**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**Form 10-Q**

**(Mark One)**
| **x**                                            | **QUARTERLY REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------|-----------------------------------------------------------------------------------------------|
| ** **                                       |                                                                                          |
| **Forthe quarterly period ended March 31, 2007** |
| ** **                                       |
| **or**                                           |
| ** **                                       |                                                                                          |
| **o**                                            | **TRANSITION REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from                           to                           .**

**Commission File Number: 000-30700**

**Crown Media Holdings, Inc.**

(Exact Name of Registrant asSpecified in Its Charter)

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

 

**12700 Ventura Boulevard,**

**Suite 200**

**Studio City, California 91604**

(Address of Principal ExecutiveOffices and Zip Code)

**(818) 755-2400**

(Registrant’s Telephone Number,Including Area Code)

(Former Name, Former Address, and Former Fiscal Year,

if Changed Since Last Report.)

Indicate by checkmark whether the registrant:  (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or such shorter periodthat the registrant was required to file such reports), and (2) has been subjectto such filing requirements for the past 90 days.  Yes  x     No o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer x | Non-accelerated filer o |
|---------------------------|---------------------|-------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o   No x

As of May 4, 2007, thenumber of shares of Class A Common Stock, $.01 par value outstanding was74,117,654, and the number of shares of Class B Common Stock, $.01 par value,outstanding was 30,670,422.

 

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**TABLE OF CONTENTS**
| **PART I**  | **Financial Information**                                                                                                          |   |
|-------------|------------------------------------------------------------------------------------------------------------------------------------|--------|
|        |                                                                                                                               |   |
| Item 1      | Financial  Statements (Unaudited)                                                                                                  |   |
|        | CROWN MEDIA  HOLDINGS, INC. AND SUBSIDIARIES                                                                                       |   |
|        | Condensed  Consolidated Balance Sheets — December 31, 2006 andMarch 31, 2007 (Unaudited)                                      |   |
|        | Condensed  Consolidated Statements of Operations and Comprehensive Loss (Unaudited)   - Three Months Ended March 31, 2006 and 2007 |   |
|        | Condensed  Consolidated Statements of Cash Flows (Unaudited)  - Three Months Ended March 31, 2006 and 2007                         |   |
|        | Notes to  Unaudited Condensed Consolidated Financial Statements                                                                    |   |
|        |                                                                                                                               |   |
| Item 2      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                        |   |
|        |                                                                                                                               |   |
| Item 3      | Quantitative  and Qualitative Disclosures About Market Risk                                                                        |   |
|        |                                                                                                                               |   |
| Item 4      | Controls and  Procedures                                                                                                           |   |
|        |                                                                                                                               |   |
| **PART II** | **Other Information**                                                                                                              |   |
|        |                                                                                                                               |   |
| Item 1A     | Risk Factors                                                                                                                       |   |
|        |                                                                                                                               |   |
| Item 6      | Exhibits                                                                                                                           |   |
|        |                                                                                                                               |   |
| Signatures  |                                                                                                                               |

 

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*In this Form 10-Q theterms “Crown Media Holdings”and the “Company” refer to Crown MediaHoldings, Inc. and, unless the context requires otherwise, subsidiaries ofCrown Media Holdings that operate or have operated our businesses, Crown MediaUnited States, LLC (“Crown Media United States”), and until the completion ofthe sale of our film library in December 2006, Crown Media Distribution,LLC (“Crown Media Distribution”). The term “common stock” refers to ourClass A common stock and Class B common stock, unless the contextrequires otherwise.*

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

**PART I. FINANCIAL INFORMATION**

**Item 1.  *Financial Statements (Unaudited)***

**CROWN MEDIA HOLDINGS, INC. ANDSUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATEDBALANCE SHEETS**

**(In thousands, except par valueand number of shares)**
| ** **                                                                                 | ** ** | **As of December 31,** | ** ** | **As of March 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                              | ** ** | **2007**                           | ** ** |
| ASSETS                                                                                     |       |                                  |       |                               |       |
| Cash  and cash equivalents                                                                 |       | $                                     | 13,965     |                               | $          | 5,786 |   |
| Accounts  receivable, less allowance for doubtful accounts of  $246 and $535, respectively |       | 57,079                                |       | 52,172                             |       |
| Program  license fees—affiliates                                                      |       | 115                                   |       | 115                                |       |
| Program  license fees—non-affiliates                                                  |       | 111,909                               |       | 121,696                            |       |
| Receivable  from buyer of international business                                           |       | 24                                    |       | 9                                  |       |
| Prepaid  and other assets                                                                  |       | 4,202                                 |       | 5,913                              |       |
| Prepaid  program license fee assets                                                        |       | 10,271                                |       | 20,219                             |       |
| Total current assets                                                                       |       | 197,565                               |       | 205,910                            |       |
|                                                                                       |       |                                  |       |                               |       |
| Accounts  receivable                                                                       |       | 850                                   |       | 406                                |       |
| Program  license fees—affiliates                                                      |       | 274                                   |       | 245                                |       |
| Program  license fees—non-affiliates                                                  |       | 185,620                               |       | 179,936                            |       |
| Subscriber  acquisition fees, net                                                          |       | 41,665                                |       | 32,659                             |       |
| Property  and equipment, net                                                               |       | 16,313                                |       | 15,958                             |       |
| Goodwill                                                                                   |       | 314,033                               |       | 314,033                            |       |
| Prepaid  and other assets                                                                  |       | 11,463                                |       | 9,547                              |       |
| Total  assets                                                                              |       | $                                     | 767,783    |                               | $          | 758,694 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

3

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| ** **                                                                                                                                                           | ** ** | **As of December 31,** | ** ** | **As of March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                                                           | ** ** | **2006**                              | ** ** | **2007**                           | ** ** |
| LIABILITIES AND STOCKHOLDERS’  DEFICIT                                                                                                                          |       |                                  |       |                               |       |
| LIABILITIES:                                                                                                                                                         |       |                                  |       |                               |       |
| Accounts payable and accrued liabilities                                                                                                                             |       | $                                     | 26,588     |                               | $          | 24,162 |   |
| Accrued restricted stock units                                                                                                                                       |       | 1,513                                 |       | 2,873                              |       |
| Subscriber acquisition fees payable                                                                                                                                  |       | 2,071                                 |       | 1,838                              |       |
| License fees payable to affiliates                                                                                                                                   |       | 2,275                                 |       | 3,705                              |       |
| License fees payable to non-affiliates                                                                                                                               |       | 96,085                                |       | 87,959                             |       |
| Payables to RHI and related companies                                                                                                                                |       | 168                                   |       | —                             |       |
| Payables to affiliates                                                                                                                                               |       | 13,777                                |       | 14,146                             |       |
| Payable to buyer of international business                                                                                                                           |       | 5,098                                 |       | 5,099                              |       |
| Interest payable                                                                                                                                                     |       | 59                                    |       | 96                                 |       |
| Capital lease obligations                                                                                                                                            |       | 672                                   |       | 688                                |       |
| Deferred credit from technical services agreement                                                                                                                    |       | 1,213                                 |       | 1,143                              |       |
| Total current liabilities                                                                                                                                            |       | 149,519                               |       | 141,709                            |       |
|                                                                                                                                                                 |       |                                  |       |                               |       |
| Accrued liabilities                                                                                                                                                  |       | 25,291                                |       | 23,166                             |       |
| License fees payable to non-affiliates                                                                                                                               |       | 88,951                                |       | 104,890                            |       |
| Line of credit and interest payable to HC Crown                                                                                                                      |       | 93,465                                |       | 95,431                             |       |
| Line of credit and interest payable to Hallmark Cards affiliate                                                                                                      |       | 53,364                                |       | 54,394                             |       |
| Payable to buyer of international business                                                                                                                           |       | 4,771                                 |       | 3,793                              |       |
| Senior unsecured note to HC Crown, including accrued interest                                                                                                        |       | 562,167                               |       | 576,435                            |       |
| Credit facility                                                                                                                                                      |       | 87,633                                |       | 93,633                             |       |
| Note and interest payable to Hallmark Cards affiliate                                                                                                                |       | 146,397                               |       | 149,269                            |       |
| Capital lease obligations                                                                                                                                            |       | 15,498                                |       | 15,320                             |       |
| Company obligated mandatorily redeemable preferred  interest                                                                                                         |       | 16,483                                |       | 17,035                             |       |
| Deferred credit from technical services agreement                                                                                                                    |       | 3,188                                 |       | 2,771                              |       |
| Total liabilities                                                                                                                                                    |       | 1,246,727                             |       | 1,277,846                          |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                        |       |                                  |       |                               |       |
| STOCKHOLDERS’ DEFICIT:                                                                                                                                          |       |                                  |       |                               |       |
| Class A common stock, $.01 par value; 200,000,000 shares  authorized; 74,117,654 shares issued and outstanding as of December 31,  2006 and March 31, 2007 |       | 741                                   |       | 741                                |       |
| Class B common stock, $.01 par value; 120,000,000 shares  authorized; 30,670,422 shares issued and  outstanding as of December 31, 2006 and March 31, 2007 |       | 307                                   |       | 307                                |       |
| Paid-in capital                                                                                                                                                      |       | 1,457,032                             |       | 1,457,032                          |       |
| Accumulated deficit                                                                                                                                                  |       | (1,937,024                            | )          | (1,977,232                         | )          |
| Total stockholders’ deficit                                                                                                                                     |       | (478,944                              | )          | (519,152                           | )          |
| Total liabilities and stockholders’ deficit                                                                                                                     |       | $                                     | 767,783    |                               | $          | 758,694 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

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**CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS ANDCOMPREHENSIVE LOSS**

**(In thousands, except per sharedata)**
| ** **                                                                                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                                 | ** ** | **2006**                                             | ** ** | **2007** | ** ** |
| Revenue:                                                                                                                   |       |                                                 |       |   |   |
| Subscriber fees                                                                                                            |       | $                                                    | 6,232      |   | $ | 7,495 |   |
| Advertising                                                                                                                |       | 37,913                                               |       | 45,850 |   |
| Advertising by Hallmark Cards                                                                                              |       | 480                                                  |       | 148 |   |
| Film asset license fees                                                                                                    |       | 270                                                  |       | — |   |
| Sublicense fees and other  revenue                                                                                         |       | 78                                                   |       | 79 |   |
| Total revenue, net                                                                                                         |       | 44,973                                               |       | 53,572 |   |
| Cost of Services:                                                                                                          |       |                                                 |       |   |   |
| Programming costs                                                                                                          |       |                                                 |       |   |   |
| Affiliates                                                                                                                 |       | 2,656                                                |       | 5,562 |   |
| Non-affiliates                                                                                                             |       | 30,937                                               |       | 34,130 |   |
| Amortization of film assets                                                                                                |       | 8,864                                                |       | — |   |
| Subscriber acquisition fee  amortization expense                                                                           |       | 7,790                                                |       | 7,848 |   |
| Amortization of capital lease                                                                                              |       | 289                                                  |       | 289 |   |
| Other costs of services                                                                                                    |       | 3,841                                                |       | 2,948 |   |
| Total cost of services                                                                                                     |       | 54,377                                               |       | 50,777 |   |
| Selling, general and administrative expense                                                                                |       | 9,030                                                |       | 14,193 |   |
| Marketing expense                                                                                                          |       | 4,257                                                |       | 4,212 |   |
| Depreciation and amortization expense                                                                                      |       | 879                                                  |       | 497 |   |
| Loss from operations before  interest expense                                                                              |       | (23,570                                              | )          | (16,107 | ) |
| Interest income                                                                                                            |       | 857                                                  |       | 388 |   |
| Interest expense                                                                                                           |       | (22,560                                              | )          | (24,489 | ) |
| Loss before discontinued  operations and cumulative effect of change in accounting principle                               |       | (45,273                                              | )          | (40,208 | ) |
| (Loss) gain from sale of discontinued operations, net of tax                                                               |       | 162                                                  |       | — |   |
| Loss before cumulative effect  of change in accounting principle                                                           |       | (45,111                                              | )          | (40,208 | ) |
| Cumulative effect of change in accounting principle                                                                        |       | (2,099                                               | )          | — |   |
| Net loss and comprehensive  loss                                                                                           |       | $                                                    | (47,210    | ) | $ | (40,208 | ) |
| Weighted average number of Class A and Class B shares  outstanding, basic and diluted                            |       | 104,788                                              |       | 104,788 |   |
| Loss per share before discontinued operations and cumulative  effect of change in accounting principle, basic  and diluted |       | $                                                    | (0.43      | ) | $ | (0.38 | ) |
| (Loss) gain per share from discontinued operations,  basic and diluted                                                     |       | (0.00                                                | )          | — |   |
| Cumulative effect of change in accounting principle,  basic and diluted                                                    |       | (0.02                                                | )          | — |   |
| Net  loss per share, basic and diluted                                                                                     |       | $                                                    | (0.45      | ) | $ | (0.38 | ) |

 

See accompanying notes tounaudited condensed consolidated financial statements.

