mainform5709.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
(Mark
One)
[X] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended March 31, 2009
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
|
84-1524410
|
(State
or Other Jurisdiction of
|
|
Incorporation
or Organization)
|
(I.R.S.
Employer Identification No.)
|
12700
Ventura Boulevard,
Suite
200
Studio
City, California 91604
(Address
of Principal Executive Offices and Zip Code)
(818)
755-2400
(Registrant’s
Telephone Number, Including Area Code)
(Former
Name, Former Address, and Former Fiscal Year,
if
Changed Since Last Report.)
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 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 [X] 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 (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes [X] No
[ ]
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 definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer [ ]
|
Accelerated
filer [X]
|
Non-accelerated
filer (do not check if a smaller reporting company)
[ ]
|
Smaller
reporting company [ ]
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No ý
As of May
1, 2009, the number of shares of Class A Common Stock, $.01 par value
outstanding was 74,117,654, and the number of shares of Class B Common Stock,
$.01 par value, outstanding was 30,670,422.
TABLE
OF CONTENTS
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|
Page
|
PART
I
|
Financial
Information
|
|
|
|
|
Item
1
|
Financial
Statements (Unaudited)
|
|
|
CROWN
MEDIA HOLDINGS, INC. AND SUBSIDIARIES
|
|
|
Condensed
Consolidated Balance Sheets – December 31, 2008 and
March
31, 2009 (Unaudited)
|
|
|
Condensed
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
|
|
|
-
Three Months Ended March 31, 2008 and 2009
|
|
|
Condensed
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
-
Three Months Ended March 31, 2008 and 2009
|
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
|
|
|
|
Item
2
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
|
|
|
Item
3
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Quantitative
and Qualitative Disclosures About Market Risk
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|
|
|
|
Item
4
|
Controls
and Procedures
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|
|
|
|
PART
II
|
Other
Information
|
|
|
|
|
Item
1A
|
Risk
Factors
|
|
|
|
|
Item
5
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Other
Information
|
|
|
|
|
Item
6
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Exhibits
|
|
|
|
|
Signatures
|
|
In
this Form 10-Q the terms “Crown Media Holdings” and the “Company” 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 term “common stock” refers to our Class A common stock and
Class B common stock, unless the context requires otherwise.
The
name Hallmark and other product or service names are trademarks or registered
trademarks of their owners.
PART
I. FINANCIAL INFORMATION
Item
1. Financial
Statements (Unaudited)
CROWN
MEDIA HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value
and number of shares)
|
|
As
of December 31, 2008
|
|
|
As
of March 31, 2009
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$ |
2,714 |
|
|
$ |
5,286 |
|
Accounts
receivable, less allowance for doubtful accounts of $294
and $778,
respectively
|
|
|
66,510 |
|
|
|
69,340 |
|
Program
license
fees
|
|
|
105,936 |
|
|
|
112,406 |
|
Prepaid
and other
assets
|
|
|
11,722 |
|
|
|
14,059 |
|
Total
current
assets
|
|
|
186,882 |
|
|
|
201,091 |
|
|
|
|
|
|
|
|
|
|
Program
license
fees
|
|
|
214,207 |
|
|
|
229,751 |
|
Property
and equipment,
net
|
|
|
15,392 |
|
|
|
14,705 |
|
Goodwill
|
|
|
314,033 |
|
|
|
314,033 |
|
Prepaid
and other
assets
|
|
|
8,831 |
|
|
|
8,345 |
|
Total
assets
|
|
$ |
739,345 |
|
|
$ |
767,925 |
|
See accompanying notes to unaudited
condensed consolidated financial statements.
CROWN
MEDIA HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value
and number of shares)
(continued)
|
|
As
of December 31,
2008
|
|
|
As
of March 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
Accounts
payable and accrued
liabilities
|
|
$ |
23,992 |
|
|
$ |
22,789 |
|
Audience
deficiency reserve
liability
|
|
|
11,505 |
|
|
|
13,399 |
|
License
fees
payable
|
|
|
128,638 |
|
|
|
127,977 |
|
Payables
to Hallmark Cards
affiliates
|
|
|
14,799 |
|
|
|
14,865 |
|
Payables
to National Interfaith Cable
Coalition
|
|
|
2,849 |
|
|
|
2,643 |
|
Credit
facility and interest
payable
|
|
|
29 |
|
|
|
32,053 |
|
Interest
payable to Hallmark Cards
affiliates
|
|
|
3,987 |
|
|
|
5,527 |
|
Total
current
liabilities
|
|
|
185,799 |
|
|
|
219,253 |
|
|
|
|
|
|
|
|
|
|
Accrued
liabilities
|
|
|
28,857 |
|
|
|
26,203 |
|
License
fees
payable
|
|
|
112,451 |
|
|
|
130,811 |
|
Payables
to Hallmark Cards
affiliates
|
|
|
- |
|
|
|
2,800 |
|
Payables
to National Interfaith Cable
Coalition
|
|
|
2,504 |
|
|
|
- |
|
Credit
facility
|
|
|
28,570 |
|
|
|
- |
|
Notes
payable to Hallmark Cards
affiliates
|
|
|
340,697 |
|
|
|
340,697 |
|
Senior
secured note to HC Crown, including accrued interest
|
|
|
686,578 |
|
|
|
704,003 |
|
Company
obligated mandatorily redeemable preferred interest
|
|
|
20,822 |
|
|
|
21,342 |
|
Total
liabilities
|
|
|
1,406,278 |
|
|
|
1,445,109 |
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT:
|
|
|
|
|
|
|
|
|
Class
A common stock, $.01 par value; 200,000,000 shares authorized; 74,117,654
shares issued and outstanding as of December 31, 2008
and March 31, 2009, respectively
|
|
|
741 |
|
|
|
741 |
|
Class
B common stock, $.01 par value; 120,000,000 shares authorized;
30,670,422 shares issued and outstanding as of December 31, 2008
and March 31, 2009, respectively
|
|
|
307 |
|
|
|
307 |
|
Paid-in
capital
|
|
|
1,465,293 |
|
|
|
1,462,493 |
|
Accumulated
deficit
|
|
|
(2,133,274 |
) |
|
|
(2,140,725 |
) |
Total
stockholders'
deficit
|
|
|
(666,933 |
) |
|
|
(677,184 |
) |
Total
liabilities and stockholders'
deficit
|
|
$ |
739,345 |
|
|
$ |
767,925 |
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
CROWN
MEDIA HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
(In thousands, except per share
data)
|
|
Three
Months Ended
March
31,
|
|
|
|
2008
|
|
|
2009
|
|
Revenue:
|
|
|
|
|
|
|
Subscriber
fees
|
|
$ |
13,853 |
|
|
$ |
15,295 |
|
Advertising
|
|
|
56,348 |
|
|
|
55,125 |
|
Advertising
by Hallmark Cards
|
|
|
75 |
|
|
|
169 |
|
Other
revenue
|
|
|
288 |
|
|
|
363 |
|
Total
revenue, net
|
|
|
70,564 |
|
|
|
70,952 |
|
Cost
of Services:
|
|
|
|
|
|
|
|
|
Programming
costs
|
|
|
|
|
|
|
|
|
Hallmark
Cards affiliates
|
|
|
89 |
|
|
|
293 |
|
Non-affiliates
|
|
|
35,316 |
|
|
|
31,922 |
|
Other
costs of services
|
|
|
3,469 |
|
|
|
4,012 |
|
Total
cost of services
|
|
|
38,874 |
|
|
|
36,227 |
|
Selling,
general and administrative expense
|
|
|
13,461 |
|
|
|
12,081 |
|
Marketing
expense
|
|
|
6,398 |
|
|
|
4,775 |
|
Depreciation
and amortization expense
|
|
|
432 |
|
|
|
483 |
|
Income
from operations
|
|
|
11,399 |
|
|
|
17,386 |
|
Interest
income
|
|
|
190 |
|
|
|
137 |
|
Interest
expense
|
|
|
(26,304
|
) |
|
|
(24,974
|
) |
Net
loss and comprehensive loss
|
|
$ |
(14,715
|
) |
|
$ |
(7,451
|
) |
Weighted
average number of Class A and Class B shares outstanding,
basic and diluted
|
|
|
104,740 |
|
|
|
104,788 |
|
Net
loss per share, basic and diluted
|
|
$ |
(0.14
|
) |
|
$ |
(0.07
|
) |
See
accompanying notes to unaudited condensed consolidated financial
statements.
CROWN
MEDIA HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
|
2009
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(14,715
|
) |
|
$ |
(7,451
|
) |
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
36,552 |
|
|
|
33,576 |
|
Accretion
on company obligated mandatorily redeemable preferred
interest
|
|
|
626 |
|
|
|
520 |
|
Provision
for allowance for doubtful accounts
|
|
|
(34
|
) |
|
|
622 |
|
Residuals
and participations
|
|
|
96 |
|
|
|
- |
|
Impairment
of film asset
|
|
|
176 |
|
|
|
- |
|
Stock-based
compensation
|
|
|
834 |
|
|
|
(287
|
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease(increase)
in accounts receivable
|
|
|
627 |
|
|
|
(3,452
|
) |
Additions
to program license fees
|
|
|
(20,234
|
) |
|
|
(54,228
|
) |
Increase
in prepaid and other assets
|
|
|
(7,866
|
) |
|
|
(2,735
|
) |
Decrease
in accounts payable, accrued and other liabilities
|
|
|
(7,096
|
) |
|
|
(3,675
|
) |
Increase
in interest payable
|
|
|
22,729 |
|
|
|
18,960 |
|
Increase
in license fees payable to affiliates
|
|
|
2,350 |
|
|
|
276 |
|
(Decrease)
increase in license fees payable to non-affiliates
|
|
|
(14,049
|
) |
|
|
17,423 |
|
Increase
in payables to affiliates
|
|
|
310 |
|
|
|
66 |
|
Net
cash provided by (used in) operating activities
|
|
|
306 |
|
|
|
(385
|
) |
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(180
|
) |
|
|
(81
|
) |
Payments
to buyer of international business
|
|
|
(1,107
|
) |
|
|
(223
|
) |
Net
cash used in investing activities.
|
|
|
(1,287
|
) |
|
|
(304
|
) |
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Borrowings
under the credit facility
|
|
|
18,761 |
|
|
|
12,391 |
|
Principal
payments on the credit facility
|
|
|
(16,530
|
) |
|
|
(8,934
|
) |
Principal
payments on capital lease obligations
|
|
|
(178
|
) |
|
|
(196
|
) |
Net
cash provided by financing activities
|
|
|
2,053 |
|
|
|
3,261 |
|
Net
increase in cash and cash equivalents
|
|
|
1,072 |
|
|
|
2,572 |
|
Cash
and cash equivalents, beginning of period
|
|
|
1,974 |
|
|
|
2,714 |
|
Cash
and cash equivalents, end of period
|
|
$ |
3,046 |
|
|
$ |
5,286 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash and non-cash activities:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
1,666 |
|
|
$ |
4,544 |
|
Tax
sharing payment from Hallmark Cards applied to note
payable to Hallmark Cards
|
|
$ |
5,075 |
|
|
$ |
- |
|
Tax
sharing amount due to Hallmark
Cards
|
|
$ |
- |
|
|
$ |
2,800 |
|
Reclassification
of Redeemable Common Stock to common stock and
paid-in
capital
|
|
$ |
32,765 |
|
|
$ |
- |
|
Interest
payable converted to principal on note payable to
Hallmark Card affiliates
|
|
$ |
24,747 |
|
|
$ |
- |
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
CROWN
MEDIA HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the Three Months Ended March 31, 2008 and 2009
1.
