**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

**Form 10-K**

**(Mark One)**

**x**                           ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the fiscal year ended December 31, 2004**

**or**

**o**                              TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the transition period from              to              .**

**Commission File Number: 000-30700**

**Crown Media Holdings, Inc.**

(ExactName of Registrant as Specified in Its Charter)

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

 

**12700Ventura Boulevard,Suite 200,Studio City, California  91604**

(Addressof Principal Executive Offices and Zip Code)

**(818)755-2400**

(Registrant’sTelephone Number, Including Area Code)

Securitiesregistered pursuant to Section 12(b) of the Act:  **None**

Securitiesregistered pursuant to Section 12(g) of the Act:  **Class A Common Stock,$0.01 par value**

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes o  No x

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. x

Indicateby check mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2). Yes x  No o

The aggregate market valueof the voting and non-voting common equity held by non-affiliates computed byreference to the price at which the common equity was last sold as of June 30,2004, the last business day of the registrant’s most recently completed secondfiscal quarter, was $79,368,767.

Asof May 1, 2005, the number of shares of Class A Common Stock, $.01par value outstanding was 73,863,037,and the number of shares of Class B Common Stock, $.01 par value,outstanding was 30,670,422.

**DOCUMENTSINCORPORATED BY REFERENCE**

NONE.

 

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**TABLE OF CONTENTS**
|                   |                                                                                                                    | **Page** |
|-------------------|--------------------------------------------------------------------------------------------------------------------|----------|
| **Part I**   |                                                                                                               | 1        |   |
| Item 1            | Business                                                                                                           |     | 1 |   |
| Item 2            | Properties                                                                                                         |     | 23 |   |
| Item 3            | Legal Proceedings                                                                                                  |     | 24 |   |
| Item 4            | Submission of Matters to a  Vote of Security Holders                                                               |     | 24 |   |
| **Part II**  |                                                                                                               | 25       |   |
| Item 5            | Market for Our Common  Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities    |     | 25 |   |
| Item 6            | Selected Financial Data                                                                                            |     | 26 |   |
| Item 7            | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                        |     | 29 |   |
| Item 7A           | Quantitative and Qualitative  Disclosures About Market Risk                                                        |     | 48 |   |
| Item 8            | Consolidated Financial  Statements and Supplementary Data                                                          |     | 49 |   |
| Item 9            | Changes in and Disagreements  with Accountants on Accounting and Financial Disclosure                              |     | 49 |   |
| Item 9A           | Controls and Procedures                                                                                            |     | 49 |   |
| **Part III** |                                                                                                               | 51       |   |
| Item 10           | Directors  and Executive Officers of the Company                                                                   |     | 51 |   |
| Item 11           | Executive  Compensation                                                                                            |     | 56 |   |
| Item 12           | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters    |     | 60 |   |
| Item 13           | Certain  Relationships and Related Transactions                                                                    |     | 63 |   |
| Item 14           | Principal  Accountant Fees and Services                                                                            |     | 78 |   |
| **Part IV**  |                                                                                                               | 79       |   |
| Item 15           | Exhibits and Financial  Statement Schedules                                                                        |     | 79 |   |
| Signatures        |                                                                                                               | 89       |   |

 

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*In this Annual Report on Form 10-K the terms “Crown Media Holdings”or the “Company,” refer to Crown Media Holdings, Inc. and, unless thecontext requires otherwise, subsidiaries of Crown Media Holdings that operateor have operated our businesses, Crown Media United States, LLC (“Crown MediaUnited States”), Crown Media Distribution, LLC (“Crown Media Distribution”),Crown Media Trust (“Crown Media Trust”) and, until completion of thesale of our international business in April, 2005. Crown Media International, LLC (“Crown Media International”) and CrownEntertainment Limited (“Crown Entertainment”). The term “common stock” refersto our Class A common stock and Class B common stock, unless thecontext requires otherwise.*

*The names Hallmark, Hallmark Entertainment, TOTALCHOICE and other product or service names are trademarks or registeredtrademarks of their owners.*

**PART I**

**ITEM 1.**                Descriptionof Business

***Company Overview***

We own and operate paytelevision channels, known as the Hallmark Channel, dedicated to high-quality,entertainment programming for adults and families.

On February 23, 2005, we announced entering intoa definitive agreement for the sale of our international business including theoutstanding capital stock of Crown Media International and Crown EntertainmentLtd., the sale of certain international rights in our library of film assetsand the broadcast facility in Denver, Colorado, and we closed this transactionon April 26, 2005. Please see “Overview—Sale of International Business” inItem 7 Management’s Discussion and Analysis of Financial Condition and Resultsof Operation. Following the sale of the Company’s international business, theprincipal executive office of the Company is now located in Studio City,California.

As anetwork, we offer compelling stories, masterfully written, directed andproduced with talented actors. We believe that with the programming we own (the“Crown Media Library,” the “Library” or the “film assets”), together with theprogramming we license from Hallmark Entertainment Distribution and thirdparties, we have established the Hallmark Channel internationally and in theUnited States as destinations for viewers seeking high-quality, entertainmentfor adults and families, and as attractive outlets for advertisers seeking totarget these viewers. We have distribution agreements with leading paytelevision distributors in each of our markets. The following table shows forour Channels: our programming sources, selected pay television distributors andthe total number of our subscribers as of December 31, 2004.
|                                      | ** ** | **Hallmark  Channel**                                  |
|--------------------------------------|------------|--------------------------------------------------------|
| ** **                           | ** ** | **U.S.**                                               | ** ** | **International** |
| Programming Sources                  |       | ·  Crown Media Library                       |   | ·  Crown Media Library |
|                                      |       | ·  Hallmark Entertainment  Distribution |   | ·  Hallmark Entertainment  Distribution |
|                                      |       | ·  Third-party sources                       |   | ·  Third-party sources |
|                                      |       | ·  NICC                                      |   |   |
| Selected Pay Television Distributors |       | ·  Adelphia                                  |   | ·  BSkyB |
|                                 |       | ·  Cablevision                               |   | ·  Canal Digital |
|                                 |       | ·  Charter                                   |   | ·  Home Entertainment |
|                                 |       | ·  Comcast                                   |   | ·  Measat |
|                                 |       | ·  Cox                                       |   | ·  Multichoice |
|                                 |       | ·  DirecTV                                   |   | ·  PCTV |
|                                 |       | ·  EchoStar                                  |   | ·  Sky Italy |
|                                 |       | ·  Time Warner                               |   |   |
| Total Subscribers                    |       | 64.6 million                                           |   | 59.4 million |

 

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As of February 28, 2005,our total number of subscribers had increased to approximately 127.9 million ofwhich 67.8 million are subscribers to our domestic channel and 60.1 million aresubscribers to our international channel. At April 30, 2005, our totalsubscribers to the Hallmark Channel in the United States were 67.9 million. Weview a “subscriber” as a household that receives, on a full or part-time basis,the Hallmark Channel on a program tier of a distributor. We determine ourdomestic subscribers from subscriber numbers reported by Nielsen Media Research.Our number of subscribers outside the United States are based on monthlyreports received from cable, satellite and other distributors around the worldwhich are licensed to distribute the Hallmark Channel. To our knowledge, thedistributors of our Channel outside the United States use the same definitionfor subscribers. Subscribers include both viewers who pay a monthly fee for thetier programming and so-called “promotional” subscribers who are given freeaccess to the tier by the distributor for a limited time with the hope thatthey will eventually choose to subscribe and pay for the tier. For a more detailed description of our Channels,see “—Channels—The Hallmark Channel—United States” and “—Channels—The HallmarkChannel—International.”

Programming acquired from thirdparties has been an important part of our Channels as we continually developand refine our programming strategy. Our domestic and international Channelshave also benefited from the volume and availability of programming in our FilmLibrary. Our Channels further have enjoyed the benefits of long-term programagreements with Hallmark Entertainment Distribution, which generally provideaccess to the Hallmark Entertainment Distribution library titles and to newproduction and first-run presentations controlled by Hallmark EntertainmentDistribution. Our Film Library and the programming that we have access tothrough our program license agreements with Hallmark Entertainment Distributionconsist of some of the most highly rated made-for-television movies, based onA.C. Nielson ratings. These programs have also won numerous Emmy Awards, GoldenGlobe Awards and Peabody Awards.

We have distribution agreements with pay televisiondistributors in each of our markets. Wecurrently distribute our domestic Channel through approximately 4,800cable systems and communities and satellite providers. By the end of 2004, we had agreements with Adelphia, Cablevision,Charter, Comcast, Cox, DirecTV, EchoStar, Insight, the National Cable TelevisionCooperative and Time Warner for the distribution of our Channel in theUnited States. The preceding providers account for more than 88% of all paycable and television subscribers in the United States as of December 31,2004. Internationally, these included British Sky Broadcasting (“BSkyB”), CanalDigital, Home Entertainment, Measat, Multichoice, PCTV and Sky Italy. BSkyBaccounted for 13% of our consolidated revenue and 33% of our internationalrevenue for the year ended December 31, 2004. No individual pay televisiondistributor or advertiser accounted for 10% of our domestic revenue and 15% ofour consolidated subscribers for the year ended December 31, 2004.

Through Crown Media Distribution, we exploit the FilmLibrary to the extent not used by our Channel. We license the use of Libraryfilms and programming to third parties in the United States includingterrestrial broadcasters in return for license fees and, prior to theInternational Sale, we licensed films and programs around the world.

We license the trademark “Hallmark” for use on ourChannels pursuant to certain trademark license agreements with Hallmark Cards,Incorporated (“Hallmark Cards”). We believe that the use of this trademark isextremely important for our domestic Channel due to the substantial namerecognition and favorable characteristics associated with the name in theUnited States. For further information concerning these trademark licenseagreements, see Part III—Item 13. Certain Relationships and RelatedTransactions—Hallmark Trademark License Agreements.

Information concerningrevenue, operating losses and identifiable assets attributable to each of ourdomestic and international pay television programming services and ourdistribution of films may be found in Note 23 of Notes to ConsolidatedFinancial Statements in this Report.

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***Development of Business***

Crown Media Holdings, Inc.,which was incorporated in the state of Delaware in December 1999, throughits subsidiaries, owns and operates pay television Channels dedicated to highquality, entertainment programming for adults and families, in the UnitedStates and, prior to the sale of its international business, in approximately152 countries throughout the world. Significant investors in Crown MediaHoldings include Hallmark Entertainment Investments Co., a subsidiary ofHallmark Cards, the National Interfaith Cable Coalition, Inc. (“NICC”),and, indirectly through their investments in Hallmark EntertainmentInvestments, Liberty Media Corporation (“Liberty Media”) and J.P. MorganPartners (BHCA), L. P. (“J.P. Morgan”). The international operations of theHallmark Channel are operated by Crown Media International and, in the UnitedKingdom, by Crown Entertainment Limited. Crown Media International commencedits operations outside the United States in 1995. Domestically, the HallmarkChannel is operated and distributed by Crown Media United States. Crown MediaInternational acquired an interest in Crown Media United States in 1998, and asa result of several transactions, Crown Media Holdings owned 100% of the commoninterests of Crown Media United States by March 2001.

Hallmark Cards controlsthe Company through its ownership of more than 80% of the equity interests inHallmark Entertainment Investments and its control over the voting of our Class Aand Class B common stock held by Hallmark Entertainment Investments. Seealso the description of the Hallmark Entertainment Investments Co. StockholdersAgreement in Item 13 below and Item 12 below regarding beneficial ownership ofour securities.

***Industry Overview***

The pay television industry iscomprised primarily of program suppliers, pay television channel providers andpay television distributors. Program suppliers, from whom we acquire or licensea portion of our programming, include many of the major production studios andother independent production companies and independent owners of programming.These program suppliers create, develop and finance the production of, orcontrol rights to, movies, television miniseries, series and other programming.Due to our acquisition of the Crown Media Library, we are a program supplier.Program suppliers generate revenue by licensing their programming tobroadcasters and video distributors (pay television channel providers) aroundthe world. These licenses are typically specific by territory and are limitedto a certain number of showings within specified periods of time.

We are also a pay televisionchannel provider. Pay television channel providers include all channelproviders (except over-the-air broadcasters) and major U.S. networks. Paytelevision channel providers often produce programming and acquire or licenseprogramming from program suppliers and generally package the programmingaccording to an overriding theme and brand strategy. Pay television providersand distributors generally restrict viewership through security encryptiondevices that limit viewership to paying subscribers. Pay television channelproviders compete with each other for distribution and to attract viewers and advertisers.Pay television providers generally target audiences with a certain demographiccomposition, so that they can then sell advertising to advertisers seeking toreach the providers’ demographic audiences.

Pay television distributors ownand operate the platforms used to deliver channels to subscribers. Thesedistributors use several different technologies to reach their subscribers asdescribed below. Distributors attempt to create a mix of channels that will beattractive to their subscriber population in an attempt to gain new subscribersand to reduce subscriber turnover. Distributors have different levels ofservice for subscribers, with each service level containing some differentchannels. More recently, distributors, particularly in the U.S., have begun tooffer additional broadband services such as Internet access, telephony andvideo-on-demand over their systems.

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As aresult of the recently increased competition for limited analog channel spacein the United States and increased use of the digital cable capacity for newbroadband services, pay television channel providers are often required to paysubscriber acquisition fees to pay television distributors for carriage ontheir systems. These subscriber acquisition fees are paid to television distributorson a per subscriber basis and generally in advance of any receipt of subscriberfee revenue from such pay television distributors.

***Distribution Platforms***

Fourmajor distribution platforms are currently used to transmit programming. First,cable television systems use coaxial or fiber optic cable to transmit multiplechannels between a central facility, known as a headend, and the individualsubscriber’s television set. Second, analog and digital satellite broadcastsystems (such as direct-to-home or “DTH”) use satellite transponders tobroadcast television programming to individual dwellings with satellitereception equipment, including a dish and a decoder. Third, digital terrestrialtelevision broadcasters (“DTT”) typically broadcast locally or through regionalor national ground-based transmission networks. In general, such broadcastersuse landline, microwave or satellite transmission systems to distributeprogramming to terrestrial transmission facilities for broadcast directly toviewers’ homes. Finally, channels can also be distributed through satellitemaster antenna television (“SMATV”). SMATV is used primarily for buildings,such as apartments and hotels that receive programming from satellites by meansof a single antenna that is connected to the buildings’ headend. The televisionsignals are then distributed to individual units in the building by cable.

***Sources of Revenue***

*Subscriber Fees*

Paytelevision customers subscribe to basic services by paying monthly fees forbasic channels to pay television distributors. The customers can also subscribeto additional packages of premium or pay-per-view services uponpayment of additional fees. Primarily in international markets, pay televisiondistributors generally pay a fee per subscriber for all or some subscribers tochannel providers. See Item 7, Management’s Discussion and Analysisof Financial Condition and Results of Operations.

*Advertising Revenue*

The advertising market differsgreatly around the world. In the United States, there is a growing sentimentamong advertisers that advertising expenditures are shifting from broadcasttelevision to cable television. In other parts of the world, the amount spentby advertisers on television varies according to the development of eachcountry’s television market. In general, advertising expenditures are less inother countries than in the United States, both in terms of percentage ofadvertising expenditures as well as absolute dollars. Program ratings systemsin many non-United States markets are growing rapidly, and as a result,advertisers are relying less on subscriber counts and more on empiricalmeasurements when buying advertising time.

Television advertising is soldin a variety of formats. Many pay television channels rely largely upon thespot advertisement format. Spot advertisements are normally 30 seconds long andair during or between programs. They are often sold in packages of a certainnumber of spots or to deliver a certain number of viewers. An alternative tospot advertising is sponsorship, by which a company sponsors a program orselection of programs on a channel by applying their branding around theprogramming.

The ability of a televisionchannel to generate advertising revenue largely depends on estimated or actualviewing levels, primarily based on ratings, and on advertising rates.Typically, in the United States and some other markets, independent ratingssystems on which advertising sales can be based are well established and widelyaccepted within the industry. In addition, pay television channel providers anddistributors may also provide estimated or actual subscriber information. OurU.S. Channel sells the 

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majorityof its advertising in the “up-front” season, generally in August, for the lastquarter of the same year and the first three quarters of the following year. Wehold back a small percentage of our inventory for audience deficiency units, “ADUs,”and sell the remainder in the spot market. ADUs are units of inventory that aremade available to advertisers as compensation for inventory the advertiserpurchased that ran in programs that under-delivered on the guaranteed ratings.

Historically, advertisers havespent more on advertising through traditional broadcast television than throughpay television. We believe that as pay television continues to gain viewershiprelative to broadcast television, it should attract a larger percentage of thetotal available dollars spent on television advertising. Also, as paytelevision draws audience share from broadcast television, audiencedemographics become fragmented; and, as a result, advertisers are able totarget groups of viewers with specific demographic profiles.

SinceFebruary 2002, paid commercial programming, “infomercials,” has beencarried on our domestic Channel and, prior to the sale of our internationalbusiness, on a limited basis in several international regional feeds of ourinternational Channel.

*Ratings*

Among the 54 ad-supported cable channels in the UnitedStates market, the Hallmark Channel ranked 10th in total day with a0.6 household rating for the 2004 year and 14th for prime time witha 0.871 household rating for the 2004 year, according to Nielsen Media Research.In 2003 among the 52 ad-supported cable channels in the UnitedStates market, the Hallmark Channel ranked 16th in total day with a0.503 household rating for the 2003 year and 22nd for prime timewith a 0.718 household rating for the 2003 year, according to Nielsen MediaResearch. Total day means the time period measured from the time each day thebroadcast of commercially-sponsored programming commences to the time suchcommercially-sponsored programming ends. We believe that the key demographicsfor the Hallmark Channel are the viewers in the groups Adults 25-54 and Women25-54.

Internationally, during2004 the international Hallmark Channel ranked in the top five cable andsatellite channels in the U.K. according to the Broadcaster Audience ResearchBoard. In the U.K., the Channel enjoyed a strong and sustained increase inratings over the past two years, increasing its television rating among adultsin multi-channel homes by 13% from 2003 and its share, or percentage of viewingaudience, among individuals in multi-channel homes by 18%. The Channel was the9th most watched commercial non-terrestrial channel in Polandaccording to AGB Polska in December 2004. The Channel ranked among the topten multi-channel networks in Hungary according to AGB Hungary for the 2004year.

*Licensing Revenue*

Program suppliers sell orlicense programming to broadcasters and video distributors (pay televisionchannel providers) who pay a license fee for the right to exploit (air) theprogramming over a certain period in their program package. Our licensing offilm assets is an important contributor to our revenues and, because theamortization of our film assets is a non-cash expense, also to our cash flow.

***Channels***

*The HallmarkChannel—United States*

**Programming**

Our domestic Channel offers a range of high quality,entertainment programming for adults and families including movies, miniseries,epics, historical dramas, romances, literary classics, and contemporarystories. Sources for programming on our domestic Channel include the CrownMedia 

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Library, programminglicensed from Hallmark Entertainment Distribution, and programming licensedfrom third parties. Prior to the purchase of the Crown Media Library, welicensed substantially all of the titles in that library from HallmarkEntertainment Distribution.

Examples of programmingfrom our Library and the Hallmark Entertainment library include, Larry McMurtry’s*Lonesome Dove*, *10thKingdom*, Neil Simon’s *London Suite, Gulliver’sTravels, Dog of the Yukon: Callof the Wild* and LarryMcMurtry’s*Dead Man’s Walk*as well as programming previously shown as Hallmark Hall of Fame such as William Faulkner’s*Old Man*, *RoseHill*, *Sarah Plain and Tall*and*What the Deaf Man Heard*. Webenefit from these original Hallmark Entertainment productions, which aresometimes premiered and often aired on our domestic Channel. Examples of thirdparty programming shown on our domestic Channel include the popular dramaseries *M*A*S*H, Judging Amy, Magnum, P.I.,Matlock, Touched By An Angel*, *Walker Texas Ranger, Rawhide, Dr. Quinn Medicine Woman,*and*Perry Mason*. Other examples ofour third party programming include acquired movies and miniseries such as *Roots*, *Northand South*, *The Thorn Birds*and*Shogun*. Our license agreementswith third parties typically provide for a license fee paid out over the termof the license for the right to exhibit a program in the United States within aspecified period of time.

**Distribution**

Our domestic Channel ended 2004 with 64.6 millionsubscribers, an increase of 15% from 56.0 million at the 2003 year-end. Wecurrently distribute our domestic Channel to approximately 70% of all UnitedStates pay television subscribers. The following table shows the approximatenumber of pay television households and domestic Channel subscribers for eachof the eight largest pay television distributors, and all other pay televisiondistributors as a group, in the United States as of December 31, 2004.
| **PAY TELEVISION DISTRIBUTOR** | ** ** | ** **                                            | ** ** | **TOTAL US PAY TV  HOUSEHOLDS(1)** | ** ** | **HALLMARK  CHANNEL—U.S.  SUBSCRIBERS(1)** | ** ** | **HALLMARK  CHANNEL—U.S.  % OF PAY TV  HOUSEHOLDS** | ** ** |
|------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **(In thousands, except percentages)** | ** ** |
| Comcast                                  |       |                                                  | 23,232     |                                              |       |                                            | 14,113     |                                                                    |       |   | 60.7 | % |   |
| DirecTV                                  |       |                                                  | 13,496     |                                              |       |                                            | 11,861     |                                                                    |       |   | 87.9 | % |   |
| Time Warner                              |       |                                                  | 13,165     |                                              |       |                                            | 10,635     |                                                                    |       |   | 80.8 | % |   |
| Cox                                      |       |                                                  | 6,277      |                                              |       |                                            | 5,035      |                                                                    |       |   | 80.2 | % |   |
| Charter                                  |       |                                                  | 6,481      |                                              |       |                                            | 4,752      |                                                                    |       |   | 73.3 | % |   |
| Adelphia                                 |       |                                                  | 5,778      |                                              |       |                                            | 4,415      |                                                                    |       |   | 76.4 | % |   |
| Echostar                                 |       |                                                  | 10,475     |                                              |       |                                            | 3,962      |                                                                    |       |   | 37.8 | % |   |
| Cablevision                              |       |                                                  | 2,979      |                                              |       |                                            | 2,491      |                                                                    |       |   | 83.6 | % |   |
| All others                               |       |                                                  | 10,704     |                                              |       |                                            | 7,301      |                                                                    |       |   | 68.2 | % |   |
| Total                                    |       |                                                  | 92,587     |                                              |       |                                            | 64,565     |                                                                    |       |   | 69.7 | % |   |

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(1)          Source:Nielsen Code and The Nielsen Public U.E. December 2004.

**Sources of Revenue**

We derive our domestic Channelrevenue primarily from subscriber fees and advertising sales. We charge our paytelevision distributors a monthly per subscriber fee for the right to broadcastour domestic Channel. Generally, these distribution agreements last from fiveto ten years, and sometimes include annual increases of both subscribers andper subscriber fees. A distribution agreement may also involve a payment by usfor the establishment of the relationship or, together with or in lieu of anypayment, the free carriage of our Channel to subscribers for a period of timeand discounts or no fees if certain subscriber levels are achieved. Please seeItem 7, Management’s Discussion and Analysis of Financial Condition and Resultsof Operations, for information regarding subscriber fees. For the years ended December 31,2002, 

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2003,and 2004 revenue derived from subscriber fees for the domestic Channel wereapproximately $13.5 million, $6.6 million and $10.8 million, respectively.

We have advertising salesoffices in New York, Los Angeles, Chicago, Atlanta and Detroit. In addition, wehave made significant investments in programming, research, marketing andpromotions, all specifically designed to support the sale of advertising timeon our domestic Channel. For the years ended December 31, 2002, 2003, and2004 revenue from the sale of advertising time on our domestic Channel wereapproximately $46.0 million, $77.6 million and $106.3 million, respectively.

**Sales and Marketing**

Our primary target demographics are women aged 25 to54 and adults aged 25 to 54 and our secondary target is adults aged 18 to 49. Ourprogramming is targeted to adults, but is generally appropriate for viewing bythe entire family, which is important to viewers, advertisers and affiliatesalike.

For over fifty years Hallmark has been a leader inhigh-quality original television production. The Hallmark Channel is the onlyhome on cable television for the movies previously shown as Hallmark Hall ofFame, a selection of movies from an award-winning entertainment series. Much ofthe Hallmark Channel’s unique programming comes from Hallmark Entertainment,including *Merlin*, *Alice in Wonderland* and *Dinotopia*. Hallmark Entertainment originalproductions rank among the highest-rated programs on U.S. broadcast networktelevision.

The power of theHallmark brand and the quality of Hallmark Entertainment combine to:

·       provideour viewers with tangible evidence of our commitment to the best inentertainment for the entire family;

·       enhanceour ability to attract advertising commitments and higher Cost-Per-Thousands (“CPM”)from the largest advertisers; and

·       providea competitive advantage in negotiating long-term distribution agreements withpay television distributors.

**Hallmark Movie Channel**

In 2004, we launched oursecond domestic channel, the Hallmark Movie Channel, which is distributed ondigital tiers or as part of packages of services. The Movie Channel featurestop-rated movies from over 3,000 hours of programming in the Crown MediaLibrary. In addition, the Movie Channel showcases movies previously shown asHallmark Hall of Fame and also features movies from sources other than Hallmarkand the Crown Media Library.

*The HallmarkChannel—International*

Asdisclosed in this Report, we sold our international business to a third partyon April 26, 2005. The following is a description of our internationalbusiness conducted prior to such sale.

**Overview**

The international Channelcommenced 2004 with 57.3 million subscribers and ended the year with 59.4million subscribers, an increase of 4%. We distributed the internationalChannel to 17 geographic markets covering approximately 152 countries, dubbedor subtitled into 26 languages compared to 17 geographic markets coveringapproximately 116 countries, dubbed or subtitled into 26 languages as of December 31,2003. Our markets included Asia Pacific, with approximately 20.5 millionsubscribers, Europe, Middle East and Africa, with more than 17.8 millionsubscribers, Latin America, with more than 11.8 million subscribers, and theUnited Kingdom, with more than 9.3 million subscribers.

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**Programming**

The international Channeloffered a range of award-winning programming including made-for-televisionmovies, miniseries, epics, historical dramas and series. We sought programmingthat was consistent with our programming theme: “great stories that stay withyou.” The high quality, entertainment programming for adults and families thatwe offered was based on universal themes, included world-renowned actorsand actresses, such as Sidney Poitier, Whoopi Goldberg, Anjelica Huston, andJames Earl Jones and was often filmed in international locations.

Significant sources for our programming were the CrownMedia Library and programming by Hallmark Entertainment, Inc. (“HallmarkEntertainment”), which was available to us through our program agreements. Priorto the purchase of the Crown Media Library, we licensed substantially all ofthe titles in that library from Hallmark Entertainment Distribution. We enjoyedaccess to new Hallmark Entertainment programming through an amended five-yearprogram license agreement with Hallmark Entertainment Distribution. For moreinformation regarding the program license agreements with HallmarkEntertainment Distribution, please see Part III below. HallmarkEntertainment provided family programming for audiences worldwide, generallydelivering more than forty projects each year. We licensed for that same timeperiod the remaining portion of the international Channel’s programming line-upfrom third parties. This third party programming was consistent with the themesand quality of the material we own or license from Hallmark EntertainmentDistribution. We licensed programming from third party suppliers such as CBSBroadcast International, Southern Star Sales Limited, Granada International,Paramount Television, Minotaur Entertainment, NBC Universal Inc., Metro-Goldwyn-MayerStudios Inc., Columbia Tri-Star International, Sony Pictures, ABA Plus andWarner Bros. Entertainment Inc.

During2004, we aired third-party series such as *Judging Amy, Law andOrder, Sue Thomas F.B. Eye, Monk, E.R., Gilmour Girls, and The Guardian.*We also aired third-party movies and mini-series including *The FourthProtocol, On Golden Pond, and Hawking.*

**Distribution**

In the countries where weoffered the international Channel, we distributed the Channel through a varietyof distribution platforms, including cable, satellite broadcast systems,digital terrestrial television and satellite master antenna television. We distributed the Channel through distributionagreements with local pay television operators such as BSkyB, CanalDigital, Home Entertainment, Measat, Multichoice, PCTV and Sky Italy. Our distribution agreements with such operatorsgenerally lasted from two to five years. We had the capability to create anddeliver our Channel to new platforms in a short period of time through ourbroadcast infrastructure based in Greenwood Village, Colorado. We had astrategic relationship with Pramer, S.C.A., which performed all day-to-dayoperations including program acquisitions, scheduling, marketing, advertisingand affiliate sales, playback and uplink for our operations in Mexico, Centraland South America.

We regularly reviewed existing and potential marketsto assess their prospects. As the number of international Channel subscribersincreased in a market, we assessed our ability to increase revenue or developnew revenue sources by subdividing the market through the addition of satellitesignals to individual countries within that market as opportunities—particularlyadvertising—arose. When we subdivided a market, we were able to customize theChannel to appeal to a more specific audience. The delivery of theinternational Channel to more targeted audiences also increased the number ofpotential advertisers on the Channel by creating more targeted advertisingopportunities for local or regional businesses in the markets in which weoperate.

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The following chart shows the approximate number oftelevision households and pay television households, as estimated by KaganWorld Media (except where noted) at December 31, 2004, and the number ofour international Channel subscribers at December 31, 2003 and 2004.
| ** **                            | ** ** | **Total  TV**    | ** ** | **Pay TV**   | ** ** | **%**             | ** ** | **Hallmark  Channel—Int’l  Subscribers**(1) | ** ** | **Hallmark  Channel—Int’l  December 31, 2004 ** | ** ** |
|---------------------------------------|------------|------------------|------------|-------------------|------------|-------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| **Markets**                           | ** ** | ** **       | ** ** | **House-  Holds** | ** ** | **House-  Holds** | ** ** | **Pay TV  Penetration**                          | ** ** | **December 31  2003**                                               | ** ** | **December 31  2004** | ** ** | **% of Pay TV  Households** | ** ** |
| ** **                            | ** ** | **(000’s)** | ** ** | ** **        | ** ** | **(000’s)**  | ** ** | ** **                                            | ** ** |
| **Asia  Pacific:**                    |       |             |       |              |       |              |       |                                                  |       |                                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Australia                             |       | 7,202            |       | 1,607             |       |              | 22.3       | %                                                     |       |                                                                     | 618        |   |   |   | 858 |   |   |   | 53.4 | % |   |
| India(2)                              |       | 117,977          |       | 52,487            |       |              | 44.5       |                                                  |       |                                                                     | 13,215     |   |   |   | 9,487 |   |   |   | 18.1 | % |   |
| Indonesia                             |       | 24,565           |       | 176               |       |              | 0.7        |                                                  |       |                                                                     | 121        |   |   |   | 144 |   |   |   | 81.8 | % |   |
| Korea                                 |       | 14,819           |       | 5,883             |       |              | 39.7       |                                                  |       |                                                                     | 3,213      |   |   |   | 4,513 |   |   |   | 76.7 | % |   |
| Malaysia                              |       | 5,244            |       | 1,435             |       |              | 27.4       |                                                  |       |                                                                     | 1,220      |   |   |   | 1,525 |   |   |   | 106.3 | % |   |
| Philippines                           |       | 8,995            |       | 2,107             |       |              | 23.4       |                                                  |       |                                                                     | 656        |   |   |   | 859 |   |   |   | 40.8 | % |   |
| Singapore                             |       | 1,240            |       | 569               |       |              | 45.9       |                                                  |       |                                                                     | 278        |   |   |   | 305 |   |   |   | 53.6 | % |   |
| Taiwan/China                          |       | 357,485          |       | 133,867           |       |              | 37.4       |                                                  |       |                                                                     | 3,900      |   |   |   | 2,410 |   |   |   | 1.8 | % |   |
| Thailand/Hong Kong                    |       | 17,835           |       | 2,475             |       |              | 13.9       |                                                  |       |                                                                     | 358        |   |   |   | 394 |   |   |   | 15.9 | % |   |
| Subtotal                              |       | 555,362          |       | 200,606           |       |              | 36.1       |                                                  |       |                                                                     | 23,579     |   |   |   | 20,495 |   |   |   | 10.2 | % |   |
| **Europe,  Middle East and Africa:**  |       |             |       |              |       |              |       |                                                  |       |                                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Africa(3)                             |       | 6,765            |       | 988               |       |              | 14.6       |                                                  |       |                                                                     | 895        |   |   |   | 1,084 |   |   |   | 109.7 | % |   |
| Belgium/Netherlands                   |       | 11,146           |       | 10,444            |       |              | 93.7       |                                                  |       |                                                                     | 219        |   |   |   | 264 |   |   |   | 2.5 | % |   |
| Bulgaria/Croatia/ Slovenia/Yugoslavia |       | 2,952            |       | 1,219             |       |              | 41.3       |                                                  |       |                                                                     | 625        |   |   |   | 803 |   |   |   | 65.9 | % |   |
| Czech Republic                        |       | 4,049            |       | 1,051             |       |              | 26.0       |                                                  |       |                                                                     | 441        |   |   |   | 463 |   |   |   | 44.1 | % |   |
| Denmark/Faroe Islands                 |       | 2,349            |       | 1,830             |       |              | 77.9       |                                                  |       |                                                                     | 964        |   |   |   | 1,054 |   |   |   | 57.6 | % |   |
| Finland/Iceland                       |       | 2,246            |       | 1,186             |       |              | 52.8       |                                                  |       |                                                                     | 79         |   |   |   | 77 |   |   |   | 6.5 | % |   |
| Hungary                               |       | 4,159            |       | 2,163             |       |              | 52.0       |                                                  |       |                                                                     | 479        |   |   |   | 1,048 |   |   |   | 48.5 | % |   |
| Israel                                |       | 1,743            |       | 1,496             |       |              | 85.8       |                                                  |       |                                                                     | 1,376      |   |   |   | 1,428 |   |   |   | 95.5 | % |   |
| Italy                                 |       | 21,708           |       | 3,298             |       |              | 15.2       |                                                  |       |                                                                     | —     |   |   |   | 2,770 |   |   |   | 84.0 | % |   |
| Middle East(4)                        |       | 2,822            |       | 932               |       |              | 33.0       |                                                  |       |                                                                     | 584        |   |   |   | 900 |   |   |   | 96.6 | % |   |
| Norway                                |       | 2,006            |       | 1,487             |       |              | 74.1       |                                                  |       |                                                                     | 793        |   |   |   | 862 |   |   |   | 58.0 | % |   |
| Poland                                |       | 12,821           |       | 4,675             |       |              | 36.5       |                                                  |       |                                                                     | 1,572      |   |   |   | 1,744 |   |   |   | 37.3 | % |   |
| Portugal                              |       | 5,015            |       | 1,756             |       |              | 35.0       |                                                  |       |                                                                     | 249        |   |   |   | 261 |   |   |   | 14.9 | % |   |
| Romania                               |       | 7,236            |       | 3,600             |       |              | 49.8       |                                                  |       |                                                                     | 2,312      |   |   |   | 1,953 |   |   |   | 54.3 | % |   |
| Russia/Bosnia                         |       | 44,661           |       | 14,448            |       |              | 32.4       |                                                  |       |                                                                     | 630        |   |   |   | 1,029 |   |   |   | 7.1 | % |   |
| Slovak Republic                       |       | 1,659            |       | 760               |       |              | 45.8       |                                                  |       |                                                                     | 295        |   |   |   | 321 |   |   |   | 42.2 | % |   |
| Spain                                 |       | 14,472           |       | 3,745             |       |              | 25.9       |                                                  |       |                                                                     | 605        |   |   |   | 450 |   |   |   | 12.0 | % |   |
| Sweden                                |       | 4,124            |       | 3,464             |       |              | 84.0       |                                                  |       |                                                                     | 758        |   |   |   | 797 |   |   |   | 23.0 | % |   |
| Turkey                                |       | 14,948           |       | 2,239             |       |              | 15.0       |                                                  |       |                                                                     | 495        |   |   |   | 451 |   |   |   | 20.1 | % |   |
| United Kingdom                        |       | 24,800           |       | 10,860            |       |              | 43.8       |                                                  |       |                                                                     | 8,633      |   |   |   | 9,336 |   |   |   | 86.0 | % |   |
| Subtotal                              |       | 191,681          |       | 71,641            |       |              | 37.4       |                                                  |       |                                                                     | 22,004     |   |   |   | 27,095 |   |   |   | 37.8 | % |   |
| **Latin  America:**                   |       |             |       |              |       |              |       |                                                  |       |                                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Argentina                             |       | 10,204           |       | 5,751             |       |              | 56.4       |                                                  |       |                                                                     | 4,402      |   |   |   | 4,414 |   |   |   | 76.8 | % |   |
| Brazil                                |       | 47,589           |       | 3,876             |       |              | 8.1        |                                                  |       |                                                                     | 682        |   |   |   | 671 |   |   |   | 17.3 | % |   |
| Chile                                 |       | 3,873            |       | 830               |       |              | 21.4       |                                                  |       |                                                                     | 938        |   |   |   | 941 |   |   |   | 113.4 | % |   |
| Colombia                              |       | 8,838            |       | 1,054             |       |              | 11.9       |                                                  |       |                                                                     | 555        |   |   |   | 368 |   |   |   | 34.9 | % |   |
| Mexico                                |       | 22,324           |       | 3,525             |       |              | 15.8       |                                                  |       |                                                                     | 3,172      |   |   |   | 3,420 |   |   |   | 97.0 | % |   |
| Venezuela                             |       | 4,915            |       | 1,031             |       |              | 21.0       |                                                  |       |                                                                     | 793        |   |   |   | 706 |   |   |   | 68.5 | % |   |
| Other Latin America(5)                |       | 14,995           |       | 1,882             |       |              | 12.6       |                                                  |       |                                                                     | 1,177      |   |   |   | 1,309 |   |   |   | 69.6 | % |   |
| Subtotal                              |       | 112,738          |       | 17,949            |       |              | 15.9       |                                                  |       |                                                                     | 11,719     |   |   |   | 11,829 |   |   |   | 65.9 | % |   |
| **TOTAL**                             |       | 859,781          |       | 290,196           |       |              | 33.8       | %                                                     |       |                                                                     | 57,302     |   |   |   | 59,419 |   |   |   |   |   |   |
|                                       |            |                  |            |                   |            |                   |            |                                                       |            |                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)             Total subscribers include promotional(free) subscribers at December 31, 2003, and December 31, 2004.

(2)             India includes Bangladesh, Brunei, Macau, Maldives, NewGuinea, Pakistan, Republic of Palau, and Sri Lanka

(3)             Source: Zenith Optimedia.

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(4)             Middle East includes Armenia, Azerbaijan, Byelorussia,Estonia, Georgia, Kazakhstan, Kyrgystan, Latvia, Lithuania, Macedonia, MiddleEast, Republic of Moldova and Republic of Ukraine

(5)             Other Latin America includes Aruba,Bolivia, Caribbean, Costa Rica, Curacao, Dominican Republic, Ecuador, ElSalvador, Guatemala, Honduras, Jamaica, Nicaragua, Panama, Paraguay, Peru, andUruguay

**Sources of Revenue**

Like most international paytelevision channels, we derived the majority of our international revenue fromsubscriber fees and, to a lesser extent, advertising sales. We generallycharged our pay television distributors a fee per subscriber for the right tobroadcast our international Channel. For the years ended December 31,2002, 2003, and 2004 revenue derived from subscriber fees for the internationalChannel were approximately $54.4 million, $62.3 million, and $71.3 million,respectively.

We also derived revenue from thesale of advertising time on our international Channel. We generated revenuedirectly from advertisers as well as from our pay television distributors underdistribution agreements that provided for a sharing of revenue fromadvertising. Advertising revenue from our international Channel was derivedprimarily from activities in a limited number of countries, including EastAsia, Mexico, Poland, South Africa, the United Kingdom and certain countries inLatin America. For the years ended December 31, 2002, 2003, and 2004revenue from the sale of advertising on our international Channel were $23.1million, $20.5 million, and $22.8 million, respectively.

TheNetwork Operations Center, which enabled us to control delivery of our Channelsto our pay television distributors, allowed us to insert commercials into ourprogramming from a central point. The Company had international sales officesin Buenos Aires, Hong Kong, London, Mumbai, Sydney and Taipei.

**Sales and Marketing**

Our international Channel focused its marketingefforts on maximizing our two revenue streams, distribution and advertisingsales, in the individual markets in which the Channel was distributed. Ourinternational Channel’s marketing efforts varied by market depending on thematurity of the local television industry, the level of distribution of ourChannel and the potential for the sale of advertising.

In markets where our international Channel is notcarried by all the pay television distributors, marketing efforts wereprimarily directed toward potential new distributors. These efforts includedadvertising in trade publications and participating in industry trade shows aswell as direct mail and public relations campaigns. In these markets, effortswere also made to market the Channel to potential viewers to drive consumerdemand for carriage of the Channel by local affiliates.

In markets where our international Channel hasobtained substantial distribution or has exclusive agreements with primarydistributors, marketing efforts were primarily directed toward maintainingsubscribers and viewership. Our efforts in these markets were primarilydirected toward a target of adults 25 to 54. These efforts often includedtraditional marketing campaigns consisting of on-air promotion; print,billboard, cross-channels, radio and television advertising and sometimes theseefforts were partially funded by our pay television distributors in each market.Additionally, we emphasized our unique relationship with our primary contentsupplier, Hallmark Entertainment Distribution, through the use of premierscreening events, press tours with actors and actresses and viewer trips tomovie sets. We also used our website to market and promote the Channel toconsumers through schedule information, movie synopses, games and contests allof which are localized across the region. This was in addition to acomprehensive business to business website for our external customers such asjournalists, affiliates and local agents.

In markets where we weredeveloping our international Channel’s advertising business, marketing effortswere also directed toward potential advertisers. When marketing the HallmarkChannel to 

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potentialadvertisers, we used local representation to target media planners and buyersand international advertisers.

***Channel Operations***

The programming department, and,prior to the international sale, programming departments at each of ourregional offices or partners have been responsible for ensuring the consistentquality of the programming we offer. The programming, scheduling andacquisitions departments work in conjunction with the traffic department andcreative services to create the distinctive appearance of our Channel. Some ofthese functions are outsourced on an as-needed basis.

The creation of our Channelbegins with the acquisition of programming. Subsequent to the sale of theinternational business, we have approximately 640 titles in the Crown MediaLibrary. In addition, we license programming from Hallmark EntertainmentDistribution and other program suppliers. Our staff or third parties review andsummarize all potential programming to ensure compliance with our quality andcontent standards. Prior to the international sale, the acquisitions staff inour regional offices licensed programming based on the amount of newprogramming required on the Channels. Each of the acquisitions offices workedtogether to leverage multi-channel acquisitions across many territories toreduce license fees, but remain sensitive to specific markets with targetedlocalized programming.

In most of our international markets, we customizedthe Hallmark Channel by dubbing or subtitling program elements into locallanguages. The decision to customize the Channel into local languages was basedon local market practices, viewer preferences and cost considerations. Languagepreparation was coordinated in the regional offices in London and Hong Kong andby Pramer in Buenos Aires. Program language elements were typically shipped tothe specific region to ensure that nuances in dialect of the particularlanguage are captured. The language versions were then combined with the otherprogramming elements.

The creation of on-airpromotional segments “interstitials”, which are broadcast between the featuremovies, miniseries and series, are typically outsourced to external vendors.Promotional segments were prepared in many languages for broadcast worldwide.These interstitials are intended to invite viewership, guide viewers tospecific programming, and promote “brand awareness” for the Hallmark Channel.

The scheduling departmentcreates the play list, which contains a list of daily programming. Thescheduling department works with marketing personnel to continuously monitorthe programming mix. The play list is then forwarded to the traffic department.

Thetraffic department inserts promotional segments and advertising into the playlist and creates the daily log, which contains a detailed schedule of thestream of programming, commercials and promotional materials that willultimately be viewed by the subscriber for each regional feed of the HallmarkChannel. The daily log, together with digital tapes that contain thecorresponding programming, are then forwarded to either the Network OperationsCenter or, to the third party facility, which is performing the playback anduplink services for the feed. Digital tapes that contain the promotionalsegments are forwarded to either the Network Operations Center or to the thirdparty origination and playback facility separately.

***Channel Delivery***

We deliver the daily log anddigital tapes to the Network Operations Center (described below) or to a thirdparty origination and playback facility for each market, where the programming,promotional and advertising elements are combined and compressed into a singlesignal, and transported to an uplink facility. The uplink facility thentransmits the signal to the satellite transponder that covers the relevantgeographic market, and the transponder reflects the signal back within itsdesignated geographic area to 

11

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head-endfacilities and Direct-to-Home satellite services operated by pay televisiondistributors who receive and decode our signal and transmit our Channel.

Prior to the international sale,we owned and operated the global Network Operations Center, which consists of5,000 square feet at Greenwood Village, Colorado, which commenced operations inFebruary 2001 and has the ability to perform origination and playbackservices for up to 32 programming Channels. The Network Operations Center is anefficient, state of the art broadcasting operation. The broadcastfacility was included in the sale of our international business, and wecontinue to use the facility under a technical services agreement. See Notes 1and 24 of our Notes to Consolidated Financial Statements in this Report forinformation on such sale and the technical services agreement.

Thefollowing chart summarizes for the United States Channel the distributionplatforms through which we deliver our Channel, our primary pay televisiondistributors, the language in which our Channel is broadcast, and the uplinkand satellites we currently use to deliver our Channel. The second chartsummarizes each of these matters for our international Channel prior to thesale of our international business.

*The Hallmark Channel—United States*
| Market        | ** ** | ** ** | ** ** | **Primary  Distribution  Platforms** | ** ** | **Primary  Pay TV  Distributors** | ** ** | **Languages**       | ** ** | **Playback  Providers/  Locations** | ** ** | **Uplink  Providers/  Locations** | ** ** | **Satellites** | ** ** |
|---------------|------------|------------|------------|--------------------------------------|------------|----------------------------------------|------------|---------------------|------------|-------------------------------------|------------|-----------------------------------|------------|----------------|------------|
| United States |       | Cable      |       | Time  Warner                         |       | English                                |       | Crown  Media        |       | Comcast  Digital                    |       | SES  AMC 11                       |       |
|               |       |       |       | DirecTV                              |       |                                   |       | International,  LLC |       | Media  Center                       |       |                              |       |
|               |       |       |       | Charter                              |       |                                   |       | Denver,  CO         |       | Littleton,  CO                      |       |                              |       |
|               |       |       |       | Adelphia                             |       |                                   |       |                |       |                                |       |                              |       |
|               |       |       |       | Echostar                             |       |                                   |       |                |       |                                |       |                              |       |
|               |       |       |       | Cox                                  |       |                                   |       |                |       |                                |       |                              |       |
|               |       |       |       | Cablevision                          |       |                                   |       |                |       |                                |       |                              |       |
|               |       |       |       | Comcast                              |       |                                   |       |                |       |                                |       |                              |       |

 

The contracts with theparties providing uplink, satellite and other services for the delivery of ourChannel in the United States expire from 2005 through 2019. Such contracts maybe terminated by the vendors prior to the expiration of the contracts underconditions that are customary to contracts of this type. Amounts payable underthese contracts, as well as international contracts, are reflected in “Operatingand Capital Leases” in the schedule of contractual commitments as of December 31,2004 as shown in Item 7 below.

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*The HallmarkChannel—International*

Thefollowing contracts were assigned to the buyer of our international businesseffective April 26, 2005.
| Market                      | ** ** | ** ** | ** ** | **Primary  Distribution  Platforms** | ** ** | **Primary  Pay TV  Distributors** | ** ** | **Languages**       | ** ** | **Playback  Providers/  Locations** | ** ** | **Uplink  Providers/  Locations** | ** ** | **Satellites** | ** ** |
|-----------------------------|------------|------------|------------|--------------------------------------|------------|----------------------------------------|------------|---------------------|------------|-------------------------------------|------------|-----------------------------------|------------|----------------|------------|
| Latin America               |       | Cable      |       | DirecTV                              |       | Spanish                                |       | Pramer, S.C.A.      |       | Crown Media                         |       | PAS 9                             |       |
|                             |       | DTH        |       | Sky  Latin America                   |       | Portuguese                             |       | Argentina           |       | International,  LLC                 |       | NSS  806                          |       |
|                             |       |       |       | Cablevision                          |       | English                                |       |                |       | Denver,  CO                         |       |                              |       |
| Asia Pacific                |       | Cable      |       | Modi                                 |       | Mandarin                               |       | Crown  Media        |       | Galaxy                              |       | Apstar  IIR                       |       |
|                        |       | DTH        |       | UBC  MSO                             |       | English                                |       | International,  LLC |       | Hong  Kong                          |       |                              |       |
|                        |       |       |       | Home  Entertainment                  |       | Korean                                 |       | Denver,  CO         |       | Tokyo,  Japan                       |       |                              |       |
|                        |       |       |       | StarHub  Cable Vision                |       | Hindi                                  |       |                |       |                                |       |                              |       |
| Central Europe              |       | Cable      |       | United  Pan-Europe                   |       | Polish                                 |       | Crown  Media        |       | BT                                  |       | Hot  Bird 3                       |       |
|                             |       | DTH        |       | Communications                       |       | Hungarian                              |       | International,  LLC |       | London,  England                    |       |                              |       |
|                             |       |       |       |                                 |       | Croatian                               |       | Denver,  CO         |       |                                |       |                              |       |
|                             |       |       |       |                                 |       | Romanian                               |       |                |       |                                |       |                              |       |
|                             |       |       |       |                                 |       | Bulgarian                              |       |                |       |                                |       |                              |       |
|                             |       |       |       |                                 |       | English                                |       |                |       |                                |       |                              |       |
| Scandinavia/ Benelux        |       | Cable      |       | Via  Sat                             |       | Swedish                                |       | Crown  Media        |       | BT                                  |       | Hot  Bird 3                       |       |
|                        |       | DTH        |       | Canal  Digital                       |       | Dutch                                  |       | International,  LLC |       | London,  England                    |       |                              |       |
|                        |       |       |       | Teledenmark                          |       | Norwegian                              |       | Denver,  CO         |       |                                |       |                              |       |
|                        |       |       |       |                                 |       | Danish                                 |       |                |       |                                |       |                              |       |
|                        |       |       |       |                                 |       | English                                |       |                |       |                                |       |                              |       |
| Africa                      |       | DTH        |       | Multichoice                          |       | English                                |       |                |       | Multichoice                         |       | PanAmSat  4                       |       |
|                             |       |       |       |                                 |       |                                   |       |                |       | Johannesburg,                       |       |                              |       |
|                             |       |       |       |                                 |       |                                   |       |                |       | SAF                                 |       |                              |       |
| Czech Republic              |       | Cable      |       | Kabel  Plus                          |       | Czech                                  |       | Crown  Media        |       | BT                                  |       | Hot  Bird 3                       |       |
|                        |       |       |       | Cable  Association                   |       | Slovak                                 |       | International,  LLC |       | London,  England                    |       |                              |       |
|                        |       |       |       |                                 |       | English                                |       | Denver,  CO         |       |                                |       |                              |       |
| Australia                   |       | Cable      |       | Foxtel                               |       | English                                |       | Foxtel              |       | Foxtel                              |       | Optus  B3                         |       |
|                             |       | DTH        |       | Austar                               |       |                                   |       | Sydney,  Australia  |       | Sydney,  Australia                  |       |                              |       |
| Russia and Middle East |       | Cable      |       | NTV                                  |       | Russian                                |       | Crown  Media        |       | BT                                  |       | Hot  Bird 3                       |       |
|                        |       | DTH        |       | Gulf  DTH                            |       | Arabic                                 |       | International,  LLC |       | London,  England                    |       |                              |       |
|                        |       |       |       |                                 |       | English                                |       | Denver,  CO         |       |                                |       |                              |       |
| United Kingdom         |       | DTH        |       | BskyB                                |       | English                                |       | BSkyB               |       | BSkyB                               |       | Astra  2D                         |       |
|                             |       |       |       | NTL                                  |       |                                   |       | London,  England    |       | London,  England                    |       |                              |       |
| Israel                      |       | Cable      |       | Tevel                                |       | Hebrew                                 |       | Crown  Media        |       | BT                                  |       | Hot  Bird 3                       |       |
|                        |       |       |       | Golden  Channels                     |       | Russian                                |       | International,  LLC |       | London,  England                    |       |                              |       |
|                        |       |       |       | Matav                                |       | English                                |       | Denver,  CO         |       |                                |       |                              |       |
|                        |       |       |       | YES  DTH                             |       |                                   |       |                |       |                                |       |                              |       |
| Turkey                      |       | DTH        |       | Digiturk                             |       | Turkish                                |       | Crown  Media        |       | BT                                  |       | Hot  Bird 3                       |       |
|                             |       |       |       |                                 |       | English                                |       | International,  LLC |       | London,  England                    |       |                              |       |
|                             |       |       |       |                                 |       |                                   |       | Denver, CO          |       |                                |       |                              |            |

 

**Film Distribution**

Crown Media Distribution ownsthe Crown Media Library, consisting currently of United States rights toapproximately 640 titles, and generates revenue from the film assets in the libraryby granting licenses to use the films to third parties. We are also using the films as programming forour television Channels and interactive uses.

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Crown Media Distributionoversees sales and distribution of the Crown Media Library to third-partylicensees. Third-party licensees purchase available rights, which primarilyinclude all forms of television and home video. Crown Media Distribution has a serviceagreement with Hallmark Entertainment, providing for services relating to theadministration, distribution and other exploitation of the Crown Media Library,and directs the Hallmark Entertainment sales force worldwide in all salesmatters pertaining to the Crown Media Library.

**Competition**

The pay television industry ishighly competitive. Our Channels have competed for distribution, viewers andadvertisers with other pay television channels, broadcast television channelsand with other general forms of entertainment.