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**CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In thousands)**
| ** **                                                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                             | ** ** | **2007** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                        |       |                                                 |       |   |   |
| Net loss                                                                     |       | $                                                    | (47,210    | ) | $ | (40,208 | ) |
| Adjustments to reconcile net  loss to net cash used in operating activities: |       |                                                 |       |   |   |
| Loss (gain) from sale of  discontinued operations                            |       | (162                                                 | )          | — |   |
| Depreciation and amortization                                                |       | 53,355                                               |       | 48,977 |   |
| Accretion on company obligated  mandatorily redeemable preferred interest    |       | 487                                                  |       | 552 |   |
| Provision for allowance for  doubtful accounts                               |       | 916                                                  |       | 330 |   |
| Cumulative effect of change in  accounting principle                         |       | 2,099                                                |       | — |   |
| Loss on sale of property and  equipment                                      |       | —                                               |       | 39 |   |
| Stock-based compensation                                                     |       | (1,907                                               | )          | 1,596 |   |
| Changes in operating assets  and liabilities:                                |       |                                                 |       |   |   |
| (Increase) decrease in  accounts receivable                                  |       | 7,406                                                |       | 5,022 |   |
| (Increase) decrease in  receivable from buyer of international business      |       | 305                                                  |       | 15 |   |
| Additions to program license  fees                                           |       | (35,399                                              | )          | (43,766 | ) |
| (Additions) deletions to  subscriber acquisition fees                        |       | (421                                                 | )          | 176 |   |
| (Increase) decrease in prepaid  and other assets                             |       | 7,196                                                |       | (10,163 | ) |
| Increase (decrease) in  accounts payable, accrued and other liabilities      |       | (24,901                                              | )          | 2,858 |   |
| Increase in interest payable                                                 |       | 16,580                                               |       | 20,172 |   |
| Increase (decrease) in  subscriber acquisition fees payable                  |       | (8,054                                               | )          | (233 | ) |
| Increase (decrease) in license  fees payable to affiliates                   |       | 8,620                                                |       | 1,430 |   |
| Increase (decrease) in  payables to affiliates                               |       | 243                                                  |       | 369 |   |
| Increase (decrease) in  deferred revenues                                    |       | 487                                                  |       | — |   |
| Net cash used in operating  activities                                       |       | (20,360                                              | )          | (12,834 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                        |       |                                                 |       |   |   |
| Purchases of property and  equipment                                         |       | (3                                                   | )          | (206 | ) |
| Payments to buyer of  international business                                 |       | (4,019                                               | )          | (977 | ) |
| Net cash used in investing  activities.                                      |       | (4,022                                               | )          | (1,183 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                        |       |                                                 |       |   |   |
| Proceeds from the issuance of  common stock upon exercise of stock options   |       | 114                                                  |       | — |   |
| Proceeds from tax sharing  agreement with Hallmark Cards                     |       | 5,000                                                |       | — |   |
| Borrowings under the credit  facility                                        |       | 10,000                                               |       | 6,000 |   |
| Principal payments on capital  lease obligations                             |       | (148                                                 | )          | (162 | ) |
| Net cash provided by financing  activities                                   |       | 14,966                                               |       | 5,838 |   |
| Net (decrease) increase in  cash and cash equivalents                        |       | (9,416                                               | )          | (8,179 | ) |
| Cash and cash equivalents, beginning of period                               |       | 15,926                                               |       | 13,965 |   |
| Cash and cash equivalents, end of period                                     |       | $                                                    | 6,510      |   | $ | 5,786 |   |
|                                                                         |       |                                                 |       |   |   |
| Supplemental disclosure of cash and non-cash activities:                     |       |                                                 |       |   |   |
| Interest paid                                                                |       | $                                                    | 4,288      |   | $ | 2,206 |   |
| Income  taxes paid                                                           |       | $                                                    | 3          |   | $ | — |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

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**CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months Ended March31, 2006 and 2007**

**1. Business and Organization**

***Organization***

CrownMedia Holdings, Inc. (“Crown Media Holdings,” “Crown Media” or the “Company”),through its wholly-owned subsidiary, Crown Media United States, LLC (“CrownMedia United States”), owns and operates pay television channels (collectivelythe “Hallmark Channel” or the “channel”) dedicated to high quality,entertainment programming for adults and families in the United States.Significant investors in Crown Media Holdings include Hallmark Entertainment InvestmentsCo. (“Hallmark Entertainment Investments”), a subsidiary of Hallmark Cards,Incorporated (“Hallmark Cards”), the National Interfaith CableCoalition, Inc. (“NICC”), and, indirectly through their investments inHallmark Entertainment Investments, Liberty Media Corporation (“Liberty Media”)and J.P. Morgan Partners (BHCA), L. P. (“J.P. Morgan”).

***Liquidity***

As of March 31, 2007, theCompany had $5.8 million in cash and cash equivalents on hand. As of March 31,2007, the Company had borrowed $93.6 million from a $130.0 million revolvingbank credit facility, which matures May 31, 2008.

The Company’s principalsources of funds are cash on hand, cash generated by operations, tax sharingpayments from Hallmark Cards and amounts available under the Company’srevolving bank credit facility. Payments under the tax sharing agreement areaffected by Hallmark Cards’ tax position and its ability to utilize the Company’stax losses. The Company received $12.0 million in tax sharing payments in 2006and does not currently expect to receive tax sharing payments during 2007. TheCompany currently has $36.4 million of unused revolving credit capacity. TheCompany’s ability to borrow additional amounts under the credit facility is notlimited or restricted as long as no covenants have been violated.

The sufficiency of theexisting sources of liquidity to fund the Company’s operations is dependentupon continued growth in subscriber revenue and advertising revenue. Anydecline in the popularity of the Hallmark Channel, any significant futureadverse modifications to the Company’s distribution agreements, an economicdecline in the advertising market, an increase in program acquisition costs, anincrease in competition or other adverse operating conditions would negatively impactthe Company’s liquidity and its ability to fund the current level of operations

The Company expects tocontinue making investments in programming, marketing and distribution.However, the Company’s recurring loss situation has demanded that all areas ofexpenses, including programming, marketing and distribution be closelymonitored and controlled.

The Company anticipatesthat its principal uses of funds for 2007 will continue to include the paymentof operating expenses, accounts payable and accrued expenses, license fees forprogramming, and interest under its bank credit facility.

The Company currentlybelieves that cash on hand, cash generated by operations and borrowingavailability under its bank credit facility, when combined with the deferral ofany required payments on related-party debt and related interest mentionedbelow, will be sufficient to fund the Company’s operations and meet itsliquidity needs through May 31, 2008.

The Company intends toextend or refinance the Bank credit facility prior to or upon its maturity. Anysuch extension or refinancing might require a continuation of a letter ofcredit from Hallmark Cards or other

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stepsby the Company and,thus, is not assured. If the Company is not able to arrangefor the extension, refinancing or replacement of the bank credit facility priorto its maturity and either (1) the bank draws down on the irrevocable letter ofcredit provided by Hallmark Cards in support of the bank credit facility or (2)Hallmark Cards purchases the interests of the lending banks, Hallmark Cardswould have all obligations and rights of the lending banks under the bankcredit facility. In that event, Hallmark Cards could demand payment ofoutstanding amounts at any time after May 31, 2008, under the terms of thewaiver and standby purchase agreement (“Waiver Agreement”) described below.

Upon maturity of the credit facility on May 31, 2008,the lending group led by JP Morgan Chase has the right to elect to forego thereceipt of cash to pay the principal amount of the credit facility in full,which is provided for under the terms of an irrevocable letter of creditprovided by Hallmark Cards, but instead can elect to initiate a process to foreclose onthe Company’s assets. Such foreclosure proceedings, would adversely affectour ability to continue our operations. Prior to any such possible foreclosureproceedings, however, the Company, if it has not secured an extension of thecredit facility or alternative financing, would cause Hallmark Cards pursuantto the terms of the Waiver Agreement to exercise its option to purchase all ofthe outstanding indebtedness under the credit facility and the credit facilitywould then be subject to terms of the Waiver Agreement.

Due to the Company’spossible inability to meet its obligations when they come due on May 31,2008, the Company anticipates that prior to May 31, 2008, it will benecessary to either extend or refinance (i) the bank credit facility and(ii) the promissory notes payable to affiliates of Hallmark Cardsdescribed in the Notes below. As part of a combination of actions and in orderto obtain additional funding, the Company may consider various alternatives,including refinancing the bank credit facility, raising additional capitalthrough the issuance of equity or debt securities, a sale of certain assets orother strategic alternatives.

**2. Summary of Significant Accounting Policies and Estimates**

***Interim Financial Statements***

Inthe opinion of management, the accompanying condensed consolidated balancesheets and related interim condensed consolidated statements of operations andcash flows include all adjustments, consisting of normal recurring itemsnecessary for their fair presentation in conformity with accounting principlesgenerally accepted in the United States. Interim results are not necessarilyindicative of results for a full year. These condensed consolidated financialstatements should be read in conjunction with the audited consolidatedfinancial statements and the notes to those statements for the year endedDecember 31, 2006, included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2006.

***Basis of Presentation***

Thecondensed consolidated financial statements include the consolidated accountsof Crown Media Holdings, including those of its wholly owned subsidiaries. Allsignificant intercompany balances and transactions have been eliminated inconsolidation.

InApril 2005, the Company completed the sale of its international businessand, accordingly, classified the operating results of the internationalbusiness as discontinued operations in the accompanying condensed consolidatedstatements of operations for all periods presented. The Company’s discontinuedoperations consisted of the international channel operations and the internationalrights to the film library assets.

InDecember 2006, the Company completed the sale of the domestic rights tothe film library assets. The accompanying condensed consolidated statements ofoperations and cash flows do not reflect associated revenue and expenses asdiscontinued operations because the portions of advertising revenue and relatedcash collections that are derived from the Company’s use of the film libraryassets to meet programming requirements of the Channel cannot be clearlydistinguished from advertising revenue and cash collections derived from theuse of programming licensed from third parties.

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***Use of Estimates***

The Company’s condensedconsolidated financial statements are prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”). Theseaccounting principles require the Company to make certain estimates, judgmentsand assumptions. The Company believes that the estimates, judgments andassumptions made when accounting for items and matters such as customerretention patterns, allowance for bad debts, useful lives of assets, ultimaterevenue used in the film asset amortization calculations, cash flow projectionsused in various asset valuations, income taxes, reserves and other provisionsfor contingencies are reasonable, based on information available at the timethey are made. These estimates, judgments and assumptions can affect thereported amounts of assets and liabilities as of the date of the condensedconsolidated financial statements, as well as the reported amounts of revenueand expenses during the periods presented. Actual results could differ fromthese estimates.

***Allowance for Doubtful Accounts***

Theallowance for doubtful accounts is based upon the Company’s assessment of probableloss related to uncollectible accounts receivable. The Company uses a number offactors in determining the allowance, including, among other things, collectiontrends. The Company’s bad debt expense was $916,000 and $330,000 for the threemonths ended March 31, 2006 and 2007, respectively.

***Program License Fees***

Programlicense fees are paid in connection with the acquisition of the rights to airprograms acquired from others. The cost of program rights are deferred and thenamortized on a straight-line basis over the shorter of their contractuallicense periods or anticipated usage. On a quarterly basis, the Companyevaluates the realizability of these deferred license fees in relation to theestimated future revenues. Estimates of net realizable value for programlicense fees are determined using future estimated advertising revenues andanticipated patterns of programming usage on a day part basis as it pertains toprogramming licensed to the channel. These estimates of expected annual futureestimated revenues are compared to net book value of the program license feeassets to determine if the programming assets are expected to be recovered.Where the analysis indicates the costs are in excess of the estimated netrealizable value, additional programming costs are recognized for thedifference.

***Subscriber Acquisition Fees***

Subscriberacquisition fees are generally required to be paid to obtain carriage on majordomestic pay distributors systems. Under certain of these agreements with majorpay distributors, Crown Media United States has in the past been obligated topay subscriber acquisition fees if defined subscriber levels are met or inorder to obtain additional carriage of the Hallmark Channel by those paydistributors. Such costs have been accrued when Crown Media UnitedStates received notice from the distributors that they had met the contractualpenetration percentage or subscriber count.

Subscriberacquisition fees are amortized over the contractual life of the distributionagreements (ranging from 4 to 9 years) as a reduction of subscriber fee revenue. If the amortization expenseexceeds the cumulative subscriber fee revenue recognized, or to be recognized,on a per distributor basis, the excess amortization is included as a componentof cost of services. Crown Media Holdings assesses the recoverability of thesecosts periodically by comparing the net carrying amount to the estimates offuture subscriber fee and advertising revenues. It also assesses therecoverability when events such as changes in distributor relationships occuror other indicators suggest impairment.

***Long-Lived Assets***

The Company reviewslong-lived assets, other than goodwill and other intangible assets withindefinite lives, for impairment whenever facts and circumstances indicate thatthe carrying amounts of the assets may not be recoverable. An impairment lossis recognized if the carrying amount of the asset is not recoverable

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andexceeds its fair value. Recoverability of assets to be held and used ismeasured by comparing the carrying amount of an asset to the estimatedundiscounted future net cash flows expected to be generated by the asset. Ifthe asset’s carrying value is not recoverable, an impairment charge isrecognized for the amount by which the carrying amount of the asset exceeds itsfair value. The Company determines fair values by using a combination ofcomparable market values and discounted cash flows, as appropriate.

Goodwill is reviewed forimpairment annually on November 30 or whenever an event or a change incircumstances indicates fair value might be below carrying value. Goodwill iscarried at historical cost if the estimated fair value is greater than thecarrying amounts. However, if estimated fair value is less than the carryingamount, goodwill is reduced to estimated fair value through an impairmentcharge to the Company’s consolidated statements of operations.

***Revenue Recognition***

Subscriberrevenue from pay television distributors is recognized as revenue when anagreement is executed, programming is provided, the price is determinable, andcollectibility is reasonably assured. Subscriber fees from pay televisiondistributors are recorded net of amortization of subscriber acquisition costsin accordance with Emerging Issues Task Force No. 01-9 (“EITF No. 01-9”),*Accounting for Consideration Given by a Vendor to aCustomer (Including a Reseller of the Vendor’s Products)*. If theamortization expense exceeds the revenue recognized on a cumulative perdistributor basis, the excess amortization is included as a component of costof services.

Advertisingrevenues are recognized as earned in the period in which the advertising istelecast. Revenue is recognized as commercial spots or long form programmingare aired and as ratings guarantees to advertisers are achieved. Advertisingrevenues are recorded net of agency commissions. Agency commissions arecalculated based on a stated percentage applied to gross billing revenue forthe Company’s broadcasting operations. Customers remit the gross billing amountto the agency and the agency remits gross billings less their commission to theCompany. Payments received in advance of being earned are recorded as deferredrevenue.

***Taxes on Income***

Pursuantto the tax sharing agreement entered into with Hallmark Cards in March 2003,the Company’s results of operations for tax purposes became a part of theHallmark Cards consolidated federal tax return as of and subsequent toMarch 2003. However, the Company continues to account for income taxes ona separate return basis. Accordingly, the Company accounts for income taxesusing an asset and liability method which requires the recognition of deferredtax assets and liabilities for the expected future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases and netoperating loss and tax credit carryforwards. Deferred tax assets andliabilities are measured using enacted tax rates expected to be applied totaxable income in the years in which those temporary differences are expectedto be recovered or settled. The Company reduces deferred tax assets by avaluation allowance if it is more likely than not that some portion or all ofthe deferred tax assets will not be realized. Any payments received fromHallmark Cards under the tax sharing agreement are recorded as an increase inadditional paid-in capital. Based on thetax sharing agreement, the Company may ultimately owe Hallmark Cards for itsshare of the consolidated federal tax liability caused by the inclusion of theCompany in the consolidated group. Such payments would be treated as areduction to paid-in capital to the extent of amounts previously received underthe tax sharing agreement.

