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** **

 

** **

**UNITEDSTATES 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  June 30, 2008** |
|                                                   |   |   |
| **or**                                                 |
|                                                   |   |   |
| **o******                                              | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d)****OF THE  SECURITIES EXCHANGE ACT OF 1934** |

** **

**For the transition periodfrom                    to                    .**

 

**Commission File Number: 000-30700**

 

**Crown Media Holdings, Inc.**

(Exact Name of Registrant as Specified in ItsCharter)

 

| ** ** | ** ** | **Delaware**                     | ** ** |                                  | ** ** |   |
|------------|------------|----------------------------------|------------|---------------------------------------|------------|--------|
|       |       | (State or Other Jurisdiction  of |       | **84-1524410**                        |       |   |
|       |       | Incorporation or Organization)   |       | (I.R.S. Employer Identification  No.) |       |   |

** **

**12700 Ventura Boulevard,**

**Suite 200**

**Studio City, California  91604**

(Address of Principal Executive Offices and ZipCode)

 

**(818) 755-2400**

(Registrant’s Telephone Number, Including AreaCode)

 

(Former Name, Former Address, and Former FiscalYear,

if Changed Since Last Report.)

 

Indicate by check markwhether the registrant:  (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes  x     No o

 

Indicate by check mark whether the registrant isa large accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company.  Seedefinition of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 ofthe Exchange Act. (Check one):

Large accelerated filer o                                      Acceleratedfiler x

 
| Non-accelerated  filer (do not check if a smaller reporting company) o |   | Smaller  reporting company o |
|------------------------------------------------------------------------|--------|------------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes o   No x

 

As of August 4, 2008,the number of shares of Class A Common Stock, $.01 par value outstandingwas 74,117,654, and the number of shares of Class B Common Stock, $.01 parvalue, outstanding was 30,670,422.

 

 

 

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**TABLE OF CONTENTS**

** **
| ** **       | ** ** | ** **                                                                                             | ** ** | **Page** |
|------------------|------------|--------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**  | ** ** | **Financial Information**                                                                              |       |     |
|             |       |                                                                                                   |       |     |
| Item 1           |       | Financial Statements  (Unaudited)                                                                      |       | 3        |
|             |       | CROWN  MEDIA HOLDINGS, INC. AND SUBSIDIARIES                                                           |       |     |
|             |       | Condensed  Consolidated Balance Sheets – December 31, 2007 andJune 30, 2008 (Unaudited) |       | 3        |
|             |       | Condensed Consolidated Statements  of Operations and Comprehensive Loss (Unaudited)                    |       |     |
|             |       | - Three and Six Months Ended  June 30, 2007 and 2008                                              |       | 5        |
|             |       | Condensed Consolidated  Statements of Cash Flows (Unaudited)                                           |       |     |
|             |       | - Six Months Ended  June 30, 2007 and 2008                                                        |       | 6        |
|             |       | Notes to Unaudited Condensed Consolidated Financial  Statements                                        |       | 7        |
|             |       |                                                                                                   |       |     |
| Item 2           |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations            |       | 23       |
|             |       |                                                                                                   |       |     |
| Item 3           |       | Quantitative  and Qualitative Disclosures About Market Risk                                            |       | 33       |
|             |       |                                                                                                   |       |     |
| Item 4           |       | Controls and  Procedures                                                                               |       | 34       |
|             |       |                                                                                                   |       |     |
| **PART II** | ** ** | **Other Information**                                                                                  |       | 34       |
|             |       |                                                                                                   |       |     |
| Item 4           |       | Submission  of Matters to a Vote of Security Holders                                                   |       | 34       |
|             |       |                                                                                                   |       |     |
| Item 6           |       | Exhibits                                                                                               |       | 35       |
|             |       |                                                                                                   |       |     |
| Signatures       |       |                                                                                                   |       | 36       |

 

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*In this Form 10-Q the terms “Crown Media Holdings”andthe “Company” refer to Crown Media Holdings, Inc. and, unless the contextrequires otherwise, subsidiaries of Crown Media Holdings that operate or haveoperated our businesses including Crown Media United States, LLC (“Crown MediaUnited States”). The term “common stock” refers to our Class A commonstock and Class B common stock, unless the context requires otherwise.*

* *

*Thename Hallmark and other product or service names are trademarks or registeredtrademarks of their owners.*

* *

**PART I. FINANCIALINFORMATION**

** **

**Item 1.  *FinancialStatements (Unaudited)***

 

**CROWN MEDIA HOLDINGS, INC. ANDSUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(In thousands, except par valueand number of shares)**

** **
| ** **                                                                                  | ** ** | **As of December 31,** | ** ** | **As of June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                  | ** ** | **2007**                              | ** ** | **2008**                          | ** ** |
| ASSETS                                                                                      |       |                                  |       |                              |       |
|                                                                                        |       |                                  |       |                              |       |
| Cash and cash equivalents                                                                   |       | $                                     | 1,974      |                              | $          | 277 |   |
| Accounts receivable, less  allowance for doubtful accounts of  $242  and $247, respectively |       | 68,603                                |       | 67,247                            |       |
| Program license fees —  affiliates                                                     |       | 166                                   |       | 975                               |       |
| Program license fees —  non-affiliates                                                 |       | 119,523                               |       | 100,206                           |       |
| Prepaid and other assets                                                                    |       | 4,478                                 |       | 4,601                             |       |
| Prepaid program license fee  assets                                                         |       | 8,361                                 |       | 20,195                            |       |
| Total current assets                                                                        |       | 203,105                               |       | 193,501                           |       |
|                                                                                        |       |                                  |       |                              |       |
| Program license fees —  affiliates                                                     |       | 653                                   |       | 7,641                             |       |
| Program license fees —  non-affiliates                                                 |       | 129,268                               |       | 137,835                           |       |
| Subscriber acquisition fees,  net                                                           |       | 3,333                                 |       | 4,436                             |       |
| Property and equipment, net                                                                 |       | 15,962                                |       | 16,070                            |       |
| Goodwill                                                                                    |       | 314,033                               |       | 314,033                           |       |
| Prepaid and other assets                                                                    |       | 9,887                                 |       | 8,403                             |       |
| Total assets                                                                                |       | $                                     | 676,241    |                              | $          | 681,919 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

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**CROWN MEDIA HOLDINGS, INC. ANDSUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATEDBALANCE SHEETS**

**(In thousands, except par valueand number of shares)**

**(continued)**

 
| ** **                                                                                                                                                                                                                                                                      | ** ** | **As of December 31,** | ** ** | **As of June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                      | ** ** | **2007**                              | ** ** | **2008**                          | ** ** |
|                                                                                                                                                                                                                                                                            |       |                                  |       |                              |       |
| LIABILITIES AND STOCKHOLDERS’  DEFICIT                                                                                                                                                                                                                                     |       |                                  |       |                              |       |
|                                                                                                                                                                                                                                                                            |       |                                  |       |                              |       |
| LIABILITIES:                                                                                                                                                                                                                                                                    |       |                                  |       |                              |       |
| Accounts payable and accrued  liabilities                                                                                                                                                                                                                                       |       | $                                     | 25,255     |                              | $          | 18,569 |   |
| Audience deficiency reserve  liability                                                                                                                                                                                                                                          |       | 15,620                                |       | 15,390                            |       |
| Accrued restricted stock units                                                                                                                                                                                                                                                  |       | 4,609                                 |       | 3,040                             |       |
| License fees payable to  affiliates                                                                                                                                                                                                                                             |       | 1,628                                 |       | 1,365                             |       |
| License fees payable to  non-affiliates                                                                                                                                                                                                                                         |       | 107,749                               |       | 114,015                           |       |
| Payables to affiliates                                                                                                                                                                                                                                                          |       | 18,951                                |       | 17,054                            |       |
| Credit facility and interest  payable                                                                                                                                                                                                                                           |       | 19,583                                |       | 54,502                            |       |
| Other current liabilities                                                                                                                                                                                                                                                       |       | 5,979                                 |       | 4,146                             |       |
| Total current liabilities                                                                                                                                                                                                                                                       |       | 199,374                               |       | 228,081                           |       |
| Accrued liabilities                                                                                                                                                                                                                                                             |       | 18,056                                |       | 17,236                            |       |
| License fees payable to  affiliates                                                                                                                                                                                                                                             |       | —                                |       | 7,391                             |       |
| License fees payable to  non-affiliates                                                                                                                                                                                                                                         |       | 56,521                                |       | 56,385                            |       |
| Payables to affiliates                                                                                                                                                                                                                                                          |       | 4,041                                 |       | 1,784                             |       |
| Credit facility                                                                                                                                                                                                                                                                 |       | 50,000                                |       | —                            |       |
| Note and interest payable to  HC Crown                                                                                                                                                                                                                                          |       | 101,360                               |       | 105,445                           |       |
| Note and interest payable to  Hallmark Cards affiliate                                                                                                                                                                                                                          |       | 57,868                                |       | 60,186                            |       |
| Senior secured note to HC  Crown, including accrued interest                                                                                                                                                                                                                    |       | 621,266                               |       | 653,106                           |       |
| Note and interest payable to  Hallmark Cards affiliate                                                                                                                                                                                                                          |       | 158,753                               |       | 165,113                           |       |
| Note and interest payable to  Hallmark Cards                                                                                                                                                                                                                                    |       | 22,075                                |       | 11,088                            |       |
| Company obligated mandatorily  redeemable preferred  interest                                                                                                                                                                                                                   |       | 18,690                                |       | 19,888                            |       |
| Other liabilities                                                                                                                                                                                                                                                               |       | 19,232                                |       | 17,701                            |       |
| Obligation to NICC for the repurchase of  Class A common stock, extinguished without cash on January 2, 2008,  per the agreement, $.01 par value;  4,357,066 and 0 shares issued and  outstanding  as of December 31, 2007 and June 30, 2008,  respectively |       | 32,765                                |       | —                            |       |
| Total liabilities                                                                                                                                                                                                                                                               |       | 1,360,001                             |       | 1,343,404                         |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                   |       |                                  |       |                              |       |
| STOCKHOLDERS’ DEFICIT:                                                                                                                                                                                                                                                     |       |                                  |       |                              |       |
| Class A common stock,  $.01 par value; 200,000,000 shares authorized; 69,760,588 and 74,117,654  shares issued and outstanding as of December 31, 2007 and June 30,  2008,  respectively                                                                         |       | 698                                   |       | 741                               |       |
| Class B common stock,  $.01 par value; 120,000,000 shares  authorized;  30,670,422 shares issued and outstanding as of December 31, 2007 and  June 30, 2008                                                                                                      |       | 307                                   |       | 307                               |       |
| Paid-in capital                                                                                                                                                                                                                                                                 |       | 1,411,291                             |       | 1,454,162                         |       |
| Accumulated deficit                                                                                                                                                                                                                                                             |       | (2,096,056                            | )          | (2,116,695                        | )          |
| Total stockholders’ deficit                                                                                                                                                                                                                                                |       | (683,760                              | )          | (661,485                          | )          |
| Total liabilities and  stockholders’ deficit                                                                                                                                                                                                                               |       | $                                     | 676,241    |                              | $          | 681,919 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

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**CROWN MEDIA HOLDINGS, INC. ANDSUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND**

**COMPREHENSIVE LOSS**

**(In thousands, except per sharedata)**

 
| ** **                                                                                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2007**                                        | ** ** | **2008**                                      | ** ** | **2007** | ** ** | **2008** | ** ** |
| Revenue:                                                                                         |       |                                            |       |                                          |       |   |   |   |   |
| Subscriber fees                                                                                  |       | $                                               | 6,507      |                                          | $          | 14,579 |   | $ | 14,002 |   | $ | 28,432 |   |
| Advertising                                                                                      |       | 49,081                                          |       | 56,538                                        |       | 94,931 |   | 112,886 |   |
| Advertising by Hallmark Cards                                                                    |       | 242                                             |       | 82                                            |       | 390 |   | 157 |   |
| Other revenue                                                                                    |       | 77                                              |       | 321                                           |       | 156 |   | 609 |   |
| Total revenue, net                                                                               |       | 55,907                                          |       | 71,520                                        |       | 109,479 |   | 142,084 |   |
| Cost of Services:                                                                                |       |                                            |       |                                          |       |   |   |   |   |
| Programming costs                                                                                |       |                                            |       |                                          |       |   |   |   |   |
| Affiliates                                                                                       |       | 4,340                                           |       | 541                                           |       | 9,902 |   | 935 |   |
| Non-affiliates                                                                                   |       | 34,049                                          |       | 35,100                                        |       | 68,179 |   | 70,111 |   |
| Amortization of film assets                                                                      |       | (521                                            | )          | —                                        |       | (521 | ) | — |   |
| Subscriber acquisition fee  amortization expense                                                 |       | 7,832                                           |       | —                                        |       | 15,680 |   | — |   |
| Amortization of capital lease  obligation                                                        |       | 290                                             |       | 290                                           |       | 579 |   | 579 |   |
| Other costs of services                                                                          |       | 2,312                                           |       | 3,304                                         |       | 5,260 |   | 6,484 |   |
| Total cost of services                                                                           |       | 48,302                                          |       | 39,235                                        |       | 99,079 |   | 78,109 |   |
| Selling, general and  administrative expense                                                     |       | 14,057                                          |       | 11,865                                        |       | 28,250 |   | 25,326 |   |
| Marketing expense                                                                                |       | 4,073                                           |       | 2,060                                         |       | 8,285 |   | 8,458 |   |
| Depreciation and amortization  expense                                                           |       | 396                                             |       | 492                                           |       | 893 |   | 924 |   |
| (Loss) income from operations                                                                    |       | (10,921                                         | )          | 17,868                                        |       | (27,028 | ) | 29,267 |   |
| Interest income                                                                                  |       | 356                                             |       | 1,012                                         |       | 744 |   | 1,202 |   |
| Interest expense                                                                                 |       | (33,097                                         | )          | (24,804                                       | )          | (57,586 | ) | (51,108 | ) |
| Net loss and comprehensive  loss                                                                 |       | $                                               | (43,662    | )                                             | $          | (5,924 | ) | $ | (83,870 | ) | $ | (20,639 | ) |
| Weighted average number of  Class A and Class B shares  outstanding, basic and diluted |       | 104,788                                         |       | 104,788                                       |       | 104,788 |   | 104,764 |   |
| Net loss per share, basic and  diluted                                                           |       | $                                               | (0.42      | )                                             | $          | (0.06 | ) | $ | (0.80 | ) | $ | (0.20 | ) |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

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**CROWN MEDIA HOLDINGS, INC. ANDSUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

