Crown Media Holdings Announces Operating Results for Fourth Quarter of 2009

Crown Media Holdings, Inc. (NASDAQ:CRWN) today reported its operating results for the quarter and year ended December 31, 2009.

Operating Highlights

• Popular holiday programming. Hallmark Channel had a strong fourth quarter in terms of ratings and finished 2009 in the top ten among the 76 ad-supported cable networks for Prime Time household ratings, according to Nielsen. Based on the popularity of its holiday programming, Hallmark Channel recorded its highest rated week and month for Prime Time and Total Day household ratings and delivery. In addition, the channel finished the year among the top ten cable networks for women 25-54 in Total Day for the third consecutive year.
• Programming expansion. Hallmark Channel introduced several new programs during the holiday season which contributed to the positive ratings results, including several skating specials, coverage of the 121^st Rose Parade, a movie night hosted by hoops&yoyo, one of Hallmark Cards’ most popular animated characters, and Jack Hanna’s Animal Adventures.
• Expanded distribution of Hallmark Movie Channel. The channel added 15.7 million subscribers to end the year in 29.1 million homes, more than doubling its subscriber count in just 12 months, and making Hallmark Movie Channel the fastest-growing cable television network in 2009. Hallmark Movie Channel is now in over 32.5 million homes and available in all top 70 markets.
• Increase in Adjusted EBITDA. Adjusted EBITDA increased 9% for the quarter to $25.4 million, from $23.3 million in the fourth quarter of 2008, due primarily to management’s successful efforts to control costs and an increase in subscriber fees. For 2009, the company delivered a record high adjusted EBITDA of $81.6 million, representing an increase of 23% over 2008.
• Partnership with Martha Stewart Living Omnimedia. Subsequent to the end of the quarter, the Company announced a programming partnership with Martha Stewart Living Omnimedia for the exclusive airing of the popular lifestyle series. Beginning in September 2010, Hallmark Channel will introduce a two and a half-hour block of programming, anchored by The Martha Stewart Show weekdays at 10:00 a.m., followed by an additional 90 minutes of programming with related lifestyle content to be developed by the partnership. The partnership will also develop a series of holiday-themed Prime Time specials throughout the year.
• Recapitalization by Hallmark Cards. Also subsequent to the end of the quarter, the Company announced that it had approved and executed definitive agreements relating to a recapitalization of Crown Media. The transaction will convert approximately $600 million of the Company’s debt from Hallmark Cards to common stock, and exchange $500 million of existing debt into $315 million of new debt and $185 million of convertible preferred stock.

"Although we continue to be impacted by the economic challenges facing our industry, we finished the year with a strong fourth quarter of ratings success for the holiday season,” noted Bill Abbott, President and CEO of Crown Media. "With effective cost-cutting measures implemented throughout the year and increases in our subscriber fee revenues, we were able to deliver a record year of Adjusted EBITDA.

"We have been successful in broadening our programming at Hallmark Channel with a variety of new specials which we aired during the year, and the upcoming introduction of The Martha Stewart Show in a two and a half-hour lifestyle programming block. This growing distinction between our two channels, and the tremendous expansion in distribution for Hallmark Movie Channel, will enable both channels to deliver strong results in 2010 and achieve their full revenue potential in the long-term. In addition, we believe that the recently announced recapitalization and the significant reduction in our debt will help us maintain the operating health of our company.”

Financial Results

Historical financial information is provided in tables at the end of this release.

Crown Media reported revenue of $77.6 million for the fourth quarter of 2009, a 3% increase from $75.2 million for the fourth quarter of 2008. Subscriber fee revenue increased 14% to $16.4 million, from $14.5 million in the prior year’s quarter. Subscriber revenue increased in 2009 primarily due to an increase in the number of Hallmark Channel pay subscribers and small contractual rate increases. Advertising revenue increased 1% to $60.8 million during the quarter, from $60.4 million in the fourth quarter of 2008. The slight increase in advertising revenue during the fourth quarter of 2009 is due to increased advertising pricing.

Crown Media reported revenue of $279.6 million for the year ended December 31, 2009, a 1% decrease from $281.8 million for the same period of 2008. Subscriber fee revenue for the year ended December 31, 2009, increased 11% to $63.6 million, from $57.2 million in the prior year. Advertising revenue decreased 4% to $214.5 million during the year ended December 31, 2009, from $223.4 million for 2008, primarily due to declines in viewer ratings across demographic categories for 2009 compared 2008.

