UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 Form
10-K
 
 (Mark
One)
 [X]
 ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
 OF
THE SECURITIES EXCHANGE ACT OF 1934
 
 For
the fiscal year ended December 31, 2009
 
 or
 
 [
]
 TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
 OF
THE SECURITIES EXCHANGE ACT OF 1934
 
 For
the transition period
from           to           .
 
 Commission
File Number: 000-30700
 
 Crown
Media Holdings, Inc.
 (Exact
Name of Registrant as Specified in Its Charter)
 
 Delaware
                84-1524410(State
      or Other Jurisdiction
                (I.R.S.
      Employerof
      Incorporation or Organization)
                Identification
      No.)
 
 12700
Ventura Boulevard,
 Suite
200,
 Studio
City, California  91604
 (Address
of Principal Executive Offices and Zip Code)
 
 (818)
755-2400
 (Registrant's
Telephone Number, Including Area Code)
 
 Securities
registered pursuant to Section 12(b) of the Act:
 
 Title of Each Class
                
                Name
      of Each Exchangeon Which RegisteredClass
      A Common Stock, $0.01 par value
                
                The
      NASDAQ Stock Market LLC
 
 Securities
registered pursuant to Section 12(g) of the Act:  None
 
 Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes
[  ]   No [X ]
 
 Indicate by check mark if the registrant is not required
to file reports pursuant to Section 13 or Section 15(d) of the
Act.  Yes [  ]   No [X]
 
 Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes [X]  No [  ]
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).[  ]  Yes   [  ]  No
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [  ]
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
 Large
accelerated filer
[  ]                Accelerated
filer [
]               Non-accelerated
filer
[X]               Smaller
reporting company [  ]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12 b-2 of the Exchange Act). Yes o   No ý
 
 The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold as of June 30, 2009, the last business day of the registrant’s most
recently completed second fiscal quarter, was $34,774,121.
 
 As of
February 28, 2010, the number of shares of Class A Common Stock, $.01 par value
outstanding was 74,117,654, and the number of shares of Class B Common Stock,
$.01 par value, outstanding was 30,670,422.
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 
 Portions
of the Registrant’s Proxy Statement for the 2010 Annual Meeting of Stockholders,
to be filed, are incorporated by reference in Part III of this Form
10-K.














TABLE
OF CONTENTS





PagePart
      IItem
      1
            BusinessItem
      1A
            Risk
      FactorsItem
      1 B
            Unresolved
      Staff CommentsItem
      2
            PropertiesItem
      3
            Legal
      ProceedingsItem
      4
            Submission
      of Matters to a Vote of Security HoldersPart
      IIItem
      5
            Market
      for Our Common Equity, Related StockholderMatters
      and Issuer Purchases of Equity SecuritiesItem
      6
            Selected
      Financial DataItem
      7
            Management's
      Discussion and Analysis of Financial Conditionand
      Results of OperationsItem
      7A
            Quantitative
      and Qualitative Disclosures About Market RiskItem
      8
            Financial
      Statements and Supplementary DataItem
      9
            Changes
      in and Disagreements with Accountants on Accountingand
      Financial DisclosureItem
      9A
            Controls
      and ProceduresItem
      9B
            Other
      InformationPart
      IIIItem
      10
            Directors,
      Executive Officers and Corporate GovernanceItem
      11
            Executive
      CompensationItem
      12
            Security
      Ownership of Certain Beneficial Owners andManagement
      and Related Stockholder MattersItem
      13
            Certain
      Relationships and Related Transactionsand
      Director IndependenceItem
      14
            Principal
      Accountant Fees and ServicesPart
      IVItem
      15
            Exhibits,
      Financial Statement SchedulesSignatures









In
this Annual Report on Form 10-K the terms "Crown Media Holdings" or the
“Company,” refer to Crown Media Holdings, Inc.  and, unless the
context requires otherwise, subsidiaries of Crown Media Holdings that operate or
have operated our businesses, including Crown Media United States, LLC ("Crown
Media United States"). The term "common stock" refers to our Class A common
stock and Class B common stock, unless the context requires
otherwise.





The
name Hallmark and other product or service names are trademarks or registered
trademarks of their owners.








PART
I





ITEM
1. Business





Company
Overview





We own
and operate pay television channels (the “Channels”), known as the Hallmark
Channel, the Hallmark Movie Channel and the Hallmark Movie Channel HD, each of
which is dedicated to high-quality entertainment programming for adults and
families.  The Hallmark Channel is a 24-hour television destination
for family-friendly programming and a leader in the production of original
movies.  The Hallmark Movie Channel is a 24-hour cable network
dedicated to offering viewers a collection of movies appropriate for the entire
family, and the Hallmark Movie Channel HD, which was launched in April 2008, is
simulcast alongside the Hallmark Movie Channel. The Hallmark Movie Channel
offers a mix of Hallmark Channel original movies, classical theatrical films,
and Hallmark Hall of Fame presentations. Our Channels are distributed in the
United States of America and its territories and possessions, including Puerto
Rico.





The
Channels offer compelling stories, masterfully written, directed and produced
with talented and recognized actors. We believe that we have established these
Channels as destinations for viewers seeking high-quality entertainment for
adults and families, and as attractive outlets for advertisers seeking to target
these viewers. We have distribution agreements with leading pay television
distributors. The following table shows our Channels’ programming sources,
selected pay television distributors and the total number of subscribers as of
December 31, 2009.





Hallmark
      Channel
            Hallmark
      Movie ChannelProgramming
      Sources
            •
      Original Productions
            •
      Original Productions•
      Other third-party sources
            •
      Other third-party sources•
      Hallmark Hall of Fame
            •
      Hallmark Hall of FameSelected
      Pay
            •
      AT&T (U-verse)
            •
      AT&T (U-verse)Television
            •
      Cablevision
            •
      CablevisionDistributors
            •
      Charter
            •
      Charter•
      Comcast
            •
      Comcast•
      Cox
            •
      Cox•
      DIRECTV
            •
      Dish Network•
      Dish Network
            •
      NCTC•
      NCTC
            •
      Mediacom•
      Mediacom
            •
      Time Warner•
      Time Warner
            •
      Verizon Communication (FiOS)•
      Verizon Communication (FiOS)Total
      Subscribers
            88.3
      million (1)
            29.1
      million (2)(1)
      Source:  Nielsen Code and The Nielsen Public U.E. December
      2009.(2)
      Source:  Internal
reports.





We view a
“subscriber” as a household that receives, on a full or part-time basis, a
channel on a program tier of a distributor.  We determine our Hallmark
Channel subscribers from subscriber numbers reported by Nielsen Media
Research.  Subscribers include both viewers who pay a monthly fee for
the tier programming and so-called “promotional” subscribers who are given free
access to the tier by the distributor for a limited time.





Programming
acquired from third parties is an important component of our Channels as we
continually develop and refine our programming strategy. This programming
includes original movies produced by a variety of experienced television
production companies and “off network” television series. Our production
agreements cover one specific movie or a package of several
movies.  Typically under these agreements, our Channels have the right
to exhibit the movies for an initial window of 3 to 5 years and have the right
to extend the term for an additional 3 years, which we exercise based on the
performance of the movies in their initial window. With respect to television
series which we acquire from third parties, we typically have the right to
exhibit the series for a window of 3 to 5 years.





We
currently distribute (a) the Hallmark Channel through approximately 5,450 cable,
satellite and other pay television distribution systems and (b) the
Hallmark Movie Channel through approximately 800 such systems. As of the end of
2009, we had agreements with AT&T Inc. (U-verse), Cablevision, Charter,
Comcast, Cox, DirecTV, Dish Network, Mediacom, the National Cable Television
Cooperative, Time Warner, Verizon Communication (FiOS), and many other pay
television distributors, for the distribution of the Hallmark Channel. We also
have agreements with AT&T Inc. (U-verse), Cablevision, Charter, Comcast,
Cox, Dish Network, DirecTV, National Cable Televisions Cooperative (“NCTC”),
Time Warner, Verizon Communications (FiOS) and other select distributors, which
give these distributors the right to distribute the Hallmark Movie Channel and
the Hallmark Movie Channel HD.  In addition, we have entered into
agreements with several telephone companies that have started to furnish video
programming to consumers, including the National Rural Telecommunications
Cooperative and AT&T.





Five of
our distributors each accounted for more than 10%, and together accounted for a
total of 76%, of our consolidated subscriber revenue for the year ended December
31, 2009.  Three of our distributors each accounted for approximately
15% or more of our consolidated subscribers for the year ended December 31,
2009, and together accounted for 61% of our consolidated subscribers on that
date.





We
license the trademark “Hallmark” for use on our Channels pursuant to certain
trademark license agreements with a subsidiary of Hallmark Cards, Incorporated.
We believe that the use of this trademark is extremely important for our
Channels due to the substantial name recognition and favorable characteristics
associated with the name in the United States. For further information
concerning these trademark license agreements, see Part III – Item 13. Certain
Relationships and Related Transactions – Hallmark Trademark License
Agreements.




During
2009, domestic channel operations comprised the Company’s sole operating
segment.








Recent
Developments




Recapitalization
of the Company




As
previously disclosed, the Company’s Board of Directors formed a Special
Committee of three independent directors to review and consider a May 28, 2009
proposal from H C Crown Corp. (“HCC”) regarding a recapitalization of the
amounts owed by the Company to HCC and its affiliates.  HCC is a
wholly-owned subsidiary of Hallmark Cards, Incorporated (“Hallmark
Cards”).  On February 9, 2010, the Special Committee of the Board and
HCC approved and executed a Recapitalization Term Sheet, representing
non-binding terms of recapitalization transactions for the
Company.  On February 26, 2010, the Company entered into the Master
Recapitalization Agreement with Hallmark Cards, HCC and related entities that
provides for the recapitalization transactions and the agreements described
below (the “Recapitalization”).  The summary of the terms of the
Recapitalization transactions is qualified entirely by reference to the
agreements to which each summary description relates, each of which we have
filed with the Securities and Exchange Commission (the “SEC”).




The
Recapitalization transactions include, among other things, $315.0 million
principal amount of the HCC Debt (as defined below) being restructured into new
debt instruments, $185.0 million principal amount of the HCC Debt being
converted into convertible preferred stock of the Company, Class B Common Stock
being converted into Class A Common Stock with Class A Common Stock becoming the
only authorized and outstanding common stock of the Company (the “Class A Common
Stock”), and the balance of the HCC Debt being converted into shares of Class A
Common Stock.  Upon execution of the Master Recapitalization
Agreement, the automatic termination of the waiver under the existing Amended
and Restated Waiver and Standby Purchase Agreement (the “Waiver Agreement”) with
Hallmark Cards and HCC was extended until August 31, 2010; the Waiver Agreement
defers payment dates on HCC Debt (excluding accounts payable).




Other
aspects of the Recapitalization concern a Credit Agreement for the new debt, an
amendment to the Tax Sharing Agreement with Hallmark Cards, a registration
rights agreement, mergers of two intermediate holding companies with the
Company, efforts to extend or replace the Company’s revolving line of credit,
Hallmark Cards’ willingness to guarantee $30.0 million of a revolving line of
credit, a standstill agreement of Hallmark entities pursuant to which such
entities agree not to acquire, through December 31, 2013, additional shares of
Class A Common Stock of the Company, subject to certain exceptions, and agree to
certain restrictions on their ability to sell or transfer shares of Class A
Common Stock of the Company until December 31, 2013 and, subject to lesser
restrictions, until December 31, 2020.




Each of
the Company (subject to approval by the Special Committee) and HCC has the right
to terminate the Master Recapitalization Agreement at any time after the later
of (x) June 30, 2010 and (y) 45 days following receipt of notice that the
information statement filed by the Company will not be reviewed by the SEC or
that the SEC staff has no further comments thereon, if the Recapitalization has
not been consummated prior to that date.  Even if there were such a
termination, the Waiver Agreement will continue to provide that the automatic
termination date of the waiver will extend to August 31, 2010.  The
closing of the Recapitalization is subject to a number of conditions, including,
among other things, (a) representations and warranties of the Company being
accurate, (b) obtaining a one-year revolving credit agreement mentioned below,
(c) there being no judgment or order which prohibits the consummation of the
Recapitalization and (d) Hallmark Cards not having delivered a written
notice to the Company certifying that Hallmark Cards in its sole discretion (but
only after consultation with outside legal counsel) shall have determined that
the status of any pending or threatened litigation or regulatory proceeding
involving the Company or its subsidiaries in connection with the
Recapitalization is unsatisfactory to Hallmark Cards.  See Note 16 of
the Consolidated Financial Statements for information regarding a pending
lawsuit on the Recapitalization in which the plaintiff objects to the
Recapitalization.




From the
date of the Master Recapitalization Agreement to the Closing Date, the Company
will be subject to various affirmative covenants (including covenants to operate
in the ordinary course of business and to keep available the services of its
officers and employees and preserve the present relationships with persons doing
business with it) as well as various negative covenants (including, among
others, with respect to sales, leases or transfers outside the ordinary course
of business and acquisitions of material assets other than in accordance with
past practices).




If the
Recapitalization is consummated, the Hallmark parties will own, excluding the
shares of Class A Common Stock that would be received upon conversion of the
preferred stock, at least 90.1% of the sum of the outstanding common stock of
the Company and shares subject to outstanding options (the outstanding options
are for 87,238 shares on the date hereof).  Certain aspects of the
Recapitalization require stockholder approval.  Hallmark Entertainment
Holdings, Inc. (“HEH”) and certain Hallmark Cards affiliates as direct or
indirect owners of a more than a majority of the Company’s voting stock have
stated in the Master Recapitalization Agreement their written consents as
stockholders to these matters in lieu of holding a meeting of the Company’s
stockholders.  No vote of other stockholders will be requested or
required.  The closing of the Recapitalization cannot occur until 20
calendar days after an information statement required by regulations of the SEC
is sent to the stockholders of the Company, or if such information statement is
furnished by sending a Notice of Internet Availability, until 40 calendar days
after such notice is sent to the stockholders of the Company.  The
Master Recapitalization Agreement requires that the Company use best efforts to
prepare and file the information statement with the SEC as promptly as is
reasonably practicable (but not later than March 20, 2010).







General




In the
Recapitalization:




·
            $315.0
      million principal amount of the HCC Debt will be restructured into new
      debt instruments on the terms summarized below (the “New Debt”), $185.0
      million principal amount of the HCC Debt will be converted into an equal
      amount of convertible preferred stock of the Company on the terms
      summarized below (the “Convertible Preferred Stock”), and the balance of
      the HCC Debt as of the closing of the Recapitalization (the “Closing
      Date”) will be converted into shares of Class A Common Stock at the
      Conversion Price (as described below). As a result of the
      Recapitalization, immediately following the closing of the
      Recapitalization transactions, all of the HCC Debt, except to the extent
      converted and continued as New Debt, will be extinguished and
      discharged.




o
            “HCC
      Debt” means (i) the aggregate principal amount of all indebtedness owed to
      Hallmark Cards, HCC and their controlled affiliates, including accrued and
      unpaid interest thereon through the Closing Date, but excluding accrued
      but unpaid interest with respect to the 2001 Note, the 2005 Note and the
      2006 Note; (b) all accounts payable and open intercompany accounts of the
      Company and its subsidiaries owed to HCC and Hallmark Cards and their
      controlled affiliates (other than the Company and its subsidiaries); and
      (c) any amounts due to Hallmark Cards or its affiliates under the Tax
      Sharing Agreement (as defined below) through December 31, 2009; provided
      that for the avoidance of doubt the following shall not constitute HCC
      Debt:  (i) Reimbursement Obligations (as defined in the Master
      Recapitalization Agreement), (ii) Ordinary Course of Business Obligations
      (as defined in the Master Recapitalization Agreement), and (iii) any
      amounts due to Hallmark Cards or its affiliates under the Tax Sharing
      Agreement accruing on or after January 1, 2010.  “2001 Note”
      means the Promissory Note, dated as of December 14, 2001, of the Company
      in the original principal amount of $75.0 million payable to HCC; “2005
      Note” means the Promissory Note, dated as of October 1, 2005, of a
      wholly-owned subsidiary of the Company in the original principal amount of
      $132,785,424 payable to HCC; and “2006 Note” means the Promissory Note,
      dated as of March 21, 2006, of the Company in the original principal
      amount of $70,414,087.87 payable to
HCC.




o
            “Conversion
      Price” means the amount equal to (x) the quantity of (i) the total HCC
      Debt as of the Date of Determination, less (ii) $500 million, divided by
      (y) the Conversion Price Shares.  “Conversion Price Shares”
      means a notional number of shares of Class A Common Stock which, when
      combined with the number of shares of Class A Common Stock directly or
      indirectly owned by Hallmark Cards as of the Date of Determination (for
      purposes of such calculation (x) including with respect to shares of Class
      A Common Stock owned directly by Hallmark Entertainment Investments Co.
      (“HEIC”) only HEH’s pro rata portion of the Class A Common Stock owned by
      HEIC, and (y) excluding the shares of Class A Common Stock that will be
      receivable by HCC upon conversion of the Convertible Preferred Stock),
      will equal 90.1% of the sum of (i) all outstanding shares of Class A
      Common Stock on the Date of Determination prior to the Closing Date, (ii)
      the Conversion Price Shares and (iii) all shares potentially issuable upon
      exercise of all outstanding options as of the Date of
      Determination.




“Date of
Determination” means the Closing Date, provided that if the Closing Date occurs
on or after March 31, 2010, the “Date of Determination” will be deemed to be
March 31, 2010.




·
            The
      terms of the New Debt as set forth in the Credit Agreement will include
      without limitation the following:




o
            Maturity:  December
      31, 2013.




o
            Tranches:




§
            Term
      A Loan of $200 million will be cash-pay in terms of interest and will bear
      interest at the rate of 9.5% per annum through December 31, 2011,
      increasing to 12% on and after January 1, 2012 through December 31,
      2013.




§
            Term
      B Loan of $115 million will be payable-in-kind, by adding interest to the
      principal (“PIK”), through December 31, 2010 and will become cash-pay for
      the quarterly period beginning on January 1, 2011 and for all quarterly
      periods thereafter. The interest rate will be 11.5% through December 31,
      2011, increasing to 14% on and after January 1, 2012 and continuing
      through December 31, 2013.




o
            PIK
      Toggle: The Company will have the option to PIK up to three quarterly cash
      payments in the aggregate for the Term A Loan and the Term B
      Loan.  For the avoidance of doubt, contractual PIK payments
      under the Term B Loan will not reduce the number of optional PIK payments
      available to the Company, and if the Company opts to PIK both the Term A
      Loan and the Term B Loan cash payments in a single quarter then that will
      count as two of the Company’s three quarterly PIK
  options.




o
            Prepayment:
      The New Debt will be pre-payable at any time at par plus accrued
      interest.




o
            Mandatory
      Prepayments: 100% of net cash proceeds from asset sales or other
      dispositions, except to the extent such net cash proceeds are reinvested
      in productive assets of a kind then used or usable in the business of the
      Company or its subsidiaries within 180 days of the sale or other
      disposition; 100% of net cash proceeds from equity issuances; 100% of net
      cash proceeds from debt issuances (exclusive of the Revolver as described
      below); 75% of Excess Cash Flow (as defined in the New Debt agreements);
      and upon the sale of assets in advance of a condemnation proceeding, or
      following the occurrence of a casualty or condemnation for which the
      Company or its subsidiaries have received proceeds, after such proceeds
      have been used to replace the subject assets.  Prepayments must
      be applied in the following order (i) first to PIK interest on the Term A
      Loan (ii) then to principal on the Term A Loan (iii) then to PIK interest
      on the Term B Loan, and (iv) finally to principal on the Term B
      Loan.




o
            Change
      in Control:  The principal and interest on the New Debt will
      become immediately due and payable upon a change in control (as defined in
      the Credit Agreement) arising from (i) a Premium Transaction (as described
      below) or (ii) a transaction approved by a special committee of the
      Company's Board of Directors.




o
            Collateral:  An
      existing lien on substantially all of the Company’s assets will be
      modified so it secures obligations under the Credit
      Agreement.  It is contemplated that this security interest will
      be subordinate to the lender under the bank revolving credit
      facility.




o
            NICC
      Reserve Account:  The Company is required to redeem the preferred
      interest held by a wholly-owned subsidiary of National Interfaith Cable
      Coalition (“NICC”) in Crown Media United States for $25.0 million by
      December 31, 2010.  Prior to closing of the Credit Agreement, the
      Company will establish with a financial institution a NICC Reserve Account
      in the Company's name and deposit in that account amounts which the
      Company chooses as a sinking fund for the mandatory redemption of that
      preferred interest.  The funds in the NICC Reserve Account are to be
      used to make any scheduled payments on the NICC preferred interest and at
      no time is the amount to exceed $25.0
million.




o
            Covenants:  Negative
      covenants include limitations on debt incurrence; dividends; liens;
      capital expenditures; investments; restricted payments; sale/leaseback
      transactions; creation of subsidiaries; changes in business conducted;
      execution or amendment of material agreements in such a way as could be
      reasonably be expected to be materially disadvantageous to the Hallmark
      lenders; transactions with affiliates; and dispositions of
      property.







Financial
covenants include:   The Company will not permit its Cash
Interest Coverage Ratio as the end of any fiscal quarter to be less than
2.0:1.0.




“Cash
Interest Coverage Ratio” is defined as the ratio of (a) EBITDA to (b) the sum of
the Term A Loan and the Term B Loan cash interest expense (excluding PIK
interest), in each case for a Measurement Period of  four consecutive
fiscal quarters ending on the date of determination, adjusted pro rata for the
three full quarters following the Closing Date.




“EBITDA”
means for any period (x) Consolidated Net Income plus (y) to the extent
Consolidated Net Income was reduced by such items: (i) provision for income
taxes during such period; (ii) interest expense deducted in computing
Consolidated Net Income; (iii) total depreciation expense and total amortization
expense (other than amortization of capitalized film costs); (iv) any
extraordinary, unusual or non-recurring expenses or losses, whether or not
included as a separate item in the statement of such Consolidated Net Income for
such period (including, but not limited to losses on sales of assets outside of
the ordinary course of business, impairment of assets, restructuring charges,
transactions costs of the Recapitalization payable by the Company and write-offs
of deferred costs for such period); (v) any other non-cash charges (other than
write-offs or write-downs during such period of inventory, accounts receivable
or any other current assets or liabilities in the ordinary course of business);
minus (z)(i) any extraordinary, unusual or non-recurring income or gains
(including, whether or not otherwise included as a separate item in the
statement of such Consolidated Net Income for such period, gains on sale of
assets outside of the ordinary course of business) for such period and (ii) any
other non-cash income items increasing Consolidated Net Income for such period,
all as determined for such period in conformity with GAAP.




The
credit agreement for the Term A Loan and Term B Loan includes cross defaults if
there is a default by the Company on any indebtedness for borrowed money and
similar obligations in excess of $1,000,000 or if there is a failure to pay the
redemption amount of $25.0 million on the preferred interest held by the NICC
subsidiary in Crown Media United States or if there is demand on the Hallmark
guarantee on the Revolver.




·
            The
      terms of the Convertible Preferred Stock will include without limitation
      the following:




o
            Liquidation
      preference:  In the event of any liquidation or winding up of
      the Company, the holders of the Convertible Preferred Stock will be
      entitled to receive, in preference to the holders of the common stock of
      the Company, an amount equal to the greater of (x) $1,000 per share plus
      accrued but unpaid dividends thereon, or (y) that amount that would be
      received by such holders on an “as converted” basis (the “Liquidation
      Preference”).  A consolidation, merger, reorganization or other
      form of acquisition of the Company or a sale of all or substantially all
      of its assets will be deemed to be a liquidation or winding up for
      purposes of the liquidation
preference.




o
            Dividends:
      No dividends will accrue or be payable from the date of issue of the
      Convertible Preferred Stock through December 31, 2010; cumulative PIK
      dividends will accrue from and after January 1, 2011 through December 31,
      2011 at a rate per annum of 14%; cumulative PIK dividends will accrue from
      and after January 1, 2012 through December 31, 2014 at a rate per annum of
      16%; and cumulative cash-pay dividends will accrue for all periods
      thereafter at a rate per annum of 16%, in each case payable solely out of
      lawfully available surplus.  The Convertible Preferred Stock
      will participate with the common stock of the Company as to dividends on
      an “as converted” basis.  The Company may elect to pay
      accumulated PIK dividends in cash at any time, subject to lawfully
      available surplus.




o
            Optional
      Conversion:  At the option of the holder, each share of
      Convertible Preferred Stock becomes and remains convertible at the earlier
      of December 31, 2013, or upon a payment or refinancing by the Company
      of all or substantially all of the New Debt, into such number of shares of
      common stock of the Company as is determined by dividing the Liquidation
      Preference of $1,000 plus accrued and unpaid dividends with respect to
      such shares of  Convertible Preferred Stock by the conversion
      price, with anti-dilution protection, including, among other things, an
      adjustment for certain issuances of common stock of the Company without
      consideration or for a consideration per share less than the then
      Conversion Price.




o
            Redemption:  The
      Company must redeem (to the extent funds are lawfully available) the
      Convertible Preferred Stock when and as the Company receives, upon a
      refinancing of the New Debt, net proceeds from such refinancing in excess
      of the aggregate outstanding principal and interest amounts of New Debt
      (“Excess Refinancing Proceeds”).  The Company may voluntarily
      redeem the Convertible Preferred Stock at the Liquidation Preference at
      any time upon 10-days written
notice.




o
            Voting:  The
      Convertible Preferred Stock will vote together with the common stock of
      the Company on an “as-converted” basis.  In addition, the
      consent of holders of more than 50% of the Convertible Preferred Stock,
      voting as a separate class, will be required for the Company to do any of
      the following, among other things:  (i) Authorize or sell any
      equity securities pari
      passu or senior in right of liquidation to the Preferred Stock;
      (ii) except for certain indebtedness permitted by the Credit Agreement,
      authorize or issue any debt security unless the debt security has received
      the prior approval of the Board of Directors, or amend the terms of any
      agreement regarding material indebtedness of the Company unless the
      amendment has been approved by the Board of Directors; (iii) repurchase or
      redeem equity securities (other than from an employee following
      termination pursuant to an arrangement or agreement), or declare or pay
      any dividend on the common stock of the Company; (iv) sell, merge,
      recapitalize, reorganize, liquidate or dissolve the Company; (v) make any
      acquisitions greater than $5,000,000; (vi) amend organizational documents
      or enter into an agreement that adversely affects or alters the rights,
      preferences or privileges of the Convertible Preferred Stock; and (vii)
      issue any additional shares of common stock of the Company (other than
      pursuant to options outstanding on the Closing Date) or options or rights
      to acquire common stock of the
Company.







Tax
Sharing Agreement




The
existing Federal Income Tax Sharing Agreement between Hallmark Cards and the
Company will be amended effective as of January 1, 2010 (as amended, the “Tax
Sharing Agreement”).  The amendment will provide, among other things,
that:




o
            Hallmark
      Cards will not pay any Crown Tax Benefits (defined in the Tax Sharing
      Agreement) in cash and instead will carry forward any such amounts to
      offset future Crown Tax Liability (defined in the Tax Sharing
      Agreement);




o
            the
      Company will be allowed to deduct both cash-pay and PIK interest due to
      Hallmark Cards in calculating tax-sharing
  payments;




o
            the
      conversion of the HCC Debt pursuant to the Recapitalization will not be
      deemed the payment of interest expense to Hallmark
  Cards;




o
            tax
      attributable to the cancellation of indebtedness income will be excluded
      from the calculation of tax sharing payments;
  and




o
            any
      amounts related to taxes owed to Hallmark Cards prior to December 31,
      2009, will be included in the HCC Debt, which will be converted into Class
      A Common Stock.




The first
payment by the Company pursuant to the Tax Sharing Agreement will occur after
the first full quarter following the Closing Date and will be made in respect of
the period commencing from January 1, 2010 through the last day of the first
full quarter following the Closing Date.




Registration
Rights Agreement




The
Company and HCC will enter into a Registration Rights Agreement providing for
three demand registration rights, three demand resale registration rights and
unlimited piggyback registration rights.  The registration rights
concern, among other things, Class A Common Stock issued in the
Recapitalization, Class A Common Stock issuable upon the conversion of the
Convertible Preferred Stock, and Class A Common Stock acquired pursuant to
subscription rights of HCC described below.




Mergers
and Amendments to Certificate of Incorporation




Two
intermediate holding companies (HEIC and HEH) will be merged with and into the
Company, and the stockholders of those companies will receive their pro rata
direct ownership of Class A Common Stock in connection therewith (the
“Mergers”).  The Company’s stockholders will receive no consideration
in connection with these mergers.




The
Company will effect an amendment to the Company’s certificate of incorporation
which will automatically convert the shares of Class B Common Stock into shares
of Class A Common Stock and eliminate the super-voting nature of the Class B
Common Stock, resulting in the only authorized common stock being the Class A
Common Stock.  The amendment will increase the Company’s authorized
capital stock to 500,000,000 shares of Class A Common Stock and decrease the
authorized Preferred Stock to 1,000,000 shares of preferred stock which may be
issued in series designated by the Board of Directors, of which 400,000 will be
designated as Series A Preferred Stock.




The
provisions dealing with corporate opportunities will be revised to further
delineate the duties of a director or officer of the Company who is also a
director or officer of Hallmark Cards or its affiliates with respect to business
opportunities and corporate transaction opportunities.




Currently
the Company is governed by Section 203 of the Delaware General Corporation Law,
dealing with restrictions on business combinations, although, by the terms of
Section 203, the restrictions on business combinations do not currently apply to
Hallmark Cards or its affiliates.  Pursuant to the amendments to the
Certificate of Incorporation, the Company will elect not to be governed by
Section 203 unless and until such time as (i) Section 203, but for the opt-out
provision, would apply to the Company or (ii) there is a transaction in which
Hallmark's beneficial interest in the Company is reduced to less than 50% of the
outstanding shares of Class A Common Stock.




Further,
the Company’s Board of Directors and Hallmark Cards affiliates representing more
than a majority of the voting power of the Company’s capital stock have approved
of an amendment to the Company’s Certificate of Incorporation that provides for
a reverse stock split at any time prior to December 31, 2013 upon the request of
a special committee of the Company’s Board of Directors.  The exact
ratio of the reverse stock split will be determined by the Board of Directors,
upon the recommendation of the special committee.




Revolver




As a
condition to closing, the Company must have obtained a revolving credit facility
from a third-party lender with a term of not less than 360 days from the Closing
Date and with availability of at least $30.0 million (the
“Revolver”).  The Revolver will have other terms and conditions
reasonably acceptable to the Company, and Hallmark Cards must have guaranteed,
or caused one or more of its affiliates to have guaranteed, the
Revolver.




Waiver
Agreement




The
Waiver Agreement, which was entered into on March 10, 2008 and most recently
amended in May 2009, has been amended to provide that the waiver thereunder will
terminate automatically on August 31, 2010.  Additionally, Hallmark
will use its best efforts to ensure that the Company will have continued access
to up to $30.0 million under the Company’s existing revolving credit facility
while the Waiver Agreement is in effect.




Standstill
Agreement




Hallmark
Cards and HCC (“Hallmark” in this context) will enter into a stockholders
agreement (the “Stockholders Agreement”) with standstill provisions pursuant to
which they will agree that Hallmark will not acquire any additional shares of
common stock of the Company through December 31, 2013, except:




o
            additional
      shares of Class A Common Stock resulting from the conversion of the
      Convertible Preferred Stock;




o
            acquisitions
      pursuant to the subscription rights described in the next
      paragraph;




o
            with
      the prior approval of a special committee of the Company’s Board of
      Directors comprised solely of independent, disinterested directors;
      and




o
            from
      January 1, 2012 through December 31, 2013, either (i) pursuant to a tender
      offer for all of the Company’s shares of Class A Common Stock, which
      tender offer is subject to a majority-of-a-minority tender condition, or
      (ii) pursuant to a “Premium Transaction” as described below under “Co-Sale
      Rights.”




Until
termination of the Stockholders Agreement, in the event that the Company
proposes to issue additional shares of capital stock, options or rights to
acquire equity securities or debt securities convertible into equity securities,
the Company will offer to HCC and its affiliates such additional shares as will
be necessary to ensure that Hallmark continues to own on a fully-diluted basis
at least the same percentage of the shares of all classes of the Company capital
stock as HCC and its affiliates owned immediately prior to such
issuance.







Co-Sale
Rights




The
Stockholders Agreement also provides that:




o
            Until
      December 31, 2013, HCC may not sell or transfer its Class A Common Stock
      to a third party, except:




§
            from
      the Closing Date through December 31, 2013, with the prior approval of a
      special committee of the Company’s Board of Directors comprised solely of
      independent, disinterested
directors;




§
            on
      or after January 1, 2012, (i) in a Premium Transaction or (ii) pursuant to
      a public offering or block trade in which to the knowledge of HCC, no
      purchaser (together with its affiliates and associates) acquires
      beneficial ownership of a block of shares of the Company in excess of 5%
      (in the case of a public offering) or 2% (in the case of any block trade)
      of the outstanding Class A Common Stock;
and




§
            to
      an affiliate of Hallmark Cards or pursuant to a bona fide pledge of the
      shares to a lender that is not an affiliate of Hallmark Cards
      (collectively, a “Permitted
Transfer”).




A
“Premium Transaction” is a transaction involving the sale or transfer by
Hallmark of its shares of Class A Common Stock to a third party (by merger or
otherwise) in which all stockholders unaffiliated with Hallmark will be entitled
to participate and will be entitled to receive both (x) consideration equivalent
in value to the highest consideration per share of Class A Common Stock received
by HCC in connection with such transaction, and (y) a premium of $0.50 per share
of Class A Common Stock (subject to adjustment for any stock splits,
combinations, reclassifications, adjustments, sale of Class A Common Stock by
the Company, or sale of Class A Common Stock by HCC pursuant to a public
offering or block trade as permitted above, or any similar
transaction).  For the avoidance of doubt, the aggregate premium shall
not exceed $17,400,880, which is the product of the number of outstanding shares
owned by minority stockholders as of the date of the Master Recapitalization
Agreement multiplied by $0.50.  Also, for the avoidance of doubt, HCC
may effectuate a Premium Transaction pursuant to a short-form merger (or other
merger) between the Company and HCC or any purchaser of its shares, so long as
the holders of Class A Common Stock not affiliated with HCC receive the
consideration provided for in this paragraph in connection with such
merger.




o
            From
      and after January 1, 2014 until the earlier of (x) December 31, 2020 and
      (y) such time as Hallmark and its controlled affiliates no longer
      beneficially own a majority of the outstanding Class A Common Stock, HCC
      may not sell or transfer, in one or a series of related transactions, a
      majority of the outstanding shares of Class A Common Stock to a third
      party, unless (i) in a Permitted Transfer, (ii) with the prior approval of
      a special committee of the Board of Directors or (iii) all stockholders
      unaffiliated with Hallmark will be entitled to either (a) participate in
      such transaction on the same terms as HCC or (b) receive cash
      consideration equivalent in value to the highest consideration per share
      of Class A Common Stock received by HCC in connection with such
      transaction.




In
addition, the Stockholders Agreement sets forth the terms on which Hallmark
Cards or one of its affiliates is required to provide a guarantee of the
Revolver.  The Hallmark obligations regarding the standstill
provisions, co-sale rights and the guarantee of the Revolver will terminate upon
a payment default on the New Debt, subject to a 60-day grace/cure
period.  The Stockholders Agreement also terminates on the earlier of
such time as Hallmark and its affiliates cease to own a majority of the Class A
Common Stock or December 31, 2020.




Listing
Requirements




Pursuant
to the Stockholders Agreement, the Company will use its commercially reasonable
best efforts to maintain the listing of the Class A Common Stock on the NASDAQ
Global Market through December 31, 2013.  Until that date, HCC will
(i) vote in favor of any proposed amendment to the Company’s certificate of
incorporation to effect a reverse stock split with respect to the Class A Common
Stock to maintain the listing on the NASDAQ Global Market if recommended by a
majority of directors who are not affiliates of Hallmark and (ii) reasonably
cooperate with the Company in meeting with representatives of the NASDAQ Global
Market in support of such listing.  Through December 31, 2013, HCC
will not cause the Company to voluntarily delist the shares of Class A Common
Stock from NASDAQ Global Market or deregister the shares of Class A Common Stock
under the Securities Exchange Act of 1934, as amended (except in connection with
a Premium Transaction or tender offer by Hallmark which is a permitted
acquisition of stock as described above).




Martha
Stewart Agreement


In
January 2010, Crown Media United States, LLC entered into a multi-year agreement
with Martha Stewart Living Omnimedia, Inc. (“Martha Stewart Living”) to
exclusively televise original episodes of the popular daytime home and lifestyle
series The Martha Stewart
Show on Hallmark Channel beginning September 2010. As part of the
agreement, Martha Stewart Living will also develop a range of new and original
series and prime time specials that will complement Hallmark Channel’s
schedule.  Beginning in the fall of 2010, Mondays through Fridays,
The Martha Stewart
Show, will be presented 10 a.m. to 11 a.m. (ET/PT), kicking off a
two-and-half-hour block of original Martha Stewart
programming.  Following The Martha Stewart Show, from
11 a.m. to 12:30 p.m. (ET/PT) each weekday, the Hallmark Channel will present
exclusive original programming currently in development at Martha Stewart Living
that will feature a portfolio of creative content for which the Martha Stewart
brand is known and which will showcase experts and personalities from within
Martha Stewart Living.  Additionally, Martha Stewart Living will
develop numerous holiday and interview specials for prime time on the
network.








Company
History





Crown
Media Holdings, Inc. was incorporated in the State of Delaware in December 1999.
Its wholly-owned subsidiary, Crown Media United States, LLC, owns, operates and
distributes the Channels. Significant investors in Crown Media Holdings include
Hallmark Entertainment Investments Co. (“Hallmark Entertainment Investments”), a
subsidiary of Hallmark Cards, the National Interfaith Cable Coalition, Inc.
("NICC"), The DIRECTV Group, Inc. and, indirectly through their investments in
Hallmark Entertainment Investments, Liberty Media Corporation ("Liberty Media")
and J.P. Morgan Partners (BHCA), L. P. ("J.P. Morgan").





Hallmark
Cards controls the Company through its ownership of more than 80% of the equity
interests in Hallmark Entertainment Investments and its control over the voting
of our Class A and Class B common stock held by Hallmark Entertainment
Investments.  See also the description of the Hallmark Entertainment
Investments Co. Stockholders Agreement in Part III - Item 13 below and Part III
- Item 12 below regarding beneficial ownership of our securities.





Employees





We had
178 employees at December 31, 2008, and 159 employees at December 31, 2009.
Neither we nor any of our subsidiaries are parties to collective bargaining
agreements. We believe that our relations with our employees are good. Most of
our Channels’ employees work at our offices in Studio City, California and New
York, New York.





Industry
Overview





The pay
television industry is comprised primarily of program suppliers, pay television
channel providers and pay television distributors. Program suppliers, from whom
we acquire or license a portion of our programming, include many of the major
production studios and other independent production companies and independent
owners of programming. These program suppliers create, develop and finance the
production of, or control rights to, movies, television miniseries, series and
other programming.





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





Pay
television distributors own and operate the platforms used to deliver channels
to subscribers. These distributors use several different technologies to reach
their subscribers as described below. Distributors attempt to create a mix of
channels that will be attractive to their subscriber population in an attempt to
gain new subscribers and to reduce subscriber turnover. Distributors have
different levels of service for subscribers, with each service level containing
some different channels. Pay television distributors often create “tiers” of
programming services, and our services occasionally are offered on family or
movie programming tiers. Various distributors offer additional broadband
services such as Internet access, telephony and video-on-demand over their
systems.





As a
result of the competition for use of the digital cable capacity for channels and
broadband services, pay television channel providers are often required
initially to pay subscriber acquisition fees to pay television distributors for
carriage on their systems or the addition of subscribers. These subscriber
acquisition fees are paid to television distributors on a per subscriber basis
and generally in advance of any receipt of subscriber fee revenue from such pay
television distributors.





Distribution
Platforms





Four
major distribution platforms are currently used to transmit programming. First,
cable television systems use coaxial or fiber optic cable to transmit multiple
channels between a central facility, known as a headend, and the individual
subscriber's television set. Second, analog and digital satellite broadcast
systems (such as direct-to-home or “DTH”) use satellite transponders to
broadcast television programming to individual dwellings with satellite
reception equipment, including a dish and a decoder. Third, telephone companies
(“Telcos”) feature a combination of traditional cable and Protocol Television
(“IPTV”) technologies. For example, Verizon adopted a hybrid model combining
traditional cable and IPTV technologies while AT&T launched full-fledged
IPTV networks.  While traditional cable systems devote a slice of
bandwidth for each channel and then cablecast them all out at once, IPTV uses a
"switched video" architecture in which only the channel being watched at that
moment is sent over the network, freeing up capacity for other features and more
interactivity. Channels can also be distributed through satellite master antenna
television (“SMATV”). SMATV is used primarily for buildings, such as apartments
and hotels that receive programming from satellites by means of a single antenna
that is connected to the buildings’ headend. The television signals are then
distributed to individual units in the building by cable. For promotional
purposes we exhibit excerpts of certain programming, and in one case, an entire
program, on our website.  The one case is the offering of our original
series “Adoption” on the internet, for both its first and second seasons.
Additionally, we offered streaming of certain original Holiday movies online
during December 2009.  We also currently offer certain episodes of
Jack Hanna’s Animal Adventure online in full length.








Sources
of Revenue





Subscriber
Fees





Subscriber
fees are generally payable to us on a per subscriber basis by pay television
distributors for the right to carry our Channels. Rates we receive per
subscriber vary with changes in the following factors, among
others:





•
            the
      degree of competition in the
market;





•
            the
      relative position in the market of the distributor and the popularity of
      the channel;





•
            the
      packaging arrangements for the channel;
and





•
            length
      of the contract term and other commercial
terms.





We are in
continuous negotiations with our existing distributors to increase our
subscriber base in order to enhance our advertising revenue. We have been
subject in the past to requests by major distributors to pay subscriber
acquisition fees for additional subscribers or to waive or accept lower
subscriber fees if certain numbers of additional subscribers are provided. We
also may help fund the distributors' efforts to market our Channels or we may
permit distributors to offer limited promotional periods without payment of
subscriber fees.





Our
Channels are usually offered as one of a number of channels on either a basic
tier or part of other program packages and are not generally offered on a
stand-alone basis. Thus, while a cable or satellite customer may subscribe and
unsubscribe to the tiers and program packages in which one of our Channels is
placed, these customers do not subscribe and unsubscribe to our Channels
alone.  We are not provided with information from the distributors on
their overall subscriber churn and in what manner their churn rates affect our
subscriber counts; instead, we are provided information on the total number of
subscribers who receive the Channels.





Our
subscriber count depends on the number of distributors carrying one of our
Channels and the size of such distributors as well as the program tiers on which
our Channel is carried by these distributors. From time to time, we experience
decreases in the number of subscribers as promotional periods end, or as a
distributor arrangement is amended or terminated by us or the distributor. The
level of subscribers could also be affected by a distributor repositioning our
Channels from one tier to another tier. Management analyzes the estimated effect
each new or amended distribution agreement will have on revenue and costs. Based
upon these analyses, if subscriber acquisition fees are needed, management
endeavors to achieve a fair combination of subscriber commitments and subscriber
acquisition fees.





We have
generally paid certain television distributors up-front subscriber acquisition
fees to obtain initial carriage on domestic pay distributor systems. Subscriber
acquisition fees that we pay are capitalized and amortized over the contractual
term of the applicable distribution agreement as a reduction in subscriber fee
revenue. If the amortization expense exceeds the revenue recognized on a per
distributor basis, the excess amortization is included as a component of cost of
services. At the time we sign a distribution agreement and periodically
thereafter, we evaluate the recoverability of the costs we incur against the
incremental revenue directly and indirectly associated with each
agreement.





Generally,
our distribution agreements last from three to ten years, and usually include
annual increases of subscriber fees. In the past, for the most part, these
distribution agreements also involved payments by us for the establishment of
the relationship or, together with or in lieu of any payment, waived subscriber
fees for our Channels to distributors for a period of time.  Please
see Item 7, Management’s Discussion and Analysis of Financial Condition and
Results of Operations, for information regarding subscriber fees.








Advertising
Revenue





Television
advertising is sold in a variety of formats. Most advertising supported cable
networks rely largely upon the spot advertisement format. Spot advertisements
are normally 30 seconds long and air during or between programs. They are often
sold in packages of a certain number of spots with a commitment to deliver a
certain number of viewers. An alternative to spot advertising is sponsorship, by
which a company sponsors a program or selection of programs on a channel and
receives enhanced exposure for its brand and products in these programs. An
additional form of television advertising is direct response advertising, which
is designed to elicit a specific and quantifiable response from the
viewer.  Unlike spot advertising, fees payable for this form of
advertising are measured by viewer response to advertising, such as product
purchases, rather than the viewer ratings which measures success in
programming.  A majority of the Hallmark Channel advertising revenue
is comprised of spot advertising. The Hallmark Movie Channel’s revenue has been
comprised to date primarily of direct response revenue. Please see “Current
Challenges – Ratings” in Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” for information on the Hallmark
Movie Channel’s commencing to sell spot advertising based on Nielsen
ratings.





The
ability of a television channel to generate advertising revenue largely depends
on estimated or actual viewing levels, primarily based on ratings, and on
advertising rates. In the United States, independent ratings systems on which
advertising sales can be based are well established and widely accepted within
the industry. In addition, pay television channel providers and distributors may
also provide estimated or actual subscriber information. Our rates for spot
advertisements are generally calculated on the basis of an agreed upon price per
unit of audience measurement in return for a guaranteed commitment by the
advertiser. We commit to provide advertisers certain rating levels in connection
with their advertising. Advertising rates also vary by time of year due to
seasonal changes in television viewership. Revenue is recorded net of estimated
delivery shortfalls (often referred to as “audience deficiency
units”).  Audience deficiency units (“ADUs”) are units of inventory
(rights to utilize future advertising timeframes) that are made available to
advertisers as fulfillment for past advertisements in programs that
under-delivered on the guaranteed viewership ratings.  ADUs are
usually settled by providing the advertiser additional advertising time.
Historically, there has been no cash paid to an advertiser to settle ADUs , but
in 2009, the Company provided an immaterial amount of cash for settlements. The
remainder of the revenue is recognized as the “make-good” advertising time is
delivered in satisfaction of ADUs. Revenue from direct response advertising
depends largelyupon actions of
viewers.





Our
Channel typically sells approximately 50% of its advertising in the “up-front”
season, generally in June and July, for the last quarter of the same year and
the first three quarters of the following year.  We hold back a small
percentage of our inventory for ADUs and sell the remainder in the spot or
scatter market and to advertisers that purchase up-front inventory on a calendar
year basis.  For information on the up-front 2009/2010 season, see
“Advertising Revenue” in Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”





Among the
76 ad-supported cable channels in the United States market in 2009, the Hallmark
Channel ranked 14thin
total day viewership with an average 0.589 household rating for the year and
10th for
prime time with an average 0.991 household rating for the year, according to
Nielsen Media Research.  In 2008, among the 73 ad-supported cable
channels in the United States market, the Hallmark Channel ranked 11th in
total day viewership with an average 0.695 household rating and 8th for
prime time with an average 1.168 household rating, according to Nielsen Media
Research.  Total day means the time period measured from the time each
day the broadcast of commercially-sponsored programming commences to the time
such commercially-sponsored programming ends.