** **
| ** **                                                                                                                                                  | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                                                  | ** ** | **2007**                                          | ** ** | **2008** | ** ** |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                                                                                                      | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net loss                                                                                                                                                    |       | $                                                 | (83,870    | ) | $ | (20,639 | ) |
| Adjustments to reconcile net  loss to net cash used in operating activities:                                                                                |       |                                              |       |   |   |
| Depreciation and amortization                                                                                                                               |       | 97,474                                            |       | 73,583 |   |
| Accretion on company obligated  mandatorily redeemable preferred interest                                                                                   |       | 1,103                                             |       | 1,198 |   |
| Provision for allowance for  doubtful accounts                                                                                                              |       | (13                                               | )          | 5 |   |
| Residuals and participations                                                                                                                                |       | (521                                              | )          | 96 |   |
| Impairment of film asset                                                                                                                                    |       | —                                            |       | 176 |   |
| Loss on sale of property and  equipment                                                                                                                     |       | 39                                                |       | — |   |
| Stock-based compensation                                                                                                                                    |       | 4,530                                             |       | 1,044 |   |
| Changes in operating assets  and liabilities:                                                                                                               |       |                                              |       |   |   |
| (Increase) decrease in  accounts receivable                                                                                                                 |       | (1,857                                            | )          | 1,352 |   |
| Additions to program license  fees                                                                                                                          |       | (76,648                                           | )          | (68,093 | ) |
| Deletions (additions) to  subscriber acquisition fees                                                                                                       |       | 120                                               |       | (2,443 | ) |
| Increase in prepaid and other  assets                                                                                                                       |       | (8,206                                            | )          | (11,359 | ) |
| Decrease in accounts payable,  accrued and other liabilities                                                                                                |       | (893                                              | )          | (11,331 | ) |
| Increase in interest payable                                                                                                                                |       | 41,203                                            |       | 43,687 |   |
| (Decrease) increase in  subscriber acquisition fees payable                                                                                                 |       | (218                                              | )          | 933 |   |
| Increase in license fees  payable to affiliates                                                                                                             |       | 1,531                                             |       | 7,128 |   |
| Increase in license fees  payable to non-affiliates                                                                                                         |       | 8,813                                             |       | 6,129 |   |
| Increase (decrease) in  payables to affiliates                                                                                                              |       | 9,276                                             |       | (4,154 | ) |
| Decrease in deferred revenue                                                                                                                                |       | —                                            |       | (313 | ) |
| Net cash (used in) provided by  operating activities                                                                                                        |       | (8,137                                            | )          | 16,999 |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                                                                                                      |       |                                              |       |   |   |
| Purchases of property and  equipment                                                                                                                        |       | (583                                              | )          | (1,267 | ) |
| Payments to buyer of  international business                                                                                                                |       | (1,984                                            | )          | (2,019 | ) |
| Net cash used in investing  activities                                                                                                                      |       | (2,567                                            | )          | (3,286 | ) |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                                                                                                      |       |                                              |       |   |   |
| Borrowings under the credit  facility                                                                                                                       |       | 6,000                                             |       | 18,761 |   |
| Principal payments on the  credit facility                                                                                                                  |       | (2,000                                            | )          | (33,810 | ) |
| Principal payments on capital  lease obligations                                                                                                            |       | (328                                              | )          | (361 | ) |
| Net cash provided by (used in)  financing activities                                                                                                        |       | 3,672                                             |       | (15,410 | ) |
| Net decrease in cash and cash  equivalents                                                                                                                  |       | (7,032                                            | )          | (1,697 | ) |
| Cash and cash equivalents,  beginning of period                                                                                                             |       | 13,965                                            |       | 1,974 |   |
| Cash and cash equivalents, end  of period                                                                                                                   |       | $                                                 | 6,933      |   | $ | 277 |   |
|                                                                                                                                                        |       |                                              |       |   |   |
| Supplemental disclosure of  cash and non-cash activities:                                                                                                   |       |                                              |       |   |   |
| Interest paid                                                                                                                                               |       | $                                                 | 4,494      |   | $ | 2,899 |   |
| Reclassification of additional  paid-in capital for obligation to return amounts  previously received as capital contributions  under tax sharing agreement |       | $                                                 | 25,192     |   | $ | — |   |
| Tax sharing payment from  Hallmark Cards applied to  note  payable to Hallmark Cards                                                                        |       | $                                                 | —     |   | $ | 10,150 |   |
| 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                                                                      |       | $                                                 | 18,778     |   | $ | 24,747 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

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**CROWN MEDIA HOLDINGS, INC. ANDSUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**For the Three and Six MonthsEnded June 30, 2007 and 2008**

 

**1. Business and Organization**

 

***Organization***

 

Crown Media Holdings, Inc.(“Crown Media Holdings,” “Crown Media” or the “Company”), through itswholly-owned subsidiary, Crown Media United States, LLC (“Crown Media UnitedStates”), owns and operates pay television channels (collectively the “HallmarkChannel” or the “channel”) dedicated to high quality, entertainment programmingfor adults and families, in the United States. Significant investors in CrownMedia Holdings include Hallmark Entertainment Investments Co. (“HallmarkEntertainment Investments”), a subsidiary of Hallmark Cards, Incorporated (“HallmarkCards”), the National Interfaith Cable Coalition, Inc. (“NICC”), and,indirectly through their investments in Hallmark Entertainment Investments,Liberty Media Corporation (“Liberty Media”) and J.P. Morgan Partners (BHCA), L.P. (“J.P. Morgan”).

 

The Company’s continuing operations are currentlyorganized into one operating segment, the domestic channels.

 

***Liquidity***

*** ***

Asof June 30, 2008, the Company had $277,000 in cash and cash equivalents onhand and borrowing capacity under the bank credit facility of $5.5million.  Day-to-day cash disbursementrequirements have typically been satisfied with cash on hand and operating cashreceipts supplemented with the borrowing capacity available under the bankcredit facility.

 

Operating activities for the year ended December 31,2007, yielded positive cash flow as have the first two quarters of 2008.  However, there can be no assurance that theCompany’s operating activities will continue to generate positive cash flow.

 

InMarch 2008, the bank credit facility was extended to May 31, 2009,and the bank’s lending commitment was reduced to $90.0 million.  This commitment decreased to $60.0 million onJune 30, 2008, at which time the Company owed $54.5 million. The bank’scommitment will decrease further to $50.0 million on September 30, 2008,and $45.0 million on March 31, 2009. The Company believes that its ability to comply with the scheduledreductions in borrowing capacity and to pay any amount outstanding uponmaturity is highly dependent upon its ability to generate cash flows fromoperations between June 30, 2008, and the respective dates on which thecommitment will be reduced or otherwise expire.  See Note 5.

 

Also in March 2008, the Company and HallmarkCards entered into an Amended and Restated Waiver Agreement which changed thematurity date of three obligations and deferred payments under certainobligations.  See Note 6.

 

Previously, the Company’s tax sharing agreement withHallmark Cards has also been a source of cash from financing activities. Morerecently, benefits to the Company under the tax sharing agreement have beenused to reduce amounts owed to Hallmark Cards and its affiliates.  Nonetheless, pursuant to the provisions ofthe tax sharing agreement, the Company may be required to pay cash to HallmarkCards as early as May 2009.

 

TheCompany’s recurring net loss situation necessitates that we continue to monitorand control all areas of expenses, including programming, marketing anddistribution.  The Company anticipatesthat its principal uses of cash during the next twelve months will continue toinclude the payment of operating expenses, accounts payable and accruedexpenses, license fees for programming, interest and repayment of principal 

 

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under its bank creditfacility, interest under certain notes payable to Hallmark Cards affiliates andpayments under the tax sharing agreement with Hallmark Cards. If the Companyhas excess cash flows, as defined in the Waiver Agreement, for the year ended December 31,2008, the Company will be required to use such excess cash flow in the firstquarter of 2009 to reduce debt under the bank credit facility or obligations toHallmark Cards and its affiliates.  SeeNote 6.

 

The sufficiency of the existing sources of liquidityto fund the Company’s operations is dependent upon maintaining subscriberrevenue at or above the amount of such revenue for the six months ended June 30,2008, and continuing growth in advertising revenue. A significant decline inthe popularity of the Hallmark Channel, a significant economic decline in theadvertising market, an increase in program acquisition costs, an increase incompetition or other adverse changes in operating conditions could negativelyimpact the Company’s liquidity and its ability to fund the current level ofoperations.  During the second quarter of2008 the Company experienced a softening of advertising rates in the scattermarket.  The Company expects thissoftening to continue through the fourth quarter of 2008.

 

TheCompany will endeavor to extend or refinance the bank credit facility prior toor upon its maturity.  Any such extensionor refinancing could require the continuation of a letter of credit fromHallmark Cards in support of the bank credit facility or other steps by the Companyand, thus, is not assured.  Upon maturity of the credit facility on May 31, 2009,without payment in full, renewal or replacement, JP Morgan Chase Bank, N.A.,will have the right to forego a call on Hallmark Cards’ irrevocable letter ofcredit and instead initiate foreclosure against the Company’s assets. Suchforeclosure proceedings would adversely affect our ability to continue ouroperations. However, prior to any such possible foreclosure, if the Company hadnot secured a refinancing of the credit facility or alternative financing, the Companywould require Hallmark Cards to exercise its option, pursuant to the terms ofthe Waiver Agreement, to purchase all of the outstanding indebtedness under thecredit facility. The credit facility would then be subject to terms of theWaiver Agreement.

 

The2001, 2005 and 2006 notes mentioned below mature on December 31, 2009.Amounts currently due under these notes are $105.4 million, $165.1 million and$60.2 million, respectively. The Tax Note in the amount of $11.1 millionmatures on July 27, 2009. Additionally, at June 30, 2008, non-interest bearing unpaid accrued service feesand unreimbursed expenses of $14.6 million were included in payable toaffiliates on the accompanying consolidated balance sheet. Finally, VISNowns a $25.0 million company obligated mandatorily redeemable preferredmembership interest in Crown Media United States that is redeemable no laterthan December 31, 2010.

 

Becauseof the Company’s possible inability to meet its obligations when they come dueon May 31, 2009 and later dates in 2009 through December 31, 2009,the Company anticipates that prior to May 2009, it will be necessary toeither extend or refinance (i) the bank credit facility and (ii) thepromissory notes payable to affiliates of Hallmark Cards described in the Notesbelow. As part of a combination of actions and in order to obtain additionalfunding, the Company may consider various alternatives, including refinancingthe bank credit facility, raising additional capital through the issuance ofequity or debt securities, or other strategic alternatives.

 

TheCompany believes that cash on hand, cash generated by operations, and borrowingavailability under its bank credit facility through May 31, 2009, whencombined with the deferral of any required payments on related-party debt andrelated interest described below, and, if necessary, Hallmark Cards’ purchaseof the outstanding indebtedness under the bank credit facility in May 2009as described below, will be sufficient to fund the Company’s operations andenable the Company to meet its liquidity needs through June 30, 2009.

 

Finally,if the Company fulfills its obligation to repay the bank credit facility by May 31,2009, but thereafter, does not have a comparable credit facility, the Companywill be solely dependent upon day-to-day operating cash receipts to meets itscash disbursement requirements.

 

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***Transactions with NICC***

 

On October 28, 2007, NICC purportedly exercisedthe Put Right, described below in Note 8, by making formal demand that theCompany purchase all of the 4,357,066 shares of Class A common stock ownedby NICC.  The Company subsequentlyinformed NICC that exercise of the Put Right constituted a breach of a bindingagreement in September 2007 whereby NICC agreed not to exercise the PutRight.

 

NICC proposed that its purchase demand be settled on January 4,2008.  If the Company repurchased theshares as requested, the settlement amount would have been $32.8 million, basedon the 30-day average closing price from October 8, 2007 through November 16,2007, inclusive.

 

As more fully described below in Note 8, the Company and NICC signedthe Modification Agreement on January 2, 2008 whereby the Company’sobligation under the Put Right was immediately extinguished.  The Modification Agreement also resolved arelated dispute with respect to expiration or survival of a prior provisionwhich would have required the Company to pay NICC $15.0 million upon a changein control of the Company.  Pursuant tothe Modification Agreement, the Company will pay NICC a total of $3.8 millionin equal installments of $1.3 million on each January 20 of 2008, 2009 and2010.  In addition, the Company willprovide NICC with two-hours of broadcast time each Sunday morning during 2008and 2009 at no cost to NICC. We estimate the value of the broadcast time to be$1.5 million.  Its discounted value was recordedas deferred revenue at December 31, 2007 and will be amortized to revenueratably over NICC’s two year use. The Company is also obligated to pay NICC anestimated $3.7 million in quarterly installments at the rate of 6% of theoutstanding liquidation preference of the CMUS preferred interest owned by VISNManagement Corp. (“VISN”), a wholly-owned subsidiary of NICC, through December 31,2010.

 

***Classification of Redeemable Common Stock***

*** ***

AtDecember 31, 2007, the Company classified 4,357,066 shares of Class Acommon stock and $32.8 million associated with the purported exercise of thePut Right referred to above as redeemable common stock. The shares and relatedamount were reclassified to common stock and paid-in capital on January 2,2008, in connection with the NICC Modification Agreement discussed above and inNote 8.

 

**2. Summary of SignificantAccounting Policies and Estimates**

 

***InterimFinancial Statements***

 

In the opinion of management, the accompanyingcondensed consolidated balance sheets and related interim condensedconsolidated statements of operations and cash flows include all adjustments,consisting of normal recurring items necessary for their fair presentation inconformity with accounting principles generally accepted in the United States.Interim results are not necessarily indicative of results for a full year. Thesecondensed consolidated financial statements should be read in conjunction withthe audited consolidated financial statements and the notes to those statementsfor the year ended December 31, 2007, included in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2007.

 

***Basis of Presentation***

*** ***

The condensed consolidated financial statements includethe consolidated accounts of Crown Media Holdings, including those of itswholly owned subsidiaries. All significant intercompany balances andtransactions have been eliminated in consolidation.

 

***Net Loss per Share***

 

Basic net loss per share is computed by dividing the netloss for the period by the weighted average number of common shares outstandingduring the period. Diluted net loss per share is computed based on the weightedaverage number of common shares and potentially dilutive common sharesoutstanding. The calculation of diluted net loss per share excludes potentialcommon shares if the effect would be antidilutive. 

 

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Potentialcommon shares consist of incremental common shares issuable upon the exercise ofstock options. Approximately 360,000 and 341,000 stock options for the threeand six months ended June 30, 2007 and 2008, respectively, have beenexcluded from the calculations of loss per share because their effect wouldhave been anti-dilutive.

 

The 4,357,066 shares related toNICC’s purported exercise of the Put Right have been excluded from thedetermination of weighted average shares outstanding through January 1,2008.

 

***Concentration of Credit Risk***

*** ***

Financial instruments, which potentially subject Crown Media Holdingsto a concentration of credit risk, consist primarily of cash, cash equivalentsand accounts receivable. Generally, Crown Media Holdings does not requirecollateral to secure receivables. Crown Media Holdings has no significantoff-balance sheet financial instruments with risk of accounting losses.