Business and Organization
Organization
Crown
Media Holdings, Inc. (“Crown Media Holdings,” “Crown Media” or the “Company”),
through its wholly-owned subsidiary, Crown Media United States, LLC (“Crown
Media United States”), owns and operates pay television channels (collectively
the “Channels” or the “channels”) dedicated to high quality, entertainment
programming for adults and families in the United States. Significant investors
in Crown Media Holdings include Hallmark Entertainment Investments Co.
("Hallmark Entertainment Investments"), a subsidiary of Hallmark Cards,
Incorporated ("Hallmark Cards"), the National Interfaith Cable Coalition, Inc.
("NICC"), the DIRECTV Group, Inc. and, indirectly through their investments in
Hallmark Entertainment Investments, Liberty Media Corporation and J.P. Morgan
Partners (BHCA), L. P.
The
Company’s continuing operations are currently organized into one operating
segment, the domestic channels.
As of
March 31, 2009, the Company had $5.3 million in cash and cash equivalents on
hand and $12.9 million of current borrowing capacity under the bank credit
facility. Day-to-day cash disbursement requirements have typically
been satisfied with cash on hand and operating cash receipts supplemented with
the borrowing capacity available under the bank credit facility and forbearance
by Hallmark Cards and its affiliates. The Company’s management
anticipates that the principal uses of cash up to May 1, 2010, will include the
payment of operating expenses, accounts payable and accrued expenses,
programming costs, interest and repayment of principal under the bank credit
facility and interest of approximately $20.0 million to $25.0 million due under
certain notes to the Hallmark Cards affiliates.
Operating
activities for the year ended December 31, 2008, yielded positive cash flow
while the three months ended March 31, 2009, yielded slightly negative cash
flow. There can be no assurance that the Company’s operating activities will
generate positive cash flow in future periods.
Another
significant aspect of the Company’s liquidity is the deferral of payments on
obligations owed to Hallmark Cards and its subsidiaries. Under the Amended and
Restated Waiver Agreement as amended with Hallmark Cards and its affiliates (the
“Waiver Agreement”), the deferred payments under such obligations are extended
to May 1, 2010.
The
Company believes that cash on hand, cash generated by operations, and borrowing
availability under its bank credit facility through March 31, 2010, when
combined with (1) the deferral of any required payments on related-party debt,
any 2009 tax sharing payments and related interest on the 10.25% Senior Secured
Note described under the Waiver Agreement, and (2) if necessary, Hallmark Cards’
purchase of any outstanding indebtedness under the bank credit facility on March
31, 2010, as described below, will be sufficient to fund the Company’s
operations and enable the Company to meet its liquidity needs through May 1,
2010.
The
sufficiency of the existing sources of liquidity to fund the Company’s
operations is dependent upon maintaining subscriber and advertising revenue at
or near the amount of such revenue for the year ended December 31, 2008. A
significant decline in the popularity of the Channels, a further economic
decline in the advertising market, an increase in program acquisition costs, an
increase in competition or other adverse changes in operating conditions could
negatively impact the Company’s liquidity and its ability to fund the current
level of operations. Since the second quarter of 2008, the Company
has experienced a softening of advertising rates in the direct response and
general rate scatter market. The Company expects this softening to
continue throughout 2009, has implemented certain cost containment measures for
2009, and has a limited number of additional, contingent cost cutting measures
that could be implemented in the remainder of 2009 depending on market
conditions.
In March
2009, effective April 1, 2009, the bank credit facility’s maturity date was
extended to March 31, 2010, and the bank’s lending commitment was set at $45.0
million. The Company’s ability to pay amounts outstanding on the
maturity date is highly dependent upon the Company’s ability to generate
sufficient, timely cash flow from operations between January 1, 2009 and March
31, 2010. Based on the Company’s forecasts for 2009 and 2010, which
assume no principal payments on notes payable to Hallmark Cards and its
affiliates, the Company would have sufficient cash to repay all or most of the
bank credit facility on the maturity date, if necessary. However,
there is uncertainty in the U.S. economy and the advertising market, so it is
possible that the cash flow may be less than the expectations of the Company’s
management.
Upon
maturity of the credit facility on March 31, 2010, to the extent the
facility has not been paid in full, renewed or replaced, the Company could
require under the Waiver Agreement that Hallmark Cards purchase the interest of
the lending bank in the facility. In that case, Hallmark Cards would
have all the obligations and rights of the lending bank under the bank credit
facility and could demand payment of outstanding amounts at any time after May
1, 2010, under the terms of the Waiver Agreement.
Because
of the Company’s possible inability to meet its obligations when they come due
on and after May 1, 2010, the Company anticipates that prior to May 1, 2010, it
will be necessary to either extend or refinance (i) the bank credit
facility and (ii) the promissory notes payable to affiliates of Hallmark
Cards. As part of a combination of actions and in order to obtain additional
funding, the Company may consider various alternatives, including restructuring
of the debt if possible, refinancing the bank credit facility, raising
additional capital through the issuance of equity or debt securities, or other
strategic alternatives. If the current credit market conditions continue, a
restructuring or refinancing could be difficult to achieve.
2.
Summary of Significant Accounting Policies and Estimates
Interim
Financial Statements
In the
opinion of management, the accompanying condensed consolidated balance sheets
and related interim condensed consolidated statements of operations and cash
flows include all adjustments, consisting of normal recurring items necessary
for their fair presentation in conformity with accounting principles generally
accepted in the United States. Interim results are not necessarily indicative of
results for a full year. These condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and the notes to those statements for the year ended December 31, 2008, included
in the Company’s Annual Report on Form 10-K for the year ended December 31,
2008.
Basis
of Presentation
The
condensed consolidated financial statements include the accounts of Crown Media
Holdings and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of the accompanying condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions about future events. These
estimates and the underlying assumptions affect the amounts of assets and
liabilities reported, disclosures about contingent assets and liabilities, and
reported amounts of revenue and expenses. Such estimates include the valuation
of accounts receivable, goodwill, intangible assets, and other long-lived
assets, legal contingencies, indemnifications, and assumptions used in the
calculation of income taxes and customer incentives, among others. These
estimates and assumptions are based on management’s best estimates and judgment.
Management evaluates its estimates and assumptions on an ongoing basis using
historical experience and other factors, including the current economic
environment, which management believes to be reasonable under the circumstances.
Management adjusts such estimates and assumptions when facts and circumstances
dictate. Illiquid credit markets, volatile equity, foreign currency, and energy
markets, and declines in consumer spending have combined to increase the
uncertainty inherent in such estimates and assumptions. As future events and
their effects cannot be determined with precision, actual results could differ
significantly from these estimates. Changes in those estimates resulting from
continuing changes in the economic environment will be reflected in the
financial statements in future periods.
Allowance
for Doubtful Accounts
The
allowance for doubtful accounts is based upon the Company’s assessment of
probable loss related to uncollectible accounts receivable. The
Company uses a number of factors in determining the allowance, including, among
other things, collection trends. The Company’s bad debt expense was $622,000 for
the three months ended March 31, 2009. The Company’s bad debt provision was a
credit of $34,000 for the three months ended March 31, 2008.
Fair
Value of Financial Instruments
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157 (“SFAS 157”), Fair Value Measurements, in
order to establish a single definition of fair value and a framework for
measuring fair value in generally accepted accounting principles that is
intended to result in increased consistency and comparability in fair value
measurements. In early 2008, the FASB issued Staff Position (FSP) FAS-157-2,
which delayed by one year, the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The Company adopted the portion of SFAS 157 that
was not delayed by FSP FAS-157-2 as of January 1, 2008, and has adopted the
balance of its provisions as of January 1, 2009.
The
Company does not have balance sheet items carried at fair value on a recurring
basis (to which SFAS 157 applied in 2008) such as derivative financial
instruments which are valued primarily based on quoted prices in active or
brokered markets for identical as well as similar assets and liabilities.
Significant balance sheet items which are subject to non-recurring fair value
measurements (to which SFAS 157 applies in 2009) consist of goodwill,
property and equipment, and subscriber acquisition fees. The adoption of
SFAS 157 in 2008 had no effect on the measurement of the Company’s
financial assets and liabilities. The standard has not had an impact on the
determination of fair value related to non-financial assets and non-financial
liabilities in the first quarter of 2009.
Net
Loss per Share
Basic net
loss per share is computed by dividing the net loss for the period by the
weighted average number of common shares outstanding during the period. Diluted
net loss per share is computed based on the weighted average number of common
shares and potentially dilutive common shares outstanding. The calculation of
diluted net loss per share excludes potential common shares if the effect would
be antidilutive. Potential common shares consist of incremental common shares
issuable upon the exercise of stock options. Approximately 341,000 stock options
for each of the three months ended March 31, 2008 and 2009, have been excluded
from the calculations of earnings per share because their effect would have been
antidilutive.
Concentration
of Credit Risk
Financial
instruments, which potentially subject Crown Media Holdings to a concentration
of credit risk, consist primarily of cash, cash equivalents and accounts
receivable. Generally, Crown Media Holdings does not require collateral to
secure receivables. Crown Media Holdings has no significant off-balance sheet
financial instruments with risk of losses.