For the fourth quarter of 2009, cost of services increased 11% to $40.5 million from $36.6 million during the same quarter of 2008. Within cost of services, programming expenses decreased 2% quarter over quarter to $32.3 million. Other cost of services and amortization of our capital lease decreased 4% from $3.6 million to $3.4 million for the fourth quarter of 2009. Salary expense also decreased primarily due to the resignation of one executive in May 2009.

During the fourth quarter of 2009, we exercised our rights to terminate two agreements in connection with our January 2010 launch of the Hallmark Channel in high definition. The estimated costs of termination were approximately $4.7 million.

Termination of one agreement also resulted in a change in the estimated life of a related deferred credit that arose in connection with the sale of our international business in 2005. After launch of the high definition service, recurring monthly expenses under the terminated agreement will cease. Accordingly, in the fourth quarter of 2009, we reduced the deferred credit by approximately $847,000 and recognized a gain on the sale of discontinued operations.

For the year ended December 31, 2009, cost of services decreased to $147.6 million from $153.8 million during 2008. Within cost of services, programming expenses decreased 9% period over period to $127.5 million. In the second and third quarters of 2008, the Company entered into amendments to significant programming agreements which added programs and deferred certain payments for programming content to periods beyond 2008. Some of the amendments resulted in the extension of related program licenses to cover slightly longer periods of availability, the deferral of expected delivery of certain programming and the deferral of certain payments primarily from 2008 until 2009. The Company prospectively changed the amortization of program license fees for any changes in the period of expected usage and/or changes in license fee. The effects of these amendments on 2008 amortization were not significant. Other cost of services and amortization of capital lease increased 17% from $13.1 million to $15.3 million for the year ended December 31, 2009, due to the $980,000 increase in severance expense recorded in 2009 and the Company’s bad debt expense of $1.3 million for the year ended December 31, 2009, as compared to $75,000 for the year ended December 31, 2008.

Selling, general and administrative expenses increased to $12.1 million for the quarter ended December 31, 2009, from $8.6 million in the year earlier period primarily due to increases in compensation related to our share-based obligations of $1.8 million and bonus expenses of $2.5 million offset in part by a $593,000 decrease in salary expense and a $372,000 decrease in legal expense. Marketing expenses of $595,000 for the quarter ended December 31, 2009, decreased from $6.5 million for the quarter ended December 31, 2008. As part of our cost reduction efforts, promotional and marketing efforts were reduced overall during the 2009 quarter compared to the fourth quarter of 2008.

In December 2009 the Company concluded that payments for residuals and participations under its liability to RHI would occur generally later than originally estimated in December 2006. Accordingly, the Company reduced the carrying amount of the liability by $682,000 and recognized a corresponding gain from sale of film assets in the accompanying statement of operations.

Selling, general and administrative expenses increased to $47.1 million for the year ended December 31, 2009, from $46.6 million in 2008. Marketing expenses decreased to $6.6 million for the year ended December 31, 2009, from $19.6 million in 2008. The Company had five marketing promotions in 2008 centered on five original movies. The Company had one significant marketing promotion in January 2009 centered on an original movie.

Adjusted EBITDA was $25.4 million for the fourth quarter of 2009 compared to $23.3 million for the same period last year. Cash provided by operating activities totaled $4.2 million for the fourth quarter of 2009 compared to $6.5 million for the same period last year. The net income for the quarter ended December 31, 2009, totaled $373,000, or $0.00 per share, compared to $1.3 million, or $0.01 per share, in the fourth quarter of 2008.

Adjusted EBITDA totaled $81.6 million for the year ended December 31, 2009, compared to $66.2 million for last year. Cash provided by operating activities totaled $37.6 million for the year ended December 31, 2009, compared to $48.1 million for last year. The net loss for the year ended December 31, 2009, totaled $22.6 million, or $0.22 per share, compared to $37.2 million, or $0.36 per share, in the same period of 2008.

The independent registered public accounting firm’s opinion on the consolidated financial statements of the Company for the year ended December 31, 2009 contains a going concern explanatory paragraph. The Company has significant short-term debt obligations that raise substantial doubt about its ability to continue as a going concern. Management’s plan is to convert these short-term obligations into new debt, convertible preferred stock and common stock by completing the Recapitalization mentioned above.

Conference Call and Webcast to be Held Thursday, March 4^th at 11:00 a.m. ET

Crown Media Holdings’ management will conduct a conference call this morning at 11:00 a.m., Eastern Time to discuss the results of the fourth quarter of 2009. Investors and interested parties may listen to the call via a live webcast accessible through the investor relations’ section of the Company’s web site at www.hallmarkchannel.com, or by dialing (866) 800-8648 (Domestic) or (617) 614-42702 (International) and requesting the "Fourth Quarter Earnings for Crown Media” call. For those listeners accessing the call through the Company’s website, please register and download audio software at the site at least 15 minutes prior to the start time. The webcast will be archived on the site, while a telephone replay of the call is available for 7 days beginning at 1:00 p.m. Eastern Time, March 4^th, at 888-286-8010 or 617-801-6888 (international callers), using reservation number 79835684.