There are several sources ofcompetition within our industry, each of which affects our business strategy.Our domestic Channel competes with other general entertainment programming fromTNT, USA Network, A&E, the Discovery Channel, Lifetime, ABC Family andother similarly targeted channels. Our international Channel competed withgeneral entertainment programming from AXN, I-SAT, Canal Fox, TNT, UK Gold andUSA Network. We compete with these channels for viewers and advertising dollarsbased upon quality of programming, number of subscribers, ratings andsubscriber demographics. We compete with all channels for carriage on cable andsatellite systems that may have limited capacity.

Competitioncontinues to intensify as the industry shifts from analog distribution todigital distribution. Many pay television distributors have upgraded theirphysical infrastructures to accommodate digital delivery, which providessignificantly more channel capacity. We believe that it will take several yearsfor the majority of current subscribers to convert to, and begin paying for,upgraded services. In an effort to accelerate the conversion, pay televisiondistributors are attempting to place new channels on their digital tier asopposed to their limited, yet more widely distributed, analog tiers. Althoughcompetition for the remaining widely distributed analog channel space is stillintense, as more and more subscribers are converted, the digital tier isexpected to become the dominant platform.

**Competitive Strengths**

Wehave established a track record of providing high quality programming. Webelieve that our primary competitive strengths include the following:

***Pay Television Channel Branded with the Well-KnownHallmark Name***

Our Channel is brandedwith the Hallmark name. We believe that viewers and distributors associate theHallmark brand with family values and high quality content and that ourassociation with this brand facilitates our efforts to achieve increaseddistribution and to attract additional viewers that leads to higher ratings andadvertising revenue.

***Long-Term Distribution Contracts that Call forIncreasing Subscriber Counts and Fees***

At December 31, 2004,we had long-term distribution agreements with Adelphia, Cablevision, Charter,Comcast, Cox, DirecTV, EchoStar, and Time Warner in the United States, as wellas a number of other distributors. The terms of our major distributionagreements generally provide for subscriber increases over time, although someprovide for lower or no subscriber fees if certain levels of subscribers areachieved.

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***A Library of Popular andAward-Winning Programming and Guaranteed Access through Long-Term Agreements toOther Similar Programming***

OurLibrary gives us control over a significant amount of popular and award-winningprogramming that we can either air on our Channel or license in the UnitedStates to third parties. These titles provide us with a portion of our coreprogramming, and by owning these titles, we have the flexibility to use them asneeded to create the most effective program schedules. Owning these titles alsoeliminates the license fees we otherwise would have to pay for these titles andprovides a revenue stream for us from licensing the titles to third parties. Wehave a five-year program agreement with Hallmark Entertainment ending December 31,2005, that provides us with access to new quality productions, as well as tothe titles in the Hallmark Entertainment Distribution library that we did notpurchase. This program agreement will be automatically extended for an additionthree year term if at that time Hallmark Entertainment Distribution’s parentcompany, Hallmark Entertainment LLC, owns at least 35% of the Company.

***Experienced Management***

Members of our seniormanagement team have experience launching, promoting and operating channelsboth domestically and internationally. They have held senior positions at suchcompanies as The Discovery Channel, Cable Satellite Public Affairs Network, theNews Corporation, Telecommunications International, Inc., ABC, CBS Sports,Turner Network Television, MediaOne International, the Golf Channel and USANetworks.

**Competitive Risks**

***One Channel Distributed Domestically***

We operate one primaryChannel in the United States. Many competitors have more than one channel andmay also be diversified entertainment companies, giving them an advantage indealing with distributors and advertisers. These companies are also able toleverage costs across multiple channels.

***Entertainment Programming***

Our programming isentertainment designed for adults and families and is intended to meet qualitystandards that are associated with the Hallmark trademark. Competitors may havemore flexibility in programming.

***Ratings Which Affect Advertising***

Our ratings have improvedsubstantially over the last two years. Nevertheless, our competitors includechannels with more subscribers and higher ratings, which affects rates that wecan charge for advertising.

**Research**

The research departments at the Company providestrategic and tactical guidance to decision-makers within the Company, as wellas supplying information about the Channel to potential advertisers andaffiliates. These departments provide dataon the size and demographics of our audience and information about ouraudiences, competitors, markets and industry.

Currently, our Channel’s research departmenttranslates our overall business strategy into a cohesive research program. Thisinformation assists our executives to more effectively target, brand, promote,program, and better understand where opportunities lie, in order to increaseour Channel’s market share.

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The research department has sophisticated ratingssystems (Npower, PNF2 and Adviews) and competitive tracking database hardwareand software. Trends and changes from these ratings systems are reported to topmanagement for short and long-term strategic planning.

Our Channel’s performanceis tracked through an internal tracking study established in July 2001,which is a monthly telephone surveyconducted among a national probability sample of approximately 1,000 adults.The research department also subscribes to a number of other services, whichare useful in obtaining information about viewers of our Channel.

**Employees**

Wehad 356 and 351 employees at December 31, 2003 and 2004, respectively.Subsequent to the sale of our international business in April 2005, we had187 employees. Neither we nor any of our subsidiaries are parties to collectivebargaining agreements. We believe that our relations with our employees aregood. Substantially all of our domestic Channel’s employees work at our officesin Studio City, California and New York, New York.

**Regulation**

Theoperations of television channels in the United States are regulated. Withinthe United States, program access rules applicable to channel providerswith ownership ties to pay television distributors may limit businesscombinations between these two types of companies.

**FinancialInformation about Geographic Areas**

Information concerningrevenue and long-lived assets attributable to external customers, domesticallyand internationally, may be found in Note 22 of our Notes to ConsolidatedFinancial Statements in this Report.

**RiskFactors and Forward-Looking Statements**

The discussion set forth in this Form 10-Kcontains statements concerning potential future events. Such forward-lookingstatements are based on assumptions by Crown Media Holdings management, as ofthe date of this Form 10-K including assumptions about risks anduncertainties faced by Crown Media Holdings. Readers can identify theseforward-looking statements by their use of such verbs as “expects,” “anticipates,”“believes,” or similar verbs or conjugations of such verbs. If any ofmanagement’s assumptions prove incorrect or should unanticipated circumstancesarise, Crown Media Holdings’ actual results, levels of activity, performance,or achievements could materially differ from those anticipated by suchforward-looking statements. Among the factors that could cause actual resultsto differ materially are those discussed below in this Form 10-K.Crown Media Holdings will not update any forward-looking statements containedin this Form 10-K to reflect future events or developments.

If we do not successfullyaddress the risks described below, our business, prospects, financialcondition, results of operations or cash flow could be materially adverselyaffected. The trading price of our Class A common stock could declinebecause of any of these risks.

**Risks Relating to Our Business**

***Our business has incurred netlosses since inception and may continue to incur losses.***

Both our international anddomestic channels have a history of net losses and we expect to continue toreport net losses for the foreseeable future. As of December 31, 2004, wehad an accumulated deficit of approximately $1.3 billion, total stockholders’equity of approximately $54.6 million, goodwill of approximately $314.0million, and film assets of $599.0 million.

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We cannot assure you that wewill achieve or sustain profitability. If we are not able to achieve or sustainprofitability, the trading price of our Class A common stock may fallsignificantly. To diminish our losses and become profitable, we will need tosubstantially increase our revenue, particularly advertising and licensingrevenue. This will require, among other things, increasing the distribution ofour channels, attracting more viewers to our channels, attracting moreadvertisers, and increasing our advertising rates. Risks associated with theseareas of our business are described below.

Inaddition, in order to accomplish these goals, the management of Crown MediaHoldings continues to believe that it is necessary to increase subscribers andenhance our programming, which results in increased subscriber acquisition feesand higher costs for programming. Over the last four years, these actions havecontributed to increased net losses for Crown Media Holdings.

***Our substantial indebtednesscould adversely affect our financial health, and the restrictions imposed bythe terms of our debt instruments may severely limit our ability to plan for orrespond to changes in our business.***

We have a substantial amount ofindebtedness. As of December 31, 2004, our total debt was $889.1 millionand we had $12.1 million of cash and cash equivalents. In addition, as of March 31,2005, we could borrow the remaining $10.0 million available borrowing under ourbank credit facility to cover the negative cash flow resulting from our currentoperations. Subject to restrictions under our debt agreements, we may also seekequity or debt financing from time to time to cover our operating losses, tofinance acquisitions or capital expenditures or for other purposes.

As a result of our level of debt and the terms of our debt instruments:

·       our vulnerability to adverse general economic conditions is heightened;

·       we will be required to dedicate a portion of our cash flow fromoperations to repayment of debt, limiting the availability of cash for otherpurposes;

·       we are and will continue to be limited by financial and other restrictivecovenants in our ability to borrow additional funds, consummate asset sales,enter into transactions with affiliates or conduct mergers and acquisitions;

·       our flexibility in planning for, or reacting to, changes in our businessand industry will be limited;

·       we are sensitive to fluctuations in interest rates; and

·       our ability to obtain additional financing in the future for workingcapital, capital expenditures, acquisitions, general corporate purposes orother purposes may be impaired.

Ourability to meet our debt and other obligations and to reduce our total debtdepends on our future operating performances and on economic, financial,competitive and other factors. There can be no assurance that our leverage andsuch restrictions will not materially and adversely affect our ability tofinance our future operations or capital needs or to engage in other businessactivities.

***We have increasing interestexpense, which may impact our future operations.***

High levels of interestexpense could have negative effects on our future operations. Interest expense,which is net of interest income and includes amortization of debt issuancecosts and interest expense on borrowings under our senior and demand notes andbank credit facility, increased substantially over the past year. The increasein interest expense in the past twelve months resulted from an increase in theaverage borrowings outstanding, due to cash generated from operations beinginsufficient to cover operating expenses and capital expenditures. A substantialportion of our cash flow from operations must be used to pay our interestexpense and will not be available for other business purposes. In addition, wemay need to incur additional indebtedness in the future. We cannot assure youthat our business will 

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generatesufficient cash flow or that future financings will be available to providesufficient proceeds to meet our obligations or to service our total debt.

***Our liquidity is dependent onexternal funds.***

Becausewe currently operate at a loss and may have a negative cash flow, anyunanticipated significant expense or any development that hampers our growth inrevenue or decreases any of our revenue, would result in the need foradditional external funds in order to continue operations. We have noarrangements for any external financings, whether debt or equity, and are notcertain whether any such new external financing would be available onacceptable terms. Any new debt financing would require the cooperation andagreement of existing lenders.

***Modification of any existingagreements with United States distributors could result in an increasedobligation to pay subscriber acquisition fees.***

Severalof the Crown Media United States’ existing distribution agreements contain “mostfavored nations” clauses. These clauses typically provide that, in the eventCrown Media United States enters into an agreement with another distributor onmore favorable terms, these terms must be offered to the existing distributor,subject to certain exceptions and conditions. Distribution agreements which wemay enter into in the future may also contain similar “most favored nationclauses.” In the past, Crown Media United States was asked to complywith such clauses and modify its distribution agreements with certain distributorsafter entering into new distribution agreements. Any claims under these clausesin the future could result in the payment of cash or the issuance of stock byus to our distributors and would negatively affect subscriber revenues;however, if our subscription base is increased as a result of suchmodification, it could result in higher advertising revenue.

***If we are unable to obtainprogramming from third parties, we may be unable to increase our subscriberbase.***

Wecompete with other pay television channel providers to acquire programming. Ifwe fail to continue to obtain programming on reasonable terms for any reason,including as a result of competition, we could be forced to incur additionalcosts to acquire such programming or look for alternative programming, whichmay hinder the growth of our subscriber base.

***If our programming declines inpopularity, our subscriber fees and advertising revenue could fall and theadditional revenue we expect as a result of the acquisition of film assets fromHallmark Entertainment Distribution may be lower than we anticipate.***

Oursuccess depends partly upon unpredictable and volatile factors beyond ourcontrol, such as viewer preferences, competing programming and the availabilityof other entertainment activities. We may not be able to anticipate and reacteffectively to shifts in tastes and interests in our markets. In particular,our ability to react effectively may be limited by our obligation to licenseprogramming from Hallmark Entertainment Distribution, which has standards andcontractual commitments to other parties that limit the types of programmingthat it will provide to us. Our competitors may have more flexible programmingarrangements, as well as greater amounts of production, better distribution, andgreater capital resources, and may be able to react more quickly to shifts intastes and interests. As a result, we may be unable to maintain the commercialsuccess of any of our current programming, or to generate sufficient demand andmarket acceptance for our new programming. A shift in viewer preferences inprogramming or alternative entertainment activities could also reduce theamount of revenue we anticipate receiving from licensing of our film assets andcause a decline in both advertising and subscriber fees revenue. The decline inrevenue could hinder or prevent us from achieving profitability and couldadversely affect the market price of our Class A common stock.

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***We are currently dependent onHallmark Entertainment to distribute and maximize licensing fees from the filmassets.***

Currently, we are dependent onHallmark Entertainment, a related party, to distribute and license our filmassets to third parties for us under a services agreement, which will expire onDecember 31, 2006. This arrangement reduces our control over the sales anddistribution of the film assets and might delay our realization of the fullrevenue stream from the film assets. We and Hallmark Entertainment each havethe right to terminate the service agreement on a yearly basis. If HallmarkEntertainment elects to terminate the agreement before we have established ourown distribution network, we may not be able to establish our own or obtainalternative distribution services of equivalent quality or on terms asfavorable to us. Termination of this services agreement could hinder ourability, at least in the short-term, to achieve the amount of additionalrevenue anticipated from these activities and could adversely affect the marketprice of our Class A common stock.

Wemay in due course develop our own distribution/sales network and hire employeesto perform the services currently performed by Hallmark Entertainment under theservice agreement. Our ability to do so is unproven and will require financial,operational and management resources. We may not be able to hire the number ofemployees, or employees who are sufficiently qualified, to perform theseservices, or do so in a cost efficient manner. If the cost to develop andmaintain this employee base is greater, or if this process takes longer thananticipated, it could have a negative impact on the revenue we anticipategenerating from the film assets.

***If we are unable to increase ouradvertising revenue, we may be unable to achieve profitability.***

Although it is expectedover time that our advertising revenue will increase, if we fail to increasesignificantly our advertising revenue, we may be unable to achieve or sustainprofitability or to expand our business. A failure to increase advertisingrevenue may be a result of any or all of the following: (i) we have a limited history of marketing andselling advertising time; (ii) we may be unable to identify, attract andretain experienced sales and marketing personnel with relevant experience forour U.S. channel; (iii) our sales and marketing organization may be unableto successfully compete against the significantly more extensive andwell-funded sales and marketing operations of our current or potentialcompetitors; (iv) the advancement of technologies such as Digital Video Recordingmay cause industry-wide changes concerning the frequency in which individualsare exposed to advertising on television; and/or (v) we will not beable to increase our advertising sales rate-card or may be required to runadditional advertising spots which affect the availability of advertisinginventory for future sales. Success inincreasing our advertising revenue also depends upon the number and coverage ofthe distributors who carry our channels, our number of subscribers, and theviewership ratings for our programming.

***Hallmark EntertainmentInvestments controls us and this control could create conflicts of interest orinhibit potential changes of control.***

Hallmark EntertainmentInvestments controls all of our outstanding shares of Class B common stockand owns shares of our Class A common stock, representing in the aggregateapproximately 95.8% of the outstanding voting power on all matters submitted toour stockholders. Hallmark Entertainment Holdings, a subsidiary ofHallmark Cards, controls the voting of all our shares held by HallmarkEntertainment Investments. HallmarkEntertainment Investments’ control could discourage others from initiatingpotential merger, takeover or other change of control transactions that mayotherwise be beneficial to our business or holders of Class A commonstock. As a result, the market price of our Class A common stock couldsuffer, and our business could suffer. Hallmark Entertainment Investments’control relationship with us also could give rise to conflicts of interest incertain situations.

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***Hallmark Entertainment Distribution may not deliver tous as many programs as it has historically delivered.***

We currently acquirelibrary programming, new productions and first-run presentations pursuant toour program license agreement with Hallmark Entertainment Distribution. However,Hallmark Entertainment Distribution is not required to deliver a specificminimum number of programs. We could be forced to develop and produce oracquire alternative programming if we no longer receive as many programs fromHallmark Entertainment Distribution as we have in prior years and, withoutadequate notice, this could negatively impact our ability to effectivelyprogram our Channel.

***We could lose the right to usethe name “Hallmark” because we have limited-duration trademark licenseagreements, which could harm our business.***

Welicense the name “Hallmark” from Hallmark Licensing, Inc., a subsidiary ofHallmark Cards, for various uses, including the name of our domestic channel.This license will expire on September 1, 2005. If Hallmark Cardsdetermines not to renew the trademark license agreements for any reason,including our failure to meet minimum programming thresholds dependent onprogramming provided by affiliates of Hallmark Cards or to comply with HallmarkCards’ programming standards, we would be forced to significantly revise ourbusiness plan and operations, and could experience a significant erosion of oursubscriber base and advertising revenue, particularly in the United States.

***If our third-party suppliersfail to provide us with network infrastructure services on a timely basis, ourcosts could increase and our growth could be hindered.***

Wecurrently rely on third parties to supply key network infrastructure services,including uplink, playback, transmission and satellite services to certain ofour markets, which are available only from limited sources. We haveoccasionally experienced delays and other problems in receiving communicationsequipment, services and facilities and may, in the future, be unable to obtainsuch services, equipment or facilities on the scale and within the time framesrequired by us on terms we find acceptable, or at all. If we are unable toobtain, or if we experience a delay in the delivery of, such services, we maybe forced to incur significant unanticipated expenses to secure alternativethird party suppliers or adjust our operations, which could hinder our growthand reduce our revenue and potential profitability.

***If the Network Operations Centerfails, or its operations are disrupted, our costs could increase and our growthcould be hindered.***

We are currently using theNetwork Operations Center for the origination and playback of signals for theHallmark Channel. Like other single-point facilities, the Network OperationsCenter is subject to interruption from fire, tornadoes, lightning and otherunexpected natural causes. Although there are redundant systems in place,equipment failure, employee misconduct or outside interference could alsodisrupt the Network Operations Center’s services. We currently have certainbackup facilities for the domestic channel. Any significant interruption at theNetwork Operations Center affecting the distribution of our channel could havean adverse effect on our operating results and financial condition.

As part of the sale of theinternational business, the buyer of the business acquired the NetworkOperations Center, but we continue to use the Network Operations Center for thedistribution of our domesticchannel pursuant to a service agreement, and we depend upon the buyer inproviding these services for our domestic Channel. Any significant interruptionof such services affecting the distribution of our channels could have anadverse effect on our operating results and financial condition.

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***If we are unable to retain keyexecutives and other personnel, our growth could be inhibited and our businessharmed.***

Oursuccess depends on the expertise and continued service of our executiveofficers and key employees of our subsidiaries. If we fail to attract, hire orretain the necessary personnel, or if we lose the services of our keyexecutives, we may be unable to implement our business plan or keep pace withdeveloping trends in our industry.

***The amount of our goodwill, aswell as our film costs, may hinder our ability to achieve profitability.***

As a result of our acquisitionsof all the common interests in Crown Media United States, we have generated asignificant amount of goodwill. We ceased the amortization of this acquiredgoodwill, and we are required to periodically review whether the value of ourgoodwill has been impaired. If we are required to write down our goodwill, ourresults of operations, stockholders’ equity could be materially adverselyaffected.

Wealso have film costs relating to the amortization of the purchase price for thefilm assets that we use and license to others. These film costs are, and willcontinue to be, a significant component of our cost of services each quarter.

***Our stock price may be volatileand could decline substantially.***

The stock market has, from time to time, experienced extreme price andvolume fluctuations. Many factors may cause the market price for our Class Acommon stock to decline, including:

·       our operating results failing to meet the expectations of securitiesanalysts or investors in any quarter;

·       material announcements by us or our competitors;

·       governmental regulatory action;

·       technological innovations by competitors or competing technologies;

·       investor perceptions of our industry or prospects, or those of ourcustomers; and

·       changes in general market conditions or economic trends.

Additionally, of theapproximately 73.9 million shares of the Company’s outstanding Class Acommon stock, only 9.6 million shares (approximately 13%) are not held by affiliatesof the Company. This stock ownership structure may also be a cause ofvolatility in the market price of the Company’s Class A common stock.

**Risks Relating to Our Industry**

***The proposed change intelevision ratings in the United States could reduce our channel revenue andour ability to achieve profitability.***

Our domestic advertisingrevenues are partially dependent on television ratings provided by NielsenMedia Research. Nielsen is currently modifying its ratings system by increasingits household sample size and plans to institute other changes in its audiencemeasurement systems. Our ratings could either be positively or negativelyaffected by these changes, depending on the demographic characteristics of thehouseholds added to the Nielsen sample and the natures of the changes in themeasurement systems.

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***Competition could reduce ourchannel revenue and our ability to achieve profitability.***

We operate in the pay televisionbusiness, which is highly competitive. If we are unable to compete effectively withlarge diversified entertainment companies that have substantially greaterresources than we have, our operating margins and market share could bereduced, and the growth of our business inhibited. In particular, we competefor distribution with other pay television channels and, when distribution isobtained, for viewers and advertisers with pay television channels, broadcasttelevision networks, radio, the Internet and other media. We also compete, tovarying degrees, with other leisure-time activities such as movie theaters, theInternet, radio, print media, electronic games and other alternative sources ofentertainment and information. Future technological developments may affectcompetition within this business.

A continuing trend towardsbusiness combinations and alliances in the communications industries may createsignificant new competitors for us or intensify existing competition. Many ofthese combined entities have more than one channel and resources far greaterthan ours. These combined entities may provide bundled packages of programming,delivery and other services that compete directly with the products we offer.

We may need to reduce our pricesor license additional programming to remain competitive, and we may be unableto sustain future pricing levels as competition increases. Our failure toachieve or sustain market acceptance of our programming at desired pricinglevels could impair our ability to achieve profitability or positive cash flow,which would harm our business.

Distributorsin the United States may attempt to pressure pay TV channels with lowerviewership, such as our Channel, to accept decreasing amounts for subscriberfees, to pay higher subscriber acquisition fees or to allow carriage of thechannel without the payment of subscriber fees. Factors that may lead to thispressure include the number of competing pay TV channels, the limited spaceavailable on services of distributors in the United States and the desire ofdistributors to maintain or reduce costs. Any reduction in subscriber feesrevenue now or in the future could have a material impact on our ability toachieve profitability and cash flow.

***New distribution technologiesmay fundamentally change the way we distribute our channels and couldsignificantly decrease our revenue or require us to incur significant capitalexpenditures.***

Our future success will depend, in part, on our ability to anticipate andadapt to technological changes and to offer, on a timely basis, services thatmeet customer demands and evolving industry standards. The pay televisionindustry has been, and is likely to continue to be, subject to:

·       rapid and significant technological change, including continuingdevelopments in technology which do not presently have widely acceptedstandards; and

·       frequent introductions of new services and alternative technologies,including new technologies for providing video services.

For example, the advent ofdigital technology is likely to accelerate the convergence of broadcast,telecommunications, Internet and other media and could result in materialchanges in the economics, regulations, intellectual property usage andtechnical platforms on which our business relies, including lower retail ratesfor video services. These changes could fundamentally affect the scale, source,and volatility of our revenue streams, cost structures, and profitability, andmay require us to significantly change our operations.

We also rely in part on thirdparties for the development of, and access to, communications and networktechnology. As a result, we may be unable to obtain access to new technology ona timely basis or on satisfactory terms, which could harm our business andprospects.

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Moreover,the increased capacity of digital distribution platforms, including the introductionof digital terrestrial television, may reduce the competition for the right tocarry channels and allow development of extra services at low incremental cost.These lower incremental costs could lower barriers to entry for competingchannels, and place pressure on our operating margins and market position. Inaddition, a greater number of channels would likely increase competition amongchannels for viewers and advertisers, which could affect our ability to attractadvertising and new distribution at desired pricing levels, and could thereforehinder or prevent the growth of our subscriber base.

***If we fail to comply withapplicable government regulations, our business could be harmed.***

If, as a provider of televisionchannels, we fail to comply with applicable present or future governmentregulations in the U.S., we could be prohibited from operating in the U.S. andcould be subject to monetary fines, either of which would increase ouroperating costs, reduce our revenue and limit our ability to achieve profitability.

Moreover, broadcastingregulations are generally subject to periodic and on-going governmental reviewand legislative initiatives, which may, in the future, affect the nature ofprogramming we are able to offer and the means by which it is distributed. Thetiming, scope or outcome of these reviews could be unfavorable to us, and anychanges to current broadcasting legislation or regulations could requireadjustments to our operations.

TheFederal Communications Commission or Congress may enact requirements that cableprogram services be offered to subscribers on an “a la carte” basis, i.e. bemade available for purchase separately and not as part of a package ofservices. Such requirements could result in a reduction in the total number ofsubscribers to our domestic program services and adversely affect advertisingrevenue.

**Available Information**

**We will make available free ofcharge through our website, *www.hallmarkchannel.com*,this Annual Report, our quarterly reports on Form 10-Q, our currentreports on Form 8-K, and amendments to such reports, as soon as reasonablypracticable after we electronically file or furnish such material with theSecurities and Exchange Commission.**

**ITEM 2.**                Properties

Thefollowing table provides certain summary information with respect to theprincipal real properties leased by the Company. We do not own any realproperty. The leases for these United States offices and facilities expirebetween March 2005 and June 2010. The Company believes thefacilities, office space and other real properties leased are adequate for itscurrent operations.

***Hallmark Channel—UnitedStates***
| **Location**                                    | ** ** | ** **                                                                      | ** ** | **Use** | ** ** | **Approximate  Area in  Square Feet** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|---------|------------|-------------------------------------------------|------------|
| 12700 Ventura Blvd.Studio City, California      |       | Executive and administrative office and post production  and editing facilities |       |    | 50,800     |                                            |       |
| 1325 Avenue of the Americas  New York, New York |       | Sales and administrative office and advertising  traffic                        |       |    | 13,028     |                                            |       |
| 205 N. Michigan Ave.  Chicago, Illinois         |       | Sales office                                                                    |       |    | 3,048      |                                            |       |

 

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***Hallmark Channel—International***

Thefollowing leases were assigned to the buyer of our international businesseffective April 26, 2005.
| **Location**                                                            | ** ** | ** **                                                                                                 | ** ** | **Use** | ** ** | **Approximate  Area in  Square Feet** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|---------|------------|-------------------------------------------------|------------|
| 6430 South Fiddlers Green Circle  Greenwood Village, Colorado           |       | Executive and administrative office, post production  and editing facilities and Network Operations Center |       |    | 33,731     |                                            |       |
| 234 A Kings Road  London, England                                       |       | Sales and scheduling office                                                                                |       |    | 11,400     |                                            |       |
| 12 F-1, No. 50, Sec. 2  Nanjing East Road  Taipei City, Taiwan     |       | Sales office                                                                                               |       |    | 980        |                                            |       |
| 25 Canton Road  Kowloon, Hong Kong                                      |       | Sales office                                                                                               |       |    | 2,800      |                                            |       |
| Paharpur Business Centre, Suite 406  Nehru Place Greens  New Delhi |       | Sales and administrative office                                                                            |       |    | 375        |                                            |       |
| Bonpland  1745  Buenos Aires, Argentina                                 |       | Sales  and administrative office                                                                           |       |    | 800        |                                            |       |

 

We own most of the equipment andfurnishings used in our businesses, except for satellite transponders, whichare leased. See Note 9 of Notes to Consolidated Financial Statements forinformation on our leasing of property and equipment.

Our film assets consistprimarily of television movies and miniseries. The masters for these films arestored in vaults and laboratories with which we have access agreements.

**ITEM 3.**                LegalProceedings

In May 2005, wereceived a letter from National Interfaith Cable Coalition, Inc.threatening litigation in regard to an Amendment dated February 22, 2001to the Amended and Restated Company Agreement of Crown Media United States. TheAmendment is described below under “Crown Media United States Amended andRestated Company Agreement” in Item 13, Certain Relationships and RelatedTransactions. The letter claims that, among other things, the Company andHallmark Entertainment, Inc. have not honored their commitments relatingto the production and financing of certain NICC and “faith and values”programming for broadcast on the Hallmark Channel in the United States. NICCalleges that we and HEI have materially breached the Amendment, causingsubstantial damages to NICC in an amount which exceeds $100.0 million. Theletter further indicates that NICC intends to file litigation for breaches ofthe Amendment unless we agree, by June 1, 2005, to enter into a new,extended agreement with NICC for the production, promotion and funding ofprogramming. We believe that the Company and HEI are in compliance with the Amendment.We cannot, however, predict whether the letter will result in litigation, anamendment or other resolution.

**ITEM 4.**                Submissionof Matters to a Vote of Security Holders

None.

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**PART II**

**ITEM 5.**                Marketfor Our Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities

***Market Information***

Our Class A common stock is listed on the NasdaqNational Market System under the ticker symbol “CRWN[E].” Set forth below arethe high and low sales prices for our Class A common stock for eachquarterly period in 2003 and 2004, as reported on the Nasdaq National MarketSystem.
| ** **            | ** ** | **Price Range** | ** ** |
|-----------------------|------------|----------------------|------------|
| **Common Stock** | ** ** | ** **           | ** ** | **High** | ** ** | **Low** | ** ** |
| **2003**              |       |                 |       |   |   |
| First Quarter         |       | $                    | 3.500      |   | $ | 1.610 |   |
| Second Quarter        |       | $                    | 6.130      |   | $ | 2.761 |   |
| Third Quarter         |       | $                    | 8.780      |   | $ | 3.750 |   |
| Fourth Quarter        |       | $                    | 9.350      |   | $ | 7.200 |   |
| **2004**              |       |                 |       |   |   |
| First Quarter         |       | $                    | 9.230      |   | $ | 7.060 |   |
| Second Quarter        |       | $                    | 9.780      |   | $ | 7.960 |   |
| Third Quarter         |       | $                    | 8.750      |   | $ | 6.250 |   |
| Fourth  Quarter       |       | $                    | 9.500      |   | $ | 8.170 |   |
|                       |            |                      |            |  |  |  |  |  |  |

 

There is no establishedpublic trading market for our Class B common stock, of which 100% is ownedby Hallmark Entertainment Investments Co.

***Holders***

Asof May 1, 2005, there were approximately 72 record holders of our Class Acommon stock and one record holder of our Class B common stock.

***Dividends***

Wehave not paid any cash dividends on our common stock since inception. Weanticipate that we will retain all of our earnings, if any, in the foreseeablefuture to finance the continued growth and expansion of our business, and wehave no current intention to pay cash dividends. Our bank creditfacility also prohibits our declaring or paying any cash dividends.

***Securities Authorized for Issuance Under EquityCompensation Plans***

The following tableprovides as of December 31, 2004, information for our only equitycompensation plan, which is the Amended and Restated 2000 Long Term IncentivePlan

**EquityCompensation Plan Information**
| **Plan Category**                                  | ** ** | ** **              | ** ** | **Number of Securities  to be Issued  Upon Exercise of  Outstanding Options,  Warrants and Rights** | ** ** | **Weighted-Average  Exercise Price of  Outstanding Options,  Warrants and Rights** | ** ** | **Number of Securities  Remaining Available for  Future Issuance Under  Equity Compensation  Plans (Excluding  Securities Reflected  in Column (a))** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **(In thousands)** | ** ** | ** **                                                                                                                                       | ** ** | **(In thousands)**                                                                                     | ** ** |
| Equity  compensation plans approved by security holders |       |                    | 1,359      |                                                                                                                                             |       |                                                                                                        | $          | 10.71                                                                                                                                                                                                        |       |   |   | 8,357 |   |   |
|                                                         |            |                         |            |                                                                                                                                                  |            |                                                                                                             |            |                                                                                                                                                                                                              |            |  |  |  |  |  |  |  |

 

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***Stock Purchases***

Wedid not make any repurchases of our outstanding shares during the fourthquarter of 2004. None of our executive officers purchased shares in open markettransactions during the fourth quarter of 2004.

**ITEM 6.**                SelectedFinancial Data

***Selected Historical Consolidated Financial Data ofCrown Media Holdings***

In the table below, we provideyou with selected historical consolidated financial and other data of CrownMedia Holdings and its subsidiaries. The following selected consolidatedstatement of operations data for the years ended December 31, 2000, 2001,2002, 2003 and 2004, and the consolidated balance sheet data as of December 31,2000, 2001, 2002, 2003 and 2004, are derived from the audited financialstatements of Crown Media Holdings and its subsidiaries. This data should beread together with “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and the consolidated financial statements andrelated notes included elsewhere in this Annual Report on Form 10-K.

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On May 9,2000, Crown Media Holdings completed its initial public offering. At the sametime, Crown Media Holdings acquired 100% of Crown Media International, and aspart of this acquisition acquired the 22.5% common interests in Crown MediaUnited States and 50% common interests of H&H Programming-Asia then ownedby Crown Media International, and separately acquired an additional 55% of thecommon interests in Crown Media United States. Prior to that date, Crown MediaHoldings did not have any significant operations. On March 15, 2001, CrownMedia Holdings acquired the remaining 22.5% of the common interests in CrownMedia United States and the remaining 50% interest in H&H Programming-Asia,which operated The Kermit Channel, which were held by The Jim Henson Company, Inc.The consolidated historical financial statements of Crown Media Holdingsinclude the results of operation for Crown Media International as a predecessorcorporation for all periods presented, including its initial ownership of 22.5%of the common interests in Crown Media United States, and include each of theother interests described above from the date of their acquisition.
| ** **                                                                                                  | ** ** | **Years Ended December 31,**                           | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2000**                                                              | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                                                                                  | ** ** | **(In thousands, except per share amounts)** | ** ** |
| **Statement of Operations Data:**                                                                           |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Revenue:                                                                                                    |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Subscriber  fees, net                                                                                       |       | $                                                                     | 47,921     |   | $ | 66,537 |   | $ | 67,913 |   | $ | 68,901 |   | $ | 82,140 |   |
| Advertising                                                                                                 |       | 16,016                                                                |       | 37,513 |   | 69,066 |   | 98,093 |   | 129,114 |   |
| Film  asset licensing fees                                                                                  |       | —                                                                |       | 2,267 |   | 23,950 |   | 40,431 |   | 29,348 |   |
| Other  revenue                                                                                              |       | 2,879                                                                 |       | 740 |   | 80 |   | 99 |   | 685 |   |
| Total  revenue, net                                                                                         |       | 66,816                                                                |       | 107,057 |   | 161,009 |   | 207,524 |   | 241,287 |   |
| Cost of services:                                                                                           |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Programming costs:                                                                                          |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Affiliates                                                                                                  |       | 31,307                                                                |       | 55,027 |   | 67,689 |   | 39,369 |   | 52,137 |   |
| Non-affiliates                                                                                              |       | 18,933                                                                |       | 62,158 |   | 70,314 |   | 69,305 |   | 85,085 |   |
| Amortization  of film assets                                                                                |       | —                                                                |       | 3,533 |   | 27,035 |   | 40,168 |   | 47,197 |   |
| Impairment  of film assets and technical equipment                                                     |       | —                                                                |       | — |   | — |   | — |   | 117,891 |   |
| Subscriber  acquisition fee amortization                                                                    |       | 4,801                                                                 |       | 6,415 |   | 44,220 |   | 25,268 |   | 26,939 |   |
| Depreciation  and amortization of technical facilities                                                      |       | —                                                                |       | 4,738 |   | 4,742 |   | 4,742 |   | 4,825 |   |
| Operating  costs                                                                                            |       | 35,643                                                                |       | 57,059 |   | 60,877 |   | 43,290 |   | 44,412 |   |
| Total  cost of services                                                                                     |       | 90,684                                                                |       | 188,930 |   | 274,877 |   | 222,142 |   | 378,486 |   |
| Selling, general and administrative expense                                                            |       | 46,271                                                                |       | 70,709 |   | 60,223 |   | 61,699 |   | 78,003 |   |
| Marketing expense                                                                                           |       | 21,280                                                                |       | 34,809 |   | 48,946 |   | 24,436 |   | 23,865 |   |
| Reorganization expense (credit)                                                                             |       | —                                                                |       | 4,629 |   | 28,801 |   | (1,757 | ) | (483 | ) |
| Depreciation and amortization expense                                                                       |       | 5,520                                                                 |       | 8,649 |   | 11,026 |   | 10,066 |   | 9,001 |   |
| Amortization of goodwill                                                                                    |       | 8,639                                                                 |       | 20,032 |   | — |   | — |   | — |   |
| Loss  from operations                                                                                       |       | (105,578                                                              | )          | (220,701 | ) | (262,864 | ) | (109,062 | ) | (247,585 | ) |
| Equity in net losses of unconsolidated entities                                                             |       | (9,328                                                                | )          | (655 | ) | — |   | — |   | — |   |
| Loss from early extinguishment of debt                                                                      |       | —                                                                |       | — |   | — |   | (39,812 | ) | — |   |
| Guaranteed preferred beneficial interest  accretion                                                    |       | —                                                                |       | (1,428 | ) | (25,508 | ) | (23,218 | ) | — |   |
| Interest expense, net                                                                                       |       | 523                                                                   |       | (10,392 | ) | (22,603 | ) | (46,868 | ) | (66,933 | ) |
| Loss  before income tax (provision) benefit                                                            |       | (114,383                                                              | )          | (233,176 | ) | (310,975 | ) | (218,960 | ) | (314,518 | ) |
| Income tax (provision) benefit                                                                              |       | (1,743                                                                | )          | 3,344 |   | (2,054 | ) | (3,189 | ) | (2,288 | ) |
| Loss  before cumulative effect of a change in accounting principle                                     |       | (116,126                                                              | )          | (229,832 | ) | (313,029 | ) | (222,149 | ) | (316,806 | ) |
| Cumulative effect of change in accounting  principle                                                   |       | —                                                                |       | — |   | — |   | 17,000 |   | — |   |
| Net  loss                                                                                                   |       | $                                                                     | (116,126   | ) | $ | (229,832 | ) | $ | (313,029 | ) | $ | (205,149 | ) | $ | (316,806 | ) |
| Weighted average number of Class A and Class B  shares outstanding,  basic and  diluted |       | 50,786                                                                |       | 74,691 |   | 104,306 |   | 104,484 |   | 104,533 |   |
| Net loss per share, basic and diluted                                                                       |       | $                                                                     | (2.32      | ) | $ | (3.08 | ) | $ | (3.00 | ) | $ | (1.96 | ) | $ | (3.03 | ) |

 

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| ** **                                          | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                          | ** ** | **2000**                              | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                          | ** ** | **(In thousands)**               | ** ** |
| **Balance  Sheet Data:**                            |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                           |       | $                                     | 34,274     |   | $ | 13,859 |   | $ | 335 |   | $ | 4,306 |   | $ | 12,102 |   |
| Goodwill                                            |       | 240,141                               |       | 314,033 |   | 314,033 |   | 314,033 |   | 314,033 |   |
| Total assets                                        |       | 531,702                               |       | 1,627,008 |   | 1,497,930 |   | 1,565,747 |   | 1,512,768 |   |
| Total long-term debt, excluding  current maturities |       | —                                |       | 205,894 |   | 382,206 |   | 808,892 |   | 886,302 |   |
| Stockholders’ equity                           |       | 246,808                               |       | 776,866 |   | 467,595 |   | 313,451 |   | 54,636 |   |
| **Other  Data:**                                    |       |                                  |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                |       | $                                     | 22,809     |   | $ | 11,150 |   | $ | 4,240 |   | $ | 4,784 |   | $ | 1,901 |   |
| Total  subscribers at year end:                     |       |                                  |       |   |   |   |   |   |   |   |   |
| Hallmark Channel—International                 |       | 33,531                                |       | 44,412 |   | 49,523 |   | 57,302 |   | 59,419 |   |
| Hallmark Channel—U.S.                          |       | 26,488                                |       | 43,532 |   | 48,815 |   | 56,010 |   | 64,565 |   |
| Total subscribers                                   |       | 60,019                                |       | 87,944 |   | 98,338 |   | 113,312 |   | 123,984 |   |

 

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**ITEM 7.**                Management’sDiscussion and Analysis of Financial Condition and Results of Operations

**Overview**

*Current Challenges*

With the completion of the sale of the internationalbusiness, management is focusing its efforts on the domestic channel and filmlibrary. The Company will continue to strive to expand its domestic subscriberbase, and to increase its domestic ratings because growth of these two factorsare necessary in order to increase subscriber demand for the Company’s Channeland its advertising revenues. In addition, our management believes thatadvertisers will generally spend more advertising dollars on more fullydistributed networks.

One of our challenges is to expand our distribution inthe United States in a cost effective manner. When subscribers are added underdistribution agreements, we are typically asked to pay subscriber acquisitionfees and support payments for the launch of the Channel. Increases in ourratings, our programming line-up and our relationship with Hallmark Cards canbe favorable factors in our negotiation of these payments. One disadvantage isthat we have one channel while many of our competitors operate multiplechannels and thus have more leverage in dealing with distributors.

The Company plans to continue its current programmingstrategy in order to increase its ratings. Building on the success that thedomestic channel experienced during the 2004 holiday season, we have anaggressive original movie schedule in 2005, which will include more than 20original movies. Additionally, the Company will design marketing campaignsaround these original movies, as well as certain holidays such as Mother’s Dayand Christmas, and build on our relationship with Hallmark Cards.

The Company will continue to monitor its operatingexpenses to identify areas where greater efficiencies can be attained to reduceour operating expenses relative to our revenue streams, and, if needed, reducethese expenses during the year to manage its cash needs. In addition, we alsoplan on refinancing our bank credit facility in 2006 to provide for our futurecash requirements.

The primary financial andnon-financial measures analyzed by management are Adjusted EBITDA (as definedbelow) and the metrics driving each of our revenue lines such as: subscriber counts;advertising rates; domestic ratings; and demographics of our viewing audiences.

*InternationalBusiness*

On February 23, 2005, we announced that we hadentered into a definitive agreement for the sale of our international businessto a group of investors comprised of Providence Equity Partners, 3i and U.K.television executive David Elstein (“investor group”). This transaction closedon April 26, 2005. The sale included the international versions of theHallmark Channel distributed outside the United States, the internationalrights to over 580 titles in the Crown Media library, and the NetworkOperations Center based in Denver, Colorado. Substantially all of the employeesof the international business as well as the broadcast facility are employed bythe investor group. Other than in respect of or as contemplated by theagreement for these transactions, there are no material relationships betweenus and our affiliates, on the one hand, and the buyer and its affiliates, onthe other hand.

The sale price for the transaction was $242.0 million,subject to purchase price adjustments relating to receivables acquired andworking capital changes. For information regarding net cash proceeds from thesale, the obligation to pay certain liabilities of the international business,adjustments made to the purchase price, the use of net proceeds from the saleof the international business and accounting treatment for the that sale, see “Saleof International Business” in Note 1 of Notes to Consolidated Financial Statementsbelow. The above purchase price and related estimated fair values wereused in the 

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Company’s evaluations ofimpairment as discussed in Note 3 to our Consolidated Financial Statementscontained in this report.

The purchase agreement provided for the sale of theoutstanding capital stock of the two operating subsidiaries of the Company’sinternational business, Crown Media International, LLC and Crown EntertainmentLimited, for $62.0 million, subject to a purchase price adjustment for certainworking capital changes. An asset purchase agreement provided for the sale ofcertain international rights to a library of theatrical films, made fortelevision movies, specials, mini-series, series and other televisionprogramming for $180.0 million, subject to purchase price adjustments relatingto receivables acquired and working capital changes. The agreements alsocontain customary representations and warranties of the parties,indemnification and termination provisions.

The purchase agreement andasset purchase agreement are Exhibits 2.1 and 2.2, respectively, to this Report.The description of these agreements contained herein is qualified in itsentirety by reference to such agreements.

*Cash Flow*

Our 2005 cash flows will be affected by the sale ofour international operations and international film rights. The generation ofpositive cash flows in years beyond 2005 are expected to be dependent uponincreasing our advertising revenues and continuing to focus on cost management.

Significant uses of cashduring the year ended December 31, 2004, were for program acquisitions inprimarily our domestic and United Kingdom markets. The Company also paidsubscriber acquisition fees resulting from distribution agreements renegotiatedin the past years. Attainment of certain subscriber levels will also cause anincrease in subscriber acquisition fee payments in future years, but as many ofour more significant distribution agreements expire in 2007, we do not foreseesignificant subscriber acquisition fee payments after 2007.

*Impairment ofAssets*

Please see Note 3 of Notesto the Consolidated Financial Statements in this Report for information onimpairment charges for 2004 relating primarily to our international assets.

**Revenue**

Our revenue consists ofprimarily subscriber fees, advertising and film asset license fees.

*Subscriber Fees*

Subscriber fees are generally payable to us on a persubscriber basis by pay television distributors for the right to carry ourchannels. In the United States, we pay certain television distributors up-frontsubscriber acquisition fees to carry our channel. However, such payments havenot been common in the international cable television markets. Subscriberacquisition fees that we pay are capitalized and amortized over the contractualterm of the applicable distribution agreement as a reduction in subscriber feerevenue. If the amortization expense exceeds the revenue recognized on a perdistributor basis, the excess amortization is included as a component of costof services. At the time we sign a distribution agreement, we evaluate therecoverability of the costs we incur against the incremental revenue directlyand indirectly associated with each agreement.

Rates we receiveper subscriber vary according to:

·       thelevel of sophistication and degree of competition in the market;

·       therelative position in the market of the distributor and the popularity of thechannel;

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·       thepackaging arrangements for the channel; and

·       othercommercial terms and length of the contract term.

In some circumstances, international distributorsprovided minimum revenue guarantees.

We are in continuous negotiations with both ourexisting distributors and new distributors to increase our subscriber base inorder to enhance our advertising results. In the United States, we are oftensubject to requests by distributors to pay subscriber acquisition fees foradditional subscribers or to waive or accept lower subscriber fees if certainnumbers of additional subscribers are provided. We also may help fund thedistributors’ efforts to market our channels or we may permit distributors tooffer limited promotional periods without payment of subscriber fees. As wecontinue our efforts to add subscribers, our domestic subscriber revenue willcontinue to be negatively affected by subscriber acquisition fee amortization,waiver of subscriber fees and bulk discounts resulting from the attainment ofcertain subscriber levels; however, we believe that as a result of thesemeasures, our subscriber counts will increase which in turn will allow us toattract additional advertisers and command higher advertising rates.

The Company discontinued distribution of the Channelin Spain effective March 31, 2005, since a new agreement was not reachedwith its primary distributor in Spain. The Company also discontinueddistribution of the Channel in Portugal effective March 31, 2005, since itwas no longer costs effective for the Company to distribute the Channel inPortugal with the discontinuance of operations in Spain.

Our channel is usually offered as one of a number ofchannels on either a basic tier or part of other program packages and is notgenerally offered on a stand-alone basis. Thus, while a cable orsatellite customer may subscribe and unsubscribe to the tiers and programpackages in which our channel is placed, these customers do not subscribe andunsubscribe to our channel alone. We are not provided with information from thedistributors on their overall subscriber churn and in what manner their churnrates affect our subscriber counts; instead we are provided information on thetotal number of subscribers who receive the Hallmark Channel.

Our subscriber countdepends on the number of distributors carrying the Hallmark Channel and thesize of such distributors as well as the program tiers on which our channel iscarried by these distributors. From time to time, we experience decreases inthe number of subscribers as promotional periods end, or as a distributorarrangement is amended or terminated by us or the distributor. Changes todistribution arrangements in 2004 have not been significant. Managementanalyzes the estimated effect each new or amended distribution agreement willhave on revenues and costs. Based upon these analyses, management endeavors toachieve a fair combination of subscriber commitments and subscriber acquisitionfees with each of our domestic distributors.

*Advertising*

Advertising sales generally are made on the basis of aprice per advertising spot or per unit of audience measurement (for example, aratings point). Thus, our advertising revenues are heavily dependent on thirdparties ratings of the persons viewing our channel. Prices vary on amarket-by-market basis. Rates differ among markets depending on audiencedemographics.

In the U.S. where regularaudience measurements are available, our advertising rates are generallycalculated on the basis of an agreed upon price per unit of audiencemeasurement in return for a guaranteed commitment by the advertiser. We committo provide advertisers certain rating levels in connection with theiradvertising. Revenue is recorded net of estimated delivery shortfalls, whichare usually settled by providing the advertiser additional advertising time.Advertising rates also vary by time of year due to seasonal changes intelevision viewership.

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*Film Licensing*

Crown Media Distributiongenerates revenue from the film assets by granting licenses to exhibit thefilms to third parties. We are also using the films as programming for ourchannel. Customers for our film assets consist of other television channels andhome video distributors who resell rights to our film assets. License fees forour film assets are generally negotiated based upon the size of the potentialaudience who will be viewing the programming.

**Cost of Services**

Our cost of servicesconsists primarily of program license fees, amortization of our film assets;subscriber acquisition fee expense; the cost of signal distribution; prior tothe international sale, dubbing and subtitling programming for foreignaudiences; administration, distribution and other exploitation of our filmassets; and the cost of promotional segments that are aired between programs.We expect cost of services to continue to increase in the future as we expandour existing markets and third party programming to support our advertisingstrategy.

**CriticalAccounting Policies, Judgments and Estimates**

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

For further informationregarding our critical accounting policies, judgments and estimates, please seethe Notes to Consolidated Financial Statements contained in this Report.

Thefollowing discussion concerns certain accounting estimates and assumptions thatare considered to be material due to the levels of subjectivity and judgmentnecessary to account for uncertain matters and the susceptibility of suchmatters to changes.

***Revenue Recognition***

Advertising revenues are recognized as earned in theperiod in which the advertising is telecast and are generally billed monthly. Revenue is recognized as commercial spots or longform programming are aired and as ratings guarantees to advertisers areachieved. Advertising revenue and expenses in barter transactions arerecorded at the fair value of the advertising to be provided. In certainmarkets, delivery of advertising is determined based upon data received fromthird parties who measure the ratings of our channels. The ratings informationdrives our calculations of impressions delivered which in turn drives theamount of revenue we recognize from each advertising spot. Our advertisingrevenue is therefore heavily reliant upon these third party ratings estimates todetermine the quantity of advertising delivered to viewers.

Revenue from film assetlicensing agreements is recognized when an agreement is executed, the film isavailable for exhibition by the licensee, the license fee is fixed orreasonably determinable, collectibility is reasonably assured and the cost ofeach film is known or reasonably determinable. When multiple films are soldunder a single arrangement, in order to properly recognize revenue when eachlicense period commences, we must estimate the relative fair value of each filmand allocate the total contracted price to the different films in thearrangement.

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***Allowance for Doubtful Accounts***

TheCompany has established an allowance for doubtful accounts based uponhistorical charge-off experience. Periodically, we analyze the attributes ofthe accounts which we have written-off during the period and adjust theallowance percentages we apply to our aged receivable balances.

***Subscriber Acquisition Fees***

Crown Media United Stateshas distribution agreements with every major cable distributor in the UnitedStates, some of which require the payment of subscriber acquisition fees. Theinitial recoverability of these subscriber acquisition fees is evaluated byprojecting the incremental subscriber fee and advertising revenue attributableto the incremental subscribers obtained through the distribution agreement. Thisanalysis includes significant judgment and estimation by management in terms ofthe estimated incremental advertising per subscriber.

***Goodwill Valuation***

Goodwill is reviewed forimpairment annually or whenever an event occurs or circumstances change thatwould more likely than not reduce fair value below carrying value. These assetsare carried at historical cost if their estimated fair value is greater thantheir carrying amounts. However, if their estimated fair value is less than thecarrying amount, goodwill is reduced to their estimated fair value through animpairment charge to the Company’s consolidated statements of operations.

***Film Assets***

*Determination ofFilm Ultimates*

The Company amortizes itsfilm assets using the individual-film-forecast-computation method over amaximum period of 9.25 years from the date of acquisition. Theindividual-film-forecast-computation method amortizes such assets in the sameratio that current period actual revenue bears to estimated unrecognizedultimate revenues. The Company’s projections of ultimate revenue regardingsales of certain rights related to its film assets to third parties andanticipated internal use of its film assets are based on the history of eachfilm and similar films, sales and marketing plans, and other factors, all ofwhich require significant judgment by management. In accordance with SOP 00-02,the Company assesses the ultimate revenue projections on a quarterly basis.

*Valuation of FilmAssets*

The Company reviews the recoverability of each film ona quarterly basis to assess whether events or circumstance have changed whichindicate that the fair value of a film is lower than its net book value. If thecarrying value of any individual film assets exceeds its fair value, the filmasset is written-down to its fair value. A discounted cash flow model is usedto estimate the fair value of the individual films. Future cash flows are basedon the terms of any existing contractual arrangements plus the projected cashinflows from future license sales including assumptions with respect tointernal use of such film assets. The Company considers the following factors,among others, in estimating future cash inflows for each film: (a) ifpreviously released, the film’s performance in historical markets, (b) thepublic’s perception of the film’s story, cast, director, or producer, (c) historicalresults of similar films, (d) historical results of the cast, director, orproducer on prior films, and (e) running time of the film. In estimating afilm’s fair value, the Company considers those cash outflows necessary togenerate the film’s cash inflows. Therefore, future exploitation andparticipation costs are factored into the estimation of fair value.

In conjunction with the Company’s conclusion in thirdquarter 2004 that it was more likely than not that the Company would dispose ofthe international rights to the film assets, the Company reviewed each 

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of its film assets forimpairment. The Company computed fair value of each film using the discountedcash flow model and also considered the indications of fair value that becameavailable during the quarter from an offer letter for the international rightsto its film library as a group. A non-cash impairment charge was recorded inthe third quarter 2004 for each film where the calculated fair value was lessthan its carrying value at September 30, 2004. The resulting impairmentcharge was $57.9 million.