Five of
our distributors each accounted for more than 10% of our consolidated subscriber
revenue for the three months ended March 31, 2008 and 2009, and together
accounted for a total of 80% and 76% of consolidated subscriber revenue during
the three months ended March 31, 2008 and 2009, respectively. Four
and three of our distributors each accounted for approximately 15% or more of
our consolidated subscribers for the three months ended March 31, 2008 and 2009,
respectively, and together accounted for 76% and 62% of our subscribers during
the three months ended March 31, 2008 and 2009, respectively.
Reclassifications
Certain
reclassifications have been made to conform prior periods' financial information
to the current presentation.
Recently
Issued Accounting Pronouncements
In
April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets. The FSP states that in developing assumptions about
renewal or extension options used to determine the useful life of an intangible
asset, an entity needs to consider its own historical experience adjusted for
entity-specific factors. In the absence of that experience, an entity shall
consider the assumptions that market participants would use about renewal or
extension options. This FSP is to be applied to intangible assets acquired after
January 1, 2009. The adoption of this FSP did not have an impact on the
Company’s condensed consolidated financial statements.
In
April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board
(APB) 28-1 Interim Disclosures
about Fair Value of Financial Instruments. The FSP amends SFAS
No. 107 Disclosures about
Fair Value of Financial Instruments to require an entity to provide
disclosures about fair value of financial instruments in interim financial
information. This FSP is to be applied prospectively and is effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. The Company will include
the required disclosures in its financial information for the quarter ending
June 30, 2009.
3.
Program License Fees
Program
license fees are comprised of the following:
|
|
As of December 31,
|
|
|
As of March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(In
thousands)
|
|
Program
license fees —
non-affiliates
|
|
$ |
576,779 |
|
|
$ |
613,026 |
|
Program
license fees — Hallmark Cards affiliates
|
|
|
10,967 |
|
|
|
11,517 |
|
Program
license fees, at
cost
|
|
|
587,746 |
|
|
|
624,543 |
|
Accumulated
amortization
|
|
|
(267,603 |
) |
|
|
(282,386 |
) |
Program
license fees,
net
|
|
$ |
320,143 |
|
|
$ |
342,157 |
|
At
December 31, 2008, and March 31, 2009, $7.6 million and $10.5 million,
respectively, of program license fees were included in prepaid and other assets
on the accompanying condensed consolidated balance sheets as the Company made
payments for the program license fees prior to commencement of the respective
license periods.
License
fees payable are comprised of the following:
|
|
As of December 31,
|
|
|
As of March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(In
thousands)
|
|
License
fees payable —
non-affiliates
|
|
$ |
231,218 |
|
|
$ |
248,641 |
|
License
fees payable — Hallmark Cards affiliates
|
|
|
9,871 |
|
|
|
10,147 |
|
Total license fees
payable
|
|
|
241,089 |
|
|
|
258,788 |
|
Less
current
maturities
|
|
|
(128,638 |
) |
|
|
(127,977 |
) |
Long-term license fees
payable
|
|
$ |
112,451 |
|
|
$ |
130,811 |
|
4.
Credit Facility
On March
2, 2009, the Company and JPMorgan Chase Bank executed Amendment No. 15 to the
credit facility, renewing the Company’s $45.0 million credit line and extending
the maturity date to March 31, 2010, all effective April 1, 2009. The
facility is guaranteed by Hallmark Cards and the Company’s subsidiaries and is
secured by all tangible and intangible property of Crown Media Holdings and its
subsidiaries. Interest rates under the credit facility increased from
the Eurodollar rate to the Eurodollar rate plus 2.25% and from the Alternate
Base rate to the Alternate Base rate plus 1.25%.
The
Company had at March 31, 2009, $12.9 million of unused revolving credit
capacity. The Company’s ability to borrow additional amounts under the credit
facility is not limited or restricted.
Each
borrowing under the bank credit facility bears interest at a Eurodollar rate or
an alternate base rate as the Company may request at the time of
borrowing. The Eurodollar rate is based on the London interbank
market for Eurodollars, and remains in effect for the time period of the loan
ranging from one, two, three, six or twelve months. The alternate
rate is the greatest of the prime rate of JP Morgan Chase Bank, the one month
London interbank market for Eurodollars plus 1.00% or the Federal Funds
effective rate plus 0.50%, and is adjusted whenever the applicable rate
changes. Prior to the effectiveness of Amendment No. 15, the Company
was required to pay a commitment fee of 0.15% per annum of the
committed, but not outstanding, amounts under the revolving credit facility,
payable in quarterly installments. Pursuant to Amendment No. 15, the commitment
fee was increased to 0.375% per annum.
At
December 31, 2008, and March 31, 2009, the Company had outstanding borrowings
under the credit facility of $28.6 million and $32.1 million, respectively, and
there were no letters of credit outstanding. At December 31, 2008, the
outstanding balance bore interest at the Eurodollar rate (a 2.02% weighted
average rate). At March 31, 2009, the outstanding balance bore interest at the
Eurodollar rate (a 1.28% weighted average rate). Interest expense on borrowings
under the credit facility for each of the three months ended March 31, 2008 and
2009, was $895,000 and $108,000, respectively.
Covenants
The
credit facility, as amended, contains a number of affirmative and negative
covenants. The Company was in compliance with these covenants at
March 31, 2009.
5.
Related Party Long-Term Obligations
Waiver
and Standby Purchase
On March
10, 2008, the Company, Hallmark Cards and affiliates of Hallmark Cards who hold
obligations of the Company entered into an Amended and Restated Waiver and
Standby Purchase Agreement, which was most recently amended on May 4, 2009, to
extend the waiver period (the “Waiver Agreement”). The Waiver
Agreement replaced a previous version of the Waiver and Standby Purchase
Agreement dated March 21, 2006 as amended through October 2007. The
Waiver Agreement defers payments (excluding interest on the 2001, 2005 and 2006
notes mentioned below) due on any of the following obligations (the “Subject
Obligations”) and interest on the 10.25% Note until May 1, 2010, or an earlier
date as described below as the waiver termination date, whereupon all of these
amounts become immediately due and payable (the “Waiver Period”):
·
|
Note
and interest payable to HC Crown, dated December 14, 2001, in the original
principal amount of $75.0 million, payable to HC Crown. (Total amount
outstanding at December 31, 2008, and March 31, 2009, including accrued
interest was $109.8 million and $110.3 million, respectively. See Note and Interest Payable to
HC Crown below.)
|
·
|
$70.0
million note and interest payable to Hallmark Cards affiliate, dated as of
March 21, 2006, arising out of the sale to Crown Media Holdings of the
Hallmark Entertainment film library. (Total amount outstanding at December
31, 2008, and March 31, 2009, including accrued interest was
$62.7 million and $63.0 million, respectively. See Note and Interest Payable to
Hallmark Cards Affiliate
below.)
|
·
|
10.25%
senior secured note, dated August 5, 2003, in the initial accreted value
of $400.0 million, payable to HC Crown. (Total amount
outstanding at December 31, 2008, and March 31, 2009, including accrued
interest was $686.6 million and $704.0 million, respectively. See Senior Secured Note
below.)
|
·
|
Note
and interest payable to Hallmark Cards affiliate, dated as of October 1,
2005, in the principal amount of $132.8 million. (Total amount outstanding
at December 31, 2008, and March 31, 2009, including accrued interest was
$172.1 million and $172.8 million, respectively. See Note and Interest Payable to
Hallmark Cards Affiliate
below.)
|
·
|
All
obligations of the Company under the bank credit facility by virtue of
Hallmark Cards’ deemed purchase of participations in all of the
obligations under a guarantee which Hallmark Cards has given in support of
the facility or the purchase by Hallmark Cards of all these obligations
pursuant to the bank credit
facility.
|
·
|
Any
and all amounts due and owing to Hallmark Cards pursuant to the Tax
Sharing Agreement (Total amount outstanding at March 31, 2009, was $2.8
million.).
|
Interest
will continue to accrue on these obligations during the Waiver
Period. The Waiver Agreement also contains certain covenants,
including but not limited to (1) our covenant not to take any action that
would prohibit us from being included as a member of Hallmark Cards consolidated
federal tax group, (2) compliance with obligations in the loan documents
for the bank credit facility and (3) commercially reasonable efforts to
refinance the obligations subject to the Waiver Period. Pursuant to
the Waiver Agreement, the Company must make prepayments on the outstanding debt
from 100% of any “Excess Cash Flow” during the Waiver Period. There
was no Excess Cash Flow for the first quarter of 2009.
The
waiver termination date is May 1, 2010, or earlier upon occurrence of certain
events including but not limited to the following: (a) the Company
fails to pay any principal or interest, regardless of amount, due on any
indebtedness to unrelated parties with an aggregate principal amount in excess
of $5.0 million or any other event or condition occurs that results in any such
indebtedness becoming due prior to its scheduled maturity, provided that the
waiver will not terminate if the Company reduces the principal amount of such
indebtedness to $5.0 million or less within five business days of a written
notice of termination from Hallmark Cards; or (b) the Company fails to pay
interest on the bank credit facility described above to the extent that Hallmark
Cards has purchased all or a portion of the indebtedness thereunder or to
perform any covenants in the Waiver Agreement.
Under the
Waiver Agreement, if the bank lender under the bank credit facility accelerates
any of the indebtedness under the bank credit facility or seeks to collect any
indebtedness under it, the Company may elect to exercise its right to require
that Hallmark Cards or its designated subsidiary exercise an option to purchase
all the outstanding indebtedness under the bank credit facility. All
expenses and fees in connection with this purchase would be added to the
principal amount of the credit facility obligations.
Hallmark
Guarantee; Interest and Fee Reductions
Hallmark
Cards has provided to the lending bank under the credit facility the Hallmark
Cards facility guarantee. The guarantee is unconditional for
obligations of the Company under the bank credit facility. If any
payment is made on the guarantee, it will be treated as a purchase of the
lending bank’s interest in the credit facility.
Prior to
April 1, 2009, Hallmark Cards provided an irrevocable letter of credit to JP
Morgan Chase Bank as credit support for our obligations under the Company’s bank
credit facility for which we previously paid the letter of credit fees. This
letter of credit was cancelled on April 1, 2009.
Also,
when Hallmark Cards’ issuance of the letter of credit resulted in reductions in
the interest rate and commitment fees under the credit facility, we agreed to
pay and have paid an amount equal to the reductions to Hallmark
Cards. With Hallmark Cards’ guarantee issued in place of the letter
of credit, commencing April 1, 2009, such fee is reduced to 0.875%, representing
the 0.75% reduction in the interest rate and the 0.125% reduction in the
commitment fee.
