acquire the broadcast rights for and produce series and original movies that appeal to our target demographic and (ii) develop a programming schedule that attracts a high number of viewers. Original productions are our most high profile programs and generate Hallmark Channel’s highest ratings. We have typically incurred additional marketing and promotional expenses to help drive higher ratings for original programming such as the series Cedar Cove in 2013, 2014 and 2015, When Calls the Heart in 2014 and 2015, Signed, Sealed, Delivered in 2014 and Good Witch in 2015. We plan to maintain or increase the number of our original productions and develop a programming schedule that attracts a greater number of viewers in our target demographic, all while controlling the costs and expenses relating to these actions.

Advertising Revenue

During the three months ended December 31, 2015, CPMs for commitments in the 2015/2016 Scatter Market for Hallmark Channel were 38% greater than the CPMs for commitments during the 2014/2015 Upfront Season and were generally 1% lower than those achieved during the three months ended December 31, 2014 in the 2014/2015 Scatter Market. An 87% increase in scatter volume as compared to the fourth quarter of 2014 accounted for the near flat 2015/2016 Scatter Market CPM’s. During the three months ended December 31, 2015, CPMs for commitments in the 2015/2016 Scatter Market for Hallmark Movies and Mysteries were 31% greater than the CPMs for commitments during the 2014/2015 Upfront Season and were generally 4% greater than those achieved during the three months ended December 31, 2014, in the 2014/2015 Scatter Market due to new advertisers.  

Our direct response rates for Hallmark Channel during the three months ended December 31, 2015, were 20% higher than those during the three months ended December 31, 2014. Our direct response rates for Hallmark Movies and Mysteries during the three months ended December 31, 2015, were 36% higher than those during the three months ended December 31, 2014. Limited direct response inventory supply resulting from a strong Scatter Market contributed to the increase in direct response rates.

During the 2014/2015 and the 2015/2016 Upfront Seasons, we entered into agreements with major advertising firms covering approximately 41% and 39%, respectively, of our advertising inventory for Hallmark Channel.  Advertising units committed during the 2015/2016 Upfront Season for Hallmark Channel were at CPMs 4% higher than the CPMs for those committed during the 2014/2015 Upfront Season, reflecting, in part, increases in rates related to our original primetime series. We sold the balance of our 2014/2015 broadcast season inventory in the Scatter Market.

During both the 2014/2015 and the 2015/2016 Upfront Seasons, Hallmark Movies and Mysteries entered into advertising commitments for approximately 29% of its advertising inventory. Advertising units committed during the 2015/2016 Upfront Season for Hallmark Movies and Mysteries were at CPMs 3% higher as compared to the CPMs for those committed during the 2014/2015 Upfront Season, reflecting, in part, increases in rates related to our original movies. We sold the balance of our 2014/2015 broadcast season inventory in the Scatter Market.  

Distribution Agreements

Distribution agreements with multiple systems operators are important because they affect our number of subscribers, which in turn has a major impact on our subscriber fees, the number of persons viewing our programming,

29


 

and the rates charged for advertising. Our long‑term distribution challenge will be obtaining favorable renewals of our major distribution agreements as they expire. Our major distribution agreements have terms which expire at various times from September 2017 through December 2032.

Viewers today have many low cost alternatives outside of the traditional linear cable channels to gain access to programming content. Businesses of most networks, including Hallmark Channel and Hallmark Movies and Mysteries, are threatened by an increase of “cord cutters” (i.e., viewers dropping traditional cable and satellite services to instead receive their programming over the internet from over-the-top services, such as SlingTV, Hulu and Netflix),  “cord shavers” (i.e., viewers scaling back the cost of traditional cable packages by opting for less expensive packages) and “cord nevers” (i.e., people who have never subscribed to a traditional pay television service).

The universe of cable and satellite TV subscribers in the United States is approximately 100 million homes. The top 25 cable TV networks in the United States, measured by the number of subscribers, have 91.4 million or more subscribers. It is a mature market with relatively high penetration. According to Nielsen, in December 2015, Hallmark Channel and Hallmark Movies and Mysteries were distributed to 90.4 million subscribers and 62.2 million subscribers, respectively.