We have
advertising sales offices in New York, Los Angeles, Chicago, and Atlanta. In
addition, we have made significant investments in programming, research,
marketing and promotions, all specifically designed to support the sale of
advertising time on our Channels. In December 2008, we entered into an agreement
with Google Inc. under which advertisers may place ads on the Channels through
the Google platform, which started in early 2009 for the Hallmark Movie Channel
and the Hallmark Channel.





See Item
7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operation” for further information on advertising and ratings.











Programming





Our
Channels offer a range of high-quality entertainment programming for adults and
families including popular television series, movies, miniseries, theatricals,
romances, literary classics, and contemporary stories. Sources for programming
on our Channels include programming licensed from Buena Vista Television, CBS
Television Distribution, Hallmark Hall of Fame, Paramount Pictures, RHI
Entertainment Distribution, Twentieth Television, Warner Bros. and other third
party producers.





Examples
of programming from other producers include, the Hallmark Channel original
movies Come Dance at My
Wedding, The Good
Witch, Mrs. Washington Goes to Smith,and Old Fashioned Thanksgiving.Examples of programming from the RHI Entertainment Distribution library
include, Steve Martini’s The
Judge, The Outsider, Talking to Heaven, andThe Five People You’ll Meet in
Heaven. We benefit from original productions, whether they have aired on
other networks or are premiered on our Channel. Examples of other third party
programming shown on our Channel include the popular seriesM*A*S*H, Little House on the
Prairie, 7thHeaven, Touched by an Angel, The
Golden Girlsand Cheers.  Examples
of Twentieth Television family-friendly movies include Big, Cheaper by the Dozen, Home Alone and Working
Girl.  Other examples of our third party programming include
acquired movies and miniseries such asEver After, The Ultimate Gift, My
Favorite Martianand Hocus Pocus. Our license
agreements with third parties typically provide for a license fee paid out over
the term of the license for the right to exhibit a program in the United States
within a specified period of time.





Our
channels air, and benefit from, programming previously shown as Hallmark Hall of
Fame such as John Grisham’s Painted House, The Magic of Ordinary
Days, Back When We Were Grownups, Sarah, Plain and Tall and What the Deaf Man
Heard.





We have
occasionally sublicensed exhibition rights to third parties to select programs
in order to reduce our programming costs.








Distribution





The
Hallmark Channel ended 2009 with 88.3 million subscribers, an increase of 3%
from 85.5 million at the 2008 year-end. We currently distribute the Hallmark
Channel to approximately 85% of all United States pay television subscribers.
The following table shows the approximate number of pay television households
and the Hallmark Channel subscribers for each of the eleven largest pay
television distributors, and all other pay television distributors as a group,
in the United States as of December 31, 2009.








HALLMARKHALLMARK
            
            
            CHANNEL
      - U.S.TOTAL
      U.S. PAY TV
            
            
            CHANNEL
      - U.S.
            
            
            %
      OF PAY TVPAY
      TELEVISION DISTRIBUTOR
            
            HOUSEHOLDS
      (1)
            
            
            SUBSCRIBERS
      (1)
            
            
            HOUSEHOLDS(In
      thousands, except percentages)Comcast
            
            
            27,034
            
            
            
            22,618
            
            
            
            83.7
            %DIRECTV
            
            
            18,441
            
            
            
            17,717
            
            
            
            96.1
            %Time
      Warner
            
            
            15,775
            
            
            
            13,282
            
            
            
            84.2
            %Dish
      Network
            
            
            13,851
            
            
            
            11,778
            
            
            
            85.0
            %Cox
            
            
            5,528
            
            
            
            4,670
            
            
            
            84.5
            %Charter
            
            
            5,701
            
            
            
            4,621
            
            
            
            81.1
            %Cablevision
            
            
            3,001
            
            
            
            2,540
            
            
            
            84.6
            %AT&T
      (U-verse)
            
            
            1,817
            
            
            
            1,777
            
            
            
            97.8
            %Verizon
      Communications (FiOS)
            
            
            2,035
            
            
            
            1,722
            
            
            
            84.6
            %Mediacom
            
            
            1,553
            
            
            
            1,289
            
            
            
            83.0
            %NCTC
      and all others
            
            
            9,238
            
            
            
            6,306
            
            
            
            68.3
            %Total
            
            
            103,974
            
            
            
            88,320
            
            
            
            84.9
            %(1) Source: Nielsen
      Code and The Nielsen Public U.E. December 2009.








Our
subscribers in the United States have grown from approximately 16.0 million full
time subscribers at January 1, 2001.




Our major
distribution agreements have terms with options which extend through December
2023. Of these distribution agreements, an agreement accounting for
approximately 5% of our subscriber base at December 31, 2009, will expire and be
the subject of renewal negotiations on or prior to December 31, 2010. A
distribution agreement with NCTC representing approximately 9% of our Hallmark
Channel subscriber base as of December 31, 2009, expired in December
2009.  Our Channels continue to be distributed by NCTC under the terms
of the expired agreement through an extension to that agreement while
negotiations continue on a renewal.





At
December 31, 2009, the Hallmark Movie Channel was distributed to over 29.1
million subscribers, an increase of nearly 14.5 million subscribers from 14.6
million at December 31, 2008. As of October 15, 2009, the Hallmark Movie Channel
was distributed in the nation’s top 30 demographic measurement areas
(DMA’s).








Sales
and Marketing





Our
primary target demographics are women aged 25 to 54 and adults aged 25 to
54.  Our programming is targeted to adults, but is generally
appropriate for viewing by the entire family, which is important to viewers,
advertisers and affiliates.





For over
fifty years Hallmark has been a leader in high-quality original television
production. The Hallmark Channel and the Hallmark Movie Channel have the
exclusive cable license to broadcast the movies previously shown as Hallmark
Hall of Fame, a selection of movies from an award-winning entertainment
series.





The power
of the Hallmark brand and the quality of our programming combine
to:





·
            provide
      our viewers with tangible evidence of our commitment to the best in
      entertainment for the entire
family;





·
            enhance
      our ability to attract advertising commitments and higher rates
      (“Cost-Per-Thousands” or “CPM’s”) from the largest advertisers;
      and





·
            provide
      a competitive advantage in negotiating long-term distribution agreements
      with pay television distributors.





Crown
Media Holdings currently uses the websites www.hallmarkchannel.com and
www.hallmarkmoviechannel.com to promote the Channels and their programs and to
provide information to potential viewers.  These websites support
major programming events such as original movie premieres and program
acquisitions as well as contain information regarding the Channels’ program
schedule and information on the Channels’ programs and their stars. Further, the
sites provide platforms for viewer participation in the Channels’ sweepstakes
promotions and community areas.  The sites have advertiser imaging
including banner messages and video content.








Channel
Operations





The
programming department has been responsible for ensuring the consistent quality
of the programming we offer. The programming, scheduling and acquisitions
departments work in conjunction with the marketing and creative services
departments to create the distinctive appearance of our
Channels.  Some of these functions are outsourced on an as-needed
basis.





The
creation of our Channels begins with the acquisition of programming. Our staff
or third parties review and summarize all potential programming to ensure
compliance with our quality and content standards.





The
creation of on-air promotional segments “interstitials,” which are broadcast
between the feature movies, miniseries and series, are typically created by the
Company’s employees, but are occasionally outsourced to external vendors. These
interstitials are intended to invite viewership, guide viewers to specific
programming, and promote "brand awareness" for the Channels. Occasionally, these
interstitials are sponsored by advertisers, resulting in additional advertising
revenue.





The
scheduling department creates the play list, which contains a list of daily
programming. The scheduling department works with advertising sales, research
and distributor sales and marketing personnel to continuously monitor the
effectiveness of programming content and sequence. The play list is then
forwarded to the traffic department.





The
traffic department inserts promotional segments and advertising into the play
list and creates the daily log, which contains a detailed schedule of the stream
of programming, commercials and promotional materials that will ultimately be
distributed to the subscribers of the Channels.








Channel
Delivery





We
deliver the daily log and digital tapes of the Hallmark Channel and Hallmark
Movie Channel programming, commercials and promotional messages to a third party
network operations center in Los Angeles, California, where the programming,
advertising and promotional elements are combined and compressed.  The
Channels are compiled in high definition (“HD”) and then the same versions of
the Channels are created in standard definition (“SD”). The Los Angeles facility
transmits the combined signals to a satellite transponder that covers the United
States. The transponder transmits the signal back to cable head-end facilities,
Telcos and direct-to-home satellite services operated by pay television
distributors who receive and decode our signal and transmit our Channels to
their subscribers.





The
following chart summarizes for the primary distribution platforms through which
we deliver our Channels, our primary pay television distributors, and the uplink
and satellites we currently use to deliver our Channels.





Primary
            Primary
            Channel
            UplinkDistribution
            Pay
      TV
            Origination
            Providers/Platforms
            Distributors
            Providers/Locations
            Locations
            SatellitesCable
            AT&T
      (U-verse)
            Andrita
      Studios
            Andrita
      Studios
            Hallmark
      Channel:Cablevision
            Los
      Angeles, CA
            Los
      Angeles, CA
            SES
      AmericomCharterComcast
            
            
            Hallmark
      Movie Channel: AMC 11CoxNCTCMediacomTime
      WarnerVerizon
      Communications (FiOS)Satellite
            DirecTV
            Andrita
      Studios
            Andrita
      Studios
            Hallmark
      Channel:Direct-to-
            Dish
      Network
            Los
      Angeles, CA
            Los
      Angeles, CA
            SES
      AmericomhomeHallmark
      Movie Channel:  AMC 11








The
contracts with the parties providing origination, uplink, satellite and other
services for the delivery of our Channels in the United States expire from 2013
through 2019. Such contracts may be terminated by the vendors prior to the
expiration of the contracts under conditions that are customary to contracts of
this type.  Amounts payable under these contracts, as well as
international contracts, are reflected in “Operating and Capital Leases” in the
schedule of contractual commitments as of December 31, 2009, as shown in
Item 7 below. Agreements with two other parties for the delivery of the Channels
were terminated in early 2010. See “Results of Operations – Year Ended December
31, 2008 Compared to Year Ended December 31, 2009 – Cost of Services” under Item
7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” regarding these terminations.





Competition





The pay
television industry is highly competitive. Our Channels compete for
distribution, viewers and advertisers with other pay television channels,
broadcast television channels and with other general forms of
entertainment.





There are
several sources of competition within our industry, each of which affects our
business strategy. The Hallmark Channel competes with other general
entertainment programming from TNT, USA Network, A&E, TV Land, Lifetime,
Oxygen, ABC Family and other similarly targeted channels. We compete with these
channels for viewers and advertising dollars based upon quality of programming,
number of subscribers, ratings and subscriber demographics. We compete with all
channels for carriage on cable, satellite and telephone systems that may have
limited capacity.





Competition
continues to intensify as the industry shifts from analog distribution to
digital distribution. Many pay television distributors have upgraded their
physical infrastructures to accommodate digital delivery, which provides
significantly more channel capacity. In an effort to accelerate the conversion,
pay television distributors are attempting to place new channels on their
digital tier as opposed to their limited, yet more widely-distributed, basic
analog tiers. Although competition for the remaining analog channel space is
still intense, as more and more subscribers are converted, the digital tier is
expected to become the dominant platform.





Competitive
Strengths





We
believe that our primary competitive strengths include the
following:





·
            Programming.  We
      have established a track record of providing high quality family
      programming.





·
            Pay Television Channels
      Branded with the Well-Known Hallmark Name.Our Channels are branded
      with the Hallmark name. We believe that viewers and distributors associate
      the Hallmark brand with family values and high quality content. Our
      association with this brand facilitates our efforts to achieve increased
      distribution and to attract additional viewers, which in turn affects
      ratings and advertising revenue.





·
            Experienced
      Management.  Members of our senior management team have
      experience promoting and operating channels. They have held senior
      positions at such companies as ABC, CBS Sports, Fox Family, Discovery
      Channel, AMC and USA Networks.





Competitive
Risks





We
believe that our primary competitive risks include the following:





·
            One Primary Channel
      Distributed Domestically.We operate only two
      channels.  Many of our competitors have more than two channels
      and are also diversified entertainment companies, giving them an advantage
      in dealing with distributors and advertisers. These companies are also
      able to leverage costs across multiple channels. Until the Hallmark Movie
      Channel is more widely distributed, it will not provide significant
      leverage in negotiations with distributors and
  advertisers.





·
            Entertainment
      Programming.  Our programming is entertainment designed
      for adults and families and is intended to meet quality standards that are
      associated with the Hallmark trademark.  Our competitors may
      have more flexibility in
programming.





·
            Ratings Which Affect
      Advertising.  Our ratings are a significant and generally
      positive factor. Nevertheless, our competitors include channels with more
      subscribers and higher ratings, which affect rates that we can charge for
      advertising.











Research





The
research department at the Company provides strategic and tactical guidance to
decision-makers within the Company, as well as supplying information about the
Channels to our potential advertisers and affiliates. This department provides
data on the size and demographics of our audience and information about our
audiences, competitors, markets and industry.





Currently,
our Channels’ research department translates our overall business strategy into
a cohesive research program.  This information assists our executives
to more effectively target, brand, promote, program, and better understand where
opportunities lie, in order to increase our Channels’ market share.





The
research department has sophisticated research tools and competitive tracking
database hardware and software. Trends and changes from these ratings systems
are reported to top management for short and long-term strategic
planning.





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





Available
Information





We
will make available free of charge through our website, www.hallmarkchannel.com,
this Annual Report on Form 10-K, our quarterly reports on Form 10-Q, our current
reports on Form 8-K, and amendments to such reports, as soon as reasonably
practicable after we electronically file or furnish such material with the
Securities and Exchange Commission.





Additionally,
we will make available, free of charge upon request, a copy of our Code of
Business Conduct and Ethics, which is applicable to all of our employees,
including our senior financial officers. Requests for a copy of this Code should
be addressed to the General Counsel at Crown Media Holdings, Inc., 12700 Ventura
Boulevard, Studio City, California  91604.





ITEM
1A.  Risk Factors





Risk
Factors and Forward-Looking Statements





The
discussion set forth in this Form 10-K contains statements concerning potential
future events. Such forward-looking statements are based on assumptions by Crown
Media Holdings management, as of the date of this Form 10-K including
assumptions about risks and uncertainties faced by Crown Media Holdings. Readers
can identify these forward-looking statements by their use of such verbs as
"expects," "anticipates," "believes," or similar verbs or conjugations of such
verbs. If any of management's assumptions prove incorrect or should
unanticipated circumstances arise, Crown Media Holdings' actual results, levels
of activity, performance, or achievements could materially differ from those
anticipated by such forward-looking statements. Among the factors that could
cause actual results to differ materially are those discussed below in this Form
10-K. Crown Media Holdings will not update any forward-looking statements
contained in this Form 10-K to reflect future events or
developments.





If we do
not successfully address the risks described below, our business, prospects,
financial condition, results of operations or cash flow could be materially
adversely affected. The trading price of our Class A common stock could decline
because of any of these risks.





Risks
Relating to Our Business





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





Our
Channels have a history of net losses and we expect to continue to report net
losses for the foreseeable future. As of December 31, 2009, we had an
accumulated deficit of approximately $2.2 billion, total stockholders’ deficit
of approximately $698.0 million, and goodwill of approximately $314.0
million.





We cannot
assure you that we will achieve an operating profit or sustain a positive cash
flow. If we are not able to do so, the trading price of our Class A common stock
may fall significantly. To diminish our losses, to continue to be profitable
before interest expense and to continue to generate a positive cash flow, we
will need to increase our advertising and subscriber revenue. This will require,
among other things, maintaining the distribution of our Channels, attracting
more and younger viewers to our channels, attracting more advertisers, and
maintaining or increasing our subscriber and advertising rates. Risks associated
with these areas of our business are described below.





In
addition, in order to accomplish these goals, the management of Crown Media
Holdings continues to believe that it is necessary to maintain subscriber levels
and enhance our programming, which may result in increased costs for
programming. Over the last five years, these actions have contributed to net
losses for Crown Media Holdings. To achieve positive net income, we would also
need to decrease our interest expense by reducing our outstanding
indebtedness.








We
believe that our ability to continue operations depends upon completion of the
Recapitalization.





We are
unable to meet our debt obligations due August 31, 2010, which are owed to
affiliates of Hallmark Cards and are owed under the bank credit
facility.  The Recapitalization is intended to exchange the existing
debt obligations to the Hallmark affiliates for new debt, preferred stock and
common stock.  Hallmark Cards and its affiliates own beneficially a
sufficient number of shares of Class A and Class B stock to approve the
Recapitalization transactions.  Nevertheless, consummation of the
Recapitalization transactions is not assured.  Various conditions must
be satisfied for a closing of the Recapitalization, including that Hallmark
Cards has not delivered a written notice to the Company certifying that Hallmark
Cards, in its sole discretion, shall have determined that the status of any
pending or threatened litigation or a regulatory proceeding involving the
Company or its subsidiaries in connection with the Recapitalization is
unsatisfactory to Hallmark Cards.  A lawsuit challenging the original
proposal for the Recapitalization was filed in 2009, and the plaintiff in that
lawsuit has indicated a continuing objection to the
Recapitalization.  We do not know what steps will be taken in this
existing lawsuit or whether any new lawsuits will be brought in regard to the
Recapitalization.  In any event, there can be no assurance that the
Recapitalization will be completed.





Our
substantial indebtedness could adversely affect our financial health, and the
restrictions imposed by the terms of our debt instruments may severely limit our
ability to plan for or respond to changes in our business.





We have a
substantial amount of indebtedness. At this time, prior to the Recapitalization,
to the extent interest is deferred and added to principal, the indebtedness
increases. As of December 31, 2009, our total debt was $1.1 billion, and we had
$10.5 million of cash and cash equivalents and $44.0 million available under our
bank credit facility to support our operations.





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





•
      our vulnerability to adverse general economic conditions is
      heightened;





•
      we are required to dedicate a portion of our cash flow from operations to
      repayment of debt, limiting the availability of cash for other
      purposes;





•
      we are, and will continue to be, limited by financial and other
      restrictive covenants 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 business
      and industry will be limited;





• we are
sensitive to fluctuations in interest rates;





•
      our ability to obtain additional financing in the future for working
      capital, capital expenditures, acquisitions, general corporate purposes or
      other purposes may be impaired; and





•
      offers to purchase the Company or its assets at prices that may be
      attractive to stockholders may be
limited.





Our
ability to meet our debt and other obligations and to reduce our total debt
likely depends at this time on completing the Recapitalization; in the future
our ability to meet our debt and other obligations will depend on our operating
performances and on economic, financial, competitive and other factors. There
can be no assurance that our leverage and such restrictions will not materially
and adversely affect our ability to finance our future operations or capital
needs or to engage in other business activities.





Even if
the Recapitalization is completed, we will have substantial indebtedness
(although significantly reduced) as well as dividends that are paid or accrued
on the preferred stock that will be outstanding, and the factors listed above
(some to a lesser extent) will continue to apply.





Information
concerning our liquidity may be found in Note 1 of our Notes to Consolidated
Financial Statements in this Report.





We
have significant interest expense, which may impact our future
operations.





High
levels of interest expense could have negative effects on our future operations.
Interest expense, which includes amortization of debt issuance costs and
interest expense on borrowings under our senior and demand notes and bank credit
facility, was significant over the past year. Although interest expense was
lower in the past twelve months than in the previous twelve months, we continue
to have significant outstanding indebtedness and related interest expense. The
Recapitalization would significantly reduce our outstanding indebtedness and
interest expense; nevertheless, even with the Recapitalization, there will be
substantial indebtedness and related interest expense. A substantial portion of
our cash flow from operations will be used to pay our interest expense and will
not be available for other business purposes. In addition, we may need to incur
additional indebtedness in the future. We cannot be assured that our business
will generate sufficient cash flow or that future financings will be available
to provide sufficient proceeds to meet our obligations or to service our total
debt.





Our
liquidity is dependent on external funds.





Although
in the past twelve months we generated positive cash flow from operations,
unanticipated significant expense or any developments that hamper our growth in
revenue or decreases any of our revenue, may result in the need for additional
external funds in order to continue operations. Except for the Recapitalization,
we have no arrangements for any such additional external financings, whether
debt or equity, and are not certain whether any new external financing would be
available on acceptable terms.  Any new debt financing would require
the cooperation and agreement of existing lenders.





The
Company is currently unable to meet its debt obligations to Hallmark Cards and
its affiliates and under the bank credit facility which come due on and after
August 31, 2010.  A default on the obligations due on August 31, 2010,
would also result in a default under the Company’s 10.25% Senior Secured Note.
The Company anticipates that prior to August 31, 2010, it will be necessary to
extend, refinance or restructure (i) the bank credit facility and (ii) the
promissory notes payable to affiliates of Hallmark Cards.  To
accomplish those changes, the Company plans to complete the
Recapitalization.





The
Recapitalization contemplates that we will endeavor to have a revolving line of
credit with JPMorgan Chase or another third party in the amount of $30.0 million
with a maturity date of not less than 360 days from closing the
Recapitalization.








There is no
assurance that Hallmark Cards and its affiliates will extend dates for the
deferral of payments on indebtedness owed by us or participate in any extension,
refinancing or restructuring of the indebtedness.





We have
substantial outstanding obligations owed to Hallmark Cards and its
affiliates.  These obligations include promissory notes and amounts
owed under a service agreement.  Hallmark Cards, its affiliates and we
are parties to the Waiver Agreement, as amended, under which principal payments
and certain interest payments on the promissory notes are deferred until August
31, 2010, subject to earlier termination as provided in that
Agreement.  See Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
- Bank Credit Facility and Hallmark Notes and Item 13 - Certain Relationships
and Related Transactions and Director Independence.  These obligations
and the Waiver Agreement have been negotiated by us with Hallmark Cards and its
affiliates.  Hallmark Cards and its affiliates have indicated that
they do not intend to extend the Waiver Agreement beyond August 31,
2010.  Any decision by Hallmark Cards and its affiliates on these
matters other than pursuant to the Recapitalization is at their
discretion.





“Most
Favored Nations” provisions may require modification of existing distribution
agreements which could adversely affect subscriber revenue.





A number
of our existing distribution agreements contain "most favored nations" or “MFN”
clauses. These clauses typically provide that, in the event we enter into an
agreement with another distributor on more favorable terms, these terms must be
offered to the distributor holding the MFN right, subject to certain exceptions
and conditions. These clauses cover matters such as subscriber fees, launch
support, local advertising time and other financial and operating provisions. In
the past, after entering into new distribution agreements, we have been asked by
some of the distributors holding MFN rights to modify their distribution
agreements to incorporate financial terms similar to those in the new
agreements.  Any claims of this type in the future could result in lower
overall subscriber revenue or increased cash outlays; however, if our
subscription base is increased as a result of such modifications, it could
result in higher advertising revenue.





If
we are unable to obtain programming from third parties, we may be unable to
increase our subscriber base.





We
compete with other pay television channel providers to acquire programming. If
we fail to continue to obtain programming on reasonable terms for any reason,
including as a result of competition, we could be forced to incur additional
costs to acquire such programming or look for alternative programming, which may
hinder the growth of our subscriber base.





If
our programming declines in popularity, our subscriber fees and advertising
revenue could fall.





Our
success depends partly upon unpredictable and volatile factors beyond our
control, such as viewer preferences, competing programming and the availability
of other entertainment activities.  We may not be able to anticipate
and react effectively to shifts in tastes and interests in our
markets.  Our competitors may have greater numbers of original
productions, better distribution, and greater capital resources, and may be able
to react more quickly to shifts in tastes and interests.  As a result,
we may be unable to maintain the commercial success of any of our current
programming, or to generate sufficient demand and market acceptance for our new
programming.  A shift in viewer preferences in programming or
alternative entertainment activities could also cause a decline in both
advertising and subscriber fees revenue.  The decline in revenue could
hinder or prevent us from achieving profitability or maintaining a positive cash
flow and could adversely affect the market price of our Class A common
stock.





In the
second, third and fourth quarters of 2009, except for the holiday period
commencing with Thanksgiving and ending on January 3, 2010, we experienced
declines in viewer ratings across demographic categories, compared to the same
periods of 2008, resulting in decreases in advertising revenues and cash
flows.  This decline has continued in the early part of
2010.  A number of changes to our program schedule were implemented in
the second and third quarters of 2009, including the replacement of programs
that had appeared in the schedule for a number of years, as well as a shift in
scheduling strategy to more specifically target our prime demographic group of
women 25-54.  These changes have caused a temporary disruption to
established viewing patterns for our audience resulting in declines in household
ratings but over time are intended to increase our delivery of viewers in the
women 25-54 demographic category.  We are considering further changes
in our programming that may be helpful.  We must successfully
implement the program rescheduling with an increase in ratings, which is
uncertain, or otherwise address the decrease in ratings in order to maintain or
increase our advertising revenues, to maintain subscriber fees and to maintain
or improve our cash flow from operations.





In
addition, our delivery of key demographics continues to be impacted by industry
developments.  One potentially significant factor is the continued
growth of time-shifting digital video recording devices (DVRs). DVRs heighten
the impact of competition as viewers are able to increase their access to what
they consider to be new, compelling content.  The number of cable
networks investing in original programming increased 74% in 2009, and acquired
(non-original) programming now represents only 33% of the prime time cable
programming.  Although Hallmark Channel continues to invest in
original programming, our increase in investment for original content did not
match the growth of the market or many of our competitors.





If
we are unable to increase our advertising revenue, we may be unable to achieve
improved results.





Although
it is expected over time that our advertising revenue will increase, if we fail
to significantly increase our advertising revenue, we may be unable to achieve
or sustain improved results or to expand our business.  A failure to
increase advertising revenue may be a result of any or all of the following: (i)
a continued decline in viewer ratings mentioned above; (ii) the current economic
environment presents uncertainty regarding the condition of the advertising
marketplace and the financial health of many industry segments and individual
companies, including those which advertise on our channels; (iii) we may be
unable to reduce our average viewer age to be within our target audience of
viewers between the ages of 25 and 54; (iv) we may be unable to identify,
attract and retain experienced sales and marketing personnel with relevant
experience; (v) our sales and marketing organization may be unable to
successfully compete against the significantly more extensive and well-funded
sales and marketing operations of our current or potential competitors; (vi) the
advancement of technologies such as Digital Video Recording may cause
advertisers to shift their expenditures to media in which their commercial
messages are not circumvented by the technology; and/or (vii) we will not be
able to increase our advertising sales rate-card or may be required to run
additional advertising spots to fulfill guaranteed delivery numbers which affect
the availability of advertising inventory for future sales. Success in
increasing our advertising revenue also depends upon the number and coverage of
the distributors who carry our channels and our number of
subscribers.





Current
economic conditions have resulted in softness of advertising rates and may
materially adversely impact our business.





In the
second half of 2008 and during the first three quarters of 2009, we experienced
some softening of our general advertising rate prices and a more dramatic
decrease in the rates of our direct response advertising because of economic
conditions.  The volume of advertising has not been impacted. See
“Results of Operations” in Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Year Ended December 31, 2008
Compared to Year Ended December 31, 2009, in this Report for additional
information on this subject.





In
addition, the turmoil in the investment market, the tightening of credit and
relatively high, increasing levels of unemployment in the United States have
lead to an increased level of commercial and consumer delinquencies, lack of
consumer confidence, increased market volatility and possibly a reduction in
business activity generally.  A continuation of these conditions could
have the following negative effects, among others:  (1) a reduction in
spending by advertisers and consumers in general, which in turn could reduce our
number of subscribers and/or advertising rates, resulting in reduced revenue;
and (2) a further increase in bad debts or the reserve for bad
debts.  These factors could make more difficult the goal of a
continuing positive cash flow, any renewal of the Bank credit facility and any
financial restructuring.








Hallmark
Entertainment Investments controls us and this control could create conflicts of
interest or inhibit potential changes of control.





Hallmark
Entertainment Investments owns all of our outstanding shares of Class B common
stock and, together with other affiliates of Hallmark Cards, owns approximately
71.8% of the outstanding shares of our Class A common stock, representing in the
aggregate approximately 94.5% of the outstanding voting power on all matters
submitted to our stockholders. Hallmark Entertainment Holdings, a subsidiary of
Hallmark Cards, controls the voting of all our shares held by Hallmark
Entertainment Investments. Additionally, a significant portion of our overall
indebtedness is held by Hallmark Cards or its wholly owned affiliates. This
control could discourage others from initiating potential merger, takeover or
other change of control transactions that may otherwise be beneficial to our
business or holders of Class A common stock. As a result, the market price of
our Class A common stock could suffer, and our business could suffer. In
addition, the control that Hallmark Cards and/or these specific wholly-owned
affiliates may exert over us, either directly or indirectly, could give rise to
conflicts of interest in certain situations.





After the
Recapitalization, Hallmark Cards will own 90.1% of the outstanding Common Stock
and will be subject to standstill and other provisions in a stockholder
agreement as described earlier in this Report.





We
could lose the right to use the name “Hallmark” because we have limited-duration
license agreements, which could harm our business.





We
license the name "Hallmark" from Hallmark Licensing, Inc., a subsidiary of
Hallmark Cards, for use in the names of our Channels. This license will expire
on September 1, 2010. If Hallmark Cards determines not to renew the trademark
license agreements for any reason, including failure to comply with Hallmark
Cards' programming standards, we would be forced to significantly revise our
business plan and operations, and could experience a significant erosion of our
subscriber base and advertising revenue.





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





We
currently rely on third parties to supply key network infrastructure services,
including uplink, playback, transmission and satellite services to our market,
which are available only from limited sources. We have occasionally experienced
delays and other problems in receiving communications equipment, services and
facilities and may, in the future, be unable to obtain such services, equipment
or facilities on the scale and within the time frames required by us on terms we
find acceptable, or at all. If we are unable to obtain, or if we experience a
delay in the delivery of, such services, we may be forced to incur significant
unanticipated expenses to secure alternative third party suppliers or adjust our
operations, which could hinder our growth and reduce our revenue and potential
profitability.





If
we are unable to retain key executives and other personnel, our growth could be
inhibited and our business harmed.





Our
success depends on the expertise and continued service of our executive officers
and key employees of our subsidiaries. If we fail to attract, hire or retain the
necessary personnel, or if we lose the services of our key executives, we may be
unable to implement our business plan or keep pace with developing trends in our
industry.





The
amount of our goodwill may hinder our ability to achieve
profitability.





As a
result of our acquisitions of all the common interests in Crown Media United
States, we have recorded a significant amount of goodwill. We are required to
periodically review whether the value of our goodwill has been impaired. If we
are required to write down our goodwill, our results of operations,
stockholders' equity (deficit) could be materially adversely
affected.





Our
stock price may be volatile and could decline substantially.





The stock
market has, from time to time, experienced extreme price and volume
fluctuations. Many factors may cause the market price for our Class A common
stock to decline, including the following:





• any
failure to recapitalize or restructure our outstanding
indebtedness;





• failure
of our operating results to meet the expectations of investors in any
quarter;





•
economic conditions that adversely affect our advertising rates or our number of
subscribers;





•
material announcements by us or our competitors;





•
governmental regulatory action;





•
      technological innovations by competitors or competing
      technologies;





•
      perceptions by the investing community or our customers with respect to
      the prospects of our company or our
industry;





• changes
in general market conditions or economic trends; and





• failure
by us to renew major distribution agreements.





Additionally,
of the approximately 74.1 million shares of the Company’s outstanding Class A
common stock, only 11.6 million shares (approximately 16%), plus shares held by
The DIRECTV Group, Inc. and National Interfaith Cable Coalition, are held by
non-affiliates of the Company. This stock ownership structure may also be a
cause of volatility in the market price of the Company’s Class A common
stock.





Prior to
entering into a new agreement on January 2, 2008, certain programming and other
commitments in then existing agreements with the National Interfaith Cable
Coalition (“NICC”) would have terminated upon the sale of 50% or more of the
shares of Class A common stock owned by NICC.  On January 2, 2008, we
and NICC entered into a new agreement superseding prior agreements and
terminating most programming relationships with NICC.  Additionally,
NICC owns approximately 4.4 million shares of the Company’s Class A common
stock.  As a result of the agreement mentioned above, NICC has sold
some of its Class A common stock and may continue to do so, which could have an
adverse impact on the share price of our Class A common stock.











Risks
Relating to Our Industry





The
recent change in the television rating system in the United States could reduce
our Channel revenue and our ability to achieve profitability.





Our
domestic advertising revenue is partially dependent on television ratings
provided by Nielsen Media Research. In 2007, Nielsen modified its ratings system
by increasing its household sample size. In the fourth quarter of 2007, Nielsen
began measuring and providing performance data based on viewing of commercial
content as well as programming content.  As the impact of the changes
continue to take effect, our ratings could either be positively or negatively
affected by these changes, depending on the demographic characteristics of the
households added to the Nielsen sample and the nature of the changes in the
measurement systems.  From the beginning of the fourth quarter of 2007
through the fourth quarter of 2008, we experienced a decrease in viewers of
approximately 5% under the new ratings measurement system compared to the system
previously in use.We
continue to factor the new rating information into our advertising rates as
Nielsen is continually in the process of modifying its ratings system to
accommodate emerging technologies.








Competition
could reduce our Channels revenue and our ability to achieve
profitability.





We
operate in the pay television business, which is highly competitive. If we are
unable to compete effectively with large diversified entertainment companies
that have substantially greater resources than we have, our operating margins
and market share could be reduced, and the growth of our business inhibited. In
particular, we compete for distribution with other pay television channels and,
when distribution is obtained, for viewers and advertisers with pay television
channels, broadcast television networks, radio, the Internet and other media. We
also compete, to varying degrees, with other leisure-time activities such as
movie theaters, the Internet, radio, print media, electronic games and other
alternative sources of entertainment and information. Future technological
developments may affect competition within this business.





A
continuing trend towards business combinations and alliances in the
communications industry may create significant new competitors for us or
intensify existing competition. Many of these combined entities have more than
one channel and resources far greater than 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 prices or license additional programming to remain
competitive, and we may be unable to sustain future pricing levels as
competition increases. Our failure to achieve or sustain market acceptance of
our programming at desired pricing levels could impair our ability to achieve
profitability or positive cash flow, which would harm our business.





Distributors
in the United States may attempt to pressure pay TV channels having lower
viewership, such as our Channels, to accept decreasing amounts for subscriber
fees, to pay higher subscriber acquisition fees or to allow carriage of the
Channels without the payment of subscriber fees. Factors that may lead to this
pressure include the number of competing pay TV channels, the limited space
available on services of distributors in the United States and the desire of
distributors to maintain or reduce costs. Any reduction in subscriber fees
revenue now or in the future could have a material impact on our operating
results and cash flow.





New
distribution technologies may fundamentally change the way we distribute our
Channels and could significantly decrease our revenue or require us to incur
significant capital expenditures.





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





•
      rapid and significant technological change, including continuing
      developments in technology which do not presently have widely accepted
      standards; and





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





For
example, the advent of digital technology is likely to accelerate the
convergence of broadcast, telecommunications, Internet and other media and could
result in material changes in the economics, regulations, intellectual property
usage and technical platforms on which our business relies, including lower
retail rates for video services. These changes could fundamentally affect the
scale, source, and volatility of our revenue streams, cost structures, and
operating results, and may require us to significantly change our
operations.





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





Moreover,
the increased capacity of digital distribution platforms, including the
introduction of digital terrestrial television, may reduce the competition for
the right to carry channels and allow development of extra services at low
incremental cost. These lower incremental costs could lower barriers to entry
for competing channels, and place pressure on our operating margins and market
position.








ITEM
1B.  Unresolved Staff Comments





Not
applicable.





ITEM
2. Properties





The
following table provides certain summary information with respect to the
principal real properties leased by the Company. We do not own any real
property. The leases for these offices and facilities expire between 2010 and
2016. The Company believes the facilities, office space and other real
properties leased are adequate for its current operations.





Location
            Use
            
            Approximate
              Area in
              Square Feet12700
      Ventura Blvd.
            Executive
      and administrative office and post
            
            
            37,164Studio
      City, California
            production
      and editing facilities1325
      Avenue of the Americas
            Advertising
      sales and administrative office
            
            
            16,937New
      York, New York
            and
      advertising traffic6430
      S. Fiddlers Green Circle
            Administrative
      office
            
            
            4,500Greenwood
      Village, Colorado205
      N. Michigan Ave.
            Advertising
      sales office
            
            
            3,048Chicago,
      Illinois1170
      Peachtree Street
            Advertising
      sales office
            
            
            180Atlanta,
      Georgia





We own
most of the equipment and furnishings used in our businesses, except for
satellite transponders, which are leased. See Note 6 of Notes to Consolidated
Financial Statements for information on our leasing of property and
equipment.





ITEM
3. Legal Proceedings





On July
13, 2009, a lawsuit was brought in the Delaware Court of Chancery against each
member of the Board of Directors of Crown Media Holdings, Hallmark Cards and its
affiliates, as well as the Company as a nominal defendant, by a minority
stockholder of the Company regarding the recapitalization proposal (the
“Proposal”) which the Company received from HC Crown Corp. The plaintiff is S.
Muoio & Co. LLC which owns beneficially approximately 5.8% of the Company's
Class A common stock, according to the complaint and filings with the Securities
and Exchange Commission. The Proposal, which the Company publicly announced on
May 28, 2009, provides for a recapitalization of its outstanding debt to
Hallmark Cards affiliates in exchange for new debt and convertible preferred
stock of the Company. The lawsuit claims to be a derivative action and a class
action on behalf of the plaintiff and other minority stockholders of the
Company. The lawsuit alleges, among other things, that, the defendants have
breached fiduciary duties owed to the Company and minority stockholders in
connection with the Proposal. The lawsuit includes allegations that if the
Proposal is consummated, an unfair amount of equity would be issued to the
majority stockholders, thereby reducing the minority stockholders' equity and
voting interests in the Company, and that the majority stockholders would be
able to eliminate the minority stockholders through a short-form merger. The
complaint requests the court to enjoin the defendants from consummating the
Proposal and to award plaintiff fees and expenses incurred in bringing the
lawsuit.





On July
22, 2009, a Stipulation Providing for Notice of Transaction (the “Stipulation”)
was filed with the Delaware Court of Chancery.  The Stipulation provided
that the Company cannot consummate the transaction contemplated in the Proposal
until not less than seven weeks after providing the plaintiff with a notice of
the terms of the proposed transaction, including copies of the final transaction
agreements.  If the plaintiff moves for preliminary injunctive relief with
respect to any such transaction, the parties will establish a schedule with the
Court of Chancery to resolve such motion during the seven week period.  In
addition, following the decision of the Court of Chancery, the Company will not
consummate any transaction for a period of at least one week, during which time
any party may seek an expedited appeal.  The Stipulation further provides
that the plaintiff shall withdraw its motion for preliminary injunction filed on
July 13, 2009 and that the action shall be stayed until the earlier of providing
the notice of a transaction or an announcement by the Company that it is no
longer considering a transaction.  Notice of the terms of the proposed
Recapitalization, including copies of the agreements, was provided to the
plaintiff on March 1, 2010.





By a
letter of February 28, 2010, the plaintiff in this lawsuit informed the Special
Committee of the Board of Directors, which considered and negotiated the
Recapitalization, that the plaintiff objected to the proposed Recapitalization
on the terms set forth in the term sheet dated February 9, 2010.  The
plaintiff asserted, among other things, that the transactions contemplated by
the term sheet would unfairly dilute the economic and voting interests of the
Company’s minority stockholders, that the transactions should be subject to a
vote of the majority of the minority stockholders and that the proposed
transactions remain inadequate.  The plaintiff indicated that if the
Company executed definitive documents for the Recapitalization, the plaintiff
would pursue the litigation.  The February 26, 2010, agreements
executed by the Company for the Recapitalization followed the provisions in the
earlier term sheet.





It is not
currently possible to predict the outcome of the proceeding discussed in this
report. The plaintiff does not seek monetary damages from the Company. Legal
fees incurred to defend the proceeding described in this report will be expensed
as incurred. See “Risk Factors” above for any potential impact of this lawsuit
on completion of the Recapitalization.





ITEM
4. Submission of Matters to a Vote of Security Holders





Not
applicable.








PART
II





ITEM
5. Market for Our Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities





Market
Information





Our Class
A common stock is listed on the NASDAQ Global Market under the ticker symbol
"CRWN." There is no established public trading market for our Class B common
stock, of which 100% is owned by Hallmark Entertainment Investments. Set forth
below are the high and low sales prices for our Class A common stock for each
quarterly period in 2008 and 2009, as reported on the NASDAQ Global
Market.








Price RangeCommon Stock
            
            High
            
            
            Low2008First
      Quarter
            
            $
            6.480
            
            
            $
            4.520Second
      Quarter
            
            $
            5.440
            
            
            $
            4.200Third
      Quarter
            
            $
            5.350
            
            
            $
            3.640Fourth
      Quarter
            
            $
            5.230
            
            
            $
            1.6302009First
      Quarter
            
            $
            2.890
            
            
            $
            1.170Second
      Quarter
            
            $
            3.280
            
            
            $
            1.450Third
      Quarter
            
            $
            2.100
            
            
            $
            1.450Fourth
      Quarter
            
            $
            1.940
            
            
            $
            1.190








Holders





As of
February 12, 2010, there were 55 record holders of our Class A common stock and
one record holder of our Class B common stock.





Dividends





We have
not paid any cash dividends on our common stock since inception. We anticipate
that we will retain all of our earnings, if any, in 2010 to finance the
continued growth and expansion of our business, and we have no current intention
to pay cash dividends. Our bank credit facility also prohibits our declaring or
paying any cash dividends.





Securities
Authorized for Issuance under Equity Compensation Plans





Information
related to our Amended and Restated 2000 Long Term Incentive Plan, our only
equity compensation plan, is presented as of December 31, 2009 in the
following table.





Equity
Compensation Plan Information





Plan
      Category
            
            Number
      of Securitiesto
      be Issued
              Upon
      Exercise ofOutstanding
      Options,
              Warrants and Rights
            
            
            Weighted-AverageExercise
      Price of
              Outstanding
      Options,
              Warrants and Rights
            
            
            Number
      of SecuritiesRemaining
      Available
              for
      Future IssuanceUnder
      Equity
              Compensation
      Plans(Excluding
      the Number of
              Securities
      to be Issued Upon
              Exercise
      of OutstandingOptions)(In
      thousands)
            
            
            
            
            
            (In thousands)Equity
      compensation plans approved by
              security
      holders
            
            
            87
            
            
            $
            13.89
            
            
            
            9,913







Stock
Purchases




We did
not make any repurchases of our outstanding shares during the fourth quarter of
2009.  None of our executive officers purchased shares of our Class A
Common Stock in open market transactions during the fourth quarter of
2009.







Performance
Graph





The following graph compares
total stockholder return on our Class A Common Stock since December 31, 2004
through December 31, 2009, to the NASDAQ Composite Index and a Peer Group Index
consisting of Time Warner Inc., Outdoor Channel Holdings, Inc. and Walt Disney
Co.  The graph assumes that $100 was invested in our stock on December
31, 2004 and that the same amount was invested in the NASDAQ Composite Index and
the Peer Group Index.  Historical results are not necessarily
indicative of future performance. The following graph is deemed furnished and
not filed with the SEC.





The
closing sale price for our stock on December 31, 2004, was $8.60.  Our
closing stock price on December 31, 2009, the last trading day of our 2009
fiscal year, was $1.45.













ITEM
6. Selected Financial Data





Selected
Historical Consolidated Financial Data of Crown Media Holdings





In the
table below, we provide you with selected historical consolidated financial and
other data of Crown Media Holdings and its subsidiaries. The following selected
consolidated statement of operations data for the years ended December 31, 2005,
2006, 2007, 2008 and 2009, and the consolidated balance sheet data as of
December 31, 2005, 2006, 2007, 2008 and 2009, are derived from the audited
financial statements of Crown Media Holdings and its subsidiaries. This data
should be read together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and related notes for the years ended December 31, 2007, 2008 and
2009,  included in this Annual Report on Form 10-K.





In April
2005, the Company completed the sale of its international business and
classified the operating results of the international business as discontinued
operations in the accompanying statements of operations for all periods
presented. The Company’s discontinued operations consisted of the international
channel operations and the international rights to the film library
assets.





In
December 2006, the Company completed the sale of its film assets.