Senior
Secured Note
In August
2003, the Company issued a senior note to HC Crown for $400.0 million. A portion
of the proceeds was used to repurchase the Company’s outstanding trust preferred
securities, and the balance of the proceeds, after expenses, was used to reduce
amounts outstanding under its bank credit facility.
In
accordance with the Waiver Agreement, cash payments are not required until May
1, 2010. The principal amount of the senior secured note accretes at 10.25% per
annum, compounding semi-annually, to February 5, 2010. From that
date, interest at 10.25% per annum is scheduled to be payable semi-annually in
arrears on the accreted value of the senior note to HC Crown on August 5 and
February 5 of each year until maturity. The note matures on
August 5, 2011, and is pre-payable without penalty. At December 31, 2008,
and March 31, 2009, $686.6 million and $704.0 million, respectively, of
principal and interest were included in the senior note payable in the
accompanying consolidated balance sheets. The note purchase agreement for the
senior note contains certain restrictive covenants which, among other things,
prevent the Company from incurring any additional indebtedness, purchasing or
otherwise acquiring shares of the Company’s stock, investing in other parties
and incurring liens on the Company’s assets. As a fee for the
issuance of the notes, the Company paid $3.0 million to HC Crown, which was
initially capitalized and is being amortized as additional interest expense over
the term of the note payable.
Note
and Interest Payable to HC Crown
On
December 14, 2001, the Company executed a $75.0 million promissory note with HC
Crown. Due to the Waiver Agreement, the note is payable in full on
May 1, 2010. Under the Waiver Agreement, accrued interest on this 2001 Note was
added to principal through November 15, 2008. Commencing November 16,
2008, interest is payable in cash, quarterly in arrears five days after the end
of each calendar quarter. This note is subordinate to the bank credit facility.
The rate of interest under this note is currently LIBOR plus 5% per annum (9.05%
and 6.425% at December 31, 2008, and March 31, 2009, respectively). At December
31, 2008, and March 31, 2009, $108.6 million, is reported as note and interest
payable to HC Crown and $1.3 million and $1.7 million, respectively, are
reported as interest payable to Hallmark Cards affiliate on the accompanying
condensed consolidated balance sheet. The $1.3 million of interest was paid on
January 5, 2009, and the $1.7 million in interest was paid on April 6,
2009.
Note
and Interest Payable to Hallmark Cards Affiliate
On
October 1, 2005, the Company converted approximately $132.8 million of its
license fees payable to Hallmark affiliates to a promissory note. The
rate of interest under this note is currently LIBOR plus 5% per annum (9.05% and
6.425% at December 31, 2008, and March 31, 2009, respectively). Pursuant to the
Waiver Agreement, the promissory note is payable in full on May 1,
2010. Under the Waiver Agreement, accrued interest on this 2005 Note
was added to principal through November 15, 2008. Commencing November
16, 2008, interest is payable in cash, quarterly in arrears five days after the
end of each calendar quarter. At December 31, 2008, and March 31, 2009, $170.1
million is reported as note and interest payable to Hallmark Cards affiliate and
$2.0 million and $2.7 million, respectively, are reported as interest payable to
Hallmark Cards affiliate on the accompanying condensed consolidated balance
sheet. The $2.0 million in interest was paid on January 5, 2009, and the $2.7
million in interest was paid on April 6, 2009.
Note
and Interest Payable to Hallmark Cards Affiliate
On March
21, 2006, the Company converted approximately $70.4 million of its payable to a
Hallmark Cards affiliate to a promissory note. The rate of interest under this
note is currently LIBOR plus 5% per annum (9.05% and 6.425% at December 31,
2008, and March 31, 2009, respectively). Pursuant to the Waiver Agreement, the
promissory note is payable in full on May 1, 2010. Under the Waiver Agreement,
accrued interest on this 2006 Note was added to principal through November 15,
2008. Commencing November 16, 2008, interest is payable in cash,
quarterly in arrears five days after the end of each calendar quarter. At
December 31, 2008, and March 31, 2009, $62.0 million is reported as note and
interest payable to HC Crown and $717,000 and $996,000, respectively, are
reported as interest payable to Hallmark Cards affiliate on the accompanying
condensed consolidated balance sheet. The $717,000 in interest was paid on
January 5, 2009, and the $996,000 in interest was paid on April 6,
2009.
Interest
Paid to HC Crown Related to the Credit Facility
Interest
expense paid to HC Crown was $390,000 for the three months ended March 31, 2008,
and $148,000 for the three months ended March 31, 2009, related to the credit
facility.
Related
Party Long-Term Obligations
The
aggregate maturities of related party long-term debt for each of the five years
subsequent to December 31, 2008, are as follows:
|
|
Payments
Due by Period
|
|
|
|
Total
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
|
|
(In
thousands)
|
|
Note
and interest payable to HC Crown,
with principal due May 1, 2010
|
|
$ |
110,325 |
|
$ |
1,744 |
|
$ |
108,581 |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
10.25
% Senior secured note to HC Crown,
including
accrued interest, due August 5, 2011
|
|
|
704,003 |
|
|
- |
|
|
- |
|
|
704,003 |
|
|
- |
|
|
- |
|
Note
and interest payable to Hallmark Cards affiliate
with principal due May 1, 2010
|
|
|
172,841 |
|
|
2,732 |
|
|
170,109 |
|
|
- |
|
|
- |
|
|
- |
|
Note
and interest payable to Hallmark Cards affiliate
with
principal due May 1, 2010
|
|
|
63,003 |
|
|
996 |
|
|
62,007 |
|
|
- |
|
|
- |
|
|
- |
|
|
|
$ |
1,050,172 |
|
$ |
5,472 |
|
$ |
340,697 |
|
$ |
704,003 |
|
$ |
- |
|
$ |
- |
|
In
addition to amounts in the table, any Excess Cash Flow for 2009 as defined in
the Waiver Agreement must be paid on bank debt or the Subject
Obligations. There was no Excess Cash Flow for the first quarter of
2009.
6.
Related Party Transactions
Tax Sharing
Agreement
Overview
On
March 11, 2003, Crown Media Holdings became a member of Hallmark Cards
consolidated U.S. federal tax group and entered into a federal tax sharing
agreement with Hallmark Cards (the “tax sharing agreement”). Hallmark Cards
includes Crown Media Holdings in its consolidated U.S. federal income tax
return. Accordingly, Hallmark Cards has benefited from past tax
losses and may benefit from future federal tax losses, which may be generated by
Crown Media Holdings. Based on the tax sharing agreement, Hallmark
Cards has agreed to pay Crown Media Holdings all of the benefits realized by
Hallmark Cards as a result of including Crown Media Holdings in its consolidated
income tax return. These benefits are estimated and paid 75% in cash
on a quarterly basis and the balance when Crown Media Holdings becomes a federal
taxpayer. A final true-up calculation is completed within 15 days
after Hallmark Cards files its consolidated federal income tax return for the
year. Pursuant to the true-up calculation, Crown Media Holdings is
obligated to reimburse Hallmark Cards the amount that any estimated payments
have exceeded the actual benefit realized by Hallmark Cards and Hallmark Cards
is obligated to pay Crown Media Holdings the amount that any actual benefit
exceeds the estimated payments. Under the tax sharing agreement, at
Hallmark Cards’ option, the non-interest bearing balance of the 25% in federal
tax benefits not funded immediately may be applied as an offset against any
amounts owed by Crown Media Holdings to any member of the Hallmark Cards
consolidated group under any loan, line of credit or other payable, subject to
limitations under any loan indentures or contracts restricting such
offsets.
The
Company received $5.1 million, which was offset during the first quarter of 2008
against debt owed under the tax sharing agreement with Hallmark Cards, and $0
during the first quarter of 2009 under the tax sharing agreement. The Company
recorded $2.8 million as a payable to Hallmark Cards affiliates during the first
quarter of 2009 under the tax sharing agreement. Any payments received from
Hallmark Cards or credited against amounts owed by Crown Media Holdings to any
member of the Hallmark Cards consolidated group under the tax sharing agreement
have been recorded as additions to paid-in capital in the consolidated
statements of stockholders’ equity (deficit).
Services
Agreement with Hallmark Cards
Hallmark
Cards provides various support services to the Company under a 2003 agreement,
the most recent renewal of which expires December 31, 2009. Such
services include tax, risk management, health safety, environmental, insurance,
legal, treasury, human resources, cash management services and real estate
consulting services. In exchange, the Company is obligated to pay
Hallmark Cards a fee, plus out-of-pocket expenses and third party fees, in
arrears on the last business day of each quarter. Fees for Hallmark Cards’
services were $541,000 for 2008 and are scheduled to be $428,000 for 2009. With
the concurrence of Hallmark Cards, the Company deferred payment of fees for
services provided through September 2008. Commencing October 2008, the Company
has paid the required monthly fees, amounting to $135,000 during the three
months ended December 31, 2008, and $107,000 during the three
months ended March 31, 2009.
At
December 31, 2008, and March 31, 2009, non-interest bearing unpaid accrued
service fees and unreimbursed expenses of $14.8 million and $14.9 million,
respectively, were included in payable to affiliates on the accompanying
consolidated balance sheets. For the year ended December 31, 2008, and the three
months ended March 31, 2009, related out-of-pocket expenses and third party fees
were $1.1 million and $66,000, respectively.
"Hallmark
Hall of Fame" Programming License Agreement
In 2008,
Crown Media United States entered into an agreement with Hallmark Hall of Fame
Productions, Inc. to license 58 “Hallmark Hall of Fame” movies, consisting of 16
contemporary Hallmark Hall of Fame titles (i.e., produced from 2003 to 2008) and
42 older titles, for exhibition on the Hallmark Channel and Hallmark Movie
Channel. These titles are licensed for ten year windows, with windows
commencing at various times between 2007 and 2010, depending on
availability. This agreement makes the Hallmark Channel and Hallmark
Movie Channel the exclusive home for these movies. The total license
fee for these movies is $17.2 million and is payable in equal monthly
installments over the various 10 year exhibition windows.
7.
Company Obligated Mandatorily Redeemable Preferred Interest and NICC License
Agreements
VISN owns
a $25.0 million company obligated mandatorily redeemable preferred interest in
Crown Media United States (the “preferred interest”) issued in connection with
an investment by the Company in Crown Media United States. On November 13, 1998,
the Company, Vision Group, VISN and Henson Cable Networks, Inc. signed an
amended and restated company agreement governing the operation of Crown Media
United States (the "company agreement"), which agreement was further amended on
February 22, 2001, January 1, 2002, March 5, 2003, January 1, 2004, November 15,
2004 and December 1, 2005 (the “December 2005 NICC Settlement
Agreement”).