The Company received a revised offer letter for theinternational rights to its film library as a group, from which managementdetermined that it was probable that the sale of international film rightswould consummate. The Company computed fair value of each film using thediscounted cash flow model based on the revised offer letter. A non-cashimpairment charge was recorded in the fourth quarter 2004 for each film wherethe calculated fair value was less than its carrying value at December 31,2004. The resulting impairment charge was an additional $53.1 million.

Subsequent to year end,the Company entered into a definitive agreement for the sale of ourinternational business. The transaction closed on April 26, 2005.

***Long-Lived Assets***

Also, as a result of obtainingthe revised offer letter, the Company computed its fair value of certainlong-lived assets using a discounted cash flows model, and also considered theindication of fair values from the revised offer for such assets that becameavailable during the quarter. In accordance with SFAS No. 144, theCompany performed an evaluation of the recoverability of the carrying value ofthe property and equipment, subtitling and dubbing and certain other long-livedassets using the market approach. For impairment analysis purposes, the Companygrouped its property and equipment, subtitling and dubbing and certain otherlong-lived assets and projected cash flows by its international channel. Basedon the market approach, the Company determined that such assets were impairedat December 31, 2004, and recorded an impairment charge of $6.9 million. This amount was comprised of $5.3 million ofproperty and equipment assets, $1.3 million of subtitling and dubbing assets,and $370,000 of certain other long-lived assets. In accordance with SFASNo. 144, the estimated fair value of the impaired assets becomes the newbasis for accounting purposes. As such, approximately $6.9 million inaccumulated amortization and depreciation was eliminated against the cost ofthese impaired assets in connection with the accounting for these impairments.

***Program License Fees***

Domesticvaluations are prepared using historical and future estimated advertisingrevenues, patterns of film usage as programming content considering day partusage, and the programming environment as it pertains to the domestic channel.The valuation computes expected annual future revenues generated from programlicense contracts and compares the expected revenues to the expectedamortization of the program license fee assets to determine if an impairmentexists. The international valuations are prepared using historical and futureestimates of advertising and subscriber revenues. The valuation computesexpected annual future estimated revenues and compares those estimated revenuesto net book value of the program license fee assets to determine if animpairment exists. Where a valuation indicates a loss, additional amortizationis provided to currently recognize that loss.

**Effectsof Transactions with Related and Certain Other Parties**

***Hallmark Transactions***

In 2005 and in prioryears, we entered into a number of significant transactions with Hallmark Cardsand its subsidiaries. These transactions include, among other things,programming, trademark licenses, administrative services, a line of credit, aTax Sharing Agreement and the issuance of a $400.0 million seniorunsecured note.

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*Bank CreditFacility*

As part of an amendment toour bank credit facility in March, 2005, Hallmark Cards has provided a letterof credit to the lenders for an amount equal to the maximum amount which may beborrowed under the bank credit facility. Hallmark has also provided to us aletter stating that Hallmark Cards and its subsidiaries will not demandpayments of various obligations owed by us to subsidiaries of Hallmark Cards. See“Bank Credit Facility” below.

*Tax SharingAgreement*

In March 2003, theCompany became a member of Hallmark Cards consolidated federal tax group andentered into a Tax Sharing Agreement with Hallmark Cards, which was amended atthe time the Company issued the senior unsecured note to HC Crown. We accountfor income taxes as if Crown Media Holdings were a separate taxpayer.Accordingly, Hallmark Cards’ ability to use our tax losses does not impact ourassessment of the need for a valuation allowance on deferred tax assets,including future tax losses. Any payments received from Hallmark Cards underthe Tax Sharing Agreement are recorded as an increase in paid-in capital. Forinformation regarding the Tax Sharing Agreement, please see Notes 2 and 13to the Notes to Consolidated Financial Statements contained in this Report.

*Senior UnsecuredNote*

On August 5, 2003,Crown Media Holdings repurchased all of the outstanding trust preferredsecurities of Crown Media Trust and related contingent appreciationcertificates issued by the Company. The securities were repurchased forapproximately $329.1 million. Funds for this repurchase were obtained from theproceeds from the issuance of a senior unsecured note issued to HC Crown in theamount of $400.0 million. For informationregarding our senior unsecured note, please see Note 13 to the Notes toConsolidated Financial Statements contained in this Report.

*NICC LicenseAgreement*

For information regardingthe amendment to our license agreement with NICC, please see Note 15 tothe Notes to Consolidated Financial Statements contained in this Report.

*Pramer Agreement*

On January 30, 2003,Crown Media International entered into an agreement with Pramer S.C.A., awholly-owned subsidiary of Liberty Media International, under whichPramer provides affiliate and advertising sales representation services, aswell as programming, production and technical services in connection with thedistribution of the Hallmark Channel in Central and South America. Thisagreement was assigned to the buyer of our international business effective April 26,2005. Pramer received a 35% commission on advertising sales and a 20%commission on affiliate sales and was reimbursed for its costs of providingproduction and technical services.

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***Selected Historical Consolidated Financial Data ofCrown Media Holdings***

In the table below, we provide selected historicalconsolidated financial and other data of Crown Media Holdings and itssubsidiaries. The following selected consolidated statement of operations datafor the years ended December 31, 2002, 2003 and 2004, are derived from theaudited financial statements of Crown Media Holdings and its subsidiaries. Thisdata should be read together with the consolidated financial statements andrelated notes included elsewhere in this Annual Report on Form 10-K.
| ** **                                              | ** ** | ** **                                  | ** ** | **Percent Change** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------|------------|
| ** **                                              | ** ** | **Years ended December 31,** | ** ** | **2003 vs.**       | ** ** | **2004 vs.** | ** ** |
| ** **                                              | ** ** | **2002**                                    | ** ** | **2003**                | ** ** | **2004** | ** ** | **2002** | ** ** | **2003** | ** ** |
| Revenues:                                               |       |                                        |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Subscriber fees                                         |       | $                                           | 67,913     |                    | $          | 68,901 |   | $ | 82,140 |   |   | 1 | % |   |   | 19 | % |   |
| Advertising                                             |       | 69,066                                      |       | 98,093                  |       | 129,114 |   |   | 42 | % |   |   | 32 | % |   |
| Film asset license fees                                 |       | 23,950                                      |       | 40,431                  |       | 29,348 |   |   | 69 | % |   |   | –27 | % |   |
| Other revenue                                           |       | 80                                          |       | 99                      |       | 685 |   |   | 24 | % |   |   | 592 | % |   |
| Total revenues                                          |       | 161,009                                     |       | 207,524                 |       | 241,287 |   |   | 29 | % |   |   | 16 | % |   |
| Cost of Services:                                       |       |                                        |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Programming costs                                       |       | 138,003                                     |       | 108,674                 |       | 137,222 |   |   | –21 | % |   |   | 26 | % |   |
| Amortization of film assets                             |       | 27,035                                      |       | 40,168                  |       | 47,197 |   |   | 49 | % |   |   | 18 | % |   |
| Impairment of film assets and technical equipment       |       | —                                      |       | —                  |       | 117,891 |   |   | 0 | % |   |   | 100 | % |   |
| Subscriber acquisition fee amortization                 |       | 44,220                                      |       | 25,268                  |       | 26,939 |   |   | –43 | % |   |   | 7 | % |   |
| Operating costs                                         |       | 65,619                                      |       | 48,032                  |       | 49,237 |   |   | –27 | % |   |   | 3 | % |   |
| Total cost of  services                                 |       | 274,877                                     |       | 222,142                 |       | 378,486 |   |   | –19 | % |   |   | 70 | % |   |
| Selling, general  and administrative expense            |       | 71,249                                      |       | 71,765                  |       | 87,004 |   |   | 1 | % |   |   | 21 | % |   |
| Marketing expense                                       |       | 48,946                                      |       | 24,436                  |       | 23,865 |   |   | –50 | % |   |   | –2 | % |   |
| Reorganization  expense (recovery)                      |       | 28,801                                      |       | (1,757                  | )          | (483 | ) |   | –106 | % |   |   | –73 | % |   |
| Loss from  operations                                   |       | $                                           | (262,864   | )                       | $          | (109,062 | ) | $ | (247,585 | ) |   | –59 | % |   |   | 127 | % |   |
| **Other  Data:**                                        |       |                                        |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Net cash used in  operating activities                  |       | $                                           | 169,907    |                    | $          | 155,174 |   | $ | 55,574 |   |   | –9 | % |   |   | –64 | % |   |
| Capital  expenditures                                   |       | $                                           | 4,240      |                    | $          | 4,784 |   | $ | 1,901 |   |   | 13 | % |   |   | –60 | % |   |
| Net cash provided  by financing activities              |       | $                                           | 160,075    |                    | $          | 163,836 |   | $ | 65,006 |   |   | 2 | % |   |   | –60 | % |   |
| Adjusted EBITDA(1)                                      |       | $                                           | (168,838   | )                       | $          | (44,537 | ) | $ | (148,309 | ) |   | –74 | % |   |   | 233 | % |   |
| Total domestic  day household ratings(2)(4)             |       | 0.298                                       |       | 0.503                   |       | 0.600 |   |   | 69 | % |   |   | 19 | % |   |
| Total domestic  primetime household ratings(3)(4)  |       | 0.545                                       |       | 0.718                   |       | 0.871 |   |   | 32 | % |   |   | 21 | % |   |
| Total subscribers at  year end:                         |       |                                        |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Hallmark Channel—International                     |       | 49,523                                      |       | 57,302                  |       | 59,419 |   |   | 16 | % |   |   | 4 | % |   |
| Hallmark Channel—U.S.                              |       | 48,815                                      |       | 56,010                  |       | 64,565 |   |   | 15 | % |   |   | 15 | % |   |
| Total subscribers                                       |       | 98,338                                      |       | 113,312                 |       | 123,984 |   |   | 15 | % |   |   | 9 | % |   |

----

(1)          See reconciliation ofAdjusted EBITDA below.

(2)          Total day is the timeperiod measured from the time each day the broadcast of commercially sponsored programmingcommences to the time such commercially sponsored programming ends.

(3)          Primetime is defined as8:00 - 11:00 P.M. in the United States.

(4)          These Nielsen ratingsare for the time period January 1 through December 31.

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Crown Media Holdings evaluates operating performancebased on several factors, including Adjusted EBITDA. Our measure of AdjustedEBITDA differs from the normal definition of EBITDA (earnings before interest,taxes, depreciation and amortization) used by most companies. We defineAdjusted EBITDA as earnings before interest, taxes, depreciation, amortization,subscriber acquisition fee amortization and amortization of film assets. We believe Adjusted EBITDA is meaningful becauseit provides investors a means to evaluate the operating performance of ourcompany on an ongoing basis using criteria that are used by other companies inour industry and investment bankers and analysts who track our industry. Webelieve that Adjusted EBITDA is a meaningful measure because it represents atransparent view of our recurring operating performance and allows ourmanagement and investors to readily view operating trends, perform analyticalcomparisons and benchmark our company to similar companies in our industry.Adjusted EBITDA is used by our management to monitor segment operations and todetermine the allocation of resources to segments. Our credit facility alsocontains covenants that are based on an adjusted EBITDA measure. Consequently,management views Adjusted EBITDA as a critical measure of our operatingperformance to meet our debt covenants and monitors this measure closely. Wedisclose Adjusted EBITDA so that our investors can have some of the sameinformation available to our management to evaluate their investment in ourCompany. We believe that Adjusted EBITDA provides an indication of the Company’sability to generate cash flows from operating activities since the majority ofour non-cash expenses are excluded from our calculation of Adjusted EBITDA. Asignificant portion of the Company’s cost structure relates to the amortizationof film assets and subscriber acquisition costs, which are significant non-cashcharges. The cash costs of acquiring film assets and adding subscribers areessentially discretionary expenditures. The adjusted EBITDA calculation allowsthe Company to assess how much is available to pay debt service and gives afurther indication of how much remains to fund discretionary expenditures suchas the acquisition of film assets or additional subscriber base. However,Adjusted EBITDA should be considered in addition to, not as a substitute for,historical operating income or loss, net loss, cash flow from operations andother measures of financial performance reported in accordance with accountingprinciples generally accepted in the United States.

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AdjustedEBITDA differs significantly from cash flows from operating activitiesreflected in the consolidated statement of cash flows. Cash flow from operatingactivities is net of interest and taxes paid and is a more comprehensivedetermination of periodic income on a cash basis, exclusive of non-cash itemsof income and expenses such as depreciation and amortization. In contrast,Adjusted EBITDA is derived from accrual basis income and is not reduced forcash invested in working capital. Consequently, Adjusted EBITDA is not affectedby the timing of receivable collections or when accrued expenses are paid. Weare not aware of any uniform standards for determining EBITDA or our AdjustedEBITDA and believe presentations of EBITDA may not be calculated consistentlyby different entities in the same or similar businesses. In the table below, we provide a reconciliation of Adjusted EBITDA tonet loss and to net cash used in operating activities of Crown Media Holdingsand its subsidiaries.
| ** **                                                                   | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                   | ** ** | **2002**                                    | ** ** | **2003** | ** ** | **2004** | ** ** |
| Net loss                                                                     |       | $                                           | (313,029   | ) | $ | (205,149 | ) | $ | (316,806 | ) |
| Amortization of film assets                                                  |       | 27,035                                      |       | 40,168 |   | 47,197 |   |
| Subscriber acquisition fee amortization expense                              |       | 51,223                                      |       | 32,361 |   | 38,253 |   |
| Depreciation and amortization                                                |       | 15,768                                      |       | 14,808 |   | 13,826 |   |
| Guaranteed preferred beneficial interest expense                             |       | 25,508                                      |       | 23,218 |   | — |   |
| Interest expense                                                             |       | 22,603                                      |       | 46,868 |   | 66,933 |   |
| Income tax provision                                                         |       | 2,054                                       |       | 3,189 |   | 2,288 |   |
| Adjusted EBITDA                                                              |       | $                                           | (168,838   | ) | $ | (44,537 | ) | $ | (148,309 | ) |
| Loss on early extinguishment of debt                                         |       | —                                      |       | 39,812 |   | — |   |
| Cumulative effect of change in accounting principle                          |       | —                                      |       | (17,000 | ) | — |   |
| Impairment of film assets and technical equipment                            |       | —                                      |       | — |   | 117,891 |   |
| Restricted stock unit and stock-based compensation                           |       | 18                                          |       | 5,912 |   | 11,488 |   |
| Programming, subtitling and dubbing amortization                             |       | 138,291                                     |       | 111,123 |   | 144,109 |   |
| Provision for allowance for doubtful account                                 |       | 4,083                                       |       | 499 |   | 1,297 |   |
| Changes in  operating assets and liabilities:                                |       |                                        |       |   |   |   |   |
| Additions to program license fees                                            |       | (144,031                                    | )          | (209,299 | ) | (209,386 | ) |
| Additions to subscriber acquisition fees                                     |       | (52,036                                     | )          | (5,292 | ) | (45,070 | ) |
| Change in subscriber acquisition fees payable                                |       | 20,272                                      |       | (38,562 | ) | 25,908 |   |
| Interest paid                                                                |       | (13,595                                     | )          | (19,855 | ) | (14,621 | ) |
| Income taxes paid                                                            |       | (2,054                                      | )          | (3,189 | ) | (2,288 | ) |
| Changes in other operating assets and liabilities,  net of adjustments above |       | 47,983                                      |       | 25,214 |   | 63,407 |   |
| Net cash used in  operating activities                                       |       | $                                           | (169,907   | ) | $ | (155,174 | ) | $ | (55,574 | ) |

 

***Results of Operations***

*Year Ended December 31,2003 Compared to Year Ended December 31, 2004*

*Revenue.*

Ourrevenue increased 16% for the year ended December 31, 2004. Our 19% increase in subscriber fee revenue forthe year ended December 31, 2004, was the result of the expiration of freecarriage periods for certain of our domestic distributors and an increase inthe number of subscribers in the United Kingdom along with foreign exchangefluctuations. Subscriber acquisition fee amortization recorded as a reductionof revenue was $11.3 million for theyear ended December 31, 2004, and $7.1 million for the comparableperiod in 2003, as a result of fees required under distribution agreementsnegotiated in previous years. Eighty-seven percent of subscriber fee revenuefor the year ended December 31,2004 and 90% of subscriber fee revenue for the year ended December 31, 2003, was earnedinternationally. 

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Subscriberfee revenue increased to $10.8 million for the domestic Hallmark Channel for the year ended December 31, 2004, from$6.6 million for the year ended December 31,2003, primarily because of the expiration of free carriage periods.

The 32% increase in advertisingrevenue reflects the following during 2004: the 9% growth in domestic andinternational subscribers; higher household ratings in the United States;higher advertising rates resulting from the increase in distribution andviewership; and expanded sales of advertising time primarily in the UnitedStates. Our domestic advertising revenue increased to $106.3 million for the year ended December 31, 2004,compared to $77.6 million for the yearended December 31, 2003. Additionally, the number of advertisers onour domestic channel rose from 326 at December 31, 2003, to 403 at December 31,2004. Our international advertising revenue, primarily from the United Kingdom,increased to $22.8 million for theyear ended December 31, 2004, compared to $20.5 million for the year ended December 31, 2003.

Revenue from the sale of our film assets totaled $29.4million for theyear ended December 31, 2004, compared with $40.4 million for thecomparable period in 2003. The decrease reflects a decrease in Internationalsales, due in part to softer market conditions and uncertainty surrounding thepotential sale of the international business and international rights to thefilm assets.

*Cost of services.  *Cost ofservices as a percent of revenue increased to 157% for the year ended December 31, 2004, as compared to 107% inthe prior year’s period. These increases were substantially all related to theimpairment charges explained below.

Non-cash impairment charges in a total amount of$117.9 million related to our film assets and technical operations primarilyrelated to our anticipated disposal of our international assets. Aftereliminating this impairment, our cost of services increased approximately 17%over 2003.

Amortization of film assets increased 18% for the year ended December 31,2004, compared to the same periods in 2003 primarily as a result of theimpairment of our film assets and related recalculation of amortization. Weanticipate an increase in the amortization of our film assets during 2005because of the use of the film assets by our Movie Channel. Total programming costsfor the yearended December 31, 2004, increased 26% due to the increased costs associated with the amortization of certainprogramming such as *M*A*S*H*and *J.A.G.*for our domestic channel.

Operating costs for the year ended December 31, 2004, increased $1.1 millionprimarily due to a $799,000 increase in bad debt expense and a $586,000impairment of subtitling and dubbing assets related to the Company’s exit fromthe Spain and Portugal market.

*Selling, general and administrative expense.  *Ourselling, general and administrative expense increased for the year ended December 31, 2004,primarily because of $7.7 million of retention program expense relatedto the proposed sale of the international business. Additionally, we recorded$11.5 million of restricted stock unit expense for the year ended December 31,2004, as compared to $5.9 million in the prior year period.

*Loss from Operations.  *Lossfrom operations for the year ended December 31, 2004, was $247.6 million, whichwas comprised of a loss from operations of our domestic channel (including ourholdings company) of $90.5 million, a loss from operations of our internationalchannel of $25.1 million, and a loss from operations of our film distributionof $132.0 million. The film distribution segment losses include an impairmentcharge of $111.0 million and the international channel segment losses includean impairment charge of $6.9 million. Loss from operations for the year ended December 31,2003, was $109.1 million, which was comprised of a loss from operationsof our domestic channel (including our holdings company) of $83.1 million, aloss from operations of our international channel of $21.0 million, and a lossfrom operations of our film distribution of $5.0 million.

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*Guaranteed preferred beneficial interest accretion.  *Thisexpense related to future obligations on our debentures issued onDecember 17, 2001, in connection with the trust preferred securities ofCrown Media Trust. The 2003 expense only included guaranteed preferredbeneficial interest accretion for a partial year due to the repurchase of ourpreferred securities on August 5, 2003.

*Interest expense.  *Interestexpense increased for the year endedDecember 31, 2004, compared to December 31, 2003, by $20.1million. This increase was primarily due to interest on our $400.0 millionsenior unsecured note payable commencing August 5, 2003, which amounted to$43.8 million for the year endedDecember 31, 2004 compared to $17.1 million in the prior year period.The terms of our senior unsecured note payable do not require any cash paymentfor interest or principal until August 2007.

*Year Ended December 31,2002 Compared to Year Ended December 31, 2003*

*Revenue.*

Ourrevenue increased 29% for the year ended December 31, 2003. Reduced subscriber fee rates in the United Statesdue to amendments in prior periods to long-term distribution agreements andcash-basis accounting treatment of certain countries in Latin America partiallyoffset our 1% increase in subscriber fee revenue for the year ended December 31,2003, due to expanded distribution internationally. Subscriber acquisition feeexpense recorded as a reduction of revenue was $7.1 million for the year ended December 31,2003, and $7.0 million for the comparable period in 2002. Although the numberof subscribers to the Hallmark Channel increased as of December 31, 2003,compared to December 31, 2002, subscriber revenue was also affected by anumber of other, offsetting factors, including discounts for new subscribers,and the waiver of subscriber fees and bulk discounts resulting from theattainment of certain subscriber levels. Subscribers have increased as a resultof amended agreements in the United States and the United Kingdom. Ninetypercent of subscriber fees revenue for the year ended December 31, 2003,and eighty percent of subscriber fee revenue for the year ended December 31,2002, respectively, was earned internationally. The amount of subscriber feerevenue was $6.6 million for the domestic Hallmark Channel for the year ended December 31,2003, and $13.6 million for the year ended December 31, 2002.

The increase in advertisingrevenue reflects the following during 2003: the 15% growth in domestic andinternational subscribers; higher ratings in the United States; higheradvertising rates resulting from the increase in distribution and viewership;and expanded sales of advertising time primarily in the United States. The mostdramatic increase in advertising revenue came from our domestic Channel whichwas $77.6 million for the year ended December 31, 2003, compared to $46.0million for the year ended December 31, 2002. Additionally, the number ofadvertisers on our domestic Channel rose from 220 at December 31, 2002, to326 at December 31, 2003.

The increase in licensing feesearned during 2003 is due to four license agreements accounting for 81% oftotal license fee revenue. As demand for our product increased in 2003, wefocused our selling effort on a small number of customers.

*Cost of services.  *Cost ofservices as a percent of revenue decreased to 107% in 2003, as compared to 171%in 2002. This decrease was primarily due to our increase in total revenuediscussed above and the changes in operating expenses explained below.

Total programming costs for the year ended December 31,2003, decreased 21% because Crown Media Holdings recorded a charge in thefourth quarter of 2002 of $48.1 million related to certain programmingwrite-offs reflecting the refinement of our programming strategy and projectedusage. Excluding the effects of thiswrite-off, programming costs in 2003 rose because of the acquisition ofprogramming for our domestic and United Kingdom Channels. For example, in September 2003,we added three series to our domestic programming schedule: *MASH*, *Matlock*and *Little House on the Prairie*. Theincrease in amortization of film assets was primarily due to increased salesduring the full year 2003.

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Subscriber acquisition fee expense was $25.3 millionfor the year ended December 31, 2003, as compared to $44.2 million for theyear ended December 31, 2002, respectively. As the result of thesettlement and amendment of certain contractual matters with U.S. distributors,expense of $21.6 million was recorded during the fourth quarter of 2002 whichdid not recur in 2003. Operating costs for the year ended December 31,2003, which include playback, dubbing and subtitling, transponder andinterstitial expenses, decreased 29% primarily due to our reorganization andresulting decrease in lower salary and benefit expense of $4.2 million andlower satellite and transponder expense of $4.8 million resulting from our 2002reorganization. Subtitling and dubbing expense decreased $5.1 million due toour exit of certain markets and our decrease in purchases of international programmingfor our Channels in non-English speaking countries. Bad debt expense decreased$3.6 million due to improved collections of receivables primarily in ourinternational markets and a decrease in write-offs related to certain foreignaccounts. In addition, during the year ended December 31, 2003, ourrevenue from domestic advertising and film licensing grew at a significantlyhigher rate than revenue from international sources and our collection rate ondomestic advertising and film licensing has historically been better thaninternational sales.

*Selling, general and administrative expense.  *Werecorded compensation expense of $5.9 million related to our RSUs during 2003.Additionally, expenses for dues and publications, investor relations, bank feesand non-income taxes declined during 2003. Selling, general and administrativeexpense as a percentage of total revenue decreased to 30% for 2003, as comparedto 37% for 2002. This percentage decrease was also due to the increase in totalrevenue noted above. Depreciation andamortization expense for the year ended December 31, 2003, decreased to $10.1million from $11.0 million for the year ended December 31, 2002, whichrepresents a decrease of $960,000, or 9%, for the year. Depreciation andamortization expense was higher for the year ended December 31, 2002,because of the $1.2 million write-down of certain impaired fixed assetsduring the fourth quarter of 2002. Depreciation and amortization expensein 2003 also included the amortization of additional expenditures in theNetwork Operation Center to accommodate the launch of our domestic Channel inthe first quarter of 2003 and our new domestic and international Channelwebsites being placed into service during 2003.

*Marketing expense.  *Marketingexpenses were higher in 2002 due to the amplified efforts to promote thepremieres of *Adoption*, *Stranded* and *Johnson County Wars*on our domestic Channel. Additionally,our fourth quarter of 2003 holiday campaign with Hallmark Cards resulted in $5.0million of expense as compared to the $15.1 million Hallmark KeepsakeSweepstakes expense in the fourth quarter of 2002.

*Reorganization expense.  *During the fourth quarter of 2003, the Companysettled certain contracts related to transponder leases and revised certainestimates of when our excess capacity under our transponder leases will besublet. These settlements and revisions in estimates resulted in a net reversalof reorganization expense of $1.8 million. Reorganization expense for the yearended December 31, 2002, was comprised of a charge of $5.5 millionfor severance costs and charges of $23.3 million related to satellite andfacility exit costs.

*Loss from Operations.  *Lossfrom operations for the year ended December 31, 2003, was $109.1 million,which was comprised of a loss from operations of our domestic channel(including our holdings company) of $83.1 million, a loss from operations ofour international channel of $21.0 million, and a loss from operations of ourfilm distribution of $5.0 million. Loss from operations for the year ended December 31,2002, was $262.9 million, which was comprised of a loss from operations of ourdomestic channel (including our holdings company) of $145.9 million, a lossfrom operations of our international channel of $108.3 million, and a loss fromoperations of our film distribution of $8.7 million. The decrease in the lossfrom our domestic operations were primarily due to the increase in advertisingrevenue and the settlement of certain contractual matters with our domesticdistributors in 2002. The decrease in the loss from our internationaloperations is due to the reorganization expense of $28.8 million recorded inthe fourth quarter 2002, as well as the related decrease in headcount and thedecrease in transponder lease expense in 2003. The decrease in the loss fromour film distribution segment was a result of higher sales.

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*Loss fromearly extinguishment of debt.  *Loss from early extinguishment of debt was $39.8 million for the yearended December 31, 2003, and resulted from the loss associated withthe repurchase of the trust preferred securities and contingent appreciationcertificates on August 5, 2003.

*Guaranteed preferred beneficialinterest accretion.  *This expense related to futureobligations on our debentures issued on December 17, 2001, in connectionwith the trust preferred securities of Crown Media Trust. Included in the 2002expense is a gain of $11.7 million, due to the revaluing of our derivativeliabilities to fair value for the year ended December 31, 2002. The 2003expense only included guaranteed preferred beneficial interest accretion for apartial year due to the repurchase of our preferred securities on August 5,2003.

*Interest expense.  *Interestexpense increased in 2003 compared to 2002 by $24.3 million. This increase wasprimarily due to additional interest on our increased borrowings under our bankcredit facility of $1.1 million, the additional interest on our HC Crownline of credit of $2.6 million, interest on our senior unsecured note payablecommencing August 5, 2003, and amounting to $17.1 million in 2003,accretion of our preferred minority interest of $8.4 million in 2003, and anincrease in the accretion related to certain discounted liabilities arisingfrom the reorganization of $753,000.

*Cumulativeeffect of change in accounting principle.  *Cumulative effect of change in accountingprinciple was a $17.0 million gain for each of the year ended December 31,2003. This gain was due to the adoption of Statement of FinancialAccounting Standards No. 150 “*Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity*,” on July 1, 2003 and the requirement to remeasure atfair value the company obligatedmandatorily redeemable preferred interest issued to VISN in 2001.

***Liquidity andCapital Resources***

Cashused in operating activities was $155.2 million and $55.6 million for the yearsended December 31, 2003 and 2004, respectively. Cash was used primarily tofund operating expenditures related to net losses of $205.1 million and $316.8million for the years ended December 31, 2003 and 2004, respectively. Thedecrease in cash flow used in operations was primarily due to higher domesticadvertising revenue.

Cashused in investing activities was $4.7 million and $1.7 million for the yearsended December 31, 2003 and 2004, respectively. Cash used in investingactivities decreased primarily due to expenditures in the Network OperationsCenter to accommodate the launch of our domestic channel in the first quarter2003 and our new domestic and international channel websites being placed intoservice during that period.

Cashprovided by financing activities was $163.8 million and $65.0 million for theyears ended December 31, 2003 and 2004, respectively. During the yearsended December 31, 2003 and 2004, we received proceeds of $49.4 millionand $56.6 million, respectively, from our Tax Sharing Agreement with HallmarkCards. We borrowed $70.0 million under our line of credit with HC Crown to meetour operating demands during the year ended December 31, 2003. Primarilyfrom the proceeds of the $400.0 million senior unsecured note, on August 5,2003, we redeemed the trust preferred securities and paid the private placementholders $326.7 million of principal, call premium and minimum return and werepaid $76.3 million on our bank credit facility.

Cashused in operating activities was $169.9 million and $155.2 million for theyears ended December 31, 2002 and 2003, respectively. Cash was usedprimarily to fund operating expenditures related to net losses of $313.0million and $205.1 million for the years ended December 31, 2002 and 2003,respectively. The decrease in cash flow used in operations was primarily due tohigher domestic and UK advertising revenue and resulting cash receipts, as wellas an increase in film asset sales. These favorable impacts on cash flows fromoperating activities were partially offset by increased programming purchasedin our U.S. and UK markets to meet our strategy and the demands of ourcustomers and higher subscriber 

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acquisition fee payments as a result of our expandeddistribution in domestic markets. Included in the net loss for the year ending December 31,2003, are a loss from extinguishment of our trust preferred securities of $39.8million and a gain from the cumulative effect of a change in accountingprinciple of $17.0 million, both of which do not represent cash flows fromoperations.

Cashused in investing activities was $4.1 million and $4.7 million for the yearsended December 31, 2002 and 2003, respectively. Cash used in investingactivities increased primarily due to expenditures in the Network OperationsCenter to accommodate the launch of our domestic Channel in the first quarter2003 and our new domestic and international Channel websites being placed intoservice during that period.

Cashprovided by financing activities was $160.1 million and $163.8 million for theyears ended December 31, 2002 and 2003, respectively. During 2003 wereceived proceeds of $49.4 million from the Tax Sharing Agreement with HallmarkCards, borrowed $70.0 million from our line of credit with HC Crown, borrowed$56.3 million under our credit facility, and borrowed $400.0 million on oursenior unsecured note payable to meet our operating demands and refinance ourtrust preferred securities. Primarily from the proceeds of the $400.0 millionsenior unsecured note, on August 5, 2003, we redeemed the trust preferredsecurities and paid the private placement holders $326.7 million of principal,call premium and minimum return and we repaid $76.3 million on our bank credit facility.In 2002, the primary sources of cash flow from financing activities wereborrowed funds under the bank credit facility and the demand note to meet ouroperating demands.

The following table aggregates all of our contractualcommitments as of December 31, 2004.
| ** **                                                           | ** ** | **Scheduled Payments by Period** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **Contractual Obligations**                                     | ** ** | ** **                                      | ** ** | **Total** | ** ** | **Less than 1  Year** | ** ** | **2-3  Years** | ** ** | **4-5  Years** | ** ** | **After 5  Years** | ** ** |
| Credit Facility and  Interest Payable(a)                             |       | $                                               | 310.5      |   |   | $ | 0.5 |   |   | $ | 310.0 |   | $ | — |   | $ | — |   |
| Company Obligated  Mandatorily Redeemable Preferred Interest    |       | 25.0                                            |       |   | — |   |   | 7.6 |   | 10.0 |   | 7.4 |   |
| HC Crown Line of Credit                                              |       | 81.1                                            |       |   | 6.1 |   |   | 75.0 |   | — |   |   |   |
| Senior Unsecured Note to  HC Crown, including accretion         |       | 596.6                                           |       |   | — |   |   | — |   | — |   | 596.6 |   |
| Capital Lease  Obligations                                           |       | 25.1                                            |       |   | 2.3 |   |   | 5.1 |   | 3.7 |   | 14.0 |   |
| Operating Leases                                                     |       | 48.2                                            |       |   | 13.1 |   |   | 19.4 |   | 11.8 |   | 3.9 |   |
| Other Obligations                                                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Program license fees  payable to non-affiliates and NICC             |       | 191.5                                           |       |   | 79.8 |   |   | 72.0 |   | 26.6 |   | 13.1 |   |
| Program license fees  payable to Hallmark Entertainment Distribution |       | 152.0                                           |       |   | — |   |   | 152.0 |   | — |   | — |   |
| Program license fees  payable for future  windows                    |       | 166.9                                           |       |   | 102.9 |   |   | 31.1 |   | 19.7 |   | 13.2 |   |
| Subscriber acquisition  fees(b)                                      |       | 35.9                                            |       |   | 35.2 |   |   | 0.7 |   | — |   | — |   |
| Deferred compensation  and interest                                  |       | 2.1                                             |       |   | 0.1 |   |   | 2.0 |   | — |   | — |   |
| Payable to Hallmark  Entertainment Holdings                          |       | 52.1                                            |       |   | — |   |   | 52.1 |   | — |   | — |   |
| Payable to Hallmark  Entertainment                                   |       | 47.9                                            |       |   | — |   |   | 47.9 |   | — |   | — |   |
| Total Contractual Cash  Obligations                                  |       | $                                               | 1,734.9    |   |   | $ | 240.0 |   |   | $ | 774.9 |   | $ | 71.8 |   | $ | 648.2 |   |
|                                                                      |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)           Thecredit agreement was amended in March 2005, to among other things, changethe maturity date to May 31, 2006. The Company repaid $195.00 million underits credit facility with proceeds from the sale of its international business.

(b)          Currentdomestic distribution agreements could significantly increase subscriberacquisition fees payable in the future by a maximum amount of $33.4 million,which would result if 32.3 million additional subscribers were provided withthe Hallmark Channel.

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*Sale of the InternationalBusiness*

In April 2004, the Company announced that it wasexploring strategic alternatives for its international operations and theinternational rights to its film library, including, but not necessarilylimited to, a sale or other corporate transaction in an effort to maximizeshareholder value. In February 2005, the Company entered into definitiveagreements for the sale of the Company’s international business and this saleclosed on April 26, 2005. See the discussion on this subject earlier in thisReport.

In accordance with thebank credit facility as amended, the Company repaid the term loan under thatcredit facility in the amount of $100.0 million at the time of closing the saleof the Company’s international business. The Company also used additional netproceeds from that sale to pay approximately $95.0 million on the outstandingamount under the revolving line of credit contained in the bank creditfacility. For information on other uses of the net proceeds from that sale, see“Sale of International Business” in Note 1 to Notes to Consolidated FinancialStatements below.

*Cash Flows*

As of December 31, 2004, the Company had $12.1million in cash and cash equivalents on hand and $10.0 million available underits bank credit facility. As of December 31, 2004, the Company hadborrowed $310.0 million under its bank credit facility, which has a maturitydate of May 31, 2006. At April 30, 2005, after the internationalsale, the Company had outstanding borrowings under the bank credit facility of$115.0 million and $105.0 million available under the bank credit facility.

The Company’s principal sources of funds are currentlycash on hand, periodic cash inflows expected under the tax sharing agreementwith Hallmark Cards and amounts available for borrowing under its creditfacility. As of March 1, 2005, we entered into Amendment No. 8 to theagreement for our bank credit facility. This amendment extended the maturitydate to May 31, 2006, as well as made a number of other significantchanges to the bank credit facility including elimination of certain financialcovenants, changes to and waivers of financial covenants concerning 2004 andthe future, and a reduction in the interest rates and commitment fees under thecredit facility. (The amounts resulting from the 2% reduction in the interestrate and the 0.3% reduction in the commitment fee under Amendment No. 8 tothe bank credit facility are paid by the Company to Hallmark Cards ascompensation for providing a support letter of credit to the bank lenders asdescribed in Note 12 below.) Had the Company not obtained the waiver of thecovenant package at September 30, 2004, and December 31, 2004, theCompany would not have satisfied certain covenants and, as such, been indefault of its credit agreement.

In connection with the Company’s growth strategy, theCompany expects to continue making investments in programming and distributionduring 2005. If necessary, the Company may reduce some of this anticipatedspending in 2005. The Company’s principal uses of funds during 2005 areexpected to be in the future the payment of operating expenses, payments forlicensing of programming and subscriber acquisition fees, and interest paymentsunder its bank credit facility.

The Company currently believes that cash on hand,remaining availability under its bank credit facility and payments anticipatedunder the tax sharing agreement with Hallmark Cards, all of which are currentlyits principal sources of funds, will be sufficient to cover projected cash usedin operations and meet its liquidity needs through the maturity date of itscredit facility. The Company’s management anticipates that it will be necessaryto either extend or refinance the credit facility prior to its maturity date. Inaddition, other financing alternatives could include the issuance of additionalequity or debt securities. There can be no assurance, however, that the creditfacility can or will be extended or financed or that additional funding will beavailable, if at all, on terms acceptable to the Company. In addition, anydecline in the popularity of the Hallmark Channel, any significant futuremodifications to the Company’s distribution agreements, an economic decline inthe advertising market, an increase in competition or other adverse operatingconditions will impact the Company’s ability to achieve its projected operatingresults.

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The Company will continueto monitor its operating expenses to identify areas where greater efficienciescan be attained to reduce its operating expenses relative to its revenuestreams and plants, and, if needed, to reduce these expenses during the year tomanage its cash needs.

***Bank Credit Facility and HCCrown Loans***

*Bank CreditFacility*

We have a credit agreement with a syndicate of banks,led by JP Morgan Chase Bank, N.A. as Administrative Agent and Issuing Bank,under which the banks extended to us a secured credit facility of up to $320.0million. We and the lending banks entered into the facility in 2001 and havesubsequently amended the terms of this facility, with the most recent amendmentas of March 1, 2005. The facility is guaranteed by our subsidiaries and issecured by all tangible and intangible property of Crown Media Holdings and itssubsidiaries. At December 31, 2004, the bank credit facility encompassed aterm loan of $100.0 million and a revolving line of credit of $220.0 million, whichincludes up to $20.0 million of letters of credit available to be issued at ourrequest. Following the consummation of the sale of the international businessas contemplated under the February, 2005 agreements, we were required to repaythe term loan portion of the credit facility in the amount of $100.0 million,and the credit facility currently consists of a revolving line of credit of$220.0 million, which includes up to $20.0 million of letters of credit. Inaddition, following such closing, any proposed borrowings by us of amounts inexcess of $180.0 million under the revolving line of credit requires theconcurrence of Hallmark Cards.

Each loan under the bank credit facility bearsinterest at a Eurodollar rate or an alternate base rate as we may request atthe time of borrowing in accordance with the credit agreement. The Eurodollarrate is based on the London interbank market for Eurodollars, and remains ineffect for the time period of the loan ranging from one, two, three, six ortwelve months. The alternate rate is based upon the prime rate of JP MorganChase Bank, a certificate of deposit rate or the Federal Funds effective rate,which is adjusted whenever the rates change. We are required to pay acommitment fee of 0.2% per annum(0.5% prior to March 1, 2005) ofthe committed, but not outstanding, amounts under the revolving creditfacility, payable in quarterly installments.

As of March 1, 2005, we entered into Amendment No. 8to the agreement for our bank credit facility. This amendment extended thematurity date to May 31, 2006. The Amendment removed a limitation on alloutstanding amounts under the bank credit facility which was in general 50% ofthe most recent valuation of our film library. Also Amendment No. 8 made anumber of other significant changes to the bank credit facility includingdeletion of certain financial covenants, changes to other financial covenants,waivers of many covenants concerning 2004, a reduction in the interest ratescharged for loans under the credit facility, and a reduction in the commitmentfee. The agreements for the bank credit facility, including Amendment No. 8,are attached as exhibits to this Report and are incorporated herein byreference. The amounts resulting from the 2% reduction in the interest rate andthe 0.3% reduction in the commitment fee under Amendment No. 8 to the bankcredit facility are paid by the Company to Hallmark Cards as compensation forproviding the support letter of credit to the bank lenders as described below. Thesupport letter of credit made possible those reductions. In effect, theinterest rate and commitment fee relating to the bank credit facility remainunchanged for the Company.

Pursuant to Amendment No. 8, Hallmark Cards hasprovided an irrevocable letter of credit issued to JP Morgan Chase Bank byCitibank, N.A. in the amount of $320.0 million, as credit support for ourobligations under our credit facility. The support letter of credit was reducedto $220.0 million upon the consummation of the sale of our internationalbusiness and the reduction of the aggregate outstanding credit exposure of ourlenders to $220.0 million. Draw-downs under the letter of credit may be madefor amounts due and payable under the credit facility and upon the occurrenceof certain other events. Any proceeds received by JP Morgan Chase Bank fromdrawing under this support letter of credit will not be 

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applied to repay ourobligations, but will be used to purchase on the part of Hallmark Cards fromthe bank lenders subordinated participations in our obligations under our bankcredit facility, junior in payment to the bank lenders under the bank creditfacility. The support letter of credit automatically expires on May 31,2006.

The credit facility, as amended, contains a number ofaffirmative and negative covenants. Negative covenants include, among otherthings: Limitations on indebtedness, liens, investments, “Restricted Payments,”capital expenditures, changes in our business activities, cash payments totelevision distributors for subscribers; not amending the promissory note withHC Crown, a related letter of credit issued for our benefit or certain of ourother material agreements; and a requirement that EBITDA (as defined in thecredit agreement) not be less than specified amounts per quarter. RestrictedPayments include any distribution on our equity, any redemption or otheracquisition of our equity including redemption of the company obligatedmandatorily redeemable preferred interest, any payment on debt of Crown MediaHoldings which is subordinated to the bank loans, any reduction of the HC Crownline of credit for Crown Media Holdings, any payment on certain obligationsassumed by Crown Media Holdings under the purchase agreement for the filmassets and any other payment to Hallmark Cards, Hallmark Entertainment or anyof their affiliates. The credit agreement, however, permits Crown MediaHoldings to pay: (1) Payments to Hallmark Cards or an affiliate (i) inpayment of a valid outstanding obligation (ii) or in an aggregate amountequal to the financial benefits received by us as a result of the reduction ofinterest charges under the bank credit facility in Amendment No. 8 plusany fees and costs incurred by Hallmark Cards in connection with the supportletter of credit provided in accordance with Amendment No. 8; and (2) paymentsto Hallmark Entertainment Distribution pursuant to license agreements. AForeign Asset Sale Effective Date is generally the date on which the Companysold its international operations and international rights to its film library.The closing of the sale of our international business under the February, 2005agreements resulted in a Foreign Asset Sale Effective Date.

Events of default under the amended credit agreementinclude: The failure to pay principal or interest, with the default continuingunremedied for five days after receipt of a remittance advice; a failure toobserve covenants; a change in control; or a termination by Hallmark Cards orany of its affiliates of the right of Crown Media Holdings or its subsidiaries touse the names “Hallmark” or “Crown” in their television services or anyChannels owned or operated by them. For purposes of the credit facility, achange in control means that (a) Hallmark Cards ceases to own directly orindirectly at least 80% of the equity interest of Hallmark EntertainmentInvestment Co. (b) Hallmark Entertainment Holdings ceases to havesufficient voting power to elect a majority of Crown Media Holdings’ board ofdirectors or beneficial ownership of over a majority of the outstanding equityinterest of Crown Media Holdings having voting power (c) the majority ofthe Board is not comprised of individuals who were either in office or who werenominated by a two-third’s vote of individuals in office or so nominated as at December 17,2001, or (d) the consummation by the Company of a Rule 13e-3transaction (or a “going-private” transaction) as defined in the SecuritiesExchange Act.

In connection withAmendment No. 8, by a letter dated February 28, 2005, Hallmark Cardsconfirmed to us that neither Hallmark Cards nor any of its wholly-ownedsubsidiaries would demand payment from us on any of the following obligationsuntil May 31, 2006, at the earliest:

·       $75.0million note payable to HC Crown plus accrued interest thereon from time totime

·       $400.0million note payable to HC Crown plus accrued interest thereon from time totime

·       $100.0million payables to Hallmark Entertainment Holdings incurred in conjunctionwith the film library transaction in 2001

·       $156.0million of license fees payable to Hallmark Entertainment Distribution Company

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Hallmark also stated its intent to re-evaluate theloan repayment schedule if all or substantially all of the assets of theCompany were sold to a third party prior to May 31, 2006. Hallmark furtherstated that it would endeavor to make any new intercompany debt with us thatarises between now and May, 2006 non-callable until May 31, 2006.

Several changes tofinancial covenants in the Amendment No. 7 to our bank credit facilitywere not effective until the Foreign Asset Sale Effective Date. The ForeignAsset Sale Effective Date did not occur in 2004, which was one of the reasonsthat we needed waivers of our compliance with certain financial covenants inour bank credit facility. Amendment No. 8 waived our compliance with the followingfinancial covenants: (1) capital expenditures in 2004; (2) cashprogram acquisition guarantees in 2004; (3) EBITDA for the quarter ended December 31,2004; (4) cash payments to television distributors for subscribers in2004; (5) net worth at December 31, 2004; (6) leverage ratio forthe quarter ended December 31, 2004; and (7) interest coverage ratiofor the 2004 year. Amendment No. 8 also deleted the net worth covenant;amended the limit on our cash program guarantees in 2005; amended the quarterlyEBITDA requirements for the remainder of the loan term; and amended the limitof cash payments to television distributors for subscribers, the minimum numberof subscribers and the minimum gross subscriber revenue. Further, pursuant toAmendment No. 8, the limitation on Restricted Payments was amended toallow us to make payments to Hallmark Cards or its affiliates as describedabove.

*HC Crown Line ofCredit*

In 2001, HC Crown issued a$75.0 million line of credit to Crown Media Holdings. The line of credit has afinal maturity date no later than December 21, 2007. The line of credit issubordinate to the bank facility, and its availability may be reduced dollarfor dollar in an amount equal to additional capital raised by Crown Media Holdings.Crown Media Holdings will pay interest on any borrowings under the line ofcredit at a rate equal to LIBOR plus three percent, payable quarterly. HC Crown’sobligation to make loans under this line of credit is supported by anirrevocable letter of credit from Credit Suisse First Boston.

*Senior UnsecuredObligation*

On August 5, 2003, Crown Media Holdingsrepurchased all of the trust preferred securities of Crown Media Trust andrelated contingent appreciation certificates issued by the Company. The securitieswere repurchased for approximately $329.1 million, including approximately $2.4million of cash distributions on the trust preferred securities during thequarter. Funds for this repurchase were obtained from the proceeds of a $400.0million 10.25% senior unsecured note issued to HC Crown. Since interest is notpayable in cash on the HC Crown senior unsecured note until August 5,2007, the Company will avoid approximately $72.0 million in cash interestpayments that would have been due under the trust preferred securities over thenext four years. See Note 12 of Notes to Consolidated Financial Statements foradditional information about the senior unsecured note.

Under the note purchaseagreement for this senior unsecured note to HC Crown, the Company and itssubsidiaries are restricted from, among other things, incurring additionalindebtedness, repurchasing or otherwise acquiring its own stock and makinginvestments in other parties and incurring additional liens.

***Tax Sharing Agreement***

On March 11, 2003,Crown Media Holdings became a member of Hallmark Cards consolidated federal taxgroup and entered into the Tax Sharing Agreement with Hallmark Cards. HallmarkCards will include Crown Media Holdings in its consolidated federal income taxreturn. Accordingly, Hallmark Cards will benefit from future tax losses, whichmay be generated by Crown Media Holdings. Based on the Tax Sharing Agreement,Hallmark Cards will pay Crown Media Holdings all of the benefits realized by 

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HallmarkCards as a result of consolidation, 75% in cash on a quarterly basis and thebalance when Crown Media Holdings becomes a taxpayer. Under the Tax SharingAgreement, at Hallmark Cards’ option, this 25% balance may also be applied asan offset against any amounts owed by Crown Media Holdings to any member of theHallmark Cards consolidation group under any loan, line of credit or otherpayable, subject to any limitations under any loan indentures or contractsrestricting such offsets. For further information regarding the Tax SharingAgreement, see Part III—Item 13. Certain Relationships and RelatedTransactions—Tax Sharing Agreement.

**ITEM 7A.**        Quantitativeand Qualitative Disclosures About Market Risk

We only invest in instrumentsthat meet high credit and quality standards, as specified in our investmentpolicy guidelines. These instruments, like all fixed income instruments, aresubject to interest rate risk. The fixed income portfolio will decline in valueif there is an increase in interest rates. If market interest rates were to increaseimmediately and uniformly by 10% from levels as of December 31, 2004, thedecline of the fair value of the fixed income portfolio would not be material.

As of December 31, 2004,our cash, cash equivalents and short-term investments had a fair value of $12.1million, which was invested in cash and short-term commercial paper. Theprimary purpose of these investing activities has been to preserve principaluntil the cash is required to fund operations. Consequently, the size of thisportfolio fluctuates significantly as cash is provided by and used in ourbusiness.

The value of certain investmentsin this portfolio can be impacted by the risk of adverse changes in securitiesand economic markets and interest rate fluctuations. At December 31, 2004,all of our investments in this category were in fixed rate instruments or moneymarket type accounts. A decrease in interest rates has the effect of reducingour future annual interest income from this portfolio, since funds would bereinvested at lower rates as the instruments mature. Over time, any netpercentage decrease in our interest rates could be reflected in a correspondingnet percentage decrease in our interest income. For the year ended December 31,2004, the impact of interest rate fluctuations, changed business prospects andall other factors did not have a material impact on the fair value of thisportfolio, or on our income derived from this portfolio.

Wehave not used derivative financial instruments for speculative purposes. As of December 31,2004, we are not hedged or otherwise protected against risks associated withany of our investing or financing activities.

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

We are exposed to market risk,including changes to interest rates. To reduce the volatility relating to theseexposures, we may enter into various derivative investment transactions in thenear term pursuant to our investment and risk management policies andprocedures in areas such as hedging and counterparty exposure practices. Wehave not and will not use derivatives for speculative purposes.

Though we intend to use riskmanagement control policies, there will be inherent risks that may only bepartially offset by our hedging programs should there be any unfavorablemovements in interest rates or equity investment prices.

Theestimated exposure discussed below is intended to measure the maximum amount wecould lose from adverse market movements in interest rates and equityinvestment prices, given a specified confidence level, over a given period oftime. Loss is defined in the value at risk estimation as fair market valueloss.

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***Our interest income and expenseis subject to fluctuations in interest rates.***

Ourmaterial interest bearing assets consisted of cash equivalents and short-terminvestments. The balance of our interest bearing assets was $12.1 million, orless than 1% of total assets, as of December 31, 2004. Our materialliabilities subject to interest rate risk consisted of capital leaseobligations, our bank credit facility, our line of credit with HC Crown and ournote payable to HC Crown. The balance of those liabilities was $877.6 million,or 60% of total liabilities, as of December 31, 2004. Net interest expensefor the year ended December 31, 2004, was $66.9 million, 28%, of our totalrevenue. Our net interest expense of these liabilities is sensitive to changesin the general level of interest rates, primarily U.S. and LIBOR interestrates. In this regard, changes in U.S. and LIBOR interest rates affect the fairvalue of interest bearing liabilities.

**ITEM 8.**                ConsolidatedFinancial Statements and Supplementary Data

OurConsolidated Financial Statements begin at page F-1 of this Annual Reporton Form 10-K.

**ITEM 9.**                Changesin and Disagreements with Accountants on Accounting and Financial Disclosure

None.

**ITEM 9A.**        Controlsand Procedures

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

TheCompany, under the supervision and with the participation of the Company’smanagement, including its Chief Executive Officer and Chief Financial Officer,carried out an evaluation of the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) as of December 31,2004. Based upon this evaluation, the Company’sChief Executive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were not effective, because of the material weaknesses describedbelow, as of that date for purposesof recording, processing, summarizing and timely reporting material informationrequired to be disclosed in reports that the Company files under the ExchangeAct.

***b.******                  Management’sReport on Internal Control over Financial Reporting***

Management is responsible for establishing and maintainingadequate internal control over financial reporting. The Company’s internalcontrol system was designed to provide reasonable assurance to the Company’smanagement and the board of directors regarding the preparation and fairpresentation of published financial statements. All internal control systems,no matter how well designed, have inherent limitations. Therefore, even thosesystems determined effective can provide only reasonable assurance with respectto financial statement preparation and presentation.

A material weaknessis a significant deficiency (as defined in the Public Company AccountingOversight Board’s Auditing Standard No. 2), or combination of significantdeficiencies, that results in there being more than a remote likelihood that amaterial misstatement in the annual or interim financial statements will not beprevented or detected on a timely basis by employees in the normal course oftheir work. In connection with management’s assessment of internal control overfinancial reporting as of December 31, 2004, we have identifieddeficiencies in our internal control over financial reporting that we deemed tobe material weaknesses, as described below:

·       TheCompany’s controls to assess and apply generally accepted accounting principlesregarding the accounting for non-routine and complex transactions did notoperate effectively due to insufficient levels of appropriately qualifiedpersonnel and the ineffective management review of accounting for 

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such transactions. As aresult of this internal control deficiency, the Company overstated certaininternational assets and understated impairment expense for those assets;overstated the write-off of certain programming license fees and overstated theprogramming license fee payable; and understated the write-off of deferredfinancing fees and overstated other assets as of and for the year ended December 31,2004. This deficiency resulted in material misstatements to the annual andinterim periods, which were corrected by management prior to the issuance ofthe Company’s consolidated financial statements.