 

Five and four of our distributors each accounted for more than 10% ofour consolidated subscriber revenue for both the three months ended June 30,2007 and 2008, and together accounted for a total of 91% and 67% ofconsolidated subscriber revenue for those periods, respectively.  Four and three of our distributors eachaccounted for more than 15% of our subscribers for the three months ended June 30,2007 and 2008, and together accounted for 77% and 62% of our subscribers onthose dates, respectively.

 

Five of our distributors each accounted for more than 10% of ourconsolidated subscriber revenue for both the six months ended June 30,2007 and 2008, and together accounted for a total of 92% and 78% ofconsolidated subscriber revenue for those periods, respectively.  Four and three of our distributors eachaccounted for more than 15% of our subscribers for the six months ended June 30,2007 and 2008, and together accounted for 77% and 62% of our subscribers onthose dates, respectively.

 

***Reclassifications***

 

Certain reclassifications havebeen made to conform the prior period’s financial information to the currentpresentation.

 

In December 2007, theCompany classified “The Note” as a $2.4 million program license fee – affiliateand the related one month amortization of $40,000 as programming costs –affiliate.  The Company is a co-owner ofthis film. The Company has reclassified $2.0 million as a film asset and$362,000 as an accounts receivable in the accompanying December 31, 2007,balance sheet.

 

During the second quarter of 2007, the Company reducedits estimate of a residual and participation liability related to the Company’suse of the film assets prior to the sale to RHI for $521,000 less than it hadoriginally accrued.  The Companyrecognized a gain on the sale of film assets in this amount during this timeperiod. During the third quarter of 2007,the Company reclassified the $521,000 gain on sale of film assets to negativeamortization of film assets.

 

***Recently Issued Accounting Pronouncements***

*** ***

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157 (“SFAS 157”), *Fair Value Measurements,* in order toestablish a single definition of fair value and a framework for measuring fairvalue in generally accepted accounting principles that is intended to result inincreased consistency and comparability in fair value measurements.SFAS 157 also expands disclosures about fair value measurements, with theintention of improving the quality of information provided to users offinancial statements. The standard applies whenever other authoritativeliterature requires (or permits) certain assets or liabilities to be measuredat fair value, but does not expand the use of fair value.

 

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SFAS 157 was originally effective for financialstatements issued for fiscal years beginning after November 15, 2007, andinterim periods within those years with early adoption permitted. In early2008, the FASB issued Staff Position (FSP) FAS-157-2, which delayed by oneyear, the effective date of SFAS 157 for all non-financial assets andnon-financial liabilities, except those that are recognized or disclosed atfair value in the financial statements on a recurring basis (at leastannually). The delay pertains to items including, but not limited to,non-financial assets and non-financial liabilities initially measured at fairvalue in a business combination, reporting units measured at fair value in thefirst step of evaluating goodwill for impairment under SFAS 142, *Goodwill and Other Intangible Assets*, indefinite-livedintangible assets measured at fair value for impairment assessment under SFAS142, and long-lived assets measured at fair value for impairment assessmentunder SFAS 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*. The Company adopted theportion of SFAS 157 that has not been delayed by FSP FAS-157-2 as of January 1,2008, and plans to adopt the balance of its provisions as of January 1,2009.

 

The Company does not have balance sheet items carriedat fair value on a recurring basis (to which SFAS 157 applies in2008) such as derivative financial instruments which are valued primarilybased on quoted prices in active or brokered markets for identical as well assimilar assets and liabilities. Balance sheet items carried at fair value on anon-recurring basis (to which SFAS 157 will apply in 2009) consist ofgoodwill, property and equipment, subscriber acquisition fees and the filmasset. The adoption of SFAS 157 in 2008 has had no effect on themeasurement of the Company’s financial assets and liabilities. The Company iscontinuing to evaluate the impact the standard will have on the determinationof fair value related to non-financial assets and non-financial liabilities inpost-2008 years.

 

In February 2007, the FASB issued Statement ofFinancial Accounting Standards No. 159 (“SFAS 159”), *Establishing the Fair Value Option for FinancialAssets and Liabilities*. The FASB has issued SFAS 159 to permitall entities to elect, at specified election dates, to measure eligiblefinancial instruments at fair value. An entity shall report unrealized gainsand losses on items for which the fair value option has been elected inearnings at each subsequent reporting date, and recognize upfront costs andfees related to those items in earnings as incurred and not deferred.SFAS 159 applies to fiscal years beginning after November 15, 2007,with early adoption permitted for an entity that has also elected to apply theprovisions of SFAS 157. An entity is prohibited from retrospectivelyapplying SFAS 159, unless it chooses early adoption. SFAS 159 alsoapplies to eligible items existing at November 15, 2007 (or early adoptiondate). The Company adopted SFAS 159 effective January 1, 2008.  The Company has not elected to measureeligible financial instruments at fair value. Accordingly, SFAS 159 hashad no effect on the Company’s condensed consolidated balance sheets or resultsof operations.

 

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3,*Determination of the Useful Life of IntangibleAssets* (“FSP 142-3”). FSP 142-3 amends the factors to be consideredin developing renewal or extension assumptions used to determine the usefullife of intangible assets under SFAS No. 142, *Goodwill andOther Intangible Assets*. Its intent is to improve the consistencybetween the useful life of an intangible asset and the period of expected cashflows used to measure its fair value. This FSP is effective for us on January 1,2009. We are still in the process of evaluating the impact FSP 142-3, but donot expect it to have a material impact on our Consolidated FinancialStatements.

 

The FASB issued Statement of Financial Accounting Standards No. 162(“SFAS 162”), *The Hierarchy of GenerallyAccepted Accounting Principles,*in May 2008.  This Statement identifies the sources ofaccounting principles and the framework for selecting the principles to be usedin the preparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles (GAAP) inthe United States (the GAAP hierarchy).  This Statement will becomeeffective 60 days following the SEC’s approval of the Public Company AccountingOversight Board amendments to AU Section 411, The Meaning of PresentFairly in Conformity With Generally Accepted Accounting Principles.  TheCompany does not expect that the adoption of this statement will have amaterial effect on the Company’s financial statements.

 

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** **

**3. Subscriber Acquisition Fees**

 

Subscriber acquisition fees are comprised of thefollowing:

 
| ** **                            | ** ** | **As of December 31,** | ** ** | **As of June 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|
| ** **                            | ** ** | **2007**                              | ** ** | **2008**                          | ** ** |
| ** **                            | ** ** | **(In thousands)**               | ** ** |
| Subscriber acquisition fees,  at cost |       | $                                     | 9,837      |                              | $          | 11,530 |   |
| Accumulated amortization              |       | (6,504                                | )          | (7,094                            | )          |
| Subscriber acquisition fees,  net     |       | $                                     | 3,333      |                              | $          | 4,436 |   |

 

*Of thenet balance at June 30, 2008, the Company expects $4.4 million will berecognized as a reduction of subscriber fee revenue in future periods.*

* *

Asof December 31, 2007, and June 30, 2008, the condensed consolidatedbalance sheets also reflect subscriber acquisition fees payable of $29,000 and$962,000, respectively, as a component of accounts payable and accruedliabilities. For the three months ended June 30, 2007 and 2008, theCompany made cash payments of $39,000 and $1.5 million, respectively, relatingto current subscriber acquisition fee obligations. For the six months ended June 30,2007 and 2008, the Company made cash payments of $96,000 and $1.5 million,respectively, relating to current subscriber acquisition fee obligations.

 

**4. Program License Fees**

 

Programlicense fees are comprised of the following:

 
| ** **                                                 | ** ** | **As of December 31,** | ** ** | **As of June 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|
| ** **                                                 | ** ** | **2007**                              | ** ** | **2008**                          | ** ** |
| ** **                                                 | ** ** | **(In thousands)**               | ** ** |
| Program license fees—RHI  Entertainment  Distribution |       | $                                     | 244,920    |                              | $          | 268,230 |   |
| Program license fees—NICC                             |       | 197                                   |       | 180                               |       |
| Program license fees—Hallmark  Cards affiliates       |       | 918                                   |       | 9,018                             |       |
| Program license fees—other  non-affiliates            |       | 297,816                               |       | 299,718                           |       |
| Program license fees, at cost                              |       | 543,851                               |       | 577,146                           |       |
| Accumulated amortization                                   |       | (294,241                              | )          | (330,489                          | )          |
| Program license fees, net                                  |       | $                                     | 249,610    |                              | $          | 246,657 |   |

 

AtDecember 31, 2007, and June 30, 2008, respectively, an additional$8.4 million and $20.2 million of program license fees were included in prepaidprogram license fee assets on the accompanying condensed consolidated balancesheets as the Company made payments for the program license fees prior tocommencement of the license period.

 

License fees payable are comprised of the following:

 
| ** **                                                 | ** ** | **As of December 31,** | ** ** | **As of June 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|
| ** **                                                 | ** ** | **2007**                              | ** ** | **2008**                          | ** ** |
| ** **                                                 | ** ** | **(In thousands)**               | ** ** |
| License fees payable—RHI  Entertainment  Distribution |       | $                                     | 21,427     |                              | $          | 44,936 |   |
| License fees payable—NICC                             |       | 1,078                                 |       | 358                               |       |
| License fees payable—Hallmark  Cards affiliates       |       | 550                                   |       | 8,398                             |       |
| License fees payable—other  non-affiliates            |       | 142,843                               |       | 125,464                           |       |
| Total license fees payable                                 |       | 165,898                               |       | 179,156                           |       |
| Less current maturities                                    |       | (109,377                              | )          | (115,380                          | )          |
| Long-term license fees payable                             |       | $                                     | 56,521     |                              | $          | 63,776 |   |

 

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**5. Credit Facility**

 

ByAmendment No. 14 in March 2008, the maturity date of the bank creditfacility was extended to May 31, 2009. Under this Amendment, the amounts available under this facility havebeen, and will continue to be, reduced from $130.0 million as follows:

 
| **Date**                | ** ** | **Revolving Credit Commitment** | ** ** |
|-------------------------|------------|-------------------------------------------|------------|
| March 10, 2008     |       | $                                         | 90,000,000 |   |
| June 30, 2008      |       | $                                         | 60,000,000 |   |
| September 30, 2008 |       | $                                         | 50,000,000 |   |
| March 31, 2009     |       | $                                         | 45,000,000 |   |

 

TheCompany had at June 30, 2008, $5.5 million of unused revolving creditcapacity. Other than with respect to the scheduled decreases in borrowingcapacity described above, the Company’s ability to borrow additional amountsunder the credit facility is not limited or restricted.  The Company and the lending banks originallyentered into the facility in 2001 and have subsequently amended the terms ofthis facility, with the most recent amendment dated as of March 10,2008.  The facility is guaranteed by theCompany’s subsidiaries and is secured by all tangible and intangible propertyof Crown Media Holdings and its subsidiaries.

 

Eachborrowing under the bank credit facility bears interest at a Eurodollar rate oran alternate base rate as the Company may request at the time ofborrowing.  The Eurodollar rate is basedon the London interbank market for Eurodollars, and remains in effect for thetime period of the loan ranging from one, two, three, six or twelvemonths.  The alternate rate is based uponthe prime rate of JP Morgan Chase Bank, a certificate of deposit rate or theFederal Funds effective rate, which is adjusted whenever the rates change.  The Company is required to pay a commitmentfee of 0.15% per annum of the committed, but not outstanding, amounts under therevolving credit facility, payable in quarterly installments.

 

At December 31, 2007, and June 30, 2008, theCompany had outstanding borrowings of $69.5 million and $54.5 million,respectively, under the credit facility and there were no letters of creditoutstanding. At December 31, 2007, $69.5 million of the outstandingbalance bore interest at the Eurodollar rate (5.60% at December 31, 2007)and $0 bore interest at the JP Morgan Chase Bank prime rate. At June 30,2008, $54.5 million of the outstanding balance bore interest at the Eurodollarrate (3.23% at June 30, 2008) and $0 bore interest at the JP Morgan ChaseBank prime rate. Under the credit facility, $1.3 million bore interest at theJP Morgan Chase Bank prime rate (7.25%) for five days during January 2008,$5.8 million bore interest at 7.25% for four days in January 2008, $2.6million bore interest at 6.50% for six days in January 2008, $362,000 boreinterest at 6.00% for six days in January and February 2008, $387,000bore interest at 6.00% for six days in January and February 2008,$6.8 million bore interest at 6.00% for six days in February 2008, and$1.6 million bore interest at 6.00% for four days in February 2008. Interest expense on borrowings under the creditfacility for each of the three months ended June 30, 2007 and 2008, was$1.4 million and $541,000, respectively. Interest expense on borrowings underthe credit facility for each of the six months ended June 30, 2007 and2008, was $2.8 million and $1.4 million, respectively.

 

***Covenants***

 

The credit facility, as amended, contains affirmative and negativecovenants.  The Notes to ConsolidatedFinancial Statements included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2007, contain a detailed description ofthese covenants. The Company was in compliance with these covenants at June 30,2008.

 

**6. Related Party Long-TermObligations**

 

***Waiver and Standby Purchase Agreement***

 

On March 10, 2008, the Company, Hallmark Cards and affiliates of HallmarkCards who hold obligations of the Company entered into an Amended and RestatedWaiver and Standby Purchase Agreement, which was amended on August 1, 2008to extend the waiver period (the “Waiver Agreement”).  The Waiver Agreement replaced a previous 

 

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version of theWaiver and Standby Purchase Agreement dated March 21, 2006 as amendedthrough October 2007.  The WaiverAgreement extended to June 30, 2009 the period during which the Hallmarkparties will defer the payment of obligations listed below.  The March 2008 agreement also includedthe following changes:  The annualaddition of interest to principal on the obligations described below (exceptthe 10.25% Note continues to add interest semi-annually to the principal); theextension of the maturity dates of three notes (the 2001, 2005 and 2006 notesmentioned below) to December 31, 2009; fixing the interest rate of thesethree notes to a rate of LIBOR plus 5%, adjusted quarterly; the accrual andaddition to principal of interest through November 15, 2008 on these threenotes; a requirement to pay interest on these three notes in cash, quarterlycommencing November 16, 2008; and a change to the definition of ExcessCash Flow.  As revised, the WaiverAgreement defers all payments due on any of the following obligations (the “SubjectObligations”) and, except as noted above, payment of interest thereon until June 30,2009, or an earlier date as described below as the waiver termination date,whereupon all of these amounts become immediately due and payable (the “WaiverPeriod”):

 

·                                          Noteand interest payable to HC Crown, dated December 14, 2001, in the originalprincipal amount of $75.0 million, payable to HC Crown. (Total amountoutstanding at December 31, 2007, and June 30, 2008, includingaccrued interest was $101.4 million and $105.4 million, respectively. See *Note and Interest Payable to HC Crown*below.)