Years Ended December 31,2005
            
            
            2006
            
            
            2007
            
            
            2008
            
            
            2009(In
      thousands, except per share amounts)Revenue:Subscriber
      fees
            
            $
            18,746
            
            
            $
            24,869
            
            
            $
            27,812
            
            
            $
            57,153
            
            
            $
            63,597Advertising
            
            
            143,780
            
            
            
            172,950
            
            
            
            205,666
            
            
            
            222,967
            
            
            
            213,770Advertising
      by Hallmark
      Cards
            
            
            2,335
            
            
            
            1,240
            
            
            
            508
            
            
            
            429
            
            
            
            775Film
      asset license
      fees
            
            
            21,693
            
            
            
            1,815
            
            
            
            —
            
            
            
            —
            
            
            
            —Sublicense
      fees and other
      revenue
            
            
            10,830
            
            
            
            305
            
            
            
            378
            
            
            
            1,245
            
            
            
            1,422Total
      revenue,
      net
            
            
            197,384
            
            
            
            201,179
            
            
            
            234,364
            
            
            
            281,794
            
            
            
            279,564Cost
      of Services:Programming
      costsHallmark
      Cards
      affiliates
            
            
            74
            
            
            
            74
            
            
            
            82
            
            
            
            798
            
            
            
            1,235Non-affiliates
            
            
            120,503
            
            
            
            152,119
            
            
            
            164,287
            
            
            
            139,900
            
            
            
            126,293Amortization
      of film
      assets
            
            
            51,619
            
            
            
            14,739
            
            
            
            (5,220
            )
            
            
            (745
            )
            
            
            —Impairment
      of film
      assets
            
            
            25,542
            
            
            
            225,832
            
            
            
            —
            
            
            
            176
            
            
            
            —Subscriber
      acquisition fee amortization expense
            
            
            35,928
            
            
            
            31,044
            
            
            
            30,996
            
            
            
            —
            
            
            
            —Amortization
      of capital
      lease
            
            
            1,158
            
            
            
            1,157
            
            
            
            1,158
            
            
            
            1,158
            
            
            
            1,158Contract
      termination fees
      expense
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,718Other
      costs of
      services
            
            
            20,448
            
            
            
            11,273
            
            
            
            11,222
            
            
            
            12,492
            
            
            
            14,175Total
      cost of
      services
            
            
            255,272
            
            
            
            436,238
            
            
            
            202,525
            
            
            
            153,779
            
            
            
            147,579Selling,
      general and administrative expense
            
            
            55,138
            
            
            
            43,968
            
            
            
            61,452
            
            
            
            46,706
            
            
            
            47,069Marketing
      expense
            
            
            24,160
            
            
            
            16,021
            
            
            
            19,733
            
            
            
            19,603
            
            
            
            6,551Depreciation
      and amortization expense
            
            
            4,471
            
            
            
            2,865
            
            
            
            1,656
            
            
            
            1,932
            
            
            
            1,947Gain
      from sale of film
      assets
            
            
            —
            
            
            
            (8,238
            )
            
            
            —
            
            
            
            (101
            )
            
            
            (682
            )(Loss)
      income from operations before interest
            
            
            (141,657
            )
            
            
            (289,675
            )
            
            
            (51,002
            )
            
            
            59,875
            
            
            
            77,100Interest
      expense, net of interest income
            
            
            (73,880
            )
            
            
            (98,728
            )
            
            
            (108,144
            )
            
            
            (100,157
            )
            
            
            (100,539
            )Loss
      before discontinued operations and cumulativeeffect
      of change in accounting principle
            
            
            (215,537
            )
            
            
            (388,403
            )
            
            
            (159,146
            )
            
            
            (40,282
            )
            
            
            (23,439
            )Loss
      from discontinued operations, net of tax
            
            
            (10,683
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —(Loss)
      gain from sale of discontinued operations, net of tax
            
            
            (6,538
            )
            
            
            1,530
            
            
            
            114
            
            
            
            3,064
            
            
            
            847Loss
      before cumulative effect of changein
      accounting
      principle
            
            
            (232,758
            )
            
            
            (386,873
            )
            
            
            (159,032
            )
            
            
            (37,218
            )
            
            
            (22,592
            )Cumulative
      effect of change in accounting principle
            
            
            —
            
            
            
            (2,099
            )
            
            
            —
            
            
            
            —
            
            
            
            —Net
      loss
            
            $
            (232,758
            )
            
            $
            (388,972
            )
            
            $
            (159,032
            )
            
            $
            (37,218
            )
            
            $
            (22,592
            )Other
      comprehensive loss:Foreign
      currency translation adjustment
            
            
            (3,434
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Comprehensive
      loss
            
            $
            (236,192
            )
            
            $
            (388,972
            )
            
            $
            (159,032
            )
            
            $
            (37,218
            )
            
            $
            (22,592
            )Weighted
      average number of Class A and Class B shares
              outstanding,
      basic and
      diluted
            
            
            104,619
            
            
            
            104,788
            
            
            
            104,038
            
            
            
            104,776
            
            
            
            104,788Loss
      per share before discontinued operations and cumulative
              effect
      of change in  accounting principle, basic and
      diluted
            
            $
            (2.06
            )
            
            $
            (3.71
            )
            
            $
            (1.53
            )
            
            $
            (0.39
            )
            
            $
            (0.23
            )(Loss)
      gain per share from discontinued operations,basic
      and
      diluted
            
            
            (0.16
            )
            
            
            0.02
            
            
            
            0.00
            
            
            
            0.03
            
            
            
            0.01Cumulative
      effect of change in accounting principle,basic
      and
      diluted
            
            
            —
            
            
            
            (0.02
            )
            
            
            —
            
            
            
            —
            
            
            
            —Net
      loss per share, basic and
      diluted
            
            $
            (2.22
            )
            
            $
            (3.71
            )
            
            $
            (1.53
            )
            
            $
            (0.36
            )
            
            $
            (0.22
            )





As of December 31,2005
            
            
            2006
            
            
            2007
            
            
            2008
            
            
            2009(In
      thousands)Balance
      Sheet Data:Cash
      and cash equivalents
            
            $
            15,926
            
            
            $
            13,965
            
            
            $
            1,974
            
            
            $
            2,714
            
            
            $
            10,456Goodwill
            
            
            314,033
            
            
            
            314,033
            
            
            
            314,033
            
            
            
            314,033
            
            
            
            314,033Total
      assets
            
            
            1,273,826
            
            
            
            767,783
            
            
            
            676,241
            
            
            
            739,345
            
            
            
            698,061Total
      long-term debt, excluding currentmaturities
            
            
            971,589
            
            
            
            975,007
            
            
            
            1,044,772
            
            
            
            1,090,616
            
            
            
            771,814Stockholders'
      deficit
            
            
            (123,189
            )
            
            
            (478,944
            )
            
            
            (683,760
            )
            
            
            (666,933
            )
            
            
            (698,030
            )Other
      Data:Capital
      expenditures
            
            $
            504
            
            
            $
            713
            
            
            $
            1,668
            
            
            $
            1,868
            
            
            $
            507Total
      subscribers at year end
            
            
            70,666
            
            
            
            74,641
            
            
            
            83,915
            
            
            
            85,540
            
            
            
            88,320














ITEM
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations





The
Company’s consolidated financial statements and accompanying notes to
consolidated financial statements included in Item 8 of this Annual Report on
Form 10-K should be read in conjunction with the discussion and analysis that
follows.








Current
Challenges





The
Company faces numerous operating challenges. Among them are increasing
viewership ratings, maintaining and increasing advertising revenue, maintaining
and expanding the distribution of the Channels, broadening viewership
demographics to meet our target audience, and controlling costs and expenses. In
addition, the Company believes that it is necessary to complete the
Recapitalization; see
“Recapitalization” in Item 1, Business and the “Liquidity” discussion below in
this Item 7.




Ratings




Ratings
success plays a significant role in our ability to achieve our distribution and
advertising goals.  Our ratings declined from 11th in
total day viewership and 8th for
prime time in 2008 to 14th in
total day viewership and 10th for
prime time in 2009.  We believe our ratings are affected by our
ability to (i) acquire and produce series and movies that appeal to our target
demographic and (ii) develop a programming schedule that attracts a high number
of viewers. Original productions are our most high profile programs and generate
the Hallmark Channel’s highest ratings. In the past, the Company has typically
incurred additional marketing and promotional expenses surrounding original
productions and certain acquired movies to drive higher ratings. Certain
acquired series delivered historically strong ratings, but recently they have
been part of the decline experienced in viewer ratings. In order to reverse the
recent decline in ratings, we plan to continue or increase the number of our
original productions and develop a programming schedule that attracts a greater
number of viewers in our target demographic, all while controlling the expenses
relating to these actions.  Our recent acquisition of the broadcast
rights of Martha Stewart Living and our planned 26 original productions for
broadcast in 2010 are key parts of these plans.




The
Hallmark Movie Channel has not been the subject of ratings measurement by
Nielsen Media Research. However, as currently planned, the Hallmark Movie
Channel will have Nielsen ratings commencing in the second quarter of 2010, and
we will sell advertising inventory for the Hallmark Movie Channel commencing in
that quarter based on a price per unit of audience measurement.




Advertising
Revenue




Continued
weakness in the economy has resulted generally in lower demand and lower rates
for our inventory of ad spots available for the scatter market and lower revenue
from direct response advertising when comparing the 2009 year to the 2008 year.
Notwithstanding the relatively higher CPMs negotiated in the 2008/2009 broadcast
year upfront sales period versus the 2007/2008 broadcast year upfront sales
period, our advertising revenue for the year ended December 31, 2009, decreased
relative to the year ended December 31, 2008, primarily because of lower viewer
ratings and also because of lower rates in the scatter market. With the
shortfall in achieving viewership commitments, our liability for ADUs has
increased significantly since December 31, 2008.




In the
2009/2010 upfront process, we entered agreements with major advertising firms
representing approximately 41% of our advertising inventory for the last quarter
of 2009 and the first three quarters of 2010.  This inventory was sold
at CPMs (i.e., advertising rates per thousand viewers) approximately 1.6% lower
than the inventory sold in the 2008/2009 upfront.  In the 2008/2009
upfront sales process, we entered agreements for approximately 51% of our
advertising inventory for the last quarter of 2008 and the first three quarters
of 2009.  We held more advertising inventory from the 2009/2010
upfront than the 2008/2009 upfront, for use in the general scatter market,
because of lower CPMs offered by some advertisers in the 2009/2010 upfront. The
Company intends to sell the balance of the general rate inventory for the
2009/2010 broadcast season to advertisers that purchase upfront inventory on a
calendar year basis, rather than an advertising year basis, and in the scatter
marketplace.




Following
the upfront period, sales of our general rate, direct response and
paid-programming inventory are made closer to the timing of the actual
advertisement.  We have historically seen significant increases in
rates on these remaining advertising sales over the rates obtained from our
upfront sales.  As compared to the upfront sales for the same periods,
scatters rates in 2009 were higher by the following percentages: 45% for the
first quarter of 2009; 40% for the second quarter of 2009; 46% for the third
quarter of 2009; and 60% for the fourth quarter of 2009.  However,
during the fourth quarter of 2008 and each of the quarters in 2009 rates for the
scatter market and direct response advertising decreased when compared to the
same periods in the prior year, except there was a slight increase in the fourth
quarter of 2009 scatter rates as compared to the fourth quarter of 2008 scatter
rates.




Advertisers
with upfront contracts have an option to terminate their contracts, as well as
an option to expand the amount of inventory purchased under the contracts. In
prior years, cancellations of upfront contracts were unusual. During the twelve
months period ended September 2009 comprising the 2008/2009 broadcast season,
advertisers canceled approximately 13% of the inventory covered by such
contracts.  The Company sold the balance of the 2008/2009 general rate
inventory, including that resulting from the cancellations, in the scatter
market.







Distribution
Agreements




Distribution
agreements are important because they affect our number of subscribers, which in
turn have a major impact on our subscriber fees, the number of persons viewing
our programming, and the rates charged for advertising. The long-term
distribution challenge is renewing our distribution arrangements with the
multiple system operators as they expire on favorable terms. Our major
distribution agreements have terms which expire at various times from December
31, 2009, through December 2023, inclusive of renewal options. An Agreement with
National Cable Televisions Cooperative representing approximately 12% of our
total Hallmark Channel subscriber base expired in December 2009. The Company is
currently in negotiations with the National Cable Televisions Cooperative to
enter into a new agreement. Agreements representing an additional 5% of our
subscribers to our Hallmark Channelwill expire prior to
December 31, 2010.




Domestic
telephone companies have entered the business of distributing television
channels to households through their wire-lines. We have distribution agreements
with several telephone companies for the carriage of the Hallmark Channel, the
Hallmark Movie Channel and Hallmark Movie Channel HD, and continue to seek
agreements with other telephone companies.




The
universe of cable TV subscribers in the United States is approximately 100
million homes.  The top 30 cable TV networks in the United States,
measured by the number of subscribers, have 90 million or more
subscribers.  Our goal is for the Hallmark Channel to reach 90 million
subscribers and the Hallmark Movie Channel to reach 40 million subscribers in
the next one to two years.




Demographics




As pay
television channels draw audience share, audience demographics (i.e. viewers
categorized by characteristics such as age, sex and income) become
fragmented.  As a result, advertisers are able to target the specific
groups of viewers who are most likely to purchase their products by buying
advertising on channels which attract the desired viewer
demographic.





We
believe that the key demographics for the Hallmark Channel are the viewers in
the groups Adults aged 25 to 54 and Women aged 25 to 54.  However, the
average median age of a viewer of the Hallmark Channel was 59.5 in 2009 and 59.8
in 2008.  In order to achieve our revenue goals, we need to draw in
our target audience.  The broadcast on the Hallmark Channel of Martha
Stewart Show and other Martha Stewart Living productions, commencing in
September 2010, are a key part of our efforts to attract our target
audience.





For
additional information on demographics and viewer ratings, please see “Sources
of Revenue – Advertising Revenue” in Item 1, Business, and “Results of
Operations – Year Ended December 31, 2008 Compared to Year Ended December 31,
2009 – Revenue” in Item 7, Management’s Discussion and Analysis of Financial
Condition and Operating Results.





Cost
Control





We expect
to continue experiencing increases in our bad debt expense during 2010, which
increases also occurred in 2009, because of the economic downturn. Such
increased expense is expected to result from certain customers, primarily
advertisers, which will experience cash flow problems in this adverse economic
environment.





We
launched a high definition version of the Hallmark Channel in February
2010.  The costs for this launch were approximately $5.0 million,
approximately $4.4 million of which represents a non-cash charge related to the
terminations of two existing channel delivery agreements, which was recorded in
2009. This amount is subject to change based upon several factors. The Company
may also incur additional costs including the cost of converting certain
television series to high definition.  The launch of a high definition
version will further the Company’s efforts to maintain
competitiveness.







Revenue
from Continuing Operations





Our
revenue consists primarily of subscriber fees and advertising
fees.  For the years ended December 31, 2007, 2008 and 2009 revenue
derived from subscriber fees for the Channels was approximately $27.8 million,
$57.2 million and $63.6 million, respectively.   For the years
ended December 31, 2007, 2008 and 2009 revenue from the sale of advertising time
on our Channels were approximately $206.2 million, $223.4 million and $214.5
million, respectively. Information relating to subscriber fees and advertising
fees is presented above in “Item 1 Business – Sources of
Revenue”





Cost
of Services





Our cost
of services consists primarily of the amortization of program license fees; the
cost of signal distribution; and the cost of promotional segments that are aired
between programs. See the discussion of programming costs in “Results of
Operations” below. See also discussion of operating costs in “Results of
Operations” below for an anticipated increase in the operating costs for the
first quarter of 2010 due to the costs of launching a high definition version of
the Hallmark Channel.








Critical
Accounting Policies, Judgments and Estimates





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





For
further information regarding our critical accounting policies, judgments and
estimates, please see the Notes to Consolidated Financial Statements contained
in this Report.





The
following discussion concerns certain accounting estimates and assumptions that
are considered to be material due to the levels of subjectivity and judgment
necessary to account for uncertain matters and the susceptibility of such
matters to changes.





Program
License Fees





Program
license fees are paid in connection with the acquisition of the rights to air
programs acquired from others. The cost of program rights are deferred and then
amortized on a straight-line basis over the shorter of their contractual license
periods or anticipated usage. On a yearly basis, the Company evaluates the
realizability of these deferred license fees in relation to the estimated future
revenue. Estimates of net realizable value for program license fees are
determined using future estimated advertising revenue and anticipated patterns
of programming usage on a day part basis (blocks of time during the day) as it
pertains to programming licensed to a Channel. These estimates of expected
annual future estimated revenue are compared to net book value of the program
license fee assets to determine if the programming assets are expected to be
recovered. Where the analysis indicates the costs are in excess of the estimated
net realizable value, additional programming costs are immediately recognized in
the amount of the excess.





Goodwill





At
December 31, 2009, the Company had a stockholders’ deficit of $698.0 million and
a goodwill asset of $314.0 million. All of our goodwill relates to our domestic
channel operations segment within Crown Media United States, which is also our
only reporting unit. The Company’s market capitalization exceeds the negative
carrying value of the reporting unit.





We
performed our annual assessment of the recoverability of our goodwill and other
nonamortizable intangible assets as of November 30 using a market approach to
determine fair value. In our market approach, we identified publicly traded
companies whose business and financial risks are comparable to ours. We then
compared the market values of those companies to our calculated value. We also
identified recent sales of companies in lines of business similar to ours and
compared the sales prices in those transactions to the calculated value of
ours.





We also
used the discounted cash flow analysis approach to validate the fair value
determined by our market approach. The values determined in our discounted cash
flow analysis corroborated the value calculated in our market approach. We
estimated the fair value of our reporting unit for the Step 1 Test using a
discounted cash flow analysis. The cash flow projections (the "2009 Cash Flow
Projections") used in our analysis were prepared by management and represent
management's estimate of the future cash flows to be generated by operations
during 2010 through 2014 (Years 1-5). For the 5 years ended
December 31, 2009, revenue grew at an annual growth rate of approximately
3%. Our gross margin increased over the same time period from a negative 103% to
a positive 28%. Given the downturn in the economy in 2009, management determined
that it was prudent to adjust the growth rates used in the 2009 Cash Flow
Projections. Therefore, the 2009 Cash Flow Projections include growth rates
which are lower than historical growth rates and lower than the growth rates
used in our 2008 cash flow projections. The growth rates used in the 2009 Cash
Flow Projections are considered by management to be appropriate and reflect the
current state of the economy. The 2009 Cash Flow Projections include many
assumptions, including assumptions regarding the timing of an economic recovery
and the impact of any such recovery on operations. In this regard, the 2009 Cash
Flow Projections are based on the economy stabilizing and growing modestly in
2010 and that the economy is somewhat more normalized in the years beyond
2010.





The
projected cash flows were discounted using a blended discount rate of 14%, which
represents an estimate of the weighted average cost of capital. The weighted
average cost of capital incorporates risk premiums that reflect the current
economic environment. Such discount rate is higher than the rate used in prior
years due to changes in the marketplace for credit and risk premiums. Terminal
growth rates  (the approximation of ongoing growth rates) after Year 5
consider the above noted factors for the initial five years forecasted cash
flows and forecasted CPI increases.








We also
reconcile the estimated fair value of our reporting unit to our market
capitalization.  As long as we continue to have a stockholders’
deficit and only one reporting unit, we believe it is unlikely we would have a
goodwill impairment.  However, ignoring that our positive market
capitalization exceeds our shareholders’ deficit, we have discussed below the
sensitivity of our discounted cash flow analysis.





The
estimated fair value determined in our Step 1 Test was in excess of the
reporting unit’s carrying value, and accordingly no Step 2 Test was performed
and no impairment charge was recorded. We note that if our fair value estimate
was 58% lower, we would still not have triggered a Step 1 failure and no
impairment charge would be taken.





The
foregoing impairment test requires a high degree of judgment with respect to
estimates of future cash flows and discount rates as well as other assumptions.
Therefore, any value ultimately derived may differ from our estimate of fair
value. Further, if the environment continues to experience recessionary
pressures for an extended period of time, our cash flow projections will need to
be revised downward and we could have impairment charges in the future. In this
regard, we estimate that if we were to use a compound annual growth rate for
revenue that is approximately 50% to 60% lower than the rate currently used in
the 2009 Cash Flow Projections and that we achieved the margins assumed in the
2009 Cash Flow Projections, we could in the future fail the Step 1 Test and
would be required to perform the Step 2 Test to measure any impairment of
goodwill.








Long-Lived
Assets





The
Company reviews long-lived assets, other than goodwill and other intangible
assets with indefinite lives, for impairment whenever facts and circumstances
indicate that the carrying amounts of the assets may not be recoverable. An
impairment loss is recognized if the carrying amount of the asset is not
recoverable and exceeds its fair value. Recoverability of assets to be held and
used is measured by comparing the carrying amount of an asset to the estimated
undiscounted future net cash flows expected to be generated by the asset. If the
asset's carrying value is not recoverable, an impairment charge is recognized
for the amount by which the carrying amount of the asset exceeds its fair value.
The Company determines fair values by using a combination of comparable market
values and discounted cash flows, as appropriate.





Revenue
Recognition





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





Advertising
revenue, net of agency commissions, is recognized in the period in which related
commercial spots or long form programming are aired and as ratings guarantees to
advertisers are achieved. Agency commissions are calculated based on a stated
percentage applied to gross billing revenue for the Company’s broadcasting
operations. Customers remit the gross billing amount to the agency and the
agency remits gross billings less their commission to the Company. Payments
received in advance of being earned are recorded as deferred revenue or audience
deficiency units.





Audience
Deficiency Unit Liability





Audience
deficiency units (“ADUs”) are units of inventory that are made available to
advertisers as fulfillment for the inventory the advertiser purchased that ran
in programs that under-delivered on the guaranteed ratings.





An
audience deficiency liability results when impressions delivered on guaranteed
ratings are less than the impressions guaranteed to advertisers. Such liability
arises as a matter of industry practice rather than as a matter of written
contract.  The liability is reduced when the Company airs the
advertisement during another program to “make-good” on the under-delivery of
impressions.  The Company typically does not remit cash to advertisers
in satisfaction of such deficiencies.





Effects
of Transactions with Related and Certain Other Parties





Hallmark
Transactions





In 2009
and in prior years, we entered into a number of significant transactions with
Hallmark Cards and its subsidiaries. These transactions include, among other
things, trademark licenses, and administrative services agreement, a Tax Sharing
Agreement, the issuance of a $400.0 million senior note, notes payable and
the Amended Waiver and Standby Agreement.  A summary of the terms and
financial impact of these transactions is described below in Item 13 “Certain Relationships and Related
Transactions” which is incorporated by reference into this Item
7.  Certain of these agreements would be modified if the
Recapitalization were implemented.





NICC
Agreement





For
information regarding the amendment to our agreements with NICC including the
required redemption of a preferred interest in Crown Media United States, please
see Item 13 “Certain
Relationships and Related Transactions – VISN Preferred Interest”
contained in this Report.








Selected
Historical Consolidated Financial Data of Crown Media Holdings





In the
table below, we provide selected historical consolidated financial and other
unaudited data of Crown Media Holdings and its subsidiaries. The following
selected consolidated statement of operations data for the years ended December
31, 2007, 2008 and 2009, are derived from the audited financial statements of
Crown Media Holdings and its subsidiaries. This data should be read together
with the consolidated financial statements and related notes included elsewhere
in this Annual Report on Form 10-K.











Percent
      ChangeYears
      ended December 31,
            
            
            2008
      vs.
            
            
            2009
      vs.2007
            
            
            2008
            
            
            2009
            
            
            2007
            
            
            2008Revenues:Subscriber
      fees
            
            $
            27,812
            
            
            $
            57,153
            
            
            $
            63,597
            
            
            
            105
            %
            
            
            11
            %Advertising
            
            
            206,174
            
            
            
            223,396
            
            
            
            214,545
            
            
            
            8
            %
            
            
            -4
            %Sublicense
      fees and other revenue
            
            
            378
            
            
            
            1,245
            
            
            
            1,422
            
            
            
            229
            %
            
            
            14
            %Total
      revenues
            
            
            234,364
            
            
            
            281,794
            
            
            
            279,564
            
            
            
            20
            %
            
            
            -1
            %Cost
      of Services:Programming
      costs
            
            
            164,369
            
            
            
            140,698
            
            
            
            127,528
            
            
            
            -14
            %
            
            
            -9
            %Subscriber
      acquisition fee amortization
            
            
            30,996
            
            
            
            -
            
            
            
            -
            
            
            
            -100
            %Contract
      termination fees expense
            
            
            -
            
            
            
            -
            
            
            
            4,718
            
            
            
            
            
            
            
            100
            %Operating
      costs
            
            
            7,160
            
            
            
            13,081
            
            
            
            15,333
            
            
            
            83
            %
            
            
            17
            %Total
      cost of services
            
            
            202,525
            
            
            
            153,779
            
            
            
            147,579
            
            
            
            -24
            %
            
            
            -4
            %Selling,
      general and administrative expense
            
            
            63,108
            
            
            
            48,638
            
            
            
            49,016
            
            
            
            -23
            %
            
            
            1
            %Marketing
      expense
            
            
            19,733
            
            
            
            19,603
            
            
            
            6,551
            
            
            
            -1
            %
            
            
            -67
            %Gain
      from sale of film assets
            
            
            -
            
            
            
            (101
            )
            
            
            (682
            )
            
            
            100
            %
            
            
            575
            %(Loss)
      income from continuing operations before interest
      expense
            
            
            (51,002
            )
            
            
            59,875
            
            
            
            77,100
            
            
            
            -217
            %
            
            
            29
            %Interest
      expense
            
            
            (108,144
            )
            
            
            (100,157
            )
            
            
            (100,539
            )
            
            
            -7
            %
            
            
            0
            %Loss
      from continuing operations
            
            
            (159,146
            )
            
            
            (40,282
            )
            
            
            (23,439
            )
            
            
            -75
            %
            
            
            -42
            %Gain
      on sale of discontinued operations
            
            
            114
            
            
            
            3,064
            
            
            
            847
            
            
            
            2588
            %
            
            
            -72
            %Net
      loss
            
            $
            (159,032
            )
            
            $
            (37,218
            )
            
            $
            (22,592
            )
            
            
            -77
            %
            
            
            -39
            %Other
      Data:Net
      cash provided by operating activities
            
            $
            14,612
            
            
            $
            48,078
            
            
            $
            37,566
            
            
            
            229
            %
            
            
            -22
            %Capital
      expenditures
            
            $
            (1,668
            )
            
            $
            (1,868
            )
            
            $
            (507
            )
            
            
            12
            %
            
            
            -73
            %Net
      cash used in investing activities
            
            $
            (7,803
            )
            
            $
            (5,437
            )
            
            $
            (1,443
            )
            
            
            -30
            %
            
            
            -73
            %Net
      cash used in financing activities
            
            $
            (18,800
            )
            
            $
            (41,901
            )
            
            $
            (28,381
            )
            
            
            123
            %
            
            
            -32
            %Total
      domestic day household ratings (1)(3)
            
            
            0.714
            
            
            
            0.695
            
            
            
            0.589
            
            
            
            -3
            %
            
            
            -15
            %Total
      domestic primetime household ratings (2)(3)
            
            
            1.155
            
            
            
            1.168
            
            
            
            0.991
            
            
            
            1
            %
            
            
            -15
            %Subscribers
      at year end
            
            
            83,915
            
            
            
            85,540
            
            
            
            88,320
            
            
            
            2
            %
            
            
            3
            %(1) Total
      day is the time period measured from the time each day the broadcast of
      commercially sponsoredprogramming
      commences to the time such commercially sponsored programming
      ends.(2) Primetime
      is defined as 8:00 - 11:00 P.M. in the United States.(3) These
      Nielsen ratings are for the time period January 1 through December
      31.








Results
of Operations





Year
Ended December 31, 2008 Compared to Year Ended December 31, 2009





Revenue.Our
revenue from continuing operations, comprised primarily of subscriber and
advertising fees, decreased $2.2 million or 1% in 2009 over 2008. Our subscriber
fee revenue increased $6.4 million or 11%.  The amount of subscriber
acquisition fees that was recorded as a reduction of subscriber fee revenue was
approximately $2.7 million and $2.6 million for 2008 and 2009, respectively.
Subscriber revenue increased in 2009 primarily due to an increase in the number
of Hallmark Channel pay subscribers and small contractual rate
increases.





The $8.9
million or 4% decrease in advertising revenue is primarily due to declines in
viewer ratings across demographic categories for 2009 compared 2008. Audience
deficiency unit revenue decreased $10.5 million from revenue of $4.1 million for
2008, to contra-revenue of $6.4 million for the same period in 2009 as a result
of such ratings declines, leading to a corresponding decrease in revenue
recognized by the Company.





We
believe that recent changes to our program schedule, along with increased
competition (including the availability of high definition distribution by
competitors), contributed to a decline in ratings. From 2005 until early 2009,
our programming schedule did not change significantly. Beginning in 2008, a
number of programs that had previously received strong ratings began to
experience ratings declines, and we placed television series in certain
timeslots instead of movies or original productions.  Also, a number
of programs in the schedule provided strong household ratings performance but
less effective delivery of our key demographic, women age 25-54.  In
2009, we began to introduce new content into the schedule with the objective of
increasing the delivery of women 25-54.  The schedule changes likely
resulted in some viewer confusion and did result in lower ratings.  We
continue to experience success in select dayparts, and we will continue to focus
on program acquisitions, original program production and schedule changes that
are intended to improve both the viewer ratings and the demographic delivery of
the Hallmark Channel.





The fact
that Hallmark Channel was not broadcast in high definition may have had a
negative impact on ratings in 2009.  Of the top 44 advertising
supported cable networks with a 0.4 household rating or higher in prime time,
only six of those networks (including Hallmark Channel) were not offered in high
definition.  Of those six networks, three experienced double-digit
ratings decreases in 2009 compared to 2008 and three experienced single digit
increases.  In 2009, 33% of viewers with access to high definition
programming services tuned to those high definition services
first.  The growth in popularity of high definition programming is
expected to continue in 2010 and beyond, and these high definition trends are
part of our decision to launch Hallmark Channel in high definition in February
2010.





The 2009
year also represented a year of increased competition within cable
television.  The number of cable networks investing in original
programming increased 74% in 2009, and acquired (non-original) programming now
represents only 33% of prime time cable programming.  Although
Hallmark Channel continues to invest in original programming, our increase in
investment for original content did not match the growth of the market or many
of our competitors.  The impact of the programming competition is
heightened by the continued growth of time-shifting digital video recording
devices, or DVR’s.  With the proliferation of these devices, viewers
are able to increase their access to the new, compelling content.





For the
year ended December 31, 2009, Nielsen ranked the Hallmark Channel 14th in
total day viewership with a 0.589 household rating and 10th in
primetime with a 0.991 household rating among the 76 cable channels in the
United States market.





Cost of services.Cost of
services as a percent of revenue decreased to 53% in 2009 as compared to 55% in
2008. This decrease results primarily from the effects of the 9% decrease in
programming costs, discussed below, offset in part by the 4% decrease in
advertising revenue discussed above.





Programming
costs decreased $13.2 million or 9% from 2008. In the second and third quarters
of 2008, we entered into agreements to amend significant programming agreements
which added programs and deferred certain payments for programming content to
periods beyond 2008. Some of the agreements resulted in the extension of related
program licenses to cover slightly longer periods of availability, the deferral
of expected delivery of certain programming and the deferral of certain payments
primarily from 2008 until 2009. Upon the amendment of the agreements, we
prospectively changed the amortization of program license fees for any changes
in the period of expected usage and/or changes in license fees.  The
effects of these amendments on 2008 amortization were not significant.Additionally, we
returned our exclusivity rights to one title, which resulted in a lower asset
and liability balance.  During the first quarter of 2009, we also
entered into amendments to some of our original programming agreements which
extended the current license period to those titles, and thus, resulted in lower
amortization in 2009 compared to 2008.  Additionally, during 2009, we
did not enter into any significant new third party license agreements, so
expiring program rights and the related amortization were not replaced in full
with assets and amortization from newer license agreements.





Operating
costs for 2009 increased $2.3 million over 2008 due in part to the $1.2 million
increase in bad debt expense and the $912,000 of severance expense recorded in
May 2009 related to one executive’s resignation. The Company’s bad debt expense
was $1.3 million for 2009, as compared to $75,000 for 2008.  The
increase in bad debt expense is due to certain advertising customers
experiencing cash flow problems under current economic
conditions.  The Company will continue to monitor cash collections as
part of estimating this expense.





Additionally,
the Company recorded negative film amortization of $745,000 in 2008 that
resulted principally from the Company’s periodic reassessment and eventual
payment of its liabilities for residuals and participations associated with the
Company’s third-party licensing and self-use of the Company’s film library prior
to the sale of the Company’s international film rights in April 2005 and the
Company’s domestic film rights in December 2006.





During
the fourth quarter of 2009, we negotiated the termination of two channel
delivery agreements related to the launch of the Hallmark Channel into high
definition. The estimated costs of termination were approximately $4.7
million.  We may incur additional costs during 2010 to obtain high
definition versions of certain of our programming.







Selling, general and administrative
expense.Our selling, general and administrative expense increased
slightly year over year.  The Company recorded $2.5 million of
severance expense associated with the resignation of its President on May 31,
2009. The Company also recorded $1.2 million of severance expense associated
with the termination of 15 employees in August 2009. These increases in expense
were offset by decreases in the travel, communication, and RSU related expenses.
Travel and communication events related expenses decreased approximately $1.3
million period over period. Additionally, the Company recorded $1.1 million of
compensation expense associated with RSUs during 2008, as compared to $269,000
of compensation benefit associated with RSUs for 2009. See Note 14 to the
consolidated financial statements in this Report.





Marketing
expense.  Our marketing expense decreased 67% in 2009 versus
2008. During 2008, we invested in five significant marketing
promotions.  The five marketing promotions were centered around the
original movies:  “The Good Witch” in January 2008, “Bridal Fever” in
February 2008, “A Gunfighter’s Pledge” in July 2008, and both “Old Fashioned
Thanksgiving” and “Moonlight and Mistletoe” in November 2008. The Company had
one significant marketing promotion in January 2009 centered around the original
movie, “Taking a Chance on Love.” As part of our contingency cost reduction
efforts, promotional and marketing efforts were reduced overall during 2009
compared to 2008.





Marketing
expenses may increase in 2010 to promote the Hallmark Channel’s programming
schedule, including the Martha Stewart Living productions.





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




Interest
expense.Interest expense in 2009 increased $382,000 compared
to 2008.   The principal balance under our credit facility was
$28.6 million at December 31, 2008, and $1.0 million at December 31, 2009. The
interest rate on our bank credit facility increased from 1.22% at December 31,
2008, to 2.49% at December 31, 2009. Interest rates on our 2001, 2005 and 2006
notes decreased from 9.05% at December 31, 2008, to 5.29% at December 31, 2009.
The benefit of these rate decreases was offset by a higher principal balance on
the Senior Secured Note, resulting in interest expense for 2009 being nearly the
same as for 2008.







Gain on sale of discontinued
operations.  The terms of our April 2005 sale of the
international business require that we reimburse the buyer for its cost of
residuals and participations incurred in connection with the its exploitation of
the related international film rights through April 25, 2015.  At the
time of the sale, we recorded an estimate of our liability for this obligation
and considered the amount in our determination of our loss from the sale of
discontinued operations as reported in 2005.  During the fourth
quarter of 2008, the buyer requested us to reimburse it for such obligations
incurred in connection with its exploitation of these films through December 31,
2007.  Using the historical information provided by the buyer, we
reduced the estimate of our remaining liability as of December 31, 2008, by
$5.1 million.  This change in estimate was reflected as a $3.1 million
gain on sale of discontinued operations and a $2.0 million decrease in interest
expense.





Termination
of one agreement relating to channel delivery also resulted in a change in the
estimated life of the deferred credit for playback services.  After
termination of services, there is no longer a recurring monthly expense for
compression and uplink services.  Accordingly, the adjustment to
eliminate the unneeded portion of the deferred credit of approximately $847,000
was recognized during the fourth quarter of 2009. Through December 31,
2009, the aggregate loss on sale of the international business is $1.0
million.











Year
Ended December 31, 2007 Compared to Year Ended December 31, 2008





Revenue.Our
revenue from continuing operations, comprised primarily of subscriber fees and
advertising, increased $47.4 million or 20% in 2008 over 2007. Our subscriber
fee revenue increased $29.3 million or 105% as a result of (1) an increase in
the number of paying subscribers, (2) significantly improved subscriber fee
rates following renewal of all of our major distribution agreements in 2007 and
2008, and (3) a significant reduction in the amount of subscriber acquisition
fees netted against gross subscriber revenue.  The renewed
distribution agreements also sharply reduced the subscriber acquisition fees we
must pay our distributors for carriage of our channels. The amount of subscriber
acquisition fees that was recorded as a reduction of subscriber fee revenue
decline from $6.5 million in 2007 to $2.7 million in 2008, reflecting the
system-by-system effect of increased subscriber fee rates and reduced subscriber
acquisition fees.





The $17.2
million or 8% increase in advertising revenue reflects an increase in
advertising rates along with improved delivery of committed viewership ratings
and increase in the number of available general rate ad spots, offset in part by
a decrease in the effectiveness of direct response advertising.  The
Hallmark Movie Channel contributed $3.2 million of the increase.





During
the second, third and fourth quarters of 2008 we experienced a softening of
advertising rates in the scatter and direct response markets as a result of
deteriorating national economic conditions.  This softening continued
throughout 2009. The relative decrease in advertising revenue in the third
quarter of 2008 compared to the second quarter of 2008 was greater than the
seasonal decrease we would typically have expected.  Advertising
revenue for the fourth quarter of 2008 was $60.4 million compared to $63.0
million in the fourth quarter of 2007.  We were not significantly
affected by cancellations under advertising contracts.  In response to
the lower advertising rates, starting in the third quarter of 2008, we reduced
the amount of time allotted to on-air self-promotion and increased the time
available for paid advertising. The volume of advertising did not
decrease.





For 2008,
Nielsen ranked the Hallmark Channel 11th in
total day viewership with a 0.695 household rating and 8th in
primetime with a 1.168 household rating among the 73 ad-supported cable channels
in the United States market. Although we had an increase in distribution to the
Nielsen Universe of approximately 2% in the fourth quarter of 2008 versus the
fourth quarter of 2007, our household ratings were down 7% for the fourth
quarter of 2008 compared to the fourth quarter of 2007.  We believe
that the reasons for this circumstance include significant sample adjustments to
viewers in determining ratings, a shift of viewers to cable news channels during
the unprecedented media coverage of the national elections and the economic
crisis.   Our year-to-date household ratings were also down slightly due to
the 2008 Summer Olympics.





Cost of
services.Cost of services as a percent of revenue decreased
to 55% in 2008 as compared to 86% in 2007. This decrease resulted from the
combined effects of the 20% increase in revenue, discussed above, and the 100%
decrease in subscriber amortization fee amortization expense discussed
below.





Programming
costs decreased $23.7 million or 14% from 2007 largely as a result of the
December 31, 2007, expiration of our programming agreement with NICC and our
efforts to manage costs. This was offset in part by our licensing of Hallmark
Hall of Fame movies under a new 2008 agreement with Hallmark Cards that provides
10-year exhibition windows for all licensed films.  During the third
quarter of 2008, we entered into amendments to significant programming
agreements which added programming and deferred certain payments of for program
content to periods beyond 2008.





Subscriber acquisition fee amortization
expense resulted from subscriber acquisition costs incurred previously by us and
amortized over the remaining life of the relevant distribution agreement.
Subscriber acquisition fee amortization expense decreased 100% as all of the
expense was netted against revenue in 2008. The Company’s three largest
affiliation agreements became fully amortized during the fourth quarter of 2007
as they expired and renewal agreements were executed.





Negative
film amortization of $5.2 million and $745,000 in 2007 and 2008, respectively,
resulted principally from the Company’s periodic reassessment and eventual
payment of its liabilities for residuals and participations associated with the
Company’s third-party licensing and self-use of it film library prior to the
sale of its international film rights in April 2005 and its domestic film rights
in December 2006.  In 2007, such favorable adjustments amounted to
$521,000 in the second quarter and $4.7 million in the third
quarter.  In 2008, such adjustment amounted to $1.1 million in the
third quarter.





Operating
costs in 2008 increased $1.3 million over 2007 primarily due to a $540,000
increase in expenses associated with the distribution of the Hallmark Movie
Channel HD in high definition format and the $716,000 increase in salaries and
benefits expense related to cost of living adjustments.








Selling, general and administrative
expense.Our selling, general and administrative expense decreased $14.6
million or 23%.  Contributing to this favorable change were decreases
of $3.5 million in RSU expense and $2.5 million in SAR expense.  Also
contributing was a $7.8 million decrease in legal expense, following our January
2008 settlement with NICC which was reflected in the 2007 year.





Marketing
expense.  Our marketing expense decreased 1%. During 2007, we
invested in five significant marketing promotions.  The five marketing
promotions were centered around the original movies: “Love is a Four Letter
Word” in February 2007, “A Stranger’s Heart” in May 2007, “Avenging Angel” in
July 2007, “All I Want for Christmas” in December 2007 and “The Note” in
December 2007. The Company also had five significant marketing promotions in
2008 centered around the original movies: “The Good Witch” in January 2008,
“Bridal Fever” in February 2008, “A Gunfighter’s Pledge” in July 2008, and both
“Old Fashioned Thanksgiving” and “Moonlight and Mistletoe” in November 2008.
Total amounts spent for the five significant marketing promotions were lower in
2008 as compared to 2007. In addition to the radio, television, print and online
advertising included in the significant marketing promotions, we executed a
multi-market event to drive press coverage, viewer awareness and tune-in to the
movie. The Company also engaged in other smaller, promotional activities
throughout 2007 and 2008, with lower expenditures for these activities in 2008
as compared to 2007.







Interest
expense.Interest expense in 2008 decreased $8.0 million
compared to 2007.   The principal balance of our credit facility
decreased from $87.6 million at December 31, 2006, to $69.6 million at December
31, 2007, to $28.6 million at December 31, 2008. The interest rate on our bank
credit facility decreased from 5.6% at December 31, 2007, to 1.22% at December
31, 2008. The benefit of this rate decrease was offset in part by higher
principal balances on four of the five notes payable to Hallmark
affiliates.  Additionally, on April 14, 2008, the Tax Note was
credited $1.5 million for the Company’s share of an IRS interest refund that
Hallmark Cards received. This refund of interest reduced the balance of the Tax
Note. During the year ended December 31, 2007, the Company recorded $7.9 million
of interest expense related to the Tax Note.  See information on the
Tax Note in “Bank Credit Facility and Hallmark Notes – Note and Interest Payable
to Hallmark Cards” below.  Interest expense in 2008 also included a
$2.0 million reduction to give effect to our change in the estimate of our
indemnification liability to the buyer of our international business as
described in the next paragraph







Gain on sale of discontinued
operations.  The terms of our April 2005 sale of the
international business require that we reimburse the buyer for its cost of
residuals and participations incurred in connection with the its exploitation of
the related international film rights through April 25, 2015.  At the
time of the sale, we recorded an estimate of our liability for this obligation
and considered the amount in our determination of our loss from the sale of
discontinued operations as reported in 2005.  During the fourth
quarter of 2008, the buyer requested us to reimburse it for such obligations
incurred in connection with its exploitation of these films through December 31,
2007.  Using the historical information provided by the buyer, we
reduced the estimate of our remaining liability as of December 31, 2008, by
$5.1 million.  This change in estimate was reflected as a $3.1 million
gain on sale of discontinued operations and a $2.0 million decrease in interest
expense.  Through December 31, 2008, the aggregate loss on sale
of the international business was $1.8 million.








Liquidity
and Capital Resources





Year
Ended December 31, 2008 Compared to Year Ended December 31, 2009





In 2008,
our operating activities provided $48.1 million of cash compared to $37.6
million of in 2009.The Company’s net loss
for the year ended December 31, 2009, decreased $14.6 million to $22.6 million
from $37.2 million for the year ended December 31, 2008. Our depreciation and
amortization expense for 2009 decreased $12.2 million to $133.0 million from
$145.2 million in 2008.  The Company had lower additions to program
license fees in 2009 as compared to 2008 due to amendments to agreements with
certain third party programming suppliers during 2008 to add programming
content. Pursuant to the Waiver Agreement, the Company paid $19.6 million for
interest on the 2001, 2005 and 2006 Notes that accrued November 16, 2008,
through September 30, 2009. The Company made programming payments of $138.4
million and $146.5 million in 2008 and 2009, respectively.





Cash used
in investing activities was $5.4 million and $1.4 million in 2008 and 2009,
respectively. During 2008 and 2009, we purchased property and equipment of $1.9
million and $507,000, respectively. During 2008 and 2009, the Company paid $3.6
million and $936,000, respectively, to the buyer of the international business
for amounts due under the terms of the sale agreement, primarily for
reimbursement of transponder lease payments. The Company established a liability
and recorded a related loss for these payments as part of the 2005 sale of our
international business.





Cash used
in financing activities was $41.9 million and $28.4 million in 2008 and 2009,
respectively. We borrowed $30.5 million and $18.1 million under our credit
facility to supplement the cash requirements of our operating and investing
activities in 2008 and 2009, respectively. We repaid principal of $71.5 million
and $45.6 million under our bank credit facility in 2008 and 2009,
respectively.





Year
Ended December 31, 2007 Compared to Year Ended December 31, 2008





In 2007,
our operating activities provided $14.6 million of cash compared to $48.1
million of in 2008.The most significant
contribution to this favorable change of $33.5 million was the increase in
operating cash receipts from $240.4 million to $282.6 million during the years
ended December 31, 2007 and 2008, respectively. Additionally, the Company’s net
loss for the year ended December 31, 2008, decreased $121.8 million to $37.2
million from $159.0 million for the year ended December 31, 2007. Our
depreciation and amortization expense for 2008 decreased $47.1 million to $145.2
million from $198.2 million in 2007.  The Company had higher additions
to program license fees in 2008 as compared to 2007 due to amendments to
agreements with certain third party programming suppliers during 2008 to add
programming content. On January 5, 2009, pursuant to the Waiver Agreement, the
Company paid $3.9 million for interest on the 2001, 2005 and 2006 Notes that
accrued from November 16, 2008, through December 31, 2008.





Cash used
in investing activities was $7.8 million and $5.4 million in 2007 and 2008,
respectively. During 2007 and 2008, we purchased property and equipment of $1.7
million and $1.9 million, respectively. During 2007 and 2008, the Company paid
$4.1 million and $3.6 million, respectively, to the buyer of the international
business for amounts due under the terms of the sale agreement, primarily for
reimbursement of transponder lease payments. In 2007, we purchased a film asset
for $2.1 million.





Cash used
in financing activities was $18.8 million and $41.9 million in 2007 and 2008,
respectively. We borrowed $18.1 million and $30.5 million under our credit
facility to supplement the cash requirements of our operating and investing
activities in 2007 and 2008, respectively. We repaid principal of $36.3 million
and $71.5 million under our bank credit facility in 2007 and 2008,
respectively.








Contractual
Obligations





The
following table summarizes the future cash disbursements to which we are
contractually committed as of December 31, 2009:








Scheduled
      Payments by Period in MillionsContractual
      Obligations
            
            Total
            
            
            Less
      than 1 Year
            
            
            1-3
      Years
            
            
            4-5
      Years
            
            
            After
      5 YearsCredit
      facility and interest payable (1)
            
            $
            1.0
            
            
            $
            1.0
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Company
      obligated mandatorily redeemablepreferred interest, including
      accretion (2)
            
            
            25.0
            
            
            
            25.0
            
            
            
            -
            
            
            
            -
            
            
            
            -Senior
      secured note to HC Crown,including accrued interest
      (1)
            
            
            883.8
            
            
            
            39.3
            
            
            
            844.5
            
            
            
            -
            
            
            
            -Notes
      and interest payable to Hallmark Cards affiliates(1)
            
            
            351.3
            
            
            
            351.3
            
            
            
            -
            
            
            
            -
            
            
            
            -Capital
      lease obligations (1)
            
            
            21.5
            
            
            
            2.2
            
            
            
            4.3
            
            
            
            4.3
            
            
            
            10.7Operating
      leases
            
            
            30.3
            
            
            
            5.9
            
            
            
            10.9
            
            
            
            9.9
            
            
            
            3.6Other
      obligationsProgram
      license fees payable for non-affiliate current and future windows
      (3)(4)
            
            
            276.4
            
            
            
            102.1
            
            
            
            125.3
            
            
            
            49.0
            
            
            
            -Program
      license fees payable for Hallmark Cards affiliate current and future
      windows (3)(4)
            
            
            8.0
            
            
            
            1.4
            
            
            
            3.2
            
            
            
            3.4
            
            
            
            -Funding
      of original productions (3)(4)
            
            
            33.0
            
            
            
            20.2
            
            
            
            12.8
            
            
            
            -
            
            
            
            -Subscriber
      acquisition fees
            
            
            0.5
            
            
            
            0.5
            
            
            
            -
            
            
            
            -
            
            
            
            -Obligations
      to NICC due to January 2, 2008 Agreement (5)
            
            
            2.8
            
            
            
            2.8
            
            
            
            -
            
            
            
            -
            
            
            
            -Deferred
      compensation and interest
            
            
            2.5
            
            
            
            0.9
            
            
            
            0.6
            
            
            
            0.3
            
            
            
            0.7Payable
      to buyer of international business
            
            
            1.2
            
            
            
            1.2
            
            
            
            -
            
            
            
            -
            
            
            
            -Other
      payables to buyer of international business
            
            
            0.6
            
            
            
            0.3
            
            
            
            0.1
            
            
            
            0.1
            
            
            
            0.1Other
      payables to buyer of film assets
            
            
            21.0
            
            
            
            4.3
            
            
            
            4.8
            
            
            
            6.0
            
            
            
            5.9Total
      Contractual Cash Obligations
            
            $
            1,658.9
            
            
            $
            558.4
            
            
            $
            1,006.5
            
            
            $
            73.0
            
            
            $
            21.0(1)
      Includes future interest. Subsequent to the balance sheet date, the
      termination dates were extended to August 31, 2010. These amounts do
      not contain interest for the period May 1 through August 31,
      2010.(2)
      The company obligated mandatorily redeemable preferred interest is to be
      redeemed on or before December 31, 2010.(3)
      The amounts and timing for certain of these commitments are contingent
      upon the future delivery date and type of programming
      produced,and,
      as such, the estimated amount and timing may change.(4)
      Contains airing windows that open subsequent to year end and, therefore,
      the liability is not included on the balance sheet as of December 31,
      2009.(5)
      Pursuant to the January 2, 2008, agreement, the Company paid NICC $1.3
      million in January 2010. Also, the Companymade
      a 6% payment based on the outstanding balance of the VISN preferred
      interest in Crown Media United States in January 2010.