·       TheCompany’s controls to assess and review key assumptions, spreadsheet formulasand valuation methodologies in our library valuation and related impairmentanalysis were not adequately designed, nor did they operate effectively. As aresult of this internal control deficiency, the Company overstated the filmlibrary asset and understated the film library impairment as of and for theyear ended December 31, 2004. This deficiency resulted in a materialmisstatement to the annual and interim periods, which was corrected bymanagement prior to the issuance of the Company’s consolidated financialstatements.

In making its assessment of internal control overfinancial reporting, management used the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission. Because of the materialweaknesses described above, management concluded that, as of December 31,2004, the Company’s internal control over financial reporting was not effectivebased on those criteria.

The Company’s independentregistered public accounting firm, KPMG LLP, has issued an audit report on ourassessment of the Company’s internal control over financial reporting. Thisreport appears on page F-4.

***c.******                   Changes in Internal Control over FinancialReporting***

There were no changes inthe Company’s internal control over financial reporting that occurred duringthe quarter ended December 31, 2004, that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

***d.******                  RemediationSteps***

In 2005, theCompany has implemented the following remediation steps to address the materialweaknesses discussed above:

·       TheCompany engaged consultants in the first quarter 2005 to assist with theaccounting for complex non-recurring transactions and to review calculations,including calculations imbedded in spreadsheets. The Company also plans toretain consulting services to serve as contemporaneous, technical resources toreview, evaluate and provide guidance on the most appropriate accountingtreatment for complex, non-recurring transactions.

·       TheCompany will adopt more stringent procedures for the review of computationaland mathematical accuracy of valuation spreadsheets.

·       TheCompany engaged a third party valuation firm to assist in determining the fairvalue of the domestic film library as of December 31, 2004.

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**PART III**

**ITEM 10**.         Directors and Executive Officers of the Company

***Board of Directors of the Registrant***

Our Board currently has 15 member positions. Alldirectors serve until the next annual meeting of stockholders or until theirsuccessors are duly elected and qualified.

Pursuant to our Second Amended and RestatedStockholders Agreement, dated August 30, 2001, as amended (“StockholdersAgreement”), our Board consists of 15 individuals nominated as follows: twelvenominated by Hallmark Entertainment Investments Co. (“HEIC”); one nominated byVISN Management Corp. (“VISN”), a subsidiary of National Interfaith CableCoalition, Inc. (“NICC”); and two independent directors nominated by theBoard who are not officers or employees of any of the parties (or their affiliates)to the Stockholders Agreement. In addition, pursuant to a separate stockholdersagreement which concerns HEIC and to which Crown Media Holdings is not a party,HEIC granted Liberty Media Corporation (“Liberty”) and J.P. MorganPartners (BHCA) L.P. (“J.P. Morgan Partners”) each the right to designate oneof our directors as part of HEIC’s twelve nominees. The right of any party tonominate a director pursuant to the Stockholders Agreement will terminate onthe later of (1) the party owning less than 5% of our common stock thenoutstanding, or (2) the party ceasing to own at least 75% of the amount ofour common stock that the party (or predecessor holder) owned immediatelyfollowing completion of our initial public offering on May 9, 2000. See “Item13. Certain Relationships and Related Transactions.”

Of the directors on the Board, Robert A. Halmi, Jr.,David J. Evans, Robert J. Druten, Brian E. Gardner, David E. Hall, Donald J.Hall, Jr., Irvine O. Hockaday, Jr., Anil Jagtiani, John P. Mascotteand Deanne R. Stedem have been nominated by HEIC; Glenn Curtis has beennominated by Liberty; Wilford V. Bane, Jr. has been nominated by VISN; andArnold L. Chavkin has been nominated by J.P. Morgan Partners. In addition, theBoard has nominated Peter A. Lund and Herbert Granath as independent directors.

Because HEIC holds Class A Common Stock and allof the Class B Common Stock, representing approximately 95.8% of thevoting power of the Company, its vote for director positions will be sufficientto elect these nominees regardless of the vote of any other stockholders.

*Robert A. Halmi, Jr.*,age 48, has been the Chairman of the Board of Crown Media Holdings since May 2000and prior to that had been Chairman of the board of directors of Crown MediaInternational since April 1996. He has also been the President of HallmarkEntertainment, LLC (“Hallmark Entertainment”) since April 1994. Mr. Halmihas been an executive producer of award-winning television programming, such asLonesome Dove, which won several Emmy Awards, a Golden Globe Award and aPeabody Award. He is also a director and Chief Executive Officer of HallmarkEntertainment Holdings, Inc., the parent company of both Crown MediaHoldings and Hallmark Entertainment.

*David J. Evans*,age 64, has been the President and ChiefExecutive Officer of Crown Media Holdings and a Director of Crown MediaHoldings since May 2000. Prior to that, he served as President and ChiefExecutive Officer of Hallmark Entertainment Networks (n/k/a Crown MediaInternational) from March 1999 to May 2000 and a Director of CrownMedia International from July 1999 until May 2000. He has served onBritish Sky Broadcasting PLC’s board of directors since November 2001 and,more recently via appointment, on its Remuneration Committee. Mr. Evansalso serves on John Fairfax Holdings Limited’s board of directors.

*Wilford V. Bane, Jr.*,age 67, has been a director of Crown Media Holdings since May 2000. He wasthe Associate General Secretary of United Methodist Communications, thecommunications agency for the United Methodist Church, from October 1990to February 2001. Mr. Bane also serves as chair of VISN. He helpedfound and launch the Vision Interfaith Satellite Network, the predecessor ofOdyssey Network 

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(which was subsequentlyacquired by us and renamed the Hallmark Channel), and served as the interimChief Executive Officer for its first two years.

*Arnold L. Chavkin*,age 53, has been a director of Crown Media Holdings since May 2000. From1998 until May 2000, Mr. Chavkin was a director of Crown MediaInternational. Mr. Chavkin is the Chief Investment Officer at J.P. MorganPartners, LLC, an indirect non-bank subsidiary of JPMorgan Chase & Co.From April 1991 to January 2001, he was a general partner, and since January 2001has been a limited partner of JPMP Master Fund Manager, L.P., the sole generalpartner of J.P. Morgan Partners, which invests in private equity opportunitieswith a significant concentration on the media and telecommunications industries.Prior to that, Mr. Chavkin was a member of Chemical Bank’s merchantbanking group and a generalist in its corporate finance group specializing inmergers and acquisitions and private placements for the energy industry.Mr. Chavkin’s experience prior to joining Chemical Bank included corporatedevelopment for Freeport McMoRan as well as positions with Gulf and WesternIndustries and Arthur Young & Company. Mr. Chavkin is a directorof Brand Services, Inc., Encore Acquisition Company, Latigo Petroleum, Inc.,Nobel Environmental Power, LLC and Vetco International Limited. Mr. Chavkinis also a director of Triton PCS Holdings, Inc. and a member of its auditcommittee and its compensation committee.

*Glenn Curtis*, age 45, has been adirector of Crown Media Holdings since January 2005. He has been VicePresident of Liberty Media Corporation (a holding company with interests inelectronic retailing, media, communications, and entertainment industries)since 2003. Prior to that, he was Executive Vice President and Chief FinancialOfficer of Startz Entertainment Group (a subsidiary of Liberty MediaCorporation providing premium movie networks on television) from 1995 to 2002.

*Robert J. Druten*,age 58, has been a director of Crown Media Holdings since May 2000 and wasa director of Crown Media International from April 1996 to May 2000. Hehas also been an Executive Vice President and the Chief Financial Officer ofHallmark Cards, Incorporated, the indirect parent of Crown Media Holdings,since April 1996. Mr. Druten is a Trustee of Entertainment PropertiesTrust. He is also a member of the board of directors of Hallmark EntertainmentHoldings and Hallmark Cards Holdings Limited.

*Brian E. Gardner*,age 52, has been a director of Crown Media Holdings since January 2004. Hehas been Executive Vice President and General Counsel of Hallmark Cards since January 2004.From 1996 to 2003, Mr. Gardner was a Managing Partner of Stinson MorrisonHecker, LLP (formerly known as Morrison & Hecker, LLP).

*Herbert A. Granath*,age 76, has been a director of Crown Media Holdings since December 2004. Hehas been a consultant for Telenet and Cable Partners Inc. since 2000 and aconsultant for Veronis, Suhler, Stevenson since 2002. He has also been adirector of Central European Media since 2001. Mr. Granath was theChairman of Disney/ABC International Television from 1995 to 2000.

*David E. Hall*, age42, has been a director of Crown Media Holdings since March 2003. He isthe President of Personal Expression Group of Hallmark Cards. He was SeniorVice President—Human Resources of Hallmark Cards from June 2002 to January 2005and a member of the board of directors of Hallmark Cards since 1996. Mr. Hallhas served in a variety of positions for Hallmark Cards since 1981. Mr. Hallwas Vice President—U.S. Sales and Marketing for Binney & Smith Inc. (awholly-owned subsidiary of Hallmark Cards) from 1999 to June 2002.

*Donald J. Hall, Jr.*,age 49, has been a director of Crown Media Holdings since May 2000.Mr. Hall has been the President and Chief Executive Officer of HallmarkCards since January 2002 and a member of the board of directors ofHallmark Cards since 1996. Mr. Hall has served in a variety of positionsfor Hallmark Cards since 1971. Mr. Hall was the Executive Vice President,Strategy and Development from September 1999 until December 2001. Priorto that, Mr. Hall was the Vice President, Product 

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Development, of HallmarkCards from September 1996 until August 1999. Mr. Hall is amember of the board of directors of Hallmark Entertainment Holdings.

*Irvine O. Hockaday, Jr.*,age 68, has been a director of Crown Media Holdings since May 2000 and wasa director of Crown Media International from April 1996 until May 2000.He is a member of the board of directors of Ford Motor Company, Dow Jones &Company, Inc., Sprint Corporation, Aquila Inc. and Estee Lauder CompaniesInc. Mr. Hockaday is a trustee of the Hall Family Foundations and theAspen Institute. He was the President and Chief Executive Officer of HallmarkCards from January 1986 to December 2001.

*Anil Jagtiani*, age44, has been a director of Crown Media Holdings since March 2003. He hasbeen Executive Vice President, Corporate Strategy and Development, for HallmarkCards since February 2003. He served as Senior Vice President, CorporateStrategy, from January 2001 until February 2003. From October 1997until December 2000, he served as the Director of Strategic Planning forBrunswick Corporation.

*Peter A. Lund*, age64, has been a director of Crown Media Holdings since May 2000. He alsoserves as Chairman and director of Eos International, Inc., a directmarketing holding company, and is a member of the board of directors of DirecTVGroup, Inc. and Emmis Communications Corporation. He is also a Trustee ofthe University of St. Thomas in St. Paul, Minnesota.

*John P. Mascotte*,age 65, has been a director of Crown Media Holdings since May 2000.Mr. Mascotte is a member of the board of directors of Hallmark Cards andalso a member of the board of directors of Wyeth Inc., Generali LifeReassurance U.S.A. and Labone Inc. He was the President and Chief ExecutiveOfficer of Blue Cross and Blue Shield of Kansas City, Inc. from July 1997to June 2001.

*Deanne R. Stedem*,age 42, has been a director of Crown Media Holdings since March 2003. Shehas been Assistant General Counsel for Hallmark Cards since 1998. She served asSenior Attorney for Hallmark Cards from 1989 until 1998.

Mr. David E. Hall andMr. Donald J. Hall, Jr. are brothers. Mr. Hockaday is Mr. DavidE. Hall’s father-in-law. There are no other family relationships among theexecutive officers or directors of the Company.

***Executive Officers of the Registrant***

The following lists ourexecutive officers and information regarding their principal occupations duringat least the last five years.

*David J. Evans, 64,* has been the President and Chief ExecutiveOfficer of Crown Media Holdings and a Director of Crown Media Holdings since May 2000.Prior to that, he served as President and Chief Executive Officer of HallmarkEntertainment Networks (n/k/a Crown Media International) from March 1999to May 2000 and a Director of Crown Media International from July 1999until May 2000. He also has served on BSkyB’s board of directors since November 2001and, more recently via appointment, on its remuneration committee.

*William J.Abbott,* 42, has beenExecutive Vice President, Advertising Sales, of Crown Media Holdings since July 2003.Prior to that, he was Executive Vice President, National Sales, of Crown MediaUnited States, LLC from January 2000 through July 2003.

*William J. Aliber, 43,* has been the Executive Vice President and ChiefFinancial Officer of Crown Media Holdings since May 2000. Prior to that,he was Executive Vice President and Chief Financial Officer of Crown MediaInternational from March 1997 through May 2000 and a Director ofCrown Media International from May 1998 through May 2000. He alsoserved as the Vice President and Chief Financial Officer of HallmarkEntertainment from June 1996 through May 2000.

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*Paul A.FitzPatrick*, 58, has beenExecutive Vice President and Chief Operating Officer of Crown Media Holdingssince October 2002. Prior to that, he was Chief Operating Officer of CrownMedia United States from September 2000 through October 2002. Priorto joining Crown Media United States, Mr. FitzPatrick served as ChiefOperating Officer of the Golf Channel from April 1997 through April 2000.

*David Kenin*, 63, has been Executive Vice President,Programming Crown Media United States, LLC since January 2002. Prior tojoining Crown Media United States, he headed Kenin Partners, where herepresented clients in various media industries, including cable television,business development, international programming, international sports rightsand new technology.

*Chris R. Moseley, 54,* has been Executive Vice President, ChiefMarketing Officer of Crown Media Holdings, Inc. since April 2004.Prior to that, she was Executive Vice President, Worldwide Marketing and BrandStrategy of Crown Media Holdings from July 2000 to April 2004. Priorto joining Crown Media Holdings, Ms. Moseley worked as Executive VicePresident, Network Marketing of Disney/ABC from October 1999 to July 2000and Senior Vice President of Marketing for Discovery Communications, Inc.from 1989 to October 1999.

*Charles L. Stanford, 59,* has been Executive Vice President, Legal andBusiness Affairs and General Counsel of Crown Media Holdings since May 2001.Prior to that, he was Senior Vice President, Business Affairs and GeneralCounsel of Crown Media Holdings from October 2000 to May 2001. Healso served as Senior Vice President, Legal and Business Affairs of Crown MediaInternational from November 1999 through October 2000.

The following persons wereexecutive officers of the Company prior to the sale of our internationalbusiness.

*Russel H.Givens*, 58, was Presidentand Chief Executive Officer of Crown Media International since July 2000.Prior to that, he served as Executive Vice President and Chief OperatingOfficer of Crown Media International commencing in July 1998.

*Jeff Henry*, 43, was Chief Executive, the Hallmark Channel, United Kingdom andEurope, Middle East and Africa of Crown Media International since November 2001.Prior to that, he served as Managing Director of Crown Entertainment Limitedcommencing in July 2000. From March 1998 until July 2000, heserved as the Chief Executive for Granada Sky Broadcasting, a joint venturebetween Granada and BSkyB.

***Structure***

Directors are electedannually. Our Board has an Audit Committee, a Compensation Committee, aNominating Committee and a Finance Committee. The responsibilities of the AuditCommittee are described below.

*Audit Committee*

The members of theAudit Committee are Messrs. Mascotte, Chairman, Chavkin and Lund, each ofwhom are believed by the Board to be independent directors as defined in Rule 4200(a)(15)of the National Association of Securities Dealers’ listing standards for theNasdaq National Market (“Nasdaq Listing Standards”). The Board has determinedthat each of the members of the Audit Committee is financially literate inaccordance with the Nasdaq Listing Standards. The Board has also determinedthat Mr. Mascotte qualifies as an audit committee financial expert, asdefined under Securities and Exchange Commission (the “Commission”) rules. Underthe Audit Committee Charter, the primary authority and responsibilities of theAudit Committee are to:

·       overseethe Company’s financial reporting processes;

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·       provideoversight relating to the Company’s internal control over financial reportingand internal audit process and activities;

·       reviewand approve related party transactions;

·       preparethe report required by the Commission to be included in the Company’s annualproxy statement;

·       bedirectly responsible for the appointment, compensation, retention, terminationand oversight of the work of the independent auditors and ensure compliancewith independence requirements for auditors;

·       pre-approveof all audit and non-audit services; and

·       establish and oversee theCompany’s whistleblower policy regarding submission of reports of questionableaccounting practices, internal accounting controls or auditing matters and theinvestigation, disposition and retention of such reports.

***Nominating Committee***

The members of the Nominating Committee are Messrs. Lund,Chairman, Bane, Gardner and Halmi, and Mr. Lund is an independent directoras defined in Rule 4200(a)(15) of the Nasdaq Listing Standards. TheNominating Committee’s functions are to consider candidates to serve as membersof the Board of Directors and to nominate qualified persons for election at theannual meeting of stockholders.

Subject to the Second Amended and RestatedStockholders Agreement, dated August 20, 2001, the Nominating Committeeidentifies director candidates primarily by considering recommendations made bydirectors and management. The Nominating Committee may also retain thirdparties to identify and evaluate director candidates. When evaluating directorcandidates, the Nominating Committee considers a number of factors, such as thecandidate’s background, skills, judgment, diversity and experience withcompanies of comparable business and size. The Nominating Committee alsoconsiders the candidate’s experience in relation to the experience of otherBoard members, the candidate’s independence or lack of independence, and the candidate’squalifications for committee membership. The Nominating Committee does notassign any particular weight or priority to any of these factors and considerseach director candidate in the context of the current needs of the Board as awhole.

The Nominating Committeewill consider nominees recommended by stockholders who follow the proceduresset forth in the Company’s bylaws. Director candidates recommended bystockholders are evaluated in the same manner as candidates recommended by aBoard member, management or a third party. Therefore, the Board has not deemedit necessary to adopt a policy regarding consideration of candidatesrecommended by stockholders.

*Section 16(a) BeneficialOwnership Reporting Compliance*

Based on a review ofreports filed by our directors, executive officers and beneficial holders of10% or more of our shares, and upon representations from those persons, allSecurities and Exchange Commission stock ownership reports required to be filedby those reporting persons during 2004 were made timely, except that Form 3sof Mr. Gardner and Mr. Curtis were filed late and each of theexecutive officers filed a late Form 4 for the grant of restricted stockunits in May, 2004.

*Code of BusinessConduct and Ethics*

The Company has a Code of BusinessConduct and Ethics that reflects long-standing positions of the Company andcontains additional provisions. The Code applies to all employees, includingexecutive 

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officers,and to directors. A shareholder can request a free copy of the Code of Business Conduct and Ethics by writing to the GeneralCounsel at 12700 Ventura Boulevard, Studio City, California 91604.

**ITEM 11**.         Executive Compensation

*Compensation ofDirectors and Executive Officers*

**SummaryCompensation Table**

The following tablesummarizes the compensation paid by us, and any of our subsidiaries, forservices performed for us, to our Chief Executive Officer and our four othermost highly compensated executive officers serving at the end of 2004 (each, a “NamedExecutive Officer, collectively, the “Named Executive Officers”).
|                                                | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Long-Term Compensation Awards** | ** ** |
|------------------------------------------------|------------|------------|------------|------------------------------|------------|---------------------------------------------|------------|
| **Name and Principal Position** | ** ** | ** ** | ** ** | **Year**                     | ** ** | **Salary($)**                               | ** ** | **Bonus($)(1)** | ** ** | **Restricted  Stock  Awards($)(2)** | ** ** | **Securities  Underlying  Options/SAR  (#)(3)** | ** ** | **All Other  Compensation  ($)** | ** ** | **Payout of   Restricted   Stock($)** | ** ** |
| David J. Evans                                 |       | 2004       |       | 1,265,625                    |       |                                        |       | (4) |   |   | 1,040,750 | (5) |   |   | 0 |   |   |   | 30,595 | (6) |   |   | 4,094,485 | (7) |   |
| President and                                  |       | 2003       |       | 1,117,500                    |       |                                        | 952,625    |   |   |   | 4,506,833 | (8) |   |   | 0 |   |   |   | 31,283 |   |   |   | 0 |   |   |
| Chief Executive Officer                        |       | 2002       |       | 1,028,076                    |       |                                        | 900,000    |   |   |   | 0 |   |   |   | 155,000 |   |   |   | 48,588 |   |   |   | 0 |   |   |
| Chris R. Moseley                               |       | 2004       |       | 674,089                      |       |                                        | 150,000    |   |   |   | 543,000 | (9) |   |   | 0 |   |   |   | 11,400 | (10) |   |   | 260,723 | (11) |   |
| Executive Vice President—                 |       | 2003       |       | 614,539                      |       |                                        | 180,000    |   |   |   | 465,260 | (12) |   |   | 0 |   |   |   | 16,141 |   |   |   | 0 |   |   |
| Chief Marketing Officer                        |       | 2002       |       | 572,885                      |       |                                        | 210,000    |   |   |   | 0 |   |   |   | 45,000 |   |   |   | 16,650 |   |   |   | 0 |   |   |
| Jeffrey Henry(13)                              |       | 2004       |       | 626,835                      |       |                                        | 151,550    |   |   |   | 543,000 | (9) |   |   | 0 |   |   |   | 61,025 | (14) |   |   | 276,741 | (11) |   |
| Chief Executive & Managing            |       | 2003       |       | 587,203                      |       |                                        | 151,566    |   |   |   | 465,260 | (12) |   |   | 0 |   |   |   | 60,002 |   |   |   | 0 |   |   |
| Director—Europe, Middle                   |       | 2002       |       | 511,313                      |       |                                        | 123,294    |   |   |   | 0 |   |   |   | 215,000 |   |   |   | 59,263 |   |   |   | 0 |   |   |
| Paul A.  FitzPatrick                           |       | 2004       |       | 596,808                      |       |                                        | 150,000    |   |   |   | 543,000 | (9) |   |   | 0 |   |   |   | 0 |   |   |   | 284,927 | (11) |   |
| Executive Vice President                       |       | 2003       |       | 549,116                      |       |                                        | 165,000    |   |   |   | 508,540 | (15) |   |   | 0 |   |   |   | 774 |   |   |   | 0 |   |   |
| and Chief Operating  Officer                   |       | 2002       |       | 513,076                      |       |                                        | 165,000    |   |   |   | 0 |   |   |   | 45,000 |   |   |   | 774 |   |   |   | 0 |   |   |
| Russel H. Givens, Jr.(16)                 |       | 2004       |       | 582,724                      |       |                                        | 165,000    |   |   |   | 543,000 | (9) |   |   | 0 |   |   |   | 16,326 | (17) |   |   | 519,653 | (11) |   |
| President and Chief                            |       | 2003       |       | 535,206                      |       |                                        | 140,000    |   |   |   | 927,317 | (18) |   |   | 0 |   |   |   | 16,331 |   |   |   | 0 |   |   |
| Executive Officer, Crown                       |       | 2002       |       | 509,800                      |       |                                        | 136,425    |   |   |   | 0 |   |   |   | 100,000 |   |   |   | 19,479 |   |   |   | 0 |   |   |
|                                                |            |            |            |                              |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)     Represents performance bonus under theterms of employment agreements with the Company. See “Executive EmploymentArrangements”.

(2)     On April 30,2003, the Company filed with the Commission a Tender Offer Statement onSchedule TO, which was amended, and made an offer to its eligible employees,including the Named Executive Officers, to exchange all eligible optionsgranted under the Amended and Restated Crown Media Holdings 2000 Long TermIncentive Plan (the “Plan”) for restricted stock units (“RSUs”) to be grantedby the Company under the Plan. On May 29, 2003, the Company accepted forexchange stock options to purchase 5,126,732 shares of our Class A CommonStock, representing 94.8% of the options that were eligible to be tendered inthe offer, and, in exchange, granted RSUs representing an aggregate of2,050,693 shares of its Class A Common Stock. The RSUs will vest in equalone-third installments on each of the first, second and third anniversaries ofthe date of grant and are subject to forfeiture until certain restrictions,including continued employment, have lapsed. Each RSU represents the right toreceive one share of the Company’s Class A Common Stock or, in the Company’sdiscretion, the cash equivalent to the value of one share of the Company’s Class ACommon Stock on the vesting date, if certain conditions are met. If anydividend is paid with respect to a share of Class A Common Stock while theRSUs are held, the Company shall pay to each holder at its discretion an amountin cash, Class A Common Stock or other property, in each case having avalue equal to the dividend. Such amounts shall vest and be paid at the sametime as the underlying RSUs are settled.

As of January 4, 2005, the number and value (basedon the closing market price of the Company’s Class A Common Stock on December 31,2004 (i.e., $8.60)) of the aggregated RSUs of each of the Named ExecutiveOfficers are as follows: 474,028 RSUs ($4,076,640) held by Mr. Evans;117,333 RSUs ($1,009,064) held by Ms. Moseley;117,333 RSUs ($1,009,064) held by Mr. Henry;122,667 RSUs ($1,054,936) held by Mr. FitzPatrick;and 174,272 RSUs ($1,498,739) held by Mr. Givens.

(3)     On May 29,2003, each Named Executive Officer exchanged stock options granted in 2001 and2002 and in any prior years for RSUs. Consequently, none of the Named ExecutiveOfficers hold any stock options. See Note 2.

(4)     TheBoard of Directors is not required to pay a bonus to Mr. Evans for 2004and has not yet determined whether to pay a discretionary bonus to Mr. Evansfor 2004.

(5)     Mr. Evanswas issued 115,000 RSUs in 2004. The value of RSUs was determined bymultiplying the closing market price of Crown Media Holdings’ Class ACommon Stock on the date of grant (i.e., $9.05) by the number of RSUs issued.

(6)     Represents paymentof 401(k) matching contributions of $6,500 and life insurance premiumpayments of $24,095.

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(7)     In January 2005,the Company paid for the first installment of vested RSUs (granted in 2003 and2004) in cash (see notes (2) and (4)) and this amount represents such cashpayment.

(8)     Mr. Evanswas issued 833,056 RSUs. The value of RSUs was determined by multiplying theclosing market price of Crown Media Holdings’ Class A Common Stock on thedate of grant (i.e., $5.41) by the number of RSUs issued.

(9)     Represents60,000 RSUs issued in 2004. The value of RSUs was determined bymultiplying the closing market price of Crown Media Holdings’ Class ACommon Stock on the date of grant (i.e., $9.05) by the number of RSUs issued.

(10)   Represents carallowance.

(11)   On June 4,2004, the Company paid for the first installment of vested RSUs (granted in2003) in cash (see note (2)) and this amount represents such cash payment.

(12)   Represents86,000 RSUs issued. The value of RSUs was determined by multiplying the closingmarket price of Crown Media Holdings’ Class A Common Stock on the date ofgrant (i.e., $5.41) by the number of RSUs issued.

(13)   Mr. Henrybecame an executive officer of the Company effective July 2004. Mr. Henry’semployment with the Company terminated effective April 26, 2005 upon saleof the Company’s international business. All compensation amounts have beenconverted from United Kingdom Pounds at the rate of £1.00=US$1.89.

(14)   Representscar allowance of $22,961 and payment of group pension plan contributions of$38,747.

(15)   Mr. FitzPatrickwas issued 94,000 RSUs. The value of RSUs was determined bymultiplying the closing market price of Crown Media Holdings’ Class ACommon Stock on the date of grant (i.e., $5.41) by the number of RSUs issued.

(16)   Mr. Givens’employment with the Company terminated effective April 26, 2005 upon saleof the Company’s international business.

(17)   Representscar allowance of $11,400 and payment of 401(k) matching contributions of$4,926.

(18)   Mr. Givens was issued171,408 RSUs. Thevalue of RSUs was determined by multiplying the closing market price of CrownMedia Holdings’ Class A Common Stock on the date of grant (i.e., $5.41) bythe number of RSUs issued.

**StockOptions Awarded By Crown Media Holdings During 2004**

The Company did not awardany stock options to the Named Executive Officers in 2004.

**Option Exercisesand Option Values in 2004**

None of the NamedExecutive Officers own any stock options.

**DirectorCompensation**

We do not compensate directors who are employees ofHallmark Cards or its subsidiaries, or Mr. Evans who is an employee of theCompany, for services as members of our Board or any of its committees. For alldirectors who are not employees of Hallmark Cards or its subsidiaries, weprovided in 2004 a $28,000 annual retainer and an additional $1,000 per meetingfee for each extraordinary meeting or meeting in excess of the number ofregularly scheduled meetings. All directors receive reimbursement of expensesincurred in connection with participation in Board meetings.

On February 6, 2004,the Compensation Committee approved an increase in director compensation fornon-employee directors. Effective fiscal year 2004, non-employee directors arecompensated as follows: (i) an annual retainer of $28,000 and $1,000 perextraordinary meeting continues to be paid as described above;(ii) restricted stock units valued at $40,000 are granted annually;(iii) the chairman of the Audit Committee is paid $5,000 annually; and (iv) chairmenof each other committee is paid $3,000 annually.

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**ExecutiveEmployment Arrangements**

***Employment Agreement with David J. Evans***

On September 18, 2001, the Company entered intoan employment agreement with Mr. Evans that provides for his employment asits President and Chief Executive Officer. The term of this agreement is threeyears, but it may be extended by mutual consent. The agreement provides for anannual base salary of $1,000,000, $1,100,000 and $1,250,000, respectively,during each twelve-month period of the term of the agreement, commencing September 18,2001. We will review in good faith Mr. Evans’ salary annually for apossible increase based on performance and salary levels for comparablepositions in comparable companies. Additionally, Mr. Evans is entitled toreceive a performance bonus based on the level at which the Company achievesits revenue and EBITDA plan as adopted by the Board. If the Company achievesless than 70% of plan revenue and EBITDA, Mr. Evans is not entitled to anyperformance bonus. If the Company achieves certain specified levels of revenueand EBITDA above the 70% threshold, Mr. Evans is entitled to a bonus of upto 100% of his then salary rate. Under the agreement, we may also pay Mr. Evansan additional bonus if we determine it is appropriate. The agreement alsoprovides that the Company grant to Mr. Evans options to purchase 1,000,000shares of Class A Common Stock of the Company. This agreement was amendedon May 28, 2004. The amendment extends the term of the agreement for anadditional one year and provides for an annual base salary of $1,312,500 forsuch extended term.

The employment agreement provides that if Mr. Evans’employment is terminated other than for cause or disability, or if Mr. Evansresigns for good reason, then he will be entitled to the amount of the basesalary due through the end of the term of the agreement as if there had been notermination, all options granted under the agreement shall immediately vestand, except for any annual bonus that is due to Mr. Evans under theagreement, we will have no further obligations under the agreement. The term “goodreason” includes, among other things, the employee’s ceasing to be employed forany reason other than death or disability after a change of control of theCompany.

Under the employmentagreement, Mr. Evans cannot compete with the Company during the term ofhis employment. Additionally, for the one-year period following his terminationof employment for any reason, Mr. Evans may not employ any person who isworking for the Company as an officer, policymaker or in a high-level creative,development or distribution position at the date of termination of Mr. Evan’semployment.

***EmploymentAgreement with Chris R. Moseley***

On June 20, 2003,Crown Media Holdings entered into an employment agreement with Chris R. Moseleythat provides for her employment as Executive Vice President—WorldwideMarketing. This agreement replaced the employment agreement dated July 5,2000 between Ms. Moseley and Crown Media Holdings. The term of thisagreement is three years, commencing on July 16, 2003, but may be extendedby mutual consent. The agreement provides for an annual base salary of$660,000, $693,000 and $727,650, respectively, during each successive yearduring the term of the agreement. Ms. Moseley is entitled to receive at theend of each calendar year during the agreement a performance bonus of no lessthan 15% and no more than 50% of her then annual salary.

The employment agreementprovides that if Ms. Moseley’s employment is terminated other than forcause, death or disability, then she will be entitled, in a lump sum, to theremaining salary payable for the balance of the term of the agreement,discounted at prime rates to present value at the time of payment. In addition,Ms. Moseley is under no obligation to mitigate against any such amountspaid.

Ms. Moseley’semployment agreement contains identical non-compete and non-solicitationprovisions to those contained in Mr. Evans’ employment agreement and whichare described above.

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This agreement was amendedon May 24, 2004. The amendment changed Ms. Moseley’s title to “ExecutiveVice President—Chief Marketing Officer” and her job description as a result ofsuch change.

***EmploymentAgreement with Jeffrey Henry***

On March 12, 2004,Crown Media International, LLC entered into an employment agreement withJeffrey Henry that provided for his employment as Chief Executive &Managing Director—Europe, Middle East & Africa. The term of hisemployment agreement was three years, commencing on July 17, 2004, butcould have been extended by mutual consent. The agreement provided for anannual base salary of £341,850 for the first year of the term, increasing by 5%or the UK Retail Prices Index, whichever was greater, during each subsequentyear of the term of the agreement. Mr. Henry was also entitled to receivea bonus at the end of each calendar year of the term of the agreement of noless than 20% of his then salary rate. The employment agreement provided thatif Mr. Henry’s employment was terminated other than for cause, death ordisability, then he would be entitled to the remaining salary amounts payableunder the agreement for the balance of the term of the agreement. Mr. Henry’semployment agreement contained identical non-compete and non-solicitationprovisions to those contained in Mr. Evans’ employment agreement and whichare described above.

The parties entered into aletter agreement on July 9, 2004 which supplement this agreement. Underthe letter agreement, if the Company’s international business is sold to athird party and Mr. Henry’s agreement is assumed by the buyer but Mr. Henrydoes not wish to be employed by such buyer, Mr. Henry may terminate theagreement. Upon such termination, Mr. Henry is entitled to the presentvalue of the remaining salary and bonus amounts payable under the agreement forthe balance of the term of the agreement, which amounts will be offset by anyamounts Mr. Henry may receive from a buyer in discharge or settlement ofthe agreement. Mr. Henry elected not to be employed by the buyer of theCompany’s international business, and his employment with the Companyterminated effective April 26, 2005.

***EmploymentAgreement with Paul A. FitzPatrick***

On September 15,2003, Crown Media Holdings entered into an employment agreement with Paul A.FitzPatrick that provides for his employment as Executive Vice President andChief Operating Officer. This agreement replaced the employment agreement datedSeptember 19, 2000 between Mr. FitzPatrick and Crown Media UnitedStates, LLC, a wholly-owned subsidiary of Crown Media Holdings. The term of hisemployment agreement is three years, commencing on September 25, 2003, butmay be extended by mutual consent. The agreement provides for an annual basesalary of $590,000 for the first year of the term, increasing by 5% or the ConsumerPrice Index, whichever is greater, during each subsequent year of the term ofthe agreement. Mr. FitzPatrick is also entitled to receive a bonus at theend of each calendar year of the term of the agreement of up to 20% of his thensalary rate, 30% of which bonus is discretionary and 70% of which is subject toCrown Media Holdings reaching certain levels of revenue and EBITDA. Additionalbonus amounts may awarded in the discretion of the Company.

The employment agreementprovides that if Mr. FitzPatrick’s employment is terminated other than forcause, death or disability, then he will be entitled to the remaining salaryamounts payable under the agreement for the balance of the term of theagreement.

Mr. FitzPatrick’semployment agreement contains identical non-compete and non-solicitationprovisions to those contained in Mr. Evans’ employment agreement and whichare described above.

***EmploymentAgreement with Russel H. Givens, Jr.***

On December 20, 2001,Crown Media International entered into an employment agreement with Russel H.Givens, Jr. that provided for his employment as President and ChiefExecutive Officer of that company. The term was for three years commencing on January 1,2002, but could have been extended by mutual consent. The agreement providedfor an annual base salary of $510,000 during the first year of the 

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term,increasing by 7% or the Consumer Price Index, whichever was greater, duringeach subsequent year of the term of the agreement. Mr. Givens was alsoentitled to receive a bonus at the end of each calendar year of the term of theagreement of up to 20% of his then salary rate, 30% of which bonus isdiscretionary and 70% of which was subject to Crown Media Internationalreaching certain levels of revenue and EBITDA. Additional bonus amounts couldbe awarded in the discretion of the Company. This employment agreement wasamended on April 2, 2004. The amendment extended the term of the agreementfor an additional two years and provided for an annual base salary of $613,094for the fourth year of the term and $643,749 for the fifth year of the term. Additionally,the amendment provided that, if in any of 2004, 2005 or 2006 all orsubstantially all assets of Crown Media International, LLC are acquired by athird party or Crown Media International, LLC is no longer operated in itscurrent form, which makes Mr. Givens’ performance benchmarks in theemployment agreement undeterminable, the bonus payable to Mr. Givens underthe agreement will be no less than 20% of his then current salary.

The employment agreementprovided that if Mr. Givens’ employment is terminated other than forcause, death or disability, then he will be entitled to the remaining basesalary amounts payable under the agreement for the balance of the term of theagreement.

Mr. Givens’employment agreement contains identical non-compete and non-solicitationprovisions to those contained in Mr. Evans’ employment agreement and whichare described above.

Mr. Givens’employment with the Company terminated effective April 26, 2005 upon saleof the Company’s international business.

**Compensation Committee Interlocks and InsiderParticipation**

During 2004, none of ourexecutive officers served on the board or compensation committee of anothercompany which had one of its executive officers serve as one of our directorsor a member of our Compensation Committee. Of our executive officers, only Mr. Evansand David Kenin serve as members of a compensation committee or other boardcommittee performing similar functions of any other entity. Mr. Evansserves on the compensation committee of British Sky Broadcasting PLC and Mr. Keninserves on the compensation committee of World Wrestling Entertainment.Mr. Chavkin, a member of our Compensation Committee, is the ChiefInvestment Officer of JP Morgan Partners, LLC which is a 100% owned subsidiaryof JP Morgan Chase & Co. JP Morgan Chase Bank, another wholly-ownedsubsidiary of JP Morgan Chase & Co., is a lead bank for the bankcredit facility of Crown Media Holdings and serves in certain other roles asdescribed in “Certain Relationships and Related Transactions” below.

**ITEM 12**.         Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters

**SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

The following table sets forth certain information, asof May 1, 2005, with respect to beneficial ownership of our Class ACommon Stock and Class B Common Stock, by each of the Named ExecutiveOfficer (defined below), each director, each holder of more than 5% of either Class Aor Class B Common Stock, and all current directors and executive officersas a group.

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Except as indicated in thefootnotes to this table, the persons named each have sole voting and investmentpower over the shares shown as owned by them. The percentage of beneficialownership is based on 73,863,037 shares of our Class A Common Stock and30,670,422 shares of our Class B Common Stock outstanding as of May 1,2005.

**Amountand Nature of Beneficial Ownership(1)**
| ** **                                                                                        | ** ** | **Class A  Common  Stock** | ** ** | **Percent of  Class** | ** ** | **Class B  Common  Stock** | ** ** | **Percent of  Class** | ** ** | **% Total  Voting  Power** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|----------------------------|------------|---------------------------------|------------|----------------------------|------------|---------------------------------|------------|
| **Name and Address of Beneficial  Owner 5% Stockholders:**                                        |       |                            |       |                       |       |                            |       |                       |       |                            |       |   |   |   |   |   |   |
| Hallmark Entertainment Investments Co.(2)(3)  2501 McGee Street, Kansas City, MO 64108            |       | 58,077,970                      |       |                       | 78.6       | %                               |       | 30,670,422                 |       |                            | 100        | % |   |   | 95.8 | % |   |
| Liberty Media Corporation(4)(3)  9197 South Peoria Street, Englewood, CO 80112                    |       | 58,077,970                      |       |                       | 78.6       | %                               |       | 30,670,422                 |       |                            | 100        | % |   |   | 95.8 | % |   |
| National Interfaith Cable Coalition, Inc.(3)(13)  810 12th Avenue South, Nashville, TN 37203 |       | 58,077,970                      |       |                       | 78.6       | %                               |       | 30,670,422                 |       |                            | 100        | % |   |   | 95.8 | % |   |
| J.P. Morgan Partners (BHCA), L.P.(5)(3)(14)  390 Madison Avenue, New York, NY 10017               |       | 58,077,970                      |       |                       | 78.6       | %                               |       | 30,670,422                 |       |                            | 100        | % |   |   | 95.8 | % |   |
| Hughes Electronics Corporation(6)  200 North Sepulveda Boulevard, El Segundo, CA 90245            |       | 5,360,202                       |       |                       | 7.3        | %                               |       | —                     |       |                            | —     |   |   |   | 1.4 | % |   |
| **Directors and Named Executive  Officers:**                                                      |       |                            |       |                       |       |                            |       |                       |       |                            |       |   |   |   |   |   |   |
| Robert A. Halmi, Jr.(7)                                                                      |       | 30,000                          |       |                       | *          |                            |       | —                     |       |                            | —     |   |   |   | * |   |   |
| David J. Evans                                                                                    |       | 84,700                          |       |                       | *          |                            |       | —                     |       |                            | —     |   |   |   | * |   |   |
| Wilford V. Bane, Jr.(8)                                                                      |       | 13,165                          |       |                       | *          |                            |       | —                     |       |                            | —     |   |   |   | * |   |   |
| Arnold L. Chavkin(5)(3)                                                                           |       | 58,077,970                      |       |                       | 78.6       | %                               |       | 30,670,422                 |       |                            | 100        | % |   |   | 95.8 | % |   |
| Glenn Curtis                                                                                      |       | 0                               |       |                       | *          |                            |       | —                     |       |                            | —     |   |   |   | * |   |   |
| Robert J. Druten                                                                                  |       | 18,500                          |       |                       | *          |                            |       | —                     |       |                            | —     |   |   |   | * |   |   |
| Paul A. FitzPatrick                                                                               |       | 0                               |       |                       | *          |                            |       | —                     |       |                            | —     |   |   |   | * |   |   |
| Brian E. Gardner                                                                                  |       | 0                               |       |                       | *          |                            |       | —                     |       |                            | —     |   |   |   | * |   |   |
| Russel H. Givens, Jr.                                                                        |       | 1,500                           |       |                       | *          |                            |       | —                     |       |                            | —     |   |   |   | * |   |   |
| Herbert A. Granath                                                                                |       | 0                               |       |                       | *          |                            |       | —                     |       |                            | —     |   |   |   | * |   |   |
| David E. Hall                                                                                     |       | 2,500                           |       |                       | *          |                            |       | —                     |       |                            | —     |   |   |   | * |   |   |
| Donald J. Hall, Jr.(9)                                                                       |       | 58,080,470                      |       |                       | 78.6       | %                               |       | 30,670,422                 |       |                            | 100        | % |   |   | 95.8 | % |   |
| Jeffrey Henry                                                                                     |       | 0                               |       |                       | *          |                            |       | —                     |       |                            | —     |   |   |   | * |   |   |
| Irvine O. Hockaday, Jr.(10)                                                                  |       | 39,770                          |       |                       | *          |                            |       | —                     |       |                            | —     |   |   |   | * |   |   |
| Anil Jagtiani                                                                                     |       | 8,000                           |       |                       | *          |                            |       | —                     |       |                            | —     |   |   |   | * |   |   |
| Peter A. Lund(8)                                                                                  |       | 13,165                          |       |                       | *          |                            |       | —                     |       |                            | —     |   |   |   | * |   |   |
| John P. Mascotte(8)(12)                                                                           |       | 77,865                          |       |                       | *          |                            |       | —                     |       |                            | —     |   |   |   | * |   |   |
| Chris R. Moseley                                                                                  |       | 0                               |       |                       | *          |                            |       | —                     |       |                            | —     |   |   |   | * |   |   |
| Deanne R. Stedem                                                                                  |       | 1,000                           |       |                       | *          |                            |       | —                     |       |                            | —     |   |   |   | * |   |   |
| All directors and  executive officers as a group (23 persons)(9)(5)(11)                      |       | 58,542,485                      |       |                       | 79.0       | %                               |       | 30,670,422                 |       |                            | 100        | % |   |   | 95.8 | % |   |

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*                     The percentage of shares or voting powerbeneficially owned does not exceed 1% of the class.

(1)           Pursuant to Rule 13d-3 under the Securitiesand Exchange Act of 1934, as amended, a person has beneficial ownership of anysecurities as to which such person, directly or indirectly, through anycontract, arrangement, undertaking, relationship, or otherwise has or sharesvoting power and/or investment power or as to which such person has the rightto acquire such voting and/or investment power within 60 days from May 1,2005. Percentage of beneficial ownership as to any person as of a particulardate is calculated by dividing the number of shares beneficially owned by suchperson by the sum of the number of shares outstanding as of such date and thenumber of unissued shares as to which the person has the right to acquirevoting and/or investment power within 60 days. The number of shares shownincludes outstanding shares of common stock owned as of May 1, 2005 by theperson indicated and shares underlying options owned by such person on May 1,2005 that were exercisable within 60 days of that date. Percentage of totalvoting power is based on votes of outstanding shares.

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(2)           Based on a Schedule 13D/A filed on December 29,2003 jointly by Hallmark Cards, HEIC and Hallmark Entertainment Holdings, whoas of that date shared voting and dispositive power with respect to 30,670,422shares of Class B Common Stock, which are convertible at the option of theholder into an equivalent number of shares of Class A Common Stock, and53,215,080 shares of Class A Common Stock. Does not include, under thecolumn headed “Class A Common Stock,” the number of shares of Class ACommon Stock that HEIC would hold if it converted all of its shares of Class BCommon Stock into shares of Class A Common Stock, which, if so converted,together with its shares of Class A Common Stock would equal approximately80% of the total outstanding Class A Common Stock. HEIC is a majorityowned subsidiary of Hallmark Entertainment Holdings and Hallmark EntertainmentHoldings is a wholly-owned subsidiary of Hallmark Cards.

(3)           On March 11, 2003, Hallmark EntertainmentHoldings, Liberty and J.P. Morgan Partners contributed 100% of their Companyshares in return for HEIC shares representing the following percentage interestin HEIC: Hallmark Entertainment Holdings, 83.4%; Liberty, 11.2%; and J.P. MorganPartners, 4.6%. In addition, VISN contributed 10% of its Company shares inreturn for HEIC shares representing an 0.8% interest in HEIC. Each of the HEICstockholders entered into the stockholders agreement concerning HEIC and Crownshares. As a result, each of the above parties may be deemed to beneficiallyown Company shares held by HEIC described in note (2) above. The totalnumber of shares shown as beneficially owned by HEIC includes 4,849,725 sharesof Class A Common Stock beneficially owned by VISN and 13,165 sharesbeneficially owned by JP Morgan Partners outside of HEIC because the parties tothe HEIC stockholders agreement may be deemed to be acting as a group. Beneficialownership of these 4,862,890 shares of Class A Common Stock has been disclaimedby the other HEIC stockholders. Each of Hallmark Entertainment Holdings,Liberty and J.P. Morgan Partners has the right to nominate directors to theHEIC Board; and VISN is entitled to designate a non-voting observer to HEIC’sBoard. In addition, Liberty and JP Morgan Partners each have the right tonominate directors to the Crown Media Holdings’ Board. Under the HEICstockholders agreement, Hallmark Entertainment Holdings directs the voting ofCrown Media Holdings shares owned by HEIC. Pursuant to the HEIC stockholdersagreement, HEIC may not sell, pledge, distribute or transfer its Crown MediaHoldings common stock without the consent of Liberty and J.P. Morgan Partners,except for mergers and other combinations approved in accordance with the CrownMedia Holdings stockholders agreement. This requirement terminates on the laterof such date as each party (1) ceases to own beneficially at least 2.5% ofthe outstanding HEIC common stock and (2) ceases to own beneficially 75%of the HEIC stock owned by the party at March 11, 2003.

(4)           Based on a Schedule 13D/A filed on March 12, 2003by Liberty.

(5)           Includes 13,165 shares of Class A Common Stockunderlying options that are held by J.P. Morgan Partners, and which are vestedor will vest within 60 days. Mr. Chavkin is: the Chief Investment Officerof J.P. Morgan Partners; one of the limited partners of JPMP Master FundManager, L.P.; the general partner of J.P. Morgan Partners; and an ExecutiveVice President of JPMP Capital Corp., which is the sole general partner of JPMPMaster Fund Manager, L.P. Mr. Chavkin disclaims beneficial ownership ofall such shares, except to the extent of his pecuniary interest therein.

(6)           Based on a Schedule 13G/A filed on February 13,2004 by Hughes Electronics Corporation.

(7)           Consists of 30,000 shares of Class A Common Stockheld in various family member trusts for which Mr. Halmi serves as trustee.Mr. Halmi disclaims beneficial ownership of all such shares, except to theextent of his pecuniary interest therein.

(8)           Consists of 13,165 shares of Class A Common Stockunderlying options that are vested or will vest within 60 days.

(9)           Donald J. Hall, Jr., may also be deemed to be abeneficial owner of the shares beneficially owned by HEIC because Mr. Hallis a co-trustee of a voting trust which controls all of the voting securitiesof Hallmark Cards and he is Vice Chairman of the board of directors, ChiefExecutive Officer and President of Hallmark Cards. See note (2). Mr. Halldisclaims beneficial ownership of such shares, except to the extent of hispecuniary interest therein.

(10)     Includes 3,073 shares of Class A Common Stockunderlying options that are vested or will vest within 60 days.

(11)     Includes 205,733 shares of Class A Common Stockunderlying options that are vested or will vest within 60 days.

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(12)     In addition, John P. Mascotte, may be deemed to be abeneficial owner of the shares beneficially owned by HEIC because Mr. Mascotteis a co-trustee of a voting trust which controls all of the voting securitiesof Hallmark Cards and a director of Hallmark Cards. See note (2). Mr. Mascottedisclaims beneficial ownership of such shares.

(13)     The National Interfaith Cable Coalition, Inc. is anot-for-profit coalition of faith groups. NICC is governed by a board ofsixteen trustees appointed by the major faith groups who are members of NICC.

(14)     J.P. Morgan Partners (BHCA), L.P. isengaged in the venture capital and leveraged buyout business. The generalpartner of J.P. Morgan Partners (BHCA), L.P. is JPMP Master Fund Manager, L.P.,and the general partner of JPMP Master Fund is JPMP Capital Corp. JPMP CapitalCorp. is a wholly-owned subsidiary of J.P. Morgan Chase & Co. which isa publicly-held company engaged in the commercial banking business.

***Stock Plans***

For information regardingshares authorized for issuance under our equity compensation plans, see “SecuritiesAuthorized for Issuance Under Equity Compensation Plans” in Item 5, Marketfor Our Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities, which information is incorporated herein by reference.

**ITEM 13**.         CertainRelationships and Related Transactions

*The following summary descriptions of agreements towhich we are a party are qualified in their entirety by reference to theagreement to which each summary description relates, each of which we havefiled with the SEC.*

***Agreements Concerning the Film Assets***

In connection with theacquisition of the film assets in 2001, we entered into the followingagreements:

*Services Agreementwith Hallmark Entertainment*

·       HallmarkEntertainment will provide services related to the administration, distributionand other exploitation of the film assets, and we will pay HallmarkEntertainment approximately $1.5 million per year for the three-year term ofthe agreement. Either party may terminate the agreement after the first yearupon 60 days written notice.

·       HallmarkEntertainment will use commercially reasonable efforts to maximize thelicensing revenue from the film assets consistent with its past efforts for comparableproducts among the film library assets.

·       Wehave sole discretion to determine which of the purchased films will be licensedby Hallmark Entertainment to third parties, as well as the distributionterritories, time periods and other licensing terms.

This services agreementwith Hallmark Entertainment will expire on December 31, 2006. Until a newservices agreement is agreed to, the existing services agreement will remain infull force and effect.

*Registration RightsAgreement*

·       Weagreed to grant Hallmark Entertainment Distribution four demand registrationrights and unlimited piggyback registration rights with respect to the sharesof Class A common stock that were issued in the transaction.

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**Hallmark Program Agreements**

*Crown Media United States*.   CrownMedia United States licenses programming from Hallmark EntertainmentDistribution under an Amended and Restated Program License Agreement dated asof January 1, 2001, for distribution within the United States. Under thisprogram agreement, Crown Media United States is required to license fromHallmark Entertainment Distribution, and Hallmark Entertainment Distribution isrequired to license to us, for the term of the agreement, ending on December 31,2005, substantially all of the television motion pictures and miniseriesHallmark Entertainment Distribution owns or produces. Crown Media United Statesis not required to license more than 50 new pictures or miniseries per year andis not required to license any picture or miniseries if not produced,co-produced or financed by Hallmark Entertainment Distribution, unless HallmarkEntertainment Distribution acquired rights to the picture or miniseries priorto January 1, 2001. Crown Media United States has the right to telecastthe programming it licenses under the program agreement through all forms oftelevision, except on a pay-per-view basis. Under the program agreement, CrownMedia United States generally licenses each movie or miniseries for a period offive years and has the right to telecast the movie or miniseries 30 timesduring that period. In addition, under the program agreement, Crown MediaUnited States has the right to order, and Hallmark Entertainment Distributionis required to produce, four two-hour movies and one series during the term ofthe program agreement.

The program agreement expires on December 31,2005, but will be automatically extended for an additional three year term ifat that time Hallmark Entertainment Distribution’s parent company, HallmarkEntertainment LLC, owns at least 35% of the Company. If Hallmark EntertainmentLLC ceases to own at least 35% of the Company, the term of the programagreement will end on the date two years after the date Hallmark EntertainmentLLC ceases to maintain its 35% ownership interest. Under the program agreement,Hallmark Entertainment Distribution is not required to deliver a specificminimum number of programs.

Crown Media United States pays license fees toHallmark Entertainment Distribution in equal annual installments over thefive-year period that it telecasts the movie or miniseries. The fees generallyincrease 5% per year. During the years ended December 31, 2003 and 2004,Crown Media United States paid Hallmark Entertainment Distribution $15.0million and $5.0 million in fees, respectively, under the original programagreement dated as of November 13, 1998. As of December 31, 2003 and2004, Crown Media United States had $78.9 million and $116.6 million in accruedand unpaid program license fees under the program agreement, respectively.