 

·                                          $70.0 million note and interest payableto Hallmark Cards affiliate, dated as of March 21, 2006, arising out of the sale to Crown Media Holdings of the HallmarkEntertainment film library. (Total amount outstanding at December 31, 2007, and June 30,2008, including accrued interest was $57.9 million and $60.2 million,respectively. See *Note and Interest Payable to Hallmark CardsAffiliate*below.)

 

·                                          10.25% senior secured note, dated August 5,2003, in the initial accreted value of $400.0 million, payable to HCCrown.  (Total amount outstanding at December 31,2007, and June 30, 2008, including accrued interest was $621.3 million and$653.1 million, respectively. See *Senior Secured Note*below.)

 

·                                          Note and interest payable to Hallmark Cardsaffiliate, dated as of October 1, 2005, in the principal amount of $132.8million. (Total amount outstanding at December 31, 2007, and June 30,2008, including accrued interest was $158.8 million and $165.1 million,respectively. See *Note and Interest Payable to Hallmark CardsAffiliate*below.)

 

·                                          Noteand interest payable to Hallmark Cards in the amount of $33.1 million, dated asof July 27, 2007. (Total amount outstanding at December 31, 2007, andJune 30, 2008, including accrued interest was $22.1 million and $11.1million, respectively. See *Tax Note*below.)

 

·                                          Allobligations of the Company under the bank credit facility by virtue of HallmarkCards’ deemed purchase of participations in all of the obligations under aletter of credit which Hallmark Cards has given in support of the facility orthe purchase by Hallmark Cards of all these obligations pursuant to the bankcredit facility.

 

Hallmark Cards has agreed that it will not accelerate the maturity ofany of the foregoing obligations or initiate collection proceedings during theWaiver Period. Interest will continue to accrue on these obligations during theWaiver Period and will be payable as indicated above. The Company will continueto pay interest on the bank credit facility during the Waiver Period.

 

The waiver termination date is June 30, 2009, or earlier uponoccurrence of any of the following events: (a) the Company fails to pay any principal or interest, regardlessof amount, due on any indebtedness to unrelated parties with an aggregateprincipal amount in excess of $5.0 million or any other event or conditionoccurs that results in any such indebtedness becoming due prior to itsscheduled maturity, provided that the waiver will not terminate if the Companyreduces the principal amount of such indebtedness to $5.0 million or lesswithin five business days of a written notice of termination from HallmarkCards; (b) certain bankruptcy events occur; (c) the Company defaultsin its payment of licensing fees under the Second Amended and Restated ProgramLicense Agreement with RHI 

 

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EntertainmentDistribution (formerly known as Hallmark Entertainment Distribution at whichtime it was a wholly-owned subsidiary of Hallmark Cards); (d) arepresentation and warranty of the Company in the Waiver Agreement is false ormisleading in any material respect; (e) the Company fails to pay intereston the bank credit facility described above to the extent that Hallmark Cardshas purchased all or a portion of the indebtedness thereunder or to perform anycovenants in the Waiver Agreement; or (f) the security agreements grantedto the Hallmark parties shall not remain perfected.

 

Under the Waiver Agreement, if the bank lender under the bank creditfacility accelerates any of the indebtedness under the bank credit facility orseeks to collect any indebtedness under it, the Company may elect to exerciseits right to require that Hallmark Cards or its designated subsidiary exercisean option to purchase all the outstanding indebtedness under the bank creditfacility as provided in the bank credit facility.  All expenses and fees in connection with thispurchase would be added to the principal amount of the credit facilityobligations.

 

The Waiver Agreement does not limit any existing rights of HallmarkCards or its affiliates to offset amounts owed to us under the Hallmark TaxSharing Agreement or as otherwise agreed by us against these obligations.  Additionally, during the Waiver Period,Hallmark Cards is permitted to offset future tax benefits it realizes pursuantto the Tax Sharing Agreement, first against accrued and unpaid interest andthen to the unpaid principal balance of the Tax Note until the earlier of suchtime as the balance reaches zero or the maturity date of the Tax Note.

 

Pursuant to the Waiver Agreement, the Company must make prepayments onthe outstanding debt from 100% of any “Excess Cash Flow” during the WaiverPeriod.   “Excess Cash Flow” is definedas 1) the net proceeds of any debt or equity financings; 2) the net cashproceeds from the sale, transfer or release by the Company of assets outsidethe ordinary course of business; and 3) if positive, the consolidated net cash flow from operations calculated in thesame manner (and subject to the same restrictions on selling, general andadministrative expenses, capital expenditures and similar items) as “Cash FlowBefore Interest, Taxes (including tax sharing payments) and Principal” as setforth in the Crown Media Holdings 2008 budget as approved by the Board ofDirectors of Crown Media Holdings and provided to the Hallmark parties. For2009, the restrictions will be those contained in the 2009 budget to beapproved by the Board of Directors of Crown Media Holdings and reasonablyacceptable to the Hallmark parties.  Anysuch Excess Cash Flow for 2008 will be used, within one business day of thedetermination of the amount (anticipated to be in the first quarter of 2009),to repay amounts outstanding under the bank credit facility; any Excess CashFlow for 2008 remaining after such a payment would be applied to the SubjectObligations listed above.  We expect thatthere will be substantial Excess Cash Flow sufficient to make a payment on thebank credit facility but not for payments to reduce the SubjectObligations.  See Note 1 Business andOrganization – Liquidity for additional information on the Excess Cash Flow for2008.  Similarly, any such Excess CashFlow for 2009 will be payable to Hallmark Cards or its affiliates in the firstquarter of 2010.

 

Additionally, the Waiver Agreement contains thefollowing covenants:  (1) compliancewith obligations in the loan documents for the bank credit facility; (2) executionof additional documents as necessary to implement the waiver agreement; (3) commerciallyreasonable efforts to refinance the obligations subject to the Waiver Period aslisted above; and (4) ratification of the security interests granted tothe Hallmark affiliates in personal property of the Company.

 

***Hallmark Letterof Credit***

 

Concurrentwith the execution of Amendment No. 14, the existing Hallmark Cards’support letter of credit was reissued by JP.Morgan in the face amount of $90.0million and with an expiration date of June 10, 2009.  On July 1, 2008, the face amount wasreduced to $60.0 million, the amount of the outstanding principal of the bankrevolving credit commitment.

 

***Senior SecuredNote***

 

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’soutstanding trust preferred securities, and the balance of the proceeds, afterexpenses, was used to reduce amounts outstanding under its bank creditfacility.

 

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Inaccordance with the Waiver Agreement, cash payments are not required until June 30,2009. The principal amount of the senior secured note accretes at 10.25% perannum, compounding semi-annually, to $596.6 million at August 5,2007.  From that date, interest at 10.25%per annum was scheduled to be payable semi-annually on the accreted value ofthe senior note to HC Crown, but now interest accrued after June 30, 2009,will be payable semi-annually in arrears on August 5 and February 5of each year until maturity.  The notematures on August 5, 2011, and is pre-payable without penalty. At December 31,2007, and June 30, 2008, $621.3 million and $653.1 million, respectively,of principal and interest were included in the senior note payable in theaccompanying consolidated balance sheets. The note purchase agreement for thesenior note contains certain restrictive covenants which, among other things,prevent the Company from incurring any additional indebtedness, purchasing orotherwise acquiring shares of the Company’s stock, investing in other partiesand incurring liens on the Company’s assets. As a fee for the issuance of the notes, the Company paid $3.0 million toHC Crown, which was initially capitalized and is being amortized as additionalinterest expense over the term of the note payable.

 

***Noteand 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 notdue until December 31, 2009. Under the Waiver Agreement, interest on this2001 Note accrues and is added to principal through November 15,2008.  Commencing November 16, 2008,interest will be payable in cash, quarterly in arrears five days after the endof each calendar quarter. This note is subordinate to the bank credit facility.The rate of interest under this note was equal to LIBOR plus 3% and iscurrently LIBOR plus 5% per annum pursuant to the March 2008 amendment tothe Waiver Agreement. At December 31, 2007, and June 30, 2008,borrowings under the note were $93.5 million and $101.3 million, respectively.Accrued interest on the note of $7.9 million and $4.1 million are included innote and interest payable to HC Crown on the accompanying consolidated balancesheets as of December 31, 2007, and June 30, 2008, respectively. At December 31,2007, $93.5 million of the outstanding balance bore interest at the Eurodollarrates of 8.23%. At June 30, 2008, $101.3 million of the outstandingbalance bore interest at the Eurodollar rates of 7.68%. At December 31,2007, and June 30, 2008, $101.4 million and $105.4 million, respectively,are each reported as note and interest payable to HC Crown on the accompanyingcondensed consolidated balance sheets.

 

***Noteand Interest Payable to Hallmark Cards Affiliate***

 

On October 1, 2005, the Company convertedapproximately $132.8 million of its license fees payable to Hallmark affiliatesto a promissory note.  The rate ofinterest under this note was equal to LIBOR plus 3% and is currently LIBOR plus5% per annum pursuant to the March 2008 amendment to the Waiver AgreementPursuant to the Waiver Agreement, the promissory note is payable in full on December 31,2009.  Under the Waiver Agreement,interest on this 2005 Note accrues and is added to principal through November 15,2008.  Commencing November 16, 2008,interest will be payable in cash, quarterly in arrears five days after the endof each calendar quarter. At December 31, 2007, and June 30, 2008,borrowings under the note were $146.4 million and $158.8 million, respectively.Accrued interest on the note of $12.4 million and $6.3 million is included innote and interest payable to Hallmark Cards affiliate on the accompanyingconsolidated balance sheets as of December 31, 2007, and June 30,2008, respectively. At December 31, 2007, $146.4 million of theoutstanding balance bore interest at the Eurodollar rates of 8.23%. At June 30,2008, $158.8 million of the outstanding balance bore interest at the Eurodollarrates of 7.68%. At December 31, 2007, and June 30, 2008, $158.8million and $165.1 million, respectively, are each reported as note andinterest payable to Hallmark Cards affiliate in the accompanying condensed consolidatedbalance sheets.

 

***Noteand Interest Payable to Hallmark Cards Affiliate***

 

On March 21,2006, the Company converted approximately $70.4 million of its payable to aHallmark Cards affiliate to a promissory note. The rate of interest under thisnote was equal to LIBOR plus 3% and is currently LIBOR plus 5% per annumpursuant to the March 2008 amendment to the Waiver Agreement. Pursuant tothe Waiver Agreement, the promissory note is payable in full on December 31,2009. Under the Waiver Agreement, interest on this 2006 Note accrues and isadded to principal through November 15, 2008.  Commencing November 16, 2008, interestwill be payable in cash, quarterly in arrears five days after the end of eachcalendar quarter. At December 31, 2007, and June 30, 2008, borrowingsunder the note were $53.4 million and $57.9 million, respectively. Accruedinterest on the note of $4.5 million and $2.3 million is included in note andinterest payable to Hallmark Cards affiliate on the accompanying consolidatedbalance sheet as of December 31, 2007, and June 30, 

 

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2008,respectively. At December 31, 2007, $53.4 million of the outstandingbalance bore interest at the Eurodollar rates of 8.23%.  At June 30, 2008, $57.9 million of theoutstanding balance bore interest at the Eurodollar rates of 7.68%.  At December 31, 2007, and June 30,2008, $57.9 million and $60.2 million, respectively, are each reported as noteand interest payable to Hallmark Cards affiliate in the accompanying condensedconsolidated balance sheets.

 

***Tax Note***

 

On July 27, 2007, the Company replaced a payableto Hallmark Cards under the Tax Sharing Agreement with a $33.1 millionpromissory note payable to Hallmark Cards due in July 2009 with interestat LIBOR plus 3% per annum (the “Tax Note”). The Tax Note may be prepaid in whole or in part with no penalty.  The Company is not required to make any cashpayments prior to maturity. Until the Tax Note and related interest is paid infull, Hallmark Cards will offset any future tax benefits it realizes pursuantto the Tax Sharing Agreement, first against accrued and unpaid interest andthen against the unpaid principal balance. In September 2007, HallmarkCards offset $6.5 million against $508,000 of accrued and unpaid interest and$6.0 million of unpaid principal. Additionally, in September 2007, theCompany recorded an additional $85,000 charge to interest expense related tothe receipt of an invoice for the actual amount owed in regard to the return oftax benefits under the Tax Sharing Agreement as described above. In December 2007,Hallmark Cards offset $5.7 million against $571,000 of accrued and unpaidinterest and $5.1 million of unpaid principal. In March 2008, HallmarkCards offset $5.1 million against $429,000 of accrued and unpaid interest and$4.6 million of unpaid principal. In June 2008, Hallmark Cards offset $5.1million against $233,000 of accrued and unpaid interest and $4.8 million ofunpaid principal.

 

On April 14, 2008, the Internal Revenue Service refunded to HallmarkCards a portion of the interest previously paid in connection with thedisallowance of certain net operating losses. In July 2008, Hallmark Cards notified the Company that they hadreduced the Company’s indebtedness as of April 14, 2008, under the TaxNote by $1.5 million in consideration of the Company’s applicable portion ofsuch refund. Accordingly, the Company reduced interest expense during the threemonths ended June 30, 2008.

 

At December 31,2007, and June 30, 2008, interest was paid to the respective balance sheetdates. At December 31, 2007, $22.1 million of the outstanding balance boreinterest at the Eurodollar rates of 8.23%. At June 30, 2008, $11.1 million of the outstanding balance boreinterest at the Eurodollar rates of 5.68%. At December 31, 2007, and June 30, 2008, borrowings under thenote were $22.1 million and $11.1 million, respectively, and are each reportedas note and interest payable to Hallmark Cards in the accompanying condensedconsolidated balance sheets.

 

The Tax Note and all payments thereunder aresubordinated to the bank credit facility extended to the Company by JP MorganChase Bank.

 

***Interest Paid to HC Crown***

 

Interestexpense paid to HC Crown was $474,000 for the three months ended June 30,2007, and $322,000 for the three months ended June 30, 2008. Interestexpense paid to HC Crown was $927,000 for the six months ended June 30,2007, and $712,000 for the six months ended June 30, 2008.