Under the
company agreement, the members agreed that if during any year ending after
January 1, 2005 and on or prior to December 31, 2009, Crown Media
United States has Federal taxable income (with possible adjustments) in excess
of $10.0 million, and the preferred interest has not been redeemed, Crown Media
United States will redeem the preferred interest in an amount equal to the
lesser of: (i) such excess Federal taxable income; (ii) $5.0 million; or (iii)
the amount equal to the preferred liquidation preference on the date of
redemption. Crown Media United States may voluntarily redeem the
preferred interest at any time; however, it is obligated to do so no later than
December 31, 2010.
On
January 2, 2008, the Company and NICC signed an agreement (the “Modification
Agreement”) which, among other things, immediately extinguished a right to put
to the Company common stock owned by NICC. In addition, the
Modification Agreement also settled the dispute with respect to whether an
obligation to pay $15.0 million upon a change in control of Crown Media Holdings
expired with, or survived, the December 31, 2007 expiration of the December
2005 NICC Settlement Agreement. We agreed to pay NICC $8.3 million in three
equal installments payable in 2008, 2009 and 2010. We also agreed to
provide NICC a two-hour broadcast period granted each Sunday morning during the
two year period ending December 31, 2009. The discounted value
of the broadcast period, estimated to be $1.4 million, is reflected as deferred
revenue as of December 31, 2007. The deferred revenue is being amortized to
revenue ratably over NICC’s two-year use of the broadcast
commitment.
During
the three months ended March 31, 2008 and 2009, Crown Media United States paid
NICC $4.9 million and $4.5 million, respectively, under the terms of the
Modification Agreement mentioned above and one programming
agreement.
8.
Share-Based Compensation
The
Company recorded $1.4 million of compensation expense and $171,000 of
compensation benefit associated with the Employment and Performance restricted
stock units (“RSUs”) during the three months ended March 31, 2008 and 2009,
respectively, which have been included in selling, general and administrative
expense on the accompanying condensed consolidated statements of operations. The
Company recorded these RSUs at fair value during each period.
The
Company issued cash settlements related to the RSUs of $3.8 million during the
year ended December 31, 2008, and $724,000 during the three months ended March
31, 2009.
At
December 31, 2008, the CEO’s share appreciation rights (“SARs”) were valued at
$440,000 using the closing price of a share of our common stock on December 31,
2008, of $2.85. At March 31, 2009, the CEO’s SARs were valued at $210,000 using
the closing price of a share of our common stock on March 31, 2009, of $2.05.
The Company recorded $570,000 and $116,000 in compensation benefit
related to SARs for the three months ended March 31, 2008 and 2009,
respectively, on our condensed consolidated statement of operations as a
component of selling, general and administrative expense. The SARs
have been recorded in accounts payable and accrued liabilities on the
accompanying condensed consolidated balance sheets at December 31, 2008 and
March 31, 2009, respectively.
9. Subsequent
Events
Chief
Executive Officer
On May 6, 2009, the Company announced
that Henry Schleiff will resign from his position as President and Chief
Executive Officer of the Company and as a member of the Board effective May 31,
2009 (the “Resignation Date”), and will be replaced by William Abbott, Executive
Vice President, National Advertising Sales. Mr. Abbott has also been
elected as a director on the Board of Directors of the Company, effective June
1, 2009.
In
connection with the foregoing, the Company has entered into a new employment
agreement (“Employment Agreement”) with Mr. Abbott and has entered into a
resignation agreement with Mr. Schleiff (the “Resignation
Agreement”). Prior employment agreements of Mr. Abbott and Mr.
Schleiff have been terminated.
The Employment Agreement with Mr.
Abbott, dated as of May 7, 2009, includes the following provisions:
·
|
Mr.
Abbott agrees to serve as President and Chief Executive Officer commencing
June 1, 2009.
|
·
|
The
term of the Agreement commences May 7, 2009, and ends on December 31,
2011, provided, that the Term will automatically renew for one year
periods if neither party provides notice to the other by June 30 of the
last year of the Term.
|
·
|
Annual
base salary will be $670,000 per year. Mr. Abbott will be
eligible to receive an annual performance bonus with a target of 60% of
his then-current base salary with a potential payout range of
0-150%. The performance bonus will be based on criteria
outlined by the Company’s Compensation Committee, which criteria shall be
the same as that established for the senior management
team.
|
·
|
Mr.
Abbott will receive a 2009 Long Term Incentive Compensation Agreement with
a target of $469,000. See below for information about this and
other Long Term Incentive Compensation
Agreements.
|
·
|
If
Mr. Abbott is terminated without cause, the Company must pay the net
present value of his base salary for 12 months and a pro rata portion of
his bonus, through the date job duties end, for the calendar year in which
termination occurs; vested ERISA benefits; and any amounts required by the
terms of his Long Term Incentive Compensation
Agreement.
|
The Resignation Agreement with Mr.
Schleiff, dated May 4, 2009, includes the following provisions:
·
|
The
continued payment of the regular installments of Mr. Schleiff’s salary and
bonus through the Resignation Date, and the continuation of benefits
through the Resignation Date.
|
·
|
The
payment of a lump sum amount of $2.5 million within 10 days after the
Resignation Date, representing the net present value of the salary and
bonus which could have been payable to Mr. Schleiff through the expiration
of his employment agreement on October 2,
2010.
|
·
|
An
amount equal to accrued but unused vacation/personal time will be paid
within 10 days of the Resignation
Date.
|
·
|
The
transaction bonus provision set forth in Mr. Schleiff’s employment
agreement will be effective if there is a “Change in Control” (as defined
in the employment agreement) within (i) 90 days after the Resignation Date
or (ii) within 180 days after the Resignation Date if a Change in Control
Agreement is signed prior to the Resignation
Date.
|
Long
Term Incentive Compensation Agreements
The
Company has granted Long Term Incentive Compensation Agreements (“LTI
Agreements”) to vice presidents and above at the Company, which LTI Agreements
were signed on May 4, 2009. The target award under each LTI
Agreements is a percentage of the employee’s base salary and range from $26,000
to $825,000 for executive officers of the Company. Of each award, 50%
is an Employment Award and 50% is a Performance Award. The Employment
Award will vest and be settled in cash on August 31, 2011, subject to earlier
pro rata settlement as provided in the LTI Agreement. The Performance
Award will vest and be settled in cash 50% on December 31, 2010, and 50% on
December 31, 2011, in accordance with the Company performance criteria
concerning adjusted EBITDA and cash flow and subject to earlier pro rata
settlement as provided in the LTI Agreement. Early settlement is
provided in the case of involuntary termination of employment without cause on
or after January 1, 2010, death or disability. Potential payouts
under the Performance Awards depend on achieving 90% or higher of a target
threshold and range from 0% to 150% of the target award. The
Company’s Compensation Committee has the ability to increase or decrease the
payout based on an assessment of demographics achieved, relative market
conditions and management of expenses.
ITEM
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion and analysis of the Company’s financial condition and
results of operations should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2008.
Description
of Business and Overview
Current
Business
We own
and operate the Channels. With 85.9 million subscribers (as provided by Nielsen
Research) in the United States at March 31, 2009, the Hallmark Channel is the
38th
most widely distributed advertising-supported cable channel in the United
States. For the first quarter of 2009, the Hallmark Channel finished the quarter
as the 14th highest
rated advertising-supported cable channel for total day ratings and the 7th highest
rated advertising-supported cable channel in prime time as measured by Nielsen
Research.
We
launched our second 24-hour linear channel, the Hallmark Movie Channel, during
the first quarter of 2005. Programming on the Hallmark Movie Channel
consists of movies and mini-series. The Hallmark Movie Channel has generated
subscriber fees and advertising revenue since 2005. As distribution continues to
expand, the financial contribution of the Hallmark Movie Channel may grow,
including increases in advertising and subscription revenue. The Hallmark Movie
Channel is operated through Crown Media Holdings’ existing infrastructure at a
small incremental cost. In April 2008, we began distributing the
Hallmark Movie Channel HD in high definition format, resulting in additional
costs; however, we expect that this additional format will continue to
contribute to subscriber growth for the Hallmark Movie Channel.
At March
31, 2009, the Hallmark Movie Channel was distributed to over 16.0 million
subscribers, an increase of nearly 1.5 million subscribers from 14.5 million at
December 31, 2008. This increase in distribution and more advertising
spots has contributed to improved Hallmark Movie Channel revenue in the first
quarter of 2009 and should continue to do so throughout the remainder of the
year.
Current
Challenges and Developments
The
Company faces numerous operating challenges. Among them are maintaining and
increasing advertising sales revenue, maintaining and expanding the distribution
of the Channels, broadening viewership demographics to meet our target audience,
and increasing viewership ratings.
In the
2008/2009 upfront sales process, we entered agreements with major advertising
firms representing approximately 51% of our advertising inventory for the last
quarter of 2008 and first three quarters of 2009. This inventory was
sold at CPMs (i.e., advertising rates per thousand viewers) approximately 7%
higher than the inventory sold in the 2007/2008 upfront. Advertisers with
upfront contracts have an option to terminate their contracts. During
the first quarter of 2009, advertisers canceled approximately 12% of the
inventory covered by such contracts, which is believed to be in line with
average cancellation rates for the advertising-supported cable channels in the
United States. Previously cancellations of upfront contracts were
unusual. The balance of the inventory has been and will be sold in the scatter
market. Continued weakness in the economy has resulted generally in lower demand
and slightly lower rates for our inventory of ad spots available for the scatter
market and lower revenue from direct response advertising when compared to the
first quarter of 2008.
Distribution
agreements 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, and the rates charged for advertising. The long-term
distribution challenges are renewing our distribution arrangements with the
multiple system operators as they expire on favorable terms. Our major
distribution agreements have terms which expire at various times from September
30, 2009, through, with options to renew, December 2023.
Domestic
telephone companies have entered the business of distributing television
channels to households through their wire-lines. We have agreements with several
telephone companies and cooperatives of telephone companies, which permit the
carriage of the Hallmark Channel and the Hallmark Movie Channel and Hallmark
Movie Channel HD, and are negotiating with others.
We expect
to experience increases in our bad debt expense during 2009 due to the economic
downturn. These increases will be due to certain customers (primarily
advertisers) experiencing cash flow problems in this economic
environment.
The
universe of cable TV subscribers in the United States is approximately 100
million homes. The top 30 cable TV networks in the United States,
measured by the number of subscribers, have 90 million or more
subscribers. Our goal is for the Hallmark Channel to reach 90 million
subscribers in the next one to two years.