Our officers and representatives of HallmarkEntertainment Distribution negotiated the terms of these programmingagreements. These programming agreements were reviewed by the independentcommittee of the Board of Directors that considered the purchase of the CrownFilm Library in 2001.

*Crown Media International*.   CrownMedia International licensed programming from Hallmark EntertainmentDistribution for distribution on a country-by-country basis outside the UnitedStates and Canada, under an Amended and Restated Program License Agreement,dated as of January 1, 2001, between Crown Media International andHallmark Entertainment Distribution. Other than as set forth below, the termsof the amended and restated program agreement were substantially the same asthose described above in relation to the agreement between HallmarkEntertainment Distribution and Crown Media United States. HallmarkEntertainment Distribution had existing contractual relationships withdistributors that precluded Crown Media International from obtainingprogramming under the program agreement in several territories in which it didnot operate, the most significant of which is Germany. Hallmark EntertainmentDistribution was expressly permitted to renew indefinitely its contracts withdistributors in Germany, Italy and Spain and could renew contracts with otherdistributors to the extent the existing contracts afford the distributorrenewal rights.

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Crown Media International had the right to distributethe programming it licenses under the program agreement through cable andsatellite broadcast systems. However, it did not license programming fordistribution on a pay-per-view basis. In addition, Crown Media Internationaland Hallmark Entertainment Distribution had agreed to negotiate in good faithon a product-by-product basis for pay television license rights to programmingnot covered under the program agreement, including documentaries, series andspecials.

Under the program agreement Crown Media Internationalgenerally licensed each movie or miniseries for a minimum of three time periodseach of 18 months or 12 months duration, with each 18- or 12-monthperiod separated by a period of one to three years depending on whetherHallmark Entertainment Distribution licenses the programming to a third partyduring the interim periods. The first 18- or 12-month time periodbegan on the later of the date specified in the program agreement or the dateCrown Media International launches in a country. The number of times we cantelecast a movie or miniseries was determined by viewer preferences andindustry practices on a country-by-country basis.

Crown Media International paid license fees toHallmark Entertainment Distribution on a country-by-country,program-by-program basis for each of the three time periods for which itlicenses programming. The fees generally increased 5% per year and were payablein four equal installments for the first time period and six equal installmentsfor subsequent time periods. During the year ended December 31, 2003,Crown Media International paid $15.0 million in fees under its original programagreement with Hallmark Entertainment Distribution, dated as of July 1,1999. During the year ended December 31, 2004, Crown Media Internationaldid not make any payments under the agreement. As of December 31, 2003 and2004, there were $11.7 million and $35.4 million in accrued and unpaid fees,respectively.

Sincethe sale of the Company’s international business has been finalized, theCompany has no further obligations under this program agreement, except forpayment of license fees for certain programming from Hallmark EntertainmentDistribution which was within its exhibition window at the time of the sale.

***Crown Media United States Amended and Restated CompanyAgreement***

In connection with an investment by Crown MediaInternational in Crown Media United States on November 13, 1998, HENDomestic Holdings, Inc., a wholly owned subsidiary of Crown MediaInternational, and Vision Group, VISN Management Corporation (“VISN”) andHenson Cable Networks, Inc. signed an amended and restated companyagreement governing the operation of Crown Media United States. As of February 22,2001, the parties agreed to certain amendments to the amended and restatedcompany agreement, as more fully described below. The company agreement wasnegotiated at arm’s length with the other party or parties to the agreement.

VISN, a subsidiaryof NICC, owns a $25.0 million preferred interest in Crown Media United States. Underthe amended and restated company agreement, the members agreed that if duringany year ending after January 1, 2005 and prior to December 31, 2009,Crown Media United States has net profits in excess of $10.0 million, and thepreferred interest has not been redeemed, Crown Media United States will redeemthe preferred interest in an amount equal to the lesser of:

·       suchexcess;

·       $5.0million; or

·       theamount equal to the preferred liquidation preference on the date of redemption.

The members also agreed that Crown Media United Stateswill redeem the preferred interest at the preferred interest liquidationpreference on the date of redemption of December 31, 2010.

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Under the amendedand restated company agreement, Crown Media United States is required to makecertain payments to NICC in relation to the provision of programming by NICC. Pursuantto the amendment adopted in 2001, Crown Media United States may be required topay to NICC a total license fee comprised of:

·       $5.3million per year, with CPI escalations, for two recurring programming blocks;

·       upto $10 million per year for production costs of an additional recurring “signature”series program block;

·       upto $600,000 per “non-dramatic” holiday special produced by NICC; and

·       $1million per “dramatic” holiday special co-produced by NICC and HallmarkEntertainment.

Pursuant to the February 2001 amendment, CrownMedia United States may be required to broadcast up to 151¤2hours per week of “faith and values” programming and up to an additional 6dramatic and non-dramatic holiday specials per year. Crown Media United Statesfunds a portion of the production costs of this new programming as describedabove.

Theterm of most of the obligations contained in the February 2001 amendmentexpire on March 26, 2006, but may be terminated earlier if NICC sells morethan 50% of the Crown Media Holdings shares it owned on February 22, 2001.In addition, six months prior to the expiration of the agreement, Crown MediaUnited States must negotiate in good faith with NICC regarding a continuationof the programming and funding commitment to NICC. If agreement is not reachedand Crown Media United States does not continue the NICC programming andfunding commitments at the same levels, NICC is entitled to compel Crown MediaHoldings to buy all of NICC’s Crown Media Holdings shares at their then-currentmarket value no later than 60 days following the expiration of the amendment.Crown Media United States, however, can nullify this put by electing tocontinue the NICC programming and funding commitments at the same levels. Duringthe years ended December 31, 2003 and 2004, Crown Media United States paidthe National Interfaith Cable Coalition $10.2 million and $12.3 million,respectively, related to this agreement. Three million dollars of theseamounts, in each of 2003 and 2004, have consisted of production advances whichare recoupable from future NICC productions. Crown Media United States hasagreed to extend a similar production advance of $3.0 million to NICC in 2005.

***DIRECTV Affiliation Agreement***

On August 20, 2001,Crown Media United States entered into an Affiliation Agreement with DIRECTV, Inc.,a wholly owned subsidiary of DIRECTV Enterprises, Inc. Pursuant to theAffiliation Agreement, DirecTV distributes the Hallmark Channel on the TOTALCHOICE ® tier of its DBS distribution system in the United States and pay uslicense fees for such distribution. At the same time we entered into a StockPurchase Agreement with DIRECTV Enterprises whereby we issued 5,360,202 sharesof our Class A common stock, which shares were subsequently transferred toits parent company, Hughes Electronics Corporation. As of December 31,2004, DIRECTV accounted for 11.9 million of our subscribers.

***HallmarkAdvertising***

Hallmark Cards purchased$1.4 million and $1.8 million of advertising on the Hallmark Channel in theUnited States at negotiated market rates, respectively, during the years ended December 31,2003 and 2004.

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***Senior Unsecured Note to HC Crown***

On August 5, 2003,Crown Media Holdings repurchased all of the trust preferred securities of CrownMedia Trust and related contingent appreciation certificates issued by theCompany. Funds for this repurchase were obtained from the proceeds of a $400.0million 10.25% senior unsecured note issued to HC Crown. After the payment ofcertain expenses for the issuance including a fee of $3.0 million to HC Crown,the Company used the balance of the proceeds of the senior unsecured note,amounting to approximately $67.3 million, to pay principal, interest, andprepayment penalties on its bank revolving credit loans. See Note 12 of ourNotes to Consolidated Financial Statements in this Report for information onthis senior unsecured note.

***Hallmark Demand Notes and Line of Credit***

On December 14,2001, the Company executed a promissory note in the amount of $75.0 millionpayable to HC Crown in replacement of the promissory note with HC Crown dated September 28,2001. This note may be borrowed against or prepaid without penalty and has afinal maturity date no later than December 21, 2007. The line of credit issubordinate to the bank credit facility and its availability may be reduceddollar for dollar in an amount equal to additional capital raised by CrownMedia Holdings. The rate of interest under the line of credit is equal to LIBORplus three percent, payable quarterly. HC Crown’s obligation to make loansunder this line of credit is supported by an irrevocable letter of credit fromCredit Suisse First Boston. As of both December 31, 2003 and 2004, theCompany had borrowed $75.0 million, respectively, under this note. Under thisnote, the Company is obligated to pay a commitment fee of 1.5% of the initialmaximum amount of the note, which may be paid by issuing common stock valued atthe average closing price of the common stock for the 15 trading days prior tothe date the fee is due. The commitment fee is payable in arrears in four equalinstallments on the last business day of each calendar quarter during 2002. Weissued 192,262 shares as payment for a portion of the commitment fee in theamount of $1.1 million. The line of credit was required by the credit facility.

***Hallmark Agreements Related to Bank Credit Facility***

Hallmark Cards and HallmarkEntertainment entered into certain agreements in order to induce the banksyndicate to enter into the Company’s credit facility. Hallmark Cards, CrownMedia Holdings and the banks are parties to a subordination and supportagreement dated August 31, 2001. Under the subordination and supportagreement, the obligations of Crown Media Holdings to pay (a) anyborrowings under the HC Crown line of credit, and (b) approximately $100.0million in accounts payable to Hallmark Entertainment Distribution as providedby the purchase agreement for the film assets, are subordinated in right ofpayment to Crown Media Holdings’ obligations under its credit facility. In thesubordination and support agreement, Hallmark Cards also agrees to cause HCCrown to advance up to $75.0 million under the HC Crown line of credit to CrownMedia Holdings (less the amount of any reduction on the HC Crown line ofcredit because of the application of net cash proceeds from issuing debt orequity as permitted by the bank credit agreement), to the extent necessary toenable Crown Media Holdings to meet its cash needs including the repayment ofthe bank loans, provided that Crown Media Holdings has borrowed the full amountthen available under the credit facility. Further, Hallmark Cards agreed thatthe HC Crown line of credit will not be declared due and payable if anyobligations to the banks remain outstanding.

Under an amended and restated limited guaranteeagreement and acknowledgement dated August 31, 2001, as amended andrestated as of December 14, 2001, with the banks, Hallmark Cardsguarantees up to a defined maximum amount Crown Media Holdings’ performance ofobligations under the bank credit agreement when due. The maximum amount is$75.0 million, less the aggregate principal amount outstanding under the HCCrown line of credit and less net cash proceeds from issuing debt or equityused to make payments on the HC Crown line of credit as permitted by the bankcredit agreement.

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As of both December 31, 2003 and 2004, borrowingsunder the HC Crown line of credit were $75.0 million. Accrued interest on thenote was $2.7 million and $6.1 million, respectively.

Hallmark Cards, certain of its subsidiaries and otherparties thereto entered into a Subordination and Support Agreement (the “SubordinationAgreement”), pursuant to which Hallmark Cards agreed to loan Crown MediaHoldings up to $75.0 million under a subordinated revolving credit line, whichis the December 14, 2001, note mentioned above payable to HC Crown. Theline of credit has a final maturity date no later than December 21, 2007. Theline of credit is subordinate to both the bank facility and the units, and itsavailability may be reduced dollar for dollar in an amount equal to additionalcapital raised by Crown Media Holdings. In addition, until the termination ofthe Subordination Agreement, Hallmark Cards will agree to loan Crown MediaHoldings an amount necessary to pay, when due, the $100.0 million inobligations owed to third parties by Hallmark Entertainment Distribution whichwere assumed by Crown Media Holdings in connection with its acquisition of thefilm assets. Lastly, Hallmark Entertainment Distribution agreed to subordinate approximately$60.2 million in obligations owed by subsidiaries of Crown Media Holdings to itpursuant to certain program license agreements.

As of March 1, 2005, we entered into Amendment No. 8to the agreement for our bank credit facility. This amendment extended thematurity date of the facility to May 31, 2006. Also Amendment No. 8made a number of other significant changes to the bank credit facilityincluding deletion of certain financial covenants, changes to other financialcovenants, waivers of many covenants concerning 2004, and a reduction in theinterest rates charged for loans under the credit facility. See discussionunder “Bank Credit Facility and HC Crown Loans” of Item 7 above in this Reportfor information on the Company’s paying to Hallmark Cards the amounts resultingfrom the reduced interest rate and reduced commitment fee provided in AmendmentNo. 8. Upon consummation of the sale of the Company’s internationalbusiness as contemplated by February 2005 agreements, the bank creditfacility was reduced from a total of $320.0 million to a revolving credit of$220.0 million. However, the Company may not borrow in excess of $180.0 millionunder that revolving line of credit unless Hallmark Cards concurs in theborrowing request.

Pursuant to Amendment No. 8, Hallmark Cards hasprovided an irrevocable letter of credit issued to JPMorgan Chase Bank byCitibank, N.A. in the amount of $320.0 million, as credit support for ourobligations under our credit facility. The support letter of credit was reducedto $220.0 million upon the consummation of the sale of our internationalbusiness and the reduction of the aggregate outstanding credit exposure of ourlenders to $220.0 million. Drawdowns under the letter of credit may be made foramounts due and payable under the credit facility and upon the occurrence ofcertain other events. Any proceeds received by JPMorgan Chase Bank from drawingunder this support letter of credit will not be applied to repay ourobligations, but will be used to purchase on the part of Hallmark Cards fromthe bank lenders subordinated participations in our obligations under our bankcredit facility, junior in payment to the bank lenders under the bank creditfacility. The support letter of credit automatically expires on May 31, 2006.

The credit facility, as amended, contains a number ofaffirmative and negative covenants, including limitations on “RestrictedPayments.”  Restricted Payments includeany distribution on our equity; any redemption or other acquisition of ourequity; and any payment to Hallmark Cards, Hallmark Entertainment or any oftheir affiliates. The credit agreement, however, permits Crown Media Holdingsto pay Restricted Payments which are, among other things:  (1) Payments to Hallmark Cards or anaffiliate (i) in payment of a valid outstanding obligation (ii) or inan aggregate amount equal to the financial benefits received by us as a resultof the reduction of interest charges under the bank credit facility inAmendment No. 8 plus any fees and costs incurred by Hallmark Cards inconnection with the support letter of credit provided in accordance withAmendment No. 8; and (2) payments to Hallmark EntertainmentDistribution pursuant to license agreements.

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In connection withAmendment No. 8, by a letter dated February 28, 2005, Hallmark Cardsconfirmed to us that neither Hallmark Cards nor any of its wholly-ownedsubsidiaries would demand payment from us on any of the following obligationsuntil May 31, 2006, at the earliest:

·       $75.0million note payable to HC Crown plus accrued interest thereon from time totime

·       $400.0million note payable to HC Crown plus accrued interest thereon from time totime

·       $100.0million payables to Hallmark Entertainment Holdings incurred in conjunctionwith the film library transaction in 2001

·       $156.0million of license fees payable to Hallmark Entertainment Distribution Company

Hallmarkalso stated its intent to re-evaluate the loan repayment schedule if all orsubstantially all of the assets of the Company were sold to a third party priorto May 31, 2006. Hallmark further stated that it would endeavor to makeany new intercompany debt with us that arises between now and May, 2006non-callable until May 31, 2006.

***Real Property Lease***

Inconnection with our lease of office facilities at 6430 S. Fiddlers GreenCircle, Greenwood Village, Colorado, which lease was assigned to the buyer ofthe international business effective April 26, 2005, HallmarkEntertainment signed a guaranty of lease obligations on June 1, 1998. Underthe guaranty, Hallmark Entertainment agreed to guarantee full and timelyperformance of all of our obligations during our lease term. The lease was for58,978 square feet and had a term of 10 years that ends in August 2008. Thelease provided for a rate of $22.64 per square foot during the first year ofthe lease and would have increased annually to $27.08 per square foot in 2008.At the time of the sale of its international business, the Company subleased25,247 square feet.

***Stockholders Agreement and Registration Rights***

*General*

We are a party to a stockholders agreement, amendedand restated as of August 30, 2001, as amended with VISN, HughesElectronics Corporation (“Hughes”), and Hallmark Entertainment Investments. Thestockholders agreement provides that our Board will consist of not less than 15directors, with 12 nominated by Hallmark Entertainment Investments, onenominated by VISN and two independent directors, who must not be officers,directors or employees of any of the parties or their affiliates, and who will benominated by the Board. The rights of the parties to nominate a director willterminate on the later of (1) such party owning less than 5% of our commonstock then outstanding or (2) such party ceasing to own at least 75% ofthe number of shares of our common stock held by them immediately after ourinitial public offering in May 2000. Hughes is entitled to appoint anobserver to the board of directors of Crown Media Holdings until Hughes and itsaffiliates cease to own beneficially in the aggregate at least 75% of theshares of our common stock acquired by DirecTV, the predecessor holder of theshares now held by Hughes, in the August 2001 transaction.

The stockholders agreement also provides that we willnot enter into any material transaction, except for specified transactions,with any of the other parties or their affiliates involving an aggregate valueof (1) $35.0 million or less, unless such transaction is approved by amajority of our independent directors and (2) more than $35.0 million,unless such transaction is approved by a majority of the members of our Boardnot nominated by the interested party.

In addition, thestockholders agreement provides that, in the event that Hallmark EntertainmentInvestments proposes to transfer 20% or more of our outstanding common stock toan unaffiliated third 

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party,each other party to the stockholders agreement will have the right toparticipate on the same terms in that transaction with respect to aproportionate number of such other party’s shares, except for Hughes.

*HallmarkEntertainment Investments Co. Stockholders Agreement*

On March 11,2003, Hallmark Entertainment Holdings contributed 100% of the Crown MediaHoldings shares owned by it to Hallmark Entertainment Investments. Two of CrownMedia Holdings investors, Liberty Crown, Inc. (“Liberty”), a subsidiary ofLiberty Media, and J.P. Morgan, also contributed 100% of their Crown MediaHoldings Shares to Hallmark Entertainment Investments and VISN contributed 10%of its Crown Media Holdings shares to Hallmark Entertainment Investments, allin return for Hallmark Entertainment Investments shares. Prior to the HallmarkEntertainment Investments transaction, J.P. Morgan and Liberty were parties tothe Crown Media Holdings stockholders agreement described above. As a result ofthe Hallmark Entertainment Investments transaction, J.P. Morgan and Liberty nolonger have any rights pursuant to such stockholders agreement. However,Hallmark Entertainment Investments has advised Crown Media Holdings that J.P.Morgan and Liberty will retain similar rights with respect to Crown MediaHoldings pursuant to the Hallmark Entertainment Investments stockholdersagreement dated March 11, 2003, among Hallmark Entertainment Investments,Hallmark Entertainment Holdings, Liberty, VISN, and J.P. Morgan, including thefollowing:

·       Libertyand J.P. Morgan each have the right to designate one person as one of thedirectors to the Crown Media Holdings Board that Hallmark EntertainmentInvestments is entitled to nominate under the Crown Media Holdings stockholdersagreement described above;

·       HallmarkEntertainment Investments will not permit Crown Media Holdings or itssubsidiaries to enter into any material transaction, except for specifiedtransactions, with any affiliates involving an aggregate value of (a) $35.0million or less, unless such transaction is approved by a majority of CrownMedia Holdings’ independent directors and (b) more than $35.0 million,unless such transaction is approved by a majority of the members of Crown MediaHoldings’ Board not nominated by any affiliate of Hallmark EntertainmentHoldings (provided that directors designated by Liberty and J.P. Morgan willnot be treated as being nominated by any affiliate of Hallmark EntertainmentHoldings);

·       registrationrights as provided for minority stockholders in the Crown Media Holdingsstockholders agreement;

·       HallmarkEntertainment Investments may not take certain actions as specified in theHallmark Entertainment Investments stockholder agreement without the consent ofJ.P. Morgan and Liberty; and

·       ifHallmark Entertainment Holdings proposes to transfer 20% or more of HallmarkEntertainment Investments common stock to an unaffiliated third party, each ofJ.P. Morgan, Liberty and VISN will have the right to participate on the sameterms in the transaction on a proportional basis.

*Registration Rights*

Under the stockholders agreement, HallmarkEntertainment Investments has the right to require us on four occasions, andthe other parties, as a group, have the right to require us on two occasions,to register for sale their shares of our common stock, so long as the number ofshares they require us to register in each case is at least 7% of our commonstock then outstanding. The other parties also have an unlimited number of “piggyback”registration rights. This means that any time we register our common stock forsale, they will have the right to include their common stock in that offeringand sale.

We are obligated to payall expenses that result from the registration of the other parties’ commonstock under the stockholders agreement, other than registration and filingfees, attorneys’ fees, underwriter 

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fees orexpenses and underwriting discounts and commissions. We have also indemnifiedthe other parties against any liabilities that may result from their sale ofcommon stock, including Securities Act liabilities.

*RightsRelating To Crown Media United States Amended and Restated Company Agreement*

Under thestockholders agreement, so long as we or any of our affiliates are entitled tohave a representative on the Crown Media United States governance committee,and VISN and its affiliates either are entitled to nominate to, or designate amember of, our Board, or beneficially own any preferred interests in CrownMedia United States, neither we nor any of our affiliates will, without theconsent of the member of our Board nominated by VISN or a representative ofNICC, vote in favor of:

·       anyspecified change in, or action described in, the Crown Media United Statesamended and restated company agreement that relates to VISN’s preferredinterest in Crown Media United States or that relates to VISN’s rights toprogramming on the Hallmark Channel in the U.S. or its programming budget;

·       anyrepayment or redemption of specified equity interests in Crown Media UnitedStates;

·       anytransfer of all of Crown Media United States’ assets or any businesscombination involving Crown Media United States where Crown Media United Statesis not the surviving entity, unless the transferee assumes specifiedobligations under the Crown Media United States amended and restated companyagreement until the later of the fifth anniversary of these offerings or thesecond anniversary of the transfer or business combination;

·       thedissolution of Crown Media United States, except in connection with a completeliquidation;

·       anytransfer of all of Crown Media United States’ assets to, or any businesscombination involving Crown Media United States’ with, us or any of ouraffiliates, or any other material transaction with us or any of our affiliates,unless we comply with specified restrictions relating to any financial benefitwe receive from the transaction that is more than what we would have receivedhad the transaction been on an arm’s-length basis or on commercially reasonableterms;

·       anytransfer of all of Crown Media United States’ assets or any businesscombination involving Crown Media United States where Crown Media United Statesis not the surviving entity, prior to the second anniversary of the initialpublic offering; or

·       anyamendment to the Crown Media United States’ amended and restated companyagreement that would result in none of us or our affiliates having the right toconsent to take any of the actions listed in the above bullet points.

We haveagreed under the stockholders agreement not to transfer any of our interests inCrown Media United States prior to the second anniversary of the initial publicoffering without the consent of VISN or NICC. In addition, we have agreed notto transfer any of our interests in Crown Media United States after the secondanniversary of the initial public offering unless the transfer is conditionedon the requirement that the transferee assume our obligations described above. Underthe terms of the stockholders agreement, the transferee’s obligations willgenerally expire on the later of (1) the fifth anniversary of the initialpublic offering, (2) the second anniversary of the transfer or (3) therepayment of VISN’s preferred interest in Crown Media United States, exceptthat the obligations of the transferee will expire upon dissolution of CrownMedia United States.

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***Intercompany Services Agreement***

We signed a newintercompany services agreement, effective January 1, 2003, with HallmarkCards under which Hallmark Cards has agreed for a term of three years, subjectto cancellation by either party after the first or second year, to provide uswith the following services:

·       taxservices;

·       riskmanagement, health, safety and environmental services and insurance;

·       legalservices;

·       treasuryand cash management services; and

·       realestate consulting services.

Wehave agreed to pay Hallmark Cards $515,000 per year for these services, plusout-of-pocket expenses and third party fees, payable in arrears on the lastbusiness day of each quarter. We made no payments to Hallmark Cards in 2001 or2002 for services, expenses and fees under the previous intercompany servicesagreement. The fee under the previous agreement was $500,000 per year. Thebalance of the payable for services, expenses and fees under the previous andthe current agreement as of December 31, 2003 and 2004, was approximately$3.0 million and $3.5 million, respectively. The intercompany servicesagreement was originally negotiated between officers of Crown MediaInternational and Hallmark Cards. The management of Crown Media Internationalbelieved that the services provided under the agreement had a value at leastequal to the annual fee.

*** Hallmark Trademark LicenseAgreements***

Crown Media United States operates under the benefitof a limited trademark license agreement with Hallmark Licensing, Inc.,amended and restated on March 27, 2001, which has also been extendedthrough September 1, 2005. The agreement permits the use of the Hallmarktrademarks in the United States under terms, which are similar to the termswhich were applicable to the use of the Hallmark trademarks outside the UnitedStates by Crown Media International described below. The amended and restatedCrown Media United States trademark agreement permits Crown Media United Statesto name its network service as the “Hallmark Channel.”  The agreement contains usage standards, whichlimit certain types of programming and programming content aired on Crown MediaUnited States’ network. Crown Media United States also has a similar trademarklicense agreement with Hallmark Licensing, Inc., which is effective January 1,2004, to permit the use of the Hallmark trademark in the name of the “HallmarkMovie Channel”.

Prior to the consummation of the sale of ourinternational business, we were permitted to use the “Hallmark” and “HallmarkEntertainment” trademarks in accordance with the terms of a royalty-free two-yeartrademark license agreement dated as of December 1, 2000, between HallmarkCards and Crown Media International. This agreement was extended through September 1,2005. Under that agreement, we may use the Hallmark and Hallmark Entertainmenttrademarks only for so long as Hallmark Cards and its wholly owned subsidiariescollectively own at least 51% of the voting interest and at least 35% of theequity interest of Crown Media Holdings, and designate a majority of our Boardand so long as there is no event of default under the agreement.

Crown Media International had the non-exclusive rightto use the Hallmark and Hallmark Entertainment trademarks to promote, market,advertise, distribute and sell television motion pictures and miniseriesproduced by or at the direction of Hallmark Entertainment Productions, LLC orits subsidiaries. Crown Media International also had the non-exclusive right touse the Hallmark and Hallmark Entertainment trademarks to promote, market,advertise, distribute and sell its network and channel so long as thesetelevision motion pictures and miniseries along with other television motionpictures and 

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miniseries acquired underour program agreement with Hallmark Entertainment Distribution represent atleast 50% of the monthly programming of that network or channel or 20% of themonthly programming during the first six months that we launch that network orchannel in a territory.

Under the agreement, if Hallmark Cards notified us inwriting that it has determined that we have failed to comply with the usage standardsset forth in the agreement or have otherwise breached our obligations under theagreement, we would have been required to stop any non-complying activitywithin 10 days of that notice or we would have been in default of the agreement.We would also have been in default if Hallmark Cards delivered such a writtennotice to us with respect to its standards three or more times in any 12-monthperiod. In addition, there would have been a default under the agreement if wefailed to cure any breach of the program agreement with Hallmark EntertainmentDistribution, if we failed to make any payments due under loan agreementswithin five days of the due date, or if we received an opinion from ourauditors that shows that we no longer are a going concern.

The license agreement could have been terminatedimmediately and without notice if we transferred in any way our rights underthe license agreement, if we had an event of default under the agreement or inevents of bankruptcy, insolvency or similar proceedings. With respect to aparticular country in which we use the Hallmark Entertainment trademark, thelicense agreement would have terminated if the television motion pictures andminiseries produced by Hallmark Entertainment or its subsidiaries and othermotion pictures and miniseries acquired under the program agreement withHallmark Entertainment comprised less than 50% of the programming of thenetwork or channel based on actual hours of broadcast in the country.

There was a similar trademark license agreementbetween Hallmark Cards and Crown Entertainment Limited that permitted the useof the Hallmark and Hallmark Entertainment trademarks in the United Kingdomthrough September 1, 2005.

Uponconsummation of the proposed sale of the international business, the foregoingtrademark licenses agreement between Hallmark Cards and Crown MediaInternational and Crown Entertainment Limited were terminated and the Companyhas no further obligations under these licenses.

***Tax Sharing Agreement***

On March 11, 2003, Crown Media Holdings became amember of Hallmark Cards consolidated federal tax group and entered into theTax Sharing Agreement with Hallmark Cards. Hallmark Cards will include CrownMedia Holdings in its consolidated federal income tax return. Accordingly, HallmarkCards will benefit from future tax losses, which may be generated by CrownMedia Holdings. Based on the Tax Sharing Agreement, Hallmark Cards will payCrown Media Holdings all of the benefits realized by Hallmark Cards as a resultof consolidation, 75% in cash on a quarterly basis and the balance when CrownMedia Holdings becomes a taxpayer. Under the Tax Sharing Agreement, at HallmarkCards’ option, this 25% balance may also be applied as an offset against anyamounts owed by Crown Media Holdings to any member of the Hallmark Cardsconsolidation group under any loan, line of credit or other payable, subject toany limitations under any loan indentures or contracts restricting suchoffsets.

An independent member of the Board of Directors ofCrown Media Holdings, with advice of independent counsel approved Crown MediaHoldings’ entering into the Tax Sharing Agreement.

HallmarkEntertainment Holdings contributed 100% of the Crown Media Holdings sharesowned by it to Hallmark Entertainment Investments. Two of Crown Media Holdings’investors, Liberty and J.P. Morgan, also contributed 100% of their CrownMedia Holdings shares to Hallmark Entertainment Investments and VISNcontributed 10% of its Crown Media Holdings shares to Hallmark EntertainmentInvestments, all in return for Hallmark Entertainment Investments shares. CrownMedia Holdings understands that Hallmark Entertainment Investments intends tohold the Crown Media Holdings Shares 

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and to evaluate media investment opportunities inwhich Crown Media Holdings does not have an interest. Hallmark EntertainmentHoldings, as the more than 80% owner of Hallmark Entertainment Investments,will have voting power over all of the Crown Media Holdings shares. The newstructure does not change the control of Crown Media Holdings.

***Corporate Opportunities Policy Established by HallmarkEntertainment***

The following is a description of a general policyadopted by the Hallmark Entertainment board of directors in connection with thestockholders agreement and our initial public offering. The policy providesthat we will be the primary (but not exclusive) vehicle for the pursuit ofcorporate opportunities relating to the ownership and operation of paytelevision channels dedicated to family programming (“Pay Television Opportunities”),which is provided or otherwise made available to Hallmark Entertainment and itssubsidiaries. However, Pay Television Opportunities do not includeopportunities: (1) developed by or made available to any public companythat is a subsidiary of Hallmark Entertainment or any of Hallmark Entertainment’ssubsidiaries (other than us and our subsidiaries), (2) relating to theproduction or distribution of programming that is developed by, or provided ormade available to, a subsidiary of Hallmark Entertainment that does not own oroperate pay television channels dedicated to family programming and whoseprimary business is the production or distribution of programming, (3) arisingout of, or relating, to Pay Television Opportunities that have been provided ormade available to us but which we have determined not to pursue or have failedto pursue within the applicable time period reasonably specified by HallmarkEntertainment, or (4) that Hallmark Entertainment or any of itssubsidiaries is legally or contractually obligated to provide or make availableto a person other than us.

Under the policy, we are not obligated to pursue anyPay Television Opportunity presented to us by Hallmark Entertainment. If wedetermine not to pursue or fail to pursue an opportunity, in each case withinsuch time as Hallmark Entertainment may reasonably specify (taking into accountthe type and nature of the Pay Television Opportunity provided or madeavailable) in its communication to us relating to such Pay Television Opportunity,then Hallmark Entertainment and its subsidiaries may pursue such Pay TelevisionOpportunity.

The policy became effective upon completion of theinitial public offering. The policy automatically terminates upon the first tooccur of: (1) Hallmark Entertainment and its subsidiaries ceasing tobeneficially own, in the aggregate, at least a majority in voting power of ouroutstanding voting securities entitled to vote generally upon all matterssubmitted to common stockholders and (2) the third anniversary of thecompletion of the initial public offering.

The policy provides that the Hallmark Entertainmentboard of directors is required to act in accordance with its fiduciary dutiesowed to Hallmark Entertainment and Hallmark Entertainment’s fiduciary duties,if any, to its subsidiaries in making all determinations in connection with thepolicy. With respect to any Pay Television Opportunity that may be subject tothe policy and any obligation (fiduciary or otherwise) to one or more othersubsidiaries, the Hallmark Entertainment board of directors will havediscretion to determine, without reference to the policy, to which of us orsuch other subsidiary of Hallmark Entertainment such Pay Television Opportunitywill be provided or made available. Notwithstanding anything set forth in thepolicy, Hallmark Entertainment will have no obligation to exercise any rightsit may have as a stockholder, partner or member of any entity that is not awholly owned subsidiary or to exercise any rights available to it underagreements with other stockholders, partners or members, in order to implementdeterminations under the policy. All determinations of the HallmarkEntertainment board of directors with respect to the Hallmark Entertainmentpolicy and the interpretation of the Hallmark Entertainment policy areconclusive and binding.

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The policy furtherprovides that Hallmark Entertainment’s board of directors from time to time mayamend, modify or rescind the policy or adopt additional or other policies ormake exceptions with respect to the application of the policy in connectionwith particular facts and circumstances, all as the Hallmark Entertainmentboard of directors may determine, consistent with its fiduciary duties and inaccordance with the stockholders agreement.

***Certain Business Relationships and Conflicts ofInterest***

Hallmark Entertainment Investments controls a majorityof our outstanding shares of Class A Common Stock and all of ouroutstanding shares of Class B common stock, representing approximately95.9% of the voting power on all matters submitted to our stockholders.Hallmark Entertainment Investments’ control could discourage others frominitiating potential merger, takeover or other change of control transactionsthat may otherwise be beneficial to our businesses or holders of Class Acommon stock. As a result, the market price of our Class A common stock orour business could suffer.

HallmarkEntertainment Investments’ control relationship with us also could give rise toconflicts of interest, including:

·       conflictsbetween Hallmark Entertainment Investments, as our controlling stockholder, andour other stockholders, whose interests may differ with respect to, among otherthings, our strategic direction or significant corporate transactions;

·       conflictsrelated to corporate opportunities that could be pursued by us, on the onehand, or by Hallmark Entertainment Investments or its other affiliates, on theother hand; or

·       conflictsrelated to existing or new contractual relationships between us, on the onehand, and Hallmark Entertainment Investments and its affiliates, on the otherhand.

In addition, our directors, who are also officers ordirectors of Hallmark Entertainment Investments or its affiliates, will havefiduciary duties, including duties of loyalty, to both companies and may haveconflicts of interest with respect to matters potentially involving oraffecting us. For example, Robert A. Halmi, Jr. is our Chairman of theBoard and also a Director and Chairman of Hallmark Entertainment Investments,which could create potential conflicts of interest. As a result, it is possiblethat we may receive less favorable contractual terms from HallmarkEntertainment Investments or its affiliates than if none of our officers ordirectors had any affiliation with Hallmark Entertainment Investments or itsaffiliates.

Our certificate of incorporation provides thatHallmark Cards will have no duty to refrain from engaging in activities orlines of business that are the same as or similar to the activities or lines ofbusiness in which we engage, and neither Hallmark Cards nor any officer ordirector of Hallmark Cards, except as provided below, will be liable to us orto our stockholders for breach of any fiduciary duty by reason of any suchactivities of Hallmark Cards. In the event that Hallmark Cards acquiresknowledge of a potential transaction or matter which may be a corporateopportunity for both Hallmark Cards and us, Hallmark Cards will have no duty tocommunicate or offer that corporate opportunity to us and will not be liable tous or our stockholders for breach of any fiduciary duty as a stockholder byreason of the fact that Hallmark Cards pursues or acquires that corporateopportunity for itself, directs that corporate opportunity to another person,or does not communicate information regarding that corporate opportunity to us.

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In the event thatone of our directors or officers who is also a director or officer of HallmarkCards acquires knowledge of a potential transaction or matter which may be acorporate opportunity for both us and Hallmark Cards, that director or officerwill have fully satisfied his or her fiduciary duty to us and our stockholderswith respect to that corporate opportunity if that director or officer acts ina manner consistent with the following policy:

·       acorporate opportunity offered to any person who is one of our officers, and whois also a director but not an officer of Hallmark Cards, will belong to us;

·       acorporate opportunity offered to any person who is one of our directors but notone of our officers, and who is also a director or officer of Hallmark Cards,will belong to us if that opportunity is expressly offered to that person inhis or her capacity as one of our directors, and otherwise will belong toHallmark Cards; and

·       acorporate opportunity offered to any person who is one of our officers and anofficer of Hallmark Cards will belong to us if that opportunity is expresslyoffered to that person in his or her capacity as one of our officers, andotherwise will belong to Hallmark Cards.

For purposes of thepolicy:

·       adirector who is our Chairman of the Board or Chairman of a committee of theBoard will not be deemed to be one of our officers by reason of holding thatposition, unless that person is one of our full-time employees;

·       referencesto us shall mean us and all corporations, partnerships, joint ventures,associations and other entities in which we beneficially own, directly orindirectly, 50% or more of the outstanding voting stock, voting power,partnership interests or similar voting interests; and

·       theterm “Hallmark Cards” means Hallmark Cards and all corporations, partnerships,joint ventures, associations and other entities, other than us, as we aredefined in this paragraph, in which Hallmark Cards beneficially owns, directlyor indirectly, 50% or more of the outstanding voting stock, voting power,partnership interests or similar voting interests.

The foregoing provisions of our certificate ofincorporation will expire on the date that Hallmark Cards ceases to ownbeneficially common stock representing at least 20% of the total voting powerof all of our classes of outstanding capital stock and no person who is one ofour directors or officers is also a director or officer of Hallmark Cards orany of its subsidiaries.

Other than as disclosedabove and under “—Stockholders Agreement and Registration Rights” and “—CorporateOpportunities Policy Established by Hallmark Entertainment,” there are nospecific policies in place with respect to any conflicts that may arise. Weexpect conflicts to be resolved on a case-by-case basis, and in a mannerconsistent with applicable law.

***Transactions With JP Morgan Chase Bank***

We have a credit agreement with a syndicate of bankslead by JP Morgan Chase Bank providing a secured line of credit and term loanof up to a total of $320.0 million, reduced to $220.0 million upon completionof the proposed sale of our international business, due May 31, 2006. Forinformation regarding the terms of the bank credit agreement, please see Item 7Management’s Discussion and Analysis of Financial Condition and Results ofOperation under “Bank Credit Facility and HC Crown Loans.” As part of thiscredit facility, JP Morgan Chase Bank has committed to lend to us up to $45.0million, now reduced to $31.0 million. At December 31, 2003 and 2004, JPMorgan Chase Bank had outstanding loans to us under the line of credit of $42.0million and $43.4 million, respectively. Each loan under the credit facilitybears interest at a Eurodollar rate or an alternate base rate as we may requestat the time of borrowing in accordance with the credit agreement. We arerequired to pay a commitment fee 

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of 0.2% per annum of thecommitted, but not outstanding, amounts under the revolving credit facility,payable in quarterly installments. This commitment fee was 0.5% per annum priorto an amendment effective March 2005. We paid a total of $13.3 million ininterest and $925,000 in fees to JP Morgan Chase Bank under the credit facilityfor the year ended December 31, 2003. We paid a total of $13.9 million ininterest and $125,000 in fees to JP Morgan Chase Bank under the credit facilityfor the year ended December 31, 2004.

JP Morgan Chase Bank served as an indenture trusteefor debentures issued by us to Crown Media Trust in connection with theissuance of preferred securities by Crown Media Trust in a private placement. JPMorgan Chase Bank served as the property trustee under the trust creating theCrown Media Trust, which is one of several trustees of the Crown Media Trust,and also as the preferred guarantee trustee relating to our guarantee of thepreferred securities issued by Crown Media Trust. Chase Manhattan Bank USA,National Association, an affiliate of JP Morgan Chase Bank, served as theDelaware trustee of Crown Media Trust, which is a trustee with its principalplace of business in the State of Delaware. As a result of the repurchase ofthe Crown Media Trust preferred securities by Crown Media Holdings, this trustwas dissolved.

Arnold L. Chavkin,one of our directors, and J.P. Morgan, a beneficial owner of more than 5% ofour outstanding Class A common stock, are related parties to JP MorganChase & Co. and its wholly-owned subsidiary, JP Morgan Chase Bank. JPMorgan Chase & Co. is a publicly-traded financial holding company. J.P.Morgan is an indirect non-bank subsidiary of JP Morgan Chase & Co. JPMorgan Chase & Co. owns 100% of JPMP Capital Corp., the sole generalpartner of JPMP Market Fund Manager L.P., which in turn is the sole generalpartner of J.P. Morgan. JP Morgan Chase & Co. also owns 100% ofChatham Ventures, Inc., which is the sole limited partner of J.P. Morgan. JPMPMaster Fund Manager, L.P. is the sole general partner of J.P. Morgan. JPMPCapital Corp. is the sole general partner of JPMP Master Fund Manager,L.P., and limited partners of JPMP Master Fund Manager, L.P. are comprised ofinvestment professionals, including Mr. Chavkin, and others. JPMP CapitalCorp. is a 100% non-bank subsidiary of JP Morgan Chase & Co. JP MorganPartners, LLC serves as the management company for the private equityorganization of JP Morgan Chase & Co., known as JP Morgan Partners. JPMorgan Partners, LLC is an indirect 100% subsidiary of JP Morgan Chase &Co. and is a direct wholly-owned subsidiary of JPMP Capital Corp. JP MorganPartners, LLC is the employer of JP Morgan Partners’ staff in New York City.

Mr. Chavkin is the ChiefInvestment Officer of JP Morgan Partners, LLC, an Executive Vice President ofJPMP Capital Corp. and one of the limited partners of JPMP Master Fund Manager,L.P. He is not an officer of JP Morgan Chase & Co. or JP Morgan ChaseBank. He also serves as an Executive Vice President or executive partner ofcertain domestic entities and global funds of various JP Morgan Partnersrelated entities.

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**ITEM 14**.         Principal Accountant Fees and Services

*Audit Fees*

The following tablepresents aggregate fees billed for professional services rendered by KPMG LLP,our principal accountant in fiscal years 2003 and 2004:
| ** **                | ** ** | **Fiscal Year** | ** ** |
|---------------------------|------------|----------------------|------------|
| **Type of Fee** | ** ** | ** **           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Audit Fees(1)             |       | $                    | 1,622,516  |   | $ | 509,488 |   |
| Audit-Related Fees(2)     |       | 105,985              |       | 9,500 |   |
| Tax Fees(3)               |       | 52,136               |       | 12,860 |   |
| All Other Fees(4)         |       | 0                    |       | 11,500 |   |
| Total Fees                |       | $                    | 1,780,637  |   | $ | 543,348 |   |
|                           |            |                      |            |  |  |  |  |  |  |

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(1)          *Audit Fees* are for the audit of our annualfinancial statements and internal control over financial reporting included inour Form 10-K, review of financial statements included in our Forms 10-Q,and statutory audits required for certain of our foreign subsidiaries.

(2)          *Audit Related Fees.*   In 2004, these fees are for services rendered inconnection with the Company’s sale of its international operations. In 2003,these fees are for services rendered in connection with the review of theTender Offer Statement on Schedule TO and its amendments filed in exchange ofRestricted Stock Units for stock options.

(3)          *Tax Fees* are for services rendered inconnection with tax advice, the filing of foreign income tax returns and thefiling of other forms.

(4)          *All OtherFees.*   In 2003,these fees are for all other services rendered in relation to benefit plan andexecutive  compensation issues.

**Independence**

The Audit Committee has considered whether, andconcluded that, the additional services provided by KPMG were compatible withmaintaining the independence of KPMG.

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**PART IV**

**ITEM 15.**         Exhibitsand Financial Statement Schedules

(A)  List of Documents Filed as Part of This Report

(1)   ConsolidatedFinancial Statements
| Reports of KPMG LLP, Independent  Registered Public Accounting Firm                                                       |
|---------------------------------------------------------------------------------------------------------------------------|
| Consolidated Balance Sheets as of  December 31, 2003 and 2004                                                        |
| Consolidated  Statements of Operations and Comprehensive Loss for the Years Ended December 31,  2002, 2003, and 2004 |
| Consolidated  Statements of Stockholders’ Equity for the Years Ended December 31,  2002, 2003, and 2004         |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2002, 2003,  and 2004                        |
| Notes to Consolidated Financial Statements                                                                                |

 

(2)   Exhibits
| Exhibit Number | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | **Exhibit Title** |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|
| 2.1                 |       | Purchase and Sale Agreement,  dated as of February 23, 2005, by and among CM Intermediary, LLC,  Bagbridge Limited and, solely with respect to Section 10.14 of the  Agreement, Crown Media Holdings, Inc. (previously filed as  Exhibit 2.1 to our Current Report on Form 8-K, filed on  February 23, 2005 and incorporated herein by reference).                |
| 2.2                 |       | Asset Purchase and Sale  Agreement, dated as of February 23, 2005, by and among Crown Media  Distribution, LLC, Bagbridge Limited and, solely with respect to  Section 10.14 of the Agreement, Crown Media Holdings, Inc.  (previously filed as Exhibit 2.2 to our Current Report on Form 8-K,  filed on February 23, 2005 and incorporated herein by reference). |
| 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 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).                                                                                                                                                                       |
| 4.1                 |       | Form of Specimen Certificate  for our Class A Common Stock (previously filed as Exhibit 4.1 to  our Registration Statement on Form S-1/A (Amendment No. 1),  Commission File No. 333-95573, and incorporated herein by  reference).                                                                                                                               |
| 10.1                |       | Second Amended and Restated  Stockholders Agreement, dated August 31, 2001 (previously filed as  Exhibit 10.6 to our Quarterly Report on Form 10-Q filed on  November 13, 2001 and incorporated herein by reference).                                                                                                                                                       |
| 10.2                |       | Acknowledgment and Agreement  to the Second Amended and Restated Stockholders Agreement, dated as of  December 31, 2001, by Hallmark Entertainment Holdings, Inc.  (previously filed as Exhibit 10.2 to our Annual Report on Form 10-K  filed on March 29, 2002 and incorporated herein by reference).                                                            |

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| 10.3  |   | Acknowledgment and Agreement  to the Second Amended and Restated Stockholders Agreement, dated as of  March 11, 2003, by Hallmark Entertainment Investments Co. (previously  filed as Exhibit 10.3 to our Annual Report on Form 10-K filed on  March 28, 2003 and incorporated herein by reference).                                                                                                                                                                   |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.4  |   | Acknowledgement to the Second  Amended and Restated Stockholders Agreement, dated March 11, 2003, by JP  Morgan Partners (BHCA), L.P. (previously filed as Exhibit 10.4 to our  Annual Report on Form 10-K filed on March 28, 2003 and incorporated  herein by reference).                                                                                                                                                                                                  |
| 10.5  |   | Acknowledgement to the Second  Amended and Restated Stockholders Agreement, dated March 11, 2003, by  Liberty Crown, Inc. and Liberty Media Corporation. (previously filed as  Exhibit 10.5 to our Annual Report on Form 10-K filed on March 28, 2003  and incorporated herein by reference).                                                                                                                                                                     |
| 10.6  |   | Consent and Waiver to Second  Amendment and Restated Stockholders Agreement, dated March 11, 2003, by  DirecTV Enterprises, Inc. (previously filed as Exhibit 10.6 to our  Annual Report on Form 10-K filed on March 28, 2003 and incorporated  herein by reference).                                                                                                                                                                                                  |
| 10.7  |   | Consent and Waiver to Second  Amendment and Restated Stockholders Agreement, dated March 11, 2003, by  VISN Management Corp. (previously filed as Exhibit 10.7 to our Annual  Report on Form 10-K filed on March 28, 2003 and incorporated herein  by reference).                                                                                                                                                                                                           |
| 10.8  |   | Consent and Waiver to Second  Amendment and Restated Stockholders Agreement, dated March 11, 2003, by  Crown Media Holdings, Inc. (previously filed as Exhibit 10.8 to our  Annual Report on Form 10-K filed on March 28, 2003 and incorporated  herein by reference).                                                                                                                                                                                                 |
| 10.9  |   | Acknowledgment and Agreement  to the Second Amended and Restated Stockholders Agreement, dated as of  February 28, 2003, by Hughes Electronics Corporation (previously filed  as Exhibit 10.9 to our Annual Report on Form 10-K filed on  March 28, 2003 and incorporated herein by reference).                                                                                                                                                                        |
| 10.10 |   | Credit, Security, Guaranty and  Pledge Agreement, dated August 31, 2001, by and among Crown Media  Holdings, Inc., its Subsidiaries named therein, the Lenders named  therein and The Chase Manhattan Bank (now known as JPMorgan Chase Bank) as  Administrative Agent and Issuing Bank (previously filed as Exhibit 10.1  to our Current Report on Form 8-K, filed on October 3, 2001 and  incorporated herein by reference).                                         |
| 10.11 |   | Amendment No. 1, dated as  of December 14, 2001, to the Credit, Security, Guaranty and Pledge  Agreement, dated as of August 31, 2001, among Crown Media  Holdings, Inc. as Borrower, the Guarantors named therein, the Lenders  named therein and JPMorgan Chase Bank as Administrative Agent and as Issuing  Bank (previously filed as Exhibit 10.1 to our Current Report on  Form 8-K, filed on December 18, 2001 and incorporated herein by  reference). |
| 10.12 |   | Amendment No. 2, dated as  of December 31, 2001, to the Credit, Security, Guaranty and Pledge  Agreement, dated as of August 31, 2001, among Crown Media  Holdings, Inc. as Borrower, the Guarantors named therein, the Lenders  named therein and JPMorgan Chase Bank as Administrative Agent and as Issuing  Bank (previously filed as Exhibit 10.5 to our Annual Report on  Form 10-K, filed on March 29, 2002 and incorporated herein by  reference).    |

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| 10.13 |   | Amendment No. 3, dated as  of March 29, 2002, to the Credit, Security, Guaranty and Pledge  Agreement, dated as of August 31, 2001, among Crown Media  Holdings, Inc. as Borrower, the Guarantors named therein, the Lenders  named therein and JPMorgan Chase Bank as Administrative Agent and as Issuing  Bank (previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q,  filed on May 15, 2002 and incorporated herein by reference).        |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.14 |   | Amendment No. 4, dated as  of May 15, 2002, to the Credit, Security, Guaranty and Pledge Agreement,  dated as of August 31, 2001, among Crown Media Holdings, Inc. as  Borrower, the Guarantors named therein, the Lenders named therein and  JPMorgan Chase Bank as Administrative Agent and as Issuing Bank (previously  filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q, filed  on May 15, 2002 and incorporated herein by reference).          |
| 10.15 |   | Amendment No. 5, dated as  of February 5, 2003, to the Credit, Security, Guaranty and Pledge  Agreement, dated as of August 31, 2001, among Crown Media  Holdings, Inc. as Borrower, the Guarantors named therein, the Lenders  named therein and JPMorgan Chase Bank as Administrative Agent and as Issuing  Bank (previously filed as Exhibit 10.15 to our Annual Report on  Form 10-K, filed on March 28, 2003 and incorporated herein by  reference).     |
| 10.16 |   | Amendment No. 6, dated as  of August 4, 2003, to the Credit, Security, Guaranty and Pledge  Agreement, dated as of August 31, 2001, among Crown Media  Holdings, Inc. as Borrower, the Guarantors named therein, the Lenders  named therein and JPMorgan Chase Bank as Administrative Agent and as Issuing  Bank (previously filed as Exhibit 10.3 to our Current Report on  Form 8-K, filed on August 6, 2003 and incorporated herein by  reference).        |
| 10.17 |   | Amendment No. 7, dated as  of October 28, 2004, to the Credit, Security, Guaranty and Pledge  Agreement, dated as of August 31, 2001, among Crown Media Holdings, Inc.  as Borrower, the Guarantors named therein, the Lenders named therein and  JPMorgan Chase Bank as Administrative Agent and as Issuing Bank (previously  filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q, filed  on November 15, 2004 and incorporated herein by reference). |
| 10.18 |   | Amendment No. 8, dated as  of March 8, 2005, to the Credit, Security, Guaranty and Pledge  Agreement, dated as of August 31, 2001, among Crown Media  Holdings, Inc. as Borrower, the Guarantors named therein, the Lenders  named therein and JPMorgan Chase Bank as Administrative Agent and as Issuing  Bank (previously filed as Exhibit 10.1 to our Current Report on  Form 8-K, filed on March 11, 2005 and incorporated herein by  reference).         |
| 10.19 |   | Subordination and Support  Agreement dated August 31, 2001, among Crown Media Holdings, Inc.,  Hallmark Cards, Incorporated and The Chase Manhattan Bank (now known as JP  Morgan Chase Bank) as agent for the Lenders and the Issuing Bank referred to  in the Credit Agreement (previously filed as Exhibit 10.3 to our Current  Report on Form 8-K, filed on October 3, 2001, and incorporated  herein by reference).                                                |
| 10.20 |   | Amended and Restated Limited  Guarantee Agreement and Acknowledgement, dated as of August 31, 2001 as  amended and restated as of December 14, 2001, made by Hallmark Cards,  Incorporated in favor of JP Morgan Chase Bank (formerly known as The Chase  Manhattan Bank) as agent on behalf of the Lenders and the Issuing Bank  (previously filed as Exhibit 10.7 to our Annual Report on Form 10-K,  filed on March 29, 2002 and incorporated herein by reference).  |