 

***Related Party Long-Term Obligations***

 

Theaggregate maturities of related party long-term debt for each of the five yearssubsequent to June 30, 2008, are as follows:

** **
| ** **                                                                                       | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                       | ** ** | **Total**                                 | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** |
| ** **                                                                                       | ** ** | **(In thousands)**                   | ** ** |
| Note and interest payable to HC Crown, with  principal due December 31, 2009                |       | $                                         | 105,445    |   | $ | — |   | $ | 105,445 |   | $ | — |   | $ | — |   | $ | — |   |
| 10.25 % Senior secured note to HC Crown, including  accrued interest, due August 5, 2011    |       | 653,106                                   |       | — |   | — |   | — |   | 653,106 |   | — |   |
| Note and interest payable to Hallmark Cards  affiliate with principal due December 31, 2009 |       | 165,113                                   |       | — |   | 165,113 |   | — |   | — |   | — |   |
| Note and interest payable to Hallmark Cards  affiliate with principal due December 31, 2009 |       | 60,186                                    |       | — |   | 60,186 |   | — |   | — |   | — |   |
| Note and interest payable to Hallmark Cards due  July 27, 2009                              |       | 11,088                                    |       | — |   | 11,088 |   | — |   | — |   | — |   |
|                                                                                             |       | $                                         | 994,938    |   | $ | — |   | $ | 341,832 |   | $ | — |   | $ | 653,106 |   | $ | — |   |

 

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In addition to amounts in the table, any Excess CashFlow for 2008 and 2009 as defined in the Waiver Agreement must be paid on bankdebt or the Subject Obligations, and any tax liability under the Tax SharingAgreement must be paid in cash to Hallmark Cards, unless Hallmark Cards deferssuch required payment.  See also Note 1Business and Organization – Liquidity.

 

**7. Related Party Transactions**

 

***Tax Sharing Agreement***

 

*Overview*

 

OnMarch 11, 2003, Crown Media Holdings became a member of Hallmark Cardsconsolidated federal tax group and entered into a federal tax sharing agreementwith Hallmark Cards (the “tax sharing agreement”). Hallmark Cards includesCrown Media Holdings in its consolidated federal income tax return.  Accordingly, Hallmark Cards has benefitedfrom past tax losses and may benefit from future federal tax losses, which maybe generated by Crown Media Holdings. Based on the tax sharing agreement, Hallmark Cards has agreed to payCrown Media Holdings all of the benefits realized by Hallmark Cards as a resultof including Crown Media Holdings in its consolidated income tax return.  These benefits are estimated and paid 75% incash on a quarterly basis and the balance when Crown Media Holdings becomes afederal taxpayer.  A final true-upcalculation is completed within 15 days after Hallmark Cards files itsconsolidated federal income tax return for the year.  Pursuant to the true-up calculation, CrownMedia Holdings is obligated to reimburse Hallmark Cards the amount that anyestimated payments have exceeded the actual benefit realized by Hallmark Cardsand Hallmark Cards is obligated to pay Crown Media Holdings the amount that anyactual benefit exceeds the estimated payments. Under the tax sharing agreement, at Hallmark Cards’ option, thenon-interest bearing balance of the 25% in federal tax benefits may be appliedas an offset against any amounts owed by Crown Media Holdings to any member ofthe Hallmark Cards consolidated group under any loan, line of credit or otherpayable, subject to limitations under any loan indentures or contractsrestricting such offsets.

 

The Company received $0 and $5.1 million (includingthe $5.1 million offset against the Tax Note during the second quarter of 2008)under the Tax Sharing Agreement during three months ended June 30, 2007and 2008, respectively. The Company received $0 and $10.2 million (includingthe $10.2 million offset against the Tax Note during 2008) under the TaxSharing Agreement during six months ended June 30, 2007 and 2008,respectively. Any payments received from Hallmark Cards or credited againstamounts owed by Crown Media Holdings to any member of the Hallmark Cardsconsolidated group under the tax sharing agreements are recorded as an additionto paid-in capital in the accompanying consolidated statements of stockholders’equity (deficit).

 

*Accounting for Uncertainty inIncome Taxes*

 

Under FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes* (“FIN 48”), ifthe probability for sustaining a tax position is at least more likely than not,then the tax position is warranted and recognition should be at the highestamount which is greater than 50% likely of being realized upon ultimatesettlement. At June 30, 2008, the total amount of unrecognized taxbenefits for uncertain tax positions was $0. The Company recognizes interestand penalties related to uncertain tax positions in income tax expense.  As of the date of adoption and on June 30,2008, we have no accrued interest related to uncertain tax positions.

 

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By virtue of its inclusion in Hallmark Cards consolidatedtax returns, the Company is subject to examination by the Internal RevenueService for periods subsequent to March 10, 2003. Further, net operatingloss carryforwards (“NOL’s”) are subject to examination in the year they areutilized regardless of whether the tax year in which they were generated hasbeen closed by statute.  The amountsubject to disallowance is limited to the NOL utilized.  Accordingly, the Company is subject toexamination for NOL’s generated prior to March 11, 2003 if and when such NOL’sare utilized in future tax returns.

 

The Company  files  state tax  returns  in major  jurisdictions such asCalifornia,  Colorado  and New  York,  and has  also been included in thecombined state tax returns of Hallmark or Hallmark Entertainment Holdings, Inc.The state returns are generally subject to examination for years after 2003.

 

***Services Agreement with Hallmark Cards***

 

The Company has an intercompany services agreementwith Hallmark Cards, which was entered into in 2003 for a term of three yearsand then extended for additional years through January 1, 2009.  Under the agreement, Hallmark Cards providesCrown Media Holdings with tax, risk management, health safety, environmental,insurance, legal, treasury and cash management services and real estateconsulting services.  Under theagreement, the Company agreed to pay Hallmark Cards $546,000 in 2007 and$541,000 in 2008 for these services, plus out-of-pocket expenses and thirdparty fees, payable in arrears on the last business day of each quarter. However, the Company has not paid these amountswith concurrence of Hallmark Cards.

 

For the year ended December 31,2007, Crown Media Holdings had accrued $546,000 under the agreement. For thethree and six months ended June 30, 2008, the Company has accrued $135,000and $270,000 under the agreement. At December 31, 2007, and June 30,2008, non-interest bearing unpaid accrued service fees and unreimbursedexpenses of $13.3 million and $14.6 million, respectively, were included inpayable to affiliates on the accompanying consolidated balance sheets. At December 31,2007, and June 30, 2008, out-of-pocket expenses and third party fees were$1.2 million and $1.0 million, respectively.

 

***“Hallmark Hall of Fame”Programming License Agreement***

 

InMay 2008, Crown Media United States entered into an agreement withHallmark Hall of Fame Productions, Inc. to license 58 “Hallmark Hall ofFame” 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 HallmarkChannel and Hallmark Movie Channel. These titles are licensed for ten year windows, with windows commencingat various times between 2007 and 2010, depending on availability.  This agreement makes the Hallmark Channel andHallmark 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 each movie’s 10year exhibition window.

 

TheCompany aired one title during 2007 and has recorded $550,000 as a license feepayable to affiliate related to this title at December 31, 2007. Windowsopened for additional titles in the amount of $5.7 million and $8.1 millionduring the three and six months ending June 30, 2008.

 

**8. Company Obligated MandatorilyRedeemable Preferred Interest and NICC License Agreements**

 

VISN owns a $25.0 million company obligated mandatorily redeemablepreferred membership interest in Crown Media United States (the “preferredinterest”) issued in connection with an investment by the Company in CrownMedia United States. On November 13, 1998, the Company, Vision Group, VISNand Henson Cable Networks, Inc. signed an amended and restated companyagreement governing the operation of Crown Media United States (the “companyagreement”), 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 yearending after January 1, 2005 and on 

 

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or prior to December 31, 2009, Crown Media United States hasFederal taxable income (with possible adjustments) in excess of $10.0 million,and the preferred interest has not been redeemed, Crown Media United Stateswill redeem the preferred interest in an amount equal to the lesser of: (i) suchexcess Federal taxable income; (ii) $5.0 million; or (iii) the amountequal to the preferred liquidation preference on the date of redemption.  Crown Media United States may voluntarilyredeem the preferred interest at any time; however, it is obligated to do so nolater than December 31, 2010. Due to the mandatory redemption provision ofthe preferred interest, on July 1, 2003, the preferred interest wasremeasured at fair value and reclassified to non-current liabilities inaccordance with the provisions of *Statement of FinancialAccounting Standards  No. 150:Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity (as amended)* (“*SFAS 150*”).At June 30, 2008, the Company reclassified $5.0 million from a currentliability to a long-term liability in the condensed consolidated balance sheet,as management does not believe that the Company will have Federal taxableincome for the year ended December 31, 2008.

 

TheDecember 2005 NICC Settlement Agreement (the “2005 NICC Agreement”)provided that in the event there was a change in control of Crown MediaHoldings prior to the December 31, 2007, expiration of the NICC Agreement,the Company was required to immediately pay NICC (1) $15.0 million (the “TerminationPayment”) (2) any remaining portions of the payments for the non-dramaticspecials and the “made for television” movie development and (3) thedeferred payments. Also, it provided that the Hallmark Channel would beobligated to continue to broadcast and pay for the Sunday “New Morning withNaomi Judd” and weekday “New Morning” series and the Sunday morning programmingblock for an additional six months following the change in control, after whichall funding and broadcast obligations to NICC would cease. Also, under the December 2005NICC Agreement, Crown Media Holdings would be required to redeem the PreferredInterest for $25.0 million plus accrued interest at LIBOR from November 27,2005.  In September 2007 NICCadvised the Company that it believed that, if there were no prior sale of theChannel, the Termination Payment provision would survive the December 31,2007 expiration of the December 2005 NICC Agreement.  The Company believed that the TerminationPayment provision expired on December 31, 2007.

 

The2005 NICC Agreement also granted NICC a conditional right to require theCompany to repurchase all of the shares of the Company’s Class A commonstock then owned by NICC (the “Put Right”). There having been no change in control of the Company, on July 1,2007, NICC and the Company commenced a required 60-day negotiating periodregarding continuation of the programming commitments.  This 60-day period expired August 29,2007, without agreement between the parties. As a result, the Put Right becamecontractually exercisable on August 30, 2007, with a November 1,2007, expiration. However, the Company believes that in September 2007 itreached a binding agreement with NICC, under which NICC agreed it would notexercise the Put Right.

 

NICCpurportedly exercised the Put Right by written notice on October 28, 2007and proposed that the purchase be settled on January 4, 2008.  The determination or resolution of whethercash would be used to satisfy the Put Right was beyond the sole control of theCompany.  Therefore, in accordance with *SFAS 150*, the accompanying consolidated balance sheet as of December 31,2007 reflects a liability of $32.8 million for the pending repurchase ofCompany shares owned by NICC.  Suchamount reflects the 30-day average closing price of the Company’s Class Acommon stock from October 8, 2007 through November 16, 2007,inclusive, as specified in the 2005 NICC Agreement with respect to exercise ofthe Put Right.

 

On January 2, 2008, the Company and NICC resolved the disputesdiscussed above and signed an agreement (the “Modification Agreement”) which,among other things, immediately extinguished the Put Right and the Company’spending obligation.  In addition, theModification Agreement also settled the dispute with respect to whether theTermination Payment provision expired with, or survived, the December 31,2007 expiration of the 2005 NICC Agreement. We agreed to pay NICC $3.8 millionin three equal installments payable each January 20 of 2008, 2009 and2010.  We also agreed to provide NICC atwo-hour broadcast period granted each Sunday morning during the two yearperiod ending December 31, 2009. The discounted value of the broadcast period, estimated to be $1.5million, was recorded as deferred revenue at December 31, 2007. We arealso obligated to pay NICC an estimated $3.7 million in quarterly installmentsat the rate of 6% of the outstanding liquidation preference of the preferredinterest through December 31, 2010. These costs are reflected on the accompanying condensed consolidated 

 

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statement of operations and comprehensive loss for the year ended December 31,2007 as a charge to selling, general and administrative expense at a discountedamount of $8.2 million.  The deferredrevenue will be amortized to revenue ratably over NICC’s two-year use of thebroadcast commitment.

 

Duringthe three months ended June 30, 2007, and 2008, Crown Media United Statespaid NICC $4.0 million and $1.5 million, respectively, related to the companyagreement as amended. During the six months ended June 30, 2007, and 2008,Crown Media United States paid NICC $11.3 million and $6.4 million,respectively, related to the company agreement as amended.

 

**9. Share-Based Compensation**

 

The Company recorded $2.1 million and $328,000 of compensation expenseassociated with the Employment and Performance RSUs during the three monthperiods ended June 30, 2007 and 2008, respectively, and has included suchamounts in selling, general and administrative expense on the accompanyingcondensed consolidated statements of operations and comprehensive loss. TheCompany recorded $3.5 million and $1.7 million of compensation expenseassociated with the Employment and Performance RSUs during the six monthperiods ended June 30, 2007 and 2008, respectively, and has included suchamounts in selling, general and administrative expense on the accompanyingcondensed consolidated statements of operations and comprehensive loss.

 

The Company issued cash settlements of $1.5million during the year ended December 31, 2007. Additionally, following the December 2007death of one of the members of the Company’s Board of Directors, the Companysettled 5,820 vested RSUs for approximately $35,000 in cash in January 2008.

 

Sixty-five percent of the Achieved Performance RSUs(that portion of the Performance RSUs that were earned based on meeting theplan’s performance criteria – “Achieved Performance RSUs”) granted in 2006became fully vested in March 2008 after all major distribution agreementswere renewed. In a second vesting, 65% to 135% (“the Modifier”) of the AchievedPerformance RSUs (less the Achieved Performance RSUs previously vested) willvest on December 31, 2008, based upon a formula using subscriber revenueachieved for a specified time period.

 

The Compensation Committee of the Board of Directorshas the discretion to increase or decrease the Modifier by 20% and also mayextend the deadlines for satisfaction of the vesting conditions.  In order to be eligible for vesting andsettlement of the Achieved Performance RSUs, the individual holding them musteither be employed at the time of the first vesting or have been terminatedwithout cause within 90 days of a vesting date.

 

On March 13, 2008, theCompensation Committee determined that the first vesting of the 2006Performance RSUs would be paid out in accordance with the vesting criteria asif all the major distribution agreements had been renewed prior to eachagreement’s expiration date, and accordingly, 100% of the first vesting of thePerformance RSUs were deemed Achieved Performance RSUs.  The settlement of 571,578 vested units valuedat approximately $3.3 million was paid on April 4, 2008.

 

At December 31,2007, the CEO’s SARs were valued at $4.6 million based on that day’s $6.50 pershare closing stock price of our common stock. At June 30, 2008, the CEO’sSARs were valued at $1.7 million based on that day’s $4.74 per share closingstock price of our common stock. The Company recorded $832,000 incompensation expense and $118,000 in compensation benefit related to SARs forthe three months ended June 30, 2007 and 2008, respectively, on ourcondensed consolidated statement of operations and comprehensive loss as acomponent of selling, general and administrative expense.  The Company recorded $1.1 million incompensation expense and $688,000 in compensation benefit related to SARs forthe six months ended June 30, 2007 and 2008, respectively, on our condensedconsolidated statement of operations and comprehensive loss as a component ofselling, general and administrative expense. The SARs of $1.4 million and $739,000 have been recorded in accountspayable and accrued liabilities on the accompanying condensed consolidatedbalance sheets at December 31, 2007, and June 30, 2008, respectively.

 

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**10. Commitments and Contingencies**

 

In thenormal course of business, the Company has entered into agreements that commitit to make cash payments in future periods with respect to non-cancelableleases and programming contracts.