***Stock-Based Compensation***

The Company accounts forits stock-based compensation under the provisions of the Financial AccountingStandards Board’s (“FASB”) Statement of Financial Accounting StandardsNo. 123—revised 2004 (“SFAS 123R”), *Share-Based Payment,*which replaced Statement of Financial Accounting Standards No. 123 (“SFAS123”), *Accounting for Stock-Based Compensation,*and supersedes APB Opinion No. 25 (“APB 25”), *Accountingfor Stock Issued to Employees*. Under the fair value recognitionprovisions of SFAS

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123R,stock-based compensation cost is measured at the grant date based on the fairvalue of the award and is recognized as expense on a straight-line basis overthe period during which the holder is required to provide services in exchangefor the award, i.e., usually the vesting period. We elected themodified-prospective method, under which the periods prior to 2006 were notrevised for comparative purposes.  Thevaluation provisions of SFAS 123R apply to new grants and to grants that wereoutstanding as of the effective date and are subsequently modified. Estimatedcompensation for grants that were outstanding as of the effective date isrecognized over the remaining service period using the compensation costestimated for the SFAS 123 pro forma disclosures. See Note 12 for further informationregarding our stock-based compensation assumptions and expenses.

***Net Loss Per Share***

Basicnet loss per share is computed by dividing the net loss for the period by theweighted average number of common shares outstanding during the period. Dilutednet loss per share is computed based on the weighted average number of commonshares and potentially dilutive common shares outstanding. The calculation ofdiluted net loss per share excludes potential common shares if the effect wouldbe anti-dilutive. Potential common shares consist of incremental common sharesissuable upon the exercise of stock options. Approximately 864,000, and 360,000stock options for the three months ended March 31, 2006 and 2007, respectively,have been excluded from the calculations of loss per share because their effectwould have been anti-dilutive.

***Concentration of Credit Risk***

Financial instruments,which potentially subject Crown Media Holdings to a concentration of creditrisk, consist primarily of cash, cash equivalents and accounts receivable.Generally, Crown Media Holdings does not require collateral to securereceivables. Crown Media Holdings has no significant off-balance sheetfinancial instruments with risk of accounting losses.

***Recently Issued AccountingPronouncements***

The Company adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes (“FIN 48”), on January 1, 2007. FIN48 requires a new evaluation process for all tax positions taken. If theprobability for sustaining a tax position is greater than 50%, then the taxposition is warranted and recognition should be at the highest amount whichwould be expected to be realized upon ultimate settlement. As of the date ofadoption of FIN 48, the total amount of unrecognized tax benefits for uncertaintax positions was $0. As a result of the implementation of FIN 48, the Companyrecognized no increase or decrease in the amount of unrecognized tax benefitsfor uncertain tax positions.

The Company  recognizes  interest and  penalties related to uncertaintax positions  in  income tax expense.  As of the date of adoption and on March 31,2007, we have no accrued interest related to uncertain tax positions.

The Company  has  been included  in  the consolidated federal income tax returns of  Hallmark  Cards since  March  11, 2003. The Internal Revenue Service is currently examining the 2003-2004tax returns of Hallmark Cards. The Company is subject to examination throughits inclusion in the Hallmark Cards tax return for the tax periods subsequentto March 10, 2003. Pursuant to statutory  provisions,  net operating loss carryforwards (“NOL’s”) are subject  to examination in the year that they are utilized in a tax returnregardless  of  whether the tax year in which they were generated has been closed  by statute.   The amount subject todisallowance is limited to the NOL utilized. Accordingly, the Company is subject to examination for NOL’sgenerated  prior  to March 11, 2003 if and when such NOL’s are utilized in future taxreturns.

The  Company  files state  tax  returns in  major  jurisdictions such as California,  Colorado and  New  York, and  has  also been included in the combined  state tax returns of Hallmark or HallmarkEntertainment Holdings, Inc. The state returns are generally subject toexamination for years after 2001.

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InSeptember 2006, the FASB issued SFAS No. 157, *Fair Value Measurements* (“SFAS No. 157”). SFASNo. 157 defines fair value, establishes a framework for measuring fairvalue and expands disclosures about fair value measurements. SFAS No. 157is effective for the Company as of January 1, 2008. The Company iscurrently evaluating the potential impact of adopting SFAS No. 157.

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities*,including an amendment of SFAS No. 115 (“SFAS No. 159”). SFASNo. 159 permits entities to choose, at specified election dates, tomeasure eligible items at fair value (the “fair value option”). A businessentity shall report unrealized gains and losses on items for which the fairvalue option has been elected in earnings at each subsequent reporting period.This accounting standard is effective as of the beginning of an entity’s firstfiscal year that begins after November 15, 2007. The effect, if any, ofadopting SFAS No. 159 on the Company’s financial position and results ofoperations has not been finalized.

**3. Residual and Participation Liabilities**

OnDecember 15, 2006, we completed the sale of domestic rights and certain internationalancillary rights to our library of approximately 620 television movies,mini-series and series (the “Crown Library”) to RHI Entertainment LLC (“RHI”).  The Company has retained the obligation topay residuals and profit participations based on the domestic exploitation ofthe Crown Library by RHI for a period of ten years following the closing of thesale. Pursuant to Amendment No. 1 to the Purchase Agreement datedDecember 15, 2006, the parties agreed that RHI will assume any liabilitiesassociated with such residuals and participations in excess of $22.5 million inthe aggregate. The cost to the Company of paying these residuals will depend onthe level of RHI’s library sales and its other uses of the library during thisperiod. The Company estimated the fair value of the $22.5 million maximumliability to be approximately $10.9 million at March 31, 2007, which isincluded in long-term accrued liabilities in the accompanying condensedconsolidated balance sheet, to pay the estimated residual and participationcosts that RHI would otherwise be obligated to pay to third parties. The amountof this liability could fluctuate based upon the amount and timing of the salesof these films by the buyer. Any revisions to these estimated liabilities willbe reflected as gain (loss) from the sale of the film assets and reflected incontinuing operations in future periods.

Also, the Companyestimated a liability of approximately $4.6 million to pay the estimatedresidual and participation costs that the buyer of our international business(including international rights to our then film library) in April 2005 wouldotherwise be obligated to pay to third parties through April 2015 in connectionwith film library sales.  The amount of this liability could fluctuate basedupon the actual internal usage or sales of these films by the buyer. Anyrevisions to these estimated liabilities will be reflected as gain (loss) fromthe sale of discontinued operations in future periods.

**4. Subscriber Acquisition Fees**

Subscriber acquisition fees arecomprised of the following:
|                                      | ** ** | **As of December 31,** | ** ** | **As of March 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | **2006**                              | ** ** | **2007**                           | ** ** |
| ** **                           | ** ** | **(In thousands)**               | ** ** |
| Subscriber acquisition fees, at cost |       | $                                     | 189,391    |                               | $          | 182,774 |   |
| Accumulated amortization             |       | (147,726                              | )          | (150,115                           | )          |
| Subscriber  acquisition fees, net    |       | $                                     | 41,665     |                               | $          | 32,659 |   |

 

*Of the net balance at March 31,2007, the Company expects $8.7 million will be recognized as a reduction ofsubscriber fee revenue and $24.0 million will be recognized as subscriberacquisition fee expense in future periods.*

As of December 31,2006, and March 31, 2007, the condensed consolidated balance sheets alsoreflect subscriber acquisition fees payable of $2.1 million and $1.8 million,respectively. For the three months ended March 31, 2006 and 2007, theCompany made cash payments of $8.0 million and $57,000, respectively, relatingto current subscriber acquisition fee obligations.

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**5. Program License Fees**

Program license fees arecomprised of the following:
|                                                           | ** ** | **As of December 31,** | ** ** | **As of March 31,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------|------------|------------------------------------|------------|
| ** **                                                | ** ** | **2006**                              | ** ** | **2007**                           | ** ** |
| ** **                                                | ** ** | **(In thousands)**               | ** ** |
| Program license fees—RHI Entertainment  Distribution |       | $                                     | 212,143    |                               | $          | 211,496 |   |
| Program license fees—NICC                            |       | 197                                   |       | 197                                |       |
| Program license fees—other affiliates                |       | 368                                   |       | 368                                |       |
| Program license fees—other non-affiliates            |       | 326,552                               |       | 357,871                            |       |
| Program license fees, at cost                             |       | 539,260                               |       | 569,932                            |       |
| Accumulated amortization                                  |       | (241,342                              | )          | (267,940                           | )          |
| Program license fees, net                                 |       | $                                     | 297,918    |                               | $          | 301,992 |   |

 

Programming costs for thethree months ended March 31, 2006 and 2007, were $33.6 million and $39.7million, respectively.

At December 31,2006, and March 31, 2007, $10.3 million and $20.2 million of program licensefees were included in prepaid program license fee assets on the accompanyingcondensed consolidated balance sheets as the Company made payments for theprogram license fees prior to commencement of the license period.

Licensefees payable are comprised of the following:
|                                                           | ** ** | **As of December 31,** | ** ** | **As of March 31,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------|------------|------------------------------------|------------|
| ** **                                                | ** ** | **2006**                              | ** ** | **2007**                           | ** ** |
| ** **                                                | ** ** | **(In thousands)**               | ** ** |
| License fees payable—RHI Entertainment  Distribution |       | $                                     | 18,439     |                               | $          | 8,711 |   |
| License fees payable—NICC                            |       | 2,275                                 |       | 3,705                              |       |
| License fees payable—non-affiliates                  |       | 166,597                               |       | 184,138                            |       |
| Total license fees payable                                |       | 187,311                               |       | 196,554                            |       |
| Less current maturities                                   |       | (98,360                               | )          | (91,664                            | )          |
| Long-term license fees payable                            |       | $                                     | 88,951     |                               | $          | 104,890 |   |

 

**6. Property and Equipment**

Property and equipment arecomprised of the following:
| ** **                        | ** ** | **As of December 31,** | ** ** | **As of March 31,** | ** ** | **Depreciable Lives** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|------------------------------------|------------|----------------------------|------------|
| ** **                        | ** ** | **2006**                              | ** ** | **2007**                           | ** ** | **(In years)**        | ** ** |
| ** **                        | ** ** | **(In thousands)**               | ** ** | ** **                         | ** ** |
| Technical equipment and computers |       | $                                     | 15,083     |                               | $          | 7,738                      |       | 3-5 |   |
| Leased assets                     |       | 17,363                                |       | 17,363                             |       | 15                         |       |
| Furniture, fixtures and equipment |       | 1,241                                 |       | 1,281                              |       | 5                          |       |
| Leasehold improvements            |       | 2,853                                 |       | 1,656                              |       | 3-7                        |       |
| Construction-in-progress          |       | 273                                   |       | 15                                 |       |                       |       |
| Property and equipment, at  cost  |       | 36,813                                |       | 28,053                             |       |                       |       |
| Accumulated depreciation          |       | (20,500                               | )          | (12,095                            | )          |                       |       |
| Property and equipment, net       |       | $                                     | 16,313     |                               | $          | 15,958                     |       |   |   |

 

Depreciationexpense related to property and equipment was $783,000 and $522,000, for thethree months ended March 31, 2006 and 2007, respectively.

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Softwareand other intangible assets of $1.0 million as of both December 31, 2006,and March 31, 2007, respectively, have been included in prepaid and otherassets in the accompanying condensed consolidated balance sheets.

**7. Credit Facility**

At March 31, 2007, theCompany had an amended credit agreement with a syndicate of banks, led by JPMorgan Chase Bank, under which the banks have extended to the Company a securedrevolving credit facility with availability of up to $130.0 million. At March 31,2007, the outstanding balance under the credit facility was $93.6 million. TheCompany currently has $36.4 million of unused revolving credit capacity. TheCompany’s ability to borrow additional amounts under the credit facility is notlimited or restricted. The Company and the lending banks originally enteredinto the facility in 2001 and have subsequently amended the terms of thisfacility, with the most recent amendment dated as of March 2, 2007. Thefacility is guaranteed by the Company’s subsidiaries and is secured by alltangible and intangible property of Crown Media Holdings and its subsidiaries.

Each borrowing under thebank credit facility bears interest at a Eurodollar rate or an alternate baserate as the Company may request at the time of borrowing in accordance with thecredit agreement. The Eurodollar rate is based on the London interbank marketfor Eurodollars, and remains in effect for the time period of the loan rangingfrom one, two, three, six or twelve months. 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. TheCompany is required to pay a commitment fee of 0.15% per annum of thecommitted, but not outstanding, amounts under the revolving credit facility,payable in quarterly installments.

At December 31,2006, and March 31, 2007, the Company had outstanding borrowings of $87.6million and $93.6 million, respectively, under the credit facility and therewere no letters of credit outstanding. At December 31, 2006, $87.6 millionof the outstanding balance bore interest at the Eurodollar rate (6.10% atDecember 31, 2006) and $0 bore interest at the JP Morgan Chase Bank primerate. At March 31, 2007, $93.6 million of the outstanding balance bore interestat the Eurodollar rate (6.07% at March 31, 2007) and $0 bore interest at the JPMorgan Chase Bank prime rate. Interestexpense on borrowings under the credit facility for each of the three monthsended March 31, 2006 and 2007, was $2.9 million, and $1.4 million,respectively.

***Covenants***

The creditfacility, as amended, contains affirmative and negative covenants.  The Company’s Annual Report on Form 10-Kcontains a detailed description of these covenants. The Company was incompliance with these covenants at March 31, 2007.

AmendmentNo. 12, dated as of March 2, 2007, extended the maturity date of therevolving credit facility to May 31, 2008. Additionally, the amendmentprovided for the Hallmark Cards letter of credit to be replaced by a JP MorganBank letter of credit for the $130.0 million, with an expiration date ofJune 10, 2008.

**8. Related Party Long-Term Obligations**

***Waiver and Standby Purchase Agreement***

Under the Waiver andStandby Purchase Agreement dated March 21, 2006, as last amended onMarch 2, 2007, Hallmark Cards agreed to defer all payments due on any ofthe following obligations and, except where noted, payment of interest thereonuntil May 31, 2008, or an earlier date as described below as the waivertermination date, whereupon all of these amounts become immediately due andpayable (the “Waiver Period”):

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·                  Line of creditand interest payable to HC Crown, dated December 14, 2001, in the originalprincipal amount of $75.0 million, payable to HC Crown. (Total amountoutstanding at March 31, 2007, including accrued interest was $95.4 million.See *Line of Credit and Interest Payable to HC Crown*below.)

·                  $70.0million line of credit and interest payable to Hallmark Cards affiliate arising out of the Company’s purchase of the HallmarkEntertainment film library. (Total amount outstanding at March 31, 2007,including accrued interest was $54.4 million. See *Line ofCredit and Interest Payable to Hallmark Cards Affiliate*below.)