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| 10.21 |   | Hallmark Inducement Agreement  dated August 31, 2001, between Hallmark Entertainment, Inc. and The  Chase Manhattan Bank (now known as JP Morgan Chase Bank) in its capacity as  agent under the Credit Agreement (previously filed as Exhibit 10.5 to  our Current Report on Form 8-K, filed on October 3, 2001, and  incorporated herein by reference).                                                       |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.22 |   | Securities Purchase Agreement,  dated as of December 17, 2001, by and among Crown Media Holdings, Inc.,  Crown Media Trust and the Investors Named Therein (previously filed as  Exhibit 10.3 to our Current Report on Form 8-K, filed on  December 18, 2001, and incorporated herein by reference).                                                                                                            |
| 10.23 |   | Contingent Appreciate  Certificate Agreement, dated as of December 17, 2001, by and among Crown  Media Holdings, Inc. and the Holders Named Therein (previously filed as  Exhibit 10.4 to our Current Report on Form 8-K, filed on  December 18, 2001, and incorporated herein by reference).                                                                                                                   |
| 10.24 |   | Indenture, dated as of  December 17, 2001, by and between Crown Media Holdings, as Issuer, and  JPMorgan Chase Bank, as Indenture Trustee (previously filed as Exhibit 10.5  to our Current Report on Form 8-K, filed on December 18, 2001, and  incorporated herein by reference).                                                                                                                                  |
| 10.25 |   | Preferred Securities Guarantee  Agreement, dated as of December 17, 2001, by and between Crown Media  Holdings, Inc., as Guarantor, and JPMorgan Chase Bank, as Preferred  Guarantee Trustee (previously filed as Exhibit 10.6 to our Current Report  on Form 8-K, filed on December 18, 2001, and incorporated herein by  reference).                                                                          |
| 10.26 |   | Subordination and Support  Agreement, dated as of December 17, 2001, by and among Crown Media  Holdings, Inc., Obligor, Crown Media Trust, Hallmark Cards,  Incorporated, JPMorgan Chase Bank, Indenture Trustee, and the holders of  Certificates identified therein (previously filed as Exhibit 10.7 to our  Current Report on Form 8-K, filed on December 18, 2001, and  incorporated herein by reference). |
| 10.27 |   | Amended and Restated Program  License Agreement, dated as of January 1, 2001, by and between Hallmark  Entertainment Distribution, LLC, and Crown Media International, Inc.  (previously filed as Exhibit 10.14 to our Annual Report on Form 10-K,  filed on March 29, 2002 and incorporated herein by reference).                                                                                              |
| 10.28 |   | Amended and Restated Program  License Agreement, dated as of January 1, 2001, by and between Hallmark  Entertainment Distribution, LLC and Crown Media United States, LLC (formerly  known as Odyssey Holdings, LLC) (previously filed as Exhibit 10.15 to  our Annual Report on Form 10-K, filed on March 29, 2002 and  incorporated herein by reference).                                                          |
| 10.29 |   | Amendments, made as of  May 15, 2002, to those certain Amended and Restated Program License  agreements, dated as of January 1, 2001, between Hallmark Entertainment  Distribution, LLC and Crown Media United States, LLC and Crown Media  International, LLC (previously filed as Exhibit 10.1 to our Quarterly  Report on Form 10-Q filed on November 14, 2002 and incorporated  herein by reference).       |
| 10.30 |   | Amended and Restated Trademark  License Agreement, dated as of December 1, 2000, by and between Hallmark  Cards, Incorporated and Crown Media International, Inc. (previously  filed as Exhibit 10.7 to our Annual Report on Form 10-K filed on  March 27, 2001 and incorporated herein by reference).                                                                                                     |
| 10.31 |   | Trademark License Extension  Agreement, dated as of November 30, 2002, by and between Hallmark Cards,  Incorporated and Crown Media International, LLC (previously filed as  Exhibit 10.28 to our Annual Report on Form 10-K filed on  March 28, 2003 and incorporated by reference herein).                                                                                                                    |

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| 10.32 |   | Trademark License Amendment  and Extension Agreement, dated as of August 28, 2003, by and between  Hallmark Cards, Incorporated and Crown Media International, LLC (previously  filed as Exhibit 10.5 to our Quarterly Report on Form 10-Q filed on  November 10, 2003 and incorporated by reference herein).                                                                    |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.33 |   | Trademark License Extension  Agreement, dated as of August 1, 2004, by and between Hallmark Cards,  Incorporated and Crown Media International, LLC (previously filed as  Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on  November 15, 2004, and incorporated by reference herein).                                                                                  |
| 10.34 |   | Amended and Restated Trademark  License Agreement (UK), dated as of December 1, 2000, by and between  Hallmark Cards, Incorporated and Hallmark Entertainment Limited (formerly  known as Hallmark Entertainment Networks (UK) Ltd.) (previously filed as  Exhibit 10.7 to our Annual Report on Form 10-K filed on  March 27, 2001 and incorporated by reference herein).        |
| 10.35 |   | Trademark License Extension  Agreement, dated as of November 30, 2002, by and between Hallmark Cards,  Incorporated and Crown Entertainment Limited (previously filed as  Exhibit 10.30 to our Annual Report on Form 10-K filed on  March 28, 2003 and incorporated by reference herein).                                                                                        |
| 10.36 |   | Trademark License Amendment  and Extension Agreement (UK), dated as of August 28, 2003, by and  between Hallmark Cards, Incorporated and Crown Entertainment Limited  (previously filed as Exhibit 10.4 to our Quarterly Report on  Form 10-Q filed on November 10, 2003 and incorporated by reference  herein).                                                            |
| 10.37 |   | Trademark License Extension  Agreement (UK), dated as of August 1, 2004, by and between Hallmark  Cards, Incorporated and Crown Entertainment Limited (previously filed as  Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on  November 15, 2004 and incorporated by reference herein).                                                                                 |
| 10.38 |   | Amended and Restated Trademark  License Agreement, dated as of March 27, 2001, by and between Hallmark  Licensing, Inc. and Odyssey Holdings, LLC (now known as Crown Media  United States, LLC) (previously filed as Exhibit 10.1 to our Quarterly  Report on Form 10-Q filed on May 4, 2001, and incorporated herein  by reference).                                      |
| 10.39 |   | Trademark License Extension  Agreement, dated as of November 30, 2002, by and between Hallmark  Licensing, Inc. and Crown Media United States, LLC (previously filed as  Exhibit 10.32 to our Annual Report on Form 10-K filed on  March 28, 2003 and incorporated by reference herein).                                                                                    |
| 10.40 |   | Trademark License Amendment  and Extension Agreement, dated as of August 28, 2003, by and between  Hallmark Licensing, Inc. and Crown Media United States, LLC (previously  filed as Exhibit 10.6 to our Quarterly Report on Form 10-Q filed on  November 10, 2003 and incorporated by reference herein).                                                                   |
| 10.41 |   | Trademark License Extension  Agreement, dated as of August 1, 2004, by and between Hallmark  Licensing, Inc. and Crown Media United States, LLC (previously filed as  Exhibit 10.5 to our Quarterly Report on Form 10-Q filed on November 15,  2004 and incorporated by reference herein).                                                                                  |
| 10.42 |   | Security Agreement, dated as  of August 1, 1999, by and between Hallmark Entertainment  Networks, Inc. (now known as Crown Media International, Inc.) and  Hallmark Cards, Incorporated (previously filed as Exhibit 10.10 to our  Registration Statement on Form S-1/A (Amendment No. 1),  Commission File No. 333-95573, and incorporated herein by reference). |

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| 10.43 |   | Security Agreement, dated as  of March 27, 2001, by and between Odyssey Holdings, LLC (now known as  Crown Media United States, LLC) and Hallmark Licensing, Inc. (previously  filed as Exhibit 10.20 to our Annual Report on Form 10-K, filed on  March 29, 2002 and incorporated herein by reference).                                  |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.44 |   | Amended and Restated Company  Agreement of Odyssey Holdings, L.L.C. (now known as Crown Media United  States, LLC) (previously filed as Exhibit 10.11 to our Registration  Statement on Form S-1/A (Amendment No. 1), Commission File  No. 333-95573, and incorporated herein by reference).                                                   |
| 10.45 |   | Amendment to the Amended and  Restated Company Agreement of Odyssey Holdings, LLC, dated March 15,  2001 (previously filed as Exhibit 10.22 to our Annual Report on  Form 10-K, filed on March 29, 2002 and incorporated herein by  reference).                                                                                                |
| 10.46 |   | Agreement, dated as of February 22,  2001, by and among Odyssey Holdings, LLC, National Interfaith Cable  Coalition, Inc. and VISN Management Corp. (previously filed as  Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on  May 4, 2001 and incorporated herein by reference).                                                  |
| 10.47 |   | Agreement, dated as of  March 5, 2003, by and among Odyssey Holdings, LLC, National Interfaith  Cable Coalition, Inc. and VISN Management Corp. (previously filed as  Exhibit 10.5 to our Quarterly Report on Form 10-Q filed on  May 15, 2003, and incorporated herein by reference).                                                    |
| 10.48 |   | Intercompany Services  Agreement, made as of December 23, 2002, by and between Hallmark Cards,  Incorporated and Crown Media Holdings, Inc. (previously filed as  Exhibit 10.38 to our Annual Report on Form 10-K filed on  March 28, 2003 and incorporated herein by reference).                                                         |
| 10.49 |   | $50,000,000 Promissory Note,  dated July 10, 2001, made by Crown Media Holdings, Inc. in favor of  HC Crown Corporation (previously filed as Exhibit 10.1 to our Quarterly  Report on Form 10-Q filed on May 4, 2001 and incorporated herein by  reference).                                                                              |
| 10.50 |   | $75,000,000 Promissory Note,  dated December 14, 2001, made by Crown Media Holdings, Inc., Crown  Media International, Inc. and Crown Media United States, LLC in favor of  HC Crown Corp. (previously filed as Exhibit 10.2 to our Current Report  on Form 8-K, filed on December 18, 2001, and incorporated  herein by reference). |
| 10.51 |   | $150,000,000 Irrevocable  Standby Letter of Credit No. TS-07001786, dated October 3, 2001,  issued by Credit Suisse First Boston, in favor of the Crown Media  Holdings, Inc. (previously filed as Exhibit 10.51 to our Annual  Report on Form 10-K, filed on March 29, 2002 and incorporated  herein by reference).            |
| 10.52 |   | Reduction Certificate to  $150,000,000 Irrevocable Standby Letter of Credit, dated December 21,  2001 (previously filed as Exhibit 10.52 to our Annual Report on Form 10-K,  filed on March 29, 2002 and incorporated herein by reference).                                                                                                    |
| 10.53 |   | Note Purchase Agreement, dated  as of August 1, 2003 between Crown Media Holdings, Inc. and HC  Crown Corp. (previously filed as Exhibit 10.1 to our Current Report on  Form 8-K filed on August 6, 2003 and incorporated by reference  herein).                                                                                          |
| 10.54 |   | 10.25% Senior Unsecured  Discount Note dated August 5, 2003 issued by Crown Media  Holdings, Inc. (previously filed as Exhibit 10.2 to our Current  Report on Form 8-K filed on August 6, 2003 and incorporated  by reference herein).                                                                                                    |
| 10.55 |   | Technical Services Agreement,  dated January 30, 2003, between Pramer S.C.A., Latin America Media  Distribution S.C.A. and Crown Media International, LLC (previously filed as  Exhibit 10.4 to our Quarterly Report on Form 10-Q filed on  May 15, 2003, and incorporated herein by reference).                                               |

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| 10.56 |   | Program License Agreement,  dated as of November 13, 1998, between National Interfaith Cable  Coalition, Inc. and Odyssey Holdings, L.L.C. (previously filed as  Exhibit 10.17 to our Registration Statement on Form S-1/A  (Amendment No. 1), Commission File No. 333-95573, and incorporated  herein by reference).                                                      |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.57 |   | Purchase and Sale Agreement,  dated April 10, 2001, by and between Crown Media Holdings, Inc. and  Hallmark Entertainment Distribution, LLC (previously filed as Appendix A to  definitive proxy materials filed on May 7, 2001, and incorporated by  reference herein).                                                                                                                  |
| 10.58 |   | Service Agreement, dated  September 28, 2001, by and between Hallmark Entertainment, Inc. and  Crown Media Holdings, Inc., as assigned to Crown Media Distribution,  LLC, pursuant to letter dated December 14, 2001 (previously filed as  Exhibit 10.28 to our Annual Report on Form 10-K, filed on  March 29, 2002 and incorporated herein by reference).           |
| 10.59 |   | Registration Rights Agreement,  dated as of September 28, 2001, by and between Crown Media  Holdings, Inc. and Hallmark Entertainment Distribution, as amended by  assignments dated September 28, 2001 and December 31, 2001  (previously filed as Exhibit 10.29 to our Annual Report on  Form 10-K, filed on March 29, 2002 and incorporated herein by  reference). |
| 10.60 |   | Extension Agreement, dated as  of March 1, 2002, by and between Crown Media Holdings, Inc., Crown  Media Distribution, LLC and Hallmark Entertainment Distribution, LLC  (previously filed as Exhibit 10.44 to our Annual Report on Form 10-K  filed on March 28, 2003 and incorporated by reference herein).                                                                   |
| 10.61 |   | Federal Income Tax Sharing  Agreement, dated March 11, 2003, by and between Hallmark Cards,  Incorporated and Crown Media Holdings, Inc. (previously filed as Exhibit 10.45  to our Annual Report on Form 10-K filed on March 28, 2003 and  incorporated by reference herein).                                                                                                  |
| 10.62 |   | Amendment No. 1 to  Federal Income Tax Sharing Agreement, dated August 5, 2003, by and  between Hallmark Cards, Incorporated and Crown Media Holdings, Inc.  (previously filed as Exhibit 10.4 to our Quarterly Report on  Form 10-Q filed on August 14, 2003 and incorporated by reference  herein).                                                                      |
| 10.63 |   | Stock Purchase Agreement,  dated as of August 20, 2001, by and between Crown Media  Holdings, Inc. and DIRECTV Enterprises, Inc. (previously filed as  Exhibit 10.7.1 to our Amendment No.1 to our Quarterly Report on  Form 10-Q/A filed on January 10, 2002 and incorporated herein by  reference).                                                                      |
| 10.64 |   | Affiliation Agreement for DBS  Satellite Exhibition of Cable Network Programming, dated as of  August 20, 2001, by and between Crown Media United States, LLC, and  DIRECTV, Inc. (previously filed as Exhibit 10.7.2 to our Amendment  No.1 to our Quarterly Report on Form 10-Q/A filed on January 10,  2002 and incorporated herein by reference).                                |
| 10.65 |   | Affiliation Agreement for DBS  Satellite Exhibition of Cable Network Programming, dated as of March 6,  2000, by and between Crown Media United States, LLC, and DIRECTV, Inc.  (previously filed as Exhibit 10.7.3 to our Amendment No.1 to our  Quarterly Report on Form 10-Q/A filed on January 10, 2002 and  incorporated herein by reference).                                  |
| 10.66 |   | Letter, dated August 30,  2001, by and between DIRECTV, Inc. and Crown Media Holdings, Inc.  (previously filed as Exhibit 10.7.4 to our Amendment No.1 to our  Quarterly Report on Form 10-Q/A filed on January 10, 2002 and  incorporated herein by reference).                                                                                                           |

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| 10.67  |   | Lease, dated as of  June 1, 1998, by and between High Pointe I Development Group L.L.C. and  Hallmark Entertainment Network, Inc. (now known as Crown Media  International, Inc.) (previously filed as Exhibit 10.20 to our  Registration Statement on Form S-1/A (Amendment No. 1), Commission  File No. 333-95573, and incorporated herein by reference).                        |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.68  |   | First  Amendment to Lease, dated as of March 23, 1999, by and between High  Pointe I Development Group L.L.C. and Hallmark Entertainment  Network, Inc. (now known as Crown Media International, Inc.)  (previously filed as Exhibit 10.21 to our Registration Statement on  Form S-1/A (Amendment No. 1), Commission File No. 333-95573,  and incorporated herein by reference).  |
| 10.69  |   | Second Amendment to Lease,  dated as of August 17, 1999, by and between High Pointe I Development  Group L.L.C. and Hallmark Entertainment Network, Inc. (now known as  Crown Media International, Inc.) (previously filed as Exhibit 10.22  to our Registration Statement on Form S-1/A (Amendment No. 1), Commission  File No. 333-95573, and incorporated herein by reference). |
| 10.70  |   | Third Amendment to Lease,  dated as of September 26, 2000, by and between High Pointe I  Development Group L.L.C. and Crown Media International, Inc. (formerly  known as Hallmark Entertainment Network, Inc.) (previously filed as  Exhibit 10.20 to our Annual Report on Form 10-K filed on  March 27, 2001, and incorporated herein by reference).                             |
| 10.71  |   | Fourth Amendment to Lease,  dated as of February 6, 2001, by and between High Pointe I Development  Group, L.L.C. and Crown Media Inc. (now known as Crown Media  International, Inc.) (previously filed as Exhibit 10.21 to our  Annual Report on Form 10-K filed on March 27, 2001, and  incorporated by reference herein).                                                                |
| 10.72  |   | Fifth Amendment to Lease, dated  as of February 12, 2002, by and between High Pointe I Development Group  LLC and Crown Media International, Inc. (previously filed as  Exhibit 10.39 to our Annual Report on Form 10-K, filed on  March 29, 2002 and incorporated herein by reference).                                                                                                     |
| 10.73  |   | Sixth Amendment to Lease,  dated as of June 26, 2003, by and between High Point I Development Group  LLC and Crown Media International, Inc (previously filed as  Exhibit 10.62 to our Annual Report on Form 10-K, filed on  March 15, 2004 and incorporated herein by reference).                                                                                                                |
| 10.74  |   | Guaranty of Lease Obligations,  dated June 1, 1998, by Hallmark Entertainment, Inc. for High Pointe  I Development Group L.L.C. (previously filed as Exhibit 10.23 to our  Registration Statement on Form S-1/A (Amendment No. 1), Commission  File No. 333-95573, and incorporated herein by reference).                                                                               |
| 10.75* |   | Amended and Restated Crown  Media Holdings, Inc. 2000 Long Term Incentive Plan (previously filed as  Exhibit 10.13 to Our Annual Report on Form 10-K filed on March 27,  2001, and incorporated herein by reference).                                                                                                                                                                             |
| 10.76* |   | Form of Amended and  Restated Crown Media Holdings, Inc. Restricted Stock Unit Agreement  (previously filed as Exhibit 10.3 to our Quarterly Report on  Form 10-Q filed on August 9, 2004, and incorporated herein by  reference).                                                                                                                                                           |
| 10.77* |   | Form of Crown Media  Holdings, Inc. 2004 Restricted Stock Unit Agreement (previously filed as  Exhibit 10.4 to our Quarterly Report on Form 10-Q filed on  August 9, 2004, and incorporated herein by reference).                                                                                                                                                                            |
| 10.78* |   | Employment Agreement, dated as  of September 18, 2001, between Crown Media Holdings, Inc. and David  Evans (previously filed as Exhibit 10.8 to our Quarterly Report on  Form 10-Q filed on November 13, 2001 and incorporated herein by  reference).                                                                                                                                        |

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| 10.79* |   | Amendment No. 1 to  Employment Agreement, dated as of May 28, 2004, between Crown Media  Holdings, Inc. and David Evans (previously filed as Exhibit 10.2 to  our Quarterly Report on Form 10-Q filed on August 9, 2004 and  incorporated herein by reference).                                                 |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.80* |   | Letter Agreement, dated July 9,  2004, by and between David Evans and Crown Media Holdings, Inc.  (previously filed as Exhibit 10.1 to our Quarterly Report on  Form 10-Q filed on August 9, 2004 and incorporated herein by  reference).                                                                            |
| 10.81* |   | Crown  Media Holdings, Inc. 2004 Restricted Stock Unit Agreement, dated as of  May 28, 2004, by and between Crown Media Holdings, Inc. and David  Evans (previously filed as Exhibit 10.5 to our Quarterly Report on  Form 10-Q filed on August 9, 2004 and incorporated herein by reference).                  |
| 10.82* |   | Amended and Restated Crown  Media Holdings, Inc. Restricted Stock Unit Agreement, dated as of  May 25, 2004, by and between Crown Media Holdings, Inc. and David  Evans (previously filed as Exhibit 10.6 to our Quarterly Report on  Form 10-Q filed on August 9, 2004 and incorporated herein by  reference). |
| 10.83* |   | Employment Agreement, dated as  of June 20, 2003, between Crown Media Holdings, Inc. and Chris  Moseley (previously filed as Exhibit 10.9 to our Quarterly Report on  Form 10-Q, filed on November 10, 2003 and incorporated herein  by reference).                                                                  |
| 10.84* |   | Letter Agreement dated as of  May 24, 2004, by and between Crown Media Holdings, Inc. and Chris  Moseley.                                                                                                                                                                                                                           |
| 10.85* |   | Employment Agreement, dated as  of October 25, 2000, by and between Crown Media Holdings, Inc. and  Charles Stanford (previously filed as Exhibit 10.66 to our Annual Report  on Form 10-K, filed on March 15, 2004 and incorporated herein by  reference).                                                          |
| 10.86* |   | Employment Agreement,  effective as of January 1, 2004, by and between Crown Media  Holdings, Inc. and William Aliber.                                                                                                                                                                                                              |
| 10.87* |   | Employment Agreement, dated as  of September 15, 2003, by and between Crown Media Holdings, Inc.  and Paul FitzPatrick (previously filed as Exhibit 10.8 to our Quarterly  Report on Form 10-Q, filed on November 10, 2003 and incorporated  herein by reference).                                                   |
| 10.88* |   | Employment Agreement, dated as  of December 20, 2001, by and between Crown Media  International, Inc. and Russel H. Givens, Jr. (previously filed as  Exhibit 10.47 to our Annual Report on Form 10-K, filed on  March 29, 2002 and incorporated herein by reference).                                          |
| 10.89* |   | Letter Agreement dated  April 2, 2004, amending Employment Agreement by and between Crown Media  International, Inc. and Russel H. Givens, Jr. (previously filed as  Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed on  May 10, 2004, and incorporated herein by reference).                          |
| 10.90  |   | Employment Agreement, dated as  of December 20, 2001, by and between Crown Media United States, LLC and  David Kenin (previously filed as Exhibit 10.6 to our Quarterly Report on  Form 10-Q, filed on May 15, 2003 and incorporated herein by  reference).                                                               |
| 10.91* |   | Amendment to Employment  Agreement dated December 6, 2004, by and between Crown Media United  States, LLC and David Kenin (previously filed as Exhibit 10.1 to our  Current Report on Form 8-K, filed on December 8, 2004 and  incorporated herein by reference)                                                          |
| 10.92* |   | Employment Agreement, dated as  of June 23, 2003, by and between Crown Media Holdings, Inc. and  William Abbott (previously filed as Exhibit 10.7 to our Quarterly Report  on Form 10-Q, filed on November 10, 2003 and incorporated herein by  reference).                                                          |
| 10.93* |   | Employment Agreement, dated as  of September 25, 2001, by and between Crown Media United States, LLC and  Lana Corbi (previously filed as Exhibit 10.46 to our Annual Report on  Form 10-K, filed on March 29, 2002 and incorporated herein by  reference).                                                               |

87

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| 10.94*  |   | Severance Agreement, dated  December 26, 2002, by and between Lana Corbi and Crown Media United  States, LLC (previously filed as Exhibit 10.63 to our Annual Report on  Form 10-K, filed on March 28, 2003 and incorporated herein by  reference).            |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.95*  |   | Employment Agreement, dated as  of March 12, 2004, by and between Crown Media International, Inc.  and Jeff Henry. (previously filed as Exhibit 10.2 to our Quarterly  Report on Form 10-Q, filed on May 10, 2004 and incorporated herein  by reference). |
| 10.96*  |   | Letter  Agreement, dated as of July 9, 2004, by and between Crown Media  Holdings, Inc. and Jeff Henry (previously filed as Exhibit 10.1 to  our Quarterly Report on Form 10-Q, filed on August 9, 2004  and incorporated herein by reference).           |
| 10.97*  |   | Letter Agreement, dated as of  July 2, 2004, by and between Crown Media Holdings, Inc. and Jeff  Henry (previously filed as Exhibit 10.4 to our Quarterly Report on  Form 10-Q, filed on November 15, 2004 and incorporated herein  by reference).        |
| 10.98*  |   | 2005 Deferred Compensation  Plan of Crown Media Holdings, Inc.                                                                                                                                                                                                                |
| 10.99   |   | Technical Services Agreement,  dated as of April 26, 2005, by and between Crown Media United States and  Rightfolder Limited.                                                                                                                                                 |
| 10.100* |   | Compromise Agreement, dated as  of April 22, 2005, by and between Jeffrey Henry and Crown Media  International, LLC.                                                                                                                                                          |
| 21.1    |   | List of Subsidiaries.                                                                                                                                                                                                                                                              |
| 23.2    |   | Consent of KPMG LLP.                                                                                                                                                                                                                                                               |
| 31.1    |   | Rule 13a-14(a) Certification  executed by the Company’s President and Chief Executive Officer.                                                                                                                                                                      |
| 31.2    |   | Rule 13a-14(a) Certification  executed by the Company’s Executive Vice President and Chief Financial  Officer.                                                                                                                                                      |
| 32.1    |   | Certification Pursuant to  18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                           |
| 32.2    |   | Certification Pursuant to  18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                           |

----

*                    Management contract or compensating plan orarrangement.

88

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.
|                    | CROWN MEDIA HOLDINGS, INC. |
|--------------------|----------------------------|
|               | By:                        | /s/ DAVID J. EVANS |
|               |                       | David J. Evans |
| * *           | * *                   | *President and Chief Executive Officer* |
| May 23,  2005 |                       |

 

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.
|                           | **Signature** | ** **                          | ** ** | ** **        | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|---------------------------|---------------|-------------------------------------|------------|-------------------|-----------|------------|------------|------------|----------|------------|
| /s/ DAVID J. EVANS        |          | Director and Principal Executive    |       | May 23, 2005 |
| David J. Evans            |          | Officer                             |       |              |
| /s/ WILLIAM  J. ALIBER    |          | Principal  Financial and Accounting |       | May 23, 2005      |
| William J. Aliber         |          | Officer                             |       |              |
| /s/ WILFORD  V. BANE, JR. |          | Director                            |       | May 23, 2005 |
| Wilford V. Bane, Jr. |          |                                |       |              |
| /s/ ARNOLD  L. CHAVKIN    |          | Director                            |       | May 23, 2005 |
| Arnold L. Chavkin         |          |                                |       |              |
| /s/ GLENN CURTIS          |          | Director                            |       | May 23, 2005 |
| Glenn Curtis              |          |                                |       |              |
| /s/ ROBERT  J. DRUTEN     |          | Director                            |       | May 23, 2005 |
| Robert J. Druten          |          |                                |       |              |
| /s/ BRIAN  GARDNER        |          | Director                            |       | May 23, 2005 |
| Brian Gardner             |          |                                |       |              |
| /s/ HERBERT  GRANATH      |          | Director                            |       | May 23, 2005 |
| Herbert Granath           |          |                                |       |              |
| /s/ DAVID  E. HALL        |          | Director                            |       | May 23, 2005 |
| David E. Hall             |          |                                |       |              |
| /s/ DONALD  J. HALL, JR.  |          | Director                            |       | May 23, 2005 |
| Donald J. Hall, Jr.  |          |                                |       |              |
| /s/ ROBERT  A. HALMI, JR. |          | Director                            |       | May 23, 2005 |
| Robert A. Halmi, Jr. |          |                                |       |              |

89

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| /s/ IRVINE  O. HOCKADAY, JR. |   | Director |   | May 23, 2005 |
|------------------------------|--------|----------|--------|-------------------|
| Irvine O. Hockaday, Jr. |   |     |   |              |
| /s/ ANIL  JAGTIANI           |   | Director |   | May 23, 2005 |
| Anil Jagtiani                |   |     |   |              |
| /s/ PETER  A. LUND           |   | Director |   | May 23, 2005 |
| Peter A. Lund                |   |     |   |              |
| /s/ JOHN  P. MASCOTTE        |   | Director |   | May 23, 2005 |
| John P. Mascotte             |   |     |   |              |
| /s/ DEANNE  R. STEDEM        |   | Director |   | May 23, 2005 |
| Deanne R. Stedem             |   |     |   |              |

 

 

90

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**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**
|                                                                                                                               | ** ** | ** ** | **Page** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------|----------|------------|
| Reports of Independent  Registered Public Accounting Firm                                                                     |       | F-3        |
| Consolidated Balance Sheets as of December 31, 2003  and 2004                                                       |       | F-6        |
| Consolidated Statements of Operations and Comprehensive  Loss for the Years Ended  December 31, 2002, 2003 and 2004 |       | F-8        |
| Consolidated Statements of Stockholders’ Equity for the Years Ended December 31,  2002, 2003 and 2004          |       | F-9        |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2003 and 2004                          |       | F-10       |
| Notes to  Consolidated Financial Statements                                                                                   |       | F-11       |

 

F-1

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(This page intentionally left blank)

F-2

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**Reportof Independent Registered Public Accounting Firm**

The Board of Directors andStockholdersCrown Media Holdings, Inc.:

We have audited the accompanying consolidated balancesheets of Crown Media Holdings, Inc. and subsidiaries (the Company) as of December 31,2004 and 2003, and the related consolidated statements of operations andcomprehensive loss, stockholders’ equity, and cash flows for each ofthe years in the three-year period ended December 31, 2004. Inconnection with our audits of the consolidated financial statements, we alsohave audited financial statement schedule II. These consolidated financialstatements and the financial statement schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements and financial statement schedule based on ouraudits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Crown Media Holdings, Inc. and subsidiaries as of December 31,2004 and 2003, and the results of their operations and their cash flows foreach of the years in the three-year period ended December 31, 2004,in conformity with U.S. generally accepted accounting principles. Also in ouropinion, the related financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole, presentsfairly, in all material respects, the information set forth therein.

As discussed in Note 14 to the consolidated financialstatements, Crown Media Holdings, Inc. and subsidiaries adopted Statementof Financial Accounting Standards No. 150, *Accountingfor Certain Financial Instruments with Characteristics of Both Liabilities andEquity*, effective July 1, 2003.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2004, based on criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated May 23,2005****expressed an unqualifiedopinion on management’s assessment of, and an adverse opinion on the effectiveoperation of, internal control over financial reporting.

Denver, ColoradoMay 23, 2005

F-3

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**Reportof Independent Registered Public Accounting Firm**

The Board of Directors andStockholdersCrown Media Holdings, Inc.:

We have audited management’s assessment, included inthe accompanying “Management’s Report on Internal Control over Financial Reporting”(Item 9A.b), that Crown Media Holdings, Inc. (the Company) did notmaintain effective internal control over financial reporting as of December 31,2004, because of the effect of material weaknesses identified in management’sassessment, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). Crown Media Holdings, Inc.’s management is responsiblefor maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remote likelihoodthat a material misstatement of the annual or interim financial statements willnot be prevented or detected. The following material weaknesses have beenidentified and included in management’s assessment as of December 31,2004:

·       TheCompany’s controls to assess and apply generally accepted accounting principlesregarding the accounting for non-routine and complex transactions did notoperate effectively due to insufficient levels of appropriately qualifiedpersonnel and the ineffective management review of accounting for suchtransactions. As a result of this internal control deficiency, the Companyoverstated certain international assets and understated impairment expense forthose assets; overstated the write-off of certain programming license fees andoverstated the programming license fee payable; and 

F-4

----

understated the write-offof deferred financing fees and overstated other assets as of and for the yearended December 31, 2004. This deficiency resulted in materialmisstatements to the annual and interim periods, which were corrected bymanagement prior to the issuance of the Company’s consolidated financialstatements.

·       TheCompany’s controls to assess and review key assumptions, spreadsheet formulasand valuation methodologies in the library valuation and related impairmentanalysis were not adequately designed, nor did they operate effectively. As aresult of this internal control deficiency, the Company overstated the filmlibrary asset and understated the film library impairment as of and for theyear ended December 31, 2004. Thisdeficiency resulted in a material misstatement to the annual and interimperiods, which was corrected by management prior to the issuance of the Company’sconsolidated financial statements.

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets of Crown Media Holdings, Inc. and subsidiariesas of December 31, 2004 and 2003, and the related consolidated statementsof operations and comprehensive loss, stockholders’ equity and cash flows foreach of the years in the three-year period ended December 31, 2004 and therelated financial statement schedule. The aforementioned material weaknesseswere considered in determining the nature, timing, and extent of audit testsapplied in our audit of the 2004 consolidated financial statements and relatedfinancial statement schedule, and this report does not affect our report dated May 23,2005, which expressed an unqualified opinion on those consolidated financialstatements and related financial statement schedule.

In ouropinion, management’s assessment that Crown Media Holdings, Inc. did notmaintain effective internal control over financial reporting as of December 31,2004, is fairly stated, in all material respects, based on criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Also, in our opinion, becauseof the effect of the material weaknesses described above on the achievement ofthe objectives of the control criteria, Crown Media Holdings, Inc. has notmaintained effective internal control over financial reporting as of December 31,2004, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).
|                   | **KPMG LLP** |
|-------------------|--------------|
| Denver, Colorado  |         |
| May 23, 2005 |         |

 

F-5

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**CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except par value and number of shares)**
| **  **                                                                                        | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                              | ** ** | **2003**                              | ** ** | **2004** | ** ** |
| ASSETS                                                                                                  |       |                                  |       |   |   |
| Cash and cash equivalents                                                                               |       | $                                     | 4,306      |   | $ | 12,102 |   |
| Accounts receivable, less allowance for doubtful accounts of  $6,703 and $6,695, respectively |       | 61,942                                |       | 75,459 |   |
| Program license fees—affiliates                                                                    |       | 27,127                                |       | 40,048 |   |
| Program license fees—non-affiliates                                                                |       | 65,571                                |       | 78,823 |   |
| Subtitling and dubbing, net                                                                             |       | 2,827                                 |       | 1,143 |   |
| Receivable from affiliate                                                                               |       | 12,083                                |       | 16,644 |   |
| Prepaid and other assets                                                                                |       | 15,143                                |       | 13,887 |   |
| Total current assets                                                                                    |       | 188,999                               |       | 238,106 |   |
| Accounts receivable                                                                                     |       | 5,891                                 |       | 6,798 |   |
| Program license fees—affiliates                                                                    |       | 47,748                                |       | 59,987 |   |
| Program license fees—non-affiliates                                                                |       | 106,047                               |       | 135,372 |   |
| Subtitling and dubbing                                                                                  |       | 2,020                                 |       | 1,583 |   |
| Film assets, net                                                                                        |       | 750,737                               |       | 599,013 |   |
| Subscriber acquisition fees, net                                                                        |       | 113,196                               |       | 120,013 |   |
| Property and equipment, net                                                                             |       | 29,235                                |       | 32,829 |   |
| Goodwill                                                                                                |       | 314,033                               |       | 314,033 |   |
| Prepaid and other assets                                                                                |       | 7,841                                 |       | 5,034 |   |
| Total assets                                                                                            |       | $                                     | 1,565,747  |   | $ | 1,512,768 |   |

 

F-6

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**CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) (In thousands, except par value and number of shares)**

 
| ** **                                                                                                                                                       | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                                       | ** ** | **2003**                              | ** ** | **2004** | ** ** |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                        |       |                                  |       |   |   |
| LIABILITIES:                                                                                                                                                     |       |                                  |       |   |   |
| Accounts payable and accrued liabilities                                                                                                                         |       | $                                     | 32,548     |   | $ | 40,228 |   |
| Accrued restricted stock units                                                                                                                                   |       | 5,906                                 |       | 13,649 |   |
| Subscriber acquisition fees payable                                                                                                                              |       | 9,119                                 |       | 35,223 |   |
| License fees payable to affiliates                                                                                                                               |       | 30,671                                |       | — |   |
| License fees payable to non-affiliates                                                                                                                           |       | 87,720                                |       | 79,815 |   |
| Payables to affiliates                                                                                                                                           |       | 7,827                                 |       | 13,512 |   |
| Interest payable to HC Crown                                                                                                                                     |       | 2,655                                 |       | — |   |
| Interest payable                                                                                                                                                 |       | 510                                   |       | 479 |   |
| Capital lease obligations                                                                                                                                        |       | 1,559                                 |       | 2,276 |   |
| Deferred revenue                                                                                                                                                 |       | 2,163                                 |       | 612 |   |
| Total current liabilities                                                                                                                                        |       | 180,678                               |       | 185,794 |   |
| Accrued liabilities                                                                                                                                              |       | 18,906                                |       | 21,617 |   |
| Subscriber acquisition fees payable                                                                                                                              |       | 1,500                                 |       | 678 |   |
| License fees payable to affiliates                                                                                                                               |       | 60,229                                |       | 151,980 |   |
| License fees payable to non-affiliates                                                                                                                           |       | 82,090                                |       | 111,761 |   |
| Line of credit and interest payable to HC Crown                                                                                                                  |       | 75,000                                |       | 81,067 |   |
| Payable to Hallmark Entertainment affiliates                                                                                                                     |       | 100,000                               |       | 100,000 |   |
| Senior unsecured note to HC Crown, including accrued interest                                                                                                    |       | 417,083                               |       | 460,930 |   |
| Credit facility                                                                                                                                                  |       | 300,000                               |       | 310,000 |   |
| Capital lease obligations                                                                                                                                        |       | 7,731                                 |       | 22,817 |   |
| Company obligated mandatorily redeemable preferred interest                                                                                                      |       | 9,079                                 |       | 11,488 |   |
| Total liabilities                                                                                                                                                |       | 1,252,296                             |       | 1,458,132 |   |
| COMMITMENTS  AND CONTINGENCIES                                                                                                                                   |       |                                  |       |   |   |
| STOCKHOLDERS’  EQUITY:                                                                                                                                      |       |                                  |       |   |   |
| Class A common stock, $.01 par value; 200,000,000 shares  authorized; 73,863,037 shares issued and outstanding as of December 31,  2003 and 2004  |       | 739                                   |       | 739 |   |
| Class B common stock, $.01 par value; 120,000,000 shares  authorized; 30,670,422 shares issued and outstanding as of December 31,  2003 and 2004  |       | 307                                   |       | 307 |   |
| Paid-in capital                                                                                                                                                  |       | 1,308,880                             |       | 1,365,450 |   |
| Accumulated other comprehensive income                                                                                                                           |       | 2,013                                 |       | 3,434 |   |
| Accumulated deficit                                                                                                                                              |       | (998,488                              | )          | (1,315,294 | ) |
| Total stockholders’ equity                                                                                                                                  |       | 313,451                               |       | 54,636 |   |
| Total liabilities and stockholders’ equity                                                                                                                  |       | $                                     | 1,565,747  |   | $ | 1,512,768 |   |

 

The accompanying notes are an integral part of these consolidated balance sheets.

F-7

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**CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(In thousands, except per share data)**
| ** **                                                                                           | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2002**                                    | ** ** | **2003** | ** ** | **2004** | ** ** |
| Revenue:                                                                                             |       |                                        |       |   |   |   |   |
| Subscriber fees                                                                                      |       | $                                           | 67,913     |   | $ | 68,901 |   | $ | 82,140 |   |
| Advertising                                                                                          |       | 64,045                                      |       | 96,696 |   | 127,268 |   |
| Advertising by Hallmark Cards                                                                        |       | 5,021                                       |       | 1,397 |   | 1,846 |   |
| Film asset license fees                                                                              |       | 23,950                                      |       | 40,431 |   | 29,348 |   |
| Other revenue                                                                                        |       | 80                                          |       | 99 |   | 685 |   |
| Total revenue, net                                                                                   |       | 161,009                                     |       | 207,524 |   | 241,287 |   |
| Cost of Services:                                                                                    |       |                                        |       |   |   |   |   |
| Programming costs                                                                                    |       |                                        |       |   |   |   |   |
| Affiliates                                                                                           |       | 67,689                                      |       | 39,369 |   | 52,137 |   |
| Non-affiliates                                                                                       |       | 70,314                                      |       | 69,305 |   | 85,085 |   |
| Amortization of film assets                                                                          |       | 27,035                                      |       | 40,168 |   | 47,197 |   |
| Impairment of film assets and  technical equipment                                                   |       | —                                      |       | — |   | 117,891 |   |
| Subscriber acquisition fee amortization  expense                                                     |       | 44,220                                      |       | 25,268 |   | 26,939 |   |
| Amortization of capital leases                                                                       |       | 4,742                                       |       | 4,742 |   | 4,825 |   |
| Operating costs                                                                                      |       | 60,877                                      |       | 43,290 |   | 44,412 |   |
| Total cost of services                                                                               |       | 274,877                                     |       | 222,142 |   | 378,486 |   |
| Selling, general and administrative expense                                                          |       | 60,223                                      |       | 61,699 |   | 78,003 |   |
| Marketing expense                                                                                    |       | 48,946                                      |       | 24,436 |   | 23,865 |   |
| Reorganization expense (recovery)                                                                    |       | 28,801                                      |       | (1,757 | ) | (483 | ) |
| Depreciation and amortization expense                                                                |       | 11,026                                      |       | 10,066 |   | 9,001 |   |
| Loss from operations                                                                                 |       | (262,864                                    | )          | (109,062 | ) | (247,585 | ) |
| Loss on early extinguishment of debt                                                                 |       | —                                      |       | (39,812 | ) | — |   |
| Guaranteed preferred beneficial interest accretion                                                   |       | (25,508                                     | )          | (23,218 | ) | — |   |
| Interest expense                                                                                     |       | (22,603                                     | )          | (46,868 | ) | (66,933 | ) |
| Loss before income taxes                                                                             |       | (310,975                                    | )          | (218,960 | ) | (314,518 | ) |
| Income tax provision                                                                                 |       | (2,054                                      | )          | (3,189 | ) | (2,288 | ) |
| Loss before cumulative effect  of change in accounting principle                                     |       | (313,029                                    | )          | (222,149 | ) | (316,806 | ) |
| Cumulative effect of change in accounting principle                                                  |       | —                                      |       | 17,000 |   | — |   |
| Net loss                                                                                             |       | $                                           | (313,029   | ) | $ | (205,149 | ) | $ | (316,806 | ) |
| Other comprehensive income (loss):                                                                   |       |                                        |       |   |   |   |   |
| Gain on fair value of  derivative asset                                                              |       | 204                                         |       | — |   | — |   |
| Foreign currency translation  adjustment                                                             |       | 1,063                                       |       | 1,366 |   | 1,421 |   |
| Comprehensive loss                                                                                   |       | $                                           | (311,762   | ) | $ | (203,783 | ) | $ | (315,385 | ) |
| Weighted average number of Class A and Class B shares outstanding,  basic and diluted |       | 104,306                                     |       | 104,484 |   | 104,533 |   |
| Loss per share before cumulative effect of change in accounting  principle, basic and diluted   |       | $                                           | (3.00      | ) | $ | (2.12 | ) | $ | (3.03 | ) |
| Cumulative effect of change in accounting principle, basic  and diluted                         |       | —                                      |       | 0.16 |   | — |   |
| Net  loss per share, basic and diluted                                                               |       | $                                           | (3.00      | ) | $ | (1.96 | ) | $ | (3.03 | ) |

 

The accompanying notes are an integral part of these consolidated statements of operations and comprehensive loss.

F-8

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**CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands)**
| **  **                                           | ** ** | **Class A  Shares** | ** ** | **Class A  Common  Stock** | ** ** | **Class B  Shares** | ** ** | **Class B  Common  Stock** | ** ** | **Paid-in  Capital** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Accumulated**  Deficit | ** ** | **Total  Stockholders’**  Equity | ** ** |
|------------------------------------------------------------|------------|--------------------------|------------|---------------------------------|------------|--------------------------|------------|---------------------------------|------------|----------------------|------------|-----------------------------------------------------------|------------|--------------------------|------------|---------------------------------------|------------|
| Balances, December 31, 2001                           |       | 73,488                   |       |                            | $          | 735                      |       |                            | 30,670     |                 |       | $                                                         | 307        |                     |       | $                                     | 1,256,754  |   |   | $ | (620 | ) |   |   | $ | (480,310 | ) |   |   | $ | 776,866 |   |   |
| Issuance of stock for exercise of options             |       | 183                      |       |                            | 2          |                     |       | —                          |       |                 | —     |                                                      |       | 1,627                    |       |                                  | —     |   |   |   | — |   |   |   | 1,629 |   |   |
| Issuance of stock for payment of debt issuance  costs |       | 124                      |       |                            | 1          |                     |       | —                          |       |                 | —     |                                                      |       | 843                      |       |                                  | —     |   |   |   | — |   |   |   | 844 |   |   |
| Stock-based compensation                                   |       | —                   |       |                            | —     |                     |       | —                          |       |                 | —     |                                                      |       | 18                       |       |                                  | —     |   |   |   | — |   |   |   | 18 |   |   |
| Foreign currency translation adjustment               |       | —                   |       |                            | —     |                     |       | —                          |       |                 | —     |                                                      |       | —                   |       |                                  | 1,063      |   |   |   | — |   |   |   | 1,063 |   |   |
| Gain on fair value of derivative                           |       | —                   |       |                            | —     |                     |       | —                          |       |                 | —     |                                                      |       | —                   |       |                                  | 204        |   |   |   | — |   |   |   | 204 |   |   |
| Net loss                                                   |       | —                   |       |                            | —     |                     |       | —                          |       |                 | —     |                                                      |       | —                   |       |                                  | —     |   |   |   | (313,029 | ) |   |   | (313,029 | ) |   |
| Balances, December 31, 2002                           |       | 73,795                   |       |                            | 738        |                     |       | 30,670                          |       |                 | 307        |                                                      |       | 1,259,242                |       |                                  | 647        |   |   |   | (793,339 | ) |   |   | 467,595 |   |   |
| Issuance of stock for payment of debt issuance  costs |       | 68                       |       |                            | 1          |                     |       | —                          |       |                 | —     |                                                      |       | 282                      |       |                                  | —     |   |   |   | — |   |   |   | 283 |   |   |
| Stock-based compensation                                   |       | —                   |       |                            | —     |                     |       | —                          |       |                 | —     |                                                      |       | 6                        |       |                                  | —     |   |   |   | — |   |   |   | 6 |   |   |
| Foreign currency translation adjustment               |       | —                   |       |                            | —     |                     |       | —                          |       |                 | —     |                                                      |       | —                   |       |                                  | 1,366      |   |   |   | — |   |   |   | 1,366 |   |   |
| Contributions under affiliate tax sharing  agreement  |       | —                   |       |                            | —     |                     |       | —                          |       |                 | —     |                                                      |       | 49,350                   |       |                                  | —     |   |   |   | — |   |   |   | 49,350 |   |   |
| Net loss                                                   |       | —                   |       |                            | —     |                     |       | —                          |       |                 | —     |                                                      |       | —                   |       |                                  | —     |   |   |   | (205,149 | ) |   |   | (205,149 | ) |   |
| Balances, December 31, 2003                           |       | 73,863                   |       |                            | 739        |                     |       | 30,670                          |       |                 | 307        |                                                      |       | 1,308,880                |       |                                  | 2,013      |   |   |   | (998,488 | ) |   |   | 313,451 |   |   |
| Stock-based compensation                                   |       | —                   |       |                            | —     |                     |       | —                          |       |                 | —     |                                                      |       | 5                        |       |                                  | —     |   |   |   | — |   |   |   | 5 |   |   |
| Foreign currency translation adjustment               |       | —                   |       |                            | —     |                     |       | —                          |       |                 | —     |                                                      |       | —                   |       |                                  | 1,421      |   |   |   | — |   |   |   | 1,421 |   |   |
| Contributions under affiliate tax sharing  agreement  |       | —                   |       |                            | —     |                     |       | —                          |       |                 | —     |                                                      |       | 56,565                   |       |                                  | —     |   |   |   | — |   |   |   | 56,565 |   |   |
| Net loss                                                   |       | —                   |       |                            | —     |                     |       | —                          |       |                 | —     |                                                      |       | —                   |       |                                  | —     |   |   |   | (316,806 | ) |   |   | (316,806 | ) |   |
| Balances, December 31, 2004                           |       | 73,863                   |       |                            | $          | 739                      |       |                            | 30,670     |                 |       | $                                                         | 307        |                     |       | $                                     | 1,365,450  |   |   | $ | 3,434 |   |   |   | $ | (1,315,294 | ) |   |   | $ | 54,636 |   |   |

 

The accompanying notes are an integral part of these consolidated statements of stockholders’ equity.

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**CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**
| ** **                                                                                        | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2002**                                    | ** ** | **2003** | ** ** | **2004** | ** ** |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                                            | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                                                          |       | $                                           | (313,029   | ) | $ | (205,149 | ) | $ | (316,806 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities:                      |       |                                        |       |   |   |   |   |
| Depreciation and amortization                                                                     |       | 232,317                                     |       | 198,460 |   | 243,385 |   |
| Accretion on guaranteed  preferred beneficial interest                                            |       | 37,240                                      |       | 22,018 |   | — |   |
| (Gain) loss on change in fair  value of derivative asset and liability                            |       | (11,274                                     | )          | 1,200 |   | — |   |
| Accretion on convertible debt                                                                     |       | 8,821                                       |       | 10,554 |   | — |   |
| Accretion on company obligated  mandatorily redeemable preferred interest                         |       | —                                      |       | 1,079 |   | 2,409 |   |
| Provision for allowance for  doubtful accounts                                                    |       | 4,083                                       |       | 499 |   | 1,297 |   |
| Cumulative effect of change in  accounting principle                                              |       | —                                      |       | (17,000 | ) | — |   |
| Impairment of film assets and  technical equipment                                                |       | —                                      |       | — |   | 117,891 |   |
| Loss on early extinguishment of  debt                                                             |       | —                                      |       | 39,812 |   | — |   |
| Loss (gain) on sale of property  and equipment                                                    |       | 1,168                                       |       | (47 | ) | (125 | ) |
| Stock-based compensation                                                                          |       | 18                                          |       | 5,912 |   | 11,488 |   |
| Changes in operating assets and liabilities:                                                      |       |                                        |       |   |   |   |   |
| Increase in accounts receivable                                                                   |       | (26,861                                     | )          | (20,772 | ) | (15,469 | ) |
| Additions to program license  fees                                                                |       | (144,031                                    | )          | (209,299 | ) | (209,386 | ) |
| Additions to subtitling and  dubbing                                                              |       | (5,334                                      | )          | (4,013 | ) | (3,894 | ) |
| Additions to subscriber  acquisition fees                                                         |       | (52,036                                     | )          | (5,292 | ) | (45,070 | ) |
| Increase in prepaid and other  assets                                                             |       | (2,040                                      | )          | (9,095 | ) | (2,549 | ) |
| Increase in accounts payable  and accrued liabilities                                             |       | 74,746                                      |       | 50,736 |   | 30,252 |   |
| Increase (decrease) in interest  payable                                                          |       | (3,388                                      | )          | 15,379 |   | 47,217 |   |
| Increase (decrease) in  subscriber acquisition fees payable                                       |       | 20,272                                      |       | (38,562 | ) | 25,908 |   |
| Increase in license fees  payable to affiliates                                                   |       | 8,581                                       |       | 17,347 |   | 61,080 |   |
| Increase (decrease) in payables  to affiliates                                                    |       | 1,557                                       |       | (10,504 | ) | (1,651 | ) |
| Increase (decrease) in deferred  revenues                                                         |       | (717                                        | )          | 1,563 |   | (1,551 | ) |
| Net cash used in operating  activities                                                            |       | (169,907                                    | )          | (155,174 | ) | (55,574 | ) |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                                            |       |                                        |       |   |   |   |   |
| Purchases of property and  equipment                                                              |       | (4,240                                      | )          | (4,784 | ) | (1,901 | ) |
| Proceeds from disposition of  property and equipment                                              |       | 116                                         |       | 88 |   | 212 |   |
| Net cash used in investing  activities                                                            |       | (4,124                                      | )          | (4,696 | ) | (1,689 | ) |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                                            |       |                                        |       |   |   |   |   |
| Proceeds from the issuance of  common stock upon exercise of stock options                        |       | 1,629                                       |       | — |   | — |   |
| Proceeds from tax sharing  agreement with Hallmark Cards                                          |       | —                                      |       | 49,350 |   | 56,565 |   |
| Borrowings under the HC Crown  demand note payable                                                |       | 5,000                                       |       | 70,000 |   | — |   |
| Borrowings under the HC Crown senior  unsecured note payable                                      |       | —                                      |       | 400,000 |   | — |   |
| Borrowings under the credit  facility                                                             |       | 168,458                                     |       | 56,250 |   | 15,000 |   |
| Payments on the credit facility                                                                   |       | (110,589                                    | )          | (76,250 | ) | (5,000 | ) |
| Repurchase of trust preferred  securities                                                         |       | —                                      |       | (326,674 | ) | — |   |
| Decrease in cash in escrow                                                                        |       | 111,625                                     |       | — |   | — |   |
| Distribution to holders of  guaranteed preferred beneficial interests                             |       | (14,730                                     | )          | (7,406 | ) | — |   |
| Principal payments on capital  lease obligations                                                  |       | (1,318                                      | )          | (1,434 | ) | (1,559 | ) |
| Net cash provided by financing  activities                                                        |       | 160,075                                     |       | 163,836 |   | 65,006 |   |
| Effect of exchange rate changes  on cash                                                          |       | 432                                         |       | 5 |   | 53 |   |
| Net (decrease) increase in cash  and cash equivalents                                             |       | (13,524                                     | )          | 3,971 |   | 7,796 |   |
| Cash and cash equivalents,  beginning of year                                                     |       | 13,859                                      |       | 335 |   | 4,306 |   |
| Cash and cash equivalents, end  of year                                                           |       | $                                           | 335        |   | $ | 4,306 |   | $ | 12,102 |   |
| Supplemental disclosure of cash  and non-cash activities:                                         |       |                                        |       |   |   |   |   |
| Interest paid                                                                                     |       | $                                           | 13,058     |   | $ | 14,119 |   | $ | 14,621 |   |
| Interest paid on preferred  securities                                                            |       | $                                           | 17,778     |   | $ | 8,944 |   | $ | — |   |
| Income taxes paid                                                                                 |       | $                                           | 2,054      |   | $ | 3,189 |   | $ | 2,288 |   |
| Asset acquired through capital  lease obligation                                                  |       | $                                           | —     |   | $ | — |   | $ | 17,363 |   |
| Issuance of Class A common  stock for payment of HC Crown demand note payable commitment fee |       | $                                           | 844        |   | $ | 283 |   | $ | — |   |
| Change in fair value of derivative asset                                                          |       | $                                           | 1,117      |   | $ | — |   | $ | — |   |

 

The accompanying notes are an integral part of these consolidated statements of cash flows.