 

In accordance with the Purchaseand Sale Agreement dated February 23, 2005, Sparrowhawk Media Limited hasmade several warranty and indemnity claims against the Company of approximately$2.0 million. At December 31, 2007, accounts payable and accruedliabilities include an accrual commensurate with the Company’s estimate that itmay be liable within the range of $250,000 to $750,000. At June 30, 2008,the Company reduced its accrual to $0.

 

On July 27, 2007, a lawsuit was brought againstCrown Media Holdings, Inc. and our former Chief Financial Officer, WilliamAliber, in the U.S. District Court for the Northern District of Illinois.  The plaintiff, Robert Lieblang, claims tohave purchased our common shares on the market from August 31, 2005 to April 13,2006 and to have sold those shares in April 2006 and in August 2006.  The plaintiff alleges that he relied to hisdetriment on allegedly false and misleading statements by the defendantsregarding the possible sale of Crown Media Holdings.  We announced the exploration of strategicalternatives including the possibility of selling the Company in August 2005;in April 2006, we announced the termination of an extensive review ofstrategic alternatives including a possible sale.  Plaintiff alleges claims under Section 10(b) ofthe Securities Exchange Act (and Rule 10b-5), the Illinois Consumer FraudAct and common law fraud.  The complaintseeks compensatory damages of approximately $2.0 million plus interest and $6.0million in punitive damages.  The Companyhas retained counsel to defend Mr. Aliber and the Company and hassubmitted the claims to an insurer under an insurance policy. The insurer ispaying costs of this lawsuit, subject to certain reservations or exclusions.Prior to December 31, 2007, the Company had incurred legal expense equalto its deductible of $500,000 under its insurance policy. In January 2008,the court ruled against the defendant’s motion to dismiss the lawsuit, althoughthe court’s ruling also narrowed the securities law claims to purchases after acertain date in 2006**.**

 

**11.  Subsequent Events**

 

EffectiveAugust 1, 2008, Hallmark Licensing, Inc. extended the trademarkagreements to September 1, 2009. Such trademark agreements allow Crown Media United States to name itsnetwork services “Hallmark Channel” and “Hallmark Movie Channel.”

 

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**ITEM 2.  *Management’sDiscussion and Analysis of Financial Condition and Results of Operations***

 

The following discussion andanalysis of the Company’s financial condition and results of operations shouldbe read in conjunction with “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2007.

 

**Description of Business andOverview**

 

*CurrentBusiness*

 

Crown Media Holdings, Inc.(“Crown Media Holdings,” “Crown Media” or the “Company”), through itssubsidiary, owns and operates pay television channels (the “Hallmark Channel”and the “Hallmark Movie Channel,” each singularly the “channel” or collectivelythe “Channels”) dedicated to high-quality entertainment programming for adultsand families, in the United States.

 

With 83.2 million subscribers (as provided by NielsenResearch) in the United States at June 30, 2008, the Hallmark Channel isthe 38th most widely distributed advertising-supported cable channelin the United States. For the second quarter of 2008, the Hallmark Channelfinished the quarter as the 10th highest rated advertising-supportedcable channel for total day ratings and the 9th highest ratedadvertising-supported cable channel in prime time as measured by NielsenResearch.

 

We launched our second 24-hour linear channel, theHallmark Movie Channel, during the first quarter of 2005.  Programming on the Hallmark Movie Channelconsists of movies and mini-series. The Hallmark Movie Channel generatedadvertising revenue in 2007 and has generated subscriber fees and advertisingrevenue in 2008. As distribution continues to expand, the financialcontribution of the Hallmark Movie Channel may grow, including increases inadvertising and subscription revenue. The Hallmark Movie Channel is operatedthrough Crown Media Holdings’ existing infrastructure at a small incrementalcost.  In April 2008, we begandistributing the Hallmark Movie Channel HD in high definition format, which hasresulted in additional costs, but is expected to result in incrementalsubscriber growth.

 

Our Annual Report on Form 10-K for the year endedDecember 31, 2007, in Item 2, summarizes information regarding principalreal property leases.  The leases for theNew York City office and the Greenwood Village, Colorado office have beenextended from expirations in 2009 to 2016****for the New YorkCity office and from expiration in 2008 to 2013 for the Greenwood Villageoffice.

 

*Current Challenges and Developments*

 

TheCompany faces numerous operating challenges. Among them are maintaining andexpanding the distribution of the Channels, broadening viewership demographics,increasing viewership ratings, and increasing advertising sales revenue.

 

Distributionagreements are important because they affect our number of subscribers, whichin turn has a major impact on our subscriber fees, the number of personsviewing our programming, and the rates charged for advertising. The long-termdistribution challenges are renewing our distribution arrangements with themultiple system operators as they expire on favorable terms. Our major distribution agreements haveterms which expire at various times from December 31, 2008, through, withoptions to renew, December 2023.

 

SinceJanuary 1, 2007, through April 2008, the Company has renewed its agreements withsix major distributors, accounting for 87% of our subscriber baseat June 30, 2008.  Each renewalagreement has a multi-year term.The March 2007agreement with EchoStar Communication Corporation provided for a repositioningof the Hallmark Channel on the DISH Network, resulting in an addition ofapproximately 6.4 million Nielsen subscribers in May 2007. It furtherprovided for carrying the Hallmark Movie Channel on a 

 

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packageof the DISH Network, increasing distribution of that Channel by more than 4.0million subscribers. In May 2007, we executed a renewal ofour distribution agreement with the National Cable Television Cooperative (“NCTC”).Under the terms of the renewal, we continue to be available to NCTC’s 1,100member companies. In November 2007, we executed a renewal agreement withComcast Corporation, providing Comcast with rights to distribute the HallmarkChannel, the Hallmark Movie Channel and the Hallmark Movie Channel HD.  In the first quarter of 2008, we reneweddistribution agreements with Time Warner Cable and DirecTV for multi-yeardistribution of the Hallmark Channel. In April 2008, we renewed ourdistribution agreement with Cablevision Systems, which was the final majordistribution agreement which originally expired in 2007. The renewal agreementcovers the Hallmark Channel as well as the Standard Definition and HighDefinition versions of the Hallmark Movie Channel, resulting in an increase indistribution of the Hallmark Movie Channel of more than 2 million subscribers.

 

Ouragreements with major distributors contain “most favored nations” clauses.  These clauses typically provide that, in theevent we enter into an agreement with another distributor on more favorableterms, these terms must be offered to the distributor, subject to variousexceptions and conditions.  These clausescover matters such as subscriber fees, launch support, local advertising timeand other financial and operating provisions. We take these provisions into account when renewing agreements.

 

Domestictelephone companies have entered the business of distributing televisionchannels to households through their wire-lines. We have agreements withseveral telephone companies and cooperatives of telephone companies, whichpermit the carriage of the Hallmark Channel and the Hallmark Movie Channel andHallmark Movie Channel HD, and are negotiating with others.

 

Theuniverse of cable TV subscribers in the United States is approximately 100million homes.  The top 30 cable TVnetworks in the United States, measured by the number of subscribers, have 90million or more subscribers.  Our goal isto reach 90 million subscribers in the next one to two years.

 

Threefactors have contributed to the ratings of the Hallmark Channel: acquiredseries and movies, original productions and marketing and promotional efforts.Certain acquired series have consistently delivered strong ratings across allday-parts. Original productions are our most high profile programs and generatethe Hallmark Channel’s highest ratings. Their ratings success is of significanthelp to our distribution and advertising sales teams in selling the HallmarkChannel. The Company typically incurs additional marketing and promotionalexpenses surrounding original productions and certain acquired movies.

 

Wehave recently completed the 2008 upfront sales process during which we soldapproximately 50% of our advertising inventory for the last quarter of 2008 andfirst three quarters of 2009.  Thisinventory was sold at modestly higher CPMs than the inventory sold in the 2007upfront. The balance of the inventory will be sold in the scatter market.  Continued weakness in the economy couldresult in lower demand and pricing for our inventory, and limit our ability tocontinue to grow advertising revenue at historical rates.

 

Historically, Nielsencable television ratings were based on viewing of networks’ programmingcontent.  Beginning in the fourth quarterof 2007, Nielsen began measuring and providing performance data based onviewing of commercial content as well as programming content.  The new ratings information also includesdata on viewing of program content through digital recording devices (*i.e.,* DVR’s), if that viewing occurs within three days ofthe program’s air date.  From thebeginning of the fourth quarter of 2007 through the second quarter of 2008, weexperienced a decrease in viewers of approximately 5% under the new ratingsmeasurement system. We have factored the new rating information into ouradvertising rates, and at this time we do not expect a significant impact fromthe new rating information on our net advertising rates.

 

At June 30, 2008,the Hallmark Movie Channel was distributed to over 6.2 million subscribers, anincrease of nearly 1.2 million subscribers from March 31, 2008.  This increase in distribution has and willcontinue to improve the Company’s ability to generate advertising revenue fromthe Hallmark Movie Channel in 2008, thus, enabling the channel to become a moresignificant component of the Company’s advertising revenue in 2008.

 

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**Revenue from Continuing Operations**

 

*Our revenueconsists of subscriber fees and advertising.*

* *

*SubscriberFees*

* *

Subscriber feesare generally payable to us on a per subscriber basis by pay televisiondistributors for the right to carry our Channels. In the past, we have paidcertain television distributors up-front subscriber acquisition fees to carryour Channel. Subscriber acquisition fees that we pay are capitalized andamortized over the contractual term of the applicable distribution agreement asa reduction in subscriber fee revenue. If the amortization expense exceeds therevenue recognized on a per distributor basis, the excess amortization isincluded as a component of cost of services. At the time we sign a distributionagreement, we evaluate the recoverability of the costs we incur against theincremental revenue directly and indirectly associated with each agreement.

* *

Rates we receive per subscriber vary with changes inthe following factors, among others:

 

·              The level of sophistication anddegree of competition in the market;

 

·              The relative position in themarket of the distributor and the popularity of the channel;

 

·              The packaging arrangements for thechannel; and

 

·              Other commercial terms and lengthof the contract term.

 

We are in continuousnegotiations with our existing distributors to increase our subscriber base inorder to enhance our advertising results.

 

#### *Advertising*

####  

Our advertising rates aregenerally calculated on the basis of an agreed upon price per unit of audiencemeasurement in return for a guaranteed commitment by the advertiser. We committo provide advertisers certain rating levels in connection with theiradvertising. Advertising rates may vary by time of year due to seasonal changesin television viewership. Revenue is recorded net of estimated deliveryshortfalls, which are usually settled by providing the advertiser additionaladvertising time. The remainder of the revenue is recognized as the “make-good”advertising time is delivered.

 

**Cost of Services**

 

Our cost ofservices consists primarily of the amortization of program license fees;subscriber acquisition fee expense; the cost of signal distribution; and thecost of promotional segments that are aired between programs. We expect cost ofservices to decrease in 2008 as compared to 2007 as subscriber acquisition feeexpense is, and will continue to be, zero in 2008, based primarily upondistribution agreements renewed in 2007 and to date in 2008.

* *

**Critical Accounting Policies, Judgments and Estimates**

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires Crown Media Holdings to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenue and expenses during the reporting period.Actual results could differ from those estimates.

 

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For further information regarding our criticalaccounting policies, judgments and estimates, please see the Notes to UnauditedCondensed Consolidated Financial Statements contained in Item 1 of this Reportand “Critical Accounting Policies, Judgments and Estimates” in Item 7 of theCompany’s Annual Report on Form 10-K as filed with the SEC for the yearended December 31, 2007.

 

**Effects of Transactions with Related and Certain OtherParties**

 

In 2008 and in prior years, we entered into a number of significanttransactions with Hallmark Cards and its subsidiaries. These transactionsinclude, among other things, programming, trademark licenses, administrativeservices, a line of credit, a tax sharing agreement, the issuance of fourpromissory notes and a waiver agreement. For information regarding suchtransactions and transactions with other related parties, please see “Effectsof Transactions with Related and Certain Other Parties” in Item 7 of theCompany’s Annual Report on Form 10-K as filed with the SEC for the yearended December 31, 2007. Also, please see Notes 6, 7 and 8 of Notes toUnaudited Condensed Consolidated Financial Statements contained in Item 1 ofthis Report.

 

## **SelectedHistorical Consolidated Financial Data of Crown Media Holdings**

##  

In the table below, we provide selectedhistorical condensed consolidated financial and other data of Crown MediaHoldings and its subsidiaries. The following selected condensed consolidatedstatement of operations data for three and six months ended June 30, 2007and 2008, are derived from the unaudited financial statements of Crown MediaHoldings and its subsidiaries. Ratings and subscriber information is unaudited.This data should be read together with the condensed consolidated financialstatements and related notes included elsewhere in this Form 10-Q.