Cash
Flows








As of
December 31, 2009, the Company had $10.5 million in cash and cash equivalents on
hand and $44.0 million of borrowing capacity under the bank credit
facility.  On March 2, 2010, the Company and the bank set the maximum
amount that could be borrowed under the bank credit facility at $30.0 million
and extended the maturity date to August 31, 2010.  After this
amendment, the Company had $30.0 million of current borrowing capacity under the
bank credit facility.  Day-to-day cash disbursement requirements have
typically been satisfied with cash on hand and operating cash receipts
supplemented with the borrowing capacity available under the bank credit
facility and forbearance by Hallmark Cards and its affiliates.  The
Company’s management anticipates that the principal uses of cash up to August
31, 2010, will include the payment of operating expenses, accounts payable and
accrued expenses, programming costs, costs incurred in connection with the
Recapitalization, interest and repayment of principal under the bank credit
facility and interest of approximately $15.0 million to $18.0 million due under
certain notes to Hallmark Cards affiliates from January 1 through August 31,
2010.  The amounts outstanding under the bank credit agreement and
those notes to Hallmark affiliates are due August 31, 2010 as discussed
below.




The
Company generated positive cash flows from operating activities for each of the
years ended December 31, 2007, 2008 and 2009.  As indicated below,
there can be no assurance that the Company’s operating activities will generate
positive cash flow in future periods.




Another
significant aspect of the Company’s liquidity is the deferral of payments on
obligations owed to Hallmark Cards and its subsidiaries. Under the Amended and
Restated Waiver Agreement as amended with Hallmark Cards and its affiliates (the
“Waiver Agreement”), the deferred payments under such obligations are extended
to August 31, 2010.  These obligations comprised $345.3 million at
December 31, 2009.  An additional $758.8 million (10.25% Senior
Secured Note) of principal and interest outstanding at December 31, 2009,
payable to a Hallmark Cards’ affiliate in August 2011, is also subject to the
Waiver Agreement until August 31, 2010.  Interest amounts related to
the 10.25% note will be added to principal through August 5,
2010.  The deferral of payments under the Waiver Agreement terminates
on August 31, 2010.  Hallmark Cards and its affiliates have no
obligation, and have stated no intent, to extend this termination date. The note purchase
agreement for the senior note provides that if there is an event of default with
respect to any other indebtedness in excess of $5.0 million, the accreted value
and any accrued and unpaid interest on the senior note would become due and
payable.




The
Company’s ability to pay amounts outstanding under the bank credit facility on
the maturity date is highly dependent upon its ability to generate sufficient,
timely cash flow from operations between January 1 and August 31,
2010.  Based on the Company’s forecasts for 2010, which assume no
principal payments on notes payable to Hallmark Cards and its affiliates, the
Company would have sufficient cash to repay all or most of the bank credit
facility on the maturity date, if necessary.  However, there is
uncertainty regarding the Company’s future advertising revenues, so it is
possible that cash flows may be less than the expectations of the Company’s
management.




Upon
maturity of the credit facility on August 31, 2010, to the extent the facility
has not been paid in full, renewed or replaced, the Company could exercise its
option under the Waiver Agreement and require Hallmark Cards to purchase the
interest of the lending bank in the facility.  In that case, Hallmark
Cards would have all the obligations and rights of the lending bank under the
bank credit facility and could demand payment of outstanding amounts at any time
after August 31, 2010, under the terms of the Waiver Agreement.







The
Company believes that cash on hand, cash generated by operations, and borrowing
availability under its bank credit facility through August 31, 2010, when
combined with (1) the deferral of otherwise required payments under the 10.25%
Senior Secured Note related-party debt and the tax sharing agreement, and (2) if
necessary, Hallmark Cards’ purchase of any outstanding indebtedness under the
bank credit facility on August 31, 2010 will be sufficient to fund the Company’s
operations and enable the Company to meet its liquidity needs until the earlier
of August 31, 2010 or the closing of the Recapitalization described
above.




The
Company has entered into the Master Recapitalization Agreement for the
Recapitalization transactions, including the exchange of existing debt owed to H
C Crown Corp. for new debt, preferred stock and common stock.  It is a
condition of the Recapitalization that the Company have obtained a revolving
credit facility from a third-party lender, guaranteed by Hallmark
Cards or one of its affiliates, with a term of not less than 360 days of
the closing date of the Recapitalization, with the availability of at least
$30.0 million and on other terms and conditions reasonably acceptable to the
Company.  If the Recapitalization is closed as contemplated at this
time, the Company believes that cash on hand, cash generated by operations and
borrowing availability under the contemplated revolving credit facility will be
sufficient to fund the Company’s operations and enable the Company to meet its
liquidity needs until at least March 31, 2011.




The form
of credit agreement with HCC and other Hallmark Card affiliates in the
Recapitalization requires that, prior to closing of the credit agreement, the
Company establish with a financial institution a reserve account (called the
"NICC Reserve Account") in the Company's name for amounts that the Company may
choose as a sinking fund with respect to the $25.0 million payable by December
31, 2010, for the redemption of the preferred interest in Crown Media United
States.  The preferred interest is held by VISN Management Corp. which is a
wholly-owned subsidiary of National Interfaith Cable Coalition.  At no time
may the amounts in the NICC Reserve Account exceed $25.0 million.  In order
to redeem the preferred interest, the Company may need to borrow up to $25.0
million under the bank credit facility.




The
sufficiency of the existing sources of liquidity to fund the Company’s
operations is dependent upon maintaining subscriber and advertising revenue at
or near the amount of such revenue for the year ended December 31, 2009. A
significant decline in the popularity of the Channels, a further economic
decline in the advertising market, an increase in program acquisition costs, an
increase in competition or other adverse changes in operating conditions could
negatively impact the Company’s liquidity and its ability to fund the current
level of operations.




The
closing of the Recapitalization is subject to a number of conditions, including,
among other things, (a) representations and warranties of the Company being
accurate, (b) obtaining the revolving credit agreement mentioned above, (c) no
judgment or order which prohibits the consummation of the Recapitalization and
(d) Hallmark Cards’ not having delivered a written notice to the Company
certifying that Hallmark Cards in its sole discretion shall have determined that
the status of any pending or threatened litigation or regulatory proceeding
involving the Company or its subsidiaries in connection with the
Recapitalization is unsatisfactory to Hallmark Cards.  If for any
reason the Recapitalization is not consummated, the Company would be unable to
meet its obligations which become due on August 31, 2010, which provides
substantial doubt about the entity’s ability to continue.  In
addition, it is unlikely that the Company could obtain, without a guarantee or
other support of Hallmark Cards, other equity or debt financing prior to
August 31, 2010 in order to replace or refinance obligations becoming due
on that date.  This is the view of the special committee which
considered and negotiated the Recapitalization.  Accordingly, the
Company believes the ability of the Company to continue its operations depends
upon completion of the Recapitalization.




The
special committee of the Board believes that the Recapitalization is fair to the
stockholders (other than Hallmark Cards and its affiliates) and in the best
interest of the Company.








Bank
Credit Facility and Hallmark Notes





In 2001,
we entered into a credit agreement (which agreement has been amended
subsequently, with the most recent amendment dated March 2, 2010) with a
syndicate of banks, led by JP Morgan Chase Bank, N.A. as Administrative Agent
and Issuing Bank.  The facility is guaranteed by our subsidiaries, is
secured by all tangible and intangible property of Crown Media Holdings and its
subsidiaries, and is guaranteed by Hallmark Cards.  As a result of
amendments through March 2010, the bank credit facility is a revolving line of
credit with JP Morgan Chase Bank, N.A., in the amount of $30.0 million due on
August 31, 2010. The credit agreement for the bank credit facility, including
all of its amendments, are exhibits to this Report or are incorporated herein by
reference.




In
connection with Amendment No. 14, JP Morgan Chase Bank became the sole lender
under the bank credit facility by acquiring the interests of all other lending
banks. Concurrent with the execution of the March 2008 amendment, the existing
Hallmark Cards’ support letter of credit was reissued by JPMorgan in the face
amount of $90.0 million and with an expiration date of June 10,
2009.  Effective April 1, 2009, this letter of credit was cancelled
with the permission of JPMorgan Chase Bank, and Hallmark Cards is providing a
guarantee agreement.




Each loan
under the bank credit facility bears interest at a Eurodollar rate or an
alternate base rate as we may request at the time of borrowing.  The
Eurodollar rate is based on the London interbank market for Eurodollars, and
remains in effect for the time period of the loan ranging from one, two, three,
six or twelve months.  The alternate rate is based upon the prime rate
of JP Morgan Chase Bank, a certificate of deposit rate or the Federal Funds
effective rate, which is adjusted whenever the rates change.  We were
required to pay a commitment fee of 0.15% per annum of the committed, but not
outstanding, amounts under the revolving credit facility, payable in quarterly
installments. Pursuant to Amendment No. 15, the commitment fee of 0.15% per
annum was increased to 0.375% per annum, which results in no increase to us
because the difference was previously paid by us to Hallmark Cards.




The
credit agreement, as amended, contains a number of affirmative and negative
covenants.  Negative covenants include, among other things:
Limitations on indebtedness; liens; investments; “Restricted Payments;” changes
in our business activities; and not amending the promissory note with HC Crown,
a related letter of credit issued for our benefit or certain of our other
material agreements.  Restricted Payments include any distribution on
our equity, any redemption or other acquisition of our equity including
redemption of the company obligated mandatorily redeemable preferred interest,
any payment on debt of Crown Media Holdings which is subordinated to the bank
loans, any reduction of the HC Crown line of credit for Crown Media Holdings,
any payment on certain obligations assumed by Crown Media Holdings under the
purchase agreement for the film assets and any other payment to Hallmark Cards
or any of its affiliates.  The credit agreement, however, permits
Crown Media Holdings to make payments to Hallmark Cards or an affiliate in
payment of a valid outstanding obligation (but not any principal payments in
excess of $10.0 million in the aggregate with respect to such obligations,
subject to any applicable subordination agreement) or any commercially
reasonable fees in consideration for Hallmark Cards having extended its
guarantee for the bank credit facility under Amendment No. 15.





Events of
default under the amended credit agreement include, among other
things,  (1) the failure to pay principal or interest, with the
default continuing unremedied for five days after receipt of a remittance
advice, (2) a failure to observe covenants, (3) a change in control, (4) the
Hallmark Cards’ guarantee of the credit facility shall have expired or otherwise
terminated or Hallmark Cards shall have disavowed its obligations under the
guarantee or default shall otherwise have occurred in accordance with the terms
of the guarantee, (5) a termination by Hallmark Cards or any of its affiliates
of the right of Crown Media Holdings or its subsidiaries to use the names
“Hallmark” or “Crown” in their television services or any Channels owned or
operated by them.  For purposes of the credit facility, a change in
control means that (a) Hallmark Cards ceases to own directly or indirectly
at least 80% of the equity interest of Hallmark Entertainment Investment,
(b) Hallmark Entertainment Holdings ceases to have sufficient voting power
to elect a majority of Crown Media Holdings’ board of directors or beneficial
ownership of over a majority of the outstanding equity interest of Crown Media
Holdings having voting power, (c) the majority of the Board is not
comprised of individuals who were either in office or who were nominated 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-3 transaction
(or a “going-private” transaction) as defined in the Securities Exchange
Act.




Affirmative
covenants include, without limitation, the following: (1) (a) within 90 days
after the end of each fiscal year, submit to the banks audited consolidated
financial statements of the Company required to be submitted to the S.E.C., and
(b) within 45 days after the end of each of the first three fiscal quarters,
submit to the banks unaudited consolidated financial statements of the Company
required to be submitted to the S.E.C.; (2) cause the Company’s corporate
existence to be effective; (3) keep tangible properties material to the
Company’s business in good condition; (4) provide notice of the following
material events: (a) any event of default, (b) material adverse change in the
condition or operations of any credit party, (c) any action which could affect
the performance of the credit parties’ obligations under the Credit Agreement,
(d) any other event which could result in a material adverse effect, (e) opening
or change of any executive office, (f) change in the name of the credit parties,
(g) any event which affects the collectibility of receivables or decrease the
value of the collateral, (h) proposed material amendment to any material
agreement that are part of the collateral and (i) any notice which a credit
party received with respect to a claimed default; (5) (a) insure its assets
adequately, (b) insure against other hazards and risks, (c) maintain
distributor’s “errors and omissions” insurance, (d) maintain broadcaster’s
“errors and omissions” insurance, (e) cause all insurance to provide to the
Lender a written notice of any termination or material change of coverage and
(f) upon request, provide to the Lender a statement of insurance coverage; (6)
maintain true and complete books and records of financial operations and provide
the Agent access to such books and records; (7) observe and perform all material
agreements with respect to the distribution/exploitation of the Products (as
defined in the Credit Agreement); (8) pay all taxes and other governmental
charges and indebtedness in the ordinary course of business of the credit
parties; (9) defend the collateral against all liens, other than permitted
encumbrances; (10) upon receipt of any (a) payment from any obligor which should
be remitted to the Agent or (b) the proceeds of any sale of Product, remit such
payment or proceeds to the Agent; (11) comply with all applicable environmental
laws, notify the Agent of any material violation of any applicable environmental
laws and indemnify the Agent and the Issuing Bank against any environmental
law-related claims; and, (12) (a) upon request, execute and deliver all
necessary documents to perfect the liens on the collateral and to carry out the
purpose of the Credit Agreement and its ancillary documents and (b) clarify, if
necessary, the chain of title for any item of the Products.





Negative
covenants include limitations on (1) indebtedness, (2) liens, (3) guaranties,
(4) investments, (5) making “Restricted Payments,” (Restricted Payments include
any distribution on equity, any redemption or other acquisition of our equity
including redemption of the company obligated mandatorily redeemable preferred
interest, any payment on debt of the Company which is subordinated to the bank
loans, any reduction of the HC Crown line of credit for the Company, any payment
on certain obligations assumed by the Company under the purchase agreement for
the film assets and any other payment to Hallmark Cards or any of its
affiliates.  The credit agreement, however, permits the Company to
make payments to Hallmark Cards or an affiliate in payment of a valid
outstanding obligation (but not any principal payments in excess of $10.0
million in the aggregate with respect to such obligations, subject to any
applicable subordination agreement) or any commercially reasonable fees in
consideration for Hallmark Cards having extended its guarantee for the bank
credit facility, (6) sale of assets, (7) sale of receivables, (8) entering into
any sale and leaseback transactions, (9) entering into transactions with
affiliates, (10) amending the promissory note with HC Crown, a related letter of
credit issued for our benefit or certain of our other material agreements, (11)
creating negative pledge, (12) mergers or acquisitions, (13) production of any
item of Product in any fiscal year having an aggregate budgeted negative cost in
excess of $5.0 million, (14) changing our business activities, (15) entering
into certain transactions that are prohibited under ERISA, (16) entering into
any interest rate protection agreement or currency agreement, (17) acquiring or
creating any new subsidiary, (18) using or storing hazardous materials on our
premises,  and (19) creating any first tier subsidiary other than CM
Intermediary or have any asset related to the Channel at a level above CM
Intermediary.










Waiver
and Standby Purchase Agreement




On March
10, 2008, the Company, Hallmark Cards and affiliates of Hallmark Cards who hold
obligations of the Company entered into an Amended and Restated Waiver and
Standby Purchase Agreement, which was most recently amended in February 2010, as
part of the Master Recapitalization Agreement, to extend the waiver period to
August 31, 2010 (the “Waiver Agreement”).  The Waiver Agreement defers
payments (excluding interest on the 2001, 2005 and 2006 notes listed below) due
on any of the following obligations (the “Subject Obligations”) until August 31,
2010 and interest on the 10.25% Note until August 5, 2010, or an earlier date as
described below as the waiver termination date, whereupon all of these amounts
become immediately due and payable (the “Waiver Period”).  Each of
these listed agreements is described below in Item 13 “Certain Relationships and Related
Transactions”.







·
            Note
      and interest payable to HC Crown, dated December 14, 2001, in the original
      principal amount of $75.0 million, payable to HC Crown. (Total amount
      outstanding at December 31, 2008 and 2009, including accrued interest was
      $109.8 million and $110.0 million,
  respectively.)




·
            $70.0
      million note and interest payable to Hallmark Cards affiliate, dated as of
      March 21, 2006, arising out of the sale to Crown Media Holdings of the
      Hallmark Entertainment film library. (Total amount outstanding at December
      31, 2008 and 2009, including accrued interest was $62.7 million and $62.8
      million, respectively.)






·
            10.25%
      senior secured note, dated August 5, 2003, in the initial accreted value
      of $400.0 million, payable to HC Crown.  (Total amount
      outstanding at December 31, 2008 and 2009, including accrued interest was
      $686.6 million and $758.8 million,
  respectively.)




·
            Note
      and interest payable to Hallmark Cards affiliate, dated as of October 1,
      2005, in the principal amount of $132.8 million. (Total amount outstanding
      at December 31, 2008 and 2009, including accrued interest was $172.1
      million and $172.4 million,
respectively.)






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






·
            Any
      and all amounts due and owing to Hallmark Cards pursuant to the Tax
      Sharing Agreement (Total amount outstanding at December 31, 2009, was $8.5
      million.).




Interest
will continue to accrue on these obligations during the Waiver Period and is
payable as indicated above.  The Waiver Agreement also contains
certain covenants, including but not limited to (1) our covenant not to
take any action (including the issuance of new stock or options) that would
prohibit us from being included as a member of Hallmark Cards consolidated
federal tax group, (2) compliance with obligations in the loan documents
for the bank credit facility and (3) commercially reasonable efforts to
refinance the obligations subject to the Waiver Period.  Pursuant to
the Waiver Agreement, the Company must make prepayments on the outstanding debt
from 100% of any “Excess Cash Flow” during the Waiver Period.  There
was Excess Cash Flow of $7.7 million for the year ended December 31, 2009, of
which $4.6 million of interest on the 2001, 2005 and 2006 Notes was remitted to
a Hallmark Cards’ affiliate on January 5, 2010. See Note 8 to the Consolidated
Financial Statements for the Use of the Excess Cash Flow to make payments to a
Hallmark Cards affiliate and to Hallmark Cards. Pursuant to the Master
Recapitalization Agreement, we have not made the payments representing the
remaining amounts of Excess Cash Flow for 2009.  Payment continues to
be deferred under the extension of the Waiver Agreement.  Excess Cash
Flow for 2008 of $45.9 million was used to make payments on the bank credit
facility of $40.9 million, on the Tax Note of $228,000 and on interest payments
of $4.7 million.




The
waiver termination date is August 31, 2010, or earlier upon occurrence of
certain events including but not limited to the following:  (a) the
Company fails to pay any principal or interest, regardless of amount, due on any
indebtedness to unrelated parties (other than the bank credit facility) with an
aggregate principal amount in excess of $5.0 million or any other event or
condition occurs that results in any such indebtedness becoming due prior to its
scheduled maturity, provided that the waiver will not terminate if the Company
reduces the principal amount of such indebtedness to $5.0 million or less within
five business days of a written notice of termination from Hallmark Cards; or
(b) the Company fails to pay interest on the bank credit facility described
above to the extent that Hallmark Cards has purchased all or a portion of the
indebtedness thereunder or to perform any covenants in the Waiver
Agreement.




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




The
Waiver Agreement does not limit any existing rights of Hallmark Cards or its
affiliates to offset amounts owed to us under the Hallmark Tax Sharing Agreement
or as otherwise agreed by us against these obligations. Additionally, during the
Waiver Period, Hallmark Cards was permitted to offset future tax benefits it
realizes pursuant to the Tax Sharing Agreement, first against accrued and unpaid
interest and then to the unpaid principal balance of the Tax Note until the
earlier of such time as the balance reaches zero or the maturity date of the Tax
Note. The Tax Note was paid in full (both principal and interest) on
December 31, 2008, without penalty.





With tax
sharing payments included in the deferred obligations, estimated tax sharing
payments, if any, which the Company would otherwise be required to pay to
Hallmark Cards after consideration of the deferred deductibility of interest on
the 10.25% Senior Secured Note are deferred until August 31, 2010. Pursuant to
the terms of the Tax Sharing Agreement, prior to changes as part of the
Recapitalization, the Company will not realize a current tax benefit from such
interest until it is paid to Hallmark Cards.





In
addition, we provided a release to Hallmark Cards and related parties for any
matters prior to the date of the restated Waiver Agreement.





In
consideration for Hallmark Cards to execute Amendment No. 4 to the waiver and
standby agreement, on July 27, 2007, the Company executed a Copyright Security
Agreement and Security and Pledge Agreement for the benefit of Hallmark Cards
and its affiliates.  Under the agreements, the Company and its
subsidiaries grant security interests to Hallmark Cards and its affiliates in
any copyright license and program license agreements and all other personal
property.








Hallmark
Guarantee; Interest and Fee Reductions





Hallmark
Cards has provided to the lending bank under the credit facility the Hallmark
Cards facility guarantee.  The guarantee is unconditional for
obligations of the Company under the bank credit facility.  If any
payment is made on the guarantee, it will be treated as a purchase of the
lending bank’s interest in the credit facility.





Prior to
April 1, 2009, Hallmark Cards provided an irrevocable letter of credit to JP
Morgan Chase Bank as credit support for our obligations under the Company’s bank
credit facility for which we previously paid the letter of credit fees. This
letter of credit was cancelled on April 1, 2009.





The above
mentioned credit support provided by Hallmark Cards resulted in reductions in
the interest rate and commitment fees under the credit facility; however, we
agreed to pay and have paid an amount equal to the reductions in the interest
rate and commitment fees to Hallmark Cards.  Prior to April 1, 2009,
we paid 2.25% and 0.375% to Hallmark Cards, representing the reductions in the
interest rate and commitment fees, respectively. On April 1, 2009, as noted in
Note 8, the interest rate and commitment fees under the renewed credit facility
increased and we began paying Hallmark Cards a smaller reduction amount of the
interest rate and commitment fees equal to 0.75% and 0.125%.





Senior
Secured Note





In August
2003, the Company issued a senior note to HC Crown for $400.0 million. In
accordance with the Waiver Agreement, cash payments are not required until
February 5, 2011 (which is the first payment date after August 31, 2010). The
principal amount of the senior secured note accretes at 10.25% per annum,
compounding semi-annually, to August 5, 2010.  From that date,
interest at 10.25% per annum is scheduled to be payable semi-annually in arrears
on the accreted value of the senior note to HC Crown on February 5, 2011, and
upon maturity on August 5, 2011, and is pre-payable without penalty. At
December 31, 2008 and 2009, $686.6 million and $758.8 million, respectively, of
principal and interest were included in the senior note payable in the
accompanying consolidated balance sheets. The note purchase agreement for the
senior note provides that if there is an event of default with respect to any
other indebtedness in excess of $5.0 million, the accreted value and any accrued
and unpaid interest on the senior note would become due and payable. The note
purchase agreement for the senior note contains certain restrictive covenants
which, among other things, prevent the Company from incurring any additional
indebtedness, purchasing or otherwise acquiring shares of the Company’s stock,
investing in other parties and incurring liens on the Company’s
assets.  As a fee for the issuance of the notes, the Company paid $3.0
million to HC Crown, which was initially capitalized and is being amortized as
additional interest expense over the term of the note payable.




Note
and Interest Payable to HC Crown





On
December 14, 2001, the Company executed a $75.0 million promissory note with HC
Crown.  Pursuant to the Waiver Agreement, the note is payable in full
on August 31, 2010 (although the maturity date of the note is December 31,
2009). Under the Waiver Agreement, accrued interest on this 2001 Note was added
to principal through November 15, 2008.  Commencing November 16, 2008,
interest is payable in cash, quarterly in arrears five days after the end of
each calendar quarter. This note is subordinate to the bank credit facility. The
rate of interest under this note is currently LIBOR plus 5% per annum (9.05% and
5.29% at December 31, 2008 and 2009, respectively). At December 31, 2008 and
2009, $108.6 million, is reported as note payable to Hallmark Cards affiliate
and $1.3 million and $1.5 million, respectively, are reported as interest
payable to Hallmark Cards affiliate on the accompanying consolidated balance
sheet. Interest of $6.3 million was paid in 2009, and interest of $1.5 million
was paid on January 5, 2010.




Note
and Interest Payable to Hallmark Cards Affiliate





On
October 1, 2005, the Company converted approximately $132.8 million of its
license fees payable to Hallmark affiliates to a promissory note.  The
rate of interest under this note is currently LIBOR plus 5% per annum (9.05% and
5.29% at December 31, 2008 and 2009, respectively). Pursuant to the Waiver
Agreement, the promissory note is payable in full on August 31, 2010 (although
the maturity date of the note is December 31, 2009).  Under the Waiver
Agreement, accrued interest on this 2005 Note was added to principal through
November 15, 2008.  Commencing November 16, 2008, interest is payable
in cash, quarterly in arrears five days after the end of each calendar quarter.
At December 31, 2008 and 2009, $170.1 million is reported as note payable to
Hallmark Cards affiliate and $2.0 million and $2.3 million, respectively, are
reported as interest payable to Hallmark Cards affiliate on the accompanying
consolidated balance sheet. Interest of $9.8 million was paid on in 2009, and
interest of $2.3 million was paid on January 5, 2010.





Note
and Interest Payable to Hallmark Cards Affiliate





On March
21, 2006, the Company converted approximately $70.4 million of its payable to a
Hallmark Cards affiliate to a promissory note. The rate of interest under this
note is currently LIBOR plus 5% per annum (9.05% and 5.29% at December 31, 2008
and 2009, respectively). Pursuant to the Waiver Agreement, the promissory note
is payable in full on August 31, 2010 (although the maturity date of the note is
December 31, 2009). Under the Waiver Agreement, accrued interest on this 2006
Note was added to principal through November 15, 2008.  Commencing
November 16, 2008, interest is payable in cash, quarterly in arrears five days
after the end of each calendar quarter. At December 31, 2008 and 2009, $62.0
million is reported as note payable to Hallmark Cards affiliates and $717,000
and $838,000, respectively, are reported as interest payable to Hallmark Cards
affiliate on the accompanying consolidated balance sheet. Interest of $3.6
million was paid in 2009, and interest of $838,000 was paid on January 5,
2010.










Note
and Interest Payable to Hallmark Cards




During
2007, the Internal Revenue Service completed its examination of Hallmark Cards'
consolidated tax returns for fiscal years 2003 and 2004 and determined that,
with respect to a portion of the losses attributable to the Company for fiscal
years 2003 and 2004, Hallmark Cards should not have carried back such losses to
its consolidated federal tax returns filed for fiscal years 2001 and
2002.  These losses are available as carry-forwards in the
consolidated federal tax return beginning in 2005 and later
years.   Furthermore, the examination changed the amount of
foreign tax credits that had previously been conveyed to the Company under the
Tax Sharing Agreement. Because the Company’s share of the tax benefits realized
from such losses and credits, $25.2 million, were either contributed to the
Company in cash or applied as an offset against amounts owed by the Company to
other members of the consolidated group, the Company was obligated to return
this amount to Hallmark Cards plus interest related thereto in the amount of
$7.9 million.  As a result, the Company recorded a $33.1 million
payable to Hallmark Cards with a corresponding $25.2 million reduction of
additional paid-in capital and a $7.9 million charge to interest expense, all of
which were recognized during 2007.





On July
27, 2007, the Company replaced a payable to Hallmark Cards under the Tax Sharing
Agreement with a $33.1 million promissory note payable to Hallmark Cards due in
July 2009 with interest at LIBOR plus 3% per annum (the "Tax
Note").  The Tax Note could be prepaid in whole or in part with no
penalty.  The Company was not required to make any cash payments prior
to maturity. Until the Tax Note and related interest were paid in full, Hallmark
Cards offset any future tax benefits it realized pursuant to the Tax Sharing
Agreement, first against accrued and unpaid interest and then against the unpaid
principal balance. In 2007, Hallmark Cards offset $12.2 million against $1.1
million of accrued and unpaid interest and $11.1 million of unpaid principal.
Additionally, in September 2007, the Company recorded an additional $85,000
charge to interest expense related to the receipt of an invoice for the actual
amount owed in regard to the return of tax benefits under the Tax Sharing
Agreement. In 2008, Hallmark Cards offset $21.3 million against $1.0 million of
accrued and unpaid interest and $20.3 million of unpaid principal.





On April
14, 2008, the Internal Revenue Service refunded to Hallmark Cards a portion of
the interest previously paid in connection with the disallowance of certain net
operating losses.  In July 2008, Hallmark Cards notified the Company
that they had reduced the Company’s indebtedness as of April 14, 2008, under the
Tax Note by $1.5 million in consideration of the Company’s applicable portion of
such refund. Accordingly, the Company reduced interest expense during
2008.





In
December 2008, the Company paid $121,000 in principal and $107,000 in interest
to fully satisfy its obligation under this note. The Tax Note and all payments
thereunder were subordinated to the bank credit facility extended to the Company
by JP Morgan Chase Bank.




Interest
Expense Paid to HC Crown




Interest
expense paid to HC Crown was $1.8 million for the year ended December 31, 2007,
$1.1 million for the year ended December 31, 2008, and $1.0 million for the year
ended December 31, 2009. Prior to Amendments No. 8 and No. 10 to the Company’s
credit facility, such amounts would have been paid to the bank
syndicate.




Tax
Sharing Agreement





On March
11, 2003, Crown Media Holdings became a member of Hallmark Cards consolidated
federal tax group and entered into the Tax Sharing Agreement with Hallmark
Cards.  Hallmark Cards includes Crown Media Holdings in its
consolidated federal income tax return.  Accordingly, Hallmark Cards
has benefited from past tax losses and may benefit from future tax losses, which
may be generated by Crown Media Holdings.  Based on the Tax Sharing
Agreement, Hallmark Cards pays Crown Media Holdings all of the benefits realized
by Hallmark Cards as a result of consolidation, 75% in cash on a quarterly basis
and the balance when Crown Media Holdings becomes a taxpayer.  Under
the Tax Sharing Agreement, at Hallmark Cards’ option, this 25% balance may also
be applied as an offset against any amounts owed by Crown Media Holdings to any
member of the Hallmark Cards consolidated group under any loan, line of credit
or other payable, subject to any limitations under any loan indentures or
contracts restricting such offsets.





The
Company received $21.3 million under the Tax Sharing Agreement during 2008,
which were offset against the Tax Note. The Company incurred liability under the
Tax Sharing Agreement to Hallmark Cards in the amount of $8.5 million during
2009.  This amount remains owed to Hallmark Cards as of December 31,
2009, and is covered by the Waiver Agreement.





The Tax
Sharing Agreement will be amended in the Recapitalization.  See “Recapitalization” in
Item 1, Business and Note 1 to the Consolidated Financial
Statements.








ITEM
7A. Quantitative and Qualitative Disclosures about Market Risk





We only
invest in instruments that meet high credit and quality standards, as specified
in our investment policy guidelines. These instruments, like all fixed income
instruments, are subject to interest rate risk. The fixed income portfolio will
decline in value if there is an increase in interest rates. If market interest
rates were to increase immediately and uniformly by 10% from levels as of
December 31, 2009, the decline of the fair value of the fixed income portfolio
would not be material.





As of
December 31, 2009, our cash, cash equivalents and short-term investments had a
fair value of $10.5 million, which was invested in cash and short-term
commercial paper. The primary purpose of these investing activities has been to
preserve principal until the cash is required to fund operations or can be used
to reduce borrowings under our credit facility based on the maturity schedule of
loans under that agreement. Consequently, the size of this portfolio is nominal
and fluctuates as cash is provided by and used in our business.





The value
of certain investments in this portfolio can be impacted by the risk of adverse
changes in securities and economic markets and interest rate fluctuations. For
the year ended December 31, 2009, the impact of interest rate fluctuations,
changed business prospects and all other factors did not have a material impact
on the fair value of this portfolio, or on our income derived from this
portfolio.





We have
not used derivative financial instruments for speculative purposes. As of
December 31, 2009, we are not hedged or otherwise protected against risks
associated with any of our investing or financing activities.





We
are exposed to market risk.





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





If we use
risk management control policies, there will be inherent risks that may only be
partially offset by our hedging programs should there be any unfavorable
movements in interest rates or equity investment prices.





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





Our
interest income and expense is subject to fluctuations in interest
rates.





Our
material interest bearing assets consisted of cash equivalents and short-term
investments. The balance of our interest bearing assets was $10.5 million, or 1%
of total assets, as of December 31, 2009. Our material liabilities subject to
interest rate risk consisted of our bank credit facility, our line of credit and
interest payable to HC Crown, our line of credit and interest payable to
Hallmark Cards affiliate, and our note and interest payable to Hallmark Cards
affiliate. The balance of those liabilities was $346.3 million, or 25% of total
liabilities, as of December 31, 2009. Net interest expense for the year ended
December 31, 2009, was $100.5 million, 36%, of our total revenue. Our net
interest expense under these liabilities is sensitive to changes in the general
level of interest rates, primarily U.S., LIBOR and Eurodollar interest rates. In
this regard, changes in U.S. and LIBOR interest rates affect the fair value of
interest bearing liabilities.





If market
interest rates were to increase or decrease by 1% from levels as of December 31,
2009, our interest expense would increase or decrease by $3.6
million.











ITEM
8. Financial Statements and Supplementary Data





Our
Consolidated Financial Statements begin at page F-1 of this Annual Report on
Form 10-K.





ITEM
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure





None.







ITEM
9A.  Controls and Procedures




Disclosure
      Controls and Procedures




As of the
end of the period covered by this report, the Company, under the supervision and
with the participation of the Company’s management, including its Chief
Executive Officer and Chief Financial Officer, carried out an evaluation of the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of December 31, 2009. In performing its
assessment of the Company’s internal control over financial reporting,
management used the criteria set forth in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based upon this evaluation, the Company’s Chief Executive
Officer and Chief Financial Officer concluded that the Company’s disclosure
controls and procedures were effective as of that date for purposes of
recording, processing, summarizing and timely reporting material information
required to be disclosed in reports that the Company files under the Securities
Exchange Act of 1934.




Management’s
      Report on Internal Control over Financial
  Reporting




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. A company's internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




Management, including the Chief Executive Officer and Chief Financial Officer,
has conducted an evaluation of the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2009, based on the
criteria for effective internal control described in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on its assessment, management concluded that the
Company’s internal control over financial reporting was effective as of
December 31, 2009.


KPMG LLP,
an independent registered public accounting firm, audited the effectiveness of
the Company’s internal control over financial reporting as of December 31, 2009,
as stated in their report included in the Financial Statement section of this
Report.





Changes
in Internal Control over Financial Reporting




There
were no changes in the Company’s internal control over financial reporting that
occurred during the quarter ended December 31, 2009, that materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.


Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, will be or have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of any system of
controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time,
control may become inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate. Because of the
inherent limitation in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.





ITEM
9B.  Other Information





Not
applicable.














PART
III








The
information required by this Part III is incorporated by reference to
information in the definitive proxy statement for our 2010 annual meeting of
stockholders under the headings “Election of Directors,” “Board Information,”
“Compensation of Directors and Executive Officers,” “Section 16(a) Beneficial
Ownership Reporting Compliance,” “Security Ownership of Certain Beneficial
Owners and Management,” and “Principal Accountant Fees and Services.” We intend
to file the definitive proxy statement with the Securities and Exchange
Commission on or prior to April 30, 2010.





ITEM
10. Directors, Executive Officers and Corporate Governance





The
information required by this Item 10 is set forth in the Proxy Statement to be
delivered to stockholders in connection with our 2010 Annual Meeting of
Stockholders (“the Proxy Statement”) under the headings “Election of Directors,”
“Board Information,” and “Compensation of Directors and Executive Officers,” and
is incorporated by reference herein.





ITEM 11. Executive
Compensation





The
information required by this Item 11 is set forth in the Proxy Statement under
the headings “Board Information,” and “Compensation of Directors and Executive
Officers,” and is incorporated by reference herein.





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





The
information required by this Item 12 is set forth in the Proxy Statement under
the heading “Security Ownership of Certain Beneficial Owners and Management,”
and is incorporated by reference herein.





ITEM
13. Certain Relationships and Related Transactions and Director
Independence





The
information required by this Item 13 is set forth in the Proxy Statement under
the headings “Certain Relationships and Related Transactions” and is
incorporated by reference herein.  The descriptions of related party
transactions below are stated in this Report because the transactions are
referenced in other Items of this Report.





The
following summary descriptions of agreements to which we are a party are
qualified in their entirety by reference to the agreement to which each summary
description relates, each of which we have filed with the SEC.




Policies
and procedures for the review, approval or ratification of transactions with
related persons





Generally,
there are two types of related party transactions which the Company enters into:
(1) transactions with Hallmark Cards to promote and market Hallmark Channel and
Hallmark Movie Channel and (2) Affiliate Transactions (as such term is defined
under the Second Amended and Restated Stockholders Agreement, dated August 30,
2001 described below (the "Stockholders Agreement")), which are subject to the
Stockholders Agreement.  Affiliate Transactions are any transactions
with parties to the Stockholders Agreement with certain exceptions.





The Audit
Committee, under its charter, has been delegated by the Board the authority to
review and approve related party transactions.  To seek approval of
marketing-related transactions with Hallmark Cards, management begins by
providing the Audit Committee a summary of the transactions, together with
researched data which supports management's decision in selecting Hallmark Cards
as a commercially reasonable and cost effective partner for such marketing
activities.  At its meetings, the Audit Committee discusses the
appropriateness of the transaction for the Company and renders a
decision.  For efficiency purposes, the Audit Committee has asked
management to seek approval only if a transaction involves a financial
commitment on the part of the Company that is greater than $5,000 per
transaction.  Notwithstanding the foregoing, management seeks approval
of transactions surrounding major holiday campaigns (for example, Valentine's
Day, Mother's Day and Christmas) regardless of the monetary value
involved.  These practices result from requirements in the
Stockholders Agreement as well as corporate governance principles, are reflected
in minutes and are not otherwise the subject of written policies or procedures.





To seek
approval of any related-party transactions, management begins by providing a
summary of the transaction and any documents that are necessary for the
independent directors to review and approve the transactions.  Such
directors then conduct a meeting (or multiple meetings, if necessary) to discuss
the appropriateness of the transactions for the Company and render their
decision.  If a transaction has a value of more than $35.0 million,
the Board generally forms a special committee of directors who are independent
of the transaction at hand and delegate authority to such committee to review
and approve the transaction.  The special committee have authority to
retain financial advisors and legal counsel who advise the committee on matters
relating to the transaction.  These practices result from requirements
in the Stockholders Agreement as well as corporate governance principles, are
reflected in minutes and are not otherwise the subject of written policies or
procedures.





"Hallmark
Hall of Fame" Programming License Agreement





In 2008,
Crown Media United States entered into an agreement with Hallmark Cards to
license 58 “Hallmark Hall of Fame” movies, consisting of 16 contemporary
Hallmark Hall of Fame titles (i.e., produced from 2003 to 2008) and 42 older
titles, for exhibition on the Hallmark Channel and Hallmark Movie
Channel.  These titles are licensed for ten year windows, with windows
commencing at various times between 2007 and 2010, depending on
availability.  This agreement makes the Hallmark Channel and Hallmark
Movie Channel the exclusive home for these movies.  The total license
fee for these movies is $17.2 million and is payable in equal monthly
installments over 10 year exhibition windows.







VISN
Preferred Interest




VISN, a
subsidiary of the National Interfaith Cable Coalition, Inc. (“NICC”), owns
a $25.0 million preferred interest in Crown Media United
States.  Under the Crown Media United States Amended and Restated
Company Agreement, originally dated November 13, 1998, the members agreed that
if during any year ending after January 1, 2005 and prior to December 31, 2009,
Crown Media United States has federal taxable income (with possible adjustments)
in excess of $10.0 million, and the preferred interest has not been redeemed,
Crown Media United States will redeem the preferred interest in an amount equal
to the lesser of:




·
            such
      excess;




·
            $5.0
      million; or




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




Crown
Media United States did not have such taxable income in 2009. Crown Media United
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). The preferred
interest has a liquidation preference of $25.0 million. See information below on
a January 2, 2008, agreement under which VISN may request the preferred interest
be replaced with promissory notes of Crown Media Holdings.







Crown
Media United States Programming Agreement with NICC







On
January 2, 2008, Crown Media Holdings entered into an agreement with the NICC
regarding termination of any right of NICC under the agreement covering the
operation of Crown Media United States (the “Company Agreement”) to compel Crown
Media Holdings to buy all of the outstanding shares of Class A common stock
owned by NICC and NICC’s subsidiary VISN Management Corp. (“VMC”) at the then
current market value.  The January 2008 agreement also covers other
aspects of Crown Media Holdings’ relationship with NICC.




The
January 2008 agreement provided for the following:




·  The put
agreement was terminated, and the purported exercise of the put was
waived.




·  Throughout
2008 and 2009, Crown will provide to NICC the use of a two-hour time period each
Sunday morning for programming by NICC and NICC shall retain any advertising
revenue from such time period.  Neither NICC nor Crown is obligated to
make any payment regarding this time period or the programming.




·  NICC
voluntarily relinquished its right to designate one director on Crown Media
Holdings’ Board of Directors, effective with the resignation of its designee on
December 19, 2007.




·  In
settlement of a claim of NICC for $15,000,000 in the event of a change of
control, Crown will pay NICC the total amount of $3,750,000 in three
installments of $1,250,000 each on January 20, 2008, January 20, 2009 and
January 20, 2010.  If there would have been a change of control prior
to January 20, 2010, Crown would have paid the remaining unpaid installments at
that time. The Company has paid the January 20, 2008, 2009 and 2010,
installments.




·  For so
long as the preferred interest remains outstanding, Crown will remit to NICC
payments equivalent to 6.0% per annum of outstanding balance of the preferred
interest. The 2008 and 2009 payments have been made.




·  At the
request of VMC, Crown will replace the preferred interest in Crown Media United
States held by NICC/VMC with a promissory note of Crown and, at VMC’s option, a
second note payable to an independent not-for-profit corporation designated by
VMC.  Such notes with an aggregate face amount equal to the
outstanding preferred interest at the conversion date would bear interest at
6.0% and a maturity date of December 31, 2010.  If the preferred
interest is not exchanged for notes, Crown will redeem the preferred interest as
set forth in the Company Agreement of Crown Media United States.




·  To the
extent required by the Stockholders Agreement of HEIC, Crown will consent, and
obtain the consent of HEIC, for VMC to assign its ownership of HEIC shares to a
non-profit corporation designated by VMC or to NICC.  The shares will
continue to be subject to the HEIC Stockholders Agreement.




·  Except as
provided or referenced in the January 2008 Agreement, the term and conditions of
the following prior agreements between or among the parties to the January 2008
agreements were superseded:  The Company Agreement and the December
2005 agreement.  The Stockholders Agreement is modified to the extent
provided in the January 2008 Agreement.  In addition, the parties
provided mutual releases.




During
the years ended December 31, 2008 and 2009, Crown Media United States paid the
National Interfaith Cable Coalition $6.4 million and $4.6 million, respectively,
related to the Company Agreement, the December 2005 Agreement and the January
2008 Agreement.





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 the Affiliation Agreement, DIRECTV distributes the
Hallmark Channel on the TOTAL CHOICE ® tier of its DBS distribution system in
the United States and pays us license fees for such distribution.  At
the same time we entered into a Stock Purchase Agreement with DIRECTV
Enterprises whereby we issued 5,360,202 shares of our Class A common stock,
which shares were subsequently transferred to its parent company, The DIRECTV
Group, Inc. In March 2008, we renewed this distribution agreement for a
multi-year term and additionally provided DIRECTV with the right to distribute
the Standard Definition and High Definition versions of the Hallmark Movie
Channel. As of December 31, 2009, DIRECTV accounted for 17.7 million of our
subscribers.





Hallmark
Advertising





Hallmark
Cards purchased $429,000 and $775,000 of advertising on the Hallmark Channel in
the United States at negotiated market rates, respectively, during the years
ended December 31, 2008 and 2009.





During
November and December of 2009 and February of 2010, Hoops & Yoyo, popular
animation characters created and owned by Hallmark Cards, hosted certain of our
original movies airing on Hallmark Channel.  The characters appeared
intermittently during the airing of the movies to provide commentaries and
narratives pertinent to the movies.  Hallmark Cards provided the
content and no license fee was paid by the Company to Hallmark Cards for such
content.





Bank
Credit Facility and Hallmark Notes





See Note
8 of our Notes to Consolidated Financial Statements in this Report and “Bank
Credit Facility and Hallmark Notes” in Item 7 Management’s Discussion and
Analysis of Financial Condition and Results of Operations of this Report for
information on the several notes payable to Hallmark Cards and its affiliates.
See “Recapitalization” in Item 1, Business and Note 1 to the Consolidated
Financial Statements.








Stockholders
Agreement and Registration Rights




General




We are a
party to a stockholders agreement, amended and restated as of August 30, 2001,
as amended (including the modification in the January 2, 2008, agreement with
NICC) with VISN, The DIRECTV Group, Inc. (“DIRECTV”), and Hallmark Entertainment
Investments. The stockholders agreement provides that our Board will consist of
not less than 15 directors, with 12 nominated by Hallmark Entertainment
Investments, and two independent directors, who must not be officers, directors
or employees of any of the parties or their affiliates, and who will be
nominated by the Board.  The rights of the parties to nominate a
director will terminate on the later of (1) such party owning less than 5% of
our common stock then outstanding or (2) such party ceasing to own at least 75%
of the number of shares of our common stock held by them immediately after our
initial public offering in May 2000. DIRECTV is entitled to appoint an observer
to the board of directors of Crown Media Holdings until DIRECTV and its
affiliates cease to own beneficially in the aggregate at least 75% of the shares
of our common stock acquired in the August 2001 transaction by the predecessor
holder of the shares and now held by DIRECTV.