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**CROWN MEDIA HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the Years Ended December 31, 2002, 2003 and 2004**

**1.   Business and Organization**

***Organization***

CrownMedia Holdings, Inc. (“Crown Media Holdings” or the “Company”), throughits subsidiaries, owns and operates pay television channels (collectively the “HallmarkChannel” or the “channel”) dedicated to high quality, entertainment programmingfor adults and families, in the United States and, prior to the sale of itsinternational business, in various countries throughout the world.Domestically, the Hallmark Channel is operated and distributed by Crown MediaUnited States LLC (“Crown Media United States”). Significant investors in CrownMedia Holdings include Hallmark Entertainment Investments Co. (“HallmarkEntertainment Investments”), a subsidiary of Hallmark Cards, Incorporated (“HallmarkCards”), the National Interfaith Cable Coalition, Inc. (“NICC”), and,indirectly through their investments in Hallmark Entertainment Investments,Liberty Media Corporation (“Liberty Media”) and J.P. Morgan Partners (BHCA), L.P. (“J.P. Morgan”). The international operations of the Hallmark Channel wereoperated by Crown Media International LLC (“Crown Media International”) and, inthe United Kingdom, by Crown Entertainment Limited (“Crown Entertainment”).Crown Media International commenced its operations outside the United States in1995.

***Sale of the International Business***

On February 23, 2005, the Company announced thatit had entered into a definitive agreement for the sale of its internationalbusiness to a group of investors comprised of Providence Equity Partners, 3iand U.K. television executive David Elstein (collectively, the “investor group”).The transaction closed on April 26, 2005. The sale included theinternational versions of the Hallmark Channel distributed outside the UnitedStates, the international rights to over 580 titles in the Crown Media library,and the network broadcast facility based in Denver, Colorado. Substantially allof the employees of the international business as well as the broadcastfacility are employed by the investor group. Other than in respect of or ascontemplated by the agreements for these transactions, there are no materialrelationships between us and our affiliates, on the one hand, and the buyer andits affiliates, on the other hand.

Proceeds from the transaction were used by Crown Mediato reduce outstanding indebtedness under its bank credit facility and to paytransaction fees, RSU settlement payments, and contract and severance forcertain executives who were involved in the Company’s international business.The sale price for the transaction was $242.0 million, subject to purchaseprice adjustments relating to receivables acquired and working capital changes.Upon closing of the transaction, the Company received cash proceeds ofapproximately $209.3 million, which was net of approximately $12.7 million paidto the buyers for future services to be provided by the buyers under a servicescontract and the adjustment for the retention by the Company of approximately$20.0 million of certain accounts receivable not acquired by the buyers in thetransaction. Within 45 days from the close of the transaction, the purchaseprice may be adjusted for certain minimum working capital considerations,absorption of the fair value of certain open film license windows estimated tobe $4.0 million and the obligation of the Company to provide up to $4.0 millionof future library sales of the international film assets. In addition, theCompany agreed to pay the buyers over a specified number of years approximately$24.5 million to cover the fair value amount of certain obligations of theinternational business. The aforementioned purchase price and estimated fairvalues were used in the Company’s evaluations of impairment as discussed innote 3.

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The agreement provided forthe sale of the outstanding capital stock of the two operating subsidiaries ofthe Company’s international business, Crown Media International and CrownEntertainment, for $62.0 million, subject to adjustment for certain workingcapital changes. Another agreement provided for the sale of certaininternational rights to a library of theatrical films, made for televisionmovies, specials, mini-series, series and other television programming for$180.0 million, subject to purchase price adjustments relating to receivablesacquired and working capital changes. These purchase price adjustments to datehave resulted in a reduction of net proceeds to the Company of $32.7 million,which includes the $20.0 million of certain receivables not acquired by thebuyers in the transaction. The agreements also contain customaryrepresentations and warranties of the parties, indemnification and terminationprovisions.

***Liquidity***

As of December 31, 2004, the Company had $12.1million in cash and cash equivalents on hand and $10.0 million available underits bank credit facility. As of December 31, 2004, the Company hadborrowed $310.0 million under its bank credit facility, which has a maturitydate of May 31, 2006. At April 30, 2005, after the internationalsale, the Company had outstanding borrowings under the bank credit facility of$115.0 million and $105.0 million available under the bank credit facility.

The Company’s principal sources of funds are currentlycash on hand, periodic cash inflows expected under the tax sharing agreementwith Hallmark Cards and amounts available for borrowing under its creditfacility. On March 1, 2005, we entered into Amendment No. 8 to theagreement for our bank credit facility. This amendment extended the maturitydate to May 31, 2006, as well as made a number of other significantchanges to the bank credit facility including elimination of certain financialcovenants, changes to and waivers of other financial covenants concerning 2004and the future, and a reduction in the interest rates and commitment fees underthe credit facility. Had the Company not obtained the waiver of the covenantpackage at December 31, 2004, the Company would not have satisfied certaincovenants and, as such, been in default of its credit agreement.

In connection with the Company’s growth strategy, theCompany expects to continue making investments in programming and distributionduring 2005. If necessary, the Company may reduce some of this anticipatedspending in 2005. The Company’s principal uses of funds during 2005 areexpected to be payment of operating expenses, licensing of programming,subscriber acquisition fees, and interest under its bank credit facility.

The Company currently believes that cash on hand,remaining availability under its bank credit facility and payments anticipatedunder the tax sharing agreement with Hallmark Cards, all of which are currentlyits principal sources of funds, will be sufficient to fund the current level ofoperations and meet its liquidity needs through at least the maturity date ofits credit facility. However, the Company’s management anticipates that it willeither extend or refinance the credit facility prior to its maturity date. Inaddition, other financing alternatives could include the issuance of additionalequity or debt securities. There can be no assurance that the credit facilitycan or will be extended or refinanced or that additional funding will beavailable, if at all, on terms acceptable to the Company. In addition, anydecline in the popularity of the Hallmark Channel, any significant futuremodifications to the Company’s distribution agreements, an economic decline inthe advertising market, an increase in competition or other adverse operatingconditions will impact the Company’s ability to achieve its projected operatingresults.

The Company will continueto monitor its operating expenses to identify areas where greater efficienciescan be attained that reduce its operating expenses relative to its revenuestreams and plans, and, if needed, to reduce these expenses during the year tomanage its cash needs.

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

***Basis of Presentation***

Theconsolidated financial statements include the consolidated accounts of CrownMedia Holdings, including those of its wholly owned subsidiaries. Allsignificant intercompany balances and transactions have been eliminated inconsolidation.

***Use of Estimates***

The Company’s consolidatedfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”). These accountingprinciples require the Company to make certain estimates, judgments andassumptions. The Company believes that the estimates, judgments and assumptionsmade when accounting for items and matters such as customer retention patterns,allowance for bad debts, useful lives of assets, ultimate revenue used in thefilm asset amortization calculations, asset valuations including cash flowprojections, recoverability of assets, income taxes, reserves and otherprovisions and contingencies are reasonable, based on information available atthe time they are made. These estimates, judgments and assumptions can affectthe reported amounts of assets and liabilities as of the date of theconsolidated financial statements, as well as the reported amounts of revenueand expenses during the periods presented. Actual results could differ fromthese estimates.

***Film Assets and Film Library Impairment***

The Company amortizes its film assets using theindividual-film-forecast-computation method over a maximum period of 9.25 yearsfrom the date of acquisition. The individual-film-forecast-computation methodamortizes such assets in the same ratio that current period actual revenuebears to estimated ultimate future revenues.

On a quarterly basis, the Company assesses whetherevents or circumstance have changed indicating that the fair value of a film islower than its unamortized cost or carrying value. If the carrying value of anyindividual film assets exceeds its fair value, the film asset is written-downto its estimated fair value. A discounted cash flow model, based on management’santicipated ultimate future revenue of the film, is used to estimate the fairvalue of the individual films. The Company considers the following factors,among others, in estimating ultimate future revenue for each film: (a) thefilm’s performance in historical markets, (b) the public’s perception ofthe film’s story, cast, director, or producer, (c) historical results ofsimilar films, (d) historical results of the cast, director, or produceron prior films, and (e) running time of the film. In estimating a film’sfair value, the Company considers those cash outflows necessary to generate thefilm’s cash inflows such as exploitation, residual and participation costs andtaxes.

The Company reviews its estimates of ultimate futurerevenues and participation costs as of each reporting date to reflect currentlyavailable information. Estimated ultimate future revenues are based on thehistory of each film and similar films, sales and marketing plans, and otherfactors, all of which require significant judgment and estimation bymanagement. Differences between expenses determined using the new estimates andany amounts previously expensed during that fiscal year are charged or creditedto the income statement in the period in which the estimates are revised.

For use of the film assetson the Hallmark Channel, the Company estimates the fair value of the internalusage based upon the portion of the film’s ultimate revenues attributable tothe term of the license window. The Company first calculates the amount of costattributable to the internal use using the individual-film-forecast-computationmethod and then expenses such amounts as the Company exhibits or exploits thefilm ratably over the term of the license window.

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***Cash and Cash Equivalents***

Cash and cash equivalentsinclude highly liquid investments with original maturities of three monthsor less that are readily convertible into cash and are not subject tosignificant risk from fluctuations in interest rates. As a result, the carryingamount of cash and cash equivalents approximates fair value.

***Allowance for Doubtful Accounts***

Theallowance for doubtful accounts is based upon the Company’s assessment ofprobable loss related to uncollectible accounts receivable. The Company uses anumber of factors in determining the allowance, including, among other things,collection trends and current anticipated economic conditions in each countryin which the Company derives its revenue. The Company’s bad debt expense was$4.1 million, $499,000, and $1.3 million for the years ended December 31,2002, 2003 and 2004, respectively.

***Program License Fees***

Program license fees are paid inconnection with the acquisition of the rights to air programs acquired fromothers. Program rights are generally deferred and then amortized on astraight-line basis over their contractual license periods or anticipatedusage. Crown Media Holdings evaluates the realizability of these costs comparedto the estimated future revenues associated with the programming expenses.

Domestic estimates of netrealizable value are determined using future estimated advertising revenues andanticipated patterns of programming usage on a day part basis as it pertains toprogramming licensed to the domestic channel. The international estimates ofnet realizable value are determined using historical and future estimates ofadvertising and subscriber revenues attributable to each territory. Theestimates compute expected annual future estimated revenues and compares thoseestimated revenues to net book value of the program license fee assets todetermine if the programming assets are realizable. Where the domestic and/orinternational analysis indicates the costs are in excess of the net realizablevalue, additional amortization is provided.

The Company broadcasts certainof its film assets on the Hallmark Channel, primarily in its internationalmarkets. The Company accounts for such usage by first calculating the cost ofthe broadcast rights under the individual-film-forecast-computation method andthen amortizes the computed cost over the respective license period using thestraight-line method.

Subtitlingand dubbing represent costs incurred to prepare programming for airing ininternational markets. These costs are capitalized as incurred and areamortized over the shorter of the program’s airing window for programminglicensed from unaffiliated third-parties or the program’s estimated life forprogramming licensed from Hallmark Entertainment Distribution and the Company’sfilm assets. Subtitling and dubbing costs related to programminglicensed from Hallmark Entertainment Distribution are amortized over a maximumperiod of 3 years.

***Subscriber Acquisition Fees***

Subscriber acquisition fees aregenerally required to be paid to obtain carriage on domestic pay distributors.Under certain of these agreements with pay distributors, Crown Media UnitedStates is obligated to pay subscriber acquisition fees if defined subscriberlevels are met or in order to obtain additional carriage of the HallmarkChannel by those pay distributors. Such costs are accrued when CrownMedia United States receives notice from the distributors that they have metthe contractual penetration 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 revenue recognized on a per distributor basis, the excessamortization is included as a component of 

F-14

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cost of services. Crown Media Holdings assesses therecoverability of these costs periodically. It also assesses the recoverabilitywhen events such as changes in distributor relationships occur or otherindicators suggest impairment.

***Property and Equipment***

Property and equipment arestated at historical cost. Equipment under capital leases are initiallyrecorded at the present value of the minimum lease payments.

Depreciation on equipment iscalculated using the straight-line method over the estimated useful lives ofthe assets. Equipment held under capital leases and leasehold improvements areamortized straight-line over the shorter of the lease term or estimated usefullife of the asset.

Whenproperty and equipment is sold or otherwise disposed of, the cost and relatedaccumulated depreciation or amortization are removed from the accounts and anyresulting gain or loss is included in income. The costs of normal maintenanceand repairs are charged to expense when incurred.

***Long-Lived Assets***

The Company reviews long-lived assets, other thangoodwill and other intangible assets with indefinite lives, for impairmentwhenever facts and circumstances indicate that the carrying amounts of theassets may not be recoverable. An impairment loss is recognized if the carryingamount of the asset is not recoverable and exceeds its fair value.Recoverability of assets to be held and used is measured by comparing thecarrying amount of an asset to the estimated undiscounted future net cash flowsexpected to be generated by the asset. If the asset’s carrying value is notrecoverable, an impairment charge is recognized for the amount by which thecarrying amount of the asset exceeds its fair value. The Company determinesfair values by using a combination of comparable market values and discountedcash flows, as appropriate.

Goodwill is reviewed forimpairment annually or whenever an event occurs or circumstances change thatindicate fair value might be below carrying value. Goodwill is carried athistorical cost if the estimated fair value is greater than the carryingamounts. However, if estimated fair value is less than the carrying amount,goodwill is reduced to estimated fair value through an impairment charge to theCompany’s consolidated statements of operations.

***Revenue Recognition***

Subscriber revenue from paytelevision distributors is recognized as revenue when an agreement is executed,programming is provided, the price is determinable, and collectibility isreasonably assured. Subscriber fees from pay television distributors arerecorded net of amortization of subscriber acquisition costs. If theamortization expense exceeds the revenue recognized on a per distributor basis,the excess amortization is included as a component of cost of services.

Advertising revenues arerecognized as earned in the period in which the advertising is telecast.Revenue is recognized as commercial spots or long form programming are airedand as ratings guarantees to advertisers are achieved. Advertising revenues arerecorded net of agency commissions. Agency commissions are calculatedbased on a stated percentage applied to gross billing revenue for the Company’sbroadcasting operations. Customers remit the gross billing amount to the agencyand the agency remits gross billings less their commission to the Company.Payments received in advance of being earned are recorded as deferred revenue.

Advertising revenue and expensesin barter transactions are recorded at the fair value of the advertising to beprovided. The fair value is determined based upon amounts received in cash forsimilar advertisements from buyers unrelated to the other party in the bartertransaction. When the revenue does 

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notmeet the requirements of Emerging Issues Task Force (“EITF”) No. 99-17, *Accounting for Advertising Barter Transactions,* no revenueis recognized. For the years ended December 31, 2002, 2003 and 2004,revenue from advertising barter transactions of $1.7 million, $105,000, and$855,000, respectively, were included as a component of advertising revenue andthe corresponding barter amounts of $1.7 million, $105,000, and $908,000 wereincluded in marketing expenses in the accompanying consolidated statements ofoperations.

Revenue from film assetlicensing agreements is recognized in accordance with Statement of Position (“SOP”)00-02,*Accounting by Distributors or Producersof Films*. Revenues are recognized when all of the following haveoccurred: an agreement is executed, the film is available for exhibition by thelicensee, the license fee is fixed or reasonably determinable, collectibilityis reasonably assured and the cost of each film is known or reasonablydeterminable. Revenue from film asset licensing agreements containing multiplefilm titles is allocated among the various film titles based on their relativeestimated fair values. Payments received from licensees prior to theavailability of a film are recorded as deferred revenue. Fees payable withterms in excess of one year are discounted for revenue recognition purposes atthe customer’s estimated incremental borrowing rate in accordance withAccounting Principles Board (“APB’) Opinion No. 21, *Interest onReceivables and Payables.*

Revenuesfrom foreign sources for the years ended December 31, 2002, 2003 and 2004,represented 48%, 40% and 39%, respectively, of total revenue. The Companyrecords revenue from customers in certain foreign territories only when thecash is received due to uncertainty regarding collection. For the years ended December 31,2002, 2003 and 2004, $3.7 million, $4.0 million and $0.9 million, respectively,was invoiced, but not recorded as revenue.

***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 to March 2003.The Company continues to account for income taxes on a separate return basis.Accordingly, the Company accounts for income taxes using an asset and liabilitymethod which requires the recognition of deferred tax assets and liabilitiesfor the expected future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and net operating loss and tax credit carryforwards.Deferred tax assets and liabilities are measured using enacted tax ratesexpected to be applied to taxable income in the years in which those temporarydifferences are expected to be recovered or settled. The Company reducesdeferred tax assets by a valuation allowance if it is more likely than not thatsome portion or all of the deferred tax assets will not be realized. Any payments received from Hallmark Cards underthe Tax Sharing Agreement are recorded as an increase in paid-in capital andany future utilization of deferred tax assets generated after March 2003will be recorded as a reduction in paid-in capital, to the extent payments werepreviously received from Hallmark Cards for such benefits under the Tax SharingAgreement.

***Stock-Based Compensation***

The Company accounts for its stock-basedemployee compensation plan using the intrinsic value method under therecognition and measurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees,* and relatedInterpretations. Accordingly, compensation cost for stock options issued toemployees is measured as the excess, if any, of the quoted market price of theCompany’s stock at the date of the grant over the exercise price of theunderlying stock options. In December 2002, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 148, *Accounting for Stock-BasedCompensation—Transition and Disclosure—an amendment of SFAS No. 123.*SFASNo. 148 requires certain additional disclosures of the estimated fairvalue of stock-based compensation. Such estimated fair value is determinedthrough the use of the Black-Scholes option pricing 

F-16

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model.SFAS No. 123, *Accounting for Stock-BasedCompensation,* encourages, but does not require, companies to recordcompensation cost for stock-based employee compensation plans at fair value.

Hadcompensation expense for these plans been determined consistent with SFAS No. 123,Crown Media Holdings’ net loss and loss per share would have been increased tothe following pro forma amounts for the years ended December 31, 2002,2003 and 2004:

**ProForma Effects(In thousands, except per share amounts)**
| ** **                                                         | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                         | ** ** | **2002**                                    | ** ** | **2003** | ** ** | **2004** | ** ** |
| Net loss                                                           |       | $                                           | (313,029   | ) | $ | (205,149 | ) | $ | (316,806 | ) |
| Pro forma stock options expense at  estimated fair value |       | (12,346                                     | )          | (6,500 | ) | (2,644 | ) |
| Stock plan expense included in net loss                            |       | 18                                          |       | 6 |   | 5 |   |
| Pro forma net loss                                                 |       | $                                           | (325,357   | ) | $ | (211,643 | ) | $ | (319,445 | ) |
| Weighted average shares                                            |       | 104,306                                     |       | 104,484 |   | 104,533 |   |
| Pro forma net loss per share, basic and diluted                    |       | $                                           | (3.12      | ) | $ | (2.03 | ) | $ | (3.06 | ) |

 

***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 antidilutive. Potential common shares consist of incremental common sharesissuable upon the exercise of stock options and restricted stock units.Approximately 7.8 million, 1.6 million, and 1.4 million stock options for theyears ended December 31, 2002, 2003, and 2004, respectively, have beenexcluded from the calculations of earnings per share because their effect wouldhave been antidilutive. Additionally, 10.1 million contingent appreciationcertificates issued in conjunction with the private placement of the trustpreferred securities have also been excluded from the calculations of dilutedearnings per share for the year ended December 31, 2002, as their effectwould have been antidilutive.

***Translation of Foreign Currency***

Thebalance sheets and statements of operations of certain Crown Media Holdings’ foreignsubsidiaries are measured using local currency as the functional currency.Revenues, expenses and cash flows of such subsidiaries are translated intoUnited States dollars at the average exchange rates prevailing during theperiod. Assets and liabilities are translated at the rates of exchange at thebalance sheet date. Translation gains and losses are deferred as a component ofaccumulated other comprehensive income (loss). Foreign currency transactiongains and losses recorded upon the remeasurement of financial assets andliabilities denominated in currencies other than the functional currency of thesubsidiary are included in determining net loss for the period.

***Concentration of Credit Risk***

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

F-17

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***Derivative Financial Instruments***

TheCompany followed the provisions of SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities,* as amended, forthe purposes of accounting for the contingent appreciation certificatesimbedded in the trust preferred securities. The standard requires therecognition of all derivative instruments on the balance sheet as either assetsor liabilities measured at fair value. Changes in fair value are recognizedimmediately in earnings unless the derivatives qualify as hedges of future cashflows. The Company discontinues hedge accounting prospectively when it isdetermined that the derivative is no longer effective in offsetting the cash flowsof the hedged item, the derivative expires or is sold, terminated or exercised,or the derivative is no longer designated as a hedging instrument. Accordingly,changes in the fair value of the contingent appreciation certificates includedin the trust preferred securities were recognized immediately in earnings. Thetrust preferred securities were repurchased in August 2003 and the costassociated with the settlement of the contingent appreciation certificates hasbeen included in the loss on early extinguishment of debt in the accompanyingconsolidated statements of operations.

***Reclassifications***

Certainreclassifications have been made to conform prior periods’ financialinformation to the current presentation.

***Recently Issued AccountingPronouncements***

In December 2004, the FASB issued SFAS No. 153,*Exchanges of Nonmonetary Assets, an amendment ofAPB Opinion No. 29, Accounting for Nonmonetary Transactions*.The amendments made by SFAS No. 153 are based on the principle thatexchanges of nonmonetary assets should be measured based on the fair value ofthe assets exchanged. Further, the amendments eliminate the narrow exceptionfor nonmonetary exchanges of similar productive assets and replace it with abroader exception for exchanges of nonmonetary assets that do not havecommercial substance. Previously, APB Opinion No. 29 required that theaccounting for an exchange of a productive asset for a similar productive assetor an equivalent interest in the same or similar productive asset should bebased on the recorded amount of the asset relinquished. APB Opinion No. 29provided an exception to its basic measurement principle (fair value) forexchanges of similar productive assets. The FASB believes that exceptionrequired that some nonmonetary exchanges, although commercially substantive, berecorded on a carryover basis. By focusing the exception on exchanges that lackcommercial substance, the FASB believes SFAS No. 153 produces financialreporting that more faithfully represents the economics of the transactions.SFAS No. 153 is effective for nonmonetary asset exchanges occurring infiscal periods beginning after June 15, 2005. Earlier application ispermitted for nonmonetary asset exchanges occurring in fiscal periods beginningafter the date of issuance. The provisions of SFAS No. 153 shall beapplied prospectively. The Company does not anticipate that the adoption ofSFAS No. 153 will have a significant impact on the Company’s overallresults of operations or financial position.

In December 2004, theFASB issued SFAS No. 123 (revised 2004), *Share-BasedPayment*. SFAS No. 123R replaced SFAS No. 123, *Accounting for Stock-Based Compensation*, and supersededAccounting Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees*. SFAS No. 123R will requirecompensation cost related to share-based payment transactions to be recognizedin the financial statements. As permitted by SFAS No. 123, Crown MediaHoldings elected to follow the guidance of APB Opinion No. 25, whichallowed companies to use the intrinsic value method of accounting to valuetheir share-based payment transactions with employees. Based on this method,Crown Media Holdings did not recognize compensation expense in its financialstatements as the stock options granted had an exercise price equal to the fairmarket value of the underlying common stock on the date of the grant. SFAS No. 123Rallows measurement of the cost of share-based payment transactions to employeesat the fair value of the award on the grant date and recognition of expenseover the requisite service or vesting 

F-18

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period.SFAS No. 123R allows implementation using a modified version ofprospective application, under which compensation expense for the unvestedportion of previously granted awards and all new awards will be recognized onor after the date of adoption. SFAS No. 123R also allows companies toadopt SFAS No. 123R by restating previously issued financial statements,basing the amounts on the expense previously calculated and reported in theirpro forma footnote disclosures required under SFAS No. 123. The provisionsof SFAS No. 123R will be adopted by Crown Media Holdings using themodified prospective method beginning January 1, 2006.

**3.   Impairment of Assets**

In the third quarter of 2004, the Company reviewedeach of its film asset titles for impairment as a result of the Companyexploring the sale of its international operations and the international rightsto its film library. The Company computed fair value of the internationalrights to each film using indications of fair value that became availableduring the quarter from an offer letter for the international operationsincluding its international rights to the film library. The offer letter wasfor the international channel operations and the international rights to thefilm library. The Company bifurcated the carrying value of each film betweenits international and domestic licensing rights using the relative discountedcash flows for each film, internationally and domestically, assuming thecontinued operations of both the international and domestic channel. Theestimated fair value of the international rights to the film library used inthe impairment evaluation were based upon the offer letter received whereas theestimated fair value of the domestic rights was based upon the discounted cashflows attributable to estimated future third party sales and internal use at September 30,2004. A non-cash impairment charge was recorded in the third quarter 2004 foreach film where the estimated fair value was less than its carrying value at September 30,2004. The resulting impairment charge of $57.9 million is included inimpairment of film assets and technical equipment on the accompany statement ofoperations for the year ended December 31, 2004. No impairment wasrecorded on the international channel operations in the third quarter of 2004,as its estimated fair value exceeded its net book value.

During the fourth quarter of 2004, the Companyreceived a revised offer letter for the international operations including theinternational rights to the film library at a considerably lower price. As inthe third quarter of 2004, the Company completed the separate valuation of theinternational channel operations and the international rights to the filmlibrary (“the asset groups”). Based on these relative fair values, the Companyallocated the offer price to the two asset groups. The amount allocated to theinternational film library asset group was further allocated to each film basedupon their relative fair values, which required the Company to record anon-cash impairment charge totaling $53.1 million in the fourth quarter 2004for each film where the estimated fair value was less than its carrying value.The resulting additional impairment charge of $53.1 million is included inimpairment of film assets and technical equipment on the accompany statement ofoperations for the year ended December 31, 2004.

The amount allocated to the international channeloperations indicated that the carrying value of the long-lived assetsassociated with the international channel operations was not recoverable. Basedon this analysis, the Company determined that such assets were impaired at December 31,2004, and recorded an impairment charge of $6.9 million. This amount was comprised of $5.3 million ofproperty and equipment assets, $1.3 million of subtitling and dubbing assets,and $370,000 of certain other long-lived assets. In accordance with SFASNo. 144, the estimated fair value of the impaired assets becomes the newbasis for accounting purposes. As such, approximately $6.9 million inaccumulated amortization and depreciation was eliminated against the cost ofthese impaired assets in connection with the accounting for these impairmentsand the impairment is included in impairment of film assets and technicalequipment on the accompany statement of operations for the year ended December 31,2004.

F-19

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**4.   Subscriber Acquisition Fees**

Subscriberacquisition fees are comprised of the following:
| ** **                           | ** ** | **As of December 31,  2003** | ** ** | **As of December 31,  2004** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **(In thousands)**                     | ** ** |
| Subscriber acquisition fees, at cost |       |                                        | $          | 191,377                                     |       |   |   | $ | 236,447 |   |   |
| Accumulated amortization             |       |                                        | (78,181    | )                                           |       |   | (116,434 | ) |   |
| Subscriber acquisition fees, net     |       |                                        | $          | 113,196                                     |       |   |   | $ | 120,013 |   |   |

 

Of the net balance at December 31,2004, the Company expects $35.5 million will be recognized as a reduction ofsubscriber fee revenue and $84.5 million will be recognized as subscriberacquisition fee expense in future periods. The Company expects to amortize thenet balance at December 31, 2004, as follows: 
| **Years Ended December 31,** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
|---------------------------------------------|------------|------------|------------|-------------------------|------------|
| 2005                                        |       |       | $          | 45,177                  |       |   |
| 2006                                        |       |       | 36,723     |                    |       |
| 2007                                        |       |       | 35,271     |                    |       |
| 2008                                        |       |       | 987        |                    |       |
| 2009                                        |       |       | 928        |                    |       |
| 2010                                        |       |       | 927        |                    |       |
| Total amortization                          |       |       | $          | 120,013                 |       |   |

 

As of December 31,2003 and 2004, the consolidated balance sheets also reflect subscriberacquisition fees payable of $10.6 million and $35.9 million, respectively. Forthe years ended December 31, 2002, 2003 and 2004, Crown Media UnitedStates made cash payments of $31.7 million, $44.3 million, and $19.2 million,respectively, relating to current subscriber acquisition fee obligations.

**5.**   FilmAssets

Amortization expense forthe film assets was $27.0 million, $40.2 million and $47.2 for the years ended December 31,2002, 2003, and 2004, respectively. The Company recorded an impairment chargeof $111.0 million for the year ended December 31, 2004. The Companyexpects to amortize $50.0 million to $70.0 million of film assets during theyear ending December 31, 2005.

The following tablesummarized the carrying amounts of the film assets as of December 31, 2003and 2004. As mentioned in note 3, the Company bifurcated the cost of the filmassets between the international and domestic licensing rights during 2004.
| ** **                              | ** ** | **As of December 31,  2003** | ** ** | **As of December 31,  2004** | ** ** |
|-----------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                              | ** ** | **(In thousands)**                     | ** ** |
| Film assets                             |       |                                        | $          | 810,928                                     |       |   |   | $ | 810,928 |   |   |
| Residual assets                         |       |                                        | 9,129      |                                        |       |   | 14,936 |   |   |
| Accumulated amortization and impairment |       |                                        | (69,320    | )                                           |       |   | (226,851 | ) |   |
| Film assets, net                        |       |                                        | $          | 750,737                                     |       |   |   | $ | 599,013 |   |   |

 

F-20

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**6.   Program License Fees**

Program license fees are comprised of the following:
| ** **                                                          | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                          | ** ** | **2003**                              | ** ** | **2004** | ** ** |
| ** **                                                          | ** ** | **(In thousands)**               | ** ** |
| Program license fees—Hallmark Entertainment  Distribution |       | $                                     | 112,069    |   | $ | 144,848 |   |
| Program license fees—NICC                                      |       | 1,885                                 |       | 2,448 |   |
| Program license fees—other affiliates                          |       | 5,906                                 |       | 5,906 |   |
| Program license fees—non-affiliates                            |       | 242,329                               |       | 329,021 |   |
| Program license fees, at cost                                       |       | 362,189                               |       | 482,223 |   |
| Accumulated amortization                                            |       | (115,696                              | )          | (167,993 | ) |
| Program license fees, net                                           |       | $                                     | 246,493    |   | $ | 314,230 |   |

 

Programming costs for the years ended December 31,2002, 2003, and 2004 were $138.0 million, $108.7 million, and $137.2 million,respectively. Amortization of program license fees, included as a component ofprogramming cost in the accompanying consolidated statements of operations, was$133.7 million, $108.4 million and $137.2 million, respectively, for the years endedDecember 31, 2002, 2003 and 2004. Amortizationexpense for subtitling and dubbing costs was $8.4 million, $3.5 million, and$5.1 million for the years ended December 31, 2002, 2003, and 2004,respectively, which has been included in operating costs in the accompanyingconsolidated statements of operations.

During the years ending December 31, 2002, 2003and 2004, certain program license fees were written-down to their netrealizable values, resulting in additional costs of $48.1 million, $7.4million, and $6.2 million, respectively, which have been included as acomponent of programming cost in the accompanying consolidated statements ofoperations.

At December 31, 2003 and 2004, $4.9 million and$7.7 million of program license fees were included in prepaid and other assetson the accompanying consolidated balance sheets as the Company made payment,but the airing windows had not commenced.

License fees payable are comprised of the following:
| ** **                                                          | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                          | ** ** | **2003**                              | ** ** | **2004** | ** ** |
| ** **                                                          | ** ** | **(In thousands)**               | ** ** |
| License fees payable—Hallmark Entertainment  Distribution |       | $                                     | 90,609     |   | $ | 151,980 |   |
| License fees payable—NICC                                      |       | 291                                   |       | — |   |
| License fees payable—non-affiliates                            |       | 169,810                               |       | 191,576 |   |
| Total license fees payable                                          |       | 260,710                               |       | 343,556 |   |
| Less current maturities                                             |       | (118,391                              | )          | (79,815 | ) |
| Long-term license fees payable                                      |       | $                                     | 142,319    |   | $ | 263,741 |   |

 

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**7.   Property and Equipment**

Property and equipment are comprised of the following:
| ** **                        | ** ** | **As of December 31,** | ** ** | **Depreciable Life** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|---------------------------|------------|
| ** **                        | ** ** | **2003**                              | ** ** | **2004**                  | ** ** | **(In years)** | ** ** |
| ** **                        | ** ** | **(In thousands)**               | ** ** | ** **                | ** ** |
| Technical equipment and computers |       | $                                     | 40,927     |                      | $          | 38,947 |   |   | 3-5 |   |   |
| Leased assets                     |       | 13,252                                |       | 30,615                    |       |   | 8-15 |   |   |
| Furniture, fixtures and equipment |       | 2,182                                 |       | 2,078                     |       |   | 5 |   |   |
| Leasehold improvements            |       | 11,369                                |       | 10,402                    |       |   | 3-7 |   |   |
| Construction-in-progress          |       | 812                                   |       | 161                       |       |   |   |   |   |
| Property and equipment, at  cost  |       | 68,542                                |       | 82,203                    |       |   |   |   |   |
| Accumulated depreciation          |       | (39,307                               | )          | (49,374                   | )          |   |   |   |   |
| Property and equipment, net       |       | $                                     | 29,235     |                      | $          | 32,829 |   |   |   |   |   |

 

Depreciation expense related toproperty and equipment was $11.3 million, $11.2 million, and $10.4 million forthe years ended December 31, 2002, 2003 and 2004, respectively.

Softwareand other intangible assets of $4.6 million and $3.2 million as of December 31,2003 and 2004, respectively, have been included in prepaid and other assets inthe accompanying consolidated balance sheets.

**8.   Reorganization**

In October 2002, the Company began reorganizingits operations in order to concentrate its efforts on the Hallmark Channel inthe U.S. and in its more successful international markets. The Companycompleted decentralizing many oversight and non-technical support functionsformerly located in the Company’s U.S.-based offices and transferred thoseresponsibilities to regional staff. In Latin America, the Company entered intoan agreement with a local distribution partner, Pramer S.C.A., who was maderesponsible for the day-to-day operations of the Hallmark Channel in thisregion. At the completion of the reorganization in April 2003, the Company’sworkforce was reduced by approximately 30% or 130 positions.

The Company recorded a reorganization charge of $28.8million during the fourth quarter of 2002. This charge was comprised of acharge of $5.5 million for severance costs and charges of $23.3 million relatedto exit costs for satellite, transponder and facility leases.

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Thefollowing table displays the activity and balances of the reorganizationaccrual account from October 7, 2002, to December 31, 2004, which isincluded in accounts payable and accrued liabilities in the accompanyingconsolidated balance sheets.
| ** **                                       | ** ** | **  Severance  ** | ** ** | **  Facilities  ** | ** ** | **Satellite and  Transponder** | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|-----------|------------|
| ** **                                       | ** ** | **(In thousands)**               | ** ** |
| Balance at  October 7, 2002                 |       |                                  | $          | 5,492                                  |       |                                |       | $         | 1,651      |   |   |   | $ | 21,658 |   |   | $ | 28,801 |   |
| Deductions due to  payments                      |       |                                  | (2,097     | )                                      |       |                                | —     |      |       |   | (545 | ) |   | (2,642 | ) |
| Balance at  December 31, 2002               |       |                                  | 3,395      |                                   |       |                                | 1,651      |      |       |   | 21,113 |   |   | 26,159 |   |
| Additions due to  accretion                      |       |                                  | —     |                                   |       |                                | 61         |      |       |   | 692 |   |   | 753 |   |
| Additions due to  adjustments to estimates       |       |                                  | —     |                                   |       |                                | —     |      |       |   | 1,194 |   |   | 1,194 |   |
| Deductions due to  settlement of contract        |       |                                  | —     |                                   |       |                                | —     |      |       |   | (2,951 | ) |   | (2,951 | ) |
| Deductions due to  payments                      |       |                                  | (3,391     | )                                      |       |                                | (189       | )         |       |   | (6,537 | ) |   | (10,117 | ) |
| Balance at  December 31, 2003               |       |                                  | 4          |                                   |       |                                | 1,523      |      |       |   | 13,511 |   |   | 15,038 |   |
| Additions due to  accretion                      |       |                                  | —     |                                   |       |                                | —     |      |       |   | 52 |   |   | 52 |   |
| Deductions due to  adjustments to estimates, net |       |                                  | (4         | )                                      |       |                                | (126       | )         |       |   | (353 | ) |   | (483 | ) |
| Deductions due to  payments                      |       |                                  | —     |                                   |       |                                | (337       | )         |       |   | (3,550 | ) |   | (3,887 | ) |
| Balance at  December 31, 2004               |       |                                  | $          | —                                 |       |                                |       | $         | 1,060      |   |   |   | $ | 9,660 |   |   | $ | 10,720 |   |

 
| ** **                          | ** ** | **As of December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|
| ** **                          | ** ** | **2003**                              | ** ** | **2004** | ** ** |
| ** **                          | ** ** | **(In thousands)**               | ** ** |
| Accrued reorganization              |       | $                                     | 15,038     |   | $ | 10,720 |   |
| Less current accrued reorganization |       | (4,215                                | )          | (2,379 | ) |
| Long-term accrued reorganization    |       | $                                     | 10,823     |   | $ | 8,341 |   |

 

**9.   Leases**

Crown Media International and Crown Media United Stateslease uplink and certain transponder space under long-term lease agreementsthat are accounted for as capital leases in accordance with SFAS No. 13,*Accounting for Leases*. CrownMedia Holdings leases transponders, office facilities and various officeequipment under operating leases that are generally non-cancelable. Theseleases expire at various dates through January 2019, and some containescalation clauses and renewal options. Future minimum lease payments under theagreements at December 31, 2004 are as follows:
| **Years Ended December 31,**                                             | ** ** | ** **              | ** ** | **Capital  Leases** | ** ** | **Operating  Leases** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                                                              | ** ** | **(in thousands)** | ** ** |
| 2005                                                                                    |       | $                       | 4,550      |                |       | $                     | 13,138     |   |   |
| 2006                                                                                    |       | 4,460                   |       |                | 10,183     |                  |       |
| 2007                                                                                    |       | 4,460                   |       |                | 9,259      |                  |       |
| 2008                                                                                    |       | 4,460                   |       |                | 7,205      |                  |       |
| 2009                                                                                    |       | 2,160                   |       |                | 4,580      |                  |       |
| Thereafter                                                                              |       | 21,510                  |       |                | 3,931      |                  |       |
| Total minimum  lease payments                                                           |       | 41,600                  |       |                | $          | 48,296                |       |   |
| Less amount  representing interest (at implicit rates ranging from 8.5% to 9.375%) |       | (16,507                 | )          |                |       |                  |       |
| Present value of  net minimum lease payments                                            |       | 25,093                  |       |                |       |                  |       |
| Less current  maturities                                                                |       | (2,276                  | )          |                |       |                  |       |
| Long term obligation                                                                    |       | $                       | 22,817     |                |       |                  |       |   |

 

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Of the future minimumoperating lease payments above, $1.1 million and $9.7 million of facilities andtransponders, respectively, have been included in the Company’s reorganizationaccrual balance as of December 31, 2004. Rent expense under theseagreements was $19.7 million, $21.3 million, and $16.0 million, respectively,for the years ended December 31, 2002, 2003, and 2004. Additionally, in2003 and 2004, the Company subleased portions of its Greenwood Villagecorporate and administrative office space. Amounts received under thesesublease agreements are offset against rent expense. Amortization of assets heldunder capital leases is included with depreciation expense in the accompanyingstatements of operations.

**10.   Credit Facility**

The Company has a credit agreement with a syndicate ofbanks, led by JP Morgan Chase Bank, under which the banks extended to the Companya secured credit facility of up to $320.0 million. The Company and the lendingbanks entered into the facility in 2001 and have subsequently amended the termsof this facility, with the most recent amendment as of March 1, 2005. Thefacility is guaranteed by the Company’s subsidiaries and is secured by alltangible and intangible property of Crown Media Holdings and its subsidiaries. AtDecember 31, 2004, the bank credit facility encompassed a term loan of$100.0 million and a revolving line of credit of $220.0 million, inclusive ofup to $20.0 million of letters of credit available to be issued at the Company’srequest. Upon the consummation of sale of the international business on April 26,2005, the Company repaid the term loan portion of the credit facility in theamount of $100.0 million, and the credit facility now consists of a revolvingline of credit of $220.0 million, which includes up to $20.0 million of lettersof credit. In addition, following such closing, any borrowings by the Company ofamounts in excess of the $180.0 million under the revolving line of creditrequires the concurrence of Hallmark Cards.

Each loan under the bank credit facility bearsinterest at a Eurodollar rate or an alternate base rate as the Company mayrequest at the time of borrowing in accordance with the credit agreement. TheEurodollar rate is based on the London interbank market for Eurodollars, andremains in effect for the time period of the loan ranging from one, two, three,six or twelve months. The alternate rate is based upon the prime rate of JPMorgan Chase Bank, a certificate of deposit rate or the Federal Funds effectiverate, which is adjusted whenever the rates change. The Company is required topay a commitment fee of 0.2% per annum(0.5% prior to March 1, 2005) ofthe committed, but not outstanding, amounts under the revolving creditfacility, payable in quarterly installments.

As of March 1, 2005, we entered into Amendment No. 8to the agreement for our bank credit facility. This amendment extended thematurity date to May 31, 2006, as well as made a number of othersignificant changes to the bank credit facility including elimination ofcertain financial covenants, changes to and waivers of financial covenantsconcerning 2004 and the future, and a reduction in the interest rates andcommitment fees under the credit facility. Had the Company not obtained thewaiver of the covenant package at September 30, 2004, and December 31,2004, the Company would not have satisfied certain covenants and, as such, beenin default of its credit agreement.

Several changes to financial covenants in theAmendment No. 7 to the bank credit facility were not effective until theForeign Asset Sale Effective Date. The Foreign Asset Sale Effective Date didnot occur in 2004, which was one of the reasons that the Company needed waiversof its compliance with certain financial covenants in its bank credit facility.Amendment No. 8 waived the Company’s non-compliance with the followingfinancial covenants: (1) capital expenditures in 2004; (2) cashprogram acquisition guarantees in 2004; (3) trailing 12-month EBITDA forthe quarter ended December 31, 2004; (4) cash payments to televisiondistributors for subscribers in 2004; (5) net worth at December 31,2004; (6) leverage ratio for the quarter ended December 31, 2004; and(7) interest coverage ratio for the 2004 year. Amendment No. 8 alsodeleted the net worth covenant; amended the limit on the Company’s cash programguarantees in 2005; amended the quarterly EBITDA requirements for the remainderof the loan 

F-24

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term; and amended thelimit of cash payments to television distributors for subscribers, the minimumnumber of subscribers and the minimum gross subscriber revenue. Further,pursuant to Amendment No. 8, the limitation on Restricted Payments wasamended to allow us to make certain payments to Hallmark Cards or itsaffiliates as described above.

At December 31, 2004,Crown Media Holdings had outstanding borrowings of $310.0 million under thecredit facility and there were no letters of credit outstanding. At December 31,2004, $310.0 million of the outstanding balance bore interest at the Eurodollarrate (5.42% at December 31, 2004) and $0 bore interest at the JP MorganChase Bank prime rate. Interest expense onborrowings under the credit facility for the years ended December 31,2002, 2003 and 2004, was $11.7 million, $12.8 million, and $13.9 million,respectively.

**11.   Private Placement**

In December 2001, CrownMedia Holdings formed a special-purpose entity, Crown Media Trust. Crown MediaTrust issued trust preferred securities in Crown Media Trust’s name toinvestors in a private placement and loaned the proceeds to Crown MediaHoldings. This loan was designed so that interest and principal paymentsmatched the dividend and any redemption requirements on the trust preferredsecurities issued by Crown Media Trust. Interest received by Crown Media Trustfrom Crown Media Holdings funded distributions to the holders of the preferredsecurities.

Crown Media Holdings owned 100%of the common equity in Crown Media Trust. On December 17, 2001, CrownMedia Holdings completed the $265.0 million private placement of the trustpreferred securities to a group of institutional investors. Under the terms ofthe private placement, Crown Media Holdings issued units to the investors, eachunit consisted of one preferred security of Crown Media Trust, and onecontingent appreciation certificate, issued by Crown Media Holdings.

Crown Media Holdings calculatedthe initial value of the contingent appreciation certificate portion of thetrust preferred securities by using Black-Scholes models and by using acombination of put and call options that would provide the same future payoutas the convertible debt portion. Crown Media Holdings calculated the initialfair value of the guaranteed preferred beneficial interest portion of the trustpreferred securities using a discounted cash flow model. The proceeds from theprivate placement of the trust preferred securities of $265.0 million werebifurcated between the convertible debt and guaranteed preferred beneficialinterest portions based upon their relative fair values.

On August 5, 2003, Crown Media Holdingsrepurchased all of the preferred securities of Crown Media Trust and relatedcontingent appreciation certificates issued by the Company. The securities wererepurchased for approximately $329.1 million, including approximately $2.4million of scheduled cash distributions on the trust preferred securitiesduring the quarter.

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The financing was initially recorded at $265.0 millionand required the allocation of fair value to the various components. Thefollowing table summarizes the transaction as at the transaction date and as ofDecember 31, 2002.
| ** **                                                                                                         | ** ** | **Initial  Fair Value  Allocation** | ** ** | **As of   December 31,  2002** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                         | ** ** | **(In thousands)**                  | ** ** |
| Convertible  debt                                                                                                  |       |                                     |       |                                          |       |   |   |
| Value of contingent  appreciation certificates                                                                     |       | $                                        | 93,682     |                                          |       |   |   |   |
| Value of embedded derivative                                                                                       |       | (50,212                                  | )          |                                          |       |   |   |
| Total carrying amount of  convertible debt(a)(b)                                                                   |       | $                                        | 43,470     |                                          |       | $ | 47,916 |   |   |
| Derivative liability(c)                                                                                            |       | $                                        | 12,083     |                                          |       | $ | 762 |   |   |
| Allocable offering costs included in debt issuance  costs(d)                                                  |       | $                                        | (2,444     | )                                             |       | $ | (2,020 | ) |   |
| Guaranteed preferred beneficial interest in Crown Media  Trust’s debentures                              |       | $                                        | 209,447    |                                          |       | $ | 245,241 |   |   |
| Distribution to holders of  guaranteed preferred beneficial  interest  in Crown Media Trust’s debentures |       | —                                   |       |                                          | (14,730    | ) |   |
| Allocable offering costs(e)                                                                                        |       | (11,771                                  | )          |                                          | (8,960     | ) |   |
| Total carrying value of  guaranteed preferred beneficial  interest(b)(f)                                      |       | $                                        | 197,676    |                                          |       | $ | 221,551 |   |   |
| Net proceeds allocated to  securities sold                                                                         |       | $                                        | 250,785    |                                          |       |   |   |   |
| Gross proceeds from private placement                                                                              |       | $                                        | 265,000    |                                          |       |   |   |   |
| Offering costs                                                                                                     |       | (14,215                                  | )          |                                          |       |   |   |
| Net proceeds allocated to securities sold                                                                          |       | $                                        | 250,785    |                                          |       |   |   |   |

----

(a)           Accreted principal to $45.6 million andadditional 11.25% interest to meet minimum return requirements over six years.

(b)          Interestpayable at 6.75% per annum in cash each quarter.

(c)           Markedto fair value through income (loss) at each reporting date.

(d)          Amortizedto interest expense over six years.

(e)           Accretedto guaranteed preferred beneficial interest over six years.

(f)             Accretedprincipal to $219.4 million and additional 11.25% interest to meet minimumreturn requirements over six years.

On August 5, 2003, Crown Media Holdingsrepurchased the trust preferred securities with the proceeds from the HC Crownsenior unsecured note and filed a Certificate of Cancellation with the DelawareSecretary of State to dissolve its Crown Media Trust subsidiary.

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Thefollowing table summarizes the transaction as of August 5, 2003.
| ** **                                                                       | ** ** | **(In thousands)** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------|------------|
| Convertible debt                                                                 |       |                    | $          | 54,408 |   |   |
| Guaranteed  preferred beneficial interest in Crown Media Trust’s debentures |       |                    | 236,162    |   |   |
| Unaccreted  offering costs                                                       |       |                    | 8,064      |   |   |
| Carrying value of  trust preferred securities at August 5, 2003             |       |                    | 298,634    |   |   |
| Balance of  unamortized debt issuance cost assets                                |       |                    | (9,664     | ) |   |
| Accrued  transaction expenses                                                    |       |                    | (1,635     | ) |   |
| Gain on  settlement of net derivative liability                                  |       |                    | 1,962      |   |   |
| Less: Cash paid  to private placement holders                                    |       |                    | (329,109   | ) |   |
| Loss on early  extinguishment of trust preferred securities                      |       |                    | $          | (39,812 | ) |   |

 

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

***Hallmark Letter of Credit***

Pursuant to Amendment No. 8to the bank credit facility, Hallmark Cards has provided an irrevocable letterof credit issued to JP Morgan Chase Bank by Citibank, N.A. in the amount of$320.0 million, as credit support for our obligations under the Company’scredit facility (the “credit facility”). The support letter of credit wasreduced to $220.0 million upon the consummation of the sale of the Company’sinternational business and the reduction of the aggregate outstanding creditexposure of its lenders to $220.0 million. Drawdowns under the letter of creditmay be made for amounts due and payable under the credit facility and upon theoccurrence of certain other events. Any proceeds received by JP Morgan ChaseBank from drawing under this support letter of credit will not be applied torepay the Company’s obligations, but will be used to purchase on the part ofHallmark Cards from the bank lenders subordinated participations in ourobligations under its bank credit facility, junior in payment to the banklenders under the bank credit facility. The support letter of creditautomatically expires on May 31, 2006. The Company pays to Hallmark Cards,as compensation for the support letter of credit, the amounts resulting fromthe 2% reduction in the interest rate and the 0.3% reduction in the commitmentfee payable by the Company under the bank credit facility as provided inAmendment No. 8.

***Senior Unsecured Note***

In August 2003, the Company issued a seniorunsecured note to HC Crown for $400.0 million. A portion of the proceeds wasused to repurchase the Company’s outstanding trust preferred securities, andthe balance of the proceeds, after expenses, was used to reduce amountsoutstanding under its bank credit facility.

The senior unsecured notepayable to HC Crown does not require cash payments until August 2007.Instead, the principal amount of the senior unsecured note accretes at 10.25%per annum, compounding semi-annually, to $596.6 million at August 5, 2007.From that date, interest at 10.25% per annum will be payable semi-annually onthe accreted value of the senior unsecured note to HC Crown. The note matureson August 5, 2011, and is pre-payable by Crown Media Holdings at any timeafter August 5, 2004, without penalty. At December 31, 2003 and 2004,$417.1 million and $460.9 million, respectively, of principal and accretedinterest were included in the senior unsecured note payable in the accompanyingconsolidated balance sheets. The note purchase agreement for the seniorunsecured note contains certain covenants which restrict on the part of theCompany, among other matters, from the incurrence of any additionalindebtedness, the repurchase or other acquisitions of the Company’s stock,investments in other parties and the incurrence of liens on the Company’sassets. As a fee for the issuance of the notes, the Company 

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paid$3.0 million to HC Crown, which was initially capitalized and is beingamortized as additional interest expense over the term of the note payable.

***Line of Credit Payable to HCCrown***

On December 14, 2001,the Company executed a $75.0 million promissory note with HC Crown maturing onthe earlier of six months from the termination of the credit facility or December 21,2007. This line of credit is subordinate to the bank credit facility. The rateof interest under this line of credit is equal to LIBOR plus three percent,payable quarterly. At both December 31, 2003 and 2004, borrowings underthe note were $75.0 million. Accrued interest on the note of $2.7 million, isincluded in interest payable to HC Crown and $6.1 million is included in lineof credit and interest payable to HC Crown as of December 31, 2003 and2004, respectively on the accompanying consolidated balance sheets.

***Related Party Long-TermObligations***

The aggregate maturies of related party long-term debtfor each of the five years subsequent to December 31, 2004 are as follows:
| ** **                                                                                            | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                            | ** ** | **Total**                                 | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2011** | ** ** |
| ** **                                                                                            | ** ** | **(In thousands)**                   | ** ** |
| Line of credit  and interest payable at 5.02% to HC Crown, with principal due  December 21, 2007 |       | $                                         | 81,067     |   | $ | — |   | $ | 6,067 |   | $ | 75,000 |   | $ | — |   |
| 10.25% Senior  unsecured note to HC Crown, including accrued interest, due August 5,  2011       |       | 596,634                                   |       | — |   | — |   | — |   | 596,634 |   |
| Payable to  Hallmark Entertainment affiliates due May 31, 2006                                   |       | 100,000                                   |       | — |   | 100,000 |   | — |   | — |   |
|                                                                                                  |       | $                                         | 777,701    |   | $ | — |   | $ | 106,067 |   | $ | 75,000 |   | $ | 596,634 |   |

 

***Hallmark Obligations***

In connection withAmendment No. 8, by a letter dated February 28, 2005, Hallmark Cardsconfirmed to the Company that neither Hallmark Cards nor any of itswholly-owned subsidiaries would demand payment from the Company on any of thefollowing obligations until May 31, 2006, at the earliest:

·       $75.0million note payable to HC Crown plus accrued interest thereon from time totime

·       $400.0million note payable to HC Crown plus accrued interest thereon from time totime

·       $100.0million payables to Hallmark Entertainment Holdings incurred in conjunctionwith the film library transaction in 2001

·       $156.0million of license fees payable to Hallmark Entertainment Distribution Company.