 

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| ** **                                          | ** ** | ** **                                          | ** ** | ** **        | ** ** | **%  Change**                                     | ** ** | ** **        | ** ** | ** ** | ** ** | **%  Change** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------|------------|---------------------------------------------------|------------|-------------------|------------|------------|------------|---------------|------------|
| ** **                                          | ** ** | **Three Months Ended June 30,** | ** ** | **2008 vs.** | ** ** | **Six Months Ended June 30,** | ** ** | **2008 vs.** | ** ** |
| ** **                                          | ** ** | **2007**                                            | ** ** | **2008**          | ** ** | **2007**                                          | ** ** | **2007**          | ** ** | **2008**   | ** ** | **2007**      | ** ** |
| Revenue:                                            |       |                                                |       |              |       |                                              |       |              |       |       |       |          |       |
| Subscriber fees                                     |       | $                                                   | 6,507      |              | $          | 14,579                                            |       | 124               | %          | $          | 14,002     |          | $          | 28,432 |   | 103 | % |
| Advertising                                         |       | 49,323                                              |       | 56,620            |       | 15                                                | %          | 95,321            |       | 113,043    |       | 19            | %          |
| Other revenue                                       |       | 77                                                  |       | 321               |       | 317                                               | %          | 156               |       | 609        |       | 290           | %          |
| Total revenue                                       |       | 55,907                                              |       | 71,520            |       | 28                                                | %          | 109,479           |       | 142,084    |       | 30            | %          |
| Cost of Services:                                   |       |                                                |       |              |       |                                              |       |              |       |       |       |          |       |
| Programming costs                                   |       | 38,389                                              |       | 35,641            |       | -7                                                | %          | 78,081            |       | 71,046     |       | -9            | %          |
| Subscriber acquisition fee amortization             |       | 7,832                                               |       | 0                 |       | -100                                              | %          | 15,680            |       | 0          |       | -100          | %          |
| Operating costs                                     |       | 2,081                                               |       | 3,594             |       | 73                                                | %          | 5,318             |       | 7,063      |       | 33            | %          |
| Total cost of services                              |       | 48,302                                              |       | 39,235            |       | -19                                               | %          | 99,079            |       | 78,109     |       | -21           | %          |
| Selling, general and administrative expense         |       | 14,453                                              |       | 12,357            |       | -15                                               | %          | 29,143            |       | 26,250     |       | -10           | %          |
| Marketing expense                                   |       | 4,073                                               |       | 2,060             |       | -49                                               | %          | 8,285             |       | 8,458      |       | 2             | %          |
| Loss from operations before interest expense        |       | (10,921                                             | )          | 17,868            |       | -264                                              | %          | (27,028           | )          | 29,267     |       | -208          | %          |
| Interest expense                                    |       | (32,741                                             | )          | (23,792           | )          | -27                                               | %          | (56,842           | )          | (49,906    | )          | -12           | %          |
| Net loss                                            |       | $                                                   | (43,662    | )                 | $          | (5,924                                            | )          | -86               | %          | $          | (83,870    | )             | $          | (20,639 | ) | -75 | % |
|                                                |       |                                                |       |              |       |                                              |       |              |       |       |       |          |       |
| **Other Data:**                                     |       |                                                |       |              |       |                                              |       |              |       |       |       |          |       |
| Net cash (used in) provided by operating activities |       | $                                                   | 4,697      |              | $          | 16,693                                            |       | 255               | %          | $          | (8,137     | )             | $          | 16,999 |   | -309 | % |
| Capital expenditures                                |       | $                                                   | (377       | )                 | $          | (1,087                                            | )          | 188               | %          | $          | (583       | )             | $          | (1,267 | ) | 117 | % |
| Net cash provided by (used in) investing activities |       | $                                                   | (1,384     | )                 | $          | (1,999                                            | )          | 44                | %          | $          | (2,567     | )             | $          | (3,286 | ) | 28 | % |
| Net cash provided by (used in) financing activities |       | $                                                   | (2,166     | )                 | $          | (17,463                                           | )          | 706               | %          | $          | 3,672      |          | $          | (15,410 | ) | -520 | % |
| Total domestic day household ratings (1)(3)         |       | 0.644                                               |       | 0.678             |       | 5                                                 | %          | 0.687             |       | 0.705      |       | 3             | %          |
| Total domestic primetime household ratings (2)(3)   |       | 1.045                                               |       | 1.076             |       | 3                                                 | %          | 1.100             |       | 1.135      |       | 3             | %          |
| Subscribers at period end                           |       | 82,600                                              |       | 83,247            |       | 1                                                 | %          | 82,600            |       | 83,247     |       | 1             | %          |

 

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(1)  Total day isthe time period measured from the time each day the broadcast of commerciallysponsored programming commences to the time such commercially sponsored programmingends.

(2)  Primetime isdefined as 8:00 - 11:00 P.M. in the United States.

(3)  These Nielsenratings are for the time period April 1 through June 30 andJanuary 1 through June 30, respectively.

 

### ***Results of Operations***

### ** **

#### *ThreeMonths Ended June 30, 2007 Compared to Three Months Ended June 30,2008*

####  

*Revenue. *Our revenue fromcontinuing operations, comprised of subscriber fees and advertising, increased28% to $71.5 million for the three months ended June 30, 2008. Our 124% increase to $14.6 million in subscriberfee revenue for the three months ended June 30, 2008, was a result ofhigher contractual rates and increases in the number of payingsubscribers from renewed distribution agreements and reductions in subscriberacquisition fees netted against gross subscriber revenue.  We anticipate that these same factors willresult in substantial increases in subscriber fees during the remainder of2008, compared to the corresponding periods in 2007; subscriber revenue growthbeyond 2008 will be limited. Subscriberacquisition fee expense recorded as a reduction of revenue was $1.9 million forthe three months ended June 30, 2007, and $676,000 for the comparableperiod in 2008. The number of paying subscribers at June 30, 2008, whencompared to June 30, 2007, has increased as a result of previously amendeddistribution agreements in the United States.

 

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The increase in advertising revenue to $56.6million for the three months ended June 30, 2008, compared to $49.3million for the three months ended June 30, 2007, reflects the growth indomestic subscribers and an increase in advertising rates. Generally, as wehave expanded our subscribers and provided higher rated programming, ouradvertising revenue has increased. The number of advertisers was 447 at June 30,2008, as compared to 439 at June 30, 2007. In addition,approximately $909,000 of the increase in advertising revenue is due toadvertising on the Hallmark Movie Channel. We also note that we have experienced in the second quarter of 2008 asoftening of advertising rates in the scatter market, probably because of thegeneral economic conditions. We expect this softening to continue in both thethird and fourth quarters of 2008.

 

Amongthe 73 ad-supported cable channels in the United States market, the HallmarkChannel ranked 10th in total day with a 0.678 household rating forthe three months ending June 30, 2008 and 9th for primetimewith a 1.076 household rating for the same period based on Nielsen ratings.

 

*Cost of services. *Cost of services as apercent of revenue decreased to 55% in 2008, as compared to 86% in 2007. Thisdecrease results from the combined effects of the 28% increase in revenue,discussed above, and a 19% decrease in related costs which is discussed below.

 

Total programming costs for the three months ended June 30, 2008,decreased 7% following the December 31, 2007, expiration of our programmingagreement with NICC and because of the Company’s effort to monitor costs. Thiswas offset in part by the Company licensing Hallmark Hall of Fame movies undera new 2008 agreement with Hallmark Cards that provides 10-year exhibitionwindows for all licensed films.  We arealso negotiating with several parties for new or revised programmingagreements.

 

The Company’s bad debt expense was $40,000 forthe three months ended June 30, 2008, as compared to the Company’snegative bad debt expense of $343,000 for the three months ended June 30,2007.

 

Subscriber acquisition fee amortization expenseresults from subscriber acquisition costs incurred previously by us andamortized over the remaining life of the relevant distribution agreement.Subscriber acquisition fee amortization expense decreased 100% as all of theexpense was net against revenue during three months ended June 30, 2008.The Company’s three largest affiliation agreements became fully amortizedduring the fourth quarter of 2007.

 

*Selling, general andadministrative expense.* Our selling, general and administrativeexpense decreased 15% quarter over quarter. This decrease is primarily due to the $1.8 million decrease and $950,000decrease of our expense related to the RSU liability and SAR liability,respectively.

 

*Marketing expense*.  Our marketing expense decreased 49%. TheCompany had one marketing promotion for “A Stranger’s Heart” in May 2007.The Company did not have any marketing promotions in the second quarter of2008.

 

*Interest expense. *Interestexpense for the three months ended June 30, 2008, decreased $8.9 millioncompared to the three months ended June 30, 2007.   On April 14, 2008, the Tax Note wascredited $1.5 million, which represented the Company’s share of an IRS interestrefund that Hallmark Cards received. This refund of interest reduced thebalance of the Tax Note. During the three months ended June 30, 2007, theCompany recorded $7.9 million of interest expense related to the Tax Note. See “InterestExpense” in the discussion of “Six Months Ended June 30, 2007 Compared toSix Months Ended June 30, 2008” below for additional explanation ofchanges in the interest expense relating to the bank credit facility.

 

#### *SixMonths Ended June 30, 2007 Compared to Six Months Ended June 30, 2008*

####  

*Revenue. *Our revenue from continuing operations,comprised of subscriber fees and advertising, increased 30% to $142.1 millionfor the six months ended June 30, 2008. Our 103% increase to $28.4 million in subscriber fee revenue for the sixmonths ended June 30, 2008, was a result of higher contractual rates and increasesin the number 

 

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of paying subscribers from renewed distribution agreements andreductions in subscriber acquisition fees netted against gross subscriberrevenue.  Subscriber acquisition fee expense recorded as a reduction of revenue was$2.9 million for the six months ended June 30, 2007, and $1.3 million forthe comparable period in 2008. The number of paying subscribers has increasedas a result of previously amended distribution agreements in the United States.

 

The increase in advertising revenue to $113.0million for the six months ended June 30, 2008, compared to $95.3 millionfor the six months ended June 30, 2007, reflects the growth in subscribersand an increase in advertising rates. In addition, approximately $2.1million of the increase in advertising revenue is due to advertising on theHallmark Movie Channel.

 

Amongthe 73 ad-supported cable channels in the United States market, the HallmarkChannel ranked 10th in total day with a 0.705 household rating forthe six months ending June 30, 2008 and 9th for primetime witha 1.135 household rating for the same period based on Nielsen ratings.

 

*Cost of services. *Cost of services as apercent of revenue decreased to 55% in 2008, as compared to 91% in 2007. Thisdecrease results from the combined effects of the 30% increase in revenue, discussedabove, and a 21% decrease in related costs which is discussed below.

 

Total programming costs for the six months ended June 30, 2008,decreased 9% following the December 31, 2007, expiration of ourprogramming agreement with NICC and because of the Company’s effort to monitorcosts. This was offset in part by the Company licensing Hallmark Hall of Famemovies under a new 2008 agreement with Hallmark Cards that provides 10-yearexhibition windows for all licensed films.

 

The Company’s bad debt expense was $5,000 for thesix months ended June 30, 2008, as compared to the Company’s bad debtexpense of $13,000 for the six months ended June 30, 2007.

 

Subscriber acquisition fee amortization expenseresults from subscriber acquisition costs incurred previously by us andamortized over the remaining life of the relevant distribution agreement.Subscriber acquisition fee amortization expense decreased 100% as all of theexpense was net against revenue during six months ended June 30, 2008. TheCompany’s three largest affiliation agreements became fully amortized duringthe fourth quarter of 2007.

 

*Selling, general andadministrative expense.* Our selling, general and administrativeexpense decreased 10% period over period. This decrease is primarily due to the $1.7 million decrease and $1.8million decrease of our expense related to the RSU liability and SAR liability,respectively.

 

*Marketing expense*.  Our marketing expense increased 2%. TheCompany had two marketing promotions in the first six months of 2007: “Love isa Four Letter Word” in February 2007 and A Stranger’s Heart” in May 2007.The Company also had two marketing promotions in the first half of 2008: “TheGood Witch” in January 2008 and “Bridal Fever” in February 2008.

 

*Interest expense. *Interest expense for the six months ended June 30,2008, decreased $6.9 million compared to the three months ended June 30,2007.   The principal balance of ourcredit facility went from $69.6 million at December 31, 2007, to $54.5million at June 30, 2008 (the balance increased from $87.6 million at December 31,2006 to $91.6 million at June 30, 2007) and a decrease in the bank creditfacility interest rate from 6.07% at June 30, 2007, to 3.23% at June 30,2008, offset in part by higher principal balances on four of the five notespayable to Hallmark affiliates. Additionally, on April 14, 2008, the Tax Note was credited $1.5million, which represented the Company’s share of an IRS interest refund thatHallmark Cards received. This refund of interest reduced the balance of the TaxNote. During the six months ended June 30, 2007, the Company recorded $7.9million of interest expense related to the Tax Note.

 

## **Liquidityand Capital Resources**

##  

During the six months ended June 30, 2008our operating activities provided $17.0 million of cash.  During the 

 

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comparable period in 2007, our operatingactivities consumed $8.1 million of cash.** The most significantcontribution to this favorable change of $25.1 million was the increase in operating cash receipts from $117.7 million to $144.6million during the six months ended June 30, 2007 and 2008, respectively.Additionally, the Company’s net loss for the six months ended June 30,2008, decreased $63.2 million to $20.6 million from $83.9 million for the sixmonths ended June 30, 2007.

 

Cash used in investingactivities was $2.6 million and $3.3 million for the six months ended June 30,2007 and 2008, respectively. During the six months ended June 30, 2007 and2008, the Company purchased property and equipment of $583,000 and $1.3million, respectively.

 

Cash provided by financingactivities was $3.7 million and cash used by financing activities was $15.4million for the six months ended June 30, 2007 and 2008, respectively. Weborrowed $6.0 million and $18.8 million under our credit facility to supplementthe cash requirements of our operating and investing activities during the sixmonths ended June 30, 2007 and 2008, respectively. We repaid principal of$2.0 million and $33.8 million under our credit facility during the six monthsended June 30, 2007 and 2008, respectively.

 

*Cash Flows*

 

Asof June 30, 2008, the Company had $277,000 in cash and cash equivalents onhand and borrowing capacity under the bank credit facility of $5.5million.  Day-to-day cash disbursementrequirements have typically been satisfied with cash on hand and operating cashreceipts supplemented with the borrowing capacity available under the bankcredit facility.

 

Operating activities for the year ended December 31,2007, yielded positive cash flow as have the first two quarters of 2008.  However, there can be no assurance that theCompany’s operating activities will continue to generate positive cash flow,which is subject to the risks affecting the Company’s liquidity.

 

The Company’s principal sources of funds are cash onhand, cash generated by operations and amounts available under the Company’srevolving bank credit facility through May 31, 2009.  In March 2008, the Company and HallmarkCards entered into an Amended and Restated Waiver Agreement which changed thematurity date of three obligations and deferred payments under certainobligations.  Under an amendment in August 2008,the deferred payments under these obligations were extended to June 30,2009.  See Note 6 Related Party Long-TermObligations – Waiver and Standby Purchase Agreement.

 

 In March 2008, the bank credit facilitywas extended to May 31, 2009, and the bank’s lending commitment wasreduced to $90.0 million.  Thiscommitment decreased to $60.0 million on June 30, 2008, at which time theCompany owed $54.5 million on the facility. The bank’s commitment will decreasefurther to $50.0 million on September 30, 2008, and $45.0 million on March 31,2009.  The Company plans to use cashflows from operations to reduce outstanding borrowings under the facility andexpects these reductions to be sufficient to maintain outstanding borrowingsunder the commitment levels throughout the term of the facility.  Accordingly, these reductions are dependentupon the Company’s ability to generate sufficient cash flows from operationsbetween June 30, 2008, and the respective dates on which the commitmentwill be reduced or otherwise expire.  SeeNote 5 Credit Facility.

 

The Waiver Agreement requires that Excess Cash Flow asdefined in the Waiver Agreement be used to make payments due under the bankcredit facility or to pay obligations subject to the Waiver Agreement.  The Company has budgeted and anticipates thatit will have substantial Excess Cash Flow for the year ended December 31,2008 and that this amount will be used to make a reduction in the bank creditfacility during the first quarter of 2009. See Note 6.  

 

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However, the existence of any Excess Cash Flow and the amount of itdepends on the Company’s results and cash flow in 2008, with its attendantrisks, and is not assured.

 

In some prior years, the Company’s Tax SharingAgreement with Hallmark Cards has also been a source of cash from financingactivities. More recently, benefits to the Company under the tax sharingagreement have been used to reduce amounts owed to Hallmark Cards and itsaffiliates under the Tax Note.  TheCompany may have taxable income for 2009 for purposes of the Tax SharingAgreement because of improved results and because accrued unpaid interest onthe Company’s 10.25% Senior Secured Note with HC Crown Corp. is not deducted indetermining tax benefits and tax liabilities under that Agreement.  This could result in a cash amount beingpayable to Hallmark Cards in the second quarter of 2009 unless Hallmark alsoagrees to defer any such tax liability. See Note 7 Related Party Transactions – Tax Sharing Agreement.