In July 2015, the Company and AT&T launched Hallmark Channel and Hallmark Movies and Mysteries on AT&T U-verse, making the channels available to AT&T U-verse subscribers. A prior distribution agreement between the Company and AT&T had expired on August 31, 2010 and the networks had not been on AT&T U-verse since such date.

Demographics

Each pay television network attracts a different audience with different viewer demographics (i.e., viewers categorized by characteristics such as age, gender and income). As a result, advertisers are able to target the specific groups of viewers who are most likely to purchase their products by advertising on networks which attract the desired viewer demographic.

We believe that the key demographics for Hallmark Channel and Hallmark Movies and Mysteries are adults aged 25 to 54 and women aged 25 to 54. The average viewing age for Hallmark Channel was 59.0  and 58.5 for 2014 and 2015, respectively. The average viewing age for Hallmark Movies and Mysteries was 65.0 for both 2014 and 2015. In order to achieve our revenue goals, we need to draw in our target audience.

Revenue from Continuing Operations

Our revenue consists primarily of advertising fees and subscriber fees. For the years ended December 31, 2013, 2014 and 2015 revenue from the sale of advertising time on our Networks was approximately $294.8 million, $327.7 million and $386.2 million, respectively. For the years ended December 31, 2013, 2014 and 2015 revenue derived from subscriber fees for the Networks was approximately $81.8 million, $82.9 million and $85.3 million, respectively. Information relating to advertising fees and subscriber fees is presented above in Item 1 BusinessSources of Revenue included in this Annual Report on Form 10‑K.

Cost of Services

Our cost of services consists primarily of the amortization of programming rights, the cost of signal distribution and the cost of promotional segments that are aired between programs. 

Critical Accounting Policies, Judgments and Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

30


 

For further information regarding our critical accounting policies, judgments and estimates, please see the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K.

The following discussion concerns certain accounting estimates and assumptions that are considered to be material due to the levels of subjectivity and judgment necessary to account for uncertain matters and the susceptibility of such matters to changes.

Programming Rights

Programming rights are stated at the lower of amortized cost or net realizable value. We periodically evaluate the net realizable value of our licensed programming rights by considering expected future revenue generation on a portfolio basis. Estimates of future revenue consider historical airing patterns and future plans for airing programming, including any changes in strategy. Estimated future revenue may differ from actual revenue based on changes in expectations related to market acceptance, advertising demand, the number of cable and satellite television subscribers receiving our Networks, and program usage. Accordingly, we continually review revenue estimates and planned usage and revise our assumptions if necessary. Given the significant estimates and judgments involved, actual demand or market conditions may be less favorable than those projected, requiring a write‑down to net realizable value.

Goodwill

At December 31, 2015, we had a stockholders equity of $579.6 million and a goodwill asset of $314.0 million. All of our goodwill relates to our Networks, which is also our only segment. In November 2015, we first assessed qualitatively whether it was necessary to perform the two‑step goodwill impairment test. We did not believe that it was more likely than not that the fair value of the reporting period was less than its carrying amount. The qualitative assessment included, but was not limited to, consideration of macroeconomic conditions, industry and market considerations, cost factors and historical cash flows.

Deferred Tax Asset

We account for income taxes under the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax bases of assets and liabilities, including related operating loss and tax credit carryforwards, using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

Net deferred tax assets are recognized to the extent that management believes these assets will more likely than not be realized. In making such determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event management subsequently determines that we would likely be able to realize deferred income tax assets in the future in excess of their net recorded amount, an adjustment to the valuation allowance would be recorded with a corresponding reduction in the provision for income taxes.

We released $22.8 million of valuation allowance against our deferred tax assets and recorded tax expense of $3.7 million during 2014. We have reported pre‑tax income since 2010. Based on positive evidence, including the five year cumulative positive income and a reasonable expectation of continued profitability in future years, the absence of significant negative evidence and certain other matters, we determined it is more likely than not that our deferred tax assets will be realized except for certain deferred tax assets attributable to state net operating losses. We note that there is inherent estimate risk related to projected future earnings.