Three
factors have contributed to the ratings of the Hallmark Channel: acquired series
and movies, original productions and marketing and promotional efforts. Certain
acquired series have consistently delivered strong ratings across all day-parts.
Original productions are our most high profile programs and generate the
Hallmark Channel’s highest ratings. Their ratings success is of significant help
to our distribution and advertising sales teams in selling the Hallmark Channel.
The Company typically incurs additional marketing and promotional expenses
surrounding original productions and certain acquired movies.
We are
considering a possible conversion of the Hallmark Channel to a high definition
signal. The cost of doing so is estimated at approximately $2.0
million to $7.0 million. Because of our cost cutting efforts in 2009,
the timing of such a conversion is uncertain at this time.
Revenue
from Continuing Operations
Our
revenue consists of subscriber fees and advertising fees.
Subscriber
Fees
Subscriber
fees are generally payable to us on a per subscriber basis by pay television
distributors for the right to carry our Channels. Rates 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 channel;
|
|
•
|
the
packaging arrangements for the channel;
and
|
|
•
|
length
of the contract term and other commercial
terms.
|
We are in
continuous negotiations with our existing distributors to increase our
subscriber base in order to enhance our advertising revenue. We have been
subject in the past to requests by major distributors to pay subscriber
acquisition fees for additional subscribers or to waive or accept lower
subscriber fees if certain numbers of additional subscribers are provided. We
also may help fund the distributors' efforts to market our Channels or we may
permit distributors to offer limited promotional periods without payment of
subscriber fees
In the
past, for the most part, we have paid certain television distributors up-front
subscriber acquisition fees to carry the Hallmark Channel. Subscriber
acquisition fees that we pay are capitalized and amortized over the contractual
term of the applicable distribution agreement as a reduction in subscriber fee
revenue. If the amortization expense exceeds the revenue recognized on a per
distributor basis, the excess amortization is included as a component of cost of
services. At the time we sign a distribution agreement, we evaluate the
recoverability of the costs we incur against the incremental revenue directly
and indirectly associated with each agreement.
Our
Channels are usually offered as one of a number of channels on either a basic
tier or part of other program packages and are not generally offered on a
stand-alone basis. Thus, while a cable or satellite customer may subscribe and
unsubscribe to the tiers and program packages in which one of our Channels is
placed, these customers do not subscribe and unsubscribe to our Channels
alone. We are not provided with information from the distributors on
their overall subscriber churn and in what manner their churn rates affect our
subscriber counts; instead, we are provided information on the total number of
subscribers who receive the Channels.
Our
subscriber count depends on the number of distributors carrying one of our
Channels and the size of such distributors as well as the program tiers on which
our Channel is carried by these distributors. From time to time, we experience
decreases in the number of subscribers as promotional periods end, or as a
distributor arrangement is amended or terminated by us or the distributor. The
level of subscribers could also be affected by a distributor repositioning our
Channels from one tier to another tier. Management analyzes the estimated effect
each new or amended distribution agreement will have on revenue and costs. Based
upon these analyses, if subscriber acquisition fees are needed, management
endeavors to achieve a fair combination of subscriber commitments and subscriber
acquisition fees.
Advertising
Our
advertising rates are generally calculated on the basis of an agreed upon price
per unit of audience measurement in return for a guaranteed commitment by the
advertiser. We commit to provide advertisers certain rating levels in connection
with their advertising. Advertising rates also vary by time of year due to
seasonal changes in television viewership. Revenue is recorded net of estimated
delivery shortfalls, which are usually settled by providing the advertiser
additional advertising time. The remainder of the revenue is recognized as the
“make-good” advertising time is delivered. Revenue from direct response
advertising depends largely upon actions of
viewers.
Cost
of Services
Our cost
of services consists primarily of the amortization of program license fees; the
cost of signal distribution; and the cost of promotional segments that are aired
between programs. We expect cost of services in 2009 to remain at the 2008 level
or increase slightly.
Critical
Accounting Policies, Judgments and Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires Crown Media Holdings 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.
For
further information regarding our critical accounting policies, judgments and
estimates, please see Notes to Unaudited Condensed Consolidated Financial
Statements contained in Item 1 of this Report and “Critical Accounting Policies,
Judgments and Estimates” in Item 7 of the Company’s Annual Report on Form 10-K
as filed with the SEC for the year ended December 31, 2008.
Effects
of Transactions with Related and Certain Other Parties
In 2009
and in prior years, we entered into a number of significant transactions with
Hallmark Cards and its subsidiaries. These transactions include, among other
things, programming, trademark licenses, administrative services, a line of
credit, a tax sharing agreement, the issuance of four promissory notes and a
waiver agreement. For information regarding such transactions and transactions
with other related parties, please see “Effects of Transactions with Related and
Certain Other Parties” in Item 7 of the Company’s Annual Report on Form 10-K as
filed with the SEC for the year ended December 31, 2008. Also, please see Notes
5, 6 and 7 of Notes to Unaudited Condensed Consolidated Financial Statements
contained in Item 1 of this Report.
Selected
Historical Consolidated Financial Data of Crown Media Holdings
In the
table below, we provide selected historical condensed consolidated financial and
other data of Crown Media Holdings and its subsidiaries. The following selected
condensed consolidated statement of operations data for three months ended March
31, 2008 and 2009, are derived from the unaudited financial statements of Crown
Media Holdings and its subsidiaries. Ratings and subscriber information is also
unaudited. This data should be read together with the condensed consolidated
financial statements and related notes included elsewhere in this Form
10-Q.
|
|
|
|
|
|
|
|
Percent
Change
|
|
|
|
Three
Months Ended March 31,
|
|
|
2009
vs.
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Subscriber
fees
|
|
$ |
13,853 |
|
|
$ |
15,295 |
|
|
|
10 |
% |
Advertising
|
|
|
56,423 |
|
|
|
55,294 |
|
|
|
-2 |
% |
Other
revenue
|
|
|
288 |
|
|
|
363 |
|
|
|
26 |
% |
Total
revenue
|
|
|
70,564 |
|
|
|
70,952 |
|
|
|
1 |
% |
Cost
of Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
Programming
costs
|
|
|
35,405 |
|
|
|
32,215 |
|
|
|
-9 |
% |
Operating
costs
|
|
|
3,469 |
|
|
|
4,012 |
|
|
|
16 |
% |
Total
cost of services
|
|
|
38,874 |
|
|
|
36,227 |
|
|
|
-7 |
% |
Selling,
general and administrative expense
|
|
|
13,893 |
|
|
|
12,564 |
|
|
|
-10 |
% |
Marketing
expense
|
|
|
6,398 |
|
|
|
4,775 |
|
|
|
-25 |
% |
Income
from operations before interest expense
|
|
|
11,399 |
|
|
|
17,386 |
|
|
|
53 |
% |
Interest
expense
|
|
|
(26,114 |
) |
|
|
(24,837 |
) |
|
|
-5 |
% |
Net
loss
|
|
$ |
(14,715 |
) |
|
$ |
(7,451 |
) |
|
|
-49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
$ |
306 |
|
|
$ |
(385 |
) |
|
|
-226 |
% |
Net
cash used in investing activities
|
|
$ |
(1,287 |
) |
|
$ |
(304 |
) |
|
|
-76 |
% |
Net
cash provided by financing activities
|
|
$ |
2,053 |
|
|
$ |
3,261 |
|
|
|
59 |
% |
Total
domestic day household ratings (1)(3)
|
|
|
0.731 |
|
|
|
0.635 |
|
|
|
-13 |
% |
Total
domestic primetime household ratings (2)(3)
|
|
|
1.193 |
|
|
|
1.160 |
|
|
|
-3 |
% |
Subscribers
at period end
|
|
|
84,215 |
|
|
|
85,891 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Total
day is the time period measured from the time each day the broadcast of
commercially sponsored
|
|
programming
commences to the time such commercially sponsored programming
ends.
|
|
|
|
|
|
(2) Primetime
is defined as 8:00 - 11:00 P.M. in the United States.
|
|
|
|
|
|
|
|
|
|
(3) These
Nielsen ratings are for the time period January 1 through March
31.
|
|
|
|
|
|
Results
of Operations
Three
Months Ended March 31, 2008 Compared to Three Months Ended March 31,
2009
Revenue. Our
revenue from continuing operations, comprised primarily of subscriber fees and
advertising, increased $388,000 or less than 1% in 2009 over 2008. Our
subscriber fee revenue increased $1.4 million or 10%. The amount of
subscriber acquisition fees that was recorded as a reduction of subscriber fee
revenue declined from $664,000 for the three months ended March 31, 2008, to
$651,000 in 2009. Subscriber revenue increased primarily due to contractual
increases in subscriber fee rates and increases in our distribution as a result
of the renewal of major distribution agreements in 2007 and 2008. We also
experienced an increase in distribution because of the addition of subscribers
in 2009 with some of the Company’s other distributors. Subscriber revenue growth
in 2009 compared to 2008 will be limited to the effects of contractual increases
in subscriber fee rates and increases, if any, in our distribution.
We
understand that Charter Communications filed for bankruptcy in March 2009. There
is a risk that a sale of some of the systems under bankruptcy to other
distributors may result in a decline of subscriber revenue. Charter
Communications has indicated in its press releases that it has received
authorization from the bankruptcy court to pay in the normal course trade
creditor balances which were incurred prior to the bankruptcy filing and that
Charter Communications is authorized to transact business in the ordinary course
of business and as such has been paying its trade creditors in full for balances
incurred after the bankruptcy filing in the normal course. See also the risk
factor concerning Charter Communications in Item 1A of Part II of this
Report.
The $1.1
million or 2% decrease in advertising revenue reflects nominal increases in
advertising rates and an increase in the number of available general/scatter
rate advertising spots, the effects of which were offset by lower delivery of committed
viewership ratings and a decrease in the effectiveness of direct response
advertising. In response to the lower advertising revenue, starting in the third
quarter of 2008, we have reduced the amount of time allotted to on-air
self-promotion and increased the time available for paid advertising. As
indicated under “Current Challenges and Developments” above, we continue to
experience a softening of advertising rates due to economic
conditions. Scatter rates were slightly lower in the first quarter of
2009 compared to the first quarter of 2008, and direct response advertising
revenue has decreased based on lower programming rates and lower viewer
responses in the first quarter of 2009 than in the first quarter of
2008. The Company experienced ratings declines in our key
demographics in the first quarter of 2009 compared to the first quarter of
2008.