·                  10.25% senior unsecured note, dated August 5,2003, in the initial accreted value of $400.0 million, payable to HCCrown. (Total amount outstanding at March 31, 2007, including accrued interestwas $576.4 million. See *Senior Unsecured Note*below.)

·                  Note and interest payable to Hallmark Cardsaffiliate, dated as of October 1, 2005, in the principal amount of $132.8million, payable to Hallmark Entertainment Holdings. (Total amountoutstanding at March 31, 2007, including accrued interest was $149.3 million.See *Note and Interest Payable to Hallmark CardsAffiliate*below.)

·                  All obligationsof the Company under the bank credit facility by virtue of Hallmark Cards’deemed purchase of participations in all of the obligations under a letter ofcredit which Hallmark Cards has given in support of the facility or thepurchase by Hallmark Cards of all these obligations pursuant to AmendmentNo. 9 to the bank credit facility.

Hallmark Cards has agreedthat it will not accelerate the maturity of any of the foregoing obligations orinitiate collection proceedings during the Waiver Period. Interest willcontinue to accrue on these obligations during the Waiver Period. The Companywill continue to pay interest on the credit facility during the Waiver Period.

The waiver terminationdate is on May 31, 2008, or earlier upon occurrence of any of thefollowing events:  (a) the Companyfails to pay any principal or interest, regardless of amount, due on anyindebtedness to unrelated parties with an aggregate principal amount in excessof $5.0 million or any other event or condition occurs that results in any suchindebtedness becoming due prior to its scheduled maturity, provided that thewaiver will not terminate if the Company reduces the principal amount of suchindebtedness to $5.0 million or less within five business days of a writtennotice of termination from Hallmark Cards; (b) certain bankruptcy eventsoccur; (c) the Company defaults in its payment of licensing fees under theSecond Amended and Restated Program License Agreement with RHI 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; or (e) the Company fails to payinterest on the bank credit facility described above to the extent thatHallmark Cards has purchased all or a portion of the indebtedness thereunder orto perform any covenants in the Waiver Agreement.

Under the Waiver Agreement,if the bank’s lenders under the bank credit facility accelerate any of theindebtedness under the bank credit facility or seek to collect any indebtednessunder it, then the Company may elect to exercise its right to require thatHallmark Cards or its designated subsidiary exercise an option to purchase allthe outstanding indebtedness under the bank credit facility as provided in thebank credit facility. All expenses and fees in connection with this purchasewould be added to the principal amount of the credit facility obligations.

The Waiver Agreement doesnot limit any existing rights of Hallmark Cards or its affiliates to offsetamounts owed to us under the Hallmark Tax Sharing Agreement and Hallmark Cards’share of the amounts payable under the December 1, 2005, agreement withNICC (described below) against these obligations. On September 1, 2006,Hallmark Cards elected to apply its $3.1 million share of the NICC obligationsagainst the amounts due under the $70.0 million Promissory  Note to Hallmark Entertainment Holdings(described below), thereby reducing the principal amount of that Note by $3.1million.

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Additionally, during thethird quarter of 2006, Hallmark Cards applied $18.0 million of benefit from theTax Sharing Agreement against the principal amount due under the March 21,2006, promissory note with Hallmark Entertainment Holdings. Pursuant to the WaiverAgreement, the Company must make prepayments on the outstanding debt from 100%of any “Excess Cash Flow” during the Waiver Period.  “Excess Cash Flow” is defined as 1) the netproceeds of any debt or equity financings or sale of assets; 2) the net cashproceeds from the incurrence by the Company of indebtedness; 3) the net cashproceeds from the sale, transfer or release by the Company of assets outsidethe ordinary course of business; and 4) if positive, the consolidated net cash flow from operations ofCrown Holdings for any calendar quarter as shown in an SEC report, less cashfunds used to pay current operating expenses and to pay or establish reasonablereserves for future expenses, indebtedness payments, and capital improvementsand replacements as determined by the Board of Directors of the Company.

***Hallmark Letter of Credit***

Pursuant to AmendmentNo. 12 to the bank credit facility, Hallmark Cards has provided anirrevocable letter of credit issued by JP Morgan Chase Bank in the amount of$130.0 million, as credit support for our obligations under the credit facilitywith an expiration date of June 10, 2008.

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

Theaggregate maturies of related party long-term debt for each of the five yearssubsequent to March 31, 2007, are as follows:
| ** **                                                                                                                                                                   | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                                                                   | ** ** | **Total**                                 | ** ** | **1 year** | ** ** | **2 years** | ** ** | **3 years** | ** ** | **4 years** | ** ** | **5 years** | ** ** |
| ** **                                                                                                                                                                   | ** ** | **(In thousands)**                   | ** ** |
| Line of credit and  interest payable to HC Crown, with principal due May 31, 2008 (8.37%  Eurodollar rate at December 31, 2006 and 8.36% Eurodollar rate at March 31,  2007) |       | $                                         | 95,431     |   | $ | — |   | $ | 95,431 |   | $ | — |   | $ | — |   | $ | — |   |
| 10.25 % Senior  unsecured note to HC Crown, including accrued interest, due August 5, 2011                                                                                   |       | 576,435                                   |       | — |   | — |   | — |   | — |   | 576,435 |   |
| Note and interest  payable to Hallmark Entertainment Holdings due May 31, 2008 (8.37% Eurodollar  rate at December 31, 2006 and 8.36% Eurodollar rate at March 31, 2007)     |       | 149,269                                   |       | — |   | 149,269 |   | — |   | — |   | — |   |
| Note and interest  payable to Hallmark Entertainment Holdings due May 31, 2008 (8.37% Eurodollar  rate at December 31, 2006 and 8.36% Eurodollar rate at March 31, 2007)     |       | 54,394                                    |       | — |   | 54,394 |   | — |   | — |   | — |   |
|                                                                                                                                                                         |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                         |       | $                                         | 875,529    |   | $ | — |   | $ | 299,094 |   | $ | — |   | $ | — |   | $ | 576,435 |   |

 

***Interest Paid to HC Crown***

Interest expense paid toHC Crown was $1.1 million for the three months ended March 31, 2006, and$453,000 for the three months ended March 31, 2007.

**9. Related Party Transactions**

***Tax Sharing Agreement***

On March 11, 2003,Crown Media Holdings became a member of Hallmark Cards consolidated federal taxgroup and entered into a federal tax sharing agreement with Hallmark Cards (the“tax sharing agreement”). Hallmark Cards includes Crown Media Holdings in itsconsolidated federal income tax return.

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Accordingly,Hallmark Cards has benefited from past tax losses and may benefit from futurefederal tax losses, which may be generated by Crown Media Holdings. Based onthe tax sharing agreement, Hallmark Cards has agreed to pay Crown MediaHoldings all of the benefits realized by Hallmark Cards as a result ofincluding Crown Media Holdings in its consolidated income tax return. Thesebenefits are estimated and paid 75% in cash on a quarterly basis and thebalance when Crown Media Holdings becomes a federal taxpayer. Under the taxsharing agreement, at Hallmark Cards’ option, this 25% balance may also beapplied as an offset against any amounts owed by Crown Media Holdings to anymember of the Hallmark Cards consolidated group under any loan, line of creditor other payable, subject to limitations under any loan indentures or contractsrestricting such offsets.

The Company received $5.0million and $0 under the Tax Sharing Agreement during and the three monthsended March 31, 2006 and 2007, respectively. Any payments received fromHallmark Cards or credited against amounts owed by Crown Media Holdings to anymember of the Hallmark Cards consolidated group under the tax sharingagreements are recorded as an addition to paid-in capital in the accompanyingcondensed consolidated balance sheets.

***Services Agreement with HallmarkCards***

Under a 2003 intercompanyservices agreement, Hallmark Cards provides Crown Media Holdings with tax, riskmanagement, health safety, environmental, insurance, legal, treasury and cashmanagement services and real estate consulting services. In 2006, the term ofthe agreement was extended to January 1, 2008. Under the agreement, the Companyagreed to pay Hallmark Cards $530,000 per year for each of 2006 and 2007 forthese services, plus out-of-pocket expenses and third party fees, payable inarrears on the last business day of each quarter. However, the Company has not paid these amounts, as  Hallmark Cards has not required payments.

Foreach of the three months ended March 31, 2006 and 2007, Crown Media Holdingshad accrued $133,000 under the agreement. At December 31, 2006, and March31, 2007, non-interest bearing unpaid accrued service fees and unreimbursedexpenses of $11.5 million and $11.8 million, respectively, were included inpayable to affiliates in the accompanying condensed consolidated balancesheets. At December 31, 2006, and March 31, 2007, out-of-pocket expensesand third party fees were $914,000 and $170,000, respectively.

***Trademark Agreement withHallmark Cards***

CrownMedia United States has a trademark license agreement with HallmarkLicensing, Inc. for use of the “Hallmark” mark for the Hallmark Channeland for the Hallmark Movie Channel. During the second quarter of 2006, HallmarkCards extended the trademark license agreements for the Hallmark Channel andthe Hallmark Movie Channel to September 1, 2007. The Company is notrequired to pay any fees under the trademark license agreements.

***Intercreditor Agreement***

The Company has anintercreditor agreement that deals with residual and participation liabilitiesfor the use of film assets by the buyer of the Company’s membership interest inCrown Media Distribution. Under the intercreditor agreement, Hallmark Cards hasagreed that any loan, debt or other amount payable by the Company to HallmarkCards will be subordinate and subject in right of payment to the payment infull of such residual and participation liabilities, but only to the extentthat any such residual and participation liabilities outstanding exceed $22.5million.

**10. Company Obligated Mandatorily Redeemable Preferred Interest andNICC License Agreements**

VISN (a subsidiary ofNICC) owns a $25.0 million company obligated mandatorily redeemable preferredinterest in Crown Media United States (the “preferred interest”) issued inconnection with an investment by

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theCompany in Crown Media United States. On November 13, 1998, the Company,Vision Group, VISN and Henson Cable Networks, Inc. signed an amended andrestated agreement governing the operation of Crown Media United States, asamended at various times through December 1, 2005 (the “company agreement”).

Under the companyagreement, the members agreed that if during any year ending afterJanuary 1, 2005 and prior to December 31, 2009, Crown Media UnitedStates has net profits in excess of $10.0 million, and the preferred interesthas not been redeemed, Crown Media United States will redeem the preferredinterest in an amount equal to the lesser of (i) such excess net profits;(ii) $5.0 million; or (iii) the amount equal to the preferredliquidation preference on the date of redemption. Crown Media United States mayvoluntarily redeem the preferred interest at any time, however, it is obligatedto do so on the date of redemption (December 31, 2010). Due to themandatory redemption provision of the preferred interest, on July 1, 2003,the preferred interest was remeasured at fair value and reclassified tonon-current liabilities in accordance with the provisions of SFAS No. 150.The preferred interest has a liquidation preference of $25.0 million.

A December 2005agreement between Crown Media Holdings and NICC replaced a prior programproduction agreement and settled various disputes which had arisen under theprior agreement. In the new agreement, the Company agreed to fund and licensethe following programming produced by NICC through the end of 2007:

·                  ASunday Morning one-hour series entitled “New Morning with Naomi Judd” at a costof $4.6 million in 2006 and $5.6 million in 2007. The 2007 amounts are payablequarterly.

·                  Aweekday one-hour daily series entitled “New Morning” at a cost of $4.2 millionin 2006 and $5.1 million in 2007. The 2005 amount included a deferred amount of$535,000 to be paid as indicated below for deferred payments. The 2007 amountsare payable quarterly.

·                  ASunday morning programming block, broadcast from 6 a.m. to 12 noon, at acost of approximately $5.8 million in 2006 and $5.8 million in 2007, increasedby a percentage equal to the increase in the Consumer Price Index, in 2007.These amounts include deferred payments of $125,000 for 2005 and $1.5 millionfor each of 2006 and 2007. The 2007 amounts not deferred are payable quarterly.

In addition, Crown MediaHoldings agreed to finish funding four specials, the production of which hadbeen commenced prior to the amendment, at a total additional cost of $1.4million in 2005 and 2006, and to fund an additional two non-dramatic specials,to be produced in 2006 and 2007, at a total cost of $1.3 million. A quarter ofthe amounts for the additional two specials was paid in January 2006,another quarter was paid in June 2006 and the remaining one-half ispayable in June 2007, or upon a change in control (that is, a sale ormerger where the aggregate ownership of Crown Media Holdings by the currentowners becomes less than 50%). The Hallmark Channel is not obligated tobroadcast the latter two specials. Crown Media Holdings will also provide orhas provided $2.0 million in each of 2005, 2006 and 2007 to fund thedevelopment by NICC of “made for television” movies and will pay NICC anadditional $1.0 million if the movie “A Reason to Believe,” which was to beproduced under the prior agreement, is not ultimately produced. The 2005 amountincludes a deferred payment of $1.8 million; the 2006 amount was paidsemi-annually in 2006; and the 2007 amount was paid in January 2007. TheHallmark Channel will have a right of first negotiation to acquire broadcastrights to the movies resulting from this development and, if it elects not toacquire these rights, may still recover a portion of its funding if the moviesare produced for others. In addition, NICC has received $45,000 in consultingfees from a series which RHI Entertainment has produced, and will receive adeferred payment of $750,000 as the last payment for certain terminatedobligations.

The deferred paymentsmentioned above are payable to NICC on December 31, 2007 or upon a changein control, whichever comes first. Added to the deferred amounts will be(1) interest at the rate charged by NICC’s prime lender or (2) ifNICC sells Crown Media Holdings common stock to finance any deficit, the increasein the sale price of the common stock between the time NICC sells the stock tofund a deferred amount and a market price of the Crown Media Holdings commonstock on the date the deferred amounts are paid by Crown Media Holdings.

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In the event there is achange of control of Crown Media Holdings prior to the expiration of theagreement (i.e., December 31, 2007), NICC will immediately receive a $15.0million “termination payment,” any remaining portions of the payments for thenon-dramatic specials and the “made for television” movie development describedabove and the deferred payments described above. The Hallmark Channel will 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 will cease. Also, under existingobligations, Crown Media Holdings would be required to redeem the $25.0 millionpreferred interest of NICC in Crown Media United States, LLC, for that amountplus accrued interest at LIBOR from November 27, 2005.

If there has not been achange of control of the Company by June 30, 2007, Crown Media Holdings isrequired to negotiate with NICC for a period of 60 days regarding continuationof the programming commitments. If at the end of the negotiating period theparties have not reached agreement and Crown Media Holdings is not willing tocontinue the programming commitments at the same levels NICC may compel CrownMedia Holdings to buy all NICC’s outstanding shares of Crown Media Holdingscommon stock at the then current market value by a written notice given nolater than November 1, 2007 (“Put Right”). If NICC sells more than 50% ofthe shares of Crown Media Holdings common stock which it owned as ofFebruary 22, 2001, except as part of a sale of Crown Media Holdings, mostof the commitments and obligations related to programming as described abovecease (at the option of Crown Media United States) at the end of the thencurrent broadcast season (approximately August 31).