The
stockholders agreement also provides that we will not enter into any material
transaction, except for specified transactions, with any of the other parties or
their affiliates involving an aggregate value of (1) $35.0 million or less,
unless such transaction is approved by a majority of our independent directors
and (2) more than $35.0 million, unless such transaction is approved by a
majority of the members of our Board not nominated by the interested
party.




In
addition, the stockholders agreement provides that, in the event that Hallmark
Entertainment Investments proposes to transfer 20% or more of our outstanding
common stock to an unaffiliated third party, each other party to the
stockholders agreement will have the right to participate on the same terms in
that transaction with respect to a proportionate number of such other party’s
shares, except for DIRECTV.





Hallmark
Entertainment Investments Co. Stockholders Agreement





On March
11, 2003, Hallmark Entertainment Holdings contributed 100% of the Crown Media
Holdings shares owned by it to Hallmark Entertainment Investments. Two of Crown
Media Holdings investors, Liberty Crown, Inc. (“Liberty”), a subsidiary of
Liberty Media, and J.P. Morgan, also contributed 100% of their Crown Media
Holdings shares to Hallmark Entertainment Investments and VISN contributed 10%
of its Crown Media Holdings shares to Hallmark Entertainment Investments, all in
return for Hallmark Entertainment Investments shares. Prior to the Hallmark
Entertainment Investments transaction, J.P. Morgan and Liberty were parties to
the Crown Media Holdings stockholders agreement described above. As a result of
the Hallmark Entertainment Investments transaction, J.P. Morgan and Liberty no
longer 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 Media
Holdings pursuant to the Hallmark Entertainment Investments stockholders
agreement dated March 11, 2003, among Hallmark Entertainment Investments,
Hallmark Entertainment Holdings, Liberty, VISN, and J.P. Morgan, including the
following:





·
            Liberty
      has the right to designate one person as one of the directors to the Crown
      Media Holdings Board that Hallmark Entertainment Investments is entitled
      to nominate under the Crown Media Holdings stockholders agreement
      described above. J.P. Morgan had the right to designate one person as one
      of the directors to the Crown Media Holdings Board but has surrendered
      such right.





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





·
            registration
      rights as provided for minority stockholders in the Crown Media Holdings
      stockholders agreement;





·
            Hallmark
      Entertainment Investments may not take certain actions as specified in the
      Hallmark Entertainment Investments stockholder agreement without the
      consent of J.P. Morgan and Liberty;
and





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





Registration
Rights




Under the
stockholders agreement, Hallmark Entertainment Investments has the right to
require us on four occasions, and the 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 of shares they require us to register in each case
is at least 7% of our common stock then outstanding.  The other
parties also have an unlimited number of “piggyback” registration
rights.  This means that any time we register our common stock for
sale, they will have the right to include their common stock in that offering
and sale.




We are
obligated to pay all expenses that result from the registration of the other
parties’ common stock under the stockholders agreement, other than registration
and filing fees, attorneys’ fees, underwriter fees or expenses and underwriting
discounts and commissions.  We have also indemnified the other parties
against any liabilities that may result from their sale of common stock,
including Securities Act liabilities.




Rights
Relating To Crown Media United States Amended and Restated Company
Agreement




Under the
stockholders agreement, so long as the Company or any of its affiliates are
entitled to have a representative on the Crown Media United States governance
committee, and VISN and its affiliates either were entitled to nominate to, or
designate a member of, our Board, or beneficially owned any preferred interests
in Crown Media United States, neither the Company nor any of its affiliates were
able without the consent of the member of our Board nominated by VISN or a
representative of NICC, to vote in favor of:




·
            any
      specified change in, or action described in, the Crown Media United States
      amended and restated company agreement that relates to VISN’s preferred
      interest in Crown Media United States or that relates to VISN’s rights to
      programming on the Hallmark Channel in the U.S. or its programming
      budget;




·
            any
      repayment or redemption of specified equity interests in Crown Media
      United States;




·
            any
      transfer of all of Crown Media United States’ assets or any business
      combination involving Crown Media United States where Crown Media United
      States is not the surviving entity, unless the transferee assumes
      specified obligations under the Crown Media United States amended and
      restated company agreement until the later of the fifth anniversary of
      these offerings or the second anniversary of the transfer or business
      combination;




·
            the
      dissolution of Crown Media United States, except in connection with a
      complete liquidation;




·
            any
      transfer of all of Crown Media United States’ assets to, or any business
      combination involving Crown Media United States’ with, us or any of our
      affiliates, or any other material transaction with us or any of our
      affiliates, unless we comply with specified restrictions relating to any
      financial benefit we receive from the transaction that is more than what
      we would have received had the transaction been on an arm’s-length basis
      or on commercially reasonable
terms;




·
            any
      transfer of all of Crown Media United States’ assets or any business
      combination involving Crown Media United States where Crown Media United
      States is not the surviving entity, prior to the second anniversary of the
      initial public offering; or




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




The
restrictions set forth above were extinguished upon execution of a settlement
agreement dated January 2, 2008 between Crown Media Holdings and NICC, pursuant
to which NICC voluntarily relinquished its right to designate a director on our
Board, effective with the resignation of NICC's designee on December 19,
2007  (for a description of this settlement agreement, see above "Item
13. Certain Relationships and Related Transactions and Director Independence -
Crown Media United States Program Agreement with NICC").







Intercompany
Services Agreement




The
Company has an intercompany services agreement with Hallmark Cards, which was
entered into in 2003 for a term of three years and then extended for additional
years through December 31, 2010. Under the agreement, Hallmark Cards provides us
with the following services:




·
            tax
      services;




·
            risk
      management, health, safety and environmental services and
      insurance;




·
            legal
      services;




·
            treasury
      and cash management services;




·
            real
      estate consulting services;




·
            human
      resources services; and




·
            other
      services mutually agreed by the
parties.




We have
agreed to pay Hallmark Cards $541,000 in 2008 and $455,000 in 2009 per year for
these services, plus out-of-pocket expenses and third party fees, payable in
arrears on the last business day of each quarter. The balance of the payable for
services, expenses and fees under this and the previous services agreement as of
both December 31, 2008 and 2009, was approximately $5.5 million. We believe that
the services being provided under the agreement have a value at least equal to
the annual fee. For the last three months of 2008, the Company paid the monthly
amount due under the intercompany service agreement in the amount of
approximately $135,000.  The Company made timely payments in
2009.







Hallmark
Trademark License Agreements




Crown
Media United States operates under the benefit of a limited trademark license
agreement with Hallmark Licensing, Inc., dated March 27, 2001, which has been
extended through September 1, 2009.  The amended and restated Crown
Media United States trademark agreement permits Crown Media United States to
name its network service as the “Hallmark Channel.”  The agreement
contains usage standards, which limit certain types of programming and
programming content aired on Crown Media United States’ network. Crown Media
United States also has a similar trademark license agreement with Hallmark
Licensing, Inc., which is effective January 1, 2004, and as extended expires
September 1, 2010, to permit the use of the Hallmark trademark in the name of
the “Hallmark Movie Channel”.




Under the
agreement, if Hallmark Cards notifies us in writing that it has determined that
we have failed to comply with the usage standards set forth in the agreement or
have otherwise breached our obligations under the agreement, we are required to
stop any non-complying activity within 10 days of that notice or we may be in
default of the agreement.  We also may be in default if Hallmark Cards
delivers such a written notice to us with respect to its standards three or more
times in any 12-month period.  In addition, there may be a default
under the agreement if we fail to cure any breach of the program agreement with
RHI Entertainment Distribution, if we fail to make any payments due under loan
agreements within five days of the due date, or if we receive an opinion from
our auditors that shows that we no longer are a going concern. The Company
obtained a waiver for the trademark license agreement dated March 3, 2010, from
Hallmark Cards related to its going concern opinion over its 2009 financial
statements.




The
license agreements can be terminated immediately and without notice if we
transfer in any way our rights under the license agreements, if we have an event
of default under the agreement or in events of bankruptcy, insolvency or similar
proceedings.





Tax
Sharing Agreement




For more
information regarding amounts owed by the Company to Hallmark Cards under the
Tax Sharing Agreement and a Tax Note, see Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operation – Bank Credit Facility
and Hallmark Notes and – Tax Sharing Agreement. See “Recapitalization” in Item
1, Business and Note 1 to the Consolidated Financial Statements.








Certain
Business Relationships and Conflicts of Interest




Hallmark
Entertainment Investments controls a majority of our outstanding shares of Class
A Common Stock and all of our outstanding shares of Class B common stock,
representing approximately 94.5% of the voting power on all matters submitted to
our stockholders. Hallmark Entertainment Investments’ control could discourage
others from initiating potential merger, takeover or other change of control
transactions that may otherwise be beneficial to our businesses or holders of
Class A common stock.  As a result, the market price of our Class A
common stock or our business could suffer.





Hallmark
Entertainment Investments’ control relationship with us also could give rise to
conflicts of interest, including:




·
            conflicts
      between Hallmark Entertainment Investments, as our controlling
      stockholder, and our other stockholders, whose interests may differ with
      respect to, among other things, our strategic direction or significant
      corporate transactions;




·
            conflicts
      related to corporate opportunities that could be pursued by us, on the one
      hand, or by Hallmark Entertainment Investments or its other affiliates, on
      the other hand; or




·
            conflicts
      related to existing or new contractual relationships between us, on the
      one hand, and Hallmark Entertainment Investments and its affiliates, on
      the other hand.




In
addition, our directors, who are also officers or directors of Hallmark
Entertainment Investments or its affiliates, will have fiduciary duties,
including duties of loyalty, to both companies and may have conflicts of
interest with respect to matters potentially involving or affecting
us.




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




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




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




·
            a
      corporate opportunity offered to any person who is one of our directors
      but not one 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 in his or her capacity as one of our directors, and
      otherwise will belong to Hallmark Cards;
and




·
            a
      corporate opportunity offered to any person who is one of our officers and
      an officer of Hallmark Cards will belong to us if that opportunity is
      expressly offered to that person in his or her capacity as one of our
      officers, and otherwise will belong to Hallmark
  Cards.




For
purposes of the policy:




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




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




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




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




Other
than as disclosed above and under “— Stockholders Agreement and Registration
Rights,” there are no specific policies in place with respect to any conflicts
that may arise.  We expect conflicts to be resolved on a case-by-case
basis, and in a manner consistent with applicable law.




Transactions
with JP Morgan Chase Bank





We have a
revolving credit facility with JP Morgan Chase Bank, N.A., providing a secured
line of credit of up to a total of $30.0 million due August 31,
2010.  This amount, which is a reduction from $45.0 million, and the
current maturity date of August 31, 2010 result from an amendment in March
2010.  For information regarding the terms of the bank credit
agreement, please see Item 7 Management’s Discussion and Analysis of Financial
Condition and Results of Operation under “Bank Credit Facility and Hallmark
Notes.” We paid to JPMorgan Chase Bank under the credit facility $519,000 in
interest and fees for the year ended December 31, 2009.





JP Morgan
Chase Bank was our related party as a result of an executive officer being on
the Board of the Company. This director resigned from the Company’s board in
August 2006. The JP Morgan Chase Bank may also be considered a related party
because of the interest of JP Morgan in Hallmark Entertainment
Investments.





ITEM
14.  Principal Accountant Fees and Services





The
information required by this Item 14 is set forth in the Proxy Statement under
the heading “Principal Accountant Fees and Services,” and is incorporated by
reference herein.








PART
IV





ITEM
15. Exhibits, Financial Statement Schedules








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





(1)
            Consolidated
      Financial Statements





Reports
of KPMG LLP, Independent Registered Public Accounting Firm


Consolidated
Balance Sheets as of December 31, 2008 and 2009


Consolidated
Statements of Operations for the


Years
Ended December 31, 2007, 2008, and 2009


Consolidated
Statements of Stockholders' Deficit for the Years


Ended
December 31, 2007, 2008, and 2009


Consolidated
Statements of Cash Flows for the Years Ended December 31,


2007,
2008, and 2009


Notes to
Consolidated Financial Statements





(2)           Exhibits











Exhibit
      Number
            Exhibit
      Title2.1
            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).2.3
            Recapitalization
      Term Sheet dated February 9, 2010 between the Special Committee of the
      Board of Directors of the Company and H C Crown Corp. (previously
      filed as Exhibit 99.1 to our Current Report on Form 8-K filed on February
      10, 2010 and incorporated herein by reference).2.4
            Agreement
      and Plan of Merger of Crown Media Holdings, Inc. and Hallmark
      Entertainment Investments Co., dated as of February 26, 2010 (previously
      filed as Exhibit 2.1 to our Current Report on Form 8-K filed on March
      1, 2010 and incorporated herein by reference).2.5
            Agreement
      and Plan of Merger of Crown Media Holdings, Inc. and Hallmark
      Entertainment Holdings, Inc., dated as of February 26, 2010 (previously
      filed as Exhibit 2.2 to our Current Report on Form 8-K filed on March
      1, 2010 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
            Certificate
      of 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 (Commission File No. 000-30700 and Film No. 1693331) and
      incorporated herein by reference).3.3
            Amended
      and Restated By-Laws (previously filed as Exhibit 3.2 to our Registration
      Statement on Form S-1/A (Amendment No. 3), Commission File No. 333-95573,
      and incorporated herein by reference).3.4
            Proposed
      form of Second Amended and Restated Certificate of Incorporation of Crown
      Media Holdings (previously filed as Exhibit 3.1 to our Current Report
      on Form 8-K filed on March 1, 2010 and incorporated herein by
      reference).3.5
            Proposed
      form of Certificate of Designation, Powers, Preferences, Qualifications,
      Limitations, Restrictions and Relative Rights of Series A Convertible
      Preferred Stock of Crown Media Holdings, Inc. (previously filed as
      Exhibit 3.2 to our Current Report on Form 8-K filed on March 1, 2010
      and incorporated herein by reference).3.6
            Proposed
      form of Third Amended and Restated Certificate of Incorporation of Crown
      Media Holdings, Inc. (previously filed as Exhibit 3.3 to our Current
      Report on Form 8-K filed on March 1, 2010 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 30, 2001
      (previously filed as Exhibit 10.6 to our Quarterly Report on Form 10-Q
      filed on November 13, 2001 (Commission File No. 000-30700 and Film No. 1784987) 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 (Commission File No. 000-30700 and Film No. 02594577) and
      incorporated herein by reference).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 (Commission File No. 000-30700 and Film No. 03626484)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 (Commission File
      No. 000-30700 and Film No. 03626484)
      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 (Commission File No. 000-30700
      and Film No. 03626484) and incorporated herein by
    reference).10.6
            Consent
      and Waiver to Second Amended 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 (Commission
      File No. 000-30700 and Film No.
      03626484) and incorporated herein by reference).10.7
            Consent
      and Waiver to Second Amended 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 (Commission File
      No. 000-30700 and Film No. 03626484)
      and incorporated herein by reference).10.8
            Consent
      and Waiver to Second Amended 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 (Commission
      File No. 000-30700 and Film No.
      03626484) 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 (Commission File No. 000-30700 and Film No. 03626484) 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
      (Commission File No. 000-30700 and
      Film No. 1751583) 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 (Commission File No. 000-30700 and Film No. 1816385) 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 (Commission File No. 000-30700 and Film No. 02594577) and
      incorporated herein by reference).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 (Commission File No. 000-30700 and Film No. 02652502) 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 (Commission File No. 000-30700 and Film No. 02652502) 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 (Commission File No. 000-30700 and Film No. 03626484) 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 (Commission File No. 000-30700 and Film No. 03825587) 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 2, 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
            Amendment
      No. 9, dated as of March 21, 2006 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 JP Morgan Chase Bank as Administrative Agent
      and Issuing Bank. (previously filed as Exhibit 10.99 to our
      Annual Report on Form 10-K, filed March 29, 2006, and incorporated herein
      by reference.)10.20
            Amendment
      No. 10, dated as of April 28, 2006 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 JP Morgan Chase Bank as Administrative Agent and as
      Issuing Bank. (previously filed as Exhibit 10.5 to our Quarterly
      Report on Form 10-Q, filed May 10, 2006, and incorporated herein by
      reference.)10.21
            Amendment
      No. 11, dated as of December 8, 2006 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 JP Morgan Chase Bank as Administrative Agent and as
      Issuing Bank (previously filed as Exhibit 10.95 to our Annual Report
      on Form 10-K, filed March 8, 2007, and incorporated herein by
      reference).10.22
            Amendment
      No. 12, dated as of March 2, 2007, 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 JP Morgan Chase Bank as Administrative Agent and as
      Issuing Bank (previously filed as Exhibit 10.96 to our Annual Report
      on Form 10-K, filed March 8, 2007, and incorporated herein by
      reference).10.23
            Amendment
      No. 13, dated as of July 27, 2007, 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 JP Morgan Chase Bank as Administrative Agent and as
      Issuing Bank (previously filed as Exhibit 10.4 to our Quarterly
      Report on Form 10-Q, filed August 8, 2007, and incorporated herein by
      reference).10.24
            Amendment
      No. 14, dated as of March 10, 2008, 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, and JP Morgan Chase Bank
      as Administrative Agent and as Issuing Bank
      (previously filed as Exhibit 10.24 to our Annual Report on Form 10-K,
      filed March 12, 2008, and incorporated herein by
    reference).10.25
            Amendment
      No. 15, dated as of March 2, 2009, 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, and JP Morgan Chase Bank
      as Administrative Agent and as Issuing Bank
      (previously filed as Exhibit 10.25 to our Annual Report on Form 10-K filed
      March 5, 2009, and incorporated herein by reference).10.26
            Amendment
      No. 16, dated as of March 2, 2010, 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, and JP Morgan
      Chase Bank as Administrative Agent and as Issuing Bank.10.27
            Amended
      and Restated Subordination and Support Agreement, dated as of July 27,
      2007, 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 10.5 to our Quarterly Report on Form 10-Q,
      filed August 8, 2007, and incorporated herein by
    reference).10.28
            Guarantee
      Agreement, dated as of March 2, 2009 between Hallmark Cards Incorporated
      and JPMorgan Chase Bank as Administrative Agent (previously filed as
      Exhibit 10.27 to our Annual Report on Form 10-K filed March 5, 2009, and
      incorporated herein by reference).10.29
            Second
      Amended and Restated Program License Agreement, dated as of January 1,
      2005, by and between Hallmark Entertainment Distribution, LLC (now RHI
      Entertainment Distribution, LLC) and Crown Media United States, LLC
      (previously filed as Exhibit 99.1 to our Current Report on Form 8-K, filed
      on October 11, 2005, and incorporated herein by
  reference).10.30
            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 7, 2001 (Commission File
      No. 000-30700 and Film No. 1623520),
      and incorporated herein by reference).10.31
            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 (Commission File No. 000-30700 and Film No. 03626484) and
      incorporated by reference herein).10.32
            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 (Commission File No. 000-30700 and Film No. 03988106) and incorporated
      by reference herein).10.33
            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).10.34
            Trademark
      License Extension Agreement (Hallmark Channel), dated as of August 1,
      2005, by and between Hallmark Licensing, Inc. and Crown Media United
      States, LLC (previously filed as Exhibit 10.3 to our Quarterly Report on
      Form 10-Q filed on November 7, 2005 and incorporated by reference
      herein).10.35
            Trademark
      License Extension Agreement (Hallmark Channel), dated as of April 10,
      2006, by and between Hallmark Licensing, Inc. and Crown Media United
      States, LLC. (previously filed as Exhibit 10.3 to our Quarterly Report on
      Form 10-Q, filed May 10, 2006, and incorporated herein by
      reference.)10.36
            Trademark
      License Extension Agreement (Hallmark Channel), dated as of August 1,
      2007, by and between Hallmark Licensing, Inc. and Crown Media United
      States, LLC (previously filed as Exhibit 10.11 to our Quarterly Report on
      Form 10-Q, filed August 8, 2007, and incorporated herein by
      reference).10.37
            Trademark
      License Extension Agreement (Hallmark Channel), dated as of August 1,
      2007, by and between Hallmark Licensing, Inc. and Crown Media United
      States, LLC (previously filed as Exhibit 10.11 to our Quarterly Report on
      Form 10-Q, filed August 8, 2007, and incorporated herein by
      reference).10.38
            Trademark
      License Agreement (Hallmark Channel), dated as of August 1, 2008, by and
      between Hallmark Licensing, Inc. and Crown Media United States, LLC
      (previously filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q,
      filed August 6, 2008, and incorporated herein by
    reference).10.39
            Trademark
      License Agreement (Hallmark Movie Channel), dated as of January 1, 2004,
      by and between Hallmark Licensing, Inc. and Crown Media United States, LLC
      (previously filed as Exhibit 10.33 to our Annual Report on Form 10-K,
      filed March 12, 2008, and incorporated herein by
    reference).10.40
            Trademark
      License Extension Agreement (Hallmark Movie Channel), dated as of August
      1, 2005, by and between Hallmark Licensing, Inc. and Crown Media United
      States, LLC (previously filed as Exhibit 10.4 to our Quarterly Report on
      Form 10-Q filed on November 7, 2005 and incorporated by reference
      herein).10.41
            Trademark
      License Extension Agreement (Hallmark Movie Channel), dated as of April
      10, 2006, by and between Hallmark Licensing, Inc. and Crown Media United
      States, LLC (previously filed as Exhibit 10.98 to our Annual Report on
      Form 10-K, filed March 8, 2007, and incorporated herein by
      reference).10.42
            Trademark
      License Extension Agreement (Hallmark Movie Channel), dated as of August
      1, 2007, by and between Hallmark Licensing, Inc. and Crown Media United
      States, LLC (previously filed as Exhibit 10.10 to our Quarterly Report on
      Form 10-Q, filed August 8, 2007, and incorporated herein by
      reference).10.43
            Trademark
      License Agreement (Hallmark Movie Channel), dated as of August 1, 2008, by
      and between Hallmark Licensing, Inc. and Crown Media United States, LLC
      (previously filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q,
      filed August 6, 2008, and incorporated herein by
    reference).10.44
            Trademark
      License Extension Agreement (Hallmark Movie Channel) dated August 15, 2009
      by and between Hallmark Licensing Inc. and Crown Media United States, LLC
      (previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q
      filed November 5, 2009, and incorporated herein by
    reference).10.45
            Trademark
      License Extension Agreement (Hallmark Channel) dated August 15, 2009 by
      and between Hallmark Licensing Inc. and Crown Media United States, LLC
      (previously filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q
      filed November 5, 2009, and incorporated herein by
    reference).10.46
            Waiver
      to the Trademark License Extension Agreement (Hallmark Channel and
      Hallmark Movie Channel) dated March 3, 2010, by and between Hallmark
      Licensing Inc. and Crown Media United States, LLC.10.47
            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).10.48
            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 (Commission File No. 000-30700 and Film No. 02594577) and
      incorporated herein by reference).10.49
            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 7, 2001  (Commission File No. 000-30700 and Film No. 1623520) and
      incorporated herein by reference).10.50
            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 (Commission File No. 000-30700 and Film No. 03701984), and
      incorporated herein by reference).10.51
            Settlement
      Agreement dated as of December 1, 2005 between National Interfaith Cable
      Coalition, Inc., VISN Management Corp. and Crown Media Holdings, Inc.
      (previously filed as Exhibit 10.1 to our Current Report on Form 8-K filed
      on December 13, 2005 and incorporated herein by
  reference).10.52
            Modification
      and Termination Agreement, dated as of January 2, 2008, by and among
      National Interfaith Cable Coalition, Inc., VISN Management Corp., Crown
      Media Holdings, Inc. and Crown Media United States, LLC (previously filed
      as Exhibit 10.102 to our Annual Report on Form 10-K, filed March 12, 2008,
      and incorporated herein by reference).10.53
            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
      (Commission File No. 000-30700 and
      Film No. 03626484) and incorporated herein by
  reference).10.54
            Intercompany
      Services Extension Agreement, dated as of January 1, 2006, by and between
      Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously
      filed as Exhibit 10.42 to our Annual Report on Form 10-K filed on March
      29, 2006, and incorporated herein by reference.)10.55
            Intercompany
      Services Extension Agreement, dated as of January 1, 2007, by and between
      Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously
      filed as Exhibit 10.99 to our Annual Report on Form 10-K, filed March 8,
      2007, and incorporated herein by reference).10.56
            Intercompany
      Services Extension Agreement, dated as of January 1, 2008, 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 March 12,
      2008, and incorporated herein by reference).10.57
            Intercompany
      Services Extension Agreement, dated as of January 1, 2009, by and between
      Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously
      filed as Exhibit 10.54 to our Annual Report on Form 10-K filed March 5,
      2009, and incorporated herein by reference).10.58
            Intercompany
      Services Extension Agreement, dated as of January 1, 2010, by and between
      Hallmark Cards, Incorporated and Crown Media Holdings,
  Inc.10.59
            $50,000,000
      Promissory Note, dated July 10, 2001, made by Crown Media, Inc. in favor
      of HC Crown Corporation (previously filed as Exhibit 10.1 to our Quarterly
      Report on Form 10-Q filed on July 31, 2001 (Commission File No. 000-30700 and Film No. 1693331) and
      incorporated herein by reference).10.60
            $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 (Commission File
      No. 000-30700 and Film No. 1816385),
      and incorporated herein by reference).10.61
            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 (Commission
      File No. 000-30700 and Film No. 03825587) and incorporated
      by reference herein).10.62
            10.25%
      Senior Secured 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 (Commission File No. 000-30700 and Film No. 03825587) and incorporated
      by reference herein).10.63
            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).10.64
            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 (Commission File No. 000-30700 and Film No. 02594577) and
      incorporated herein by reference).10.65
            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 (Commission File No. 000-30700 and Film No. 03626484) and
      incorporated by reference herein).10.66
            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 (Commission File No. 000-30700 and Film No. 03846439) and incorporated
      by reference herein).10.67
            Promissory
      Note in the amount of $33,082,019, dated July 27, 2007, issued by Crown
      Media Holdings, Inc. in favor of Hallmark Cards, Incorporated (previously
      filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q, filed August
      8, 2007, and incorporated herein by reference).10.68
            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 (Commission File No. 000-30700 and Film No. 2506612) and
      incorporated herein by reference).10.69
            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 (Commission
      File No. 000-30700 and Film No.
      2506612) and incorporated herein by reference).10.70
            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 (Commission
      File No. 000-30700 and Film No.
      2506612) and incorporated herein by reference).10.71
            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 (Commission File No. 000-30700
      and Film No. 2506612) and incorporated herein by
    reference).10.72*
            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 (Commission File No. 000-30700 and Film No. 1580885), and
      incorporated herein by reference).10.73*
            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).10.74*
            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).10.75*
            Form
      of Crown Media Holdings, Inc. 2005 Restricted Stock Unit Agreement
      (previously filed as Exhibit 10.72 to our Annual Report on Form 10-K,
      filed March 29, 2006, and incorporated herein by
    reference.)10.76*
            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 (Commission File
      No. 000-30700 and Film No. 03701984) and incorporated
      herein by reference).10.77*
            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)10.78*
            Second
      Amendment to Employment Agreement, dated as of December 6, 2004, by and
      between David Kenin and Crown Media Holdings, Inc. (previously filed as
      Exhibit 10.1 to our Current Report on Form 8-K filed on December 8, 2004
      and incorporated herein by reference).10.79*
            Third
      Amendment to Employment Agreement, dated as of June 13, 2007, by and
      between David Kenin and Crown Media Holdings, Inc. (previously filed as
      Exhibit 10.1 to our Current Report on Form 8-K filed on June 26, 2007 and
      incorporated herein by reference).10.80*
            Resignation
      Agreement dated May 19, 2009 between the Company and David Kenin
      (previously filed as Exhibit 10.1 to our Current Report on Form 8-K filed
      on May 21, 2009 and incorporated herein by reference).10.81*
            2008
      Deferred Compensation Plan of Crown Media Holdings, Inc. (previously filed
      as Exhibit 10.77 to our Annual Report on Form 10-K filed March 5, 2009,
      and incorporated herein by reference).10.82
            Technical
      Services Agreement, dated as of April 26, 2005, by and between Crown Media
      United States LLC and Crown Media International LLC (previously filed as
      Exhibit 10.99 to our Annual Report on Form 10-K, filed on May 27, 2005 and
      incorporated herein by reference).10.83
            $132,785,424
      Promissory Note, dated October 1, 2005, made by Crown Media United States,
      LLC in favor of Hallmark Entertainment Distribution, LLC. (previously
      filed as Exhibit 10.97 to our Annual Report on Form 10-K, filed March 29,
      2006, and incorporated herein by reference.)10.84
            Amended
      and Restated  Waiver and Standby Purchase Agreement dated March
      10, 2008 by and between Hallmark Cards Incorporated, HC Crown Corp., Crown
      Media United States, LLC and Crown Media Holdings, Inc. (previously filed
      as Exhibit 10.77 to our Annual Report on Form 10-K, filed March 12, 2008,
      and incorporated herein by reference).10.85
            Amendment
      No. 1 to Amended and Restated  Waiver and Standby Purchase
      Agreement dated March 10, 2008 by and between Hallmark Cards Incorporated,
      HC Crown Corp., Crown Media United States, LLC and Crown Media Holdings,
      Inc. (previously filed as Exhibit 10.1 to our Quarterly Report on Form
      10-Q, filed August 6, 2008, and incorporated herein by
      reference).10.86
            Amendment
      No. 2 to Amended and Restated Waiver and Standby Purchase Agreement
      dated October 30, 2008, by and between Hallmark Cards Incorporated
      and Crown Media Holdings, Inc. (previously filed as Exhibit 10.1 to
      our Quarterly Report on Form 10-Q, filed November 6, 2008, and
      incorporated herein by reference).10.87
            Amendment
      No. 3 to Amended and Restated Waiver and Standby Purchase Agreement
      dated March 2, 2009, by and between Hallmark Cards Incorporated and Crown
      Media Holdings, Inc. (previously filed as Exhibit 10.82 to our Annual
      Report on Form 10-K filed March 5, 2009, and incorporated herein by
      reference).10.88
            Amendment
      4 to Amended and Restated Waiver and Standby Purchase Agreement dated May
      4, 2009, by and between Hallmark Cards Incorporated and Crown Media
      Holdings, Inc. (previously filed as Exhibit 10.1 to our Quarterly Report
      on Form 10-Q filed May 7, 2009, and incorporated herein by
      reference).10.89
            $70,414,087
      Promissory Note, dated March 21, 2006, made by Crown Media Holdings, Inc.
      in favor of Hallmark Entertainment Holdings, Inc. (previously filed as
      Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed May 10, 2006, and
      incorporated herein by reference.)10.90
            Copyright
      Security Agreement, dated July 27, 2007, executed by Crown Media Holdings,
      Inc. and its subsidiaries for the benefit of Hallmark Cards,
      Incorporated  (previously filed as Exhibit 10.6 to our Quarterly
      Report on Form 10-Q, filed August 8, 2007, and incorporated herein by
      reference).10.91
            Security
      and Pledge Agreement, dated July 27, 2007, by and among Crown Media
      Holdings, Inc., its subsidiaries and Hallmark Cards,
      Incorporated  (previously filed as Exhibit 10.7 to our Quarterly
      Report on Form 10-Q, filed August 8, 2007, and incorporated herein by
      reference).10.92
            Letter
      Agreement, dated May 2, 2006, by and between Hallmark Cards, Incorporated
      and Crown Media Holdings, Inc. (previously filed as Exhibit 10.6 to our
      Quarterly Report on Form 10-Q, filed May 10, 2006, and incorporated herein
      by reference.)10.93*
            Employment
      Agreement dated as of May 7, 2009 between the Company and William Abbott
      (previously filed as Exhibit 10.1 to our Current Report on Form 8-K filed
      on May 6, 2009 and incorporated herein by reference).10.94*
            Employment
      Agreement dated August 8, 2006, between Crown Media Holdings, Inc. and
      Charles Stanford. (previously filed as Exhibit 10.10 to our Quarterly
      Report on Form 10-Q, filed August 9, 2006, and incorporated herein by
      reference.)10.95*
            Employment
      Agreement Amendment dated January 29, 2008 between Crown Media Holdings,
      Inc. and Charles Stanford (previously filed as Exhibit 10.85 to our Annual
      Report on Form 10-K, filed March 12, 2008, and incorporated herein by
      reference).10.96*
            Employment
      Agreement dated August 8, 2006, between Crown Media Holdings, Inc. and
      Laura Masse (previously filed as Exhibit 10.11 to our Quarterly Report on
      Form 10-Q, filed August 9, 2006, and incorporated herein by
      reference.)10.97*
            Amendment
      to Employment Agreement, dated as of May 9, 2008, by and between Crown
      Media Holdings, Inc. and Laura Masse (previously filed as Exhibit 10.4 to
      our Quarterly Report on Form 10-Q, filed August 6, 2008, and incorporated
      herein by reference.)10.98*
            Employment
      Agreement dated August 8, 2006, between Crown Media Holdings, Inc. and
      Brian Stewart. (previously filed as Exhibit 10.12 to our Quarterly Report
      on Form 10-Q, filed August 9, 2006, and incorporated herein by
      reference.)10.99*
            Employment
      Agreement Amendment dated November 8, 2006 between Crown Media Holdings,
      Inc. and Brian Stewart. (previously filed as Exhibit 10.5 to our Quarterly
      Report on Form 10-Q, filed November 9, 2006, and incorporated herein by
      reference.)10.100*
            Employment
      Agreement Amendment dated January 29, 2008 between Crown Media Holdings,
      Inc. and Brian Stewart (previously filed as Exhibit 10.89 to our Annual
      Report on Form 10-K, filed March 12, 2008, and incorporated herein by
      reference).10.101*
            Amendment
      to Employment Agreement, dated as of May 30, 2008, by and between Crown
      Media Holdings, Inc. and Janice Arouh (previously filed as Exhibit 10.5 to
      our Quarterly Report on Form 10-Q, filed August 6, 2008, and incorporated
      herein by reference.)10.102
            Purchase
      Agreement, dated as of October 3, 2006, by and among Crown Media Holdings,
      Inc., CM Intermediary, LLC, Crown Media Distribution, LLC and RHI
      Enterprises, LLC. (previously filed as Exhibit 10.1 to our Current Report
      on Form 8-K, filed on October 6, 2006, and incorporated herein by
      reference).10.103
            Amendment
      No. 1 to Purchase Agreement, dated as of December 15, 2006, by and among
      Crown Media Holdings, Inc., CM Intermediary, LLC, Crown Media
      Distribution, LLC and RHI Enterprises, LLC (previously filed as Exhibit
      10.1 to our Current Report on Form 8-K, filed on December 21, 2006, and
      incorporated herein by reference).10.104
            Intercreditor
      Agreement, dated as of October 3, 2006, by and among Hallmark Cards,
      Incorporated, Crown Media Holdings, Inc., CM Intermediary, LLC, Crown
      Media Distribution, LLC and RHI Enterprises, LLC. (previously filed as
      Exhibit 10.2 to our Current Report on Form 8-K, filed on October 6, 2006,
      and incorporated herein by reference).10.105*
            Employment
      Agreement dated October 3, 2006 between Crown Media Holdings, Inc. and
      Henry Schleiff (previously filed as Exhibit 10.1 to our Quarterly Report
      on Form 10-Q, filed November 9, 2006, and incorporated herein by
      reference.)10.106*
            Restricted
      Stock Unit Agreement dated October 3, 2006 between Crown Media Holdings,
      Inc. and Henry Schleiff. (previously filed as Exhibit 10.2 to our
      Quarterly Report on Form 10-Q, filed November 9, 2006, and incorporated
      herein by reference.)10.107*
            Stock
      Appreciation Rights Agreement dated October 3, 2006 between Crown Media
      Holdings, Inc. and Henry Schleiff. (previously filed as Exhibit 10.3 to
      our Quarterly Report on Form 10-Q, filed November 9, 2006, and
      incorporated herein by reference.)10.108*
            First
      Amendment to the Employment Agreement, dated December 16, 2008, by and
      between Crown Media Holdings, Inc. and Henry Schleiff (previously filed as
      Exhibit 10.104 to our Annual Report on Form 10-K filed March 5, 2009, and
      incorporated herein by reference).10.109*
            Resignation
      Agreement dated May 4, 2009 between the Company and Henry Schleiff
      (previously filed as Exhibit 10.2 to our Current Report on Form 8-K filed
      on May 6, 2009 and incorporated herein by reference).10.110*
            Crown
      Media Holdings, Inc. 2007 Annual Advertising Sales Commission
      Plan**  (previously filed as Exhibit 10.2 to our Quarterly
      Report on Form 10-Q, filed August 8, 2007, and incorporated herein by
      reference).10.111*
            Crown
      Media Holdings, Inc. 2008 Annual Advertising Sales Commission
      Plan**  (previously filed as Exhibit 10.7 to our Quarterly
      Report on Form 10-Q, filed August 6, 2008, and incorporated herein by
      reference).10.112
            Television
      License Agreement, dated as of January 1, 2008 between Hallmark Hall
      of Fame Productions, Inc. and the Company.**  (previously
      filed as Exhibit 10.6 to our Quarterly Report on Form 10-Q, filed August
      6, 2008, and incorporated herein by reference).10.113
            Lease
      Agreement, dated September 8, 2008, by and between Paramount
      Group, Inc., 1325 Avenue of the Americas, L.P., and Crown Media
      United States, LLC (previously filed as Exhibit 10.2 to our Quarterly
      Report on Form 10-Q, filed November 6, 2008, and incorporated herein by
      reference).10.114
            Guaranty
      Commitment, dated as of September 2, 2008, by and between Hallmark
      Cards, Incorporated and Crown Media United States, LLC (previously filed
      as Exhibit 10.3 to our Quarterly Report on Form 10-Q, filed November 6,
      2008, and incorporated herein by reference).10.115*
            Employment
      Agreement, dated as of June 15, 2009, by and between Crown Media Holdings,
      Inc. and Edward Georger (previously filed as Exhibit 10.3 to our Quarterly
      Report on Form 10-Q filed November 5, 2009, and incorporated herein by
      reference).10.116*
            Form
      of 2009 Long Term Incentive Compensation Agreement effective as of January
      1, 2009 between the Company and employee (previously filed as Exhibit 10.2
      to our Quarterly Report on Form 10-Q filed on May 7, 2009 and incorporated
      herein by reference).10.117
            Master
      Recapitalization Agreement by and among Hallmark Cards, Incorporated, H C
      Crown Corp., Hallmark Entertainment Holdings, Inc., Crown Media Holdings,
      Inc., Crown Media United States, LLC, and The Subsidiaries of Crown Media
      Holdings, Inc. Listed as Guarantors on the Credit Facility, dated as of
      February 26, 2010 (previously filed as Exhibit 10.1 to our Current
      Report on Form 8-K filed on March 1, 2010 and incorporated herein by
      reference).10.118
            Proposed
      form of Credit Agreement Among Crown Media Holdings, Inc. as Borrower and
      HC Crown Corp., as Lender and Each of the Credit Parties Identified on the
      Signature Pages Hereto (previously filed as Exhibit 10.2 to our
      Current Report on Form 8-K filed on March 1, 2010 and incorporated herein
      by reference).10.119
            Proposed
      form of Stockholders Agreement by and among H C Crown Corp., Hallmark
      Cards, Incorporated and Crown Media Holdings, Inc. (previously filed as
      Exhibit 4.1 to our Current Report on Form 8-K filed on March 1, 2010
      and incorporated herein by reference).10.120
            Proposed
      form of Registration Rights Agreement among H C Crown Corp., any Other
      HEIC Stockholder and Crown Media Holdings, Inc. (previously filed as
      Exhibit 4.2 to our Current Report on Form 8-K filed on March 1, 2010
      and incorporated herein by reference).10.121
            Proposed
      form of Amendment No. 2 to Federal Income Tax Sharing Agreement between
      Hallmark Cards, Incorporated and Crown Media Holdings, Inc. (previously
      filed as Exhibit 10.3 to our Current Report on Form 8-K filed on
      March 1, 2010 and incorporated herein by reference).21.1
            List
      of Subsidiaries.23.2
            Consent
      of Independent Registered Public Accounting Firm31.1
            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 or arrangement.





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








SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





CROWN
MEDIA HOLDINGS, INC.





By:                 /s/
WILLIAM J. ABBOTT


William
J. Abbott


President
and Chief Executive Officer





March 4,
2010





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


Signature
            Title
            Date/s/ WILLIAM J. ABBOTT
            Director
      and Principal
            March
      4, 2010William
      J. Abbott
            Executive
      Officer/s/ BRIAN C. STEWART
            Principal
      Financial and
            March
      4, 2010Brian
      C. Stewart
            Accounting
      Officer/s/ DWIGHT C. ARN
            Director
            March
      4, 2010Dwight
      C. Arn/s/ ROBERT BLOSS
            Director
            March
      4, 2010Robert
      Bloss/s/ WILLIAM CELLA
            Director
            March
      4, 2010William
      Cella/s/ GLENN CURTIS
            Director
            March
      4, 2010Glenn
      Curtis/s/ STEVE DOYAL
            Director
            March
      4, 2010Steve
      Doyal/s/ BRIAN GARDNER
            Director
            March
      4, 2010Brian
      Gardner/s/ HERBERT A. GRANATH
            Director
            March
      4, 2010Herbert
      A. Granath/s/ DONALD J. HALL, JR.
            Director
            March
      4, 2010Donald
      J. Hall, Jr./s/ IRVINE O. HOCKADAY, JR.
            Director
            March
      4, 2010Irvine
      O. Hockaday, Jr./s/ A. DRUE JENNINGS
            Director
            March
      4, 2010A.
      Drue Jennings/s/ PETER A. LUND
            Director
            March
      4, 2010Peter
      A. Lund/s/ BRAD R. MOORE
            Director
            March
      4, 2010Brad
      R. Moore/s/ DEANNE R. STEDEM
            Director
            March
      4, 2010Deanne
      R. Stedem





INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 PageReports
      of Independent Registered Public Accounting FirmConsolidated
      Balance Sheets as of December 31, 2008 and2009Consolidated
      Statements of Operationsfor
      the Years Ended December 31, 2007, 2008 and 2009Consolidated
      Statements of Stockholders' Deficitfor
      the Years Ended December 31, 2007, 2008 and 2009Consolidated
      Statements of Cash Flows for the Years EndedDecember
      31, 2007, 2008 and
      2009Notes
      to Consolidated Financial Statements
 
 
 
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  Report
of Independent Registered Public Accounting Firm
  The Board
of Directors and Stockholders
  Crown
Media Holdings, Inc.:
  We have
audited the accompanying consolidated balance sheets of Crown Media Holdings,
Inc. and subsidiaries (the Company) as of December 31, 2008 and 2009, and the
related consolidated statements of operations, stockholders’ deficit, and cash
flows for each of the years in the three-year period ended December 31, 2009.
These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, 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 statements referred to above present fairly,
in all material respects, the consolidated financial position of Crown Media
Holdings, Inc. and subsidiaries as of December 31, 2008 and 2009, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2009, in conformity with U.S. generally
accepted accounting principles.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in note 1 to the
consolidated financial statements, the Company has significant short-term debt
obligations that raise substantial doubt about its ability to continue as a
going concern. Management’s plans in regard to these matters are also described
in note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Crown Media Holdings, Inc.’s internal control
over financial reporting as of December 31, 2009, based on criteria established
in Internal Control –
Integrated Frameworkissued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated March 4, 2010 expressed
an unqualified opinion on the effectiveness of the Company’s internal control
over financial reporting.
 
 
 
 KPMG
LLP
 Denver,
Colorado
 March 4,
2010
 
  
 Report
of Independent Registered Public Accounting Firm
  The Board
of Directors and Stockholders
  Crown
Media Holdings, Inc.:
  We have
audited Crown Media Holdings, Inc.’s internal control over financial reporting
as of December 31, 2009, based on criteria established in Internal Control – Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Crown Media Holdings, Inc.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying “Management’s Report on Internal Control
over Financial Reporting”. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our
audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
 
 A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 
 In our
opinion, Crown Media Holdings, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control – Integrated
Frameworkissued by COSO.
 
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Crown Media
Holdings, Inc. and subsidiaries as of December 31, 2008 and 2009, and the
related consolidated statements of operations, stockholders’ deficit, and cash
flows for each of the years in the three-year period ended December 31, 2009,
and our report dated March 4, 2010 expressed an unqualified opinion on those
consolidated financial statements.
 
 
 
 KPMG
LLP
 Denver,
Colorado
 March 4,
2010
 
 
 
 
 
 
 
  
  
 
 CROWN
MEDIA HOLDINGS, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 (In
thousands, except par value and number of shares)
 
 
 
 
 As
      of December 31,2008
              
              
              2009ASSETSCash
      and cash
      equivalents
              
              $
              2,714
              
              
              $
              10,456Accounts
      receivable, less allowance for doubtful accounts of$294
      and $476,
      respectively
              
              
              66,510
              
              
              
              68,817Program
      license
      fees
              
              
              105,936
              
              
              
              106,825Prepaid
      and other
      assets
              
              
              11,722
              
              
              
              4,049Total
      current
      assets
              
              
              186,882
              
              
              
              190,147Program
      license
      fees
              
              
              214,207
              
              
              
              178,332Property
      and equipment,
      net
              
              
              15,392
              
              
              
              13,176Goodwill
              
              
              314,033
              
              
              
              314,033Prepaid
      and other
      assets
              
              
              8,831
              
              
              
              2,373Total
      assets
              
              $
              739,345
              
              
              $
              698,061
 
 
 
 
 
 The
accompanying notes are an integral part of these consolidated balance
sheets
  
  CROWN
MEDIA HOLDINGS, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS (Continued)
 (In
thousands, except par value and number of shares)
 
 
 
 
 
 
 As
      of December 31,2008
              
              
              2009LIABILITIES
      AND STOCKHOLDERS’ DEFICITLIABILITIES:Accounts
      payable and accrued liabilities
              
              $
              26,841
              
              
              $
              19,642Audience
      deficiency reserve
      liability
              
              
              11,505
              
              
              
              17,872License
      fees
      payable
              
              
              128,638
              
              
              
              99,494Payables
      to Hallmark Cards
      affiliates
              
              
              14,799
              
              
              
              23,745Credit
      facility and interest
      payable
              
              
              29
              
              
              
              1,002Notes
      and interest payable to Hallmark Cards affiliates
              
              
              3,987
              
              
              
              345,314Company
      obligated mandatorily redeemable preferredinterest
              
              
              -
              
              
              
              22,902Total
      current
      liabilities
              
              
              185,799
              
              
              
              529,971Accrued
      liabilities
              
              
              31,361
              
              
              
              24,484License
      fees
      payable
              
              
              112,451
              
              
              
              82,881Credit
      facility
              
              
              28,570
              
              
              
              -Notes
      payable to Hallmark Cards affiliates
              
              
              340,697
              
              
              
              -Senior
      secured note to HC Crown, including accrued interest
              
              
              686,578
              
              
              
              758,755Company
      obligated mandatorily redeemable preferredinterest
              
              
              20,822
              
              
              
              -Total
      liabilities
              
              
              1,406,278
              
              
              
              1,396,091COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS'
      DEFICIT:Class
      A common stock, $.01 par value; 200,000,000 shares authorized; 74,117,654
      shares issued and outstanding as of December 31, 2008 and 2009,
      respectively
              
              
              741
              
              
              
              741Class
      B common stock, $.01 par value; 120,000,000 sharesauthorized;
      30,670,422 shares issued and outstanding as of December 31, 2008 and 2009,
      respectively
              
              
              307
              
              
              
              307Paid-in
      capital
              
              
              1,465,293
              
              
              
              1,456,788Accumulated
      deficit
              
              
              (2,133,274
              )
              
              
              (2,155,866
              )Total
      stockholders'
      deficit
              
              
              (666,933
              )
              
              
              (698,030
              )Total
      liabilities and stockholders' deficit
              
              $
              739,345
              
              
              $
              698,061
 
 The
accompanying notes are an integral part of these consolidated balance
sheets.
  