For the
three months ended March 31, 2009, Nielsen ranked the Hallmark Channel 14th in
total day viewership with a 0.635 household rating and 7th in primetime with a
1.160 household rating among the 73 cable channels in the United States
market.
Cost of
services. Cost of services as a percent of revenue decreased
to 51% in 2009 as compared to 55% in 2008. This decrease results primarily from
the effects of the 9% decrease in programming costs, discussed
below.
Programming
costs decreased $3.2 million or 9% from the three months ended March 31, 2008.
During 2008, we entered into amendments to significant programming agreements
which added programming and deferred certain payments for program content to
periods in 2009 and beyond. These amendments also extended the windows for a
number of programs under license resulting in lower amortization for these
titles in the first quarter of 2009 compared to previous
quarters. During the first quarter of 2009, we also entered into
amendments to some of our original programming agreements which extended the
current license period to those titles and thus resulted in lower amortization
in the first quarter of 2009 compared to the first quarter of 2008.
Operating
costs for the three months ended March 31, 2009, increased $543,000 over 2008
primarily due the $657,000 increase in bad debt expense. The Company’s bad debt
expense was $622,000 for the three months ended March 31, 2009, as compared to
the Company’s negative bad debt expense of $34,000 for the three months ended
March 31, 2008. The increase in bad debt expense is due to certain advertising
customers experiencing cash flow problems under current economic
conditions. The Company will continue to monitor cash collections as
part of determining this expense and expects that this expense may continue at
higher levels in 2009 than in 2008.
Selling, general and administrative
expense. Our selling, general and administrative expense decreased $1.3
million or 10%. The Company recorded $1.4 million of compensation
expense associated with RSUs during the three months ended March 31, 2008, as
compared to $171,000 of compensation benefit associated with RSUs for the three
months ended March 31, 2009. On March 13, 2008, the Compensation Committee
determined that 100% of the first vesting of the 2006 Performance RSUs of
571,578 units vested. On February 10, 2009, the Compensation
Committee determined that the 100% of the second vesting of the 2006 Performance
RSUs of 307,772 units vested. The Company recorded $570,000 and
$116,000 of compensation benefit associated with SARs for the three months ended
March 31, 2008 and 2009, respectively. The SAR liability has declined
due to a lower stock price. See Note 8 to the Unaudited Condensed Consolidated
Financial Statements in this Report.
Marketing
expense. Our marketing expense decreased 25%. During the three
months ended March 31, 2008, we invested in two significant marketing promotions
that were centered around the original movies: “The Good Witch” in January 2008
and “Bridal Fever” in February 2008. The Company had one significant marketing
promotion in January 2009 centered around the original movie, “Taking a Chance
on Love.” The Company also had a marketing promotion in March 2009 for the
series the “Golden Girls.” As part of our contingency cost reduction
efforts, promotional and marketing efforts were reduced overall during the 2009
quarter compared to the first quarter of 2008.
Interest
expense. Interest expense for the three months ended March 31,
2009, decreased $1.3 million compared to the three months ended March 31, 2008.
The principal balance of our credit facility was $71.8 million at March 31,
2008, and $32.1 million at March 31, 2009. The interest rate on our bank credit
facility decreased from 3.45% at March 31, 2008, to 1.31% at March 31, 2009.
Interest rates of our 2001, 2005 and 2006 notes decreased from 9.65% at March
31, 2008, to 6.42% at March 31, 2009. The benefit of this rate decrease was
offset in part by a higher principal balance on the Senior Secured
Note.
Liquidity
and Capital Resources
During
the three months ended March 31, 2008, our operating activities provided
$306,000 of cash compared to cash used of $385,000 in the first quarter of
2009. The
Company’s net loss for the three months ended March 31, 2009, decreased $7.2
million to $7.5 million from $14.7 million for the three months ended March 31,
2008. Our depreciation and amortization expense for the three months ended March
31, 2009, decreased $3.0 million to $33.6 million from $36.6 million in
2008. During the first quarter of 2009, we entered into amendments to
some of our original programming agreements which extended the current license
period to those titles and thus resulted in lower amortization in the first
quarter of 2009 compared to the first quarter of 2008. On January 5, 2009,
pursuant to the Waiver Agreement, the Company paid $3.9 million for interest on
the 2001, 2005 and 2006 Notes that accrued from November 16, 2008, through
December 31, 2008. Additions to non-affiliate program license fee assets and
corresponding license fees payable increased from $17.5 million during March 31,
2008, as compared to additions of $53.0 million during March 31,
2009.
Cash used
in investing activities was $1.3 million and $304,000 for the three months ended
March 31, 2008 and 2009, respectively. During the three months ended March 31,
2008 and 2009, the Company paid $1.1 million and $223,000, respectively, to the
buyer of the international business (which occurred in April 2005) for amounts
due under the terms of the sale agreement, primarily for reimbursement of
transponder lease payments.
Cash
provided by financing activities was $2.1 million and $3.3 million for the three
months ended March 31, 2008 and 2009, respectively. We borrowed $18.8 million
and $12.4 million under our credit facility to supplement the cash requirements
of our operating and investing activities during the three months ended March
31, 2008 and 2009, respectively. We repaid principal of $16.5 million and $8.9
million under our bank credit facility during the three months ended March 31,
2008 and 2009, respectively.
The
Company experienced a decrease in cash amounts received resulting from lower
revenue and lower rates of cash collections, with total cash receipts declining
from $71.8 million to $69.9 million during the three months ended March 31, 2008
and 2009, respectively.
Cash
Flows
Overview
Operational
cash flows for 2009 are expected to differ substantially from the actual cash
flows in 2008. We anticipate that we will pay interest on our 2001,
2005 and 2006 Hallmark Notes of approximately $20.0 million to $23.0 million
during 2009. Although our amortization expense has declined, based on the terms
of our programming agreements, our programming cash payments will be higher in
2009 as compared to 2008. Due to potential decrease in advertising revenue
caused by current economic conditions, cash receipts in 2009 may be less than in
2008. The combination of these factors will decrease the amount of
any principal repayments under our bank credit facility during 2009 as compared
to 2008, but we intend to maintain our compliance with our bank and Hallmark
Cards covenants.
As of
March 31, 2009, the Company had $5.3 million in cash and cash equivalents on
hand and $12.9 million of current borrowing capacity under the bank credit
facility. Day-to-day cash disbursement requirements have typically
been satisfied with cash on hand and operating cash receipts supplemented with
the borrowing capacity available under the bank credit facility and forbearance
by Hallmark Cards and its affiliates. The Company’s management
anticipates that the principal uses of cash up to May 1, 2010, will include the
payment of operating expenses, accounts payable and accrued expenses,
programming costs, interest and repayment of principal under the bank credit
facility and interest of approximately $20.0 million to $25.0 million due under
certain notes to the Hallmark Cards affiliates.
Operating
activities for the year ended December 31, 2008, yielded positive cash flow
while the three months ended March 31, 2009, yielded slightly negative cash
flow. There can be no assurance that the Company’s operating activities will
generate positive cash flow in future periods.
Another
significant aspect of the Company’s liquidity is the deferral of payments on
obligations owed to Hallmark Cards and its subsidiaries. Under the Amended and
Restated Waiver Agreement as amended with Hallmark Cards and its affiliates (the
“Waiver Agreement”), the deferred payments under such obligations are extended
to May 1, 2010.
The
Company believes that cash on hand, cash generated by operations, and borrowing
availability under its bank credit facility through March 31, 2010, when
combined with (1) the deferral of any required payments on related-party debt,
any 2009 tax sharing payments and related interest on the 10.25% Senior Secured
Note described under the Waiver Agreement, and (2) if necessary, Hallmark Cards’
purchase of any outstanding indebtedness under the bank credit facility on March
31, 2010, as described below, will be sufficient to fund the Company’s
operations and enable the Company to meet its liquidity needs through May 1,
2010.
The
sufficiency of the existing sources of liquidity to fund the Company’s
operations is dependent upon maintaining subscriber and advertising revenue at
or near the amount of such revenue for the year ended December 31, 2008. A
significant decline in the popularity of the Channels, a further economic
decline in the advertising market, an increase in program acquisition costs, an
increase in competition or other adverse changes in operating conditions could
negatively impact the Company’s liquidity and its ability to fund the current
level of operations. Since the second quarter of 2008, the Company
has experienced a softening of advertising rates in the direct response and
general rate scatter market. The Company expects this softening to
continue throughout 2009, has implemented certain cost containment measures for
2009, and has a limited number of additional, contingent cost cutting measures
that could be implemented in the remainder of 2009 depending on market
conditions.
In March
2009, effective April 1, 2009, the bank credit facility’s maturity date was
extended to March 31, 2010, and the bank’s lending commitment was set at $45.0
million. The Company’s ability to pay amounts outstanding on the
maturity date is highly dependent upon the Company’s ability to generate
sufficient, timely cash flow from operations between January 1, 2009 and March
31, 2010. Based on the Company’s forecasts for 2009 and 2010, which
assume no principal payments on notes payable to Hallmark Cards and its
affiliates, the Company would have sufficient cash to repay all or most of the
bank credit facility on the maturity date, if necessary. However,
there is uncertainty in the U.S. economy and the advertising market, so it is
possible that the cash flow may be less than the expectations of the Company’s
management.
Upon
maturity of the credit facility on March 31, 2010, to the extent the
facility has not been paid in full, renewed or replaced, the Company could
require under the Waiver Agreement that Hallmark Cards purchase the interest of
the lending bank in the facility. In that case, Hallmark Cards would
have all the obligations and rights of the lending bank under the bank credit
facility and could demand payment of outstanding amounts at any time after May
1, 2010, under the terms of the Waiver Agreement.
Because
of the Company’s possible inability to meet its obligations when they come due
on and after May 1, 2010, the Company anticipates that prior to May 1, 2010, it
will be necessary to either extend or refinance (i) the bank credit
facility and (ii) the promissory notes payable to affiliates of Hallmark
Cards. As part of a combination of actions and in order to obtain additional
funding, the Company may consider various alternatives, including restructuring
of the debt if possible, refinancing the bank credit facility, raising
additional capital through the issuance of equity or debt securities, or other
strategic alternatives. If the current credit market conditions continue, a
restructuring or refinancing could be difficult to achieve.
Upon
maturity of the bank credit facility on March 31, 2010, if not renewed or
refinanced, the Company will not have a comparable credit
facility. In that case, the Company would be solely dependent upon
day-to-day operating cash receipts to meet its cash requirements.