About Crown Media Holdings

Crown Media Holdings, Inc. (NASDAQ:CRWN) owns and operates cable television channels dedicated to high quality, broad appeal, entertainment programming. The Company currently operates and distributes Hallmark Channel in both high definition (HD) and standard definition (SD) to nearly 90 million subscribers in the U.S. Hallmark Channel consistently ranks among the highest-rated cable networks and is one of the nation’s leading networks in providing quality family programming. Crown Media also operates a second 24-hour linear channel, Hallmark Movie Channel, available in both HD and SD, featuring the greatest movies of all time. Significant investors in Crown Media Holdings include: Hallmark Entertainment Holdings, Inc., a subsidiary of Hallmark Cards, Incorporated, Liberty Media Corp., and J.P. Morgan Partners (BHCA), LP, each through their investments in Hallmark Entertainment Investments Co.; VISN Management Corp., a for-profit subsidiary of the National Interfaith Cable Coalition: and The DIRECTV Group, Inc.

Forward-looking Statements

Statements contained in this press release may contain forward-looking statements as contemplated by the 1995 Private Securities Litigation Reform Act that are based on management’s current expectations, estimates and projections. Words such as "expects,” "anticipates,” "intends,” "plans,” "believes,” "estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected or implied in the forward-looking statements. Such risks and uncertainties include: competition for distribution of channels, viewers, advertisers, and the acquisition of programming; fluctuations in the availability of programming; fluctuations in demand for the programming Crown Media airs on its channels; our ability to address our liquidity needs; our incurrence of losses; our substantial indebtedness affecting our financial condition and results; and other risks detailed in the Company’s filings with the Securities and Exchange Commission, including the Risk Factors stated in the Company’s most recent 10-K and 10-Q Reports. Crown Media Holdings is not undertaking any obligation to release publicly any updates to any forward looking statements to reflect events or circumstances after the date of this release or to reflect the occurrence of unanticipated events.

Use of Adjusted EBITDA

Crown Media evaluates operating performance based on several factors, including Adjusted EBITDA. Our calculation of Adjusted EBITDA adds back non-cash expenses and other items mentioned below.

Our measure of Adjusted EBITDA differs from the normal definition of EBITDA (earnings before interest, taxes, depreciation and amortization) used by most companies. We define Adjusted EBITDA as earnings before interest, taxes, depreciation, amortization, subscriber acquisition fee amortization, amortization of film assets, impairment charges, and other non-cash expenses. For this purpose, restricted stock unit compensation is treated as a non-cash item, although it may result in cash payments during subsequent periods. Our credit facility contained a covenant that used this adjusted EBITDA measure. The Company no longer has an EBITDA covenant in its bank credit agreement. See "Selected Fourth Quarter Unaudited Financial Information” below for a reconciliation to GAAP net income. Management views Adjusted EBITDA as a critical measure of our operating performance and monitors this measure closely. We disclose Adjusted EBITDA so that our investors can have some of the same information available to our management to evaluate their investment in our Company.

We also believe that an Adjusted EBITDA provides an indication of the Company's ability to generate cash flows from operating activities since our non-cash expenses are excluded from our calculation of Adjusted EBITDA. The Adjusted EBITDA calculation allows the Company to assess how much is available to pay debt service and gives a further indication of how much remains to fund discretionary expenditures such as the acquisition of programming or additional subscriber base. However, Adjusted EBITDA should be considered in addition to, not as a substitute for, historical operating income or loss, net loss, cash flow from operations and other measures of financial performance reported in accordance with accounting principles generally accepted in the United States.

Adjusted EBITDA differs significantly from cash flows from operating activities reflected in the consolidated statement of cash flows. Cash flow from operating activities is net of interest and taxes paid and is a more comprehensive determination of periodic income on a cash basis, exclusive of non-cash items of income and expenses such as depreciation, amortization, loss from discontinued operations and impairment of film assets. In contrast, Adjusted EBITDA is derived from accrual basis income and is not reduced for cash invested in working capital. Consequently, Adjusted EBITDA is not affected by the timing of receivable collections or when accrued expenses are paid. We are not aware of any uniform standards for determining EBITDA or our Adjusted EBITDA and believe that our calculation of Adjusted EBITDA is probably calculated differently than presentations of EBITDA by other entities because our calculation was based upon the definition in a bank credit agreement.