The Company has, at NICC’srequest, started negotiations with NICC regarding the continuation of theprogramming commitments. In the event a new agreement is not reached or otherresolution is not reached and NICC seeks to exercise its Put Right, the Companywill endeavor to finance the purchase of the NICC stock through outside sourcesrather than from funds from operations. In the alternative, the Company can, ifnecessary, extinguish NICC’s Put Right completely by offering to continue theprogramming commitments to NICC at the same level as in the current agreement.

During the three monthsended March 31, 2006, and 2007, Crown Media United States paid NICC $7.5  million and $7.3 million, respectively,related to the company agreement as amended.

**11.  RHI Entertainment**

***Program License Agreements withRHI Entertainment Distribution***

CrownMedia United States has licensed programming for distribution in the UnitedStates from Hallmark Entertainment Distribution, now RHI EntertainmentDistribution, since 1998. It currently licenses this programming under aSecond Amended and Restated Program License Agreement dated as ofJanuary 1, 2005 (“Second Restated Agreement”). This Second RestatedAgreement expires on December 31, 2008.

Under the Second RestatedAgreement, RHI Entertainment Distribution is required to produce and deliver toCrown Media United States, and Crown Media United States is required to orderand license from RHI Entertainment Distribution, 31 original movies and 6original mini-series in 2006 and 18 original movies and 3 original mini-seriesin 2007.  Crown Media United States may,however, completely cancel the 2007 commitment to order 18 original movies and3 original mini-series or it may reduce the number of original movies it isrequired to license in each of 2006 and 2007 by up to six movies per year.Crown Media United States exercised this option to reduce by six the number oforiginal movies produced in 2006. It also elected not to exercise its right tocancel the 2007 original productions, but did exercise the option to reduce totwelve the number of original movies produced in 2007. Crown Media UnitedStates has exclusive rights to these original movies and mini-series during athree year exhibition window (the window is five years for certainholiday-themed movies and movies produced in 2005). Crown Media United Statesmay exhibit the original

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moviesand mini-series in any television media in the United States, its territoriesand possessions (together with Puerto Rico), including pay per view and highdefinition television. Crown Media United States may also sublicense itsexhibition rights in any television media regarding the original and othermovies and mini-series covered by the agreement to third parties, subject tothe reasonable consent of RHI Entertainment Distribution. The license feepayable for the original movies produced in 2006 is $1,680,000 per movie and in2007 is $1,764,000 per movie. If the movies are produced for the HallmarkChannel’s “Mystery Movie” series, the license fees are increased by $200,000and if they are holiday-themed movies, the license fees are increased by$100,000. The license fees for mini-series produced in 2006 are $840,000 perhour; and in 2007 are $882,000 per hour. Crown Media United States must also share any revenues from video ondemand or pay per view exploitation with RHI Entertainment Distribution.

In addition to theoriginal movies and mini-Series, Crown Media United States has agreed tolicense from RHI Entertainment Distribution 15 “off-network” movies andmini-series in 2006 through 2013. These programs generally will not have beenseen on cable television in the United States prior to their exhibition on theHallmark Channel. The license fees payable for the off-network movies are$281,420 per movie in 2006; $295,491 per movie in 2007 and $310,266 per moviein 2008 and subsequent years. The license fees payable for the off-network mini-seriesare $351,775 per hour in 2006; $369,364 per hour in 2007 and $387,832 per hourin 2008 and subsequent years. Crown Media United States’ initial exhibitionperiod for these off-network movies and mini-series is three years and CrownMedia United States’ exhibition rights are exclusive in all television media inthe United States, including Puerto Rico. Crown Media United States’ exhibitionrights to these off-network movies and mini-series do not, however, include payper view or video on demand. RHI Entertainment Distribution has an option torequire Crown Media United States to license these off-network movies andmini-series for an additional, consecutive three year period at a cost of 50%of the initial license fee.

Crown Media United Stateshas also agreed to license up to 143 older movies and mini-series from the RHIEntertainment Distribution Library for a three year exclusive exhibitionwindow, at an approximate total cost of $57.5 million. Most of these movies andmini-series have previously been exhibited on the Hallmark Channel or HallmarkMovie Channel.

Under both the currentand previous agreements with RHI Entertainment Distribution, if Crown MediaUnited States sub-licenses any licensed program to a third party, it mustequally share with RHI Entertainment Distribution the excess, if any, of thesublicensing fee over the initial program license fee paid by the Crown MediaUnited States. Crown Media United States did not sub-license any licensedprogram to a third party during either of the three months ended March 31, 2006and 2007.

Programming costs relatedto the RHI Entertainment Distribution program agreements were $9.8 million and$14.8 million for the three months ended March 31, 2006, and 2007,respectively. As of December 31, 2006, and March 31, 2007, $18.4 millionand $8.7 million, respectively, are included in license fees payable tonon-affiliates in the accompanying condensed consolidated balance sheets. CrownMedia Holdings paid RHI Entertainment Distribution $7.4 million and $21.1million for license fees during the three months ended March 31, 2006 and 2007,respectively.

**12. Share-Based Compensation**

CrownMedia Holdings has one stock option plan, the Amended and Restated Crown MediaHoldings, Inc. 2000 Long Term Incentive Plan (the “Plan”). The Plan coversthree types of share-based compensation: Stock Options, Restricted Stock Units(“RSU”) and Share Appreciation Rights (“SAR”) that are subject to SFAS 123R.Compensation cost for stock options issued to employees represented the excessof the quoted market price of the Company’s stock at the measurement date ofthe grant over the exercise price of the option.

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***Stock-Based Compensation***

We currently use theBlack-Scholes option pricing model to determine the fair value of stock options.The determination of the fair value of stock-based payment awards on the dateof grant using an option-pricing model is affected by our stock price as wellas assumptions regarding a number of complex and subjective variables. Thesevariables include our expected stock price volatility over the term of theawards, actual and projected employee stock option exercise behaviors,risk-free interest rate and expected dividends.

We estimate the expectedterm of options granted by taking the average of the vesting term and thecontractual term of the option. We estimate the expected volatility of ourcommon stock by using historical volatility. We base the risk-free interestrate that we use in the option valuation model on U.S. Treasury zero-couponissues with remaining terms similar to the expected term on the options. We donot anticipate paying any cash dividends in the foreseeable future andtherefore use an expected dividend yield of zero in the option valuation model.We are required to estimate forfeitures at the time of grant and revise thoseestimates in subsequent periods if actual forfeitures differ from thoseestimates. We use historical data to estimate pre-vesting option forfeituresand record stock-based compensation expense only for those awards that areexpected to vest. The fair value of all stock-based payment awards is amortizedon a straight-line basis over the requisite service periods of the awards,which are generally the vesting periods.

The Company recorded a$1.9 million compensation benefit related to restricted stock units and $6,000compensation expense related to stock options for the three months ended March31, 2006, on our condensed consolidated statement of operations as a componentof selling, general and administrative expense.

During the three monthsended March 31, 2007, the Company recorded $1.4 million of compensation expenseassociated with the Employment and Performance RSUs which has been included inselling, general and administrative expense in the accompanying condensedconsolidated statements of operations

As of March 31, 2007,there was no unrecognized compensation cost, adjusted for estimatedforfeitures, related to non-vested stock options granted to our employees.Total unrecognized compensation cost will be adjusted for future changes inestimated forfeitures.

***StockOption Information***

A summary of the status of Crown’Stock Option Plan at March 31, 2007, and changes during the period then endedis presented below:
| ** **                       | ** ** | **Shares**              | ** ** | **Exercise  Price  Per Option** | ** **            | **Weighted-   Average  Exercise  Price  Per Option** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------|------------|-------------------------|------------|--------------------------------------|-----------------------|----------------------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **(in thousands)** | ** ** | ** **                           | ** **            | ** **                                                     | ** ** | ** **                                           | ** ** | ** **                      | ** ** |
| Balance,  December 31, 2005 |       | 867                     |       |                                 |                  | $                                                              | 10.42      |                                                 |       |                            |       |   |
| Options forfeited                |       | (57                     | )          | $                                    | 8.94 - 17.4 | 5                                                              | $          | 12.89                                                |       |                            |       |   |   |
| Balance,  December 31, 2006 |       | 810                     |       |                                 |                  | $                                                              | 10.24      |                                                 | 2.09       |                            | $          | 0.00 |   |
| Options  forfeited               |       | (450                    | )          | $                                    | 9.10                  |                                                           | $          | 9.10                                                 |       |                            |       |   |   |
| Balance, March  31, 2007         |       | 360                     |       |                                 |                  | $                                                              | 11.67      |                                                 | 4.24       |                            | $          | 0.00 |   |
| Exercisable                      |       | 360                     |       |                                 |                  | $                                                              | 11.67      |                                                 | 4.24       |                            | $          | 0.00 |   |

 
| ** **                                                       | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                                | ** ** |
|------------------------------------------------------------------|------------|------------------------------|------------|-------------------------------------------------------------|------------|
| **Range of Exercise Prices Per Option** | ** ** | **Shares  Outstanding**      | ** ** | **Weighted Average  Remaining  Contractual Life** | ** ** | **Weighted Average  Exercise Price  Per Option** | ** ** | **Exercisable  Shares** | ** ** | **Weighted Average  Exercise Price  Per Option** | ** ** |
| ** **                                                       | ** ** | **(In thousands)**      | ** ** | **(In years)**                                         | ** ** | ** ** | ** ** | **(In thousands)** | ** ** | ** ** | ** ** |
| $6.30 - 10.50                                          |       | 67                           |       | 2.9                                                         |       | $ | 9.09 |   | 67 |   | $ | 9.09 |   |
| $10.51 - 12.60                                         |       | 235                          |       | 4.8                                                         |       | $ | 11.47 |   | 235 |   | $ | 11.47 |   |
| $12.61 - 14.70                                         |       | 24                           |       | 3.1                                                         |       | $ | 14.00 |   | 24 |   | $ | 14.00 |   |
| $14.71 - 21.00                                         |       | 34                           |       | 4.0                                                         |       | $ | 16.52 |   | 34 |   | $ | 16.52 |   |
|                                                             |       | 360                          |       |                                                        |       |   |   | 360 |   |   |   |

 

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***RestrictedStock Unit Information***

The Company’s restricted stockunits (“RSUs”) vest based on employment, performance and market conditions.Certain RSUs vest either in one-third increments on the anniversary of thegrant date in each of the three years following the grant or all at one time onthe third year anniversary of the grant date, in both cases based on continuingemployment (“Employment RSUs”). Other RSUs granted prior to 2006 vest on thethird anniversary date of the grant date, provided that the price of theCompany’s Class A common stock is at least $14 or higher on that date (“PerformanceRSUs”).

The Company’s RSUs aresettled in either common stock or cash as determined by the Company’s Board ofDirectors. The Company has historically settled the RSUs in cash, andconsidering such past practices, has classified its RSUs as liability awardsfor accounting purposes.

In January 2006, the Company settled vested EmploymentRSUs to one executive for approximately $4.4 million. In June 2006, the Companysettled vested 2003 and 2004 Employment RSUs for approximately $1.5 million incash. InJune 2006, the Company settled vested 2003 and 2004 Board ofDirector RSUs for approximately $80,000 in cash. In August 2006, theCompany settled vested 2005 Employment RSUs for approximately $442,000 in cash.The Company settled the CEO’s RSUs for $203,000 in November 2005, $165,000in February 2006 and $76,000 in May 2006. The CEO’s Performance RSUslapsed without vesting. InAugust 2006, the Company settled vested 2005 Board of Director RSUs forapproximately $34,000 in cash. Additionally, in August 2006, one executive retired,and the Company settled vested Employment RSUs for approximately $16,000 incash.

In August 2006, theCompany’s Board of Directors approved a grant of Employment and PerformanceRSUs to the executive officers and other employees. The Employment RSUs willvest and be settled in stock or cash on August 17, 2009, the thirdanniversary of the grant date, provided the individual holding the RSUs isemployed by the Company on that date. Performance RSUs become eligible to vest(“Achieved Performance RSUs”), in the range of 150% (which results in an awardof additional Performance RSUs) to 0% of the Performance RSUs, depending uponthe successful renewal of specific distributor agreements within certain time periods.Sixty-five percent of the Achieved Performance RSUs will fully vest upon thesigning of the renewal agreements, which the Company intends to complete byNovember 2007. In a second vesting, 65% to 135% (“the Modifier”) of theAchieved Performance RSUs (less the Achieved Performance RSUs previously vestedand settled) will vest on December 31, 2008, based upon a formula usingsubscriber revenue achieved for a specified time period.

The CompensationCommittee of the Board of Directors has the discretion to increase or decreasethe Modifier by 20% and also may extend the deadlines for satisfaction of thevesting conditions in the event that a renewal of the distribution agreementsis delayed for factors beyond the control of the Company.

Under the 2006 RestrictedStock Units Agreement dated October 3, 2006, the Company grantedrestricted stock units to the Company’s CEO. The Employment RSUs will vest andbe settled on the fourth anniversary of the grant date, provided the CEO isemployed by the Company on that date, or upon death or disability. PerformanceRSUs become eligible to vest (“Achieved Performance RSUs”), in the range of150% (which results in an award of additional Performance RSUs) to 0% of thePerformance RSUs, depending upon the successful renewal of specific distributoragreements within certain time periods. Once the final renewal which determinesthe amount of the Achieved Performance RSUs has occurred, 65% of the AchievedPerformance RSUs will vest and be settled. In a second vesting, 65% to 135%(the “Modifier”) of the Achieved Performance RSUs (less the AchievedPerformance RSUs previously vested and settled) will vest and be settled onDecember 31, 2008, based upon a formula using subscriber revenue achievedfor a specified time period.

The Company’sCompensation Committee has the discretion to increase or decrease the Modifierby 20% and also may extend the deadlines for satisfaction of the vestingconditions in the event that a renewal of the distribution agreements isdelayed for factors beyond the control of the Company.