Furthermore, the Company does not intend to repay theaforementioned liabilities within the next 12 months. Therefore, the Companyhas classified these liabilities as non-current liabilities on the accompanyingconsolidated balance sheet.

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**13.   Related PartyTransactions**

***Tax Sharing Agreement***

On March 11, 2003, Crown Media Holdings became amember of Hallmark Cards consolidated federal tax group and entered into afederal tax sharing agreement with Hallmark Cards (the “Tax Sharing Agreement”).Hallmark Cards includes Crown Media Holdings in its consolidated federal incometax return. Accordingly, Hallmark Cards has benefited from past tax losses andwill benefit from future federal tax losses, which may be generated by CrownMedia Holdings. Based on the Tax Sharing Agreement, Hallmark Cards has agreedto pay Crown Media Holdings all of the benefits realized or realizable byHallmark Cards as a result of including Crown Media Holdings in itsconsolidated income tax return, 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, the non-interest bearing balanceof the 25% in federal tax benefits may also be applied as an offset against anyamounts owed by Crown Media Holdings to any member of the Hallmark Cardsconsolidation group under any loan, line of credit or other payable, subject tolimitations under any loan indentures or contracts restricting such offsets. Asof December 31, 2004, Hallmark Cards has not exercised this option.

The Company received $49.4million and $56.6 million under the Tax Sharing Agreement during 2003 and 2004,respectively. These receipts have been recorded as an addition to paid-incapital in the accompanying consolidated statements of stockholders’ equity.

***Hallmark Entertainment Investments***

On March 11, 2003,Hallmark Entertainment Holdings, Inc. (“Hallmark EntertainmentHoldings”, a wholly-owned subsidiary of Hallmark Cards) contributed 100%of the Crown Media Holdings shares owned by it to Hallmark EntertainmentInvestments. Two of Crown Media Holdings’ investors, Liberty Crown, Inc.,a subsidiary of Liberty Media, and JP Morgan, also contributed 100% of theirCrown Media Holdings shares to Hallmark Entertainment Investments, and VISNcontributed 10% of its Crown Media Holdings shares to Hallmark EntertainmentInvestments, all in return for shares in Hallmark Entertainment Investments.Hallmark Entertainment Holdings, now an owner of more than 80% of Hallmark EntertainmentInvestments, has voting power over all of the Crown Media Holdings shares ownedby Hallmark Entertainment Investments.

***Costs Incurred on Crown MediaHoldings’ Behalf***

Sinceinception, Hallmark Entertainment has at times paid certain costs on behalf ofCrown Media Holdings. For the years ended December 31, 2002, 2003, and2004, $1.4 million, $430,000, and $3.8 million, respectively, represented thechange in the intercompany balance with Hallmark Entertainment. Non-interestbearing unreimbursed costs of $670,000 and $4.5 million are included in payableto affiliates in the accompanying consolidated balance sheets as of December 31,2003 and 2004, respectively.

***Services Agreement with HallmarkCards***

Crown Media Holdingsentered into an Intercompany Services Agreement with Hallmark Cards, effective January 1,2003, under which Hallmark Cards agreed for a term of three years to provideCrown Media Holdings with tax, risk management, health safety, environmental,insurance, legal, treasury and cash management services and real estateconsulting services. Under the agreement, the Company agreed to pay HallmarkCards $515,000 per year for these services, plus out-of-pocket expenses andthird party fees, payable in arrears on the last business day of each quarter. For the year ended December 31, 2002,Crown Media Holdings had accrued $500,000 under the agreement. For each of theyears ended December 31, 2003 and 2004, Crown Media Holdings had accrued$515,000 under the agreement. Additionally, Hallmark Cards made a payment onCrown Media Holdings’ behalf for certain expenses in 

F-29

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the amount of $500,000 during first quarter 2002. At December 31,2003 and 2004 non-interest bearing unpaid accrued service fees and unreimbursedexpenses of $6.8 million and $8.6 million, respectively, were included inpayable to affiliates in the accompanying consolidated balance sheets.

***Film Asset Services Agreementwith Hallmark Entertainment***

TheCompany entered into a film asset services agreement with HallmarkEntertainment, under which Hallmark Entertainment provides Crown Media Holdingswith services related to the administration, distribution and otherexploitation of the Company’s film assets. The services agreement expires on December 31,2006, subject to cancellation by either party after the first or secondyear. In consideration for the servicesprovided by Hallmark Entertainment, Crown Media Holdings is obligated to pay aservice fee of $1.5 million per year, payable in quarterly installments of$375,000. Crown Media Holdings paid $1.9 million to Hallmark Entertainment forthese services in April 2002 and $1.5 million during 2003 and 2004. Atboth December 31, 2003 and 2004, non-interest bearing unpaid accruedservice fees of $375,000 were included in payable to affiliates in theaccompanying consolidated balance sheets.

***Trademark Agreement withHallmark Cards***

CrownMedia United States has trademark license agreement with Hallmark Licensing, Inc.for use of the “Hallmark” mark for the versions of the Hallmark Channeldistributed in the United States and for the Hallmark Movie Channel. CrownMedia International and Crown Entertainment had trademark license agreementswith Hallmark Cards for use of the “Hallmark” mark for the version of theHallmark Channel distributed internationally. The trademark license agreementsfor the United States Hallmark Channel and the Movie Channel expire on September 1,2005. The Company is not required to pay any fees under the trademark licenseagreements.

***Program License Agreements withHallmark Entertainment Distribution***

Crown Media United Stateslicenses programming for distribution in the United States from HallmarkEntertainment Distribution under a separate program license agreement, dated January 1,2001. Under this program license agreement, Crown Media United States licensesprograms owned or controlled by Hallmark Entertainment Distribution, as well asall programming produced by or on behalf of Hallmark Entertainment Distributionfor Crown Media United States. The program agreement has a term of five yearsand is automatically renewable for additional three-year periods, subject torate adjustments, so long as Hallmark Entertainment Distribution or itsaffiliates, owns an interest of 35% or more of Crown Media Holdings. If,at any time, Hallmark Entertainment Distribution ceases to own a 35% interestin Crown Media Holdings, and if, at that time, the remaining term of theprogram agreement is less than two years, then the remaining term of theprogram agreement will be extended to the date two years after the date onwhich Hallmark Entertainment Distribution ceased to own a 35% interest in CrownMedia Holdings.

Crown Media International had aprogram license agreement with Hallmark Entertainment Distribution dated January 1,2001. The agreement would have expired on December 31, 2005, subject to arenewal through December 31, 2010. Under the terms of the agreement, CrownMedia International had the exclusive right to exhibit Hallmark EntertainmentDistribution produced programming in the territories in which Crown MediaInternational operated during three 18-month windows. Crown Media Internationalalso had the exclusive right to exhibit programming in markets where it did notcurrently operate, if it elected to distribute the channel in those markets,subject to any agreement between Hallmark Entertainment Distribution and athird party existing at the time Crown Media International launches the channelin those markets. In addition, under the agreement, Hallmark EntertainmentDistribution was generally obligated to sell to Crown Media International allof the programming it produces and Crown Media International was obligated topurchase up to 50 programs produced per year during the term of the agreement.

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If Crown Media United States sub-licenses, or CrownMedia International had sub-licensed, any licensed program to a third party,they must equally share with Hallmark Entertainment Distribution the excess, ifany, of the sublicensing fee over the initial program license fee paid by theCompany. The Company did not sub-license any licensed program to a third partyduring 2003. The Company sub-licensed $3.0 million and $1.7 million during theyears ended December 31, 2002 and 2004, respectively, which resulted in$749,000 and $330,000, respectively, owed to Hallmark EntertainmentDistribution. Amounts due to Hallmark Entertainment Distribution as a result ofthese sub-licensing agreements have been included in license fees payable toaffiliates in the accompanying consolidated balance sheets as noted below.

Programming costs relatedto the Hallmark program agreements were $47.3 million, $27.1 million, and $39.3million for the years ended December 31, 2002, 2003 and 2004,respectively. As of December 31, 2003 and 2004, $90.6 million and $152.0million, respectively, are included in license fees payable to affiliates inthe accompanying consolidated balance sheets. The Company obtained a letterfrom Hallmark Cards whereas Hallmark Cards or its subsidiaries will not demandpayment of these license fees payable prior to May 31, 2006. Crown MediaHoldings paid Hallmark Entertainment Distribution $25.0 million, $30.0 millionand $5.0 million for license fees in 2002, 2003 and 2004, respectively.

**14.   Company Obligated Mandatorily RedeemablePreferred Interest and NICC License Agreements**

VISN owns a $25.0 million company obligatedmandatorily redeemable preferred interest in Crown Media United States (the “preferredinterest”) issued in connection with an investment by Crown Media Internationalin Crown Media United States. On November 13, 1998, HEN Domestic Holdings, Inc.,a wholly-owned subsidiary of Crown Media International, Vision Group, VISN andHenson Cable Networks, Inc. signed an amended and restated companyagreement governing the operation of Crown Media United States, which agreementwas further amended on February 22, 2001 and January 1, 2002 (the “companyagreement”).

Under the company agreement, the members agreed thatif during any year ending after January 1, 2005 and prior to December 31,2009, Crown Media United States has net profits in excess of $10.0 million, andthe preferred interest has not been redeemed, Crown Media United States willredeem the preferred interest in an amount equal to the lesser of: (i) suchexcess net profits; (ii) $5.0 million; or (iii) the amount equal tothe preferred liquidation preference on the date of redemption. Crown MediaUnited States may voluntarily redeem the preferred interest at any time,however, it is obligated to do so on the date of redemption (December 31,2010). Due to the mandatory 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.

Under the companyagreement, Crown Media United States may be required to make certain paymentsin regards to programming provisions to the National Interfaith Cable Coalition(“NICC”). Specifically, Crown Media United States may be required to paylicense fees to NICC or fund production costs consisting of: (i) a totalof $5.3 million per year, with consumer price index escalations, for tworecurring programming blocks produced by NICC; (ii) up to $10 million peryear for an additional recurring “signature” series program block co-producedby NICC and Crown Media United States; (iii) up to $600,000 per “non-dramatic”holiday special produced by NICC; and (iv) up to $1.0 million per “dramatic”holiday special co-produced by NICC and Hallmark Entertainment. In addition, six months prior to the expirationof the agreement, Crown Media United States must negotiate in good faith withNICC regarding a continuation of this programming and funding commitment. Ifagreement is not reached and Crown Media United States does not continue theNICC programming and funding commitments at the same levels, NICC is entitledto compel Crown Media Holdings to repurchase all of NICC’s Crown Media Holdingsshares at their then-current market value no later than 60 days following theexpiration of 

F-31

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the amendment. Crown Media United States, however, cannullify this put by electing to continue the NICC programming and fundingcommitments at the same levels.

Pursuant to additionalamendments effective January 1, 2002, and January 1, 2004, CrownMedia United States agreed to advance NICC $3,000,000 in each of 2002, 2003 and2004 to help fund NICC’s cost of expanding its production operations to producethe aforementioned programming. This advance will be recovered from the licensefees payable for this programming when such programming is produced andaccepted by Crown Media United States for distribution on the channel. Theseexpenses are included as components of affiliate programming costs in theaccompanying consolidated statements of operations.

During the year ended December 31,2003 and 2004, Crown Media United States paid NICC $10.2 million and $12.3million, respectively, related to the company agreement as amended.

**15.   Stockholders’ Equity**

The Company’s authorized capitalstock current consists of 200,000,000 shares of Class A common stock and120,000,000 shares of Class B common stock, all at $0.01 par value pershare.

Hallmark EntertainmentInvestment Company controls all of the Company’s outstanding shares of Class Bcommon stock, which, together with the shares of Class A common stock itowns, represents approximately 95.8% as of December 31, 2004, of thevoting power on all matters submitted to the Company’s stockholders. Each shareof Class B common stock is convertible at the option of the holder intoone share of Class A common stock. Shares of Class B common stock aregenerally automatically convertible into Class A common stock upon sale orother transfer by the selling stockholder. In addition, the Class B commonstockholder is entitled to 10 votes per share as compared to one vote per shareof Class A common stock. With the exception of the voting and conversionrights, shares of Class A common stock and shares of Class B commonstock are identical.

TheCompany has not paid any cash dividends on its common stock since inception.The Company anticipates that it will retain all of its earnings, if any, in theforeseeable future to finance the continued growth and expansion of itsbusiness, and the Company has no current intention to pay cash dividends. TheCompany’s bank credit facility also prohibits its declaring or paying any cashdividends.

**16.   Income Taxes**

Crown Media Holdings accountsfor income taxes using the asset and liability method. Under this method, CrownMedia Holdings recognizes deferred tax assets and liabilities for future taxconsequences attributable to the difference between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbasis. Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporary differencesare expected to be recovered or settled.

On March 11, 2003, Crown Media Holdings became amember of Hallmark Cards consolidated federal tax group and entered into afederal tax sharing agreement with Hallmark Cards. Hallmark Cards benefits fromtax losses generated after that date. Hallmark Cards will pay Crown MediaHoldings for the benefits realized by Hallmark Cards as a result of includingCrown Media Holdings in its consolidated income tax return, 75% in cash on aquarterly basis and the balance when Crown Media Holdings becomes a taxpayer. Underthis federal tax sharing agreement, at Hallmark Cards’ option, thisnon-interest bearing 25% balance may also be applied as an offset against anyamounts owed by Crown Media Holdings to any member of the Hallmark Cardsconsolidation group under any loan, line of credit or other payable, subject tolimitations under any loan indentures or contracts restricting such offsets. From May 9, 2000 through March 10,2003, Crown Media Holdings was not included in the consolidated federal incometax return of Hallmark Cards. Consequently, there was no tax sharing agreementcovering federal taxes during that period.

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Hallmark Cards expects to use approximately $264.7million of the Company’s 2004 tax losses and has used approximately $522.6million (including the $264.7 million generated in 2004) of Crown MediaHoldings tax losses since entering into the tax sharing agreement. Pursuant tothe tax sharing agreement, the Company received $49.4 million and $56.6 millionunder the tax sharing agreement during 2003 and 2004, respectively. Thesereceipts have been recorded as an addition to paid-in capital. The Company hasrecorded a deferred tax asset of $103.2 million related to the taxable lossgenerated during the year ended December 31, 2004, which has been includedin the net operating loss component of deferred tax assets in the table below. TheCompany has recorded a deferred tax asset of $203.8 million related to thecumulative losses generated while the Company has been party to the tax sharingagreement. The entire amount of the Company’s deferred tax asset resulting fromnet operating losses generated while a party to the tax sharing agreement hasbeen offset with a valuation allowance. The Company may ultimately reverse thevaluation allowance and record a tax benefit if it is determined, more likelythan not, that the Company could realize the tax benefit if it were treated asa stand-alone taxpayer. Realization of deferred tax assets previously utilizedby Hallmark Cards would result in a charge to paid-in capital for the amountreceived under the tax sharing agreement.

Since May 9, 2000, theCompany has been included in certain combined state income tax returns ofHallmark or Hallmark Entertainment. Consequently, Hallmark Entertainment andthe Company entered into a state tax sharing agreement. Under the state taxsharing agreement, Hallmark Entertainment and Crown Media Holdings fileconsolidated, combined or unitary state tax returns. Crown Media Holdings makestax-sharing payments to (or receives payments from) Hallmark Entertainmentequal to the taxes (or tax refunds) that Crown Media Holdings would pay (orreceive) if it filed on a stand-alone basis. Such payments are computed basedon Crown Media Holdings’ taxable income (loss) and other tax items beginningthe day following the May 9, 2000, reorganization.

The income tax provision is comprised of the following:
| ** **      | ** ** | **Years Ended December 31,** | ** ** |
|-----------------|------------|---------------------------------------------|------------|
| ** **      | ** ** | **2002**                                    | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **      | ** ** | **(In thousands)**                     | ** ** |
| Current:        |       |                                        |       |   |   |   |   |
| Federal         |       | $                                           | —     |   | $ | — |   | $ | — |   |
| Foreign         |       | 2,054                                       |       | 3,189 |   | 2,288 |   |
| State and local |       | —                                      |       | — |   | — |   |
| Total current   |       | 2,054                                       |       | 3,189 |   | 2,288 |   |
| Deferred:       |       |                                        |       |   |   |   |   |
| Federal         |       | —                                      |       | — |   | — |   |
| State and local |       | —                                      |       | — |   | — |   |
| Total deferred  |       | —                                      |       | — |   | — |   |
| Total           |       | $                                           | 2,054      |   | $ | 3,189 |   | $ | 2,288 |   |

 

The following table reconciles the income tax provisionat the U.S. statutory rate to the provision per the financial statements:
| ** **                              | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------|------------|---------------------------------------------|------------|
| ** **                              | ** ** | **2002**                                    | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                              | ** ** | **(In thousands)**                     | ** ** |
| Taxes computed at 35%                   |       | $                                           | (108,841   | ) | $ | (70,686 | ) | $ | (110,081 | ) |
| Other                                   |       | 4,451                                       |       | 1,295 |   | 265 |   |
| Increase in federal valuation allowance |       | 104,390                                     |       | 69,391 |   | 109,816 |   |
| Tax on foreign income                   |       | 2,054                                       |       | 3,189 |   | 2,288 |   |
| Income tax provision                    |       | $                                           | 2,054      |   | $ | 3,189 |   | $ | 2,288 |   |

 

F-33

----

The components of Crown Media Holdings’ deferred taxassets and liabilities are comprised of the following:
| ** **                           | ** ** | **As of December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|
| ** **                           | ** ** | **2003**                              | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **(In thousands)**               | ** ** |
| Deferred  tax assets:                |       |                                  |       |   |   |
| Deferred  revenue                    |       | $                                     | 852        |   | $ | 38 |   |
| Bad  debt reserve                    |       | 2,728                                 |       | 2,611 |   |
| Accrued  compensation                |       | 5,011                                 |       | 8,472 |   |
| Net  operating loss                  |       | 388,696                               |       | 471,454 |   |
| Losses  from unconsolidated entities |       | 747                                   |       | — |   |
| Other                                |       | 8,930                                 |       | 5,737 |   |
| Valuation  allowance                 |       | (213,101                              | )          | (316,455 | ) |
| Total  deferred tax assets           |       | 193,863                               |       | 171,857 |   |
| Deferred  tax liabilities:           |       |                                  |       |   |   |
| Depreciation                         |       | (12,995                               | )          | (12,314 | ) |
| Film  inventory                      |       | (174,499                              | )          | (154,274 | ) |
| Other                                |       | (6,369                                | )          | (5,269 | ) |
| Total  deferred tax liabilities      |       | (193,863                              | )          | (171,857 | ) |
| Net deferred taxes                   |       | $                                     | —     |   | $ | — |   |

 

As of December 31, 2004, cumulative federal net taxoperating losses, exclusive of those used by Hallmark Cards in its consolidatedreturns, are approximately $686.0 million and expire in 2020 through 2023.

**17.   Fair Value**

The following table presents the carrying amounts andestimated fair values of the Company’s financial instruments at December 31,2003 and 2004. The estimated fair value of a financial instrument is the amountat which the instrument could be exchanged in a current transaction betweenwilling parties.
| ** **                                                     | ** ** | **2003**                | ** ** | **2004**        | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|-----------------|------------|
| ** **                                                     | ** ** | **Carrying  Amount**    | ** ** | **Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| ** **                                                     | ** ** | **(In thousands)** | ** ** |
| Senior unsecured  note to HC Crown, including accrued interest |       | $                       | 417,083    |            | $          | 417,083 |   | $ | 460,930 |   | $ | 428,765 |   |
| Company obligated  mandatorily redeemable preferred interest   |       | 9,079                   |       | 9,079           |       | 11,488 |   | 12,100 |   |
|                                                                |            |                         |            |                 |            |  |  |  |  |  |  |  |  |

 

The carrying amounts shown inthe table are included in the accompanying consolidated balance sheets underthe indicated captions. The Company estimates the fair value of the companyobligated mandatorily redeemable preferred interest on an annual basis in November asit is not practicable to perform the valuation more frequently. The Companyemploys a discounted cash flows approach to value the company obligatedmandatorily redeemable preferred interest that involves a significant amount oftime to perform. The valuation is dependent upon the future pre-tax income ofCrown Media United States since the Company is only obligated to make paymentson the instrument to the extent pre-tax income is generated by Crown MediaUnited States.

The Company estimates the fairvalue of the senior unsecured note to HC Crown on a quarterly basis. TheCompany estimated the fair value of the senior unsecured not to HC Crown bydetermining the discounted value of future cash flows, based upon a borrowingrate of 11.5%, which is estimated to be the current market interest rate for adebt instrument with similar terms.

F-34

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Accountspayable and receivable are reasonable estimates of their fair values because ofthe short-term nature of these instruments. The interest rates on the bankcredit facility and the line of credit with HC Crown are variable and/or resetperiodically, therefore, the fair value of this debt is not significantly affectedby fluctuations in interest rates. The Company’s payables to affiliates do notbear interest.

**18.**   Stock-Based Compensation

Crown Media Holdings has onestock option plan, the Amended and Restated Crown Media Holdings, Inc.2000 Long Term Incentive Plan (the “Plan”). Crown Media Holdings accounts forthe Plan under APB 25, under which compensation cost approximated $0 for theyears ended December 31, 2002, 2003 and 2004. Compensation cost for stockoptions issued to employees represented the excess of the quoted market priceof the Company’s stock at the measurement date of the grant over the exercise priceof the option.

Crown Media Holdings may grantoptions for up to 10.0 million shares under the Plan and has granted options on1.8 million shares during 2002. The stock options expire 10 years from the dateof grant and generally vest over service periods that range from date of grantto four years.

The fair value of each optiongrant is estimated on the date of grant using the Black-Scholes option pricingmodel with the following assumptions used for grants in 2002: risk-freeinterest rate of 4.24% for the options with a four year vesting period; noexpected dividend yield; expected lives of six years; and expected volatilityof 35.21%. Expected volatility was calculated using the average volatilities ofcomparable public companies through December 31, 2002.

There were no stock optionsgranted in 2003 and 2004.

A summary of the status of the Plan at December 31,2002, 2003, and 2004, and changes during the years then ended is presented inthe table and narrative below
| ** **                       | ** ** | **Shares**              | ** ** | **Exercise Price  Per Option** | ** ** | **Weighted Average  Exercise Price  Per Option** | ** **            |
|----------------------------------|------------|-------------------------|------------|------------------------------------------|------------|-----------------------------------------------------------------|-----------------------|
| ** **                       | ** ** | **(In thousands)** | ** ** | ** **                               | ** ** | ** **                                                      | ** **            |
| Balance, December 31, 2001  |       |                    | 6,891      |                                     |       |                                                            |                  |   | $ | 12.66 |   |   |
| Options granted                  |       |                    | 1,806      |                                     |       | $                                                               | 9.76-12.50            |   |   | $ | 12.19 |   |   |
| Options exercised                |       |                    | (182       | )                                        |       | $                                                               | 8.33-  8.94 |   |   | $ | 8.93 |   |   |
| Options canceled                 |       |                    | (678       | )                                        |       | $                                                               | 12.50-20.77           |   |   | $ | 15.62 |   |   |
| Balance, December 31, 2002  |       |                    | 7,837      |                                     |       |                                                            |                  |   | $ | 12.38 |   |   |
| Options canceled                 |       |                    | (6,189     | )                                        |       | $                                                               | 7.47-21.00            |   |   | $ | 12.80 |   |   |
| Balance, December 31, 2003  |       |                    | 1,648      |                                     |       |                                                            |                  |   | $ | 11.12 |   |   |
| Options canceled                 |       |                    | (289       | )                                        |       | $                                                               | 8.33-17.45            |   |   | $ | 13.09 |   |   |
| Balance,  December 31, 2004 |       |                    | 1,359      |                                     |       |                                                            |                  |   | $ | 10.71 |   |   |

 
| **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                                  |       |                         | 794        |   |   |   | 1.5 |   |   |   | $ | 8.95 |   |   |   | 783 |   |   |   | $ | 8.94 |   |   |
| $10.51-12.60                                             |       |                         | 315        |   |   |   | 7.0 |   |   |   | $ | 11.73 |   |   |   | 208 |   |   |   | $ | 11.92 |   |   |
| $12.61-14.70                                             |       |                         | 149        |   |   |   | 5.3 |   |   |   | $ | 14.00 |   |   |   | 149 |   |   |   | $ | 14.00 |   |   |
| $14.71-21.00                                             |       |                         | 101        |   |   |   | 6.2 |   |   |   | $ | 16.47 |   |   |   | 95 |   |   |   | $ | 16.45 |   |   |
|                                                     |       |                         | 1,359      |   |   |   |   |   |   |   |   |   |   |   | 1,235 |   |   |   |   |   |   |

 

F-35

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In April 2003, the Company’s Board of Directorsapproved actions to provide additional incentives to encourage retention of itsemployees. Crown Media Holdings’ then outstanding stock options held byemployees had exercise prices significantly above the current market value ofits Class A common stock. The Company made an offer in May 2003 tosenior management and vice presidents, totaling approximately 55 persons, toexchange their options for restricted stock units (“RSUs”). The exchange ratiowas one RSU for every 2.5 options for shares of the Company’s Class Acommon stock, resulting in a total of 5,126,732 options exchanged for 2,050,693RSUs. Each RSU, upon vesting, represents the right to receive one share of Class Acommon stock or the value of the share in cash at the time of vesting. Thedetermination of whether RSUs will be settled in cash or common stock is madeby the Company’s Board of Directors. The RSUs vest over three years inone-third increments on the anniversary of the grant date each year.

Options for 279,254 shares of common stock owned bycertain executives and vice presidents that were not exchanged are also subjectto variable plan accounting in which compensation is remeasured at eachreporting date until the options are exercised, expire unexercised or areforfeited.

In May 2004, the Company’s Board of Directorsapproved an additional grant to employees of 1,065,000 RSUs. The EmploymentRSUs, which constitute 70% of the award granted in 2004, vest in equalone-third installments over the next three years on the anniversary of thegrant date each year. The Company is accruing expense related to the EmploymentRSUs ratably over each installment’s vesting period. The Performance RSUs,constituting 30% of the award granted in 2004, vest on the 3rdanniversary of the grant date, provided that the price of the Crown commonstock is $14 or higher on that date. The Company will begin to accrue compensationexpense for the Performance RSUs when it becomes probable that the price of theCompany’s stock will be $14 or more on the 3rd anniversary of thegrant date.

In May 2004, the Company granted 115,000 RSUs toa Company executive and changed the original vesting terms of this employee’s2003 grant such that one-half of the grant will vest in January 2005 andthe other half will vest in January 2006. Compensation expense alreadyrecorded for this employee’s 2003 grant will not be adjusted, rather, compensationexpense for the remaining unvested portion of the grant will be accrued inone-half increments ratably over the new vesting periods.

The Company is recording compensation expense based onthe fair value of the common stock or cash equivalent required to settle theRSUs at each reporting period end during the vesting period of the RSUs. Suchcompensation expense is calculated using variable plan accounting.

The Company recorded $5.9 million and $11.5 million ofcompensation expense associated with the RSUs during the years ended December 31,2003 and 2004, respectively, which has been recorded as an accrued liability inthe accompanying consolidated balance sheet and is included in selling, generaland administrative expense in the accompanying consolidated statement ofoperations. The Company settled the first one-third increment of the 2003 RSUsin June 2004 for approximately $3.5 million in cash.

In addition, in May 2003,the Company’s Board immediately vested the stock options of all employees belowthe vice-president level who held options at that time and granted them a rightto receive a future cash payment of $1.00 for each outstanding option held bythe employee. The immediate vesting of the employees’ stock options created anew measurement date which required the Company to record stock compensationexpense, if any, for the excess of the Company’s stock price on the measurementdate over the underlying stock options’ exercise price. Since the price of theCompany’s Class A common stock on the measurement date was less than theexercise price of all of the stock options owned by the employees, nocompensation expense was recorded under APB 25. However, the June 2004cash payments totaling $344,000 was contingent upon each respective employees’continuous employment through that date. As a result, the Company recordedcompensation expense from June 2003 through May 2004 as the compensationwas earned. For the years ended December 31, 2003 and 2004, $188,000 and$140,000, respectively, of compensation expense was recorded related to thisobligation.

F-36

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**19.   Employee Benefits**

***Benefit Plans***

CrownMedia Holdings adopted a 401(k) retirement plan for all of its UnitedStates employees effective January 1, 2002. Under the provisions of theCrown Media Employee Savings Plan (“ESP”), any full-time or part-time employeemay join the ESP 90 days after his or her employment. Employees that qualifyfor participation can contribute up to 50% of their pre-tax salary, subject toa maximum contribution limit as determined by the Internal Revenue Service, andup to 16% of after-tax salary, not to exceed 50% total of combined and pre-taxand after-tax contributions. Additionally, for every dollar up to six percentof salary an employee contributes, Crown Media Holdings will contribute fiftycents. Crown Media Holdings contributed $557,000, $411,000, and $536,000 forthe years ended December 31, 2002, 2003, and 2004, respectively.

***Deferred Compensation Plans***

The Company sponsors adeferred compensation plan for its management. Participants in this plan earninterest on their deferred compensation. The Company’s deferred compensationobligations for this plan are included in its consolidated balance sheet inlong-term accrued liabilities. The deferred compensation liability as ofDecember 31, 2003 and 2004, was $0 and $2.1 million, respectively.

***Retention Program***

The Company established aretention program for approximately 175 employees who could be affected ifCrown Media Holdings’ international business was sold. Under the program,employees that remained with the Company through the earlier of the date onwhich a sale of the international business becomes effective orDecember 31, 2004, were entitled to a retention bonus totalingapproximately $7.7 million. The Company recorded $7.7 million of expense forthe year ended December 31, 2004, in regard to this retention program, ofwhich $7.1 million was paid in 2005.

**20.**   Nonmonetary Transaction

In December 2003, theCompany executed two agreements with a customer for the exchange of programmingrights. The Company exchanged exclusive programming rights forvarious titles from its film assets with license windows of 5 yearseach within certain territories. The customerexchanged the exclusive programming rights to 32episodes of a mini-movie series, each with a 3-year window, to air theprogramming within the United States. Under the arrangement, theCompany will pay approximately $5.0 million for theprogramming rights obtained and receive approximately $3.5 million  from the customer for the film asset licensing fees as a result of  this  nonmonetarytransaction. The payment terms in the arrangement are for four quarterlyinstallments to be made by each party on the same dates, commencing in March 2003and ending in January 2005.  The transaction was based uponthe fair value of the programming rights received since it was morereadily determinable than the fair value of the film asset licensing feesexchanged. Accordingly, the Company capitalized $5.0 million in program licensefees and recognized $3.5 million in film asset licensing fees during December 2003.

**21.   Commitments and Contingencies**

In the normal course ofbusiness, the Company has entered into agreements that commit it to make cashpayments in future periods with respect to non-cancelable leases andprogramming contracts.

Until April 26, 2005,the Company subleased transponder capacity to third parties and all guaranteedperformance criteria was matched with the guaranteed performance criteria thatthe Company receives from the lease transponder providers. Until April 26,2005, the Company had a third party contract for the distribution of channelsfrom its Network Operations Center that required it to perform according toindustry standard practice, with penalties attached should performance dropbelow agreed-upon criteria.

F-37

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TheCompany uses the Network Operations Center for origination and playback andother playback and satellite vendors for the distribution of its signals. Theseare subject to potential interruption from fire, tornadoes, lightning and otherunexpected causes. Any significant interruption of these technical facilitiesor services could have an adverse effect on the Company’s operating results andfinancial condition. A potential loss of revenue from such interruption doesnot relieve the Company of the vast majority of committed expenditures andexpenses.

SFASNo. 63 requires an entity providing licensed programming to report anasset and liability for the rights licensed under a programming agreement onlywhen the license period has begun and when certain other defined requirementsare met. As such, the accompanying consolidated balance sheets do not reflectboth gross assets and liabilities of $179.9 million and $166.9 million as of December 31,2003 and 2004, respectively, related to committed program license fees payableto Hallmark Entertainment Distribution and various third parties with airingwindows which begin subsequent to period-end.

Under certain of theagreements with distributors, additional subscriber acquisition fees willbecome payable by the Company if defined incremental subscriber levels arereached. The maximum amount of these additional subscriber acquisition fees is$33.4 million in aggregate at December 31, 2004, representing anincremental 32.3 million subscribers to the Hallmark Channel. Under certain ofthe agreements, the Company may also be required to pay substantial marketingsupport payments, if subscribers exceed proscribed benchmarks, as defined inthe respective agreements.

In May 2005,we received a letter from National Interfaith Cable Coalition, Inc.threatening litigation in regard to an Amendment dated February 22, 2001to the Amended and Restated Company Agreement of Crown Media United States. TheAmendment is described below under “Crown Media United States Amended and RestatedCompany Agreement” in Item 13, Certain Relationships and Related Transactions. Theletter claims that, among other things, the Company and Hallmark Entertainment, Inc.have not honored their commitments relating to the production and financing of certainNICC and “faith and values” programming for broadcast on the Hallmark Channelin the United States. NICC alleges that we and HEI have materially breached theAmendment, causing substantial damages to NICC in an amount which exceeds$100.0 million. The letter further indicates that NICC intends to filelitigation for breaches of the Amendment unless we agree, by June 1, 2005,to enter into a new, extended agreement with NICC for the production, promotionand funding of programming. We believe that the Company and HEI are incompliances with the Amendment. We cannot, however, predict whether the letterwill result in litigation, an amendment or other resolution.

Contractual maturities of long-term obligations overthe next five years are as follows:
| **Years Ended December 31,** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
|---------------------------------------------|------------|------------|------------|-------------------------|------------|
| 2005                                        |       |       | $          | 301                     |       |   |
| 2006                                        |       |       | 412,579    |                    |       |
| 2007                                        |       |       | 80,000     |                    |       |
| 2008                                        |       |       | 5,000      |                    |       |
| 2009                                        |       |       | 5,000      |                    |       |
| Thereafter                                  |       |       | 604,055    |                    |       |
|                                        |       |       | $          | 1,106,935               |       |   |

 

**22.   Segment Reporting**

The Company’s operations were at December 31,2004, organized into three principal divisions representing the operatingsegments: domestic channel, international channels, and film distribution. TheCompany evaluated performance and allocated resources based on the results ofthese segments. The key operating performance criteria used in this evaluationincluded revenue, Adjusted Segment EBITDA and total assets.

F-38

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Adjusted Segment EBITDA is the primary measure used bythe Company’s chief operating decision makers to evaluate segment operatingperformance and to decide how to allocate resources to segments. The Company’smeasure of Adjusted Segment EBITDA differs from the normal definition of EBITDA(earnings before interest, taxes, depreciation and amortization) used by mostcompanies. The Company defines Adjusted Segment EBITDA as earnings beforeinterest, taxes, depreciation, amortization, subscriber acquisition feeamortization, amortization of film assets, impairment of film assets andtechnical equipment, other expense, guaranteed preferred beneficial interestaccretion and cumulative effect of change in accounting principle. The Company believes Adjusted Segment EBITDA ismeaningful, because it provides investors a means to evaluate the operatingperformance of the Company on an ongoing basis using criteria that are used byother companies in its industry and investment bankers and analysts who track itsindustry. The Company believes that Adjusted Segment EBITDA is a meaningfulmeasure because it represents a transparent view of its recurring operatingperformance and allows its management and investors to readily view operatingtrends, perform analytical comparisons and benchmark the Company to similarcompanies in its industry. Adjusted Segment EBITDA is used by management tomonitor segment operations and to determine the allocation of resources tosegments. However, Adjusted Segment EBITDA should be considered inaddition to, not as a substitute for, historical operating income or loss, netloss, cash flow from operations and other measures of financial performancereported in accordance with accounting principles generally accepted in theUnited States.

Adjusted Segment EBITDA differs significantly fromcash flows from operating activities reflected in the consolidated statement ofcash flows. Cash flow from operating activities is net of interest and taxespaid and is a more comprehensive determination of periodic income on a cashbasis, exclusive of non-cash items of income and expenses such as depreciationand amortization. In contrast, Adjusted Segment EBITDA is derived from accrualbasis income and is not reduced for cash invested in working capital.Consequently, Adjusted Segment EBITDA is not affected by the timing ofreceivable collections or when accrued expenses are paid. The Company is notaware of any uniform standards for determining EBITDA or its Adjusted SegmentEBITDA and believes presentations of EBITDA may not be calculated consistentlyby different entities in the same or similar businesses. The Company provides a reconciliation of Adjusted Segment EBITDA to netloss of Crown Media Holdings and its subsidiaries.

Thefollowing tables present the Company’s key performance measures (in thousands):

*2002*
| ** **                                         | ** ** | **Domestic** | ** ** | **International** | ** ** | **Film  Distribution** | ** ** | **Adjustments** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------|------------|--------------|------------|-------------------|------------|------------------------|------------|-----------------|------------|------------------|------------|
| Total revenue                                      |       | $66,567      |       |              | $77,496    |                   |       |            | $23,951    |             |       |   | $(7,005 | )(1) |   | $161,009 |   |
| Adjusted Segment EBITDA                            |       | $(101,575    | )          |              | $(62,350   | )                      |       |            | $(26,113   | )                |       |   | $21,200 | (2) |   | $(168,838 | ) |
| Depreciation and amortization expense         |       | (4,797       | )          |              | (30,430    | )                      |       |            | 26,445     |             |       |   | (6,986 | )(3) |   | (15,768 | ) |
| Amortization of film assets                        |       | —       |       |              | —     |                   |       |            | (27,035    | )                |       |   | — |   |   | (27,035 | ) |
| Subscriber acquisition fee expense                 |       | (34,295      | )          |              | —     |                   |       |            | 4,663      |             |       |   | (21,591 | )(2) |   | (51,223 | ) |
| Interest expense                                   |       | (3,514       | )          |              | (558       | )                      |       |            | (20,075    | )                |       |   | 1,544 | (2) |   | (22,603 | ) |
| Guaranteed preferred beneficial interest accretion |       | —       |       |              | —     |                   |       |            | (25,508    | )                |       |   | — |   |   | (25,508 | ) |
| Income tax provision                               |       | —       |       |              | (1,902     | )                      |       |            | (152       | )                |       |   |   |   |   | (2,054 | ) |
| Net loss                                           |       | $(144,181    | )          |              | $(95,240   | )                      |       |            | $(67,775   | )                |       |   | $(5,833 | ) |   | $(313,029 | ) |
| Total assets                                       |       | $589,000     |       |              | $87,128    |                   |       |            | $821,802   |             |       |   | $— |   |   | $1,497,930 |   |

 

F-39

----

*2003*
| ** **                                                | ** ** | **Domestic** | ** ** | **International** | ** ** | **Film   Distribution ** | ** ** | **Adjustments** | ** ** | ** Consolidated ** | ** ** |
|-----------------------------------------------------------|------------|--------------|------------|-------------------|------------|------------------------------------|------------|-----------------|------------|------------------------------|------------|
| Total revenue                                             |       | $91,284      |       |              | $83,437    |                               |       |            | $39,896    |                         |       |   | $(7,093 | )(1) |   |   | $207,524 |   |   |
| Adjusted Segment EBITDA                                   |       | $(29,936     | )          |              | $(11,190   | )                                  |       |            | $19,345    |                         |       |   | $(22,756 | )(2) |   |   | $(44,537 | ) |   |
| Guaranteed preferred beneficial  interest accretion  |       | —       |       |              | —     |                               |       |            | —     |                         |       |   | 22,812 | (2) |   |   | 22,812 |   |   |
| Depreciation and amortization  expense                    |       | (5,493       | )          |              | (28,035    | )                                  |       |            | 18,730     |                         |       |   | (10 | )(3) |   |   | (14,808 | ) |   |
| Amortization of film assets                               |       | —       |       |              | —     |                               |       |            | (40,168    | )                            |       |   | — |   |   |   | (40,168 | ) |   |
| Subscriber acquisition fee expense                        |       | (36,265      | )          |              | —     |                               |       |            | 3,904      |                         |       |   | — |   |   |   | (32,361 | ) |   |
| Interest expense                                          |       | (1,472       | )          |              | (2,360     | )                                  |       |            | (42,991    | )                            |       |   | (45 | )(2) |   |   | (46,868 | ) |   |
| Loss on early extinguishment of  debt                     |       | —       |       |              | —     |                               |       |            | (39,812    | )                            |       |   | — |   |   |   | (39,812 | ) |   |
| Guaranteed preferred beneficial interest accretion        |       | —       |       |              | —     |                               |       |            | (23,218    | )                            |       |   | — |   |   |   | (23,218 | ) |   |
| Income tax provision                                      |       | —       |       |              | (2,932     | )                                  |       |            | (257       | )                            |       |   |   |   |   |   | (3,189 | ) |   |
| Cumulative effect of change in  accounting principle |       | 17,000       |       |              | —     |                               |       |            | —     |                         |       |   | — |   |   |   | 17,000 |   |   |
| Net loss                                                  |       | $(56,166     | )          |              | $(44,517   | )                                  |       |            | $(104,467  | )                            |       |   | $1 |   |   |   | $(205,149 | ) |   |
| Total assets                                              |       | $661,224     |       |              | $91,910    |                               |       |            | $812,613   |                         |       |   | $— |   |   |   | $1,565,747 |   |   |

 

F-40

----

*2004*
| ** **                                        | ** ** | **Domestic** | ** ** | **International** | ** ** | **Film   Distribution ** | ** ** | ** Adjustments ** | ** ** | ** Consolidated ** | ** ** |
|---------------------------------------------------|------------|--------------|------------|-------------------|------------|------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Total revenue                                     |       | $128,434     |       |              | $95,467    |                               |       |                        | $28,698    |                         |       |   | $(11,312 | )(1) |   |   | $241,287 |   |   |
| Adjusted Segment EBITDA                           |       | $(15,096     | )          |              | $(14,491   | )                                  |       |                        | $3,095     |                         |       |   | $(121,817 | )(2) |   |   | $(148,309 | ) |   |
| Impairment of film assets and technical equipment |       | —       |       |              | —     |                               |       |                        | —     |                         |       |   | 117,891 | (2) |   |   | 117,891 |   |   |
| Depreciation and amortization expense             |       | (6,816       | )          |              | (23,860    | )                                  |       |                        | 12,920     |                         |       |   | 3,930 | (3) |   |   | (13,826 | ) |   |
| Amortization of film assets                       |       | —       |       |              | —     |                               |       |                        | (47,197    | )                            |       |   | — |   |   |   | (47,197 | ) |   |
| Impairment of film assets and technical equipment |       | —       |       |              | (6,892     | )                                  |       |                        | (110,999   | )                            |       |   | — |   |   |   | (117,891 | ) |   |
| Subscriber acquisition fee  expense               |       | (41,639      | )          |              | —     |                               |       |                        | 3,386      |                         |       |   | — |   |   |   | (38,253 | ) |   |
| Interest expense                                  |       | (2,495       | )          |              | (1,488     | )                                  |       |                        | (62,950    | )                            |       |   | — |   |   |   | (66,933 | ) |   |
| Income tax provision                              |       | —       |       |              | (2,097     | )                                  |       |                        | (191       | )                            |       |   |   |   |   |   | (2,288 | ) |   |
| Net loss                                          |       | $(66,046     | )          |              | $(48,828   | )                                  |       |                        | $(201,936  | )                            |       |   | $4 |   |   |   | $(316,806 | ) |   |
| Total assets                                      |       | $761,612     |       |              | $80,862    |                               |       |                        | $670,294   |                         |       |   | $— |   |   |   | $1,512,768 |   |   |

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(1)          Adjustment representsthe netting of certain subscriber acquisition fee expense against revenue notallocated to the domestic segment.

(2)          Represents amounts notallocated to segments that are reviewed by our chief operating decision maker,which consist primarily of our impairment of film assets and technicalequipment.

(3)          Represents programmingexpense excluded from individual segments EBITDA calculation.

British Sky Broadcasting,which is domiciled in the United Kingdom and is included in the Company’sinternational segment, accounted for 17%, 8%, and 13% of the Company’sconsolidated revenues for the years ended December 31, 2002, 2003 and2004, respectively. No individual country, other than the United States and theUnited Kingdom, accounted for more than 10% of the Company’s consolidatedrevenues or accounts receivable. No individual pay television distributoraccounted for more than 15% of the Company’s consolidated subscribers for theyears ended December 31, 2002, 2003 or 2004.

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**23.   Quarterly Information (Unaudited)**

The following tables contain unaudited quarterlyfinancial data (in thousands, except per share amounts) for the years ended December 31,2003 and 2004.
| ** **                                               | ** ** | **Quarters Ended** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|
| **2003**                                                 | ** ** | ** **              | ** ** | **3/31** | ** ** | **6/30** | ** ** | **9/30** | ** ** | **12/31** | ** ** | **Full Year** | ** ** |
| Total revenues                                           |       | $41,958                 |       | $45,423 |   | $50,986 |   | $69,157 |   | $207,524 |   |
| Programming costs                                        |       | (23,443                 | )          | (24,074 | ) | (29,727 | ) | (31,430 | ) | (108,674 | ) |
| Amortization of  film assets                             |       | (6,777                  | )          | (6,809 | ) | (11,371 | ) | (15,211 | ) | (40,168 | ) |
| Operating costs                                          |       | (17,673                 | )          | (19,387 | ) | (19,389 | ) | (16,851 | ) | (73,300 | ) |
| Selling,  marketing, general and administrative expenses |       | (22,027                 | )          | (23,665 | ) | (23,765 | ) | (24,987 | ) | (94,444 | ) |
| Loss from operations                                     |       | (27,962                 | )          | (28,512 | ) | (33,266 | ) | (19,322 | ) | (109,062 | ) |
| Loss from early  extinguishment of debt                  |       | —                  |       | — |   | (39,812 | ) | — |   | (39,812 | ) |
| Guaranteed  preferred beneficial interest accretion      |       | (11,047                 | )          | (12,171 | ) | — |   | — |   | (23,218 | ) |
| Interest expense                                         |       | (7,342                  | )          | (7,514 | ) | (15,374 | ) | (16,638 | ) | (46,868 | ) |
| Income tax  provision                                    |       | (339                    | )          | (1,200 | ) | (593 | ) | (1,057 | ) | (3,189 | ) |
| Cumulative effect  of change in accounting principle     |       | —                  |       | — |   | 16,328 |   | 672 |   | 17,000 |   |
| Net loss                                                 |       | $(46,690                | )          | $(49,397 | ) | $(72,717 | ) | $(36,345 | ) | $(205,149 | ) |
| Net loss per  share                                      |       | $(0.45                  | )          | $(0.47 | ) | $(0.70 | ) | $(0.35 | ) | $(1.96 | ) |
|                                                          |            |                         |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                               | ** ** | **Quarters Ended** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|
| **2004**                                                 | ** ** | ** **              | ** ** | **3/31** | ** ** | **6/30** | ** ** | **9/30** | ** ** | **12/31** | ** ** | **Full Year** | ** ** |
| Total revenues                                           |       | $58,333                 |       | $55,840 |   | $55,774 |   | $71,340 |   | $241,287 |   |
| Programming costs                                        |       | (29,827                 | )          | (31,036 | ) | (32,746 | ) | (43,613 | ) | (137,222 | ) |
| Amortization of  film assets                             |       | (9,982                  | )          | (5,484 | ) | (8,941 | ) | (22,790 | ) | (47,197 | ) |
| Impairment of  film assets and technical equipment       |       | —                  |       | — |   | (57,931 | ) | (59,960 | ) | (117,891 | ) |
| Operating costs                                          |       | (18,734                 | )          | (15,527 | ) | (19,469 | ) | (22,446 | ) | (76,176 | ) |
| Selling,  marketing, general and administrative expenses |       | (25,004                 | )          | (28,016 | ) | (24,745 | ) | (32,621 | ) | (110,386 | ) |
| Loss from operations                                     |       | (25,214                 | )          | (24,223 | ) | (88,058 | ) | (110,090 | ) | (247,585 | ) |
| Interest expense,  net                                   |       | (15,787                 | )          | (15,895 | ) | (16,801 | ) | (18,450 | ) | (66,933 | ) |
| Income tax  provision                                    |       | (475                    | )          | (469 | ) | (904 | ) | (440 | ) | (2,288 | ) |
| Net loss                                                 |       | $(41,476                | )          | $(40,587 | ) | $(105,763 | ) | $(128,980 | ) | $(316,806 | ) |
| Net loss per  share                                      |       | $(0.40                  | )          | $(0.39 | ) | $(1.01 | ) | $(1.23 | ) | $(3.03 | ) |
|                                                          |            |                         |            |  |  |  |  |  |  |  |  |  |  |

 

**24.   Subsequent Events**

***Amendment No. 8 of Credit Facility***

As of March 1, 2005, the Company entered intoAmendment No. 8 to its bank credit facility agreement. This amendmentextended the maturity date to May 31, 2006. Amendment No. 8 deleted aprevious provision regarding the decrease in the revolving line of credit to$180.0 million, which under Amendment No. 7 to the bank credit facility(executed in October 2004) would have become effective on the ForeignAsset Sale Effective Date. Therefore, the maximum amount of the revolving lineof credit will remain at $220.0 million. The Amendment removed a limitation onthe level of outstanding amounts under the bank credit facility which waslimited to 50% of the fair value of our film library. Also, 

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Amendment No. 8made a number of other significant changes to the bank credit facilityincluding deletion of certain financial covenants, changes to other financialcovenants, waivers of many covenants concerning 2004, a reduction in theinterest rates charged for loans under the credit facility and a reduction inthe commitment fee.

Several changes tofinancial covenants in the Amendment No. 7 to the bank credit facilitywere not effective until the Foreign Asset Sale Effective Date. The ForeignAsset Sale Effective Date did not occur in 2004, which was one of the reasonsthat the Company needed waivers of its compliance with certain financialcovenants in its bank credit facility. Amendment No. 8 waived itscompliance with the following financial covenants: (1) capital expendituresin 2004; (2) cash program acquisition guarantees in 2004; (3) trailing12-month EBITDA for the quarter ended December 31, 2004; (4) cashpayments to television distributors for subscribers in 2004; (5) net worthat December 31, 2004; (6) leverage ratio for the quarter ended December 31,2004; and (7) interest coverage ratio for the 2004 year. Amendment No. 8also deleted the net worth covenant; amended the limit on the Company’s cashprogram guarantees in 2005; amended the quarterly EBITDA requirements for theremainder of the loan term; and amended the limit of cash payments totelevision distributors for subscribers, the minimum number of subscribers andthe minimum gross subscriber revenue. Further, pursuant to Amendment No. 8,the limitation on Restricted Payments was amended to allow us to make certainpayments to Hallmark Cards or its affiliates.

***Sale of the International Business***

On February 23, 2005, we announced that we hadentered into a definitive agreement for the sale of our international businessto a group of investors comprised of Providence Equity Partners, 3i and U.K.television executive David Elstein. The transaction closed on April 26,2005. The sale included the international versions of the Hallmark Channel distributedoutside the United States, the international rights to over 580 titles in theCrown Media library, and the network broadcast facility based in Denver,Colorado. Substantially all of the employees of the international business aswell as the broadcast facility are employed by the investor group. Other thanin respect of or as contemplated by the agreements for these transactions,there are no material relationships between us and our affiliates, on the onehand, and the buyer and its affiliates, on the other hand.

Thecarrying amounts of the major classes of assets and liabilities included aspart of the anticipated disposal group are comprised of the following:
| ** **                                | ** ** | **As of December 31, 2004** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                | ** ** | **(In thousands)**                              | ** ** |
| Accounts  receivable                      |       |                                            | $31,552    |   |   |
| Program license  fees                     |       |                                            | 53,943     |   |   |
| Prepaid and other  assets                 |       |                                            | 9,155      |   |   |
| Property and  equipment, net              |       |                                            | 11,300     |   |   |
| Film assets, net                          |       |                                            | 147,646    |   |   |
| Accounts payable  and accrued liabilities |       |                                            | (8,255     | ) |   |
| License fees  payable                     |       |                                            | (11,053    | ) |   |
| Net assets of  disposal group             |       |                                            | $234,288   |   |   |

 

 

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**Crown MediaHoldings, Inc.Schedule II—Valuation and Qualifying Accounts(In thousands)**
| **Description**                        | ** ** | ** ** | ** ** | **Balance at  Beginning  of Year** | ** ** | **Additions  Charged  to Expense** | ** ** | **Deductions** | ** ** | **Balance  at End  of Year** | ** ** |
|----------------------------------------|------------|------------|------------|----------------------------------------------|------------|-----------------------------------------|------------|----------------|------------|----------------------------------------|------------|
| ***Allowance  for doubtful accounts*** |       |       |       |                                         |       |                                    |       |           |       |                                   |       |   |   |   |   |
| Year-ended  December 31, 2002     |       |       | $          | 7,361                                        |       |                                    |       | $              | 4,083      |                                   |       |   | $ | (3,928 | ) |   | $ | 7,516 |   |
| Year-ended  December 31, 2003     |       |       | $          | 7,516                                        |       |                                    |       | $              | 499        |                                   |       |   | $ | (1,312 | ) |   | $ | 6,703 |   |
| Year-ended  December 31, 2004     |       |       | $          | 6,703                                        |       |                                    |       | $              | 1,297      |                                   |       |   | $ | (1,305 | ) |   | $ | 6,695 |   |

 

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