  
 CROWN
MEDIA HOLDINGS, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (In
thousands, except per share data)
 
 Years Ended December 31,2007
              
              
              2008
              
              
              2009Revenue:Subscriber
      fees
              
              $
              27,812
              
              
              $
              57,153
              
              
              $
              63,597Advertising
              
              
              205,666
              
              
              
              222,967
              
              
              
              213,770Advertising
      by Hallmark
      Cards
              
              
              508
              
              
              
              429
              
              
              
              775Sublicense
      fees and other
      revenue
              
              
              378
              
              
              
              1,245
              
              
              
              1,422Total
      revenue,
      net
              
              
              234,364
              
              
              
              281,794
              
              
              
              279,564Cost
      of Services:Programming
      costsHallmark
      Cards
      affiliates
              
              
              82
              
              
              
              798
              
              
              
              1,235Non-affiliates
              
              
              164,287
              
              
              
              139,900
              
              
              
              126,293Amortization
      of film
      assets
              
              
              (5,220
              )
              
              
              (745
              )
              
              
              -Impairment
      of film
      assets
              
              
              -
              
              
              
              176
              
              
              
              -Subscriber
      acquisition fee amortization expense
              
              
              30,996
              
              
              
              -
              
              
              
              -Amortization
      of capital
      lease
              
              
              1,158
              
              
              
              1,158
              
              
              
              1,158Contract
      termination
      expense
              
              
              -
              
              
              
              -
              
              
              
              4,718Other
      costs of
      services
              
              
              11,222
              
              
              
              12,492
              
              
              
              14,175Total
      cost of
      services
              
              
              202,525
              
              
              
              153,779
              
              
              
              147,579Selling,
      general and administrative expense
              
              
              61,452
              
              
              
              46,706
              
              
              
              47,069Marketing
      expense
              
              
              19,733
              
              
              
              19,603
              
              
              
              6,551Depreciation
      and amortization expense
              
              
              1,656
              
              
              
              1,932
              
              
              
              1,947Gain
      from sale of film
      assets
              
              
              -
              
              
              
              (101
              )
              
              
              (682
              )(Loss)
      income from operations before interest
              
              
              (51,002
              )
              
              
              59,875
              
              
              
              77,100Interest
      income
              
              
              1,351
              
              
              
              723
              
              
              
              481Interest
      expense
              
              
              (109,495
              )
              
              
              (100,880
              )
              
              
              (101,020
              )Loss
      before discontinued operations
              
              
              (159,146
              )
              
              
              (40,282
              )
              
              
              (23,439
              )Gain
      from sale of discontinued operations, net of tax
              
              
              114
              
              
              
              3,064
              
              
              
              847Net
      loss
              
              $
              (159,032
              )
              
              $
              (37,218
              )
              
              $
              (22,592
              )Weighted
      average number of Class A and Class B sharesoutstanding,
      basic and
      diluted
              
              
              104,038
              
              
              
              104,776
              
              
              
              104,788Loss
      per share before discontinued operations,basic
      and
      diluted
              
              $
              (1.53
              )
              
              $
              (0.39
              )
              
              $
              (0.23
              )Gain
      per share from discontinued operations,basic
      and
      diluted
              
              
              -
              
              
              
              0.03
              
              
              
              0.01Net
      loss per share, basic and
      diluted
              
              $
              (1.53
              )
              
              $
              (0.36
              )
              
              $
              (0.22
              )
 
 The
accompanying notes are an integral part of these consolidated statements of
operations.
  
  
 CROWN
MEDIA HOLDINGS, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' DEFICIT
 (In
thousands)
 
 Class
      A
                Shares
              
              
              Class
      A
                Common
                Stock
              
              
              Class
      B
                Shares
              
              
              Class
      B
                Common
                Stock
              
              
              Paid-in
                Capital
              
              
              Accumulated
                Deficit
              
              
              Total
                Stockholders'
                DeficitBalances,
      December 31, 2006
              
              
              74,118
              
              
              $
              741
              
              
              
              30,670
              
              
              $
              307
              
              
              $
              1,457,032
              
              
              $
              (1,937,024
              )
              
              $
              (478,944
              )Reduction
      of additional paid-in
                capital
      for obligation under tax
                sharing
      agreement
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (25,192
              )
              
              
              —
              
              
              
              (25,192
              )Reclassification
      of NICC Class A
                common
      stock as mandatorily
                redeemable
      common stock
              
              
              (4,357
              )
              
              
              (43
              )
              
              
              —
              
              
              
              —
              
              
              
              (32,722
              )
              
              
              —
              
              
              
              (32,765
              )Contributions
      of additional paid-in
                capital
      under tax sharing
                agreement
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              12,173
              
              
              
              —
              
              
              
              12,173Net
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (159,032
              )
              
              
              (159,032
              )Balances,
      December 31, 2007
              
              
              69,761
              
              
              
              698
              
              
              
              30,670
              
              
              
              307
              
              
              
              1,411,291
              
              
              
              (2,096,056
              )
              
              
              (683,760
              )Reclassification
      of NICC
                mandatorily
      redeemable common
                stock  as
      Class A  common stock
              
              
              4,357
              
              
              
              43
              
              
              
              —
              
              
              
              —
              
              
              
              32,722
              
              
              
              —
              
              
              
              32,765Contributions
      of additional paid-in
                capital
      under tax sharing
                agreement
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              21,280
              
              
              
              —
              
              
              
              21,280Net
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (37,218
              )
              
              
              (37,218
              )Balances,
      December 31, 2008
              
              
              74,118
              
              
              
              741
              
              
              
              30,670
              
              
              
              307
              
              
              
              1,465,293
              
              
              
              (2,133,274
              )
              
              
              (666,933
              )Reduction
      of additional paid-in
                capital
      for obligation under tax
                sharing
      agreement
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (8,505
              )
              
              
              —
              
              
              
              (8,505
              )Net
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (22,592
              )
              
              
              (22,592
              )Balances,
      December 31, 2009
              
              
              74,118
              
              
              $
              741
              
              
              
              30,670
              
              
              $
              307
              
              
              $
              1,456,788
              
              
              $
              (2,155,866
              )
              
              $
              (698,030
              )
 
 The
accompanying notes are an integral part of these consolidated statements of
stockholders’ deficit.
  
  
 CROWN
MEDIA HOLDINGS, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (In
thousands)
 
 Years Ended December 31,2007
              
              
              2008
              
              
              2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (159,032
              )
              
              $
              (37,218
              )
              
              $
              (22,592
              )Adjustments
      to reconcile net loss to net cash provided byoperating
      activities:Gain
      from sale of discontinued operations
              
              
              (114
              )
              
              
              (3,064
              )
              
              
              (847
              )Gain
      from sale of film assets
              
              
              —
              
              
              
              (101
              )
              
              
              (682
              )Depreciation
      and amortization
              
              
              198,209
              
              
              
              145,172
              
              
              
              133,040Accretion
      on company obligated mandatorily redeemablepreferred
      interest
              
              
              2,207
              
              
              
              2,132
              
              
              
              2,080Provision
      for allowance for doubtful accounts
              
              
              166
              
              
              
              75
              
              
              
              1,303Impairment
      of film assets
              
              
              —
              
              
              
              176
              
              
              
              -Loss
      on sale of property and equipment
              
              
              20
              
              
              
              -
              
              
              
              -Stock-based
      compensation
              
              
              6,007
              
              
              
              (89
              )
              
              
              (516
              )Changes
      in operating assets and liabilities:(Increase)
      decrease in accounts receivable
              
              
              (10,817
              )
              
              
              1,944
              
              
              
              (3,610
              )Additions
      to program license fees
              
              
              (116,062
              )
              
              
              (210,123
              )
              
              
              (92,542
              )Deletions
      (additions) to subscriber acquisition fees
              
              
              858
              
              
              
              (2,693
              )
              
              
              (1,000
              )Decrease
      in prepaid and other assets
              
              
              3,761
              
              
              
              2,354
              
              
              
              11,582Increase
      (decrease) in accounts payable, accruedand
      other liabilities
              
              
              16,142
              
              
              
              (18,506
              )
              
              
              (3,355
              )Increase
      in interest payable
              
              
              92,926
              
              
              
              91,296
              
              
              
              72,998Increase
      in license fees payable toHallmark
      Cards affiliates
              
              
              550
              
              
              
              9,321
              
              
              
              538Increase
      in payables to Hallmark Cards affiliates
              
              
              1,753
              
              
              
              1,533
              
              
              
              420(Decrease)
      increase in license fees payables tonon-affiliates
              
              
              (21,962
              )
              
              
              65,869
              
              
              
              (59,251
              )Net
      cash provided by operating activities
              
              
              14,612
              
              
              
              48,078
              
              
              
              37,566CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
              
              
              (1,668
              )
              
              
              (1,868
              )
              
              
              (507
              )Purchases
      of film asset
              
              
              (2,051
              )
              
              
              35
              
              
              
              -Payments
      to buyer of international business
              
              
              (4,104
              )
              
              
              (3,604
              )
              
              
              (936
              )Proceeds
      from disposition of property and equipment
              
              
              20
              
              
              
              -
              
              
              
              -Net
      cash used in investing activities
              
              
              (7,803
              )
              
              
              (5,437
              )
              
              
              (1,443
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Borrowings
      under the credit
      facility
              
              
              18,145
              
              
              
              30,543
              
              
              
              18,062Payments
      on the credit
      facility
              
              
              (36,273
              )
              
              
              (71,478
              )
              
              
              (45,633
              )Payment
      on note payable to Hallmark Cards
              
              
              —
              
              
              
              (228
              )
              
              
              -Principal
      payments on capital lease obligations
              
              
              (672
              )
              
              
              (738
              )
              
              
              (810
              )Net
      cash used in financing activities
              
              
              (18,800
              )
              
              
              (41,901
              )
              
              
              (28,381
              )Net
      (decrease) increase in cash and cash equivalents
              
              
              (11,991
              )
              
              
              740
              
              
              
              7,742Cash
      and cash equivalents, beginning of year
              
              
              13,965
              
              
              
              1,974
              
              
              
              2,714Cash
      and cash equivalents, end of
      year
              
              $
              1,974
              
              
              $
              2,714
              
              
              $
              10,456
 
 The
accompanying notes are an integral part of these consolidated statements of cash
flows.
 
  
  CROWN
MEDIA HOLDINGS, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
 (In
thousands)
 
 
 
 Years Ended December 31,2007
              
              
              2008
              
              
              2009Supplemental
      disclosure of cash and non-cash activities:Interest
      paid
              
              $
              9,076
              
              
              $
              4,800
              
              
              $
              22,537Tax
      sharing payment from Hallmark Cards applied to note
      payable to Hallmark Cards affiliate
              
              $
              12,172
              
              
              $
              21,280
              
              
              $
              —Reduction
      of additional paid-in capital for obligation undertax
      sharing
      agreement
              
              $
              25,192
              
              
              $
              —
              
              
              $
              8,505Reclassification
      of common stock and paid-in capital toRedeemable
      Common
      Stock
              
              $
              32,765
              
              
              $
              —
              
              
              $
              —Reclassification
      of Redeemable Common Stock tocommon
      stock and paid-in
      capital
              
              $
              —
              
              
              $
              32,765
              
              
              $
              —Interest
      payable converted to principal on notes payable toHallmark
      Cards affiliate
              
              $
              18,778
              
              
              $
              47,490
              
              
              $
              —Disposal
      of film assetAccounts
      receivable
              
              $
              —
              
              
              $
              74
              
              
              $
              —Program
      license fee –
      non-affiliate
              
              $
              —
              
              
              $
              1,110
              
              
              $
              —Film
      asset,
      net
              
              $
              —
              
              
              $
              1,507
              
              
              $
              —Accrued
      liabilities
              
              $
              —
              
              
              $
              573
              
              
              $
              —
 
 The
accompanying notes are an integral part of these consolidated statements of cash
flows.
 
 
  
  CROWN
MEDIA HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 For
the Years Ended December 31, 2007, 2008 and 2009
 
 1.
Business and Organization
 
 Organization
 
 Crown
Media Holdings, Inc. (“Crown Media Holdings” or the “Company”), through its
wholly-owned subsidiary, Crown Media United States, LLC (“Crown Media United
States”), owns and operates pay television channels (collectively the “Channels”
or the “channels”) dedicated to high quality, entertainment programming for
adults and families, in the United States. Significant investors in Crown Media
Holdings include Hallmark Entertainment Investments Co. ("Hallmark Entertainment
Investments"), a subsidiary of Hallmark Cards, Incorporated ("Hallmark Cards"),
the National Interfaith Cable Coalition, Inc. ("NICC"), the DIRECTV Group, Inc.
and, indirectly through their investments in Hallmark Entertainment Investments,
Liberty Media Corporation ("Liberty Media") and J.P. Morgan Partners (BHCA), L.
P. ("J.P. Morgan").
 
 The
Company’s continuing operations are currently organized into one operating
segment, the channels.
 
 Recent
Developments
  Recapitalization
of the Company
  In the
second quarter of 2009, the Company’s Board of Directors formed a Special
Committee of three independent directors to review and consider a May 28, 2009
proposal from H C Crown Corp. (“HCC”) regarding a recapitalization of the
amounts owed by the Company to HCC and its affiliates.  HCC is a
wholly-owned subsidiary of Hallmark Cards.  On February 9, 2010, the
Special Committee of the Board and HCC approved and executed a Recapitalization
Term Sheet, representing non-binding terms of recapitalization transactions for
the Company.  On February 26, 2010, the Company entered into the
Master Recapitalization Agreement with Hallmark Cards, HCC and related entities
that provides for the recapitalization transactions and the agreements described
below (the “Recapitalization”).  The summary of the terms of the
Recapitalization transactions is qualified entirely by reference to the
agreements to which each summary description relates, each of which we have
filed with the Securities and Exchange Commission (the “SEC”).
  The
Recapitalization transactions include, among other things, $315.0 million
principal amount of the HCC Debt (as defined below) being restructured into new
debt instruments, $185.0 million principal amount of the HCC Debt being
converted into convertible preferred stock of the Company, Class B Common Stock
being converted into Class A Common Stock with Class A Common Stock becoming the
only authorized and outstanding common stock of the Company (the “Class A Common
Stock”), and the balance of the HCC Debt being converted into shares of Class A
Common Stock.  Upon execution of the Master Recapitalization
Agreement, the automatic termination of the waiver under the existing Amended
and Restated Waiver and Standby Purchase Agreement (the “Waiver Agreement”) with
Hallmark Cards and HCC was extended until August 31, 2010; the Waiver Agreement
defers payment dates on HCC Debt (excluding accounts payable).
  Other
aspects of the Recapitalization concern a Credit Agreement for the new debt, an
amendment to the Tax Sharing Agreement with Hallmark Cards, a registration
rights agreement, mergers of two intermediate holding companies with the
Company, efforts to extend or replace the Company’s revolving line of credit,
Hallmark Cards’ willingness to guarantee $30.0 million of a revolving line of
credit, a standstill agreement of Hallmark entities pursuant to which such
entities agree not to acquire, through December 31, 2013, additional shares of
Class A Common Stock of the Company, subject to certain exceptions, and agree to
certain restrictions on their ability to sell or transfer shares of Class A
Common Stock of the Company until December 31, 2013 and, subject to lesser
restrictions, until December 31, 2020.
  Each of
the Company (subject to approval by the Special Committee) and HCC has the right
to terminate the Master Recapitalization Agreement at any time after the later
of (x) June 30, 2010 and (y) 45 days following receipt of notice that the
information statement filed by the Company will not be reviewed by the SEC or
that the SEC staff has no further comments thereon, if the Recapitalization has
not been consummated prior to that date.  Even if there were such a
termination, the Waiver Agreement will continue to provide that the automatic
termination date of the waiver will extend to August 31, 2010.  The
closing of the Recapitalization is subject to a number of conditions, including,
among other things, (a) representations and warranties of the Company being
accurate, (b) obtaining a one-year revolving credit agreement mentioned below,
(c) there being no judgment or order which prohibits the consummation of the
Recapitalization and (d) Hallmark Cards not having delivered a written
notice to the Company certifying that Hallmark Cards in its sole discretion (but
only after consultation with outside legal counsel) shall have determined that
the status of any pending or threatened litigation or regulatory proceeding
involving the Company or its subsidiaries in connection with the
Recapitalization is unsatisfactory to Hallmark Cards.  See Note 16 for
information regarding a pending lawsuit on the Recapitalization in which the
plaintiff objects to the Recapitalization.
  From the
date of the Master Recapitalization Agreement to the Closing Date, the Company
will be subject to various affirmative covenants (including covenants to operate
in the ordinary course of business and to keep available the services of its
officers and employees and preserve the present relationships with persons doing
business with it) as well as various negative covenants (including, among
others, with respect to sales, leases or transfers outside the ordinary course
of business and acquisitions of material assets other than in accordance with
past practices).
  If the
Recapitalization is consummated, the Hallmark parties will own, excluding the
shares of Class A Common Stock that would be received upon conversion of the
preferred stock, at least 90.1% of the sum of the outstanding common stock of
the Company and shares subject to outstanding options (the outstanding options
are for 87,238 shares on the date hereof).  Certain aspects of the
Recapitalization require stockholder approval.  Hallmark Entertainment
Holdings, Inc. (“HEH”) and certain Hallmark Cards affiliates as direct or
indirect owners of a more than a majority of the Company’s voting stock have
stated in the Master Recapitalization Agreement their written consents as
stockholders to these matters in lieu of holding a meeting of the Company’s
stockholders.  No vote of other stockholders will be requested or
required.  The closing of the Recapitalization cannot occur until 20
calendar days after an information statement required by regulations of the SEC
is sent to the stockholders of the Company, or if such information statement is
furnished by sending a Notice of Internet Availability, until 40 calendar days
after such notice is sent to the stockholders of the Company.  The
Master Recapitalization Agreement requires that the Company use best efforts to
prepare and file the information statement with the SEC as promptly as is
reasonably practicable (but not later than March 20, 2010).
  
 General
  In the
Recapitalization:
  ·
              $315.0
      million principal amount of the HCC Debt will be restructured into new
      debt instruments on the terms summarized below (the “New Debt”), $185.0
      million principal amount of the HCC Debt will be converted into an equal
      amount of convertible preferred stock of the Company on the terms
      summarized below (the “Convertible Preferred Stock”), and the balance of
      the HCC Debt as of the closing of the Recapitalization (the “Closing
      Date”) will be converted into shares of Class A Common Stock at the
      Conversion Price (as described below). As a result of the
      Recapitalization, immediately following the closing of the
      Recapitalization transactions, all of the HCC Debt, except to the extent
      converted and continued as New Debt, will be extinguished and
      discharged.
  o
              “HCC
      Debt” means (i) the aggregate principal amount of all indebtedness owed to
      Hallmark Cards, HCC and their controlled affiliates, including accrued and
      unpaid interest thereon through the Closing Date, but excluding accrued
      but unpaid interest with respect to the 2001 Note, the 2005 Note and the
      2006 Note; (b) all accounts payable and open intercompany accounts of the
      Company and its subsidiaries owed to HCC and Hallmark Cards and their
      controlled affiliates (other than the Company and its subsidiaries); and
      (c) any amounts due to Hallmark Cards or its affiliates under the Tax
      Sharing Agreement (as defined below) through December 31, 2009; provided
      that for the avoidance of doubt the following shall not constitute HCC
      Debt:  (i) Reimbursement Obligations (as defined in the Master
      Recapitalization Agreement), (ii) Ordinary Course of Business Obligations
      (as defined in the Master Recapitalization Agreement), and (iii) any
      amounts due to Hallmark Cards or its affiliates under the Tax Sharing
      Agreement accruing on or after January 1, 2010.  “2001 Note”
      means the Promissory Note, dated as of December 14, 2001, of the Company
      in the original principal amount of $75.0 million payable to HCC; “2005
      Note” means the Promissory Note, dated as of October 1, 2005, of a
      wholly-owned subsidiary of the Company in the original principal amount of
      $132,785,424 payable to HCC; and “2006 Note” means the Promissory Note,
      dated as of March 21, 2006, of the Company in the original principal
      amount of $70,414,087.87 payable to
HCC.
  o
              “Conversion
      Price” means the amount equal to (x) the quantity of (i) the total HCC
      Debt as of the Date of Determination, less (ii) $500 million, divided by
      (y) the Conversion Price Shares.  “Conversion Price Shares”
      means a notional number of shares of Class A Common Stock which, when
      combined with the number of shares of Class A Common Stock directly or
      indirectly owned by Hallmark Cards as of the Date of Determination (for
      purposes of such calculation (x) including with respect to shares of Class
      A Common Stock owned directly by Hallmark Entertainment Investments Co.
      (“HEIC”) only HEH’s pro rata portion of the Class A Common Stock owned by
      HEIC, and (y) excluding the shares of Class A Common Stock that will be
      receivable by HCC upon conversion of the Convertible Preferred Stock),
      will equal 90.1% of the sum of (i) all outstanding shares of Class A
      Common Stock on the Date of Determination prior to the Closing Date, (ii)
      the Conversion Price Shares and (iii) all shares potentially issuable upon
      exercise of all outstanding options as of the Date of
      Determination.
  “Date of
Determination” means the Closing Date, provided that if the Closing Date occurs
on or after March 31, 2010, the “Date of Determination” will be deemed to be
March 31, 2010.
  ·
              The
      terms of the New Debt as set forth in the Credit Agreement will include
      without limitation the following:
  o
              Maturity:  December
      31, 2013.
  o
              Tranches:
  §
              Term
      A Loan of $200 million will be cash-pay in terms of interest and will bear
      interest at the rate of 9.5% per annum through December 31, 2011,
      increasing to 12% on and after January 1, 2012 through December 31,
      2013.
  §
              Term
      B Loan of $115 million will be payable-in-kind, by adding interest to the
      principal (“PIK”), through December 31, 2010 and will become cash-pay for
      the quarterly period beginning on January 1, 2011 and for all quarterly
      periods thereafter. The interest rate will be 11.5% through December 31,
      2011, increasing to 14% on and after January 1, 2012 and continuing
      through December 31, 2013.
  o
              PIK
      Toggle: The Company will have the option to PIK up to three quarterly cash
      payments in the aggregate for the Term A Loan and the Term B
      Loan.  For the avoidance of doubt, contractual PIK payments
      under the Term B Loan will not reduce the number of optional PIK payments
      available to the Company, and if the Company opts to PIK both the Term A
      Loan and the Term B Loan cash payments in a single quarter then that will
      count as two of the Company’s three quarterly PIK
  options.
  o
              Prepayment:
      The New Debt will be pre-payable at any time at par plus accrued
      interest.
  o
              Mandatory
      Prepayments: 100% of net cash proceeds from asset sales or other
      dispositions, except to the extent such net cash proceeds are reinvested
      in productive assets of a kind then used or usable in the business of the
      Company or its subsidiaries within 180 days of the sale or other
      disposition; 100% of net cash proceeds from equity issuances; 100% of net
      cash proceeds from debt issuances (exclusive of the Revolver as described
      below); 75% of Excess Cash Flow (as defined in the New Debt agreements);
      and upon the sale of assets in advance of a condemnation proceeding, or
      following the occurrence of a casualty or condemnation for which the
      Company or its subsidiaries have received proceeds, after such proceeds
      have been used to replace the subject assets.  Prepayments must
      be applied in the following order (i) first to PIK interest on the Term A
      Loan (ii) then to principal on the Term A Loan (iii) then to PIK interest
      on the Term B Loan, and (iv) finally to principal on the Term B
      Loan.
  o
              Change
      in Control:  The principal and interest on the New Debt will
      become immediately due and payable upon a change in control (as defined in
      the Credit Agreement) arising from (i) a Premium Transaction (as described
      below) or (ii) a transaction approved by a special committee of the
      Company's Board of Directors.
  o
              Collateral:  An
      existing lien on substantially all of the Company’s assets will be
      modified so it secures obligations under the Credit
      Agreement.  It is contemplated that this security interest will
      be subordinate to the lender under the bank revolving credit
      facility.
  o
              NICC
      Reserve Account:  The Company is required to redeem the preferred
      interest held by a wholly-owned subsidiary of National Interfaith Cable
      Coalition (“NICC”) in Crown Media United States for $25.0 million by
      December 31, 2010.  Prior to closing of the Credit Agreement, the
      Company will establish with a financial institution a NICC Reserve Account
      in the Company's name and deposit in that account amounts which the
      Company chooses as a sinking fund for the mandatory redemption of that
      preferred interest.  The funds in the NICC Reserve Account are to be
      used to make any scheduled payments on the NICC preferred interest and at
      no time is the amount to exceed $25.0
million.
  o
              Covenants:  Negative
      covenants include limitations on debt incurrence; dividends; liens;
      capital expenditures; investments; restricted payments; sale/leaseback
      transactions; creation of subsidiaries; changes in business conducted;
      execution or amendment of material agreements in such a way as could be
      reasonably be expected to be materially disadvantageous to the Hallmark
      lenders; transactions with affiliates; and dispositions of
      property.
  
 Financial
covenants include:   The Company will not permit its Cash
Interest Coverage Ratio as the end of any fiscal quarter to be less than
2.0:1.0.
  “Cash
Interest Coverage Ratio” is defined as the ratio of (a) EBITDA to (b) the sum of
the Term A Loan and the Term B Loan cash interest expense (excluding PIK
interest), in each case for a Measurement Period of  four consecutive
fiscal quarters ending on the date of determination, adjusted pro rata for the
three full quarters following the Closing Date.
  “EBITDA”
means for any period (x) Consolidated Net Income plus (y) to the extent
Consolidated Net Income was reduced by such items: (i) provision for income
taxes during such period; (ii) interest expense deducted in computing
Consolidated Net Income; (iii) total depreciation expense and total amortization
expense (other than amortization of capitalized film costs); (iv) any
extraordinary, unusual or non-recurring expenses or losses, whether or not
included as a separate item in the statement of such Consolidated Net Income for
such period (including, but not limited to losses on sales of assets outside of
the ordinary course of business, impairment of assets, restructuring charges,
transactions costs of the Recapitalization payable by the Company and write-offs
of deferred costs for such period); (v) any other non-cash charges (other than
write-offs or write-downs during such period of inventory, accounts receivable
or any other current assets or liabilities in the ordinary course of business);
minus (z)(i) any extraordinary, unusual or non-recurring income or gains
(including, whether or not otherwise included as a separate item in the
statement of such Consolidated Net Income for such period, gains on sale of
assets outside of the ordinary course of business) for such period and (ii) any
other non-cash income items increasing Consolidated Net Income for such period,
all as determined for such period in conformity with GAAP.
  The
credit agreement for the Term A Loan and Term B Loan includes cross defaults if
there is a default by the Company on any indebtedness for borrowed money and
similar obligations in excess of $1,000,000 or if there is a failure to pay the
redemption amount of $25.0 million on the preferred interest held by the NICC
subsidiary in Crown Media United States or if there is demand on the Hallmark
guarantee on the Revolver.
  ·
              The
      terms of the Convertible Preferred Stock will include without limitation
      the following:
  o
              Liquidation
      preference:  In the event of any liquidation or winding up of
      the Company, the holders of the Convertible Preferred Stock will be
      entitled to receive, in preference to the holders of the common stock of
      the Company, an amount equal to the greater of (x) $1,000 per share plus
      accrued but unpaid dividends thereon, or (y) that amount that would be
      received by such holders on an “as converted” basis (the “Liquidation
      Preference”).  A consolidation, merger, reorganization or other
      form of acquisition of the Company or a sale of all or substantially all
      of its assets will be deemed to be a liquidation or winding up for
      purposes of the liquidation
preference.
  o
              Dividends:
      No dividends will accrue or be payable from the date of issue of the
      Convertible Preferred Stock through December 31, 2010; cumulative PIK
      dividends will accrue from and after January 1, 2011 through December 31,
      2011 at a rate per annum of 14%; cumulative PIK dividends will accrue from
      and after January 1, 2012 through December 31, 2014 at a rate per annum of
      16%; and cumulative cash-pay dividends will accrue for all periods
      thereafter at a rate per annum of 16%, in each case payable solely out of
      lawfully available surplus.  The Convertible Preferred Stock
      will participate with the common stock of the Company as to dividends on
      an “as converted” basis.  The Company may elect to pay
      accumulated PIK dividends in cash at any time, subject to lawfully
      available surplus.
  o
              Optional
      Conversion:  At the option of the holder, each share of
      Convertible Preferred Stock becomes and remains convertible at the earlier
      of December 31, 2013, or upon a payment or refinancing by the Company
      of all or substantially all of the New Debt, into such number of shares of
      common stock of the Company as is determined by dividing the Liquidation
      Preference of $1,000 plus accrued and unpaid dividends with respect to
      such shares of  Convertible Preferred Stock by the conversion
      price, with anti-dilution protection, including, among other things, an
      adjustment for certain issuances of common stock of the Company without
      consideration or for a consideration per share less than the then
      Conversion Price.
  o
              Redemption:  The
      Company must redeem (to the extent funds are lawfully available) the
      Convertible Preferred Stock when and as the Company receives, upon a
      refinancing of the New Debt, net proceeds from such refinancing in excess
      of the aggregate outstanding principal and interest amounts of New Debt
      (“Excess Refinancing Proceeds”).  The Company may voluntarily
      redeem the Convertible Preferred Stock at the Liquidation Preference at
      any time upon 10-days written
notice.
  o
              Voting:  The
      Convertible Preferred Stock will vote together with the common stock of
      the Company on an “as-converted” basis.  In addition, the
      consent of holders of more than 50% of the Convertible Preferred Stock,
      voting as a separate class, will be required for the Company to do any of
      the following, among other things:  (i) Authorize or sell any
      equity securities pari
      passu or senior in right of liquidation to the Preferred Stock;
      (ii) except for certain indebtedness permitted by the Credit Agreement,
      authorize or issue any debt security unless the debt security has received
      the prior approval of the Board of Directors, or amend the terms of any
      agreement regarding material indebtedness of the Company unless the
      amendment has been approved by the Board of Directors; (iii) repurchase or
      redeem equity securities (other than from an employee following
      termination pursuant to an arrangement or agreement), or declare or pay
      any dividend on the common stock of the Company; (iv) sell, merge,
      recapitalize, reorganize, liquidate or dissolve the Company; (v) make any
      acquisitions greater than $5,000,000; (vi) amend organizational documents
      or enter into an agreement that adversely affects or alters the rights,
      preferences or privileges of the Convertible Preferred Stock; and (vii)
      issue any additional shares of common stock of the Company (other than
      pursuant to options outstanding on the Closing Date) or options or rights
      to acquire common stock of the
Company.
  Tax
Sharing Agreement
  The
existing Federal Income Tax Sharing Agreement between Hallmark Cards and the
Company will be amended effective as of January 1, 2010 (as amended, the “Tax
Sharing Agreement”).  The amendment will provide, among other things,
that:
  o
              Hallmark
      Cards will not pay any Crown Tax Benefits (defined in the Tax Sharing
      Agreement) in cash and instead will carry forward any such amounts to
      offset future Crown Tax Liability (defined in the Tax Sharing
      Agreement);
  o
              the
      Company will be allowed to deduct both cash-pay and PIK interest due to
      Hallmark Cards in calculating tax-sharing
  payments;
  o
              the
      conversion of the HCC Debt pursuant to the Recapitalization will not be
      deemed the payment of interest expense to Hallmark
  Cards;
  o
              tax
      attributable to the cancellation of indebtedness income will be excluded
      from the calculation of tax sharing payments;
  and
  o
              any
      amounts related to taxes owed to Hallmark Cards prior to December 31,
      2009, will be included in the HCC Debt, which will be converted into Class
      A Common Stock.
  The first
payment by the Company pursuant to the Tax Sharing Agreement will occur after
the first full quarter following the Closing Date and will be made in respect of
the period commencing from January 1, 2010 through the last day of the first
full quarter following the Closing Date.
  
 Registration
Rights Agreement
  The
Company and HCC will enter into a Registration Rights Agreement providing for
three demand registration rights, three demand resale registration rights and
unlimited piggyback registration rights.  The registration rights
concern, among other things, Class A Common Stock issued in the
Recapitalization, Class A Common Stock issuable upon the conversion of the
Convertible Preferred Stock, and Class A Common Stock acquired pursuant to
subscription rights of HCC described below.
  Mergers
and Amendments to Certificate of Incorporation
  Two
intermediate holding companies (HEIC and HEH) will be merged with and into the
Company, and the stockholders of those companies will receive their pro rata
direct ownership of Class A Common Stock in connection therewith (the
“Mergers”).  The Company’s stockholders will receive no consideration
in connection with these mergers.
  The
Company will effect an amendment to the Company’s certificate of incorporation
which will automatically convert the shares of Class B Common Stock into shares
of Class A Common Stock and eliminate the super-voting nature of the Class B
Common Stock, resulting in the only authorized common stock being the Class A
Common Stock.  The amendment will increase the Company’s authorized
capital stock to 500,000,000 shares of Class A Common Stock and decrease the
authorized Preferred Stock to 1,000,000 shares of preferred stock which may be
issued in series designated by the Board of Directors, of which 400,000 will be
designated as Series A Preferred Stock.
  The
provisions dealing with corporate opportunities will be revised to further
delineate the duties of a director or officer of the Company who is also a
director or officer of Hallmark Cards or its affiliates with respect to business
opportunities and corporate transaction opportunities.
  Currently
the Company is governed by Section 203 of the Delaware General Corporation Law,
dealing with restrictions on business combinations, although, by the terms of
Section 203, the restrictions on business combinations do not currently apply to
Hallmark Cards or its affiliates.  Pursuant to the amendments to the
Certificate of Incorporation, the Company will elect not to be governed by
Section 203 unless and until such time as (i) Section 203, but for the opt-out
provision, would apply to the Company or (ii) there is a transaction in which
Hallmark's beneficial interest in the Company is reduced to less than 50% of the
outstanding shares of Class A Common Stock.
  Further,
the Company’s Board of Directors and Hallmark Cards affiliates representing more
than a majority of the voting power of the Company’s capital stock have approved
of an amendment to the Company’s Certificate of Incorporation that provides for
a reverse stock split at any time prior to December 31, 2013 upon the request of
a special committee of the Company’s Board of Directors.  The exact
ratio of the reverse stock split will be determined by the Board of Directors,
upon the recommendation of the special committee.
  Revolver
  As a
condition to closing, the Company must have obtained a revolving credit facility
from a third-party lender with a term of not less than 360 days from the Closing
Date and with availability of at least $30.0 million (the
“Revolver”).  The Revolver will have other terms and conditions
reasonably acceptable to the Company, and Hallmark Cards must have guaranteed,
or caused one or more of its affiliates to have guaranteed, the
Revolver.
  
 Waiver
Agreement
  The
Waiver Agreement, which was entered into on March 10, 2008 and most recently
amended in May 2009, has been amended to provide that the waiver thereunder will
terminate automatically on August 31, 2010.  Additionally, Hallmark
will use its best efforts to ensure that the Company will have continued access
to up to $30.0 million under the Company’s existing revolving credit facility
while the Waiver Agreement is in effect.
  Standstill
Agreement
  Hallmark
Cards and HCC (“Hallmark” in this context) will enter into a stockholders
agreement (the “Stockholders Agreement”) with standstill provisions pursuant to
which they will agree that Hallmark will not acquire any additional shares of
common stock of the Company through December 31, 2013, except:
  o
              additional
      shares of Class A Common Stock resulting from the conversion of the
      Convertible Preferred Stock;
  o
              acquisitions
      pursuant to the subscription rights described in the next
      paragraph;
  o
              with
      the prior approval of a special committee of the Company’s Board of
      Directors comprised solely of independent, disinterested directors;
      and
  o
              from
      January 1, 2012 through December 31, 2013, either (i) pursuant to a tender
      offer for all of the Company’s shares of Class A Common Stock, which
      tender offer is subject to a majority-of-a-minority tender condition, or
      (ii) pursuant to a “Premium Transaction” as described below under “Co-Sale
      Rights.”
  Until
termination of the Stockholders Agreement, in the event that the Company
proposes to issue additional shares of capital stock, options or rights to
acquire equity securities or debt securities convertible into equity securities,
the Company will offer to HCC and its affiliates such additional shares as will
be necessary to ensure that Hallmark continues to own on a fully-diluted basis
at least the same percentage of the shares of all classes of the Company capital
stock as HCC and its affiliates owned immediately prior to such
issuance.
  Co-Sale
Rights
  The
Stockholders Agreement also provides that:
  o
              Until
      December 31, 2013, HCC may not sell or transfer its Class A Common Stock
      to a third party, except:
  §
              from
      the Closing Date through December 31, 2013, with the prior approval of a
      special committee of the Company’s Board of Directors comprised solely of
      independent, disinterested
directors;
  §
              on
      or after January 1, 2012, (i) in a Premium Transaction or (ii) pursuant to
      a public offering or block trade in which to the knowledge of HCC, no
      purchaser (together with its affiliates and associates) acquires
      beneficial ownership of a block of shares of the Company in excess of 5%
      (in the case of a public offering) or 2% (in the case of any block trade)
      of the outstanding Class A Common Stock;
and
  §
              to
      an affiliate of Hallmark Cards or pursuant to a bona fide pledge of the
      shares to a lender that is not an affiliate of Hallmark Cards
      (collectively, a “Permitted
Transfer”).
  A
“Premium Transaction” is a transaction involving the sale or transfer by
Hallmark of its shares of Class A Common Stock to a third party (by merger or
otherwise) in which all stockholders unaffiliated with Hallmark will be entitled
to participate and will be entitled to receive both (x) consideration equivalent
in value to the highest consideration per share of Class A Common Stock received
by HCC in connection with such transaction, and (y) a premium of $0.50 per share
of Class A Common Stock (subject to adjustment for any stock splits,
combinations, reclassifications, adjustments, sale of Class A Common Stock by
the Company, or sale of Class A Common Stock by HCC pursuant to a public
offering or block trade as permitted above, or any similar
transaction).  For the avoidance of doubt, the aggregate premium shall
not exceed $17,400,880, which is the product of the number of outstanding shares
owned by minority stockholders as of the date of the Master Recapitalization
Agreement multiplied by $0.50.  Also, for the avoidance of doubt, HCC
may effectuate a Premium Transaction pursuant to a short-form merger (or other
merger) between the Company and HCC or any purchaser of its shares, so long as
the holders of Class A Common Stock not affiliated with HCC receive the
consideration provided for in this paragraph in connection with such
merger.
  o
              From
      and after January 1, 2014 until the earlier of (x) December 31, 2020 and
      (y) such time as Hallmark and its controlled affiliates no longer
      beneficially own a majority of the outstanding Class A Common Stock, HCC
      may not sell or transfer, in one or a series of related transactions, a
      majority of the outstanding shares of Class A Common Stock to a third
      party, unless (i) in a Permitted Transfer, (ii) with the prior approval of
      a special committee of the Board of Directors or (iii) all stockholders
      unaffiliated with Hallmark will be entitled to either (a) participate in
      such transaction on the same terms as HCC or (b) receive cash
      consideration equivalent in value to the highest consideration per share
      of Class A Common Stock received by HCC in connection with such
      transaction.
  In
addition, the Stockholders Agreement sets forth the terms on which Hallmark
Cards or one of its affiliates is required to provide a guarantee of the
Revolver.  The Hallmark obligations regarding the standstill
provisions, co-sale rights and the guarantee of the Revolver will terminate upon
a payment default on the New Debt, subject to a 60-day grace/cure
period.  The Stockholders Agreement also terminates on the earlier of
such time as Hallmark and its affiliates cease to own a majority of the Class A
Common Stock or December 31, 2020.
  Listing
Requirements
  Pursuant
to the Stockholders Agreement, the Company will use its commercially reasonable
best efforts to maintain the listing of the Class A Common Stock on the NASDAQ
Global Market through December 31, 2013.  Until that date, HCC will
(i) vote in favor of any proposed amendment to the Company’s certificate of
incorporation to effect a reverse stock split with respect to the Class A Common
Stock to maintain the listing on the NASDAQ Global Market if recommended by a
majority of directors who are not affiliates of Hallmark and (ii) reasonably
cooperate with the Company in meeting with representatives of the NASDAQ Global
Market in support of such listing.  Through December 31, 2013, HCC
will not cause the Company to voluntarily delist the shares of Class A Common
Stock from NASDAQ Global Market or deregister the shares of Class A Common Stock
under the Securities Exchange Act of 1934, as amended (except in connection with
a Premium Transaction or tender offer by Hallmark which is a permitted
acquisition of stock as described above).
  Martha
Stewart Agreement
 
 In
January 2010, Crown Media United States, LLC entered into a multi-year agreement
with Martha Stewart Living Omnimedia, Inc. (“Martha Stewart Living”) to
exclusively televise original episodes of the popular daytime home and lifestyle
series The Martha Stewart
Show on Hallmark Channel beginning September 2010. As part of the
agreement, Martha Stewart Living will also develop a range of new and original
series and prime time specials that will complement Hallmark Channel’s
schedule.  Beginning in the fall of 2010, Mondays through Fridays,
The Martha Stewart
Show, will be presented 10 a.m. to 11 a.m. (ET/PT), kicking off a
two-and-half-hour block of original Martha Stewart
programming.  Following The Martha Stewart Show, from
11 a.m. to 12:30 p.m. (ET/PT) each weekday, the Hallmark Channel will present
exclusive original programming currently in development at Martha Stewart Living
that will feature a portfolio of creative content for which the Martha Stewart
brand is known and which will showcase experts and personalities from within
Martha Stewart Living.  Additionally, Martha Stewart Living will
develop numerous holiday and interview specials for prime time on the
network.
 
  
 Liquidity
  As of
December 31, 2009, the Company had $10.5 million in cash and cash equivalents on
hand and $44.0 million of borrowing capacity under the bank credit
facility.  On March 2, 2010, the Company and the bank set the maximum
amount that could be borrowed under the bank credit facility at $30.0 million
and extended the maturity date to August 31, 2010.  After this
amendment, the Company has $30.0 million of current borrowing capacity under the
bank credit facility.  Day-to-day cash disbursement requirements have
typically been satisfied with cash on hand and operating cash receipts
supplemented with the borrowing capacity available under the bank credit
facility and forbearance by Hallmark Cards and its affiliates.  The
Company’s management anticipates that the principal uses of cash up to August
31, 2010, will include the payment of operating expenses, accounts payable and
accrued expenses, programming costs, costs incurred in connection with the
Recapitalization, interest and repayment of principal under the bank credit
facility and interest of approximately $15.0 million to $18.0 million due under
certain notes to Hallmark Cards affiliates from January 1 through August 31,
2010.  The amounts outstanding under the bank credit agreement and
those notes to Hallmark affiliates are due August 31, 2010, as discussed
below.
  The
Company generated positive cash flows from operating activities for each of the
years ended December 31, 2007, 2008 and 2009.  As indicated below,
there can be no assurance that the Company’s operating activities will generate
positive cash flow in future periods.
  Another
significant aspect of the Company’s liquidity is the deferral of payments on
obligations owed to Hallmark Cards and its subsidiaries. Under the Amended and
Restated Waiver Agreement as amended with Hallmark Cards and its affiliates (the
“Waiver Agreement”), the deferred payments under such obligations are extended
to August 31, 2010.  These obligations comprised $345.3 million at
December 31, 2009.  An additional $758.8 million (10.25% Senior
Secured Note) of principal and interest outstanding at December 31, 2009,
payable to a Hallmark Cards’ affiliate in August 2011, is also subject to the
Waiver Agreement until August 31, 2010.  Interest amounts related to
the 10.25% note will be added to principal through August 5,
2010.  The deferral of payments under the Waiver Agreement terminates
on August 31, 2010.  Hallmark Cards and its affiliates have no
obligation, and have stated no intent, to extend this waiver termination date.
The note purchase agreement for the senior note provides that if there is an
event of default with respect to any other indebtedness in excess of $5.0
million, the accreted value and any accrued and unpaid interest on the senior
note would become due and payable.
  The
Company’s ability to pay amounts outstanding under the bank credit facility on
the maturity date is highly dependent upon its ability to generate sufficient,
timely cash flow from operations between January 1 and August 31,
2010.  Based on the Company’s forecasts for 2010, which assume no
principal payments on notes payable to Hallmark Cards and its affiliates, the
Company would have sufficient cash to repay all or most of the bank credit
facility on the maturity date, if necessary.  However, there is
uncertainty regarding the Company’s future advertising revenues, so it is
possible that cash flows may be less than the expectations of the Company’s
management.
  Upon
maturity of the credit facility on August 31, 2010, to the extent the facility
has not been paid in full, renewed or replaced, the Company could exercise its
option under the Waiver Agreement and require Hallmark Cards to purchase the
interest of the lending bank in the facility.  In that case, Hallmark
Cards would have all the obligations and rights of the lending bank under the
bank credit facility and could demand payment of outstanding amounts at any time
after August 31, 2010, under the terms of the Waiver Agreement.
  The
Company believes that cash on hand, cash generated by operations, and borrowing
availability under its bank credit facility through August 31, 2010, when
combined with (1) the deferral of otherwise required payments under the 10.25%
Senior Secured Note related-party debt and the tax sharing agreement, and (2) if
necessary, Hallmark Cards’ purchase of any outstanding indebtedness under the
bank credit facility on August 31, 2010 will be sufficient to fund the Company’s
operations and enable the Company to meet its liquidity needs until the earlier
of August 31, 2010 or the closing of the Recapitalization described above
in this Note 1.
  