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Under SFAS 123R, the fairvalue of the 2004 and 2005 Employment RSU grants are estimated using aBlack-Scholes option pricing model. The fair value of the 2004 and 2005Performance RSU grants are estimated at each reporting date using a Monte CarloLattice option pricing model. The Company applyies a forfeiture rate to theRSUs as required by SFAS No. 123R.
|                                            | ** ** | ** ** | ** ** | **Weighted-Average  Remaining** | ** ** |
|--------------------------------------------|------------|------------|------------|---------------------------------|------------|
| **Employment RSUs**                   | ** ** | **Units**  | ** ** | **Contractual Term**       | ** ** |
| Nonvested Balance,  December 31, 2005 |       | 1,477,343  |       |                            |       |
| Units issued                               |       | 579,500    |       |                            |       |
| Units settled in cash                      |       | (1,009,453 | )          |                            |       |
| Units forfeited                            |       | (232,423   | )          |                            |       |
| Nonvested  Balance, December 31, 2006 |       | 814,967    |       | 2.27                            |       |
| Nonvested Balance,  March 31, 2007         |       | 814,967    |       | 2.02                            |       |

 

Theclosing price of a share of our common stock was $6.34 on March 31, 2006,and was $3.63 on December 31, 2006. The closing price of a share of ourcommon stock was $5.33 on March 31, 2007.
|                                            | ** ** | ** ** | ** ** | **Weighted-Average  Remaining** | ** ** |
|--------------------------------------------|------------|------------|------------|---------------------------------|------------|
| **Performance RSUs**                  | ** ** | **Units**  | ** ** | **Contractual Term**       | ** ** |
| Nonvested  Balance, December 31, 2005 |       | 688,500    |       |                            |       |
| Units issued                               |       | 990,500    |       |                            |       |
| Units forfeited                            |       | (374,300   | )          |                            |       |
| Nonvested  Balance, December 31, 2006 |       | 1,304,700  |       | 1.25                            |       |
| Nonvested Balance,  March 31, 2007         |       | 1,304,700  |       | 1.01                            |       |

 

AtDecember 31, 2006, the 2004 Performance RSUs were valued at $0.00 per unitand the 2005 Performance RSUs were valued at $0.12 per unit. At March 31, 2007,the 2004 Performance RSUs were valued at $0.00 per unit and the 2005Performance RSUs were valued at $0.58 per unit. The chief executive officerPerformance grant expired in May 2006. Valuation of these Performance RSUgrants is based upon market conditions.

Thefollowing table includes assumptions used to value the Performance RSUs atDecember 31, 2006.
|                           | ** ** | **2004 Grant** | ** ** | **2005 Grant** | ** ** |
|---------------------------|------------|---------------------|------------|---------------------|------------|
| Expected  volatility      |       | 40.80               | %          | 47.20               | %          |
| Expected  dividends       |       | 0                   |       | 0                   |       |
| Expected Term  (in years) |       | 0.41                |       | 1.63                |       |
| Risk-free rate            |       | 5.09                | %          | 4.82                | %          |

 

The following table includesassumptions used to value the Performance RSUs at March 31, 2007.
|                           | ** ** | **2004 Grant** | ** ** | **2005 Grant** | ** ** |
|---------------------------|------------|---------------------|------------|---------------------|------------|
| Expected  volatility      |       | 43.29               | %          | 50.98               | %          |
| Expected  dividends       |       | 0                   |       | 0                   |       |
| Expected Term  (in years) |       | 0.16                |       | 1.38                |       |
| Risk-free rate            |       | 5.06                | %          | 4.74                | %          |

 

Under SFAS 123R, the fairvalue of each 2006 Employment and Performance RSU grant is estimated using thefair value of $3.63 based upon the closingprice of a share of our common stock as of the December 31, 2006,reporting date. Under SFAS 123R, the fair value of each 2006 Employmentand Performance RSU grant is estimated using the fair value of $5.33 based uponthe closing price of a share of

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our common stock as of the March 31, 2007, reportingdate. Valuation of the 2006 Employment RSUs is based solely on a servicecondition. Valuation of the 2006 Performance RSUs is based upon a servicecondition and a performance condition.

In connection with theadoption of SFAS 123R, we recorded totalcompensation costs related to RSUs granted under the Plan of $2.1 million as acumulative catch-up adjustment during the year ended December 31, 2006.Prior to January 1, 2006, the Performance RSUs were not recorded on theCompany’s financial statements as a liability, as it was not deemed probablethat these units would be settled based on the performance of the Company’s commonstock. Additionally, the Company did not account for forfeitures. Commencing in2006, the Company established a liability for the fair market value of thePerformance RSUs based on an option-pricing model. Further, the PerformanceRSUs are reviewed quarterly for changes in the fair market value.
|                                            | ** ** | ** ** | ** ** | **Weighted-Average  Remaining** | ** ** |
|--------------------------------------------|------------|------------|------------|---------------------------------|------------|
| **Board of Directors RSUs** | ** ** | **Units**  | ** ** | **Contractual Term**       | ** ** |
| Nonvested  Balance, December 31, 2005 |       | 32,468     |       |                            |       |
| Units issued                               |       | 103,549    |       |                            |       |
| Units settled in cash                      |       | (28,710    | )          |                            |       |
| Units forfeited                            |       | (26,157    | )          |                            |       |
| Nonvested  Balance, December 31, 2006 |       | 81,150     |       | 2.32                            |       |
| Nonvested Balance,  March 31, 2007         |       | 81,150     |       | 2.08                            |       |

 

***Chief Executive Officer (“CEO”) Share AppreciationRights Agreement***

Under Share AppreciationRights Agreement dated October 3, 2006, the Company has agreed to grantstock appreciation rights (“SARs”) to the CEO upon occurrence of certainevents. The value of each SAR corresponds to the value of one share ofClass A common stock and will be settled at the Company’s discretion inClass A common stock or cash. SARs will be granted during the term ofemployment the day after the fair market value of the Company’s stock reachesthe “threshold price” and stays at the threshold price or higher for 60consecutive calendar days. SARs will then be granted each time that the fairmarket value of the Company’s stock increases another incremental five dollarsover the previous price at which a SAR grant was triggered and stays at suchprice or higher for 60 consecutive calendar days. Upon the occurrence of eachevent which triggers a SAR grant, the CEO will be granted that number of SARswith a value equal to 0.8% of the Enterprise Growth as of the grant datedivided by the triggering Company stock price. “Enterprise Growth” equals theincrease in market capitalization (compared to the market capitalization basedon the Start Price or the last price triggering a grant of an SAR), adjustedupward or downward by the amount of debt incurred or paid down since the StartDate or last trigger date, as applicable. “Threshold price” shall mean theaverage of the fair market value for the 5 business days prior to the date ofannouncement of the CEO’s employment (i.e., October 4, 2006) (“Start Price”)plus five dollars.

In the event of a changein control of the Company, then as of the change in control, (i) if therehas been no prior SAR trigger and the change in control price (price of theCompany’s stock less transaction costs and certain other amounts) exceeds theStart Price, then the CEO shall be granted that number of SARs equal to 0.8% ofthe Enterprise Growth divided by the change in control price; or (ii) ifthere has been a previous SAR trigger and the change in control price exceedsthe previous SAR trigger, then the CEO shall be granted that number of SARsequal to 0.8% of the Enterprise Growth divided by the change in control price.If the CEO’s employment is terminated without cause by the Company or by himfor good reason or because of his death or disability, and if a change in controloccurs within 90 days after the termination of employment or an agreement thatwill result in a change of control is executed prior to the termination and thechange of control occurs within 180 days after the termination, the CEO willreceive a grant of SARs on the basis described above.

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SARs will vest upon theearlier of (i) 3 years of employment after the grant date,(ii) termination of employment without cause by the Company,(iii) termination by the CEO for good reason or (iv)  upon a changein control of the Company. The Company at its discretion may settle SARs incash or in stock.

The fair value of the CEO’sSAR grant is estimated at each reporting date using a Monte Carlo Latticeoption pricing model. At December 31,2006, and the CEO’s SARs were valued at $872,616 using the closing price of ashare of our common stock on December 31, 2006, of $3.63. At March 31,2007, and the CEO’s SARs were valued at $2.0 million using the closing price ofa share of our common stock on March 31, 2007, of $5.33. Valuation of this SARgrant is based upon market and service conditions. The Company recorded$59,000 in compensation expense related to SARs for the year endedDecember 31, 2006, on our consolidated statement of operations as acomponent of selling, general and administrative expense. The Company recorded$236,000 in compensation expense related to SARs for the three months endedMarch 31, 2007, on our statement of operations as a component of selling,general and administrative expense. The SARs have been recorded in accountspayable and accrued liabilities in the accompanying consolidated balance sheetfor the year ended December 31, 2006.

Thefollowing table includes assumptions used to value the SARs atDecember 31, 2006.
| Expected volatility             |   | 46.91   | %      |
|---------------------------------|--------|---------|--------|
| Expected  dividends             |   | 0       |   |
| Expected Term  (in years)       |   | 3.56    |   |
| Risk-free rate                  |   | 4.72    | %      |
| Average Number of SARs  granted |   | 240,390 |   |

 

Thefollowing table includes assumptions used to value the SARs at March 31, 2007.
| Expected volatility             |   | 40.71   | %      |
|---------------------------------|--------|---------|--------|
| Expected  dividends             |   | 0       |   |
| Expected Term  (in years)       |   | 3.25    |   |
| Risk-free rate                  |   | 4.54    | %      |
| Average Number of SARs  granted |   | 369,409 |   |

 

**13. Employee Benefits**

***Deferred Compensation Plans***

The Company sponsors adeferred compensation plan for its management. Participants in this plan earninterest on their deferred compensation. Related liabilities of $3.3 millionand $2.4 million at December 31, 2006, and March 31, 2007, respectively,are included in the accompanying condensed consolidated balance sheets amongshort and long-term accrued liabilities. The Company suspended this plan for2006 and no deferral of employee compensation earned was allowed in 2006. TheCompany continued to pay interest on amounts deferred in previous years and paidout these amounts in accordance with the terms of the plan. The Companyreactivated the plan in 2007.

The Company also sponsorsa deferred compensation plan for its Board of Directors. Participants in thisplan earn interest on their deferred compensation. Related liabilities of$589,000 and $292,000 at December 31, 2006, and March 31, 2007,respectively, are included in the accompanying condensed consolidated balancesheets among short and long-term accrued liabilities. The Company suspendedthis plan for 2006 and no deferral of director compensation earned was allowedin 2006. The Company continued to pay interest on amounts deferred in previousyears and paid out these amounts in accordance with the terms of the plan. TheCompany reactivated this plan in 2007.

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**14. Customer and Segment Information**

The Company’scontinuing operations are currently organized into one operating segment, thedomestic channels. Five of our distributors each accounted for more than 10% ofour condensed consolidated subscriber revenue for both the three months endedMarch 31, 2006 and 2007, and together accounted for a total of 90% and 92% ofconsolidated subscriber revenue for those periods, respectively.  Three of our distributors each accounted formore than 15% of our consolidated subscribers for both the three months endedMarch 31, 2006 and 2007, and together accounted for 60% and 66% of oursubscribers on those dates, respectively.

**16. Commitments and Contingencies**

In the normal course of business, the Company hasentered into agreements that commit it to make cash payments in future periodswith respect to non-cancelable leases and programming contracts.

In accordance with the Purchase and Sale Agreement datedFebruary 23, 2005, Sparrowhawk Media Limited has made several warranty andindemnity claims against the Company of approximately $2.0 million. The Companyrecorded an accrual related to this claim during the year ended December 31,2006, which is included in accounts payable and accrued liabilities in theaccompanying condensed consolidated balance sheet. The Company estimated thatit may be liable within the range of $500,000 to $1.0 million related to theseclaims at both December 31, 2006, and March 31, 2007.

**ITEM 2.  *Management’s Discussion and Analysis of FinancialCondition and Results of Operations***

The following discussion and analysis of the Company’sfinancial condition and results of operations should be read in conjunctionwith “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006.

**Description of Business and Overview**

*CurrentBusiness*

CrownMedia Holdings, Inc. (“Crown Media Holdings,” “Crown Media” or the “Company”),through its subsidiary, owns and operates pay television channels (collectivelythe “Hallmark Channel,” the “Hallmark Movie Channel,” the “channel” orcollectively the “channels”) dedicated to high-quality entertainmentprogramming for adults and families, in the United States.

With 76.0 millionsubscribers (as provided by Nielsen Research) in the United States at March 31,2007, the Hallmark Channel is the 39th most widely distributed advertising-supported cable channel in theUnited States. For the first quarter of 2007, the Hallmark Channel finished thequarter as the 11th highest rated advertising-supported cablechannel for total day ratings and the8th highest rated advertising-supported cablechannel in prime time as measured by Nielsen Research.

The Hallmark MovieChannel focuses on movies and mini-series. It will generate advertising revenuein 2007, and as distribution continues to expand, the financial contribution ofthe Hallmark Movie Channel may grow. The Hallmark Movie Channel is operatedthrough Crown Media Holdings existing infrastructure at a small incrementalcost, which will increase since we have completed the sale of our domestic filmlibrary and will need to acquire more third-party programming for the HallmarkMovie Channel.

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*CurrentChallenges*

The Hallmark Channelfaces numerous operating challenges. Among them are maintaining and expandingthe distribution of the channels, broadening viewership demographics andimproving viewership ratings, and increasing advertising sales revenue.

Distribution agreementsare important because they affect our number of subscribers, which in turn hasa major impact on our subscriber fees, the number of persons viewing ourprogramming, and the rates charged for advertising. The current and long-termdistribution challenges are renewing our distribution arrangements with themultiple system operators as they expire. Our major distribution agreements haveterms which expire at various times through February 2012. Agreementswhich provide approximately two-thirds of our subscriber base at April 30,2007, will expire and be the subject of renewal negotiations on or prior toDecember 31, 2007.****Whilethe economics of the renewals and potential cash incentive payments are unknownand could have a significant impact on our business, we believe that theratings success of the Hallmark Channel and the positive family-friendlyenvironment we have created with our programming schedule will assist us in ourrenewal discussions. Any renewals of these distribution agreements may also besignificant as to whether we are able to maintain or increase our subscriberfees. Since January 1, 2007, the Company has renewed its agreements with three majordistributors, accounting for 19% of our subscriber base at April 30,2007.  As previously announced, one ofthose renewal agreements was a multi-year agreement in March 2007 with EchoStarCommunication Corporation that provides for a repositioning of the HallmarkChannel on the DISH Network, resulting in an addition of approximately 5.7 millionNielsen subscribers in April 2007, and for carrying the Hallmark Movie Channelon a package of the DISH Network, increasing distribution of that Channel bymore than 4.0 million subscribers.

Our agreements with majordistributors 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.