Should
there be a sustained recession in the United States, rising unemployment or
continued declines in discretionary income, the Company’s revenue and margins
could be significantly affected in 2009 and the future years. The
Company cannot predict whether, when or the manner in which the economic
conditions will change.
Bank
Credit Facility, Hallmark Notes, and Tax Sharing Agreement
For
information regarding our Bank Credit Facility, Hallmark Notes and Tax Sharing
Agreement, please see “Bank Credit Facility, Hallmark Notes, and Tax Sharing
Agreement” of the Company’s Annual Report on Form 10-K as filed with the SEC for
the year ended December 31, 2008. Also, please see Notes 4, 5 and 6 of Notes to
Unaudited Condensed Consolidated Financial Statements contained in Item 1 of
this Report.
The
Company will endeavor to extend or refinance the bank credit facility prior to
or upon its maturity. Any such extension or refinancing could require
the continuing guaranty or other support from Hallmark Cards in regard to the
bank credit facility or other steps by the Company and, thus, is not
assured. Upon maturity of the credit facility on March 31, 2010, to
the extent the facility has not been paid in full, renewed or replaced, the
Company could require under the Waiver Agreement that Hallmark Cards purchase
the interest of the lending bank in the facility. In that case,
Hallmark Cards would have all the obligations and rights of the lending bank
under the bank credit facility and could demand payment of outstanding amounts
any time after May 1, 2010 under the terms of the Waiver Agreement.
Risk
Factors and Forward-Looking Statements
The
discussion set forth in this Form 10-Q contains statements concerning potential
future events. Such forward-looking statements are based on assumptions by Crown
Media Holdings management, as of the date of this Form 10-Q including
assumptions about risks and uncertainties faced by Crown Media Holdings. Readers
can identify these forward-looking statements by their use of such verbs as
"expects," "anticipates," "believes," or similar verbs or conjugations of such
verbs. If any of management's assumptions prove incorrect or should
unanticipated circumstances arise, Crown Media Holdings' actual results, levels
of activity, performance, or achievements could materially differ from those
anticipated by such forward-looking statements.
Among the
factors that could cause actual results to differ materially are those discussed
in this Report below and in the Company’s filings with the Securities and
Exchange Commission, including the Risk Factors stated in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2008, and this Report. Such
Risk Factors include, but are not limited to, the
following: competition for distribution of channels, viewers,
advertisers and the acquisition of programming; fluctuations in the availability
of programming; fluctuations in demand for programming which we air on our
channels; our ability to address our liquidity needs; our incurrence of losses;
and our substantial indebtedness affecting our financial condition and
results.
Available
Information
We
will make available free of charge through our website, www.hallmarkchannel.com,
the 2008 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.
Additionally,
we will make available, free of charge upon request, a copy of our Code of
Business Conduct and Ethics, which is applicable to all of our employees,
including our senior financial officers. Requests for a copy of this code should
be addressed to the General Counsel at 12700 Ventura Boulevard, Studio City,
California 91604.
Item
3. Quantitative and
Qualitative Disclosures About Market Risk
We only
invest in instruments that meet high credit and quality standards, as specified
in our investment policy guidelines. These instruments, like all fixed income
instruments, are subject to interest rate risk. The fixed income portfolio will
decline in value if interest rates increase. If market interest rates were to
increase immediately and uniformly by 10% from levels as of March 31, 2009, the
decline of the fair value of the fixed income portfolio would not be
material.
As of
March 31, 2009, our cash, cash equivalents and short-term investments had a fair
value of $5.3 million and were invested in cash and short-term commercial paper.
The primary purpose of these investing activities has been to preserve principal
until the cash is required to fund operations. Consequently, the size of this
portfolio fluctuates significantly as cash is provided by and used in our
business.
The value
of certain investments in this portfolio can be impacted by the risk of adverse
changes in securities and economic markets and interest rate fluctuations. For
the three months ended March 31, 2009, the impact of interest rate fluctuations,
changed business prospects and all other factors did not have a material impact
on the fair value of this portfolio, or on our income derived from this
portfolio.
We have
not used derivative financial instruments for speculative purposes. As of March
31, 2009, we are not hedged or otherwise protected against risks associated with
any of our investing or financing activities.
We
are exposed to market risk.
We are
exposed to market risk, including changes to interest rates. To reduce the
volatility relating to these exposures, we may enter into various derivative
investment transactions in the near term pursuant to our investment and risk
management policies and procedures in areas such as hedging and counterparty
exposure practices. We have not used derivatives for speculative
purposes.
If we use
risk management control policies, there will be inherent risks that may only be
partially offset by our hedging programs should there be any unfavorable
movements in interest rates or equity investment prices.
The
estimated exposure discussed below is intended to measure the maximum amount we
could lose from adverse market movements in interest rates and equity investment
prices, given a specified confidence level, over a given period of
time. Loss is defined in the value at risk estimation as fair market
value loss.
Our
interest income and expense is subject to fluctuations in interest
rates.
Our
material interest bearing assets consisted of cash equivalents and short-term
investments. The balance of our interest bearing assets was $5.3 million, or
less than 1% of total assets, as of March 31, 2009. Our material liabilities
subject to interest rate risk consisted of our bank credit facility, our note
and interest payable to HC Crown, and our notes and interest payable to Hallmark
Cards affiliates. The balance of those liabilities was $372.8 million, or 26% of
total liabilities, as of March 31, 2009. Net interest expense for the three
months ended March 31, 2009, was $24.8 million, 36%, of our total revenue. Our
net interest expense for these liabilities is sensitive to changes in the
general level of interest rates, primarily U.S. and LIBOR interest rates. In
this regard, changes in U.S. and LIBOR (“Eurodollar”) interest rates affect the
fair value of interest bearing liabilities.
If market
interest rates were to increase or decrease by 1% from levels as of March 31,
2009, our interest expense for the three months would change correspondingly by
$933,000.
Item
4. Controls and
Procedures.
a. Disclosure
Controls and Procedures
Our
management evaluated, with the participation of our Chief Executive Officer and
our Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Quarterly Report on Form
10-Q. Based on this evaluation, our Chief Executive Officer and our Chief
Financial Officer have concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this Quarterly Report on
Form 10-Q.
b. Changes
in Internal Control over Financial Reporting
There was
no change in the Company’s internal control over financial reporting that
occurred during the quarter ended March 31, 2009, that materially affected, or
was reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART
II. OTHER INFORMATION
Item
1A. Risk Factors
The
bankruptcy of Charter Communications could affect our revenue
adversely.
Charter
Communications, which accounts for approximately 5% of our subscribers,
commenced a Chapter 11 bankruptcy on March 27, 2009, in order to implement a
financial restructuring. Although there is a pre-arranged plan which
is subject to approval in the proceeding and which provides for acceptance of
trade contracts and obligations, the bankruptcy could result in a rejection (in
essence, a cancellation) of our distribution agreement with Charter
Communications, thereby potentially decreasing our subscriber revenue. These
effects depend on the final plan adopted in the bankruptcy proceeding of Charter
Communication. These effects also depend on whether we would be able
to renegotiate a new distribution agreement with Charter Communications if the
agreement is rejected or with any purchaser of Charter Communications during or
after the bankruptcy and whether there are any different terms in any
renegotiated agreement. If Charter Communications would be acquired by another
distributor in the bankruptcy proceeding, the distribution agreement of the
acquiring party may become applicable.
Item
5. Other
Information.
The
Company has granted Long Term Incentive Compensation Agreements (“LTI
Agreements”) to vice presidents and above at the Company, which LTI Agreements
were signed on May 4, 2009. The target award under each LTI
Agreements is a percentage of the employee’s base salary and range from $26,000
to $825,000 for executive officers of the Company. Of each award, 50%
is an Employment Award and 50% is a Performance Award. The Employment
Award will vest and be settled in cash on August 31, 2011, subject to earlier
pro rata settlement as provided in the LTI Agreement. The Performance
Award will vest and be settled in cash 50% on December 31, 2010, and 50% on
December 31, 2011, in accordance with the Company performance criteria
concerning adjusted EBITDA and cash flow and subject to earlier pro rata
settlement as provided in the LTI Agreement. Early settlement is
provided in the case of involuntary termination of employment without cause on
or after January 1, 2010, death or disability. Potential payouts
under the Performance Awards depend on achieving 90% or higher of a target
threshold and range from 0% to 150% of the target award. The
Company’s Compensation Committee has the ability to increase or decrease the
payout based on an assessment of demographics achieved, relative market
conditions and management of expenses.
Item
6. Exhibits
INDEX
TO EXHIBITS
Exhibit
Number
|
Exhibit
Title
|
3.1
|
Amended
and Restated Certificate of Incorporation (previously filed as Exhibit 3.1
to our Registration Statement on Form S-1/A (Amendment No. 2), Commission
File No. 333-95573, and incorporated herein by
reference).
|
3.2
|
Amendment
to the Amended and Restated Certificate of Incorporation (previously filed
as Exhibit 3.2 to our Quarterly Report on Form 10-Q filed on July 31, 2001
(File No. 000-30700; Film No. 1693331) and incorporated herein by
reference).
|
3.3
|
Amended
and Restated By-Laws (previously filed as Exhibit 3.2 to our Registration
Statement on Form S-1/A (Amendment No. 3), Commission File No. 333-95573,
and incorporated herein by reference).
|
10.1
|
Amendment
4 to Amended and Restated Waiver and Standby Purchase Agreement dated May
4, 2009, by and between Hallmark Cards Incorporated and Crown Media
Holdings, Inc.
|
10.2*
|
Form
of 2009 Long Term Incentive Compensation Agreement effective as of January
1, 2009 by and between Crown Media Holdings, Inc. and
Employee.
|
31.1
|
Rule
13a-14(a) Certification executed by the Company's Chief Executive
Officer.
|
31.2
|
Rule
13a-14(a) Certification executed by the Company's Executive Vice President
and Chief Financial Officer.
|
32
|
Section
1350 Certifications.
|
_______________________________________________________________________________________________________________________________________________________________________________________________________
*Management
contract or compensating plan or arrangement.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
CROWN MEDIA HOLDINGS,
INC.
Signature
|
Title
|
Date
|
|
|
|
By: /s/ HENRY S.
SCHLEIFF
|
Principal
Executive Officer
|
May
7, 2009
|
Henry
S. Schleiff
|
|
|
|
|
|
By: /s/ BRIAN C.
STEWART
|
Principal
Financial
and Accounting
Officer
|
May
7, 2009
|
Brian
C. Stewart
|
|
|
|
|
|