 The
Company has entered into the Master Recapitalization Agreement for the
Recapitalization transactions, including the exchange of existing debt owed to H
C Crown Corp. for new debt, preferred stock and common stock.  It is a
condition of the Recapitalization that the Company have obtained a revolving
credit facility from a third-party lender, guaranteed by Hallmark Cards or one
of its affiliates, with a term of not less than 360 days of the closing date of
the Recapitalization, with the availability of at least $30.0 million and on
other terms and conditions reasonably acceptable to the Company.  If
the Recapitalization is closed as contemplated at this time, the Company
believes that cash on hand, cash generated by operations and borrowing
availability under the contemplated revolving credit facility will be sufficient
to fund the Company’s operations and enable the Company to meet its liquidity
needs until at least March 31, 2011.
  The form
of credit agreement with HCC and other Hallmark Card affiliates in the
Recapitalization requires that, prior to closing of the credit agreement, the
Company establish with a financial institution a reserve account (called the
"NICC Reserve Account") in the Company's name for amounts that the Company may
choose as a sinking fund with respect to the $25.0 million payable by December
31, 2010, for the redemption of the preferred interest in Crown Media United
States.  The preferred interest is held by VISN Management Corp. (“VISN”)
which is a wholly-owned subsidiary of National Interfaith Cable Coalition. 
At no time may the amounts in the NICC Reserve Account exceed $25.0
million.  In order to redeem the preferred interest, the Company may need
to borrow up to $25.0 million under the bank credit facility.
  The
sufficiency of the existing sources of liquidity to fund the Company’s
operations is dependent upon maintaining subscriber and advertising revenue at
or near the amount of such revenue for the year ended December 31, 2009. A
significant decline in the popularity of the Channels, a further economic
decline in the advertising market, an increase in program acquisition costs, an
increase in competition or other adverse changes in operating conditions could
negatively impact the Company’s liquidity and its ability to fund the current
level of operations.
  The
closing of the Recapitalization is subject to a number of conditions, including,
among other things, (a) representations and warranties of the Company being
accurate, (b) obtaining the revolving credit agreement mentioned above, (c) no
judgment or order which prohibits the consummation of the Recapitalization and
(d) Hallmark Cards’ not having delivered a written notice to the Company
certifying that Hallmark Cards in its sole discretion shall have determined that
the status of any pending or threatened litigation or regulatory proceeding
involving the Company or its subsidiaries in connection with the
Recapitalization is unsatisfactory to Hallmark Cards.  If for any
reason the Recapitalization is not consummated, the Company would be unable to
meet its obligations which become due on August 31, 2010, which provides
substantial doubt about the entity’s ability to continue.  In
addition, it is unlikely that the Company could obtain, without a guarantee or
other support of Hallmark Cards, other equity or debt financing prior to
August 31, 2010 in order to replace or refinance obligations becoming due
on that date.  This is the view of the special committee which
considered and negotiated the Recapitalization.  Accordingly, the
Company believes the ability of the Company to continue its operations depends
upon completion of the Recapitalization.
  2.
Summary of Significant Accounting Policies and Estimates
 
 Basis
of Presentation
 
 The
consolidated financial statements include the accounts of Crown Media Holdings
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
 
 Use
of Estimates
 
 The
preparation of the accompanying consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions about future events. These
estimates and the underlying assumptions affect the amounts of assets and
liabilities reported, disclosures about contingent assets and liabilities, and
reported amounts of revenues and expenses. Such estimates include the
collectibility of accounts receivable, the valuation of goodwill, intangible
assets, and other long-lived assets, legal contingencies, indemnifications, and
assumptions used in the calculation of income taxes, among others. These
estimates and assumptions are based on management’s best estimates and judgment.
Management evaluates its estimates and assumptions on an ongoing basis using
historical experience and other factors, including the current economic
environment, which management believes to be reasonable under the circumstances.
Management adjusts such estimates and assumptions when facts and circumstances
dictate. Illiquid credit markets, volatile equity, foreign currency, and energy
markets, and declines in consumer spending have combined to increase the
uncertainty inherent in such estimates and assumptions. As future events and
their effects cannot be determined with precision, actual results could differ
significantly from these estimates. Changes in those estimates resulting from
continuing changes in the economic environment will be reflected in the
financial statements in future periods.
 
 Cash
and Cash Equivalents
 
 Cash and
cash equivalents include highly liquid investments with original maturities of
three months or less that are readily convertible into cash and are not
subject to significant risk from fluctuations in interest rates. As a result,
the carrying amount of cash and cash equivalents approximates fair
value.
 
 
 Allowance
for Doubtful Accounts
 
 The
allowance for doubtful accounts is based upon the Company’s assessment of
probable loss related to uncollectible accounts receivable.  The
Company uses a number of factors in determining the allowance, including, among
other things, collection trends. The Company’s bad debt expense was $166,000,
$75,000 and $1.3 million for the years ended December 31, 2007, 2008 and 2009,
respectively.
 
 The
activity in the allowance for doubtful accounts for each of the three years
ending December 31, 2007, 2008, and 2009, is as follows:
 
 Balance
      at Beginning of Year
              
              
              Additions
      Charged to Expense
              
              
              Deductions
              
              
              Balance
      at End of YearAllowance
      for doubtful accountsYear-ended
      December 31, 2007
              
              $
              246
              
              
              $
              166
              
              
              $
              (170
              )
              
              $
              242Year-ended
      December 31, 2008
              
              $
              242
              
              
              $
              75
              
              
              $
              (23
              )
              
              $
              294Year-ended
      December 31, 2009
              
              $
              294
              
              
              $
              1,303
              
              
              $
              (1,121
              )
              
              $
              476
 
 
 Program
License Fees
 
 Program
license fees are incurred in connection with the Company’s acquisition of rights
to air programs acquired from others. The cost of program rights are deferred
and then amortized on a straight-line basis over the shorter of their
contractual license periods or anticipated usage. The Company evaluates the
realizability of these deferred license fees in relation to the estimated future
revenue. Estimates of the net realizable value for the program licenses are
determined using estimates of future advertising revenue and program usage. The
estimated net realizable value is compared to the net book value of the program
license fee assets to determine if the unamortized costs of the Company’s
programming assets are expected to be recovered. If the analysis indicates the
costs are in excess of the estimated net realizable value, the Company would
write down the unamortized cost of  the program license fee assets to
the estimated net realizable value with a corresponding impairment charge to
programming costs.
 
 Subscriber
Acquisition Fees
 
 In the
past, under certain agreements with major domestic pay distributor systems,
Crown Media United States was obligated to pay subscriber acquisition fees if
defined subscriber levels were met or in order to obtain additional carriage of
the Hallmark Channel by those pay distributors.
 
 Subscriber
acquisition fees are amortized over the contractual life of the distribution
agreements (ranging from 1 to 9 years) as a reduction of subscriber fee revenue.
If the amortization expense exceeds the cumulative subscriber fee revenue
recognized, or to be recognized, on a per distributor basis, the excess
amortization is included as a component of cost of services. Crown Media
Holdings assesses the recoverability of these costs periodically by comparing
the net carrying amount to the estimates of future subscriber fee and
advertising revenue. The Company also assesses the recoverability of these fees
whenever events such as changes in distributor relationships occur or other
indicators suggest impairment.
 
 Subscriber
acquisition fee assets are a component of prepaid and other assets and
subscriber acquisition fee liabilities are a component of accounts payable and
accrued liabilities in the accompanying consolidated balance
sheets.
 
 Property
and Equipment
 
 Property
and equipment are stated at historical cost, net of accumulated depreciation and
amortization. Equipment under capital leases are initially recorded at the
present value of the minimum lease payments.
 
 Depreciation
on equipment is calculated using the straight-line method over the estimated
useful lives of the assets. Equipment held under capital leases and leasehold
improvements are amortized straight-line over the shorter of the lease term or
estimated useful life of the asset.
 
 When
property and equipment is sold or otherwise disposed of, the cost and related
accumulated depreciation or amortization are removed from the accounts and any
resulting gain or loss is included in the results of operations. The costs of
normal maintenance and repairs are charged to expense when
incurred.
 
 
 Long-Lived
Assets
 
 The
Company reviews long-lived assets, other than goodwill and other intangible
assets with indefinite lives, for impairment whenever facts and circumstances
indicate that the carrying amounts of the assets may not be recoverable.
Recoverability of assets to be held and used is evaluated by comparing the
carrying amount of an asset to the estimated undiscounted future net cash flows
expected to be generated by the asset. If the asset's carrying value is not
recoverable, an impairment charge is recognized for the amount by which the
carrying amount of the asset exceeds its fair value. The Company estimates fair
values by using a combination of comparable market values and discounted cash
flows, as appropriate.
 
  Goodwill
is reviewed for impairment annually as of November 30 and whenever the
occurrence of an event or a change in circumstances would suggest that the
carrying value of goodwill might be in excess of its fair value. However, in the
event that the estimated fair value is less than the carrying amount, the
carrying value of goodwill would be reduced to its estimated fair value through
an impairment charge to the Company’s consolidated statements of operations. The
fair value of the reporting unit has been determined from time-to-time using a
combination of the discounted future cash flow method, the public company
guideline method, and the guideline transaction method.
   The
public company guideline method involves identifying and selecting
publicly-traded companies with financial and operating characteristics similar
to the Company and applying valuation multiples to the Company. The guideline
transaction method involves identifying a list of applicable market transactions
in which the companies selected bear certain similarities in terms of line of
business, capital structure and maturity of business to the
Company.
   Legal
Costs and Contingencies
   In the
normal course of business, the Company incurs costs to hire and retain external
legal counsel to advise it on regulatory, litigation and other matters. The
Company expenses these costs as the related services are received.
  If a loss
is considered probable and the amount can be reasonably estimated, the Company
recognizes an expense for the estimated loss. If the Company has the potential
to recover a portion of the estimated loss from a third party, the Company makes
a separate assessment of recoverability and reduces the estimated loss if
recovery is also deemed probable.
 
 Leases
 
 The
Company accrues rent expense on a straight line basis over the lease term.
 
 Assets
subject to capital leases are capitalized as property and equipment at the
inception of the lease. Capitalized lease assets are depreciated over their
estimated useful lives and are included in accounts payable and accrued
liabilities in the accompanying consolidated balance sheets.
 
 Fair
Value of Financial Instruments
 
  Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (the
“ASC”) Topic 820, Fair Value
Measurements and Disclosures, provides guidance which defines fair value,
establishes a framework for measuring fair value and specifies disclosures about
fair value measurements.  On January 1, 2008 we adopted that portion
of the standard that relates to those nonfinancial assets and liabilities which
are recognized or disclosed at fair value on a recurring basis (that is, at
least annually).  On January 1, 2009, subject to the FASB’s delayed
implementation, we adopted the remaining provisions of the
standard.  After adoption, we now determine fair value as an exit
price, representing the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants.
  
 The
Company does not have balance sheet items carried at fair value on a recurring
basis such as derivative financial instruments which are valued primarily based
on quoted prices in active or brokered markets for identical as well as similar
assets and liabilities. Significant balance sheet items which are subject to
non-recurring fair value measurements consist of impairment valuations of
goodwill and property and equipment. The standard has not had a significant
impact on the determination of fair value related to non-financial assets and
non-financial liabilities in 2009.
 
 Revenue
Recognition
 
 Subscriber
revenue from pay television distributors is recognized as revenue when an
agreement is executed, programming is provided, the price is fixed and
determinable, and collectibility is reasonably assured. Subscriber fees from pay
television distributors are recorded net of amortization of subscriber
acquisition costs. If the amortization expense exceeds the revenue recognized on
a cumulative per distributor basis, the excess amortization is included as a
component of cost of services.
 
 Advertising
revenue, net of agency commissions, is recognized in the period in which related
commercial spots or long form programming are aired and as ratings guarantees to
advertisers are achieved. Agency commissions are calculated based on a stated
percentage applied to gross billing revenue for the Company’s broadcasting
operations. Customers remit the gross billing amount to their agency and the
agency remits gross billings less their commission to the Company. Payments
received in advance of being earned are recorded as deferred
revenue.
 
 
 Audience
Deficiency Unit Liability
 
 Audience
deficiency units (“ADUs”) are units of inventory (rights to utilize future
advertising timeframes) that are made available to advertisers as fulfillment
for past advertisements in programs that under-delivered on the guaranteed
viewership ratings. The related liability results when impressions delivered on
guaranteed ratings are less than the impressions guaranteed to advertisers. Such
liability (a type of deferred revenue) arises as a matter of industry practice
rather than as a matter of written contract.  The liability is reduced
and revenue is recognized when the Company airs the advertisement during another
program to “make-good” on the under-delivery of impressions.  The
Company typically does not remit cash to advertisers in satisfaction of such
deficiencies.
 
 Advertising
Costs
 
 The
Company expenses advertising costs as incurred. Advertising expense was $19.7
million, $19.6 million and $6.6 million for the years ended December 31, 2007,
2008 and 2009, respectively.
 
 Taxes
on Income
 
 Pursuant
to 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 the Hallmark
Cards consolidated federal tax return as of and subsequent to March
2003.  However, the Company continues to account for income taxes on a
separate return basis. Accordingly, the Company accounts for income taxes using
an asset and liability method which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and net operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to be applied to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The Company
reduces deferred tax assets by a valuation allowance if it is more likely than
not that some portion or all of the deferred tax assets will not be realized
without regard to the Tax Sharing Agreement.  All payments received from
Hallmark Cards under the tax sharing agreement are recorded as increases in
additional paid-in capital and amounts the Company owes Hallmark Cards for its
share of the consolidated federal tax liability caused by the inclusion of the
Company in the consolidated group are treated as a reduction to paid-in
capital.
 
 Stock-Based
Compensation
 
 Stock-based
compensation cost is measured at the grant date based on the fair value of the
award and is recognized as expense on a straight-line basis over the period
during which the holder is required to provide services in exchange for the
award, i.e., usually
the vesting period. See Note 14 for further information regarding our
stock-based compensation assumptions and expenses.
 
 Net
Loss per Share
 
 Basic net
loss per share and diluted net loss per share have been computed by dividing the
net loss for the period by the weighted average number of common shares
outstanding during the period. The calculation of diluted net loss per share
excludes potential common shares, the effect of which would be
antidilutive.  If the Company had reported net income, diluted net
loss per share would have been computed based on the weighted average number of
common shares and potentially dilutive common shares outstanding. Potential
common shares consist of incremental common shares issuable upon the exercise of
stock options. Approximately 356,000, 341,000 and 87,000 stock options for the
years ended December 31, 2007, 2008 and 2009, respectively, have been excluded
from the calculations of earnings per share because their effect would have been
antidilutive.
 
 Concentration
of Credit Risk
 
 Financial
instruments, which potentially subject Crown Media Holdings to a concentration
of credit risk, consist primarily of cash, cash equivalents and accounts
receivable. Generally, Crown Media Holdings does not require collateral to
secure receivables. Crown Media Holdings has no significant off-balance sheet
financial instruments with risk of accounting losses.
 
 Five of
our distributors each accounted for more than 10% of our consolidated subscriber
revenue for the years ended December 31, 2007, 2008 and 2009, and together
accounted for a total of 92%, 77% and 75% of consolidated subscriber revenue
during the years ended December 31, 2007, 2008 and 2009,
respectively.  Four, three and three of our distributors each
accounted for approximately 15% or more of our consolidated subscribers for the
years ended December 31, 2007, 2008 and 2009, respectively, and together
accounted for 77%, 61% and 61% of our subscribers during the years ended
December 31, 2007, 2008 and 2009, respectively.
 
 Reclassifications
 
 Certain
reclassifications have been made to conform prior periods' financial information
to the current presentation.
 
 Recently
Issued Accounting Pronouncements
 
  The
FASB’s Accounting Standards Codification is effective for all interim and annual
financial statements issued after September 15, 2009.  The ASC is now
the single official source of authoritative, nongovernmental generally accepted
accounting principles (GAAP) in the United States.  The historical
GAAP hierarchy was eliminated and the ASC became the only level of authoritative
GAAP, other than guidance issued by the Securities and Exchange
Commission.  Our accounting policies were not affected by the
conversion to the ASC.  However, we have conformed references to
specific accounting standards in these notes to consolidated financial
statements to the appropriate section of the ASC.
  
 In
October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue
Recognition (ASC Topic 605): Multiple Deliverable Revenue
Arrangements – A Consensus of the FASB Emerging Issues Task Force. This
update provides application guidance on whether multiple deliverables exist, how
the deliverables should be separated and how the consideration should be
allocated to one or more units of accounting. This update establishes a selling
price hierarchy for determining the selling price of a deliverable. The selling
price used for each deliverable will be based on vendor-specific objective
evidence, if available, third-party evidence if vendor-specific objective
evidence is not available, or estimated selling price if neither vendor-specific
or third-party evidence is available. The Company will be required to apply this
guidance prospectively for revenue arrangements entered into or materially
modified after January 1, 2011; however, earlier application is permitted. The
Company has not determined the impact that this update may have on its financial
statements.
 
 In
January 2010, the FASB issued guidance that requires reporting entities to make
new disclosures about recurring or nonrecurring fair-value measurements
including significant transfers into and out of Level 1 and Level 2 fair value
measurements and information on purchases, sales, issuances, and settlements on
a gross basis in the reconciliation of Level 3 fair value measurements. The
guidance is effective for annual reporting periods beginning after
December 15, 2009, except for Level 3 reconciliation disclosures that are
effective for annual periods beginning after December 15, 2010. We do not
expect the adoption of this guidance to have a material impact on our
consolidated financial statements.
 
 
 3.
Sale of Membership Interest in Crown Media Distribution, Residual and
Participation Liability and Third Party Indemnity
 
  In
December 2006, the Company sold its film library consisting of domestic rights
and certain international ancillary rights to approximately 620 television
movies, mini-series and series (the “Crown Library”) to RHI Entertainment LLC
(“RHI”).  As a condition of the sale, the Company agreed to pay up to $22.5
million for residuals and profit participations related to RHI’s domestic
exploitation of the Crown Library for a ten-year period ending December 14,
2016. The Company estimated the fair value of this obligation to be
approximately $10.6 million at December 15, 2006, assuming the maximum payout.
Any revisions to this estimated liability will be reflected as gain (loss) from
sale of film assets in future periods. In 2006, the Company recorded an $8.2
million gain related to the sale of these film assets.
 
 In
December 2009 the Company concluded that payments for residuals and
participations under its liability to RHI would occur generally later than
originally estimated in December 2006.  Accordingly, the Company
reduced the carrying amount of the liability by $682,000 and recognized a
corresponding gain from sale of film assets in the accompanying statement of
operations. Carrying amounts of this liability of $13.8 million and $13.9
million as of December 31, 2008 and 2009, respectively, are included in accrued
liabilities on the accompanying consolidated balance sheets.  The
aggregate amount of payments that the Company will make under this obligation is
dependent upon the relative success RHI achieves in exploiting these film
assets.  However, in no event will the actual cash payments under this
obligation exceed $22.5 million.  The timing of such payments is
dependent upon not only the timing of RHI’s exploitation of these film assets
but RHI’s administrative processes by which it will request payments from the
Company.   Accordingly, it is likely that, during the remaining
term of this liability, the carrying amount will be adjusted as additional
information becomes available to the Company.
  With sale
of the domestic rights to its film library in December 2006, the Company
completed its two-stage exit from the film distribution
business.  Until that time, the Company reported its estimate of
residuals and participations expense as a component of film amortization
expense.  Amortization of the cost of the film library ceased with its
sale.  However, as relevant to 2007 and 2008, the Company remained
subject to obligations for residuals and participations for the licenses of the
film assets prior to the sale of the domestic film library.
 
 During
2007 and 2008, the Company obtained usage information related to the licenses
entered into prior to the sales of the film library.  From this
information the Company was able to more accurately determine its obligation for
the residuals and participations.  From time-to-time, the Company
reduced its estimate of the remaining obligations based upon the current
estimates and information received from the third party agents.  The
corresponding benefits of such reductions in liabilities have been reflected as
reductions of film amortization expense. The negative amortization expense
reported in 2007 and 2008 reflects the Company’s changes in estimates as it
settled the obligations established in prior years. From December 2006 through
September 2008, the Company remitted payments of approximately $2.2 million,
after which it reduced its estimate of the remaining liability to
zero.  The Company believes it has fully satisfied its liabilities for
the obligations.
 
 Also,
included in accounts payable and accrued liabilities as of December 31, 2008 and
2009, is $336,000 and $364,000, respectively, for the estimated cost of
residuals and participations that the buyer of our international business (which
included the international rights to our film library) would otherwise be
obligated to pay to third parties in connection with international film library
sales between the April 2005 sale and April 2015.  The Company’s actual
cost of this obligation will depend on the actual internal usage or sales of
these films by the buyer. Any revisions to these estimated liabilities will be
reflected as gain (loss) from sale of discontinued operations in future
periods.
 
 In
December 2008, the Company received information from the buyer of the
international business related to the actual internal usage and sales of these
films through December 31, 2007.   As a result, the Company
reduced its estimate of this liability by $5.1 million. The Company did so by
recording a gain from sale of discontinued operations of $3.0 million and a
reduction of interest expense of $2.1 million.
 
 In December 2009, the
Company concluded that payments for residuals and participations under its
liability to the buyer of the international business would occur generally later
than estimated in December 2008.   Accordingly, the Company
reduced the carrying amount of the liability by $12,000 and recognized a
corresponding decrease in interest expense in the accompanying statement of
operations.
  
 4.
Program License Fees
 
 Program
license fees are comprised of the following:
 
 As of December 31,2008
              
              
              2009(In
      thousands)Program
      license fees — other non-affiliates
              
              $
              576,779
              
              
              $
              597,206Program
      license fees — Hallmark Cards affiliates
              
              
              10,967
              
              
              
              12,668Program
      license fees, at cost
              
              
              587,746
              
              
              
              609,874Accumulated
      amortization
              
              
              (267,603
              )
              
              
              (324,717
              )Program
      license fees,
      net
              
              $
              320,143
              
              
              $
              285,157
 
  Programming
costs included in the accompanying consolidated statements of operations for the
years ended December 31, 2007, 2008 and 2009, were $164.4 million, $140.7
million and $127.5 million, respectively.
   In the
regular course of evaluating the remaining usefulness of its various program
licenses, the Company may determine that certain licenses may be of little
future program value to it.  In such instances, the Company shortens
the estimated remaining lives to zero, thereby accelerating amortization of the
remaining net book value.  During the year ended December 31,
2007, such changes in estimates resulted in additional amortization of program
license fees of $2.7 million; the Company made no such changes in estimates
during the years ended December 31, 2008 and 2009.
  At
December 31, 2008 and 2009, $7.6 million and $1.8 million, respectively, of
program license fees were included in prepaid and other assets on the
accompanying consolidated balance sheets as the Company made payments for the
program license fees prior to commencement of the license period.
 
 License
fees payable are comprised of the following:
 
 As of December 31,2008
              
              
              2009(In
      thousands)License
      fees payable —  non-affiliates
              
              $
              231,218
              
              
              $
              171,966License
      fees payable — Hallmark Cards affiliates
              
              
              9,871
              
              
              
              10,409Total
      license fees
      payable
              
              
              241,089
              
              
              
              182,375Less
      current
      maturities
              
              
              (128,638
              )
              
              
              (99,494
              )Long-term
      license fees
      payable
              
              $
              112,451
              
              
              $
              82,881
 
 
 
 5.
Property and Equipment
 
 Property
and equipment are comprised of the following:
 
 As of December 31,
              
              
              Depreciable
      Life2008
              
              
              2009
              
              
              (In years)(In
      thousands)Technical
      equipment and computers
              
              $
              8,372
              
              
              $
              6,614
              
              
              
              3-5Leased
      assets
              
              
              17,363
              
              
              
              17,363
              
              
              
              15Furniture,
      fixtures and equipment
              
              
              690
              
              
              
              652
              
              
              
              5Leasehold
      improvements
              
              
              1,137
              
              
              
              1,127
              
              
              
              3-7Construction-in-progress
              
              
              123
              
              
              
              -Property
      and equipment, at cost
              
              
              27,685
              
              
              
              25,756Accumulated
      depreciation
              
              
              (12,293
              )
              
              
              (12,580
              )Property
      and equipment, net
              
              $
              15,392
              
              
              $
              13,176
 
  Depreciation
expense related to property and equipment was $2.0 million, $2.4 million and
$2.6 million, for the years ended December 31, 2007, 2008 and 2009,
respectively.
  Software
and other intangible assets of $524,000 and $507,000 as of December 31, 2008 and
2009, respectively, have been included in prepaid and other assets on the
accompanying consolidated balance sheets.
 
 6.  Leases
 
 The
Company leases uplink and certain transponder space under a long-term lease
agreement that is accounted for as a capital lease. The capital lease liability
is included as a component of both accounts payable and accrued liabilities and
non-current accrued liabilities in the accompanying consolidated balance sheets.
In addition, the Company leases uplink services and office facilities under
operating leases that are generally non-cancelable. These leases expire at
various dates through June 2019, and some contain escalation clauses and renewal
options. Future minimum lease payments under the agreements at December 31,
2009, are as follows:
 
 Capital Leases
              
              
              Operating
      LeasesYears Ended December 31,(in
      thousands)2010
              
              $
              2,160
              
              
              $
              5,8532011
              
              
              2,160
              
              
              
              5,6842012
              
              
              2,160
              
              
              
              5,1952013
              
              
              2,160
              
              
              
              4,8872014
              
              
              2,160
              
              
              
              5,057Thereafter
              
              
              10,710
              
              
              
              3,629Total
      minimum lease payments
              
              
              21,510
              
              
              $
              30,305
              (1)Less
      amount representing interest(at
      implicit rate of 9.375%)
              
              
              (7,561
              )Present
      value of net minimum lease payments
              
              
              13,949Less
      current maturities
              
              
              (890
              )Long
      term obligation
              
              $
              13,059
 
 (1)
      Minimum payments have not been reduced by minimum sublease rentals of
      $50,000 due in 2010 under
subleases.
 
 
 Rent
expense under the operating leases was $2.2 million, $3.0 million and $2.9
million, respectively, for the years ended December 31, 2007, 2008 and 2009.
Amortization of assets held under capital leases is recorded as amortization of
capital lease on the accompanying statements of operations.
 
 The
Company accrues rent expense on a straight line basis over the lease term.
Accordingly, the Company recognizes rent expense on a straight-line basis over
the term of the lease, including a rental holiday. The Company uses the initial
lease term, including the free rent holiday period, to determine the lease
term.
 
 
 7.
Credit Facility
 
 By
Amendment No. 16 on March 2, 2010, to the amended credit agreement with JPMorgan
Chase Bank, the maturity date of the bank credit facility was extended to August
31, 2010.  Additionally, in connection with Recapitalization
agreements, the Company and the Bank set the maximum amount that could be
borrowed under the bank credit facility at $30.0 million.
  The
facility is guaranteed by Hallmark Cards and the Company’s subsidiaries and is
secured by all tangible and intangible property of Crown Media Holdings and its
subsidiaries. The provisions of the Amendment No. 15 became effective April 1,
2009.  Interest on the credit facility was increased from the
Eurodollar rate to the Eurodollar rate plus 2.25% and from the alternate base
rate to the alternate base rate plus 1.25%.  The maximum amount that
could be borrowed under the bank credit agreement was $45.0 million at December
31, 2009.  The Company’s ability to borrow additional amounts under
the credit facility is not limited or restricted.
  At
December 31, 2008 and 2009, the Company had outstanding borrowings of $28.6
million and $1.0 million, respectively, under the credit facility and there were
no letters of credit outstanding. At December 31, 2008, $28.6 million of the
outstanding balance bore interest at the Eurodollar rate (2.02% weighted average
rate at December 31, 2008) and $0 bore interest at the JP Morgan Chase Bank
prime rate. At December 31, 2009, $1.0 million of the outstanding balance bore
interest at the Eurodollar rate (2.49% weighted average rate at December 31,
2009) and $0 bore interest at the JP Morgan Chase Bank prime rate. Interest
expense on borrowings under the credit facility for each of the years ended
December 31, 2007, 2008 and 2009, was $5.4 million, $2.1 million and $350,000,
respectively.
 
 Covenants
 
 The
credit facility, as amended, contains a number of affirmative and negative
covenants.  The Company was in compliance with these covenants at both
December 31, 2009, and March 2, 2010.
 
 8.
Related Party Obligations
 
 Since
March 2006, substantially all of the Company’s borrowings have been subject to a
Waiver and Standby Purchase Agreement between the Company, Hallmark Cards and
affiliates of Hallmark Cards who hold obligations of the
Company.  Pursuant to the Master Recapitalization Agreement which
included an amendment to the Amended and Restated Waiver and Standby Purchase
Agreement (as amended, the “Waiver Agreement”), the waiver termination date was
extended to August 31, 2010 when the Waiver Agreement automatically terminates
(thus concluding the “Waiver Period”).  The Waiver Agreement is
subject to early termination upon the occurrence of one or more events described
below, whereupon all deferred amounts would become immediately due and
payable.  The Waiver Agreement defers payments (excluding interest on
the 2001, 2005 and 2006 notes, described below, accruing subsequent to November
15, 2008) otherwise due on any of the following obligations (the “Subject
Obligations”) until August 31, 2010.  The Waiver Agreement also
provides that interest accruing on the 10.25% Note through August 5, 2010, will
be added to principal.
 
  ·
              Note
      and interest payable to HC Crown, dated December 14, 2001, in the original
      principal amount of $75.0 million, payable to HC Crown. (Total amount
      outstanding at December 31, 2008 and 2009, including accrued interest was
      $109.8 million and $110.1 million, respectively. See Note and Interest Payable to
      HC Crownbelow.)
  ·
              $70.0
      million note and interest payable to Hallmark Cards affiliate, dated as of
      March 21, 2006. (Total amount outstanding at December 31, 2008 and 2009,
      including accrued interest was $62.7 million and $62.8 million,
      respectively. See Note
      and Interest Payable to Hallmark Cards Affiliatebelow.)
   ·
              10.25%
      senior secured note, dated August 5, 2003, in the initial accreted value
      of $400.0 million, payable to HC Crown.  (Total amount
      outstanding at December 31, 2008 and 2009, including accrued interest was
      $686.6 million and $758.8 million, respectively. See Senior Secured Notebelow.)
  ·
              Note
      and interest payable to Hallmark Cards affiliate, dated as of October 1,
      2005, in the principal amount of $132.8 million. (Total amount outstanding
      at December 31, 2008 and 2009, including accrued interest was $172.1
      million and $172.4 million, respectively. See Note and Interest Payable to
      Hallmark Cards Affiliatebelow.)
   ·
              All
      obligations of the Company under the bank credit facility by virtue of
      Hallmark Cards’ deemed purchase of participations in all of the
      obligations under a guarantee which Hallmark Cards has given in support of
      the facility or the purchase by Hallmark Cards of all these obligations
      pursuant to the bank credit
facility.
   ·
              Any
      and all amounts due and owing to Hallmark Cards pursuant to the Tax
      Sharing Agreement (Total amount outstanding at December 31, 2008 and 2009,
      was $0 and $8.5 million, respectively.).
  Interest
will continue to accrue on these obligations during the Waiver Period and is
payable as indicated above.  The Waiver Agreement also contains
certain covenants, including but not limited to (1) the Company’s covenant
not to take any action (including the issuance of new stock or options) that
would prohibit the Company from being included as a member of Hallmark Cards
consolidated federal tax group, (2) compliance with obligations in the loan
documents for the bank credit facility and (3) commercially reasonable
efforts to refinance the obligations subject to the Waiver
Period.  Pursuant to the Waiver Agreement, the Company must make
prepayments on the outstanding debt from 100% of any “Excess Cash Flow” during
the Waiver Period.  There was Excess Cash Flow of $7.7 million for the
year ended December 31, 2009, of which $4.6 million of interest on the 2001,
2005 and 2006 Notes was remitted to a Hallmark Cards’ affiliate on January 5,
2010. Pursuant to the Master Recapitalization Agreement, we have not made
payments representing the remaining amounts of Excess Cash Flow for
2009.  Payment continues to be deferred under the extension of the
Waiver Agreement.  Excess Cash Flow for 2008 of $45.9 million was used
to make payments on the bank credit facility of $40.9 million, on the Tax Note
of $228,000 and on interest payments of $4.7 million.
  The
Waiver Agreement is subject to early termination upon occurrence of certain
events including but not limited to the following:  (a) the Company
fails to pay any principal or interest, regardless of amount, due on any
indebtedness to unrelated parties with an aggregate principal amount in excess
of $5.0 million or any other event or condition occurs that results in any such
indebtedness becoming due prior to its scheduled maturity, provided that the
waiver will not terminate if the Company reduces the principal amount of such
indebtedness to $5.0 million or less within five business days of a written
notice of termination from Hallmark Cards; or (b) the Company fails to pay
interest on the bank credit facility described above to the extent that Hallmark
Cards has purchased all or a portion of the indebtedness thereunder or to
perform any covenants in the Waiver Agreement.
  Under the
Waiver Agreement, if the bank lender under the bank credit facility accelerates
any of the indebtedness under the bank credit facility or seeks to collect any
indebtedness under it, the Company may elect to exercise its right to require
that Hallmark Cards or its designated subsidiary exercise an option to purchase
all the outstanding indebtedness under the bank credit facility.  All
expenses and fees in connection with this purchase would be added to the
principal amount of the credit facility obligations.
  
 Hallmark
Guarantee; Interest and Fee Reductions
 
 Hallmark
Cards has provided to the lending bank under the credit facility the Hallmark
Cards facility guarantee.  The guarantee is unconditional for
obligations of the Company under the bank credit facility.  If any
payment is made on the guarantee, it will be treated as a purchase of the
lending bank’s interest in the credit facility.
 
 Prior to
April 1, 2009, Hallmark Cards provided an irrevocable letter of credit to JP
Morgan Chase Bank as credit support for the Company’s obligations under the
Company’s bank credit facility for which the Company previously paid the letter
of credit fees. This letter of credit was cancelled on April 1,
2009.
 
 The above
mentioned credit support provided by Hallmark Cards resulted in reductions in
the interest rate and commitment fees under the credit facility; however, the
Company agreed to pay and has paid an amount equal to the reductions in the
interest rate and commitment fees to Hallmark Cards.  Prior to April
1, 2009, the Company agreed to pay 2.25% and 0.375% to Hallmark Cards,
representing the reductions in the interest rate and commitment fees,
respectively. On April 1, 2009, as noted in Note 8, the interest rate and
commitment fees under the renewed credit facility increased and we began paying
Hallmark Cards a smaller reduction amount of the interest rate and commitment
fees equal to 0.75% and 0.125%.
 
 Senior
Secured Note
 
 In August
2003, the Company issued a senior note to HC Crown for $400.0 million. In
accordance with the Waiver Agreement, cash payments will not be required until
February 5, 2011 (which is the first payment date after August 31, 2010). The
principal amount of the senior secured note accretes at 10.25% per annum,
compounding semi-annually, to August 5, 2010.  From that date,
interest at 10.25% per annum is scheduled to be payable semi-annually in arrears
on the accreted value of the senior note to HC Crown on February 5, 2011, and
upon maturity on August 5, 2011. The senior note is pre-payable without
penalty. At December 31, 2008 and 2009, $686.6 million and $758.8 million,
respectively, of principal and interest were included in the senior note payable
in the accompanying consolidated balance sheets. The note purchase agreement for
the senior note provides that if there is an event of default with respect to
any other indebtedness in excess of $5.0 million, the accreted value and any
accrued and unpaid interest on the senior note would become due and payable.
Further, the note purchase agreement contains certain restrictive covenants
which, among other things, prevent the Company from incurring any additional
indebtedness, purchasing or otherwise acquiring shares of the Company’s stock,
investing in other parties and incurring liens on the Company’s
assets.  As a fee for the issuance of the note, the Company paid $3.0
million to HC Crown, which was initially capitalized and is being amortized as
additional interest expense over the term of the note payable.
  Note
and Interest Payable to HC Crown
 
 On
December 14, 2001, the Company executed a $75.0 million promissory note with HC
Crown.  Pursuant to the Waiver Agreement, the note is payable in full
on August 31, 2010 (although the maturity date of the note is December 31,
2009). Under the Waiver Agreement, accrued interest on this 2001 Note was added
to principal through November 15, 2008.  Commencing November 16, 2008,
interest is payable in cash, quarterly in arrears five days after the end of
each calendar quarter. This note is subordinate to the bank credit facility. The
rate of interest under this note is currently LIBOR plus 5% per annum (9.05% and
5.29% at December 31, 2008 and 2009, respectively). At December 31, 2008 and
2009, $108.6 million, is reported as note payable to Hallmark Cards affiliate
and $1.3 million and $1.5 million, respectively, are reported as interest
payable to Hallmark Cards affiliate on the accompanying consolidated balance
sheet. Interest of $6.3 million was paid in 2009 and interest of $1.5 million
was paid on January 5, 2010.
  Note
and Interest Payable to Hallmark Cards Affiliate
 
 On
October 1, 2005, the Company converted approximately $132.8 million of its
license fees payable to Hallmark affiliates to a promissory note.  The
rate of interest under this note is currently LIBOR plus 5% per annum (9.05% and
5.29% at December 31, 2008 and 2009, respectively). Pursuant to the Waiver
Agreement, the promissory note is payable in full on August 31, 2010 (although
the maturity date of the note is December 31, 2009).  Under the Waiver
Agreement, accrued interest on this 2005 Note was added to principal through
November 15, 2008.  Commencing November 16, 2008, interest is payable
in cash, quarterly in arrears five days after the end of each calendar quarter.
At December 31, 2008 and 2009, $170.1 million is reported as note payable to
Hallmark Cards affiliate and $2.0 million and $2.3 million, respectively, are
reported as interest payable to Hallmark Cards affiliate on the accompanying
consolidated balance sheet. Interest of $9.8 million was paid in 2009 and
interest of $2.3 million was paid on January 5, 2010.
 
 Note
and Interest Payable to Hallmark Cards Affiliate
 
 On March
21, 2006, the Company converted approximately $70.4 million of its payable to a
Hallmark Cards affiliate to a promissory note. The rate of interest under this
note is currently LIBOR plus 5% per annum (9.05% and 5.29% at December 31, 2008
and 2009, respectively). Pursuant to the Waiver Agreement, the promissory note
is payable in full on August 31, 2010 (although the maturity date of the note is
December 31, 2009). Under the Waiver Agreement, accrued interest on this 2006
Note was added to principal through November 15, 2008.  Commencing
November 16, 2008, interest is payable in cash, quarterly in arrears five days
after the end of each calendar quarter. At December 31, 2008 and 2009, $62.0
million is reported as note payable to Hallmark Cards affiliates and $717,000
and $838,000, respectively, are reported as interest payable to Hallmark Cards
affiliate on the accompanying consolidated balance sheet. Interest of $3.6
million was paid in 2009 and interest of $838,000 was paid on January 5,
2010.
 
 Note
and Interest Payable to Hallmark Cards
  During
2007, the Internal Revenue Service completed its examination of Hallmark Cards'
consolidated tax returns for fiscal years 2003 and 2004 and determined that,
with respect to a portion of the losses attributable to the Company for fiscal
years 2003 and 2004, Hallmark Cards should not have carried back such losses to
its consolidated federal tax returns filed for fiscal years 2001 and
2002.  These losses are available as carry-forwards in the
consolidated federal tax return beginning in 2005 and later
years.   Furthermore, the examination changed the amount of
foreign tax credits that had previously been conveyed to the Company under the
Tax Sharing Agreement. Because the Company’s aggregate share of the tax benefits
realized from such losses and credits ($25.2 million) was either contributed to
the Company in cash or applied as an offset against amounts owed by the Company
to other members of the consolidated group, the Company was obligated to return
this amount to Hallmark Cards plus interest related thereto in the amount of
$7.9 million.  As a result, the Company recorded a $33.1 million
payable to Hallmark Cards with a corresponding $25.2 million reduction of
additional paid-in capital and a $7.9 million charge to interest expense, all of
which were recognized during 2007.
 
 On July
27, 2007, the Company replaced the payable to Hallmark Cards under the Tax
Sharing Agreement with a $33.1 million promissory note payable to Hallmark Cards
due in July 2009 with interest at LIBOR plus 3% per annum (the "Tax
Note").  Subsequently, Hallmark Cards offset tax benefits realized
pursuant to the Tax Sharing Agreement against amounts owed under the Tax Note,
first against accrued and unpaid interest and then against the unpaid principal
balance. During 2007, Hallmark Cards offset $12.2 million against $1.1 million
of accrued and unpaid interest and $11.1 million of unpaid principal.
Additionally, in 2007, the Company recorded an additional $85,000 charge to
interest expense related to the receipt of an invoice for the actual amount owed
in regard to the return of tax benefits under the Tax Sharing Agreement. During
2008, Hallmark Cards offset $21.3 million against $933,000 of accrued and unpaid
interest and $20.3 million of unpaid principal.
 
 On April
14, 2008, the Internal Revenue Service refunded to Hallmark Cards a portion of
the interest previously paid in connection with the disallowance of certain net
operating losses.  In July 2008, Hallmark Cards notified the Company
that they had reduced the Company’s indebtedness as of April 14, 2008, under the
Tax Note by $1.5 million in consideration of the Company’s applicable portion of
such refund. Accordingly, the Company reduced interest expense during
2008.
 
 In
December 2008, the Company paid $121,000 in principal and $107,000 in interest
to fully satisfy its obligation under this note.
  The Tax
Note and all payments thereunder were subordinated to the bank credit facility
extended to the Company by JP Morgan Chase Bank.
  
 Interest
Paid to HC Crown
  Interest
expense paid to HC Crown in connection with the credit facility was $1.8 million
for the year ended December 31, 2007, $1.1 million for the year ended December
31, 2008, and $1.0 million for the year ended December 31, 2009.
  Related
Party Long-Term Obligations
  The
aggregate maturities of related party long-term debt for each of the five years
subsequent to December 31, 2009, are as follows:
  
 Payments
      Due by PeriodTotal
              
              
              2010
              
              
              2011
              
              
              2012
              
              
              2013
              
              
              2014(In
      thousands)Note
      and interest payable to HC Crown,
                with
      principal deferred until August 31, 2010
              
              $
              110,062
              
              
              $
              110,062
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -10.25
      % Senior secured note to HC Crown,
                including
      accrued interest, due August 5, 2011
              
              
              758,755
              
              
              
              -
              
              
              
              758,755
              
              
              
              -
              
              
              
              -
              
              
              
              -Note
      and interest payable to Hallmark Cards affiliate
                with
      principal deferred until August 31, 2010
              
              
              172,407
              
              
              
              172,407
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Note
      and interest payable to Hallmark Cards affiliate
                with
      principal deferred until August 31, 2010
              
              
              62,845
              
              
              
              62,845
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -$
              1,104,069
              
              
              $
              345,314
              
              
              $
              758,755
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
 
 
 9.
Related Party Transactions
 
  Recapitalization
Proposal
 
 See
“Recapitalization” in Note 1 for information regarding the proposed
Recapitalization of outstanding debt obligations owed to affiliates of Hallmark
Cards.
 
 Tax Sharing
Agreement
  Overview
  On
March 11, 2003, Crown Media Holdings became a member of Hallmark Cards
consolidated federal tax group and entered into a federal tax sharing agreement
with Hallmark Cards (the “tax sharing agreement”). Hallmark Cards includes Crown
Media Holdings in its consolidated federal income tax
return.  Accordingly, Hallmark Cards has benefited from past tax
losses and may benefit from future federal tax losses, which may be generated by
Crown Media Holdings.  Based on the tax sharing agreement, Hallmark
Cards has agreed to pay Crown Media Holdings all of the benefits realized by
Hallmark Cards as a result of including Crown Media Holdings in its consolidated
income tax return.  These benefits are estimated and paid 75% in cash
on a quarterly basis and the balance is to be applied against any future tax
liabilities of Crown Media Holdings.  A final true-up calculation is
completed within 15 days after Hallmark Cards files its consolidated federal
income tax return for the year.  Pursuant to the true-up calculation,
Crown Media Holdings is obligated to reimburse Hallmark Cards the amount that
any estimated payments have exceeded the actual benefit realized by Hallmark
Cards and Hallmark Cards is obligated to pay Crown Media Holdings the amount
that any actual benefit exceeds the estimated payments.  Under the tax
sharing agreement, at Hallmark Cards’ option, the non-interest bearing balance
of the 25% in federal tax benefits may be applied as an offset against any
amounts owed by Crown Media Holdings to any member of the Hallmark Cards
consolidated group under any loan, line of credit or other payable, subject to
limitations under any loan indentures or contracts restricting such offsets.
Pursuant to the amendment to the tax sharing agreement in August 2003, the
benefit that would otherwise result from interest accrued on the 10.25% senior
secured note will not be available to the Company until such interest is paid in
cash.
 
 The
Company received $12.2 million (through offset to the Tax Note during 2007) and
$21.3 million (through offset to the Tax Note during 2008) under the Tax Sharing
Agreement during 2007 and 2008, respectively. The Company owed Hallmark Cards
$8.5 million under the Tax Sharing Agreement during 2009. Any payments received
from Hallmark Cards or credited against amounts owed by Crown Media Holdings to
any member of the Hallmark Cards consolidated group under the tax sharing
agreements have been recorded as additions to paid-in capital in the
accompanying consolidated statements of stockholders’ deficit. Any amounts owed
or payments made to Hallmark Cards to any member of the Hallmark Cards
consolidated group under the tax sharing agreements have been recorded as
reductions to paid-in capital in the accompanying consolidated statements of
stockholders’ deficit.
 
 Hallmark
Entertainment Investments
  On March
11, 2003, Hallmark Entertainment Holdings, Inc. (“Hallmark
Entertainment Holdings”, a wholly-owned subsidiary of Hallmark Cards)
contributed 100% of the Crown Media Holdings shares owned by it to Hallmark
Entertainment Investments (“HEIC”). Two of Crown Media Holdings’ investors,
Liberty Crown, Inc., a subsidiary of Liberty Media, and JP Morgan, also
contributed 100% of their Crown Media Holdings shares to Hallmark Entertainment
Investments, and VISN contributed 10% of its Crown Media Holdings shares to
Hallmark Entertainment Investments, all in return for shares in Hallmark
Entertainment Investments. Hallmark Entertainment Holdings, now an owner of more
than 80% of Hallmark Entertainment Investments, has voting power over all of the
Crown Media Holdings shares owned by Hallmark Entertainment
Investments.  See Note 11 for further information on the percentage of
voting power.
 
 
 Services
Agreement with Hallmark Cards
 
 The
Company has an intercompany services agreement with Hallmark Cards, which was
entered into in 2003 for a term of three years and then extended for additional
years through December 31, 2010.  Under the agreement, Hallmark Cards
provides Crown Media Holdings with tax, risk management, health safety,
environmental, insurance, legal, treasury, human resources, and cash management
services and real estate consulting services.  Under the original
agreement, the Company agreed to pay Hallmark Cards $515,000 per year for these
services, plus out-of-pocket expenses and third party fees, payable in arrears
on the last business day of each quarter. This amount was changed to $546,000
for 2007, $541,000 for 2008 and $455,000 for 2009. However, the Company did not
pay these amounts with concurrence of Hallmark Cards through September 2008.
From October through December 2008, the Company paid $135,000.  The
Company timely paid the monthly amounts due in 2009.
 
 At
December 31, 2008 and 2009 non-interest bearing unpaid accrued service fees and
unreimbursed expenses of $14.8 million and $15.2 million, respectively, were
included in payable to affiliates on the accompanying consolidated balance
sheets. For the years ended December 31, 2007, 2008 and 2009 out-of-pocket
expenses and third party fees were $1.2 million, $1.1 million and $420,000,
respectively.
 
 "Hallmark
Hall of Fame" Programming License Agreement
 
 In 2008,
Crown Media United States entered into an agreement with Hallmark Hall of Fame
Productions, Inc. to license 58 “Hallmark Hall of Fame” movies, consisting of 16
contemporary Hallmark Hall of Fame titles (i.e., produced from 2003 to 2008) and
42 older titles, for exhibition on the Hallmark Channel and Hallmark Movie
Channel.  These titles are licensed for ten year windows, with windows
commencing at various times between 2007 and 2010, depending on
availability.  This agreement makes the Hallmark Channel and Hallmark
Movie Channel the exclusive home for these movies.  The total license
fee for these movies is $17.2 million and is payable in equal monthly
installments over the various 10-year exhibition windows.
 