Domestic telephonecompanies are entering the business of distributing television channels tohouseholds through their wire-lines. We have reached agreements with severaltelephone companies and cooperatives of telephone companies, which permit thecarriage of the Hallmark Channel and the Hallmark Movie Channel, and arenegotiating with others. We expect that subscribers to these telephone serviceswill in large part be customers previously served by cable and satellitetelevision companies, which continue to carry our programming. To date,subscribers and revenues through telephone companies have not been significant.

Three factors havecontributed to the ratings improvements of the Hallmark Channel: acquiredseries and movies, original productions and marketing. Acquired series such as *Little House on the Prairie*, *Walker,Texas Ranger* and *M*A*S*H* haveconsistently delivered strong ratings across all day-parts. Originalproductions are our most high profile programs and generate the channel’shighest ratings. Original productions are significant in helping ourdistribution and advertising sales teams sell the channel. Substantially all ofour original programming has in the past been provided by RHI Entertainment,but in the future, we will acquire some of this programming from otherproducers. The Company typically incurs additional marketing expensessurrounding original productions and certain acquired movies.

We have extended ourprogram license for *M*A*S*H*;however, commencing January 1, 2007, our rights became non-exclusive incable television and we may only broadcast the series from 8 a.m. to8 p.m. Previously, *M*A*S*H* hasbeen aired on the Hallmark Channel during primetime on an exclusive basis. Thischange was made for cost savings. Beginning in the fourth quarter of 2006, wefilled the late night programming position previously occupied by *M*A*S*H*with two-hour movies. To date, the ratings from thisday part have not been significantly different from the ratings received when *M*A*S*H*filled this programming position.

To continue the ratingsgrowth and enhance the demographics of our viewers, including attracting ayounger audience, the Hallmark Channel must continue to invest in programmingand marketing.

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Delivering strong ratingsgrowth to larger audiences has made it possible for our advertising sales togrow rapidly over the last few years. To advertisers, the Hallmark Channeloffers a strong brand, positive environment and family friendly programming witha successful growth pattern. These characteristics have enabled the channel tosell to a broader range of advertisers, including those in the packaged goodsand pharmaceutical industries.

We sold approximately 46%of our inventory for advertising on our Channels in the upfront market(generally sales in June, July and August for the last quarter of2006 and the first three quarters of 2007), compared to 50% to 55% sold in the2005 upfront market. We were able to achieve significant increases in our CPMs inthe 2006 upfront market compared to the 2005 upfront market. The balance ofadvertising inventory has been made available in the scatter market, which inthe past and in the first quarter of 2007 has yielded higher advertising ratesthan the upfront market.

**Revenue from Continuing Operations**

*Our revenue consists of subscriber fees and advertising.*

*Subscriber Fees*

Subscriberfees are 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 subscribervary among our distributors for many reasons, including the following:

·              The level ofsophistication and degree of competition in the market;

·              The relative positionin the market of the distributor and the popularity of the channel;

·              The packagingarrangements for the channel; and

·              Other commercialterms and length of the contract term.

We are in continuous negotiationswith our existing distributors to increase our subscriber base in order toenhance our advertising results. We have been subject to requests by majordistributors to pay subscriber acquisition fees for additional subscribers orto waive or accept lower subscriber fees if certain numbers of additionalsubscribers are provided. We also may help fund the distributors’ efforts tomarket our channels or we may permit distributors to offer limited promotionalperiods without payment of subscriber fees. We believe that the need for these free carriage periods, payments foradditional subscribers and similar concessions may diminish as the HallmarkChannel becomes more fully distributed. As we continue our efforts to renew ourdistribution agreements, however, subscriber fee revenues could be negativelyaffected by our distributors’ emphasis on reducing their programming costs andmoving programming services and subscribers to digital distribution systems.During the distributor’s transition from analog to digital distributionsystems, short-term subscriber losses could occur.

Our channel is usually offered asone of a number of channels on either a basic tier or part of other programpackages and is not generally offered on a stand-alone basis. Thus, whilea cable or satellite customer may subscribe and unsubscribe to the tiers andprogram packages in which our channel is placed, these customers do notsubscribe and unsubscribe to our channel alone. We are not provided with information from the distributors on theiroverall

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subscriber churn and in what manner their churn ratesaffect our subscriber counts; instead, we are provided information on the totalnumber of subscribers who receive the Hallmark Channel.

Our subscriber count depends onthe number of distributors carrying the Hallmark Channel, the size of suchdistributors, and the program tiers on which our channel is carried by thesedistributors. From time to time, we experience decreases in the number ofsubscribers as promotional periods end or the Hallmark Channel is moved fromanalog to digital carriage or as a distribution agreement is amended orterminated by us or the distributor.

#### A*dvertising*

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 (numbers of viewers and demographics)levels in connection with their advertising. Revenue is recorded net ofestimated delivery shortfalls, which are usually settled by providing theadvertiser additional advertising time. Advertising rates also vary by time ofyear due to seasonal changes in television viewership.

*Film AssetLicense Fees*

Prior to our sale of Crown Media Distribution in December 2006, wegenerated revenue from film assets by granting licenses to third parties toexhibit the films in the United States. We also used the films as programmingfor the Hallmark Channel and the Hallmark Movie Channel. Customers for our filmassets consisted of other television channels, home video distributors andbrokers who resell rights to our film assets. License fees for our film assetswere generally negotiated based, among other things, upon the size of thepotential audience which will be viewing the programming and the term of thelicense.

**Cost of Services**

*Our cost of services has consisted primarily of program license fees;subscriber acquisition fee expense; the cost of signal distribution;administration, and the cost of promotional segments that are aired betweenprograms. We expect cost of services to continue to increase in the future aswe expand and improve our programming, marketing, and promotion to support ouradvertising strategy.*

**Critical Accounting Policies, Judgmentsand Estimates**

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requiresCrown Media Holdings to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

For further information regarding our critical accounting policies,judgments and estimates, please see the Notes to Unaudited CondensedConsolidated Financial Statements contained in Item 1 of this Report and “CriticalAccounting Policies, Judgments and Estimates” in Item 7 of the Company’s AnnualReport on Form 10-K for the year ended December 31, 2006, as filed with theSEC.

**Effects of Transactions with Related andCertain Other Parties**

In 2007 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 such transactions and transactions with otherrelated parties, please see “Effects of Transactions with Related and CertainOther Parties” in Item 7 of the Company’s Annual Report on Form 10-K for theyear ended December 31, 2006, filed with the SEC and Notes 8 and 9 ofNotes to Unaudited Condensed Consolidated Financial Statements contained inItem 1 of this Report.

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

In the table below, we provide selected historicalcondensed consolidated financial and other data of Crown Media Holdings and itssubsidiaries. The following selected condensed consolidated statement ofoperations data for three months ended March 31, 2006 and 2007, are derivedfrom the unaudited financial statements of Crown Media Holdings and itssubsidiaries (except ratings and subscriber information). This data should beread together with the condensed consolidated financial statements and relatednotes included elsewhere in this Form 10-Q.
| ** **                                                 | ** ** | ** **                                           | ** ** | **Percent  Change** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|---------------------|------------|
| ** **                                                 | ** ** | **Three Months Ended March 31,** | ** ** | **2007 vs.**   | ** ** |
| ** **                                                 | ** ** | **2006**                                             | ** ** | **2007**            | ** ** | **2006** | ** ** |
| Revenues:                                                  |       |                                                 |       |                |       |   |   |
| Subscriber fees                                            |       | $                                                    | 6,232      |                | $          | 7,495 |   | 20 | % |
| Advertising                                                |       | 38,393                                               |       | 45,998              |       | 20 | % |
| Film asset license fees                                    |       | 270                                                  |       | —              |       | -100 | % |
| Sublicense fees and other revenue                          |       | 78                                                   |       | 79                  |       | 1 | % |
| Total revenues                                             |       | 44,973                                               |       | 53,572              |       | 19 | % |
| Cost of  Services:                                         |       |                                                 |       |                |       |   |   |
| Programming costs                                          |       | 33,593                                               |       | 39,692              |       | 18 | % |
| Amortization of film assets                                |       | 8,864                                                |       | —              |       | -100 | % |
| Subscriber acquisition fee amortization                    |       | 7,790                                                |       | 7,848               |       | 1 | % |
| Operating costs                                            |       | 4,130                                                |       | 3,237               |       | -22 | % |
| Total cost of services                                     |       | 54,377                                               |       | 50,777              |       | -7 | % |
| Selling, general  and administrative expense               |       | 9,909                                                |       | 14,690              |       | 48 | % |
| Marketing  expense                                         |       | 4,257                                                |       | 4,212               |       | -1 | % |
| Loss from  continuing operations before interest expense   |       | (23,570                                              | )          | (16,107             | )          | -32 | % |
| Interest expense                                           |       | (21,703                                              | )          | (24,101             | )          | 11 | % |
| Loss from  continuing operations                           |       | (45,273                                              | )          | (40,208             | )          | -11 | % |
| Gain (loss) on  sale of discontinued operations            |       | 162                                                  |       | —              |       | -100 | % |
| Cumulative  effect of change in accounting  principal |       | (2,099                                               | )          | —              |       | 100 | % |
| Net loss                                                   |       | $                                                    | (47,210    | )                   | $          | (40,208 | ) | -15 | % |
|                                                       |       |                                                 |       |                |       |   |   |
| **Other  Data:**                                           | ** ** | ** **                                           | ** ** | ** **          | ** ** | ** ** | ** ** |
| Net cash used in  operating activities                     |       | $                                                    | (20,360    | )                   | $          | (12,834 | ) | -37 | % |
| Capital  expenditures                                      |       | $                                                    | (3         | )                   | $          | (206 | ) | 6767 | % |
| Net cash  provided by financing activities                 |       | $                                                    | 14,966     |                | $          | 5,838 |   | -61 | % |
| Total domestic  day household ratings (1)(3)               |       | 0.742                                                |       | 0.732               |       | -1 | % |
| Total domestic  primetime household ratings (2)(3)         |       | 1.121                                                |       | 1.159               |       | 3 | % |
| Subscribers at  period end                                 |       | 71,852                                               |       | 76,240              |       | 6 | % |

 

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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 sponsoredprogramming ends.

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

(3) These Nielsenratings are for the time period January 1 through March 31.

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

#### *Three Months Ended March 31,2006 Compared to Three Months Ended March 31, 2007*

*Revenue. *Our revenue fromcontinuing operations, which is comprised of subscriber fees and advertising,increased 19% to $53.6 million for the three months ended March 31, 2007. Our 20% increase to $7.5 million in subscriberfee revenue for the three months ended March 31, 2007, was a result of theexpiration of free carriage periods during 2006 for certain of our domesticdistributors and an increase in our subscriber fees. Many of our distribution dealsrequired us to provide a period of free carriage to the cable operator.Subscriber acquisition fee expense recorded as a reduction of revenue was$982,000 for the three months ended March 31, 2007, and $2.2 million for thecomparable period in 2006, primarily due to the renewal of distributionagreements and the resulting reversal of certain subscriber acquisition feesassociated with the previous agreements during the first quarter of 2007.Subscribers have increased as a result of previously amended distributionagreements in the United States, which provided for incentives for growth indistribution.

The increase in advertising revenue to $46.0 million forthe three months ended March 31, 2007, compared to $38.4 million for the threemonths ended March 31, 2006, reflects the growth in domestic subscribers and anincrease in advertising rates. Generally, as we have expanded our domesticsubscribers and provided higher rated programming, our advertising revenue hasincreased. The number of advertisers was 439 at March 31, 2007, as compared to427 at March 31, 2006.

Amongthe 69 ad-supported cable channels in the United States market, the HallmarkChannel ranked 11th in total day with a 0.732 household rating forthe three months ending March 31, 2007 and 8th forprimetime with a 1.159 household rating for the same period based on Nielsenratings. This ratings performance is significant, particularly because theHallmark Channel is not a fully distributed network. Most of the channels thatrate above the Hallmark Channel have higher levels of distribution.

Revenue from thesale of our film assets totaled $0 for the three months ended March 31, 2007, comparedwith $270,000 for the comparable period in 2006.  The Company sold itsfilm assets in December 2006.

*Cost of services. *Cost of services as apercent of revenue decreased to 95% in 2007, as compared to 121% in 2006. Thisdecrease was primarily due to changes in our cost of services as explainedbelow.

Total programmingcosts for the three months ended March 31, 2007, increased 18% due directly to the expensing (instead ofamortizing over a period of time) of certain NICC programming, higheramortization of more original programs produced to air on the Hallmark Channelin the current period as compared to the prior period, and $1.7 million inwrite-offs of certain programming during the first quarter of 2007. The$8.9 million decrease in amortization of film assets was primarily due to thesale of our film assets in December 2006.

The Company’s bad debt expense was $916,000 for thethree months ended March 31, 2006, as compared to the Company’s bad debtexpense of $330,000 for the three months ended March 31, 2007. This decrease inbad debt expense was due to the Company’s increased collection efforts in 2007.

Subscriberacquisition fee amortization expense results from subscriber acquisition costsincurred previously by us and amortized over the remaining life of the relevantdistribution agreement.

*Selling, general andadministrative expense.* Our selling, general and administrativeexpense increased 48% due to a $3.3 million increase and a $236,000 increase incompensation expense related to the obligations of restricted stock units andstock appreciation rights, a $702,000 increase in other benefits expense, and a$1.2 million increase in commissions expense, offset in part by a $382,000decrease in depreciation and amortization expense related to assets becomingfully depreciated. Our closing stock price was $9.17 at December 31, 2005,$6.34 at March 31, 2006, $3.63 at December 31, 2006 and $5.33 at March 31,2007. The closing stock prices are used to value both our restricted stockunits and our stock appreciation rights. Any increases/decreases in our closingstock price causes increases/decreases in our compensation expense.

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*Interest expense. *Interestexpense increased for the three months ended March 31, 2007, compared to March31, 2006, by $2.4 million.  This increasewas due to the $2.1 million increase in interest on our $400.0 million seniorunsecured note, the $367,000 increase in interest on our $132.8 million notepayable to Hallmark Cards affiliates, the $868,000 increase in interest on our$70.4 million note payable to Hallmark Cards affiliates commencing March 21,2006, the $326,000 increase in interest on our $86.3 million note payable toHallmark Cards affiliates, and offset in part by the $1.5 million decrease ininterest on our bank credit facility due to a lower principal balance.  The majority of the aforementioned increasesoccurred due to increases in principal balances.

*Lossfrom Continuing Operations. *Lossfrom operations for the three months ended March 31, 2007, was $40.2 million.Loss from continuing operations for the three months ended March 31, 2006, was$45.3 million. Our loss from continuing operations decreased primarily due tohigher advertising and subscriber revenue and the elimination of film assetsamortization, partially offset by higher expenses, primarily programming andinterest expenses.