Management periodically evaluates the sustainability of tax positions taken. Whenever management estimates the probability of sustaining a tax position is at least more likely than not (i.e., greater than 50%), the tax position is deemed warranted and is recognized at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Interest and penalties related to uncertain tax positions are recognized as income tax expense.

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Internally Produced Films

With respect to internally produced television movies intended for broadcast, the most sensitive factor affecting estimates of future revenues over the movie’s life is the programs rating and the strength of the advertising market. Program ratings, which are an indication of market acceptance, directly affect our ability to generate advertising revenues during the airing of the film. If our estimate of future revenues decreases, amortization of film costs may be accelerated.  Conversely, if our estimates of future revenues increases, amortization of film costs may be slowed.

Selected Historical Consolidated Financial Data of Crown Media Holdings

In the table below, we provide selected historical consolidated financial and other data (unaudited ratings and subscriber information) of Crown Media Holdings and its subsidiaries. The following selected consolidated statements of operations and cash flow data for the years ended December 31, 2013, 2014 and 2015, are derived from the audited financial statements of Crown Media Holdings and its subsidiaries. This data should be read together with our Consolidated Financial Statements and related notes included in this Annual Report on Form 10‑K.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

 

 

 

 

 

 

 

 

 

 

 

 

Change

 

 

 

Year Ended December 31,

 

2014 vs.

 

2015 vs.

 

 

    

2013

    

2014

    

2015

    

2013

    

2014

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

$

294,805

 

$

327,691

 

$

386,244

 

11

%  

18

%

Subscriber fees

 

 

81,818

 

 

82,903

 

 

85,324

 

1

%  

3

%

Other revenue

 

 

1,178

 

 

5,002

 

 

7,166

 

325

%  

43

%

Total revenue

 

 

377,801

 

 

415,596

 

 

478,734

 

10

%  

15

%

Cost of Services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Programming costs

 

 

134,001

 

 

148,596

 

 

176,191

 

11

%  

19

%

Operating costs

 

 

15,148

 

 

16,533

 

 

23,004

 

9

%  

39

%

Total cost of services

 

 

149,149

 

 

165,129

 

 

199,195

 

11

%  

21

%

Selling, general and administrative expense

 

 

65,288

 

 

71,038

 

 

78,865

 

9

%  

11

%

Marketing expense

 

 

11,544

 

 

12,436

 

 

15,423

 

8

%  

24

%

Gain from extinguishment of indemnification

 

 

(121)

 

 

 

 

 

 

 

 

 

Income before interest and income tax expense

 

 

151,941

 

 

166,993

 

 

185,251

 

10

%  

11

%

Interest expense

 

 

(42,577)

 

 

(39,263)

 

 

(25,028)

 

(8)

%  

(36)

%

Loss on extinguishment of debt

 

 

 

 

(3,668)

 

 

(22,478)

 

100

%  

513

%

Income before income tax expense and loss from sale of discontinued operations

 

 

109,364

 

 

124,062

 

 

137,745

 

13

%  

11

%

Income tax provision

 

 

(41,649)

 

 

(28,936)

 

 

(51,662)

 

(31)

%  

79

%

Income before loss from sale of discontinued operations

 

 

67,715

 

 

95,126

 

 

86,083

 

40

%  

(10)

%

Loss from sale of discontinued operations

 

 

 

 

(629)

 

 

 —

 

100

%  

(100)

%

Net income

 

$

67,715

 

$

94,497

 

$

86,083

 

40

%  

(9)

%

Cash Flow Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

57,578

 

$

69,310

 

$

77,470

 

20

%  

12

%

Net cash used in investing activities

 

$

(1,511)

 

$

(2,719)

 

$

(2,115)

 

80

%  

(22)

%

Net cash used in financing activities

 

$

(36,022)

 

$

(69,453)

 

$

(85,639)

 

93

%  

23

%

Other Data (Unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HC day household ratings(1)(3)(4)

 

 

0.5

 

 

0.5

 

 

0.5

 

2