 

TheCompany’s recurring net loss situation necessitates that we continue to monitorand control all areas of expenses, including programming, marketing anddistribution.  The Company anticipatesthat its principal uses of cash during the next twelve months will continue toinclude the payment of operating expenses, accounts payable and accrued expenses,license fees for programming, interest and repayment of principal under itsbank credit facility including the use of Excess Cash Flow as required by theWaiver Agreement, interest under certain notes payable to Hallmark Cardsaffiliates and payments under the Tax Sharing Agreement with Hallmark Cards.

 

TheCompany will endeavor to extend or refinance the bank credit facility prior toor upon its maturity.  Any such extensionor refinancing could require the continuation of a letter of credit fromHallmark Cards in support of the bank credit facility or other steps by theCompany and, thus, is not assured.  Upon maturity of the credit facility on May 31, 2009,without payment in full, renewal or replacement, (1) JP Morgan Chase Bank,N.A., wouldhave the right to draw down on Hallmark Cards’ irrevocable letter of credit or (2) HallmarkCards could purchase the interest of the lending bank in the facility.  In either case, Hallmark Cards would have allthe obligations and rights of the lending bank under the bank credit facilityand could demand payment of outstanding amounts at any time after June 30,2009 under the terms of the Waiver Agreement. Upon maturity of the credit facility on May 31, if not paid infull, renewed or replaced, the lending bank could forego a call on Hallmark Cards’ irrevocable letter ofcredit and instead initiate foreclosure against the Company’s assets. Suchforeclosure proceedings would adversely affect our ability to continue ouroperations. However, prior to any such possible foreclosure, if the Company hadnot secured a refinancing of the credit facility or alternative financing, theCompany would require Hallmark Cards to exercise its option, pursuant to theterms of the Waiver Agreement, to purchase all of the outstanding indebtednessunder the credit facility. The credit facility would then be subject to termsof the Waiver Agreement.

 

Uponmaturity of the bank credit facility on May 31, 2009, the Company will nothave a comparable credit facility unless the bank credit facility is extended,renewed or replaced.  In that case, theCompany would be solely dependent upon day-to-day operating cash receipts tomeets its cash requirements.

 

TheCompany believes that cash on hand, cash generated by operations, and borrowingavailability under its bank credit facility through May 31, 2009, whencombined with the deferral of any required payments on related-party debt andrelated interest described under the Waiver Agreement, and, if necessary,Hallmark Cards’ purchase of any outstanding indebtedness under the bank creditfacility in May 2009 as described above, will be sufficient to fund theCompany’s operations and enable the Company to meet its liquidity needs throughJune 30, 2009.

 

The sufficiency of the existing sources of liquidityto fund the Company’s operations is dependent upon maintaining subscriberrevenue at or above the amount of such revenue for the six months ended June 30,2008, and continuing growth in advertising revenue. A significant decline inthe popularity of the Hallmark Channel, a significant economic decline in theadvertising market, an increase in program acquisition costs, an increase incompetition or other adverse changes in operating conditions could negativelyimpact the Company’s liquidity and its ability to fund the current level ofoperations.  During the second quarter of2008 the Company experienced a 

 

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softening of advertising rates in the scatter market.  The Company expects this softening tocontinue through the fourth quarter of 2008.

 

The Company’s long-termobligations include notes payable to Hallmark Cards or affiliates of HallmarkCards which are the subject of the Waiver Agreement.  These obligations include Notes issued in2001, 2005 and 2006 which mature on December 31, 2009.  See Note 6. Amounts currently due under these notes are $105.4 million, $165.1million and $60.2 million, respectively. The Tax Note in the current amount of$11.1 million matures on July 27, 2009. Additionally, at June 30, 2008, non-interest bearingunpaid accrued service fees and unreimbursed expenses of $14.6 million wereincluded in payable to affiliates on the accompanying consolidated balancesheet.  Another long-termobligation concern is VISN/s ownership of the $25.0 million company obligatedmandatorily redeemable preferred membership interest in Crown Media UnitedStates that is redeemable no later than December 31, 2010.  See Note 8 Company Obligated MandatoryRedeemable Preferred Interest and NICC License Agreement.

 

Becauseof the Company’s possible inability to meet its obligations when they come dueon and after June 30, 2009 and through December 31, 2009, the Companyanticipates that prior to June 30, 2009, it will be necessary to eitherextend or refinance (i) the bank credit facility and (ii) thepromissory notes payable to affiliates of Hallmark Cards. As part of acombination of actions and in order to obtain additional funding, the Companymay consider various alternatives, including refinancing the bank creditfacility, raising additional capital through the issuance of equity or debtsecurities, or other strategic alternatives.

 

***Bank Credit Facility, Hallmark Notes, andTax Sharing Agreement***

 

Forinformation regarding our Bank Credit Facility, Hallmark Notes and Tax SharingAgreement, please see “Bank Credit Facility, Hallmark Notes, and Tax SharingAgreement” of the Company’s Annual Report on Form 10-K as filed with theSEC for the year ended December 31, 2007. Also, please see Notes 5,6 and 7 of Notes to Unaudited Condensed Consolidated Financial Statementscontained in Item 1 of this Report.

 

## **Risk Factors and Forward-Looking Statements**

##  

The discussion set forth in this Form 10-Qcontains statements concerning potential future events. Such forward-lookingstatements are based on assumptions by Crown Media Holdings management, as ofthe date of this Form 10-Q including assumptions about risks anduncertainties faced by Crown Media Holdings. Readers can identify theseforward-looking statements by their use of such verbs as “expects,” “anticipates,”“believes,” or similar verbs or conjugations of such verbs. If any ofmanagement’s assumptions prove incorrect or should unanticipated circumstancesarise, Crown Media Holdings’ actual results, levels of activity, performance,or achievements could materially differ from those anticipated by suchforward-looking statements.

 

Among the factors that could cause actualresults to differ materially are those discussed in this Report below and inthe Company’s filings with the Securities and Exchange Commission, includingthe Risk Factors stated in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2007. Such Risk Factors include, but are notlimited to, the following:  competitionfor distribution of channels, viewers, advertisers and the acquisition ofprogramming; fluctuations in the availability of programming; fluctuations indemand for programming which we air on our channels; our ability to address ourliquidity needs; our incurrence of losses; and our substantial indebtednessaffecting our financial condition and results.

 

### **Available Information**

### ** **

**We will makeavailable free of charge through our website, www.hallmarkchannel.com, the AnnualReport, 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 weelectronically file or furnish such material with the Securities and ExchangeCommission.**

 

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**Additionally,we will make available, free of charge upon request, a copy of our Code ofBusiness Conduct and Ethics, which is applicable to all of our employees,including our senior financial officers. Requests for a copy of this codeshould be addressed to the General Counsel at 12700 Ventura Boulevard, StudioCity, California  91604.**

 

**Item 3.  *Quantitative and QualitativeDisclosures About Market Risk***

 

We only invest in instrumentsthat meet high credit and quality standards, as specified in our investmentpolicy guidelines. These instruments, like all fixed income instruments, aresubject to interest rate risk. The fixed income portfolio will decline in valueif interest rates increase. If market interest rates were to increaseimmediately and uniformly by 10% from levels as of June 30, 2008, thedecline of the fair value of the fixed income portfolio would not be material.

 

As of June 30, 2008, ourcash, cash equivalents and short-term investments had a fair value of $277,000and were invested in cash and short-term commercial paper. The primary purposeof these investing activities has been to preserve principal until the cash isrequired to fund operations. Consequently, the size of this portfoliofluctuates significantly as cash is provided by and used in our business.

 

The value of certain investmentsin this portfolio can be impacted by the risk of adverse changes in securitiesand economic markets and interest rate fluctuations. For the three and sixmonths ended June 30, 2008, the impact of interest rate fluctuations,changed business prospects and all other factors did not have a material impacton the fair value of this portfolio, or on our income derived from thisportfolio.

 

We have not used derivativefinancial instruments for speculative purposes. As of June 30, 2008, weare not hedged or otherwise protected against risks associated with any of ourinvesting 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 theseexposures, we may enter into various derivative investment transactions in thenear term pursuant to our investment and risk management policies andprocedures in areas such as hedging and counterparty exposure practices. Wehave not and will not use derivatives for speculative purposes.

 

If we use risk managementcontrol policies, there will be inherent risks that may only be partiallyoffset by our hedging programs should there be any unfavorable movements ininterest rates or equity investment prices.

 

The estimated exposure discussed below is intended tomeasure the maximum amount we could lose from adverse market movements ininterest rates and equity investment prices, given a specified confidencelevel, over a given period of time.  Lossis defined in the value at risk estimation as fair market value loss.

 

***Our interest income and expense is subjectto fluctuations in interest rates.***

 

Our material interest bearing assets consisted of cashequivalents and short-term investments. The balance of our interest bearingassets was $277,000, or less than 1% of total assets, as of June 30, 2008.Our material liabilities subject to interest rate risk consisted of our bankcredit facility, our note and interest payable to HC Crown, and our notes andinterest payable to Hallmark Cards affiliates. The balance of those liabilitieswas $396.3 million, or 29% of total liabilities, as of June 30, 2008. Netinterest expense for the three and six months ended June 30, 2008, was$23.8 million, 33%, of our total revenue and $49.9 million, 35%, of our totalrevenue, respectively. Our net interest expense of these liabilities issensitive to changes in the general level of interest rates, primarily U.S. andLIBOR 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 by1% from levels as of June 30, 2008, our interest expense for the three andsix months would change correspondingly by $1.0 million and $2.1 million,respectively.

 

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**Item 4.  *Controls and Procedures.***

 

***a.******              DisclosureControls and Procedures***

 

Our management evaluated,with the participation of our Chief Executive Officer and our Chief FinancialOfficer, the effectiveness of our disclosure controls and procedures as of theend of the period covered by this Quarterly Report on Form 10-Q. Based onthis evaluation, our Chief Executive Officer and our Chief Financial Officer haveconcluded that our disclosure controls and procedures were effective as of theend of the period covered by this Quarterly Report on Form 10-Q.

 

***b.******              Changesin Internal Control over Financial Reporting***

 

There was no change in the Company’s internal controlover financial reporting that occurred during the quarter ended June 30,2008, that materially affected, or was reasonably likely to materially affect,the Company’s internal control over financial reporting.

 

**PART II.  OTHER INFORMATION**

 

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

 

Our2008 annual meeting of stockholders was held on June 24, 2008.  The following proposals were voted upon atthe meeting, with the following number of votes cast for, against or withheld:

 

# **Proposal 1**: Election of Directors

# ** **

| **Name**                     | ** ** | **Number of Votes  For** | ** ** | **Votes For as a  Percent of Votes  Eligible** | ** ** | **Votes Withheld** | ** ** |
|------------------------------|------------|------------------------------------|------------|-------------------------------------------------------------------------|------------|-------------------------|------------|
| Dwight C. Arn                |       | 373,444,871                        |       | 98.06                                                                   | %          | 716,318                 |       |
| William Cella                |       | 374,113,564                        |       | 98.23                                                                   | %          | 47,625                  |       |
| Glenn Curtis                 |       | 373,211,560                        |       | 98.00                                                                   | %          | 949,629                 |       |
| Steve Doyal                  |       | 373,445,671                        |       | 98.06                                                                   | %          | 715,518                 |       |
| Brian E. Gardner             |       | 373,290,402                        |       | 98.02                                                                   | %          | 870,787                 |       |
| Herbert A.Granath            |       | 374,118,493                        |       | 98.23                                                                   | %          | 42,696                  |       |
| David E. Hall                |       | 373,286,422                        |       | 98.02                                                                   | %          | 874,767                 |       |
| Donald J. Hall, Jr.     |       | 373,445,791                        |       | 98.06                                                                   | %          | 715,398                 |       |
| Irvine O. Hockaday, Jr. |       | 373,002,794                        |       | 97.94                                                                   | %          | 1,158,395               |       |
| A. Drue Jennings             |       | 374,040,171                        |       | 98.21                                                                   | %          | 121,018                 |       |
| Peter A. Lund                |       | 374,120,222                        |       | 98.24                                                                   | %          | 40,967                  |       |
| Brad R. Moore                |       | 373,446,671                        |       | 98.06                                                                   | %          | 714,518                 |       |
| Henry S. Schleiff            |       | 373,453,716                        |       | 98.06                                                                   | %          | 707,473                 |       |
| Deanne R. Stedem             |       | 373,287,258                        |       | 98.02                                                                   | %          | 873,931                 |       |

 

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**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 No. 1 to Waiver and Standby Purchase  Agreement dated August 1, 2008, by and between Hallmark Cards  Incorporated and Crown Media Holdings, Inc.                                                                                                  |
| 10.2                    |       | Trademark License Extension Agreement (Hallmark  Movie Channel), dated August 1, 2008, by and between Hallmark  Licensing, Inc. and Crown Media United States, LLC.                                                                                              |
| 10.3                    |       | Trademark License Extension Agreement (Hallmark  Channel), dated August 1, 2008, by and between Hallmark  Licensing, Inc. and Crown Media United States, LLC.                                                                                                    |
| 10.4*                   |       | Amendment to Employment Agreement, dated as of  May 9, 2008, by and between Laura Masse and Crown Media  Holdings, Inc.                                                                                                                                          |
| 10.5*                   |       | Amendment to Employment Agreement, dated as of  May 30, 2008, by and between Janice Arouh and Crown Media  Holdings, Inc.                                                                                                                                        |
| 10.6**                  |       | Television License Agreement, dated as of  January 1, 2008 between Hallmark Hall of Fame Productions, Inc. and  the Company.**                                                                                                                                   |
| 10.7*                   |       | Crown Media Holdings, Inc. 2008 Annual  Advertising Sales Commission Plan.**                                                                                                                                                                                          |
| 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.                                                                                                                                                                                                                                          |

 

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* Management contract or compensating plan orarrangement.

** Portions of this exhibit have been omittedpursuant to a confidential treatment request filed with the Commission.

 

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**SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 

CROWN MEDIA HOLDINGS, INC.

 
| **Signature**                                                 | ** ** | **Title**           | ** ** | **Date**            |
|---------------------------------------------------------------|------------|---------------------|------------|---------------------|
|                                                          |       |                |       |                |
| By:       /s/ HENRY S. SCHLEIFF |       | Principal Executive |       | August 6, 2008 |
|                                                          |       | Officer             |       |                |
| Henry  S. Schleiff                                            |       |                |       |                |
|                                                          |       |                |       |                |
| By:       /s/ BRIAN C. STEWART  |       | Principal           |       | August 6, 2008 |
|                                                          |       | Financial and       |       |                |
| Brian  C. Stewart                                             |       | Accounting Officer  |       |                |

 

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