*Cumulative effect of change in accounting principle.  *On January 1, 2006, weadopted SFAS 123R. The total compensationcost related to 2004 and 2005 performance RSUs granted under the Plan net ofestimated forfeitures was $2.1 million, which was recorded as a cumulativecatch-up adjustment during the three months ended March 31, 2006. Under prioraccounting treatment, the performance RSUs were not classified as a liabilityas it was deemed improbable that these RSUs would settle based upon theperformance of our Class A common stock.

## **Liquidityand Capital Resources**

Cash used in operating activities from continuingoperations was $20.4 million and $12.8 million for the three months ended March31, 2006 and 2007.**Lossfrom operations for the three months ended March 31, 2006 and 2007, was $45.3million and $40.2 million, respectively. Duringthe three months ended March 31, 2006, the Company made payments of $8.0million for subscriber acquisition fees. During the three months ended March31, 2007, the Company made payments of $57,000 for subscriber acquisition fees.

Cash used in investing activities was $4.0 million and$1.2 million for the three months ended March 31, 2006 and 2007, respectively.During the three months ended March 31, 2006, the Company made payments to thebuyer of the international business of $4.0 million. During the three monthsended March 31, 2007, the Company made payments to the buyer of theinternational business of $977,000.

Cash provided by financing activities was $15.0 millionand $5.8 million for the three months ended March 31, 2006 and 2007,respectively. During the three months ended March 31, 2006 and 2007, wereceived proceeds of $5.0 million and $0, respectively, from our tax sharingagreement with Hallmark Cards. We borrowed $10.0 million and $6.0 million underour credit facility to cover the cash we used in operating and investingactivities during the three months ended March 31, 2006 and 2007, respectively.

*Cash Flows*

As of March 31, 2007, the Company had $5.8 million incash and cash equivalents on hand. As of March 31, 2007, the Company hadborrowed $93.6 million from a $130.0 million revolving bank credit facility,which matures May 31, 2008.

The Company’s principal sources of funds are cash onhand, cash generated by operations, tax sharing payments from Hallmark Cardsand amounts available under the Company’s revolving bank credit facility.Payments under the tax sharing agreement are affected by Hallmark Cards’ taxposition and its ability to utilize the Company’s tax losses. The Companyreceived $12.0 million in tax sharing payments in 2006 and does not currentlyexpect to receive tax sharing payments during 2007. The Company currently has$36.4 million of unused revolving credit capacity. The Company’s ability toborrow additional amounts under the credit facility is not limited orrestricted as long as no covenants have been violated. We are in compliancewill all of our debt covenants at March 31, 2007.

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The sufficiency of theexisting sources of liquidity to fund the Company’s operations is dependentupon continued growth in subscriber revenue and advertising revenue. Anydecline in the popularity of the Hallmark Channel, any significant futureadverse modifications to the Company’s distribution agreements, an economicdecline in the advertising market, an increase in program acquisition costs, anincrease in competition or other adverse operating conditions would negativelyimpact the Company’s liquidity and its ability to fund the current level ofoperations

The Company expects tocontinue making investments in programming, marketing and distribution.However, the Company’s recurring loss situation has demanded that all areas ofexpenses, including programming, marketing and distribution be closelymonitored and controlled.

The Company anticipatesthat its principal uses of funds for 2007 will continue to include the paymentof operating expenses, accounts payable and accrued expenses, license fees forprogramming, and interest under its bank credit facility.

The Company currentlybelieves that cash on hand, cash generated by operations and borrowingavailability under its bank credit facility, when combined with the deferral ofany required payments on related-party debt and related interest mentionedbelow, will be sufficient to fund the Company’s operations and meet itsliquidity needs through May 31, 2008.

The Company intends toextend or refinance the Bank credit facility prior to or upon its maturity. Anysuch extension or refinancing might require a continuation of a letter ofcredit from Hallmark Cards or other steps by the Company and,thus, is notassured. If the Company is not able to arrange for the extension, refinancingor replacement of the bank credit facility prior to its maturity and either (1)the bank draws down on the irrevocable letter of credit provided by HallmarkCards in support of the bank credit facility or (2) Hallmark Cards purchasesthe interests of the lending banks, Hallmark Cards would have all obligationsand rights of the lending banks under the bank credit facility. In that event,Hallmark Cards could demand payment of outstanding amounts at any time afterMay 31, 2008, under the terms of the waiver and standby purchase agreement(“Waiver Agreement”) described below.

Upon maturity of the credit facility on May 31, 2008,the lending group led by JP Morgan Chase has the right to elect to forego thereceipt of cash to pay the principal amount of the credit facility in full,which is provided for under the terms of an irrevocable letter of creditprovided by Hallmark Cards, but instead can elect to initiate a process to foreclose onthe Company’s assets. Such foreclosure proceedings, would adverselyaffect our ability to continue our operations. Prior to any such possibleforeclosure proceedings, however, the Company, if it has not secured anextension of the credit facility or alternative financing, would cause HallmarkCards pursuant to the terms of the Waiver Agreement to exercise its option topurchase all of the outstanding indebtedness under the credit facility and thecredit facility would then be subject to terms of the Waiver Agreement.

Due to the Company’spossible inability to meet its obligations when they come due on May 31,2008, the Company anticipates that prior to May 31, 2008, it will benecessary to either extend or refinance (i) the bank credit facility and(ii) the promissory notes payable to affiliates of Hallmark Cardsdescribed in the Notes below. As part of a combination of actions and in orderto obtain additional funding, the Company may consider various alternatives,including refinancing the bank credit facility, raising additional capitalthrough the issuance of equity or debt securities, a sale of certain assets orother strategic alternatives.

***Bank Credit Facility, HC Crown Loans, and Tax Sharing Agreement***

For information regarding our Bank CreditFacility, HC Crown Loans and Tax Sharing Agreement, please see “Bank CreditFacility, HC Crown Loans, and Tax Sharing Agreement” of the Company’s AnnualReport on Form 10-K for the year ended December 31, 2006, as filed with the SECand Notes 7, 8 and 9 of Notes to Unaudited Condensed Consolidated FinancialStatements contained in Item 1 of this Report.

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

Thediscussion set forth in this Form 10-Q contains statements concerning potentialfuture events. Such forward-looking statements are based on assumptions byCrown Media Holdings management, as of the date of this Form 10-Q includingassumptions about risks and uncertainties faced by Crown Media Holdings. Readerscan identify these forward-looking statements by their use of such verbs as “expects,”“anticipates,” “believes,” or similar verbs or conjugations of such verbs. Ifany of management’s assumptions prove incorrect or should unanticipatedcircumstances arise, Crown Media Holdings’ actual results, levels of activity,performance, or achievements could materially differ from those anticipated bysuch forward-looking statements.

Amongthe factors that could cause actual results to differ materially are thosediscussed in this Report below and in the Company’s filings with the Securitiesand Exchange Commission, including the Risk Factors stated in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2006. Such RiskFactors include, but are not limited to, the following:  competition for distribution of channels,viewers, advertisers and the acquisition of programming; fluctuations in theavailability of programming; fluctuations in demand for programming which weair on our channels; our ability to address our liquidity needs; our incurrenceof losses; and our substantial indebtedness affecting our financial conditionand results.

Statedbelow are certain Risk Factors which contain significant changes from thosestated in the Company’s Annual Report on Form 10-K for the year ended December31, 2006. Crown Media Holdings will not update any forward-looking statementscontained in that Form 10-K to reflect future events or developments.

If we do not successfullyaddress the risks described below and in our prior Reports mentioned above, ourbusiness, prospects, financial condition, results of operations or cash flowcould be materially adversely affected. The trading price of our Class A commonstock could decline because of any of these risks.

**Risks Relating to Our Business**

***Our liquidity is dependent on external funds.***

Because we currently operate at a loss, we may have anegative cash flow and any unanticipated significant expense or any developmentthat hampers our growth in revenue or decreases any of our revenue would resultin the need for additional external funds in order to continue operations. Wehave no arrangements for any such additional external financings, whether debtor equity, and are not certain whether any such new external financing would beavailable on acceptable terms. Any new debt financing would require thecooperation and agreement of existing lenders.

Further, as discussed in this Report under “Liquidityand Capital Resources” above, we need to (1) extend, refinance or replace ourbank line of credit on or prior to May 31, 2008, or to extend or replaceborrowings from Hallmark Cards by May 31, 2008, that would result from thebanks drawing upon the irrevocable letter of credit supporting the bank creditfacility, and (2) extend or refinance outstanding notes payables to HallmarkCards and its subsidiaries on or prior to May 31, 2008.

Upon maturity ofthe credit facility on May 31, 2008, the lending group led by JP Morgan Chasehas the right to elect to forego the receipt of cash to pay the principalamount of the credit facility in full, which is provided for under the terms ofan irrevocable letter of credit provided by Hallmark Cards, but instead canelect to initiate a process to foreclose on the Company’s assets. Such foreclosureproceedings, which we view as a remote possibility, couldaffect our ability to continue our operations. Prior to any such possibleforeclosure proceedings, the Company would consider various alternatives asindicated above.  The Companycould also cause Hallmark Cards, pursuant to the terms of the Waiver Agreement,to exercise its option to purchase all of the outstanding indebtedness underthe credit agreement. The credit facility would then be subject to HallmarkCards agreement not to demand payment prior to May 31, 2008.

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### **Available Information**

**We will make available free of chargethrough our website, www.hallmarkchannel.com, the Annual Report, our quarterlyreports on Form 10-Q, our current reports on Form 8-K, and amendments to suchreports, as soon as reasonably practicable after we electronically file orfurnish such material with the Securities and Exchange Commission.**

**Additionally, we will make available,free of charge upon request, a copy of our Code of Business Conduct and Ethics,which is applicable to all of our employees, including our senior financialofficers. Requests for a copy of this code should be addressed to the GeneralCounsel at 12700 Ventura Boulevard, Studio City, California  91604.**

**Item 3.  *Quantitativeand Qualitative Disclosures About Market Risk***

We only invest in instruments that meet high credit andquality standards, as specified in our investment policy guidelines. Theseinstruments, like all fixed income instruments, are subject to interest raterisk. The fixed income portfolio will decline in value if interest ratesincrease. If market interest rates were to increase immediately and uniformlyby 10% from levels as of March 31, 2007, the decline of the fair value of thefixed income portfolio would not be material.

As of March 31, 2007, our cash, cash equivalents andshort-term investments had a fair value of $5.8 million, which were invested incash and short-term commercial paper. The primary purpose of these investingactivities has been to preserve principal until the cash is required to fundoperations. Consequently, the size of this portfolio fluctuates significantlyas cash is provided by and used in our business.

The value of certain investments in this portfolio canbe impacted by the risk of adverse changes in securities and economic marketsand interest rate fluctuations. At March 31, 2007, all of our investments inthis category were in fixed rate instruments or money market type accounts. Adecrease in interest rates has the effect of reducing our future annualinterest income from this portfolio, since funds would be reinvested at lowerrates as the instruments mature. Over time, any net percentage decrease in ourinterest rates could be reflected in a corresponding net percentage decrease inour interest income. For the three months ended March 31, 2007, the impact ofinterest rate fluctuations, changed business prospects and all other factorsdid not have a material impact on the fair value of this portfolio, or on ourincome derived from this portfolio.

We have not used derivative financial instruments forspeculative purposes. As of March 31, 2007, we are not hedged or otherwiseprotected against risks associated with any of our investing or financingactivities.

***We are exposed to market risk.***

We are exposed to market risk, including changes tointerest rates. To reduce the volatility relating to these exposures, we mayenter into various derivative investment transactions in the near term pursuantto our investment and risk management policies and procedures in areas such ashedging and counterparty exposure practices. We have not and will not usederivatives for speculative purposes.

Though we intend to use risk management controlpolicies, there will be inherent risks that may only be partially offset by ourhedging programs should there be any unfavorable movements in interest rates orequity investment prices.

***Our interest income and expense is subject to fluctuations in interestrates.***

Ourmaterial interest bearing assets consisted of cash equivalents and short-terminvestments. The balance of our interest bearing assets was $5.8 million, orless than 1% of total assets, as of March 31, 2007. Our material liabilitiessubject to interest rate risk consisted of our bank credit facility, our lineof credit and interest payable to HC Crown, our line of credit and interestpayable to Hallmark Cards affiliate, and our note and interest payable toHallmark Cards affiliate. The balance of those liabilities was $392.8 million,or

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31% of total liabilities, as of March 31, 2007. Netinterest expense for the three months ended March 31, 2007, was $24.1 million,45%, of our total revenue. 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 interest ratesaffect the fair value of interest bearing liabilities.

Ifmarket interest rates were to increase or decrease by 1% from levels as ofMarch 31, 2007, our interest expense for the quarter would changecorrespondingly by $933,000.

**Item 4.  *Controls andProcedures.***

***a.  Disclosure Controls and Procedures***

Ourmanagement  evaluated, with theparticipation of our Chief Executive Officer and our Chief Financial Officer,the effectiveness of our disclosure controls and procedures as of the end ofthe period covered by this Quarterly Report on Form 10-Q. Based on thisevaluation, 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.  Changes in Internal Control over FinancialReporting***

Therewas no change in the Company’s internal control over financial reporting thatoccurred during the quarter ended March 31, 2007, that materially affected, orwas reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

**PART II.  OTHER INFORMATION**

**Item1A.  *Risk Factors***

See “RisksRelating to Our Business” in Part I, Item 2 above for information on changes torisk factors.

**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).                                            |
|           |       |                                                                                                                                                                                                                                             |
| 31.1           |       | Rule 13a-14(a) Certification executed by the  Company’s Acting 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 or arrangement.

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**SIGNATURES**

Pursuant to the requirements of the Securities ExchangeAct of 1934, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.

CROWN MEDIA HOLDINGS, INC.
| Signature                                                                             | ** ** | **Title**          | ** **          | **Date** |
|---------------------------------------------------------------------------------------|------------|--------------------|---------------------|----------|
|                                                                                  |       |               |                |     |
| By:          /s/  HENRY S. SCHLEIFF |       |               | Principal Executive |     | May 10, 2007 |
|                                                                                  |       |               | Officer             |     |   |
| Henry S. Schleiff                                                                     |       |               |                |     |
|                                                                                  |       |               |                |     |
| By:          /s/  BRIAN C. STEWART  |       |               | Principal           |     | May 10, 2007 |
|                                                                                  |       | Financial and      |                |     |
| Brian C. Stewart                                                                      |       | Accounting Officer |                |     |
|                                                                                  |       |               |                |     |

 

 

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