 Trademark
Agreement with Hallmark Cards
 
 Crown
Media United States has a trademark license agreement with Hallmark Licensing,
Inc. for use of the “Hallmark” mark for the Hallmark Channel and for the
Hallmark Movie Channel.  In September 2009, Hallmark Cards extended
the trademark license agreements for the Hallmark Channel and the Hallmark Movie
Channel to September 1, 2010. The Company is not required to pay any fees under
the trademark license agreements.
 
 The
Company has accounted for the agreement pursuant to the contractual terms of the
arrangement, which is royalty free.  Accordingly, no amounts have been
reflected in the consolidated balance sheets or consolidated statements of
operations and of the Company.
 
 In
addition, there may be a default under the agreement if we fail to make any
payments due under loan agreements within five days of the due date, or if we
receive an opinion from our auditors that shows that we no longer are a going
concern. The Company obtained a waiver for the trademark license agreement dated
March 3, 2010, from Hallmark Cards related to its going concern opinion over its
2009 financial statements.
  
 Intercreditor
Agreement
 
 The
Company has an intercreditor agreement that deals with residual and
participation liabilities for the use of film assets by the buyer of the
Company’s membership interest in Crown Media Distribution. Under the
intercreditor agreement, Hallmark Cards has agreed that any loan, debt or other
amount payable by the Company to Hallmark Cards will be subordinate and subject
in order of payment of such residual and participation liabilities.
  
 10.
Company Obligated Mandatorily Redeemable Preferred Interest and NICC License
Agreements
 
 VISN owns
a $25.0 million company obligated mandatorily redeemable preferred interest in
Crown Media United States (the “preferred interest”). On November 13, 1998, the
Company, Vision Group, VISN and Henson Cable Networks, Inc. signed an amended
and restated company agreement governing the operation of Crown Media United
States (the "company agreement"), which agreement was further amended on
February 22, 2001, January 1, 2002, March 5, 2003, January 1, 2004, November 15,
2004 and December 1, 2005 (the “December 2005 NICC Settlement
Agreement”).
 
 Crown
Media United States may voluntarily redeem the $25.0 million preferred interest
at any time; however, it is obligated to do so no later than December 31,
2010.
 
 On
January 2, 2008, the Company and NICC resolved disputes amongst themselves and
signed an agreement (the “Modification Agreement”) which, among other things,
immediately extinguished NICC’s conditional right to require the Company to
repurchase all of the shares of the Company’s Class A common stock then owned by
NICC (“Put Right”).  In addition, the Modification Agreement also
settled the dispute with respect to whether the Termination Payment provision
expired with, or survived, the December 31, 2007 expiration of the December
2005 NICC Settlement Agreement. We agreed to pay NICC $3.8 million in three
equal installments payable each January 20 of 2008, 2009 and
2010.  We also agreed to provide NICC a two-hour broadcast period
granted each Sunday morning during the two year period ending December 31,
2009.  We are also obligated to pay NICC an estimated $3.7 million in
yearly installments at the rate of 6% of the outstanding liquidation preference
of the preferred interest.  These costs are reflected on the
accompanying consolidated statement of operations for the year ended
December 31, 2007, as a charge to selling, general and administrative
expense at a discounted amount of $8.2 million. At December 31, 2008, the
Company recorded additional programming expense of approximately $744,000 to
give effect to revisions of anticipated dates on which preferred interest
redemptions will occur.
 
 NICC made
a claim stemming from certain provisions in the December 2005 NICC Agreement
that had not previously been resolved. The Company conducted extensive
negotiations with NICC on this issue and signed a final settlement during 2008.
As a result of this settlement, the Company gave NICC full ownership of “The
Note,” a Hallmark Channel original movie then co-owned by NICC and the Company
with the Company maintaining certain broadcast rights on its channels.  As
a result of the settlement, the Company recognized settlement expense of
approximately $500,000 during 2008.
 
  In
recording the settlement in 2008, the Company reduced settlement expense by
approximately $17,000 and recognized a gain of approximately $101,000 on the
disposal of its film asset.  The Company recorded a short-term
receivable from NICC in the amount of $150,000.  In turn, the Company
relieved (1) $1.5 million from film asset, (2) $91,000 from its residual and
participation liability, $224,000 from accounts receivable related to Canadian
tax credits, and approximately $500,000 from accrued liabilities for the
previously recorded FAS 5 liability.  Finally, the Company recorded
the retained program license at approximately $1.1 million, the result of
apportioning the $1.5 million carrying value of “The Note” on the basis of
relative fair values retained and transferred.
  During
the year ended December 31, 2007, 2008, and 2009, Crown Media United States paid
NICC $22.1 million, $6.4 million and $4.6 million, respectively, related to the
company agreement as amended.
 
 Transactions
with NICC
  Subsequent
to the execution of the Modification Agreement, NICC asserted that a provision
of the 2005 NICC Agreement had not been satisfied.  In December 2008,
NICC and the Company agreed to a settlement whereby the Company assigned its
ownership interest in a film asset, a Hallmark Channel original movie which
until then was co-owned by NICC and the Company.  The Company retained
broadcast rights and certain other distribution rights for a period of four
years.  In expectation of the settlement, the Company recognized settlement
expense of approximately $500,000 during 2008. Upon closing of the settlement
agreement, the Company recognized a gain of approximately $101,000 in connection
with the disposition of its ownership interest in a film asset, which is
included as a component of selling, general and administrative expense in the
statement of operations for the year ending December 31, 2008.
 
 11.
Stockholders’ Equity
 
 The
Company’s authorized capital stock continues to consist of 200,000,000 shares of
Class A common stock, 120,000,000 shares of Class B common stock, and 10,000,000
shares of preferred stock, all $0.01 par value per share. The Company has not
issued any shares of preferred stock. Each share of Class B common stock is
convertible at the option of the holder into one share of Class A common stock.
Shares of Class B common stock are generally automatically convertible into
Class A common stock upon sale or other transfer by the selling
stockholder.  In addition, each share of Class B common stock entitles
the holder to 10 votes on all voting matters submitted to the Company’s
stockholders.  In contrast, each share of Class A common stock
entitles the holder to one vote.  Otherwise, shares of Class A common
stock and shares of Class B common stock are identical. See “Recapitalization”
under Note 1 for descriptions of changes to the Company’s preferred stock and
common stock that will occur if the Recapitalization is
consummated.
 
 At
December 31, 2009, HEIC controlled 100% of the outstanding shares of Class B
common stock.  As a result of its combined control of Class A and
Class B shares, HEIC possessed approximately 94.5% of the voting power of
outstanding shares at December 31, 2009.
 
 The
Company 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 2010 to
finance the continued growth and expansion of its business. The Company has no
current intention to pay cash dividends. Its bank credit facility also prohibits
the Company from declaring or paying any cash dividends.
 
 
 12.
Income Taxes
 
 Crown
Media Holdings accounts for income taxes using the asset and liability method.
Under this method, Crown Media Holdings recognizes deferred tax assets and
liabilities for future tax consequences attributable to the difference between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled.
 
 See Note
9, Related Party Transactions, for a description of the Crown Media Holdings’
federal tax sharing agreement with Hallmark Cards.
 
 Hallmark
Cards expects to use approximately $16.6 million of the Company’s 2009 tax
losses in its consolidated federal tax return for 2009 and has used
approximately $960.5 million (including the approximately $16.6 million
generated in 2009) of Crown Media Holdings tax losses since entering into the
tax sharing agreement.  The Company has recorded a deferred tax asset
of $6.5 million related to the taxable loss generated during the year ended
December 31, 2009, which has been included in the net operating loss component
of deferred tax assets in the table below.  The Company has recorded a
deferred tax asset of $644.5 million related to the cumulative losses generated.
The entire amount of the Company’s net deferred tax assets have been offset with
a valuation allowance.  During 2009, the valuation allowance changed
by $8.2 million. The Company may ultimately reverse the valuation allowance and
record a tax benefit if it is determined to be more likely than not that the
Company could realize the tax benefit if it were treated as a stand-alone
taxpayer.
 
 In the
event the Company realizes taxable income in any future period, the Company
would be obligated to pay Hallmark Cards for its share of the consolidated
federal tax liability. Such payments would be treated as a reduction to paid-in
capital to the extent of amounts previously received under the Tax Sharing
Agreement.
 
 Since May
9, 2000, the Company has been included in certain combined state income tax
returns of Hallmark Cards or Hallmark Entertainment Holdings. Consequently,
Hallmark Entertainment Holdings and the Company entered into a state tax sharing
agreement. Under the state tax sharing agreement, Hallmark Entertainment
Holdings and Crown Media Holdings file consolidated, combined or unitary state
tax returns.  Crown Media Holdings makes tax-sharing payments to (or
receives payments from) Hallmark Entertainment Holdings equal to the taxes (or
tax refunds) that Crown Media Holdings would pay (or receive) if it filed on a
stand-alone basis. Such payments are computed based on Crown Media Holdings’
taxable income (loss) and other tax items beginning the day following the May 9,
2000, reorganization.
 
 The
following table reconciles the income tax provision at the U.S. statutory rate
to the provision per the financial statements:
 
 Years Ended December 31,2007
              
              
              2008
              
              
              2009(In
      thousands)Tax
      benefit computed at 35%
              
              $
              (55,701
              )
              
              $
              (14,099
              )
              
              $
              (8,204
              )State
      taxes
              
              
              (6,293
              )
              
              
              (1,550
              )
              
              
              (874
              )Other
              
              
              601
              
              
              
              541
              
              
              
              554Increase
      in valuation allowance
              
              
              61,393
              
              
              
              15,108
              
              
              
              8,524Income
      tax provision
              
              $
              -
              
              
              $
              -
              
              
              $
              -
 
 The
components of Crown Media Holdings' deferred tax assets and liabilities are
comprised of the following:
 
 As of December 31,2008
              
              
              2009(In
      thousands)Deferred
      tax assets:Bad
      debt
      reserve
              
              $
              115
              
              
              $
              186Accrued
      compensation
              
              
              2,380
              
              
              
              1,656Net
      operating
      loss
              
              
              638,000
              
              
              
              644,531Depreciation
              
              
              4,994
              
              
              
              5,073Other
              
              
              13,824
              
              
              
              14,769Valuation
      allowance
              
              
              (656,748
              )
              
              
              (664,912
              )Total
      deferred tax assets
              
              
              2,565
              
              
              
              1,303Deferred
      tax liabilities:Program
      license
      fees
              
              
              (936
              )
              
              
              (485
              )Other
              
              
              (1,629
              )
              
              
              (818
              )Total
      deferred tax liabilities
              
              
              (2,565
              )
              
              
              (1,303
              )Net
      deferred taxes
              
              $
              —
              
              
              $
              —
 
 
 As of
December 31, 2009, the Company’s cumulative federal and state net tax operating
losses were approximately $1.6 billion. Of this amount, approximately $692.4
million has not been utilized by Hallmark Cards in its consolidated returns and
will expire beginning in 2020 through 2026.
 
 Accounting
for Uncertainty in Income Taxes
 
 An
evaluation process is required under applicable accounting standards for all tax
positions taken. If the probability for sustaining a tax position is at least
more likely than not, then the tax position is warranted and recognition should
be at the highest amount which is greater than 50% likely of being realized upon
ultimate settlement. At December 31, 2008 and 2009, the total amount of
unrecognized tax benefits for uncertain tax positions was $0. The Company
recognized no increase or decrease in the amount of unrecognized tax benefits
for uncertain tax positions.
 
 The
Company recognizes interest and penalties related to uncertain tax positions in
income tax expense.  At December 31, 2008 and 2009, we have no accrued
interest related to uncertain tax positions.
 
 By virtue
of its inclusion in Hallmark Cards consolidated tax returns, the Company is
subject to examination by the Internal Revenue Service for periods subsequent to
March 10, 2003. Further, net operating loss carryforwards (“NOL's”) are
subject to examination in the year they are utilized regardless of whether the
tax year in which they were generated has been closed by statute.  The
amount subject to disallowance is limited to the NOL
utilized.  Accordingly, the Company is subject to examination for
NOL’s generated prior to March 11, 2003 if and when such NOL’s are utilized in
future tax returns.
 
 The  Company  files  state  tax  returns  in  major  jurisdictions
such as
California,  Colorado  and  New  York,  and  has  also
been included in the combined state tax returns of Hallmark or Hallmark
Entertainment Holdings, Inc. The state returns are generally subject to
examination for years after 2005.
 
 
 13.
Fair Value
 
 The
following table presents the carrying amounts and estimated fair values of the
Company’s financial instruments at December 31, 2008 and 2009.
 
 
 2008
              
              
              2009Carrying
              
              
              Significant
      Unobservable
                Inputs(Level
      3)
              
              
              Carrying
              
              
              Significant
      Unobservable
                Inputs(Level
      3)Amount
              
              
              Fair
      Value
              
              
              Amount
              
              
              Fair
      Value(In
      thousands)Senior
      secured note to HC Crown, including accrued
      interest
              
              $
              686,578
              
              
              $
              599,683
              
              
              $
              758,755
              
              
              $
              641,635Note
      and interest payable to HC Crown
              
              
              109,837
              
              
              
              86,544
              
              
              
              110,062
              
              
              
              93,074Note
      and interest payable to Hallmark Cardsaffiliate
              
              
              62,724
              
              
              
              49,422
              
              
              
              62,845
              
              
              
              53,144Note
      and interest payable to Hallmark Cardsaffiliate
              
              
              172,077
              
              
              
              135,584
              
              
              
              172,407
              
              
              
              145,795Company
      obligated mandatorily redeemablepreferred interest
              
              
              20,822
              
              
              
              17,430
              
              
              
              22,902
              
              
              
              19,800
 
 
 ASC Topic
820 defines fair value of a liability as the price that would be paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. When determining fair value, the Company considers the
principal or most advantageous market in which the Company would transact and
the market-based risk measurements or assumptions that market participants would
use in pricing the liability, such as inherent risk, transfer restrictions, and
credit risk. Level 3 is defined as inputs that are generally unobservable and
typically reflect management’s estimates of assumptions that market participants
would use in pricing the liability.
 
 The
carrying amounts shown in the table are included on the accompanying
consolidated balance sheets under the indicated captions. The valuation of the
Company obligated mandatorily redeemable preferred interest was dependent upon
the future pre-tax income of Crown Media United States since the Company would
only have been obligated to make payments on the instrument within 60 days after
the end of any fiscal year in which pre-tax income was generated by Crown Media
United States. The remaining preferred liquidation preference is payable in full
on December 31, 2010.
 
 The
Company estimates the fair value of its debt to Hallmark Cards affiliates using
the discounted future cash flow method.  Since June 30, 2009, these
estimates have been made on a quarterly basis.
 
 Accounts
payable and receivable are carried at reasonable estimates of their fair values
because of the short-term nature of these instruments. Long-term license fees
payable are also considered carried at reasonable estimates of their fair value.
Interest rates on borrowings under the bank credit facility are for relatively
short periods and variable. Therefore, the fair value of this debt is not
significantly affected by fluctuations in interest rates.  The credit
spread in debt is fixed, but the market credit spread will
fluctuate.
 
 Estimates
of the fair value of the Company’s financial instruments are presented in the
tables above. As a result of recent market conditions, the Company’s debt
obligations with Hallmark Cards affiliates and the mandatorily redeemable
preferred interest have limited or no observable market data available. Fair
value measurements for these instruments are included in Level 3 of the fair
value hierarchy of ASC Topic 820. These fair value measurements are based
primarily upon the Company’s own estimates and are often based on its current
pricing policy, the current economic and competitive environment, the
characteristics of the instrument, credit and interest rate risks, and other
such factors. Therefore, the results cannot be determined with precision, cannot
be substantiated by comparison to quoted prices in active markets, and may not
be realized in an immediate settlement of the liability. Additionally, there are
inherent uncertainties in any fair value measurement technique, and changes in
the underlying assumptions used, including discount rates, liquidity risks, and
estimates of future cash flows, could significantly affect the fair value
measurement amounts.
 
 The
majority of the Company’s debt has been transacted with Hallmark Cards and its
affiliates.
 
 
 14.
Share-Based Compensation
 
 Crown
Media Holdings has one stock option plan, the Amended and Restated Crown Media
Holdings, Inc. 2000 Long Term Incentive Plan (the "Plan"). The Plan covers three
types of share-based compensation: Stock Options, Restricted Stock Units (“RSU”)
and Share Appreciation Rights (“SAR”).
 
  Stock-Based
      Compensation
  The
Company recorded $4.6 million and $1.1 million of compensation expense
associated with the employment and performance RSUs during the years ended
December 31, 2007 and 2008, respectively, which has been included in selling,
general and administrative expense on the accompanying consolidated statements
of operations. The Company recorded $269,000 of compensation benefit associated
with the Employment and Performance RSUs during the year ended December 31,
2009, which has been included in selling, general and administrative expense on
the accompanying consolidated statements of operations. These awards are
included as liabilities in accounts payable and accrued liabilities in the
accompanying consolidated balance sheets due to the Company’s history of
settling these awards in cash.
 
 As of
December 31, 2008 and 2009, there was no unrecognized compensation cost, related
to non-vested stock options granted to the Company’s employees. The closing
price of a share of the Company’s common stock was $2.85 on December 31, 2008
and $1.45 on December 31, 2009, which is used to calculate the year end RSU and
SAR liabilities. As of December 31, 2008 and 2009, there was unrecognized
compensation cost, related to non-vested RSUs granted to the Company’s
employees, in the amount of $515,000 and $190,000, respectively, using the
aforementioned stock prices. As of December 31, 2008 and 2009, there was
unrecognized compensation cost, related to non-vested SARs granted to the
Company’s former CEO, in the amount of $193,000 and $0, respectively, using the
aforementioned stock prices. Actual compensation costs recognized in future
periods may vary based upon fluctuations in stock price and
forfeitures.
 
 
 General
Stock Option Information
 
 Crown
Media Holdings may grant options for up to 10.0 million shares under the Plan.
The stock options expire 10 years from the date of grant and generally vest over
service periods that range from date of grant to four years.  Certain
option and share awards provide for accelerated vesting if there is a change in
control (as defined in the Plan).
 
 There
were no stock option grants in 2007, 2008 and 2009.
 
 A summary
of the status of the Company’s Stock Option Plan at December 31, 2008 and 2009,
and changes during the years then ended is presented below:
 
 Shares
                (in thousands)
              
              
              ExercisePrice
                Per Option
              
              
              Weighted-Average
                ExercisePrice
                Per Option
              
              
              Weighted-Average
                RemainingContractual
                Term in Years
              
              
              AggregateIntrinsic
                ValueBalance,
      December 31, 2008
              
              
              341
              
              
              
              
              
              $
              11.60
              
              
              
              2.51
              
              
              $
              0.00Options
      cancelled
              
              
              (254
              )
              
              
              $8.94-16.38
              
              
              $
              10.81Balance,
      December 31, 2009
              
              
              87
              
              
              
              
              
              
              $
              13.89
              
              
              
              1.51
              
              
              $
              0.00Exercisable
              
              
              87
              
              
              
              
              
              
              $
              13.89
              
              
              
              1.51
              
              
              $
              0.00
 
 Approximately
200,000 stock options expired, without being exercised, in August 2009 following
the resignation of one of the Company’s executives in May 2009. Such options
were fully vested at the time of resignation.
 
 
 General
      Restricted Stock Unit
Information
 
 The
Company’s restricted stock units (“RSUs”) vest based on employment, performance
and market conditions. Certain RSUs vest either in one-third increments on the
anniversary of the grant date in each of the three years following the grant or
all at one time on the third year anniversary of the grant date, in both cases
based on continuing employment (“Employment RSUs”). Other RSUs have provided for
vesting on the third anniversary date of the grant date, provided that the price
of the Company’s Class A common stock was at least $14 or higher on that date
(“Performance RSUs”).
  The
Company’s RSUs are settled in either common stock or cash as determined by the
Company’s Board of Directors. The Company has historically settled the RSUs in
cash, and considering such past practices, has classified its RSUs as liability
awards for accounting purposes.
  We
recognize compensation cost, net of estimated forfeitures, over the vesting term
and include changes in fair value at each reporting period.
  
 The
following table shows the cash settlements for each of the following years
ending December 31:
 
 Settlement
      Amount
                (in
      thousands)2007
              
              $
              1,5422008
              
              
              3,8482009
              
              
              1,499Total
              
              $
              6,889
 
 
 
 In August
2006, the Company’s Board of Directors approved a grant to those Directors who
were not employees of the Company or of Hallmark Cards or its affiliated
companies, a total of 71,979 RSUs. The RSUs vested in equal one-third
installments over three years on the anniversary of the grant dates each
year.
 
 In August
2006, the Company’s Board of Directors approved an additional grant of 1,298,000
Employment and Performance RSUs to the executive officers and other employees.
The Employment RSUs and the Performance RSUs constituted 35% and 65% of the
grant, respectively.  The Employment RSUs vested and were settled in
cash on August 17, 2009, the third anniversary of the grant date.
 
 On March
13, 2008, the Compensation Committee determined that the first vesting of the
2006 Performance RSUs would be paid out in accordance with the vesting criteria
as if all the major distribution agreements had been renewed prior to each
agreement’s expiration date, and accordingly, 100% of the first vesting of the
Performance RSUs were deemed achieved.  The settlement of 571,578
vested units valued at approximately $3.3 million was paid on April 4,
2008.  On February 10, 2009, the Compensation Committee determined
that the second vesting of the Performance RSUs would be paid out in accordance
with the vesting criteria as $59.9 million of gross subscriber revenue was
achieved for the year ended December 31, 2008, and accordingly, 100% of the
second vesting of the Performance RSUs were deemed achieved and the related full
liability was recorded at this time.  The settlement of 307,772 vested
units valued at approximately $689,000 were paid in February 2009.
 
 Under the
2006 Restricted Stock Units Agreement dated October 3, 2006, the Company granted
200,000 restricted stock units to the Company’s then CEO. The Employment RSUs
constituted 50% of the grant and the Performance RSUs 50%. The Company also
executed a Restricted Stock Units Agreement with the CFO, dated November 8,
2006, which provided for the grant of 25,200 Employment RSUs and 46,800
Performance RSUs to the CFO. The Employment RSUs for the CEO were forfeited in
May 2009, upon receipt of the CEO’s resignation.
 
 Additionally,
the Company granted 52,129 RSUs in August 2008 to members of its Board of
Directors who were not employees of the Company or Hallmark Cards and its
subsidiaries.  These RSUs are part of the compensation of directors
consisting of the annual grant of RSUs valued at $40,000.
 
 Additionally,
the Company granted 147,540 RSUs in August 2009 to members of its Board of
Directors who were not employees of the Company or Hallmark Cards and its
subsidiaries.  These RSUs are part of the compensation of directors
consisting of the annual grant of RSUs valued at $45,000.
 
  
 Employment
      RSUs
              
              Units
              
              
              Weighted-Average
      RemainingContractual Term in YearsOutstanding
      Balance,December
      31, 2008
              
              
              519,650
              
              
              
              0.84Units
      settled in cash
              
              
              (373,450
              )Units
      forfeited
              
              
              (146,200
              )Balance,
      December 31, 2009
              
              
              -
              
              
              
              0.00
 
 
 
 Performance
      RSUs
              
              Units
              
              
              Weighted-Average
      RemainingContractual Term in YearsOutstanding
      Balance,December
      31, 2008
              
              
              307,772
              
              
              
              0.00Units
      settled in cash
              
              
              (307,772
              )Balance,
      December 31, 2009
              
              
              -
              
              
              
              0.00
 
 
 
 
 
 Board
      of Directors RSUs
              
              Units
              
              
              Weighted-Average
      RemainingContractual Term in YearsNonvested
      Balance,December
      31, 2008
              
              
              88,667
              
              
              
              2.02Units
      issued
              
              
              147,540Units
      settled in cash
              
              
              (44,215
              )Nonvested
      Balance,December
      31, 2009
              
              
              191,992
              
              
              
              2.35
 
 
 
 
 Chief
Executive Officer (“CEO”) Share Appreciation Rights Agreement
   Under
Share Appreciation Rights Agreement dated October 3, 2006, the Company agreed to
grant stock appreciation rights ("SARs") to the then CEO upon occurrence of
certain events. The value of each SAR corresponds to the value of one share of
Class A common stock and would have been settled at the Company's discretion in
Class A common stock or cash. SARs would have been granted during the term of
employment the day after the fair market value of the Company's stock reached
the "threshold price" and stayed at the threshold price or higher for 60
consecutive calendar days. SARs would then have been granted each time that the
fair market value of the Company's stock increases another incremental five
dollars over the previous price at which a SAR grant was triggered and stayed at
such price or higher for 60 consecutive calendar days. Upon the occurrence of
each event which triggered a SAR grant, the CEO would then have been granted
that number of SARs with a value equal to 0.8% of the Enterprise Growth as of
the grant date divided by the triggering Company stock price. "Enterprise
Growth" equals the increase in market capitalization (compared to the market
capitalization based on the Start Price or the last price triggering a grant of
an SAR), adjusted upward or downward by the amount of debt incurred or paid down
since the Start Date or last trigger date, as applicable. "Threshold price"
shall mean the average of the fair market value for the 5 business days prior to
the date of announcement of the CEO’s employment (i.e., October 4, 2006) ("Start
Price") plus five dollars. These SARs were deemed granted for financial
reporting purposes, but the performance conditions were never achieved. The
Company ascribed a value to these SARs on a quarterly basis and adjusted the
related liability based on estimates of achievement of the threshold
price.
   SARs
would have vested upon the earlier of (i) 3 years of employment after the grant
date, (ii) termination of employment without cause by the Company, (iii)
termination by the CEO for good reason or (iv) upon a change in control of the
Company. The then CEO terminated his employment in May 2009 and his SARs were
forfeited at that time.
  The fair
value of the CEO’s SAR grant was estimated at each reporting date using a Monte
Carlo Lattice option pricing model. Valuation of this SAR grant was based upon
market and service conditions. At December 31, 2008, the CEO’s SARs were valued
at $440,000 using the closing price of a share of our common stock on December
31, 2008, of $2.85. The Company recorded $1.4 million in compensation expense
for the year ended December 31, 2007, and $1.2 million and $247,000 in
compensation benefit related to SARs for the years ended December 31, 2008 and
2009, respectively, on the Company’s consolidated statement of operations as a
component of selling, general and administrative expense.  The SARs
were recorded in accounts payable and accrued liabilities on the accompanying
consolidated balance sheets for the year ended December 31, 2008.
  The
following table includes assumptions used to value the SARs at December 31, 2007
and 2008.
 
 2007
              
              
              2008Expected
      volatility
              
              
              46.70
              %
              
              
              66.20
              %Expected
      dividends
              
              
              0
              
              
              
              0Expected
      Term (in years)
              
              
              4.00
              
              
              
              4.00Risk-free
      rate
              
              
              3.07
              %
              
              
              0.76
              %
 
 
 
 15.
Employee Benefits
 
 Benefit
Plans
 
 Crown
Media Holdings adopted a 401(k) retirement plan for all of its United States
employees effective January 1, 2002. Under the provisions of the Crown Media
Employee Savings Plan (“ESP”), any full-time or part-time employee may join the
ESP 90 days after his or her employment commences. Employees that qualify for
participation can contribute up to 50% of their pre-tax salary, subject to a
maximum contribution limit as determined by the Internal Revenue Service, and up
to 16% of after-tax salary, not to exceed 50% total of combined and pre-tax and
after-tax contributions. Commencing on January 1, 2009, all eligible employees
will be automatically enrolled into the plan; thereafter, all eligible new hires
and rehires will be automatically enrolled in the plan. Employees will have 90
days to terminate his or her participation in the plan and the plan will refund
any contributions. Additionally, for every dollar up to six percent of salary an
employee contributes, Crown Media Holdings will contribute fifty cents. Crown
Media Holdings contributed and expensed $353,000, $409,000 and $481,000 for the
years ended December 31, 2007, 2008 and 2009, respectively.
 
 Deferred
Compensation Plans
 
  The
Company sponsors a deferred compensation plan for its management. Participants
in this plan earn interest on their deferred compensation. Related liabilities
of $2.4 million and $2.2 million at December 31, 2008 and 2009,
respectively, are included on the accompanying consolidated balance sheets among
short and long-term accrued liabilities.
   The
Company also sponsors a deferred compensation plan for its Board of
Directors.  Participants in this plan earn interest on their deferred
compensation. Related liabilities of $333,000 and $355,000 at December 31,
2008 and 2009, respectively, are included on the accompanying consolidated
balance sheets among short and long-term accrued liabilities.
  Resignation
Agreements
 
 The
individual then serving as the Company’s chief executive officer resigned May
31, 2009.  Pursuant to the resignation agreement, in June 2009 the
Company paid this individual $2.5 million, an amount representing the present
value of the salary and bonus that otherwise would have been paid to him from
June 1, 2009 through October 2, 2010, the scheduled expiration of his employment
contract.  The Company is obligated to provide him office space, an
assistant and payment of COBRA insurance benefits for periods that expire at
various times through May 31, 2010. These expenses were recorded as selling,
general and administrative expense on the accompanying consolidated statements
of operations in 2009.
 
 The
Executive Vice President of Programming resigned from his position effective
May 31, 2009. The executive received continued payment of the regular
installments of his salary through December 31, 2009 ($523,000) and received his
salary through May 31, 2010, in one lump sum paid on January 15, 2010
($347,000). He also received a payment of a pro rated annual bonus of
approximately $55,000, determined by the Company, for the 2009 calendar year for
the period up to the resignation date.  These expenses were recorded
as other operating costs on the accompanying consolidated statements of
operations in 2009.
 
 Long
Term Incentive Compensation Agreements
 
 In the
second quarter of 2009, the Company granted Long Term Incentive Compensation
Agreements (“LTI Agreements”) to vice presidents and above.  The
target award under each LTI Agreements is a percentage of the employee’s base
salary and range from $26,000 to $469,000 for executive officers of the
Company.  Of each award, 50% is an Employment Award and 50% is a
Performance Award.  The Employment Award will vest and be settled in
cash on August 31, 2011, subject to earlier pro rata settlement as provided in
the LTI Agreement.  The Performance Award will vest and be settled in
cash 50% on December 31, 2010, and 50% on December 31, 2011, in accordance with
the Company performance criteria concerning adjusted EBITDA and cash flow and
subject to earlier pro rata settlement as provided in the LTI Agreement. Early
settlement is provided in the case of involuntary termination of employment
without cause on or after January 1, 2010, death or
disability.  Potential payouts under the Performance Awards depend on
achieving 90% or higher of a target threshold and range from 0% to 150% of the
target award.  The Company’s Compensation Committee has the ability to
increase or decrease the payout based on an assessment of demographics achieved,
relative market conditions and management of expenses.
 
 The
Company recorded $540,000 of expense included in selling, general and
administrative expense in the accompanying consolidated statement of operations
in 2009 related to these agreements. Additionally, the $540,000 liability for
these agreements was included in accounts payable and accrued liabilities in the
accompanying consolidated balance sheet.
 
 Employee
Terminations
 
 In August
2009, the Company terminated the employment of certain
individuals.  The Company recorded severance expense of approximately
$1.2 million during the third quarter of 2009 as part of selling, general and
administrative expenses.
  
 
  16.
Commitments and Contingencies
 
 In the
normal course of business, the Company has entered into agreements that commit
it to make cash payments in future periods with respect to non-cancelable leases
and programming contracts.
 
 An entity
providing licensed programming is required to report an asset and liability for
the rights licensed under a programming agreement only when the license period
has begun and when certain other defined requirements are met. As such, the
accompanying consolidated balance sheets do not reflect both gross assets and
liabilities of $161.4 million and $146.7 million as of December 31, 2008 and
2009, respectively, related to committed program license fees payable with
airing windows which begin subsequent to period-end.
 
 Contractual
maturities of long-term obligations over the next five years are as follows (in
thousands):
 
  
 Total
              
              
              2010
              
              
              2011
              
              
              2012
              
              
              2013
              
              
              2014
              
              
              ThereafterCredit
      facility and interest payable (1)
              
              $
              1,008
              
              
              
              1,008
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Interest
      payable to Hallmark Cards affiliate (1)
              
              
              2
              
              
              
              2
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Company
      obligated mandatorily redeemablepreferred
      interest, including accretion (2)
              
              
              25,000
              
              
              
              25,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Senior
      secured note to HC Crown,including
      accrued interest (1)
              
              
              883,791
              
              
              
              39,258
              
              
              
              844,533
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Note
      and interest payable to HC Crown (1)
              
              
              111,978
              
              
              
              111,978
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Note
      and interest payable to Hallmark Cards affiliate (1)
              
              
              175,430
              
              
              
              175,430
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Note
      and interest payable to Hallmark Cards affiliate (1)
              
              
              63,947
              
              
              
              63,947
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Capital
      lease obligations (1)
              
              
              21,510
              
              
              
              2,160
              
              
              
              2,160
              
              
              
              2,160
              
              
              
              2,160
              
              
              
              2,160
              
              
              
              10,710Operating
      leases
              
              
              30,305
              
              
              
              5,853
              
              
              
              5,684
              
              
              
              5,195
              
              
              
              4,887
              
              
              
              5,057
              
              
              
              3,629License
      fees payable to non-affiliates forcurrent
      and future windows (3)(4)
              
              
              276,407
              
              
              
              102,062
              
              
              
              65,970
              
              
              
              59,330
              
              
              
              34,290
              
              
              
              14,755
              
              
              
              -License
      fees payable to Hallmark Cards affiliates forcurrent
      and future windows (3)(4)
              
              
              8,016
              
              
              
              1,380
              
              
              
              1,548
              
              
              
              1,648
              
              
              
              1,720
              
              
              
              1,720
              
              
              
              -Funding
      of original productions (3)(4)
              
              
              33,000
              
              
              
              20,200
              
              
              
              12,800
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Subscriber
      acquisition fees
              
              
              462
              
              
              
              462
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Obligations
      to NICC due to January 2, 2008 Agreement (5)
              
              
              2,750
              
              
              
              2,750
              
              
              
              
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Deferred
      compensation and interest
              
              
              2,534
              
              
              
              920
              
              
              
              438
              
              
              
              199
              
              
              
              146
              
              
              
              130
              
              
              
              701Payable
      to buyer of international business
              
              
              1,224
              
              
              
              1,224
              
              
              
              
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Other
      payables to buyer of international business
              
              
              612
              
              
              
              320
              
              
              
              76
              
              
              
              58
              
              
              
              53
              
              
              
              53
              
              
              
              52Other
      payables to buyer of film assets
              
              
              20,929
              
              
              
              4,269
              
              
              
              2,240
              
              
              
              2,560
              
              
              
              2,960
              
              
              
              3,040
              
              
              
              5,860Total
      Contractual Cash Obligations
              
              $
              1,658,905
              
              
              $
              558,223
              
              
              $
              935,449
              
              
              $
              71,150
              
              
              $
              46,216
              
              
              $
              26,915
              
              
              $
              20,952(1)
      Includes future interest. Subsequent to the balance sheet date, the
      termination dates were extended to August 31, 2010. These amounts do
      not contain interest for the period May 1 through August 31,
      2010.(2)
      The company obligated mandatorily redeemable preferred interest is to be
      redeemed on or before December 31, 2010.(3)
      The amounts and timing for certain of these commitments are contingent
      upon the future delivery date and type of programming
      produced,and,
      as such, the estimated amount and timing may change.(4)
      Contains airing windows that open subsequent to year end and, therefore,
      the liability is not included on the balance sheet as of December 31,
      2009.(5)
      Pursuant to the January 2, 2008, agreement, the Company will pay NICC $1.3
      million on January 20, 2010. Also, the Companywill
      make a 6% payment based on the outstanding balance of the VISN preferred
      interest in Crown Media United States in January 2010.
  
 
 Lawsuit
 
 
 On July
13, 2009, a lawsuit was brought in the Delaware Court of Chancery against each
member of the Board of Directors of Crown Media Holdings, Hallmark Cards and its
affiliates, as well as the Company as a nominal defendant, by a minority
stockholder of the Company regarding the recapitalization proposal (the
“Proposal”) which the Company received from HCC. The plaintiff is S. Muoio &
Co. LLC which owns beneficially approximately 5.8% of the Company's Class A
common stock, according to the complaint and filings with the Securities and
Exchange Commission. The Proposal, which the Company publicly announced on May
28, 2009, provides for a recapitalization of its outstanding debt to Hallmark
Cards affiliates in exchange for new debt and convertible preferred stock of the
Company. The lawsuit claims to be a derivative action and a class action on
behalf of the plaintiff and other minority stockholders of the Company. The
lawsuit alleges, among other things, that, the defendants have breached
fiduciary duties owed to the Company and minority stockholders in connection
with the Proposal. The lawsuit includes allegations that if the Proposal is
consummated, an unfair amount of equity would be issued to the majority
stockholders, thereby reducing the minority stockholders' equity and voting
interests in the Company, and that the majority stockholders would be able to
eliminate the minority stockholders through a short-form merger. The complaint
requests the court to enjoin the defendants from consummating the Proposal and
to award plaintiff fees and expenses incurred in bringing the
lawsuit.
 
 On July
22, 2009, a Stipulation Providing for Notice of Transaction (the “Stipulation”)
was filed with the Delaware Court of Chancery.  The Stipulation provides
that the Company will not consummate any transaction arising out of or relating
to the Proposal until not less than seven weeks after providing the plaintiff
with a notice of the terms of the proposed transaction, including copies of the
final transaction agreements.  If the plaintiff moves for preliminary
injunctive relief with respect to any such transaction, the parties will
establish a schedule with the Court of Chancery to resolve such motion during
the seven week period.  In addition, following the decision of the Court of
Chancery, the Company will not consummate any transaction for a period of at
least one week, during which time any party may seek an expedited appeal.
 The Stipulation further provides that the plaintiff shall withdraw its
motion for preliminary injunction filed on July 13, 2009 and that the action
shall be stayed until the earlier of providing the notice of a transaction or an
announcement by the Company that it is no longer considering a transaction.
 Notice of the terms of the proposed Recapitalization, including copies of
the agreements, was provided to the plaintiff on March 1, 2010.
 
 By a
letter of February 28, 2010, the plaintiff in this lawsuit informed the Special
Committee of the Board of Directors, which considered and negotiated the
Recapitalization, that the plaintiff objected to the proposed Recapitalization
on the terms set forth in the term sheet dated February 9, 2010.  The
plaintiff asserted, among other things, that the transactions contemplated by
the term sheet would unfairly dilute the economic and voting interests of the
Company’s minority stockholders, that the transactions should be subject to a
vote of the majority of the minority stockholders and that the proposed
transactions remain inadequate.  The plaintiff indicated that if the
Company executed definitive documents for the Recapitalization, the plaintiff
would pursue the litigation.  The February 26, 2010 agreements
executed by the Company for the Recapitalization followed the provisions in the
earlier term sheet.
 
 The
Company is unable to predict the outcome of the legal proceeding discussed in
this Note. The plaintiff does not seek monetary damages from the Company or
other named defendants. However, if the plaintiff’s request for relief is
granted, the Company will be unable to consummate the recapitalization described
in the Proposal. Legal fees to defend the proceeding described in this Note are
being expensed as incurred.
 
 Contract
Termination
 
 During
the fourth quarter of 2009, we exercised our rights to terminate two agreements
in connection with our February 2010 launch of the Hallmark Channel in high
definition. The Company estimated the costs of termination to be approximately
$4.7 million and recorded them as a component of cost of services in the
accompanying consolidated statement of operations for 2009.
  Termination
of one agreement for a standard definition version of the Channel also resulted
in a change in the estimated life of a related deferred credit that arose in
connection with the sale of our international business in 2005.  After
launch of the high definition service, recurring monthly expenses under the
terminated agreement will cease.  Accordingly, in the fourth quarter
of 2009, we reduced the deferred credit by approximately $847,000 and recognized
a gain on the sale of discontinued operations.  Through
December 31, 2009, the aggregate loss on sale of the international business
is $983,000.
 
 17.
Segment Reporting
 
 During
2007, 2008 and 2009, channel operations comprise the Company’s sole operating
segment.  The Company has evaluated performance and allocated
resources based on the results of this segment. The key operating performance
criteria used in this evaluation include revenue, loss from continuing
operations and total assets.
 
 
 18.
Quarterly Information (Unaudited)
 
 The
following tables contain unaudited quarterly financial data (in thousands,
except per share amounts) for the years ended December 31, 2008 and
2009.
 
 Quarters
      Ended2008
              
              March
      31
              
              
              June
      30
              
              
              September
      30
              
              
              December
      31
              
              
              Full
      YearTotal
      revenues
              
              $
              70,564
              
              
              $
              71,520
              
              
              $
              64,482
              
              
              $
              75,228
              
              
              $
              281,794Programming
      costs
              
              
              (35,405
              )
              
              
              (35,641
              )
              
              
              (36,653
              )
              
              
              (32,999
              )
              
              
              (140,698
              )Amortization
      of film assets
              
              
              (163
              )
              
              
              (80
              )
              
              
              1,068
              
              
              
              (80
              )
              
              
              745Operating
      costs
              
              
              (3,306
              )
              
              
              (3,514
              )
              
              
              (3,527
              )
              
              
              (3,479
              )
              
              
              (13,826
              )Selling,
      marketing, general andadministrative expenses
              
              
              (20,291
              )
              
              
              (14,417
              )
              
              
              (17,779
              )
              
              
              (15,653
              )
              
              
              (68,140
              )Income
      from operations
              
              
              11,399
              
              
              
              17,868
              
              
              
              7,591
              
              
              
              23,017
              
              
              
              59,875Interest
      expense
              
              
              (26,114
              )
              
              
              (23,792
              )
              
              
              (25,454
              )
              
              
              (24,797
              )
              
              
              (100,157
              )Gain
      on sale of discontinued operations
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,064
              
              
              
              3,064Net
      (loss) income
              
              $
              (14,715
              )
              
              $
              (5,924
              )
              
              $
              (17,863
              )
              
              $
              1,284
              
              
              $
              (37,218
              )Net
      (loss) income per share
              
              $
              (0.14
              )
              
              $
              (0.06
              )
              
              $
              (0.17
              )
              
              $
              0.01
              
              
              $
              (0.36
              )
 
 
 
 Quarters
      Ended2009
              
              March
      31
              
              
              June
      30
              
              
              September
      30
              
              
              December
      31
              
              
              Full
      YearTotal
      revenues
              
              $
              70,952
              
              
              $
              68,182
              
              
              $
              62,819
              
              
              $
              77,611
              
              
              $
              279,564Programming
      costs
              
              
              (32,215
              )
              
              
              (31,301
              )
              
              
              (31,680
              )
              
              
              (32,332
              )
              
              
              (127,528
              )Contract
      termination fees expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (4,718
              )
              
              
              (4,718
              )Operating
      costs
              
              
              (4,012
              )
              
              
              (4,488
              )
              
              
              (3,405
              )
              
              
              (3,428
              )
              
              
              (15,333
              )Selling,
      marketing, general and administrative expenses
              
              
              (17,339
              )
              
              
              (12,037
              )
              
              
              (13,042
              )
              
              
              (13,149
              )
              
              
              (55,567
              )Gain
      on sale of film library
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              682
              
              
              
              682Income
      from operations
              
              
              17,386
              
              
              
              20,356
              
              
              
              14,692
              
              
              
              24,666
              
              
              
              77,100Interest
      expense
              
              
              (24,837
              )
              
              
              (25,678
              )
              
              
              (24,884
              )
              
              
              (25,140
              )
              
              
              (100,539
              )Gain
      on sale of discontinued operations
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              847
              
              
              
              847Net
      (loss) income
              
              $
              (7,451
              )
              
              $
              (5,322
              )
              
              $
              (10,192
              )
              
              $
              373
              
              
              $
              (22,592
              )Net
      (loss) income per share
              
              $
              (0.07
              )
              
              $
              (0.05
              )
              
              $
              (0.10
              )
              
              $
              0.00
              
              
              $
              (0.22
              )
 
 
 
 The
Company completed an analysis during the third quarter of 2008 of its residual
and participation liability, related to the Company’s licenses of the film
assets prior to the sale to RHI.  Using new information that became
available during this time period, the Company determined that it needed to
reduce its liability by $1.1 million, and thus, recorded a negative amortization
of film assets in this amount during this time period.
 
 In December 2008, the Company
received information from the buyer of the international business related to the
actual internal usage and sales of these films through December 31,
2007.   As a result, the Company determined that it needed to
reduce its liability by $5.1 million. The Company did so by recording a gain
from sale of discontinued operations of $3.0 million and a reduction of interest
expense of $2.1 million during this time period.
 
 On April
14, 2008, the Internal Revenue Service refunded to Hallmark Cards a portion of
the interest previously paid in connection with the disallowance of certain net
operating losses.  In July 2008, Hallmark Cards notified the Company
that they had reduced the Company’s indebtedness as of April 14, 2008, under the
Tax Note by $1.5 million in consideration of the Company’s applicable portion of
such refund.
 
 The
Company recognized settlement expense of approximately $500,000 during the third
quarter of 2008. Upon closing of the settlement agreement, the Company
recognized a gain of approximately $101,000 in connection with the disposition
of its ownership interest in “The Note,” which is included as a component of
selling, general and administrative expense in the statement of operations for
the year ending December 31, 2008
 
 In
December 2009, the Company reviewed actual payment information concerning its
indemnification to RHI for residual and participation liabilities through
December 31, 2009.   As a result, the Company determined that it
needed to reduce its liability concerning its indemnification to RHI by
$682,000. The Company did so by recording a gain from sale of film assets of
$682,000 during this time period.
 
 During
the fourth quarter of 2009, we negotiated the termination of two agreements
related to the launch of the Hallmark Channel into high definition. The
estimated costs of termination were approximately $4.7 million.
  Termination
of one agreement also resulted in a change in the estimated life of the deferred
credit.  After launching the Hallmark Channel in high definition,
recurring monthly expenses under the terminated agreement will cease.
Accordingly, the adjustment to eliminate the unneeded portion of the deferred
credit of approximately $847,000 was recognized during the fourth quarter of
2009.
 
 19.
Subsequent Events
 
 On
January 25, 2010, Crown Media Holdings, Inc. entered into an agreement with
Martha Stewart Living Omnimedia, Inc. covering programs to be shown on Hallmark
Channel, commencing September 2010.
  On March
2, 2010, the maturity date of the bank credit facility was extended to August
31, 2010.
  On
February 26, 2010, the termination date of the Waiver Agreement was extended to
August 31, 2010.
  See
“Recapitalization” in Note 1 for information regarding agreements into which the
Company entered on February 26, 2010 for a proposed Recapitalization of debt
obligations owed to affiliates of Hallmark Cards and related matters. See Note
16 for information on the objection by a plaintiff in a lawsuit to terms of the
February 26, 2010 agreements for the proposed Recapitalization.